##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K/A

Amendment No. 1


|                                                |  |                                                                                                 
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|(Mark One)                                      |  |                                                                                                 
|þ                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES AND EXCHANGE ACT OF 1934    
|                                               
|For the fiscal year ended December 31,
    2002
|                                               
|or                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|                                               
|For the transition period
    from           to

Commission file number: 0-27168



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Viewpoint Corporation

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 95-4102687                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

498 Seventh Avenue, Suite 1810, New York,
NY 10018

(Address of principal executive offices and
zip code)


(212) 201-0800

(Registrants telephone number, including
area code)




---

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


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 reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

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 the
Form 10-K.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act Rule 12b-2
of the
Act)     Yes þ          No o

|                                                                                                        |  |  |             | 
|------------------------------------------------------------------------------------------------------- |  |  | ----------- | 
|Aggregate market value of voting stock held by
    non-affiliates of the registrant as of June 28, 2002 |  |  | 197,477,449 | 
|Number of shares of common stock outstanding as
    of April 28, 2003                                   |  |  | 45,985,507  | 



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TABLE OF CONTENTS



|                                      |                                                                                               |  |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                               
|                                      | Item 1. Business                                                                             
|                                      | Item 2. Properties                                                                           
|                                      | Item 3. Legal Proceedings                                                                    
|                                      | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                              
|                                      | Item 5. Market for Registrants Common Stock and Related Stockholder Matters                 
|                                      | Item 6. Selected Financial Data                                                              
|                                      | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                      | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                           
|                                      | Item 8. Financial Statements and Supplementary Data                                          
|                                      | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                             
|                                      | Item 14. Controls and Procedures                                                             
|PART IV                              
|                                      | Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K                      
|SIGNATURES                           
|PROMISSORY ISSUED BY KAPLAN          
|CONSENT OF PRICEWATERHOUSECOOPERS LLP
|906 CERTIFICATION: PRESIDENT AND CEO 
|906 CERTIFICATION: SENIOR VP AND CFO 



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TABLE OF CONTENTS

|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|PART I  
|Item 1.  |  | Business                                                                                           |  |      | 2  | 
|Item 2.  |  | Properties                                                                                         |  |      | 8  | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |      | 9  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 9  | 
|PART II 
|Item 5.  |  | Market for Registrants Common Stock and
    Related Stockholder Matters                           |  |      | 9  | 
|Item 6.  |  | Selected Financial Data                                                                            |  |      | 11 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 13 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |      | 33 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                        |  |      | 34 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |      | 70 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                 |  |      | 70 | 
|Item 11. |  | Executive Compensation                                                                             |  |      | 72 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |      | 77 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 79 | 
|Item 14. |  | Controls and Procedures                                                                            |  |      | 80 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                               |  |      | 81 | 
|         |  | Signatures                                                                                         |  |      | 84 | 
|         |  | Certifications                                                                                     |  |      | 85 | 

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PART I

In addition to historical information, this
Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties that could cause
actual results to differ materially from the results implied by
the forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to,
those discussed in the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations-Factors That May Affect Future Results of
Operations. You should carefully review the risks
described in other documents we file from time to time with the
Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q to be filed in 2003. When used in this
report, the words expects, anticipates,
intends, plans, believes,
seeks, targets, estimates,
and similar expressions are generally intended to identify
forward-looking statements. You should not place undue reliance
on the forward-looking statements, which speak only as of the
date of this Annual Report on Form 10-K. We undertake no
obligation to publicly release any revisions to the
forward-looking statements or reflect events or circumstances
after the date of this document.






|        |         
|------- | --------
|Item 1. | Business

General

Viewpoint Corporation provides interactive media
technologies and digital content creation services for website
marketing, online advertising, and embedded applications. Our
graphics operating system has been licensed by Fortune
500 companies and others for use in online, offline and
embedded applications serving a wide variety of needs,
including: business process visualizations, marketing campaigns,
rich media advertising and product presentations.

Until December 1999, the Company (which was then
known as MetaCreations) was primarily engaged in the
development, marketing, and sales of prepackaged software
graphics products. Its principal products were computer graphics
painting tools, photo editing, and 3D graphics
software. With its acquisition of Real Time Geometry Corporation
in December 1996, the Company became involved, on a limited
basis, in the development of technologies designed to make
practical the efficient display and deployment of interactive
media on the Internet. In June 1999, the Company increased its
commitment to the development of interactive Internet
technologies and formed Metastream.com Corporation to operate a
business exploiting these technologies. In December 1999, the
Board of Directors of the Company approved a plan to focus
exclusively on the Internet technologies of Metastream and to
correspondingly divest the Company of all its prepackaged
software business. In September 2000, the Company acquired
Viewpoint Digital, Inc., a company primarily involved in the
licensing of a catalog of three-dimensional digital models and
providing digital content creation services. In November 2000,
the Company changed its name to Viewpoint Corporation and
changed its ticker symbol from MCRE to VWPT.

Viewpoint Experience Technology and the
Viewpoint Media Player

Our technology, which we refer to as Viewpoint
Experience Technology, or VET, enables Websites and other media
publishers to integrate many interactive graphics media
technologies onto regular Web pages or other digital formats.
Available media types include: photo-realistic 3D,
high-resolution two-dimensional images, text annotations and
animations, Macromedia®FlashTM-compatible vector
graphics animations, object movies, immersive surround pictures,
and digital audio and video. Interactive digital media can add
dimension, contextual information, animation, realistic color,
shadows and real-time reflections, movement, and robust
interactivity to otherwise static digital objects. Our
technology enables websites to publish content that mixes the
narrative drive of more traditional media with the interaction
of the Web. End-users can be invited to rotate and re-position
objects, view extended, narrowband-friendly presentations, and
configure colors and patterns.

VET involves the publication of digital content
created in the Viewpoint format from a web server or other
digital format and the playback of that content by Viewpoint
Media Player, our software that operates on the end-users
computer, i.e., on the client-side.

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Viewpoints client-side software exploits
the abundant processing power available on the end users
computer to perform most of the functions of displaying and
processing information so that a server need only transmit
relatively small files to communicate complex messages. For
example, in the absence of client-side software, each end-user
interaction with a digital three-dimensional model served from a
website would involve a separate communication between the
end-users computer and the server. In contrast,
Viewpoints client-side software can process instructions
served by a web server to instantaneously assemble a digital
three-dimensional model on the end-users computer. Once
the model is displayed on the end-users screen, the user
can interact with the model without communicating further with
the web server. As computer processing capacities on personal
computers have grown at a much more rapid rate than that of
connection speeds in recent years, the Company believes
VETs use of this speed advantage is of significant
competitive importance.

Unlike many client-server systems,
Viewpoints technology does not involve special server
software.

Content that is interpreted by Viewpoint Media
Player can be created with most graphics industry standard
prepackaged software products, such as Adobes Photoshop
and Autodesks 3D Studio Max products. We also make
software applications for creating content in the Viewpoint
format available for free from our website.

Viewpoint Media Player software is automatically
updateable. As we develop and release new features and
functionality of the software, we update an end-users
existing version when the end user next views a web page which
contains content in the Viewpoint format. We do not
ship new versions of Viewpoint Media Player in the
same way that traditional software manufacturers do and,
therefore, we avoid the costs and delays associated with the
typical software product cycle. Moreover, the ability to update
an end users copy of a Viewpoint Media Player as it
encounters content in the Viewpoint format assures content
publishers that their content can exhibit the latest features
and improvements without requiring end-users to endure a lengthy
download process.

Like Microsofts .NET platform,
Viewpoints technology employs extensible mark-up language
(or XML), an increasingly popular language for
describing data and enabling it to communicate with other forms
of data. Since content in the Viewpoint format is able to
instantaneously exchange data with other platforms and
programming languages, deep integration between interactive
media in our format and other data systems can be achieved.

Our technology is not dependent on any particular
platform; it can be deployed to provide efficient visualization
techniques not only on personal computers but also on cable
television set-top boxes, in personal digital assistant devices,
within and beyond browser environments, and on compact disks,
and other media formats. As a method of providing efficient
visual communication, we believe the commercial applications of
VET are virtually unlimited. However, we are primarily focused
at this time on licensing our technology for use in enhancing
website offerings. Recently we have begun to focus on licensing
our technology for online advertising purposes. We also market
our technology, albeit to a lesser extent, for use in custom
developed applications.

Viewpoint Professional Services

We provide fee-based professional services for
implementing visualization solutions. Encompassing both digital
content creation and application enhancing services, our
strategic, creative and consulting services bring together our
teams of experts in rich media, content creation and technology
implementation in order to identify the ideal Viewpoint solution
for each clients unique needs and to ensure the timely,
successful implementation of those solutions. Our professional
services groups use VET as well as a spectrum of tools and other
technologies to create enhanced rich media solutions for our
clients particular purposes, whether over the Web,
intranet systems or offline media applications. Our professional
services groups provide the support our clients need to
implement the rich media content, to fully utilize the enhanced
softwares and/or to maximize the branding potential of the
advertising opportunity.

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Viewpoints Business Model

The Companys business model differs from
that of many other companies that have developed Website design
and content-creation software for sale or license to a target
market of Internet professionals  that is, Website
developers, interactive agencies, solutions integrators,
application service providers and content developers, as well as
professionals working in-house at e-merchants and other Website
owners. Instead of selling pre-packaged software products to
Internet professionals  a relatively small
market  we endeavor primarily to license technology
to the audience where the value is created: the much larger
market of e-commerce merchants, Website owners and others who
can harvest benefits from communicating visually in the digital
domain. Moreover, as described below, we generally license the
use of our technology in a way that encourages repetitive
payments, instead of the one-time fees associated with
prepackaged software tools sales.

We earn fees by licensing the right to publish or
broadcast content that can be read by Viewpoint
Media Player. We issue to our customers keys that enable their
websites to display content in the Viewpoint format. We offer
these keys through a variety of broadcast license arrangements
tailored to the specific needs of the client. Examples of
typical arrangements include:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | Licenses which are time-based and generally
    limited to specific Web site addresses or specific content;      
|
| |  | Licenses which are perpetual and generally
    limited to specific types or amounts of content;                  
|
| |  | Licenses which permit a narrowcast
    only to a local area network or intranet; and                           
|
| |  | Licenses that permit the client to distribute
    content by means of CDs, DVDs and other portable storage media.

We believe that this revenue model, if
successful, should produce a recurring stream of revenues from
existing clients with the opportunity to scale income
substantially as new customers are acquired.

To view content in the Viewpoint format, an
end-user must have Viewpoint Media Player software installed on
their computer. Like most makers of Internet-browsing plug-in
software, we do not charge end-users to download or use
Viewpoint Media Player. If content in the Viewpoint format is
displayed from a web server to an end-user who does not have
Viewpoint Media Player installed, the end-user will be afforded
the opportunity to download the player. Once the player is
installed, the end-user can view and interact with the content.

Many end-users browsing through the Internet are
reluctant to download software, such as Viewpoint Media Player,
to view specialized content. Therefore, broad distribution of
the Viewpoint Media Player to computers is important to our
success. In September 2002, Ipsos-NPD, a world-leading market
research firm, conducted a quantitative online study to evaluate
the penetration of various media players across the U.S.,
including Viewpoint Media Player. The survey found that 55.7% of
Internet users in the United States have Viewpoint Media Player
installed and active on their machines.

A key aspect of our business model is an
open tools philosophy. We believe the long-term
success of our platform will be fueled by having the most
popular content creation tools able to output content in the
Viewpoint format, rather than requiring design professionals to
use Viewpoints own proprietary toolset. This approach
eliminates much of the very large cost associated with
development and support of proprietary commercial toolsets.
Another advantage of this strategy is that software tools
companies that do incorporate Viewpoint functionality, such as
Adobe Systems Incorporated and Autodesk Incorporated, have
natural incentives to promote the Viewpoint platform. More than
50 companies are developing or have developed support for the
Viewpoint format within their tools. In addition, we make
available on our Website, without charge, the core software
necessary to develop Viewpoint content, as well as extensive
tutorials and related materials.

Our professional services groups play an integral
role in our overall strategy. Professional services provide a
significant revenue opportunity, through the sale of complete
solutions comprising technology and content creation services to
customers desiring a single vendor solution. At the same time,
the groups increase our ability to sell broadcast licenses, by
enabling us to offer Viewpoint content to clients who are
impressed by the

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advantages of VET but who do not wish to create
Viewpoint content themselves or trust that creation to others.
Also, the groups work keeps us on the cutting-edge of the
industry, giving us hands-on experience with the design and
development problems faced by our own clients, and enabling us
to provide thorough, up-to-date training for other industry
professionals. Nonetheless, we are not reliant on our own
content creation services. We have cultivated a network of
thousands of independent content developers trained to provide
those services because we do not want a limited pool of content
creators to become an obstacle to expanding the more profitable
licensing business.


In response to encouragement from several
customers, we began in 2001, and continued throughout most of
2002, to market engineering services to enhance existing or
create new software applications meant to perform a specific
task or set of tasks or assist in communicating through
visualization. While content creation services focus on creating
interactive digital objects and enhancing Websites, engineering
services create or alter software to enable clients to design
products, improve process workflow or enhance customer service
experiences. The Companys engineering services leverage
off of the existing engineering staff and the Companys
growing engineering application developers network. Although the
Company continues to perform custom engineering services in some
cases, we are not actively marketing these services but rather
focusing our sales and marketing efforts more narrowly on
website marketing and online advertising.

Market Opportunity

The market for interactive media technologies is
relatively small. However, the number of Internet users
continues to increase rapidly as does the number of commercial
applications that are based on digital technology. We believe
that these patterns will result in continuing the trend of
increasing expenditures for online marketing, advertising,
branding, and e-commerce, and that such communications will
increasingly utilize interactive media technologies.

We initially focused our business on Website
licensing for marketing and direct selling. We believe our
technology meets this markets demand for:



| |   |                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Effective merchandising to build brand awareness
    and drive sales.                                                                                                                                                                        
|
| |  | Realistic product presentation and interaction.                                                                                                                                                                                              
|
| |  | Interoperability of major media types required
    for compelling product displays (including, for example,
    interactive 3D, vector graphics, character animation, object
    movies, high resolution 2D images, digital sound and video).
|
| |  | Compression and streaming delivery at narrowband
    and broadband data rates.                                                                                                                                                               
|
| |  | Client-side data logging of the use of downloaded
    rich media.                                                                                                                                                                            
|
| |  | Ease of deployment and integration into Web,
    hyper-text mark-up language and IT infrastructures.                                                                                                                                         
|
| |  | Continual advancement and refresh of
    features (through the automatic update function of Viewpoint
    Media Player).                                                                                                                   
|
| |  | Consistent and high quality playback across
    browser and non-browser environments and all major playback
    platforms.                                                                                                                   

In the third quarter of 2002, the Company began
marketing its technology and services for use in online
advertising. The Company believes that the web lacks compelling
advertising formats and that numerous additional digital
advertising formats are emerging, such as those for
televisions new digital set-top boxes. We further believe
that our technology enables advertisers to deliver compelling
and interactive ads, tapping into a large selection of media
types. We also believe that Viewpoints potential for
providing client-side tracking as well as high playback quality
and consistency across advertising platforms should provide
strong defensibility in this space.

In the third and fourth quarters of 2002, a total
of three advertisers deployed advertisements using content in
the Viewpoint format. Since January 1, 2003, six
advertisers have launched advertisements from websites

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using content in the Viewpoint format. Reports we
have received from publishers indicate that end-users are
interacting with ads in the Viewpoint format at rates that are
more than ten times higher than the average rate at which
Internet users interact with or click-through static
banner ads. Although these higher interactivity
rates may be due in part to the novelty of encountering
interactive ads in the Viewpoint format, we believe that
advertisers utilizing the Viewpoint format will consistently
achieve higher recognition than otherwise results from
advertisements published in standard formats.


Viewpoint also provides custom engineering
services in the development of enterprise applications of our
technology. The Company believes that, as data becomes more
complicated and is communicated over wider geographic distances,
providing efficient and effective visualization will become
critical to publishers success and that the market for
custom visualization applications will grow. We are currently
providing custom engineering services for several clients and
expect to continue to perform these services for additional
customers. However, we are not currently devoting substantial
sales and marketing resources to pursue these opportunities so
that we can focus on the more saleable markets for e-commerce,
marketing and online advertising.

Major Customer

America Online, Inc. (AOL) was our
largest customer in 2002, accounting for 51% of our revenue. We
entered into a licensing and services agreement with AOL in July
2001 that provides for a three-year initial term, with three
one-year renewal terms. The majority of the license fees for the
initial term were received in 2002. In 2002, we entered into a
master consulting agreement under which we provide content
creation services to AOL from time to time for additional fees
which are negotiated at the time the projects to be performed
are identified and documented. We expect to continue to perform
such services in 2003.

Under two additional licensing and service
agreements we entered into with AOL in 2002, we performed custom
engineering services and provided limited license rights on a
project basis. We may be entering into similar arrangements with
AOL in 2003.

Competition

The Companys competitors (and some of their
products) include: Kaon (Activate!3D); Cycore AB (Cult3D);
Macromedia, Inc. (Shockwave and Flash); and Rich FX
(Examine-FX). Some of the Companys competitors and
potential competitors have longer operating histories and
significantly greater financial, management, technology,
development, sales, marketing and other resources than the
Company. As the Company competes with larger competitors across
a broader range of products and technologies, the Company may
face increasing competition from such companies. If these or
other competitors develop products, technologies or solutions
that offer significant performance, price or other advantages
over those of the Company, the Companys business would be
harmed.

A variety of other possible actions by the
Companys competitors could also have a material adverse
effect on the Companys business, including increased
promotion or the introduction of new or enhanced products and
technologies. Moreover, new personal computer platforms and
operating systems may provide new entrants in the market with
opportunities to obtain a substantial market share in the
Companys markets.

The Company also faces competition from
developers of personal computer operating systems such as
Microsoft and Apple Computer, Inc., as well as from open-source
operating systems such as Linux. These operating systems may
incorporate functions that could be superior to or incompatible
with the Companys products and technologies.

Most companies that offer enhanced visualization
products for use on the Internet target a single media type. For
example, Cult 3D provides a client-server based system for
predominantly viewing three-dimensional images. Some of our
potential customers use the technologies afforded by these
companies because their offerings are less expensive.

Macromedia, Inc. produces and markets
Flash, a popular pre-packaged software product that
enables design professionals to create animated content.
Macromedia sells copies of Flash to design professionals,

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employing a business model that Viewpoint
abandoned in early 2000. The prevalence of Flash means that
Website publishers seeking to add animated content to their
sites are able to tap into a large population of content
creators to obtain animated content. This method of obtaining
and deploying content is typically less expensive for website
publishers than obtaining and deploying content in the Viewpoint
format.


Nonetheless, we believe that VET offers
significant advantages over many of our competitors
products:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Greater visual
    realism We believe that 3D
    and other digital rich media objects created in the Viewpoint
    format offer higher quality and a more true-to-life online
    experience than competitors formats.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Interactivity
    VET lets a customer interact with and examine our clients
    products in ways not possible with our competitors
    formats. The variety of media types available in instances of
    content in the Viewpoint format and the integration of these
    media types affords end-users an opportunity to interact with
    content to a degree not available through our competitors
    offerings. Viewpoint lets consumers pick up/put down, zoom
    in/out, see how parts move, add/remove components, turn products
    on/off, change colors/fabrics/textures, instantly receive key
    data (e.g. compare pricing).                                 
|
| |  | Narrowband
    friendly Viewpoints
    compression technology greatly reduces download time of
    3D objects to almost what is expected from ordinary
    2D images, so that even consumers with slow connections to
    the Internet can see Viewpoint content quickly and can interact
    with them in real time. The client-side rendering makes this
    possible as only a small file of instructions are communicated
    to the end-users computer, where the object is actually
    rendered. Many of the Companys competitors render objects
    on the server-side which is more taxing on servers and
    connections and leads to poorer user interoperability.
|
| |  | Many media/One
    player Viewpoint includes
    and integrates seamlessly with many rich media types like IPIX
    Panoramas, high quality 3D, text annotations, FlashÀ vector
    graphics, audio and more, enabling clients to create more
    compelling Web experiences in a concise and integrated fashion.                                                                                                                                                                                                                                                                                                                                                               
|
| |  | No pop-up
    windows Viewpoints
    transparent windowless rendering allows
    3D images to share space on the page with text, graphics,
    and even buttons and hyperlinks. Our browser-less
    rendering allows 3D objects and vector graphics
    animation to play right over open windows. 2D images can
    hyper zoom from traditional thumbnails into images
    that utilize the entire screens desktop area. The XML
    capabilities of the technology allow a seamless and immediately
    updateable data integration with back-end servers without
    generating additional windows.                                                                 
|
| |  | Automatic
    updates Once users
    download the Viewpoint Media Player, they can automatically
    receive all releases and upgrades when next viewing a web page
    containing content in the Viewpoint format. Because new releases
    and additional functionality can be sent automatically, in the
    background, the users online experience is never
    interrupted.                                                                                                                                                                                                                                                                                              
|
| |  | Lack of dependence on
    Java The Companys
    technology is not based upon the Java software language, which
    is inconsistently supported in the current and recent version of
    Microsofts browser, Internet Explorer. In addition, it is
    not clear whether future versions of Internet Explorer will
    provide Java support. Some of Viewpoints competitors base
    their technology on the Java language and the Company feels its
    lack of dependence on Java technology is an advantage.                                                                                                                                                               
|
| |  | Seamless
    integration VET technology
    requires no special server side software to deploy, and
    integrates easily with existing hyper-text mark-up language
    pages and back end database systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Viewpoint is currently a leading provider of
interactive media technologies and services, as noted by several
trade publications. In September 2002, Ipsos-NPD, a
world-leading market research firm, conducted a quantitative
online study to evaluate the penetration of various media
players across the U.S., including Viewpoint Media Player. The
survey found that 55.7% of Internet users in the United States
have Viewpoint Media Player installed and active on their
machines. Viewpoint Media Player penetration exceeded that of
Real Networks RealPlayer (47.7%), and Apple QuickTime (52.5%),
and was on par with Macromedia Shockwave.

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Product Development

Continuous development of new products and
enhancements of our existing products is critical to our
success. The Companys principal current product
development efforts are focused on the development of Viewpoint
Experience Technology and other complementary technologies. From
time to time, the Company may also acquire rights or licenses to
basic software technologies that it considers complementary to
its Viewpoint solution.

The Companys growth will, in part, be a
function of the introduction of new products, technologies and
services and future enhancements to existing products and
technologies. Any such new products, technologies or
enhancements may not achieve market acceptance. In addition, the
Company has historically experienced delays in the development
of new products, technologies and enhancements, and such delays
may occur in the future. If the Company were unable, due to
resource constraints or technological or other reasons, to
develop and introduce such products, technologies or
enhancements in a timely manner, this inability could have a
material adverse effect on the Companys business. In
particular, the introductions of new products, technologies and
enhancements, are subject to the risk of development delays.

The Companys research and development
expenses, exclusive of non-cash stock compensation charges, were
approximately $4,836,000, $6,926,000 and $6,366,000, for 2002,
2001, and 2000, respectively. The Company may hire additional
engineers in connection with its continued product development
efforts, which would result in increased research and
development expenses.

Intellectual Property

The Company regards its patents, copyrights,
service marks, trademarks, trade dress, trade secrets, propriety
technology and similar intellectual property as critical to its
success, and relies on trademark, copyright and patent law,
trade secret protection and confidentiality and/or license
agreements with its employees, partners, customers and others to
protect its proprietary rights. The Company has applied for the
registration of certain of its trademarks and service marks in
the United States and internationally. We have nine patents that
expire on varying dates between 2006 and 2020. In addition, the
Company has filed U.S. and international patent applications
covering certain of its proprietary technology. Effective
trademark, service mark, copyright, patent and trade secret
protection may not be available in every country in which the
Companys products and services are made available online.
The Company has licensed in the past, and expects that it may
license in the future, certain of its proprietary rights, such
as patents, trademarks, technology or copyrighted material, to
third parties.

Employees

As of March 28, 2003, Viewpoint had
141 full time employees, including 40 in sales and
marketing; 37 in creative services; 49 in research, development
and quality assurance; and 15 in administration. The Company
also employs independent contractors. The employees and the
Company are not parties to any collective bargaining agreements,
and the Company believes that its relationships with its
employees are good.

In our continuing efforts to achieve
efficiencies, we consolidated our U.S. offices and reduced
by forty-eight the number of our employees during the first
quarter of 2003. Most of these employees were involved in the
content-creation process, a function which we have increasingly
outsourced to third parties.

The continued development, enhancement, and
maintenance of our technology is contingent on our ability to
attract and retain experienced and talented software engineers.
While we do not currently anticipate a short-term need for
additional software engineers, recruiting qualified personnel
has sometimes been difficult and time-consuming.






|        |           
|------- | ----------
|Item 2. | Properties

The Company leases approximately 17,000 square
feet of space on the 18th floor of a 24-story office building in
New York City, New York. This space houses approximately 108
personnel, including substantially all of the Companys
general and administrative and research and development
personnel as well as a

8



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significant portion of the sales and marketing
and creative services personnel. The primary lease agreement
expires in March 2010, if not renewed. The Company believes that
this office space is adequate for its current needs and that
additional space is available in the building or in the New York
City area to provide for anticipated growth.


The Company also leases approximately 12,000
square feet of office space in Los Angeles, California, pursuant
to a lease that expires in December 2004. This space houses
approximately 17 personnel principally engaged in sales and
marketing, creative services, and management information systems
services.

The Company also leases approximately 12,000
square feet of office space in Draper, Utah, pursuant to a
sublease agreement that expires in April 2010. This space housed
approximately 29 personnel principally engaged in sales and
marketing, creative services, and management information systems
services. In February 2003 the Company closed this office and is
currently in the process of subleasing the property.








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

The Company is engaged in certain legal actions
arising in the ordinary course of business. The Company believes
it has adequate legal defenses in legal actions in which it is
the defendant and believes that the ultimate outcome of such
actions will not have a material adverse effect on the
Companys consolidated financial position, results of
operations, or cash flows. None of the proceedings or group of
similar proceedings involve a claim for damages that exceeds ten
percent of our current assets.








|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

None.




PART II








|        |                                                                         
|------- | ------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Stock
    and Related Stockholder Matters

Viewpoint Corporations
(Viewpoint or the Company) common stock,
$0.001 par value, began trading over the counter in December
1995. The common stock is traded on The Nasdaq National Market
under the symbol VWPT. On March 28, 2003, there
were 318 holders of record of our common stock. Because brokers
and other institutions on behalf of stockholders hold many of
such shares, we are unable to estimate the total number of
stockholders represented by these record holders. The following
table sets forth, for the periods indicated, the range of high
and low closing sales prices per share of our commons stock:

|            |  |      |      |     |  |   |      | 
|----------- |  | ---- | ---- | --- |  | - | ---- | 
|            |  | High |      | Low
|            |  |      |      |    
|2002        |  |      |      |     |  |   |      | 
|4th Quarter |  | $    | 3.30 |     |  | $ | 1.65 | 
|3rd Quarter |  |      | 4.83 |     |  |   | 2.18 | 
|2nd Quarter |  |      | 6.25 |     |  |   | 4.82 | 
|1st Quarter |  |      | 6.99 |     |  |   | 5.09 | 
|2001        |  | $    | 8.50 |     |  | $ | 2.75 | 
|4th Quarter |  |      | 7.11 |     |  |   | 3.00 | 
|3rd Quarter |  |      | 7.65 |     |  |   | 2.86 | 
|2nd Quarter |  |      | 8.50 |     |  |   | 3.94 | 
|1st Quarter |  |      | 7.69 |     |  |   | 2.75 | 

The Nasdaq National Market notified us on
March 20, 2003 that our common stock may be delisted from
Nasdaq for failure to maintain a minimum bid price of $1.00 and
that we will be provided until September 16, 2003 to regain
compliance with National Market standards. If we are unable to
regain

9



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compliance with the minimum bid price we may be
eligible to transfer our common stock to listing on The Nasdaq
SmallCap Market if we meet applicable listing standards and
thereby gain an additional 180 days to regain compliance
with the minimum bid price requirement. In response to the
potential delisting of our common stock due to the failure to
meet the Nasdaq National Markets minimum bid price
requirement, we may ask our stockholders to authorize a reverse
stock split at our annual meeting in 2003. If the reverse stock
split is approved by our stockholders and we effect the reverse
stock split, we would reduce the number of outstanding shares of
common stock. With fewer shares outstanding, we would expect our
stock price to increase. While a reverse stock split may enable
us to cure the minimum bid price deficiency, share prices of
companies effecting reverse stock splits often decline and we
cannot assure you that our stock price would not decline after a
reverse stock split.


The Company has not paid any cash dividends on
its common stock to date. The Company currently anticipates that
it will retain all future earnings, if any, for use in its
business and does not anticipate paying any cash dividends on
its common stock in the foreseeable future.

Information with respect to securities authorized
for issuance under equity compensation plans is included in our
Proxy Statement relating to our 2003 annual meeting of
stockholders and is incorporated herein by reference.

10



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected consolidated financial
data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and
related notes thereto appearing elsewhere in this Annual Report
on Form 10-K.

|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |         |  
|--------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | - | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                      |                                                                                                                                                      |                                      
|                                                                      |                                                                                                                                                      | Years Ended December 31,             
|                                                                      |                                                                                                                                                      |                                      
|                                                                      |                                                                                                                                                      | 2002                                  |         | 2001   |   | 2000 |         | 1999   |   | 1998
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |     
|                                                                      |                                                                                                                                                      |                                      
|                                                                      |                                                                                                                                                      | (In thousands, except per share data)
|Statements of Operations Data                                         |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Revenues:                                                             |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|                                                                      | Licenses                                                                                                                                             |                                       | $       | 5,039  |   |      | $       | 8,148  |   |      | $       | 1,421  |   |   | $       | 1,868   |   |   | $       | 3,001   |  
|                                                                      | Related party licenses                                                                                                                               |                                       |         | 7,554  |   |      |         | 1,533  |   |      |         |       |   |   |         | 950     |   |   |         |        |  
|                                                                      | Services                                                                                                                                             |                                       |         | 3,302  |   |      |         | 3,500  |   |      |         | 1,659  |   |   |         | 25      |   |   |         |        |  
|                                                                      | Related party services                                                                                                                               |                                       |         | 2,244  |   |      |         | 827    |   |      |         | 500    |   |   |         | 250     |   |   |         |        |  
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Total revenues                                                        |                                                                                                                                                      |                                       | 18,139  |        |   |      | 14,008  |        |   |      | 3,580   |        |   |   | 3,093   |         |   |   | 3,001   |        
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Cost of Revenues:                                                     |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|                                                                      | Licenses                                                                                                                                             |                                       |         | 353    |   |      |         | 309    |   |      |         | 76     |   |   |         |        |   |   |         |        |  
|                                                                      | Services                                                                                                                                             |                                       |         | 3,587  |   |      |         | 3,283  |   |      |         | 1,467  |   |   |         |        |   |   |         |        |  
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Total cost of revenues                                                |                                                                                                                                                      |                                       | 3,940   |        |   |      | 3,592   |        |   |      | 1,543   |        |   |   |        |         |   |   |        |        
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Gross profit                                                          |                                                                                                                                                      |                                       | 14,199  |        |   |      | 10,416  |        |   |      | 2,037   |        |   |   | 3,093   |         |   |   | 3,001   |        
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Operating expenses:                                                   |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|                                                                      | Sales and marketing (including non-cash
    stock-based compensation charges totaling $3,187 in 2002, $2,335
    in 2001, and $5,122 in 2000)        |                                       |         | 16,682 |   |      |         | 17,521 |   |      |         | 18,616 |   |   |         | 3,000   |   |   |         | 981     |  
|                                                                      | Research and development (including non-cash
    stock-based compensation charges totaling $712 in 2002, $2,920
    in 2001, and $4,193 in 2000)     |                                       |         | 5,548  |   |      |         | 9,846  |   |      |         | 10,559 |   |   |         | 5,055   |   |   |         | 1,434   |  
|                                                                      | General and administrative (including non-cash
    stock-based compensation charges totaling $1,523 in 2002, $1,918
    in 2001, and $3,026 in 2000) |                                       |         | 9,134  |   |      |         | 10,423 |   |      |         | 9,814  |   |   |         | 6,993   |   |   |         | 4,010   |  
|                                                                      | Depreciation                                                                                                                                         |                                       |         | 1,962  |   |      |         | 1,804  |   |      |         | 801    |   |   |         | 406     |   |   |         | 399     |  
|                                                                      | Amortization of intangible assets(1)(2)                                                                                                              |                                       |         | 664    |   |      |         | 3,325  |   |      |         | 1,258  |   |   |         | 75      |   |   |         | 150     |  
|                                                                      | Amortization of goodwill(1)                                                                                                                          |                                       |         |       |   |      |         | 14,128 |   |      |         | 1,767  |   |   |         |        |   |   |         |        |  
|                                                                      | Impairment of goodwill and other intangible
    assets(2)                                                                                            |                                       |         | 6,275  |   |      |         | 7,925  |   |      |         |       |   |   |         |        |   |   |         |        |  
|                                                                      | Compensation charge related to forgiveness of an
    officer loan                                                                                    |                                       |         |       |   |      |         |       |   |      |         | 2,322  |   |   |         |        |   |   |         |        |  
|                                                                      | Non-cash sales and marketing charges(3)                                                                                                              |                                       |         |       |   |      |         |       |   |      |         | 19,998 |   |   |         |        |   |   |         |        |  
|                                                                      | Acquired in-process research and development
    costs(1)                                                                                            |                                       |         |       |   |      |         |       |   |      |         | 963    |   |   |         |        |   |   |         |        |  
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Total operating expenses                                              |                                                                                                                                                      |                                       | 40,265  |        |   |      | 64,972  |        |   |      | 66,098  |        |   |   | 15,529  |         |   |   | 6,974   |        
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Loss from operations                                                  |                                                                                                                                                      |                                       | (26,066 | )      |   |      | (54,556 | )      |   |      | (64,061 | )      |   |   | (12,436 | )       |   |   | (3,973  | )      
|Other income                                                          |                                                                                                                                                      |                                       | 153     |        |   |      | 1,064   |        |   |      | 2,180   |        |   |   | 2,286   |         |   |   | 2,618   |        
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Loss before provision for income taxes                                |                                                                                                                                                      |                                       | (25,913 | )      |   |      | (53,492 | )      |   |      | (61,881 | )      |   |   | (10,150 | )       |   |   | (1,355  | )      
|Provision (benefit) for income taxes                                  |                                                                                                                                                      |                                       | 107     |        |   |      |        |        |   |      |        |        |   |   | 5,481   |         |   |   | (353    | )      
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Loss before minority interest in loss of
    subsidiary               |                                                                                                                                                      |                                       | (26,020 | )      |   |      | (53,492 | )      |   |      | (61,881 | )      |   |   | (15,631 | )       |   |   | (1,002  | )      
|Minority interest in loss of subsidiary                               |                                                                                                                                                      |                                       |        |        |   |      |        |        |   |      | 4,429   |        |   |   | 1,048   |         |   |   |        |        
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Net loss from continuing operations                                   |                                                                                                                                                      |                                       | (26,020 | )      |   |      | (53,492 | )      |   |      | (57,452 | )      |   |   | (14,583 | )       |   |   | (1,002  | )      
|Discontinued operations:                                              |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|                                                                      | Loss from discontinued operations                                                                                                                    |                                       |         |       |   |      |         |       |   |      |         |       |   |   |         | (14,811 | ) |   |         | (18,829 | )
|                                                                      | Adjustment to net loss on disposal of
    discontinued operations                                                                                    |                                       |         | 127    |   |      |         | 1,122  |   |      |         | 1,496  |   |   |         | (21,260 | ) |   |         |        |  
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Net income (loss) from discontinued
    operations(4)                 |                                                                                                                                                      |                                       | 127     |        |   |      | 1,122   |        |   |      | 1,496   |        |   |   | (36,071 | )       |   |   | (18,829 | )      
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Net loss                                                              |                                                                                                                                                      |                                       | (25,893 | )      |   |      | (52,370 | )      |   |      | (55,956 | )      |   |   | (50,654 | )       |   |   | (19,831 | )      
|Accretion of mandatorily redeemable preferred
    stock of subsidiary |                                                                                                                                                      |                                       |        |        |   |      |        |        |   |      | (438    | )      |   |   |        |         |   |   |        |        
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Net loss applicable to common shareholders                            |                                                                                                                                                      | $                                     | (25,893 | )      |   | $    | (52,370 | )      |   | $    | (56,394 | )      |   | $ | (50,654 | )       |   | $ | (19,831 | )      
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Basic and diluted net loss per common share:                          |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|                                                                      | Net loss per common share from continuing
    operations                                                                                             |                                       | $       | (0.64  | ) |      | $       | (1.37  | ) |      | $       | (2.01  | ) |   | $       | (0.59   | ) |   | $       | (0.04   | )
|                                                                      | Net income (loss) per common share from
    discontinued operations                                                                                  |                                       |         | (0.00  | ) |      |         | 0.03   |   |      |         | 0.05   |   |   |         | (1.47   | ) |   |         | (0.79   | )
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Net loss per common share                                             |                                                                                                                                                      | $                                     | (0.64   | )      |   | $    | (1.34   | )      |   | $    | (1.96   | )      |   | $ | (2.06   | )       |   | $ | (0.83   | )      
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        
|Weighted average number of shares
    outstanding  basic and diluted |                                                                                                                                                      |                                       | 40,759  |        |   |      | 39,077  |        |   |      | 28,718  |        |   |   | 24,581  |         |   |   | 23,779  |        
|                                                                      |                                                                                                                                                      |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |         |   |   |         |        

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|                                                 |  |                |        |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        | 
|------------------------------------------------ |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ------ | 
|                                                 |  |               
|                                                 |  | December 31,  
|                                                 |  |               
|                                                 |  | 2002           |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                 |  |                |        |      |  |      |        |      |  |     
|                                                 |  |               
|                                                 |  | (In thousands)
|Balance Sheet Data                               |  |                |        |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |        | 
|Cash, cash equivalents and marketable securities |  | $              | 11,568 |      |  | $    | 15,122 |      |  | $    | 29,033  |  |  | $ | 37,247 |  |  | $ | 46,335 | 
|Working capital                                  |  |                | 8,680  |      |  |      | 11,765 |      |  |      | 34,313  |  |  |   | 33,638 |  |  |   | 55,439 | 
|Total assets(1)                                  |  |                | 53,352 |      |  |      | 61,917 |      |  |      | 102,349 |  |  |   | 50,574 |  |  |   | 79,116 | 
|Convertible notes and warrants(5)                |  |                | 7,000  |      |  |      |       |      |  |      |        |  |  |   |       |  |  |   |       | 
|Stockholders equity                             |  |                | 38,352 |      |  |      | 52,737 |      |  |      | 96,339  |  |  |   | 29,901 |  |  |   | 70,181 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In November 2000, the Company consummated a share
    exchange with Computer Associates International, Inc.,
    (Computer Associates) and another shareholder of
    Metastream Corporation (Metastream), pursuant to
    which the Company issued 1.15 shares of the Companys
    common stock in exchange for each outstanding share of common
    stock of Metastream. The share exchanges were accounted for as
    acquisitions of minority interest under the purchase method of
    accounting, and goodwill of $42,892,000 was recorded.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In September 2000, the Company purchased all the
    outstanding capital stock of Viewpoint Digital, Inc.
    (Viewpoint Digital). The total purchase price
    including contingent consideration was $26,850,000 of which
    $24,517,000 was recorded as goodwill and other intangible assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Effective January 1, 2002, the Company
    completed the adoption of Statements of Financial Accounting
    Standards (SFAS) No. 141, Business
    Combinations, and SFAS No. 142, Goodwill and
    Other Intangible Assets. SFAS No. 141 requires all
    business combinations initiated after June 30, 2001 to be
    accounted for using the purchase method of accounting. As
    required by SFAS No. 142, the Company discontinued
    amortizing the remaining balances of goodwill as of
    January 1, 2002. All remaining and future acquired goodwill
    will be subject to impairment tests annually, or earlier if
    indicators of potential impairment exist, using a
    fair-value-based approach. All other intangible assets will
    continue to be amortized over their estimated useful lives and
    assessed for impairment under SFAS No. 144,
    Accounting for the Impairment or Disposal of Long-Lived
    Assets.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | During 2002, due to the persistence of
    unfavorable economic conditions along with lower-than-expected
    revenues generated to date and reduced estimates of future
    performance of the Viewpoint Digital assets, the Company
    performed an additional impairment analysis on the goodwill and
    other intangible asset balances recorded upon the acquisition of
    Viewpoint Digital. In accordance with the provisions of SFAS
    No. 142 and SFAS No. 144, the Company recorded
    impairment charges totaling $6,275,000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2001, the Company performed impairment
    assessments on the goodwill and other intangibles recorded upon
    the acquisition of Viewpoint Digital and the acquisition of
    Computer Associates minority interest in Metastream. As a
    result of continuing poor economic conditions, which resulted in
    a decrease in estimated undiscounted future cash flows, the
    Company recorded a $7,925,000 goodwill impairment charge on the
    Viewpoint Digital goodwill during the fourth quarter of 2001.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | In connection with the issuance of mandatorily
    redeemable preferred stock in Metastream to America Online, Inc.
    (AOL) and Adobe Systems Incorporated
    (Adobe), the Company recorded one-time non-cash
    sales and marketing charges of approximately $19,998,000 during
    the year ended December 31, 2000. These charges represented
    the difference between the fair market value of the
    Companys common shares into which AOL and Adobe could have
    converted the Metastream shares on the date of issuance, and the
    $20,000,000 aggregate cash consideration received from both AOL
    and Adobe. These charges were recorded as sales and marketing,
    as the incremental value of the equity over the cash
    consideration received was deemed to be the fair value of the
    license and distribution agreements simultaneously entered into
    with AOL and Adobe.
|   
|(4) | In December 1999, the Board of Directors of the
    Company approved a plan to focus exclusively on the
    Companys interactive media technologies and digital
    content creation services, and to correspondingly divest itself
    of all its prepackaged software graphics business. Consequently,
    the results of operations of the prepackaged software graphics
    business have been classified as net income (loss) from
    discontinued operations for the years ended December 31,
    1998 through 2002.                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(5) | On December 31, 2002, the Company completed
    a private placement of convertible notes and warrants in which
    it issued to three institutional investors,
    4.95% convertible notes having an aggregate principal
    amount of $7,000,000, and warrants to purchase
    726,330 shares of Company common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with the consolidated financial statements and notes
thereto.

In addition to historical information, this
Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties that could cause
actual results to differ materially from the results by the
forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to,
those discussed in the section entitled Factors That May
Affect Future Results of Operations. You should carefully
review the risks described in other documents we file from time
to time with the Securities and Exchange Commission, including
the Quarterly Reports on Form 10-Q to be filed in 2003.
When used in this report, the words expects,
anticipates, intends, plans,
believes, seeks, targets,
estimates, and similar expressions are generally
intended to identify forward-looking statements. You should not
place undue reliance on the forward-looking statements, which
speak only as of the date of this Annual Report on
Form 10-K. We undertake no obligation to publicly release
any revisions to the forward-looking statements or reflect
events or circumstances after the date of this
document.

Overview

Viewpoint Corporation provides interactive media
technologies and digital content creation services for website
marketing, online advertising, and embedded applications. Our
graphics operating system has been licensed by Fortune 500
companies and others for use in online, offline and embedded
applications serving a wide variety of needs, including:
business process visualizations, marketing campaigns, rich media
advertising and product presentations.

Until December 1999, the Company (which was then
known as MetaCreations) was primarily engaged in the
development, marketing, and sales of prepackaged software
graphics products. Its principal products were computer graphics
painting tools, photo editing, and 3D graphics
software. With its acquisition of Real Time Geometry Corporation
in December 1996, the Company became involved, on a limited
basis, in the development of technologies designed to make
practical the efficient display and deployment of interactive
media on the Internet. In June 1999, the Company increased its
commitment to the development of interactive Internet
technologies and formed Metastream.com Corporation to operate a
business exploiting these technologies. In December 1999, the
Board of Directors of the Company approved a plan to focus
exclusively on the Internet technologies of Metastream and to
correspondingly divest the Company of all its prepackaged
software business. In September 2000, the Company acquired
Viewpoint Digital, Inc., a company primarily involved in the
licensing of a catalog of three-dimensional digital models and
providing digital content creation services. In November 2000,
the Company changed its name to Viewpoint Corporation. The
Companys primary initiatives include:



| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Licensing technology for specific marketing and
    e-commerce visualization solutions;                                                                                                                                                              
|
| |  | Providing a full range of fee-based digital asset
    content creation and engineering professional services for
    implementing visualization solutions for marketing and creating
    new and enhancing existing enterprise software applications;
|
| |  | Proliferating the Viewpoint format into digital
    advertisements on various digital media, primarily the Web and
    digital set-top cable boxes;                                                                                                  
|
| |  | Forging technological alliances with leading
    interactive agencies and Web content providers; and                                                                                                                                                 
|
| |  | Maximizing market penetration and name
    recognition, including distribution of the Companys
    client-side software graphics operating system, Viewpoint Media
    Player                                                                       

Viewpoint believes that its success will depend
largely on its ability to improve and enhance its interactive
media technologies. Accordingly, Viewpoint has and intends to
continue to invest in research and development and sales and
marketing. Revenues from continuing operations primarily have
been from the sale of technology licenses and fee-based
professional services, including digital content creation
services and engineering services to enhance and create new
enterprise software applications.

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In light of its relatively recent change in
strategic focus from selling prepackaged software, Viewpoint has
a limited operating history upon which an evaluation of the
Company and its prospects can be based. Viewpoints
prospects must be considered in light of the risks and
difficulties frequently encountered by early stage technology
companies. There can be no assurance that Viewpoint will achieve
or sustain profitability. Viewpoint has had significant
quarterly and annual operating losses since its inception, and
as of December 31, 2002, had an accumulated deficit of
$224,077,000.

The Company may, from time to time, provide
guidance of certain financial and non-financial expectations and
has done so within this Form 10-K. We use these
expectations to assist us in making decisions about our
allocations of resources, not as predictions of future results.
The expectations are subject to risks of our business as well as
those contained in Factors That May Affect Future Results
of Operations.

Results of Operations

The following table sets forth certain selected
financial information expressed as a percentage of total
revenues for the periods indicated:

|                              |                                                                                      |                          |     |      |   |      |     |     |   |  |       |     |  
|----------------------------- | ------------------------------------------------------------------------------------ | ------------------------ | --- | ---- | - | ---- | --- | --- | - |  | ----- | --- | -
|                              |                                                                                      |                         
|                              |                                                                                      | Years Ended December 31,
|                              |                                                                                      |                         
|                              |                                                                                      | 2002                     |     | 2001 |   | 2000
|                              |                                                                                      |                          |     |      |   |     
|Statements of Operations Data |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    
|Revenues:                     |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    
|                              | Licenses                                                                             |                          |     | 28   | % |      |     | 58  | % |  |       | 40  | %
|                              | Related party licenses                                                               |                          |     | 42   |   |      |     | 11  |   |  |       |    |  
|                              | Services                                                                             |                          |     | 18   |   |      |     | 25  |   |  |       | 46  |  
|                              | Related party services                                                               |                          |     | 12   |   |      |     | 6   |   |  |       | 14  |  
|                              |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    
|Total revenues                |                                                                                      |                          | 100 |      |   |      | 100 |     |   |  | 100   |    
|                              |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    
|Cost of revenues:             |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    
|                              | Licenses                                                                             |                          |     | 2    |   |      |     | 2   |   |  |       | 2   |  
|                              | Services                                                                             |                          |     | 20   |   |      |     | 24  |   |  |       | 41  |  
|                              |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    
|Total cost of revenues        |                                                                                      |                          | 22  |      |   |      | 26  |     |   |  | 43    |    
|                              |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    
|Gross profit                  |                                                                                      |                          | 78  |      |   |      | 74  |     |   |  | 57    |    
|                              |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    
|Operating expenses:           |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    
|                              | Sales and marketing (including non-cash
    stock-based compensation charges)        |                          |     | 92   |   |      |     | 125 |   |  |       | 520 |  
|                              | Research and development (including non-cash
    stock-based compensation charges)   |                          |     | 30   |   |      |     | 70  |   |  |       | 295 |  
|                              | General and administrative (including non-cash
    stock-based compensation charges) |                          |     | 50   |   |      |     | 74  |   |  |       | 274 |  
|                              | Depreciation                                                                         |                          |     | 11   |   |      |     | 13  |   |  |       | 23  |  
|                              | Amortization of intangible assets                                                    |                          |     | 4    |   |      |     | 24  |   |  |       | 34  |  
|                              | Amortization of goodwill                                                             |                          |     |     |   |      |     | 101 |   |  |       | 49  |  
|                              | Impairment of goodwill and other intangible assets                                   |                          |     | 35   |   |      |     | 57  |   |  |       |    |  
|                              | Compensation charge related to forgiveness of an
    officer loan                    |                          |     |     |   |      |     |    |   |  |       | 65  |  
|                              | Non-cash sales and marketing charges                                                 |                          |     |     |   |      |     |    |   |  |       | 559 |  
|                              | Acquired in-process research and development costs                                   |                          |     |     |   |      |     |    |   |  |       | 27  |  
|                              |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    
|Total operating expenses      |                                                                                      |                          | 222 |      |   |      | 464 |     |   |  | 1,846 |    
|                              |                                                                                      |                          |     |      |   |      |     |     |   |  |       |    

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|                                                                      |  |                          |      |      |  |      |      |    |  |  |        |   
|--------------------------------------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | -- |  |  | ------ | --
|                                                                      |  |                         
|                                                                      |  | Years Ended December 31,
|                                                                      |  |                         
|                                                                      |  | 2002                     |      | 2001 |  | 2000
|                                                                      |  |                          |      |      |  |     
|Loss from operations                                                  |  |                          | (144 | )    |  |      | (389 | )  |  |  | (1,789 | ) 
|Other income                                                          |  |                          | 1    |      |  |      | 7    |    |  |  | 60     |   
|                                                                      |  |                          |      |      |  |      |      |    |  |  |        |   
|Loss before provision for income taxes                                |  |                          | (143 | )    |  |      | (382 | )  |  |  | (1,729 | ) 
|Provision for income taxes                                            |  |                          | (1   | )    |  |      |     |    |  |  |       |   
|                                                                      |  |                          |      |      |  |      |      |    |  |  |        |   
|Loss before minority interest in loss of
    subsidiary               |  |                          | (144 | )    |  |      | (382 | )  |  |  | (1,729 | ) 
|Minority interest in loss of subsidiary                               |  |                          |     |      |  |      |     |    |  |  | 124    |   
|                                                                      |  |                          |      |      |  |      |      |    |  |  |        |   
|Net loss from continuing operations                                   |  |                          | (144 | )    |  |      | (382 | )  |  |  | (1,605 | ) 
|Adjustment to net loss on disposal of
    discontinued operations     |  |                          | 1    |      |  |      | 8    |    |  |  | 42     |   
|                                                                      |  |                          |      |      |  |      |      |    |  |  |        |   
|Net loss                                                              |  |                          | (143 | )    |  |      | (374 | )  |  |  | (1,563 | ) 
|Accretion of mandatorily redeemable preferred
    stock of subsidiary |  |                          |     |      |  |      |     |    |  |  | (12    | ) 
|                                                                      |  |                          |      |      |  |      |      |    |  |  |        |   
|Net loss applicable to common shareholders                            |  |                          | (143 | )%   |  |      | (374 | )% |  |  | (1,575 | )%
|                                                                      |  |                          |      |      |  |      |      |    |  |  |        |   

Revenues

|                       |  |                        |        |          |  |      |     |          |  |      |        |  |  |  |     |   |  |   |       | 
|---------------------- |  | ---------------------- | ------ | -------- |  | ---- | --- | -------- |  | ---- | ------ |  |  |  | --- | - |  | - | ----- | 
|                       |  | 2002                   |        | % Change |  | 2001 |     | % Change |  | 2000
|                       |  |                        |        |          |  |      |     |          |  |     
|                       |  |                       
|                       |  | (Dollars in thousands)
|Licenses               |  | $                      | 5,039  |          |  |      | (38 | )%       |  | $    | 8,148  |  |  |  | 473 | % |  | $ | 1,421 | 
|Related party licenses |  |                        | 7,554  |          |  |      | 393 | %        |  |      | 1,533  |  |  |  | N/A |   |  |   |      | 
|Services               |  |                        | 3,302  |          |  |      | (6  | )%       |  |      | 3,500  |  |  |  | 111 | % |  |   | 1,659 | 
|Related party services |  |                        | 2,244  |          |  |      | 171 | %        |  |      | 827    |  |  |  | 65  | % |  |   | 500   | 
|                       |  |                        |        |          |  |      |     |          |  |      |        |  |  |  |     |   |  |   |       | 
|Total revenues         |  | $                      | 18,139 |          |  |      | 29  | %        |  | $    | 14,008 |  |  |  | 291 | % |  | $ | 3,580 | 

The Company recognizes revenue in accordance with
Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended, and Staff
Accounting Bulletin (SAB) No. 101 Revenue
Recognition in Financial Statements.

Viewpoint generates revenues through two sources:
(a) software licenses and (b) services. License
revenues are generated from licensing the rights to use our
products directly to end-users and indirectly through value
added resellers (VARs). Service revenues are
generated from fee-based professional services, sales of
customer support services (maintenance contracts), and training
services performed for customers that license our products.

License revenues from end-users include sales of
perpetual and term-based licenses for broadcasting digital
content in the Viewpoint format, and limited licenses for our
digital content library. License revenues are recognized over
the term of the license in a term-based broadcast license model
when the term is less than 15 months, and up-front in a
perpetual broadcast license model and term-based broadcast
license model when the term is 15 months or longer,
providing that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management.
License revenues from VARs require either (i) an
upfront, non-refundable payment or (ii) a percentage
royalty based on sell through, or both, as consideration for the
right to resell our technology. Up-front, non-refundable
payments are recognized when the license right begins and the
technology has been delivered to the VAR, which is upon content
contract signing, provided all other revenue recognition
criteria are met and no further obligations exist. For
arrangements that do not call for an up-front, non-refundable
payment, revenue is recognized as the royalties are earned,
which is upon notification of sell through, provided all other
revenue recognition criteria are met and no further obligations
exist.

Fee-based professional services for customized
software development are performed on a time-and-material or
fixed-fee basis, under separate service arrangements. Revenues
for fixed-fee arrangements are recognized on a
percentage-of-completion basis in accordance with the provisions
of SOP 81-1 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
and SAB No. 101. Percent-

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age-of-completion for service contracts is
measured principally by the percentage of costs incurred and
accrued to date for each contract, which principally consist of
direct labor costs and overhead, to the estimated total cost for
each contract at completion. Revenues from customer support
services are recognized ratably over the term of the contract.
Revenues from training services are recognized as services are
performed.


Fees from licenses sold together with fee-based
professional services are generally recognized upon delivery of
the software, provided that the payment of the license fees are
not dependent upon the performance of the services, and the
services are not essential to the functionality of the licensed
software. If the services are essential to the functionality of
the software, or payment of the license fees are dependent upon
the performance of the services, both the software license and
service fees are recognized on a percentage of completion method
of contract accounting.

For arrangements involving multiple elements, we
defer revenue for the undelivered elements based on their fair
value and recognize the difference between the total arrangement
fee and the amount deferred for the undelivered elements as
revenue. The determination of fair value of each undelivered
element in multiple element arrangements is based on the price
charged when the same element is sold separately. For
maintenance and technical support elements, we use renewal rates
to determine the price when sold separately.

License revenues decreased approximately
$3,109,000, or 38%, for 2002 compared to 2001. The decrease is
due to revenues generated by our digital content library
decreasing by $3,203,000. The decrease is the direct result of a
license agreement under which the Company licensed its digital
content library to a long-time, leading distributor of 3D
animation software for $750,000, which represented a
non-refundable minimum license fee of $500,000 in cash due upon
signing and $250,000 due within 90 days. As a result of
this transaction, the Company significantly reduced its sales
efforts relating to its digital content library in return for an
expected revenue share. After certain minimum revenue targets
are met, the Company will receive a 50% share in future net
revenues derived from sublicenses of its digital content
library. During the year ended December 31, 2002, the
minimum revenue targets were not met and the Company did not
receive a revenue share.

Related party license revenues increased by
approximately $6,021,000, or 393%, for 2002 compared to 2001.
The increase in related party license revenues is the result of
$5,993,000 in increased AOL license revenues and $125,000 in
increased Adobe license revenues, which were partially offset by
a decrease of $97,000 in Computer Associates license revenues.
The increase in AOL license revenues is due to our expanding
relationship with AOL which was evidenced by two new licensing
arrangements in 2002 in addition to a full year of license
revenues in 2002 related to a contract entered into in July of
2001. In addition, in March 2002, the Company amended the July
2001 contract, which resulted in the Company recording revenues
when payments are due, as compared to the partial deferral of
those payments, which would otherwise have occurred. This
amendment resulted in the Company recognizing $5,825,000 in
license revenues for this contract as opposed to $2,700,000 if
the contract had not been amended.

Service revenues decreased $198,000, or 6%, for
2002 compared to 2001. The decrease was caused by the
persistence of unfavorable economic conditions.

Related party service revenues increased by
approximately $1,417,000, or 171%, for 2002 compared to 2001.
The increase is primarily related to our expanding relationship
with AOL, which accounted for a $1,837,000 increase in service
revenues primarily related to the creation of customized digital
content and specific engineering services. This increase was
partially offset by a $420,000 decrease in service revenues with
Computer Associates primarily due to the expiration, during the
year, of an engineering services agreement from 1999.

Total related party revenues for the year ended
December 31, 2002, were $9,337,000, $336,000, and $125,000
related to agreements, including reseller agreements, with AOL,
Computer Associates, and Adobe, respectively, all of whom have
representatives on the Companys Board of Directors.

License revenues increased by approximately
$6,727,000, or 473%, and service revenues increased by
approximately $1,841,000 or 111%, in 2001 compared to 2000. The
increase was primarily attributable to an

16



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expansion of our direct sales force and indirect
channel partnerships, and incremental sales from the acquisition
of Viewpoint Digital.


Related party license revenues increased by
$1,533,000, and related party service revenues increased
$327,000, or 65%, in 2001 compared to 2000. The increase was due
to the new contract with AOL entered into in July 2001, which
accounted for $1,350,000 and $317,000 of the increase in related
party license revenues and related party service revenues,
respectively.

Total related party revenues for the year ended
December 31, 2001 were $1,507,000 and $853,000, related to
agreements, including reseller arrangements, with AOL and
Computer Associates, respectively.

During the year ended December 31, 2001, the
Company established a strategic relationship with one of its
customers whereby the customer purchased licenses from the
Company and the Company agreed to purchase publicly traded
equities of the customers parent. The Company also entered
into a license agreement with another customer in exchange for
the customers mass distribution of Viewpoint Media Player
to an important target audience. These transactions effectively
include nonmonetary sales of our software for equity securities
and services of our customers, and accordingly the Company used
the fair value of the equities and services received in
determining the amount of revenues and expenses to record. Total
revenues and expenses were $429,000 and $264,000, respectively,
related to these transactions.

The increase in license and service revenues in
2002 compared to 2001, and 2001 compared to 2000, were the
direct result of increases in the amount of licenses sold and
services performed as the Companys pricing and product
offerings did not materially change from 2000 to 2002.

Revenues in 2000 were related to sales of
licenses and fee-based professional services with two customers
accounting for 40% of total revenues. Revenues of $2,459,000
were the result of the acquisition of Viewpoint Digital in
September 2000. Related party service revenues for 2000 were
$500,000 related to an engineering services agreement with
Computer Associates.

Cost of
Revenues

|                             |  |                        |       |          |  |      |    |          |  |      |       |   |  |  |     |   |  |   |       |  
|---------------------------- |  | ---------------------- | ----- | -------- |  | ---- | -- | -------- |  | ---- | ----- | - |  |  | --- | - |  | - | ----- | -
|                             |  | 2002                   |       | % Change |  | 2001 |    | % Change |  | 2000
|                             |  |                        |       |          |  |      |    |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Licenses                     |  | $                      | 353   |          |  |      | 14 | %        |  | $    | 309   |   |  |  | 307 | % |  | $ | 76    |  
|Services                     |  |                        | 3,587 |          |  |      | 9  | %        |  |      | 3,283 |   |  |  | 124 | % |  |   | 1,467 |  
|                             |  |                        |       |          |  |      |    |          |  |      |       |   |  |  |     |   |  |   |       |  
|Total cost of revenues       |  | $                      | 3,940 |          |  |      | 10 | %        |  | $    | 3,592 |   |  |  | 133 | % |  | $ | 1,543 |  
|Percentage of total revenues |  |                        | 22    | %        |  |      |    |          |  |      | 26    | % |  |  |     |   |  |   | 43    | %

Cost of revenues consists primarily of salaries
and consulting fees for those who provide fee-based professional
services. The increase in cost of revenues is directly related
to an increase in fee-based professional services.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Sales and Marketing (Including Non-Cash
    Stock-Based Compensation Charges Totaling $3,187 in 2002, $2,335
    in 2001, and $5,122 in 2000)

|                             |  |                        |        |          |  |      |    |          |  |      |        |   |  |  |    |    |  |   |        |  
|---------------------------- |  | ---------------------- | ------ | -------- |  | ---- | -- | -------- |  | ---- | ------ | - |  |  | -- | -- |  | - | ------ | -
|                             |  | 2002                   |        | % Change |  | 2001 |    | % Change |  | 2000
|                             |  |                        |        |          |  |      |    |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Sales and marketing          |  | $                      | 16,682 |          |  |      | (5 | )%       |  | $    | 17,521 |   |  |  | (6 | )% |  | $ | 18,616 |  
|Percentage of total revenues |  |                        | 92     | %        |  |      |    |          |  |      | 125    | % |  |  |    |    |  |   | 520    | %

Sales and marketing expenses include salaries and
benefits, sales commissions, non-cash stock-based compensation
charges, consulting fees and travel and entertainment expenses
for our sales and marketing personnel. Sales and marketing
expenses also include the cost of programs aimed at increasing
revenue, such as advertising, trade shows and public relations.

Sales and marketing expenses decreased $839,000,
or 5%, in 2002 compared to 2001 due to a decrease in marketing
costs of $662,000, salaries and benefits of $588,000, travel and
entertainment expenses of $545,000,

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and facilities expenses of $388,000, which was
partially offset by an increase in non-cash stock-based
compensation charges of $852,000 and reserves for officer loans
of $612,000. Salaries and benefits, and travel and entertainment
expenses decreased due to headcount reductions in marketing
personnel and creative service personnel. The decrease in
facilities expenses was due to the closure of our Tokyo sales
office in December 2001. Non-cash stock-based compensation
charges increased as certain personnel who were reflected in
research and development during 2001 are now reflected in sales
and marketing due to a change in the nature of their duties. The
Company loaned a total of $575,000 to two officers of the
Company during 2001 in accordance with the contractual terms of
the officers employment agreements. One loan for $200,000
was secured solely by the proceeds from the sale of Company
stock issuable upon exercise of the officers stock options
and another loan for $375,000 was secured solely by the net,
after tax proceeds from the sale of Company stock issuable upon
exercise of the officers stock options. The Company
recorded a reserve against these loans in 2002 as the value of
the Companys stock fell substantially below the exercise
price of the options securing the loans. The amounts reserved
represent the unsecured portion of the loans and accrued
interest. One of the officers resigned from the Company
effective December 31, 2002, requiring the loan to be
repaid. The officer defaulted on the loan on January 31,
2003, and the Company took possession of the collateral.


Quarterly savings of approximately $1,100,000 in
sales and marketing costs are expected to be realized beginning
in the second quarter of 2003, resulting from the Companys
office consolidation and accompanying workforce reductions in
Utah, as well as workforce reductions in New York and
California, which occurred during the first quarter of 2003. In
accordance with SFAS 146, the Company will record a
restructuring charge of approximately $1,400,000 during the
first quarter of 2003 related to the closure of its Utah and
London facility.

Sales and marketing expenses decreased
$1,095,000, or 6%, in 2001 compared to 2000 primarily due to a
decrease in non-cash stock-based compensation charges of
$2,787,000, Web development costs of $2,252,000, and marketing
and public relations costs of $1,540,000 costs, which was
partially offset by an increase in salaries and benefits of
$4,813,000. Non-cash stock-based compensation charges decreased
because the Company generally no longer grants stock options to
employees at below fair market value at the date of grant and
certain employees who were granted stock options below fair
market value have left the Company. Marketing costs and Web
development costs decreased from 2000 to 2001 due to the initial
launch costs related to Metastream, which occurred in 2000.
Salaries and benefits increased from 2000 to 2001 due to
internal growth and the acquisition of Viewpoint Digital.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Research and Development (Including
    Non-Cash Stock-Based Compensation Charges Totaling $712 in 2002,
    $2,920 in 2001, and $4,193 in 2000)

|                             |  |                        |       |          |  |      |     |          |  |      |       |   |  |  |    |    |  |   |        |  
|---------------------------- |  | ---------------------- | ----- | -------- |  | ---- | --- | -------- |  | ---- | ----- | - |  |  | -- | -- |  | - | ------ | -
|                             |  | 2002                   |       | % Change |  | 2001 |     | % Change |  | 2000
|                             |  |                        |       |          |  |      |     |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Research and development     |  | $                      | 5,548 |          |  |      | (44 | )%       |  | $    | 9,846 |   |  |  | (7 | )% |  | $ | 10,559 |  
|Percentage of total revenues |  |                        | 30    | %        |  |      |     |          |  |      | 70    | % |  |  |    |    |  |   | 295    | %

Research and development expenses consist
primarily of salaries and benefits for software developers,
contracted development efforts, and non-cash stock-based
compensation charges related to the Companys product
development efforts. The Company expenses as incurred research
and development costs necessary to establish the technological
feasibility of its internally developed software products and
technologies. To date, the establishment of technological
feasibility of the Companys products and general release
has substantially coincided. As a result, the Company has not
capitalized any internal software development costs since costs
qualifying for such capitalization have not been significant.
Additionally, the Company capitalizes costs of software,
consulting services, hardware and payroll-related costs incurred
to purchase or develop internal-use software, when technological
feasibility has been established, it is probable that the
project will be completed and the software will be used as
intended. The Company expenses costs incurred during preliminary
project assessment, research and development, re-engineering,
training and application maintenance.

Research and development expenses decreased
$4,298,000, or 44%, in 2002 compared to 2001 due to a decrease
in non-cash stock-based compensation charges of $2,208,000, and
salaries and benefits of $1,421,000,

18



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##### Table of Contents



and contracted development costs of $1,022,000.
Non-cash stock-based compensation charges and salaries and
benefits decreased as certain personnel who were reflected in
research and development during 2001, are now reflected in sales
and marketing due to a change in the nature of their duties. In
addition, non-cash stock-based compensation charges decreased
because the Company generally no longer grants stock options to
employees at below fair market value at the date of grant and
certain employees who were granted stock options below fair
market value have left the Company. Salaries and benefits
decreased due to specific engineering salaries and benefits
being classified as cost of revenues as compared to research and
development, as a result of revenue generating customer-specific
development work. The decrease in contracted development costs
is the direct result of specific projects that were necessary in
2001 and able to be outsourced which were not required in 2002.


Quarterly savings of approximately $200,000 in
research and development costs are expected to be realized
beginning in the second quarter of 2003, resulting from the
Companys office consolidation and accompanying workforce
reductions in Utah, as well as workforce reductions in New York
and California, which occurred in the first quarter of 2003.

Research and development expenses decreased
$713,000, or 7%, in 2001 compared to 2000 primarily due to a
decrease in a reserve for notes receivable of $2,106,000, and
non-cash stock-based compensation charges of $1,273,000, which
was partially offset by an increase in salaries and benefits and
contracted development efforts of $2,851,000. The Company loaned
$2,000,000 to a former executive of the Company in 1996, in
accordance with the contractual terms of the former
executives employment agreement. The loan, which accrued
interest semi-annually at 5.67%, was secured solely by 160,000
shares of Company stock owned by the executive. The decrease in
reserve for notes receivable is attributable to a $1,441,000
reserve against the loan in 2000 of which approximately $665,000
was recovered during 2001. The amount reserved in 2000
represents the unsecured portion of the loan and accrued
interest. The increase in salaries and benefits and contracted
development is the result of an increase in headcount related to
research and development.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | General and Administrative (Including
    Non-Cash Stock-Based Compensation Charges Totaling $1,523 in
    2002, $1,918 in 2001, and $3,026 in 2000)

|                             |  |                        |       |          |  |      |     |          |  |      |        |   |  |  |   |   |  |   |       |  
|---------------------------- |  | ---------------------- | ----- | -------- |  | ---- | --- | -------- |  | ---- | ------ | - |  |  | - | - |  | - | ----- | -
|                             |  | 2002                   |       | % Change |  | 2001 |     | % Change |  | 2000
|                             |  |                        |       |          |  |      |     |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|General and administrative   |  | $                      | 9,134 |          |  |      | (12 | )%       |  | $    | 10,423 |   |  |  | 6 | % |  | $ | 9,814 |  
|Percentage of total revenues |  |                        | 50    | %        |  |      |     |          |  |      | 74     | % |  |  |   |   |  |   | 274   | %

General and administrative expenses primarily
consist of corporate overhead of the Company, which includes
salaries and benefits related to finance, human resources,
legal, and executive personnel along with other administrative
costs such as facilities costs, legal, accounting and investor
relation fees, and insurance expense.

General and administrative expenses decreased
$1,289,000, or 12%, in 2002 compared to 2001 due to a decrease
in facilities costs of $600,000, non-cash stock-based
compensation charges of $395,000, and salaries and benefits of
$265,000. Facilities costs decreased due to the closure of the
San Francisco office in August 2001 and the consolidation of
certain New York office space. Salaries and benefits decreased
due to reduction in headcount.

Quarterly savings of approximately $228,000 in
general and administrative costs are expected to be realized
beginning in the second quarter of 2003, resulting from the
Companys office consolidation and accompanying workforce
reductions as well as workforce reductions in New York and
California, which occurred during the first quarter of 2003.

General and administrative expenses increased
$609,000, or 6%, in 2001 compared to 2000 due to an increase in
facilities expense of $727,000, and salaries and benefits of
$660,000, which was partially offset by a decrease in non-cash
stock-based compensation charges of $1,108,000. Salaries and
benefits and facilities expense increased due to an increase in
headcount and the acquisition of Viewpoint Digital.

19



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Depreciation

|                             |  |                        |       |          |  |      |   |          |  |      |       |   |  |  |     |   |  |   |     |  
|---------------------------- |  | ---------------------- | ----- | -------- |  | ---- | - | -------- |  | ---- | ----- | - |  |  | --- | - |  | - | --- | -
|                             |  | 2002                   |       | % Change |  | 2001 |   | % Change |  | 2000
|                             |  |                        |       |          |  |      |   |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Depreciation                 |  | $                      | 1,962 |          |  |      | 9 | %        |  | $    | 1,804 |   |  |  | 125 | % |  | $ | 801 |  
|Percentage of total revenues |  |                        | 11    | %        |  |      |   |          |  |      | 13    | % |  |  |     |   |  |   | 23  | %

Depreciation expense increased $158,000, or 9% in
2002 compared to 2001, and $1,003,000, or 125% in 2001 compared
to 2000 due to increases in property and equipment additions.

Amortization
of Intangible Assets

|                                  |  |                        |     |          |  |      |     |          |  |      |       |   |  |  |     |   |  |   |       |  
|--------------------------------- |  | ---------------------- | --- | -------- |  | ---- | --- | -------- |  | ---- | ----- | - |  |  | --- | - |  | - | ----- | -
|                                  |  | 2002                   |     | % Change |  | 2001 |     | % Change |  | 2000
|                                  |  |                        |     |          |  |      |     |          |  |     
|                                  |  |                       
|                                  |  | (Dollars in thousands)
|Amortization of intangible assets |  | $                      | 664 |          |  |      | (80 | )%       |  | $    | 3,325 |   |  |  | 164 | % |  | $ | 1,258 |  
|Percentage of total revenues      |  |                        | 4   | %        |  |      |     |          |  |      | 24    | % |  |  |     |   |  |   | 34    | %

Amortization of intangible assets decreased
$2,661,000 or 80%, in 2002 compared to 2001 as all intangible
assets acquired in the Viewpoint Digital transaction were either
fully amortized or written off in accordance with SFAS
No. 144 during 2002.

Amortization of intangible assets increased
$2,067,000, or 164%, in 2001 compared to 2000 due to a full year
of amortization on the intangible assets recorded as part of the
acquisition of Viewpoint Digital.

Amortization
of Goodwill

|                             |  |                        |   |          |  |      |      |          |  |      |        |    |  |  |     |   |  |   |       |  
|---------------------------- |  | ---------------------- | - | -------- |  | ---- | ---- | -------- |  | ---- | ------ | -- |  |  | --- | - |  | - | ----- | -
|                             |  | 2002                   |   | % Change |  | 2001 |      | % Change |  | 2000
|                             |  |                        |   |          |  |      |      |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Amortization of goodwill     |  | $                      |  |          |  |      | (100 | )%       |  | $    | 14,128 |    |  |  | 700 | % |  | $ | 1,767 |  
|Percentage of total revenues |  |                        |  | %        |  |      |      |          |  |      | (101   | )% |  |  |     |   |  |   | 49    | %

Amortization of goodwill decreased $14,128,000 or
100% in 2002 compared to 2001 due to the adoption of SFAS
No. 142. As required by SFAS No. 142, the Company
discontinued amortizing the remaining balances of goodwill as of
January 1, 2002. All remaining and future acquired goodwill
will be subject to impairment tests annually, or earlier if
indicators of potential impairment exist, using a
fair-value-based approach.

Amortization of goodwill increased $12,361,000 or
700% in 2001 compared to 2000 due to a full year of amortization
on goodwill recorded as part of the acquisition of Viewpoint
Digital and the acquisition of Computer Associates
minority interest in Metastream.

Impairment of
Goodwill and Other Intangible Assets

|                                                   |  |                        |       |          |  |      |     |          |  |      |       |   |  |  |     |  |  |   |   |  
|-------------------------------------------------- |  | ---------------------- | ----- | -------- |  | ---- | --- | -------- |  | ---- | ----- | - |  |  | --- |  |  | - | - | -
|                                                   |  | 2002                   |       | % Change |  | 2001 |     | % Change |  | 2000
|                                                   |  |                        |       |          |  |      |     |          |  |     
|                                                   |  |                       
|                                                   |  | (Dollars in thousands)
|Impairment of goodwill and other intangible assets |  | $                      | 6,275 |          |  |      | (21 | )%       |  | $    | 7,925 |   |  |  | N/A |  |  | $ |  |  
|Percentage of total revenues                       |  |                        | 35    | %        |  |      |     |          |  |      | 57    | % |  |  |     |  |  |   |  | %

In conjunction with the implementation of SFAS
No. 142, the Company completed a goodwill impairment review
as of January 1, 2002 and found no impairment on that date.
As of March 31, 2002, due to the persistence of unfavorable
economic conditions along with lower-than-expected revenues
generated to date and reduced estimates of future performance of
the Viewpoint Digital assets, the Company performed an
additional impairment analysis on the goodwill and other
intangible asset balances recorded upon the acquisition of
Viewpoint Digital. In accordance with the provisions of SFAS
No. 142 and SFAS No. 144, the Company recorded
impairment charges totaling $6,275,000 during the three months
ended March 31, 2002. The fair value of the Viewpoint
Digital assets was estimated using the expected present value of
future cash

20



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##### Table of Contents



flows. The assumptions supporting the cash flows,
including a discount rate of 20%, were determined using the
Companys best estimates as of the date the impairment was
recorded.


During 2001, the Company assessed the impairment
of long-lived assets periodically in accordance with the
provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. During 2001, the Company performed impairment
assessments on the goodwill and other intangibles recorded upon
the acquisition of Viewpoint Digital and the acquisition of
Computer Associates minority interest in Metastream. As a
result of continuing poor economic conditions, which resulted in
a decrease in estimated undiscounted future cash flows, the
Company recorded a $7,925,000 goodwill impairment charge on the
Viewpoint Digital goodwill during the fourth quarter of 2001.
The charge was determined based upon the estimated discounted
cash flows over the remaining useful life of the goodwill using
a discount rate of 15%. The assumptions supporting the cash
flows including the discount rate were determined using the
Companys best estimates as of the date the impairment was
recorded.

During 2003 the market value of the
Companys stockholders equity fell below its carrying
value indicating the existence of a potential goodwill
impairment. The Company will assess the carrying value of its
goodwill in accordance with the provisions of SFAS No. 142,
during the first quarter of 2003.

Compensation
Charge Related to Forgiveness of an Officer Loan

|                                                                  |  |                        |   |          |  |      |     |          |  |      |   |   |  |  |      |    |  |   |       |  
|----------------------------------------------------------------- |  | ---------------------- | - | -------- |  | ---- | --- | -------- |  | ---- | - | - |  |  | ---- | -- |  | - | ----- | -
|                                                                  |  | 2002                   |   | % Change |  | 2001 |     | % Change |  | 2000
|                                                                  |  |                        |   |          |  |      |     |          |  |     
|                                                                  |  |                       
|                                                                  |  | (Dollars in thousands)
|Compensation charge related to forgiveness of an
    officer loan |  | $                      |  |          |  |      | N/A |          |  | $    |  |   |  |  | (100 | )% |  | $ | 2,322 |  
|Percentage of total revenues                                      |  |                        |  | %        |  |      |     |          |  |      |  | % |  |  |      |    |  |   | 65    | %

The Company loaned $1,000,000 to an officer of
the Company in 1996 in accordance with the contractual terms of
the officers employment agreement. The loan, which accrued
interest semi-annually at 5.67%, was secured solely by the net,
after tax proceeds from the sale of Company stock issuable upon
the exercise of the officers stock options. The loan was
forgiven in 2000 in accordance with the contractual terms of the
officers employment agreement, upon the merger of the
Company with Metastream. The compensation charge of $2,322,000
included the forgiveness of the loan and the income taxes
thereon.



| |                                         
| | ----------------------------------------
| | Non-Cash Sales and Marketing
    Charges

|                                     |  |                        |   |          |  |      |     |          |  |      |   |   |  |  |        |  |  |   |        |  
|------------------------------------ |  | ---------------------- | - | -------- |  | ---- | --- | -------- |  | ---- | - | - |  |  | ------ |  |  | - | ------ | -
|                                     |  | 2002                   |   | % Change |  | 2001 |     | % Change |  | 2000
|                                     |  |                        |   |          |  |      |     |          |  |     
|                                     |  |                       
|                                     |  | (Dollars in thousands)
|Non-cash sales and marketing charges |  | $                      |  |          |  |      | N/A |          |  | $    |  |   |  |  | (100)% |  |  | $ | 19,998 |  
|Percentage of total revenues         |  |                        |  | %        |  |      |     |          |  |      |  | % |  |  |        |  |  |   | 559    | %

In connection with the issuance of mandatorily
redeemable preferred stock in Metastream to AOL and Adobe, the
Company recorded one-time non-cash sales and marketing charges
of $19,998,000 during the year ended December 31, 2000.
These charges represented the difference between the fair market
value of the Companys common shares into which AOL and
Adobe could have converted the Metastream shares on the date of
issuance, and the $20,000,000 aggregate cash consideration
received from both AOL and Adobe. These charges were recorded as
sales and marketing, as the incremental value of the equity over
the cash consideration received was deemed to be the fair value
of the license and distribution agreements simultaneously
entered into with AOL and Adobe.



| |                                                       
| | ------------------------------------------------------
| | Acquired In-Process Research and
    Development Costs

|                                                   |  |                        |   |          |  |      |     |          |  |      |   |   |  |  |        |  |  |   |     |  
|-------------------------------------------------- |  | ---------------------- | - | -------- |  | ---- | --- | -------- |  | ---- | - | - |  |  | ------ |  |  | - | --- | -
|                                                   |  | 2002                   |   | % Change |  | 2001 |     | % Change |  | 2000
|                                                   |  |                        |   |          |  |      |     |          |  |     
|                                                   |  |                       
|                                                   |  | (Dollars in thousands)
|Acquired in-process research and development costs |  | $                      |  |          |  |      | N/A |          |  | $    |  |   |  |  | (100)% |  |  | $ | 963 |  
|Percentage of total revenues                       |  |                        |  | %        |  |      |     |          |  |      |  | % |  |  |        |  |  |   | 27  | %

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Acquired in-process research and development
costs represent the write-off of research and development costs
recorded as part of the Viewpoint Digital acquisition in
September 2000.



| |             
| | ------------
| | Other Income

|                             |  |                        |     |          |  |      |       |          |  |      |       |   |  |  |       |  |  |   |       |  
|---------------------------- |  | ---------------------- | --- | -------- |  | ---- | ----- | -------- |  | ---- | ----- | - |  |  | ----- |  |  | - | ----- | -
|                             |  | 2002                   |     | % Change |  | 2001 |       | % Change |  | 2000
|                             |  |                        |     |          |  |      |       |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Other income                 |  | $                      | 153 |          |  |      | (86)% |          |  | $    | 1,064 |   |  |  | (51)% |  |  | $ | 2,180 |  
|Percentage of total revenues |  |                        | 1   | %        |  |      |       |          |  |      | 7     | % |  |  |       |  |  |   | 60    | %

Other income primarily consists of interest and
investment income on cash, cash equivalents and marketable
securities. As a result, other income fluctuates with changes in
the Companys cash, cash equivalents and marketable
securities balances and market interest rates.

Other income decreased $911,000 or 86% in 2002
compared to 2001, and $1,116,000 or 51% in 2001 compared to 2000
due to a decrease in average cash, cash equivalents and
marketable securities balances as well as a decline in interest
rates.



| |                                            
| | -------------------------------------------
| | Minority Interest in Loss of
    Subsidiary

|                                        |  |                        |   |          |  |      |     |          |  |      |   |   |  |  |        |  |  |   |       |  
|--------------------------------------- |  | ---------------------- | - | -------- |  | ---- | --- | -------- |  | ---- | - | - |  |  | ------ |  |  | - | ----- | -
|                                        |  | 2002                   |   | % Change |  | 2001 |     | % Change |  | 2000
|                                        |  |                        |   |          |  |      |     |          |  |     
|                                        |  |                       
|                                        |  | (Dollars in thousands)
|Minority interest in loss of subsidiary |  | $                      |  |          |  |      | N/A |          |  | $    |  |   |  |  | (100)% |  |  | $ | 4,429 |  
|Percentage of total revenues            |  |                        |  | %        |  |      |     |          |  |      |  | % |  |  |        |  |  |   | 124   | %

Metastream, originally a joint initiative between
the Company and Computer Associates, was formed in June 1999.
For financial reporting purposes, the assets, liabilities and
operations of Metastream were included in the Companys
consolidated financial statements. Computer Associates and
another minority shareholders combined 20% interest in
Metastream was recorded as minority interest in the
Companys consolidated balance sheets, and the losses
attributed to their combined 20% interest were reported as the
minority interest in the Companys consolidated statements
of operations. In November 2000, the Company acquired the
minority interest by issuing approximately 5,578,000 shares of
Company common stock in exchange for 4,850,000 shares of
Metastream common stock.

Adjustment to
Net Loss on Disposal of Discontinued Operations

|                                                                  |  |                        |     |          |  |      |       |          |  |      |       |   |  |  |       |  |  |   |       |  
|----------------------------------------------------------------- |  | ---------------------- | --- | -------- |  | ---- | ----- | -------- |  | ---- | ----- | - |  |  | ----- |  |  | - | ----- | -
|                                                                  |  | 2002                   |     | % Change |  | 2001 |       | % Change |  | 2000
|                                                                  |  |                        |     |          |  |      |       |          |  |     
|                                                                  |  |                       
|                                                                  |  | (Dollars in thousands)
|Adjustment to net loss on disposal of
    discontinued operations |  | $                      | 127 |          |  |      | (89)% |          |  | $    | 1,122 |   |  |  | (25)% |  |  | $ | 1,496 |  
|Percentage of total revenues                                      |  |                        | 1   | %        |  |      |       |          |  |      | 8     | % |  |  |       |  |  |   | 42    | %

In December 1999, the Board of Directors of the
Company approved a plan to focus exclusively on its interactive
media technologies and digital content creation services and to
correspondingly divest itself of its prepackaged software
graphics business. Accordingly, these operations are reflected
as discontinued operations for all periods presented in the
accompanying consolidated statements of operations.

The loss on disposal of discontinued operations,
which totaled approximately $21,260,000 for the year ended
December 31, 1999, consisted of the estimated future
results of operations of the discontinued business through the
estimated date of divestiture, the amounts expected to be
realized upon the sale of the discontinued business, severance
and related benefits, and asset write-downs. The Company
recorded an adjustment to net loss on disposal of discontinued
operations of $1,496,000 during the year ended December 31,
2000, primarily as a result of better than expected net revenues
during the year from the discontinued business. During the years
ended December 31, 2002 and 2001, the Company recorded an
adjustment to net loss on disposal of discontinued operations of
$127,000 and $1,122,000, respectively, as a result of changes in
estimates related to accounts receivable and accounts payable of
the discontinued business. Changes in

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estimates, which are not expected to be
significant, will be accounted for prospectively and included in
adjustment to net loss on disposal of discontinued operations.


Factors That May Affect Future Results of
Operations



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | We Have a History of Losses and Expect to
    Incur Losses in the Future, Which May Cause Our Share Price to
    Decline

We have had significant quarterly and annual
operating losses since our inception, and as of
December 31, 2002, we had an accumulated deficit of
approximately $224,077,000. We believe that we will continue to
incur operating losses in the future, which may cause our share
price to decline.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Our Future Revenues May be Unpredictable
    and May Cause Our Quarterly Results to Fall Below Market
    Expectations

As a result of our limited operating history and
the rapidly changing nature of the markets in which we compete,
we may be unable to forecast our quarterly and annual revenues
accurately. If our future quarterly operating results fall below
the expectations of securities analysts or investors due to the
following factors, the trading price of our common stock will
likely drop:



| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to retain existing customers, attract
    new customers, and satisfy our customers demands;                                                                    
|
| |  | introduction or enhancement of new products,
    technologies or services by our competitors which may render our
    technologies and services less attractive or obsolete;
|
| |  | varying operating costs and capital expenditures
    related to the expansion of our business operations and
    infrastructure; and                                        
|
| |  | difficulty integrating our graphics technology
    with third party software programs.                                                                                      

Based on these factors, we believe our revenues,
expenses and operating results could vary significantly in the
future and period-to-period comparisons should not be relied
upon as indications of future results. Our staffing and other
operating expenses are based in large part on anticipated
revenues. It may be difficult for us to adjust our spending to
compensate for any unexpected shortfall. If we are unable to
reduce our spending following any such shortfall, our results of
operations would be adversely affected.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | We May Have to Obtain Financing on Less
    Favorable Terms, Which Could Dilute Current Stockholders
    Ownership Interests in the Company

In order to fund our operations and pursue our
growth strategy we may seek additional funding through public or
private equity financing or from other sources. We have no
commitment for additional financing and we may experience
difficulty in obtaining additional financing on favorable terms,
if at all. Any financing we obtain may contain covenants that
restrict our freedom to operate our business or may have rights,
preferences, or privileges senior to our common stock and may
dilute our current shareholders ownership interest in the
Company.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Our Stock Price is Volatile, Which Could
    Subject Us to Class Action Litigation

The market price of our common stock has
fluctuated significantly in the past. The price at which our
common stock will trade in the future will depend on a number of
factors including:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | actual or anticipated fluctuations in our
    operating results;                               
|
| |  | general market and economic conditions affecting
    Internet companies;                       
|
| |  | our announcement of new products, technologies or
    services; and                            
|
| |  | developments regarding our products, technologies
    or services, or those of our competitors.

23



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In addition, securities class action litigation
has often been brought against companies following periods of
volatility in the market price of its securities. We may in the
future be the target of similar litigation. Securities
litigation could result in substantial costs and divert
managements attention and resources, which could have a
material adverse effect on our business, financial condition,
operating results and cash flows.



| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We May be Delisted From Nasdaq, Which Would
    Adversely Impact Our Stock Price and the Ability of Our
    Stockholders to Purchase and Sell Our Shares in an Orderly
    Manner

We may be unable to maintain compliance with
Nasdaq listing standards.

The Nasdaq National Market notified us on
March 20, 2003 that our common stock may be delisted from
Nasdaq for failure to maintain a minimum bid price of $1.00 and
that we will be provided until September 16, 2003 to regain
compliance with National Market standards. If we are unable to
regain compliance with the minimum bid price we may be eligible
to transfer our common stock to listing on The Nasdaq SmallCap
Market if we meet applicable listing standards and thereby gain
an additional 180 days to regain compliance with the
minimum bid price requirement. Transitioning to the SmallCap
Market or the delisting of our stock could damage our general
business reputation and impair our ability to raise additional
funds. This may further adversely impact our stock price.
Furthermore, a delisting of our shares would adversely impact
the ability of our stockholders to purchase and sell our shares
in an orderly manner, or at all. Any of the foregoing events
could have a material adverse effect on our business, financial
condition and operating results.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | We may effect a reverse stock split and if
    we do so, our stock price may decline after the reverse stock
    split

In response to the potential delisting of our
common stock due to the failure to meet the Nasdaq National
Markets minimum bid price requirement discussed above, we
may ask our stockholders to authorize a reverse stock split at
our annual meeting in 2003. If the reverse stock split is
approved by our stockholders and we effect the reverse stock
split, we would reduce the number of outstanding shares of
common stock. With fewer shares outstanding, we would expect our
stock price to increase. While a reverse stock split may enable
us to cure the minimum bid price deficiency, share prices of
companies effecting reverse stock splits often decline and we
cannot assure you that our stock price would not decline after a
reverse stock split.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | If the Internet Does Not Become a More
    Widespread Commerce Medium, Demand for Our Products and
    Technologies May Decline Significantly

The market for our products, technologies and
services is new and evolving rapidly. Growth in the computer
graphics market depends, in large part, on increased use of the
Internet for e-commerce. If the rate of adoption of the Internet
as a method for e-commerce slows, the market for our products,
technologies and services may not grow, or may develop more
slowly than expected. Licensing of our products and technologies
depends in large part on the development of the Internet as a
viable commercial marketplace. There are now substantially more
users and much more traffic over the Internet than
ever before, use of the Internet is growing faster than
anticipated, and the technological infrastructure of the
Internet may be unable to support the demands placed on it by
continued growth. Delays in development or adoption of new
technological standards and protocols, or increased government
regulation, could also affect Internet use. Any of these
developments could adversely effect our business because
substantially all of our revenues are derived from online
services and sales.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Market is Characterized by Rapidly
    Changing Technology, and if We Do Not Respond in a Timely
    Manner, Our Products and Technologies May Not Succeed in the
    Marketplace

The market for e-commerce visualization is
characterized by rapidly changing technology. As a result, our
success depends substantially upon our ability to continue to
enhance our products and technologies and to develop new
products and technologies that meet customers increasing
expectations. Additionally, we may

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not be successful in developing and marketing
enhancements to our existing products and technologies or
introducing new products and technologies on a timely basis. Our
new or enhanced products and technologies may not succeed in the
marketplace.


In addition, the computer graphics industry is
subject to rapidly changing methods and models of information
delivery. If a general market migration to a method of
information delivery that is not conforming with our
technologies were to occur, our business and financial results
would be adversely impacted.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Security Risks Could Limit the Growth of
    E-Commerce Which Would Adversely Impact Our Ability to Increase
    Sales of Graphics Technology

E-tailers are less likely to acquire licenses to
use our graphics technology and less likely to have a desire for
our services if e-commerce activity fails to grow or declines
due to Internet security risks. Security risks that may occur
are failure of encryption and authentication technologies and
third-party circumvention of security measures. These risks may
limit the ability of e-tailers to sell their products online due
to damage to the e-tailers reputations and restrictions by
credit card companies of online transactions.

We May Be
Unable to Protect Our Intellectual Property Rights

Our success and ability to compete substantially
depend on the uniqueness or value of our products and
technologies. We rely on a combination of copyright, trademark,
patent, trade secret laws, and employee and third-party
nondisclosure agreements to protect our intellectual and
proprietary rights, products, and technologies. Policing
unauthorized use of our products and technologies is difficult
and the steps we take may not prevent the misappropriation or
infringement of technology or proprietary rights. In addition,
litigation may be necessary to enforce our intellectual property
rights. Such misappropriation or litigation could result in
substantial costs and diversion of resources and the potential
loss of intellectual property rights, any of which would
adversely impair our business.



| |                                                                               
| | ------------------------------------------------------------------------------
| | We May Be Liable for Infringing the
    Intellectual Property Rights of Others

Our products and technologies may be the subject
of infringement claims in the future. This could result in
costly litigation and could require us to obtain a license to
the intellectual property of third parties. We may be unable to
obtain licenses from these third parties on favorable terms, if
at all. Even if a license is available, we may have to pay
substantial royalties to obtain it. If we cannot obtain
necessary licenses on reasonable terms, our business would be
adversely affected.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | We May Need to Enter Into Business
    Combinations and Strategic Alliances Which Could Be Difficult to
    Integrate and May Disrupt Our Business

We may continue to expand our operations or
market presence by entering into business combinations,
investments, joint ventures or other strategic alliances with
other companies. These transactions create risks such as:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | difficulty assimilating the operations,
    technology and personnel of the combined companies;
|
| |  | disruption of our ongoing business;                                                            
|
| |  | problems retaining key technical and managerial
    personnel;                                 
|
| |  | expenses associated with amortization of
    purchased intangible assets;                      
|
| |  | additional operating losses and expenses of
    acquired businesses; and                       
|
| |  | impairment of relationships with existing
    employees, customers and business partners.      

We do not currently have plans, nor have we
entered into negotiations, to acquire any businesses.

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The Loss of
Our Key Engineering or Management Employees Would Harm Our
Business

We depend on the continued employment of our key
engineering and management employees. We do not have long-term
employment agreements with our key personnel, and we do not have
key person life insurance policies. If any of our
key engineering or management employees leave our company, our
business may be adversely affected.



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we Fail to Establish, Maintain, or
    Expand our Strategic Relationships for the Integration of Our
    Technology With the Services and Products of Third Parties, the
    Growth of Our Business May Cease or Decline

We achieve higher margins from licensing the use
of our technology than we achieve through the performance of
services. We provide the makers of industry-leading content
creation software products with software that enables their
products to create content in the Viewpoint format so that
content creating professionals can provide their customers with
content in the Viewpoint format. Customers desiring content in
the Viewpoint format created by third parties would then require
a license from Viewpoint in order to publish the content.

Currently, we have relationships with Adobe
Systems Incorporated (Adobe), Autodesk, Inc.
(Autodesk), and other makers of leading content
creation software products under which we provide the right and
ability to output content in our format. If these parties do not
continue to integrate and support our technology correctly, or
if we are unable to enter into successful new strategic
relationships with software providers that can integrate and
support our graphics technology, our revenues and growth may
suffer because professionals will less likely offer services
involving the creation of content in the Viewpoint format to
their customers.

Clients that account for large
portions of our revenues in one period may not generate similar
amounts of revenue in subsequent periods

A large portion of our revenues in some periods
are generated from a small number of clients. For example, AOL,
accounted for 51% of our revenue in 2002. Similarly, in some
quarterly periods a large portion of our revenue is sometimes
received from a small number of clients as we perform the
services required or sell a long-term license to such clients in
a particular quarter. These clients may not renew licenses or
retain our services for similar license and services fees in the
future. Any cancellation, deferral or significant reduction in
our work performed for these clients could have a material
adverse effect on our business, financial condition and results
of operations.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Our Charter Documents Could Make it More
    Difficult for an Unsolicited Third Party to
    Acquire Us

Our certificate of incorporation and by-laws are
designed to make it difficult for an unsolicited third party to
acquire control of us, even if a change in control would be
beneficial to stockholders. For example, our certificate of
incorporation authorizes our board of directors to issue up to
5,000,000 shares of blank check preferred stock.
Without stockholder approval, the board of directors has the
authority to attach special rights, including voting and
dividend rights, to this preferred stock. With these rights,
preferred stockholders could make it more difficult for an
unsolicited third party to acquire our company. In addition, we
must receive a stockholders proposal for an annual meeting
within a specified period for that proposal to be included on
the agenda. Because stockholders do not have the power to call
meetings and are subject to timing requirements in submitting
stockholder proposals for consideration at an annual or special
meeting, any third-party takeover not supported by the board of
directors would be subject to significant delays and
difficulties.

Critical Accounting Policies And
Estimates

Viewpoints discussion and analysis of its
financial condition and results of operations are based upon its
consolidated financial statements, which have been prepared in
accordance with accounting principals generally accepted in the
United States of America. The preparation of these financial
statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities,
revenues and

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expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company
evaluates its critical accounting policies and estimates,
including those related to revenue recognition and goodwill and
other intangible assets. We base our estimates on historical
experience and on various other assumptions that we believe to
be reasonable under the circumstances though actual results may
differ from these estimates under different assumptions or
conditions. For a complete description of the Companys
accounting policies, see Note 2 to the consolidated financial
statements included in this Annual Report on Form 10-K.


We believe the following critical accounting
policies affect the more significant judgments and estimates
used in the preparation of our consolidated financial statements:



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes revenue in accordance with
SOP 97-2, Software Revenue Recognition, as
amended, and SAB No. 101 Revenue Recognition in
Financial Statements. We follow the very specific and
detailed guidelines of SOP 97-2 in measuring revenue;
however, certain judgments affect the application of our revenue
policy.

Viewpoint generates revenues through two sources:
(a) software licenses and (b) services. License
revenues are generated from licensing the rights to use our
products directly to end-users and indirectly through VARs.
Service revenues are generated from fee-based professional
services, sales of customer support services (maintenance
contracts), and training services performed for customers that
license our products.

License revenues from end-users include sales of
perpetual and term based licenses for broadcasting digital
content in the Viewpoint format, and limited licenses for our
digital content library. License revenues are recognized over
the term of the license in a term-based broadcast license model
when the term is less than 15 months, and up-front in a
perpetual broadcast license model and a term-based broadcast
license model when the term is 15 months or longer,
providing that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management.
License revenues from VARs require either (i) an upfront,
non-refundable payment or (ii) a percentage royalty based on
sell through, or both, as consideration for the right to resell
our technology. Up-front, non-refundable payments are recognized
when the license right begins and the technology has been
delivered to the VAR, which is upon contract signing, provided
all other revenue recognition criteria are met and no further
obligations exist. For arrangements that do not call for an
up-front, non-refundable payment, revenue is recognized as the
royalties are earned, which is upon notification of sell
through, provided all other revenue recognition criteria are met
and no further obligations exist.

Fee-based professional services for customized
software development are performed on a time-and-material or
fixed-fee basis, under separate service arrangements. Revenues
for fixed-fee arrangements are recognized on a
percentage-of-completion basis in accordance with the provisions
of SOP 81-1 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
and SAB No. 101. Percentage-of-completion for service
contracts is measured principally by the percentage of costs
incurred and accrued to date for each contract, which
principally consist of direct labor costs and overhead, to the
estimated total cost for each contract at completion. Revenues
from customer support services are recognized ratably over the
term of the contract. Revenues from training services are
recognized as services are performed.

Fees from licenses sold together with fee-based
professional services are generally recognized upon delivery of
the software, provided that the payment of the license fees are
not dependent upon the performance of the services, and the
services are not essential to the functionality of the licensed
software. If the services are essential to the functionality of
the software, or payment of the license fees are dependent upon
the performance of the services, both the software license and
service fees are recognized on a percentage of completion method
of contract accounting.

For arrangements involving multiple elements, we
defer revenue for the undelivered elements based on their fair
value and recognize the difference between the total arrangement
fee and the amount deferred for the undelivered elements as
revenue. The determination of fair value of each undelivered
element in multiple

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element arrangements is based on the price
charged when the same element is sold separately. For
maintenance and technical support elements, we use renewal rates
to determine the price when sold separately.


Standard terms for license and service agreements
call for payment within 90 days. Probability of collection
is based upon the assessment of the customers financial
condition through the review of their current financial
statements and/or credit reports. For follow-on sales to
existing customers, prior payment history is also used to
evaluate probability of collection. Our agreements with
customers do not contain product return rights. If the fee is
not fixed or determinable, revenue is recognized as payments
become due from the customer. If a nonstandard acceptance period
is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period.

The Company periodically enters into nonmonetary
arrangements whereby the Companys licenses or services are
exchanged for services of its customers. Nonmonetary revenues
are recognized at the estimated fair value of the services
received. Generally, nonmonetary revenues equal nonmonetary
expenses, however, due to timing, nonmonetary accounts
receivable and accounts payable may result.

Goodwill and
Intangible Assets

Effective January 1, 2002, the Company
completed the adoption of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. As
required by SFAS No. 142, the Company discontinued
amortizing the remaining balances of goodwill as of
January 1, 2002. All remaining and future acquired goodwill
will be subject to impairment tests annually, or earlier if
indicators of potential impairment exist, using a
fair-value-based approach. When evaluating goodwill for
potential impairment, the Company first compares the fair value
of the reporting unit, based on market values of the reporting
unit or on the present value of estimated future cash flows,
with its carrying amount. If the estimated fair value of the
reporting unit is less than its carrying amount, an impairment
loss calculation is prepared. The impairment loss calculation
compares the implied fair value of the reporting unit goodwill
with the carrying amount of that goodwill. If the carrying
amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. All other intangible assets will
continue to be amortized over their estimated useful lives and
assessed for impairment under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting
Standards Board (FASB) issued Financial
Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities which
requires the consolidation by primary beneficiaries of variable
interest entities (VIEs), as defined. Public
companies will generally be subject to its provisions effective
after January 31, 2003 for newly-acquired VIEs and the
first fiscal or interim period beginning after June 15,
2003 for VIE holdings acquired prior to February 1, 2003.
The adoption of FIN 46 is not expected to have a material
effect on the Companys financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This Statement requires recognition of a
liability for a cost associated with an exit or disposal
activity when the liability is incurred, as opposed to when the
entity commits to an exit plan under EITF No. 94-3. SFAS
No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The
provisions of SFAS No. 146 will be applied to the costs
associated with the Companys consolidation of its
workforce into two main facilities, which occurred during the
first quarter of 2003.

In November 2002, the FASB issued FIN
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB

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Statements No. 5, 57 and 107 and a
rescission of FASB Interpretation No. 34. FIN 45
expands on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees issued. It also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability
for the fair value of the obligation undertaken. The initial
recognition and measurement provisions are applicable to
guarantees issued or modified after December 31, 2002 and
are not expected to have a material effect on the Companys
financial statements. The disclosure requirements are effective
for financial statements of interim and annual periods ending
after December 15, 2002.


In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This
Statement amends SFAS No. 123, Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The disclosure provisions of this
Standard are effective for fiscal years ending after
December 15, 2002 and have been incorporated into these
financial statements and accompanying footnotes.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents, and marketable securities
totaled $11,568,000 at December 31, 2002, down from
$15,122,000 at December 31, 2001 and $29,033,000 at
December 31, 2000.

Net cash used in operating activities of the
Company totaled $10,043,000 for 2002 compared to $15,500,000 for
2001 and $28,745,000 for 2000. Net cash used in operating
activities in 2002 primarily resulted from a $26,020,000 net
loss from continuing operations offset in part by $6,275,000 in
impairment of goodwill and other intangible assets, $5,422,000
in non-cash stock-based compensation charges, $2,626,000 in
depreciation and amortization, and $1,353,000 in provisions for
bad debt and reserve for notes receivable. Net cash used in
operating activities in 2001 primarily resulted from a
$53,492,000 net loss from continuing operations offset in part
by $19,257,000 in depreciation and amortization, $7,925,000 in
goodwill impairment, $7,173,000 in non-cash stock-based
compensation charges, and $6,488,000 of net cash provided by
discontinued operations. Net cash used in operating activities
in 2000 primarily resulted from a $57,452,000 net loss from
continuing operations and $8,607,000 of net cash used in
discontinued operations, offset in part by $19,998,000 in
non-cash sales and marketing charges, $12,341,000 in non-cash
stock-based compensation charges, and $4,789,000 in depreciation
and amortization.

Net cash provided by investing activities totaled
$5,142,000, $8,387,000, and $1,584,000 for 2002, 2001, and 2000,
respectively. Net cash provided by investing activities in 2002
primarily resulted from $6,127,000 of net proceeds from sales
and maturities of marketable securities partially offset by
$936,000 for the purchase of property and equipment. Net cash
provided by investing activities in 2001 primarily resulted from
$8,843,000 of net proceeds from sales and maturities of
marketable securities partially offset by $872,000 for the
purchase of property and equipment. Net cash provided by
investing activities in 2000 primarily resulted from $17,135,000
of net proceeds from sales and maturities of marketable
securities, partially offset by $10,225,000 of cash used to
acquire Viewpoint Digital and $4,233,000 for the purchase of
property and equipment.

Net cash provided by financing activities totaled
$7,534,000, $1,874,000, and $35,993,000 for 2002, 2001 and 2000,
respectively. Net cash provided by financing activities in 2002
primarily resulted from the issuance of convertible notes and
warrants of $6,840,000 and $1,387,000 of proceeds from the
exercise of stock options by the Companys employees,
partially offset by $693,000 in cash put in a restricted escrow
account for interest on the convertible notes. Net cash provided
by financing activities in 2001 primarily resulted from
$2,449,000 of proceeds from the exercise of stock options by the
Companys employees, partially offset by $575,000 in loans
to two officers of the Company. Net cash provided by financing
activities in 2000 primarily resulted from $19,839,000 received
from AOL and Adobe relating to their investment in Metastream,
$12,604,000 of proceeds from the exercise of stock options by
the Companys employees and $3,500,000 received from
Computer Associates related to their investment in Metastream.

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On December 31, 2002, the Company completed
a private placement of convertible notes and warrants in which
it issued to three institutional investors, 4.95% convertible
notes having an aggregate principal amount of $7,000,000, and
warrants to purchase 726,330 shares of Company common
stock. Interest on the convertible notes is payable quarterly in
arrears in cash or, at the option of the Company, in shares of
Company common stock, provided the Company satisfies certain
financial and other conditions. If interest is paid in shares of
Company common stock, the number of shares to be issued shall be
calculated by dividing the interest payable by 95% of the
arithmetic average of the dollar volume-weighted average price
of Company common stock on each of the five consecutive trading
days immediately preceding the interest payment date. The
convertible notes mature on December 31, 2007, unless
earlier converted into shares of Company common stock at a price
of $2.26 per share. The warrants expire on December 31,
2006, and are exercisable at a price of $2.26 per share.

The Company is required to file a registration
statement covering the resale of all of the shares of common
stock issuable to the investors upon conversion of the
convertible notes and exercise of the warrants issued,
(including any interest shares under the convertible notes) and
have the registration statement declared effective no later than
April 30, 2003.

At any time after June 30, 2004, the
investors may cause the Company to redeem up to all of the
outstanding convertible notes in cash at par plus accrued and
unpaid interest if the dollar volume-weighted average price of
Company common stock is less than $2.26 for any
25 consecutive trading days. If the investors redeem their
convertible notes, up to 20% of the amount to be redeemed may,
at the Companys option, be paid in shares of Company
common stock, and said payment would be at 95% of the arithmetic
average of the dollar volume-weighted average price of Company
common stock for the 20 consecutive trading days
immediately preceding payment. At any time after
December 31, 2005, the investors may cause the Company to
redeem up to all of the outstanding convertible notes in cash at
83% of par plus accrued and unpaid interest if the dollar
volume-weighted average price of Company common stock is less
than $2.26 for any 25 consecutive trading days following
December 31, 2005.

At any time after April 15, 2004, the
Company has the right to require the investors to convert up to
all of the outstanding convertible notes at $2.26 if the dollar
volume-weighted average price of Company common Stock exceeds
$3.39 for any 25 consecutive trading days following
April 15, 2004. At any time following the 30 month
anniversary of the day the registration statement is declared
effective by the Securities and Exchange Commission
(SEC), the Company has the right to redeem the
convertible notes at a price equal to the greater of
(i) par plus accrued and unpaid interest and (ii) a
value assigned to the convertible notes by an independent
investment bank or major financial institution.

The investors may require the Company to sell
additional 4.95% convertible notes having an aggregate
principal amount of up to $2,800,000, and warrants to purchase
up to 290,533 shares of Company common stock prior to
December 31, 2003 or later if the registration statement is
not effective by a certain date.

The Company has the right to sell additional
4.95% convertible notes having an aggregate principal
amount of up to $7,000,000 and warrants to purchase up to
726,330 shares of Company common stock prior to
June 30, 2003, if the dollar volume-weighted average price
of Company common stock exceeds $3.25 on each of not less than
15 trading days in any 20 consecutive trading day
period.

In conjunction with the issuance of convertible
notes and warrants on December 31, 2002, there were several
covenants with events of default, including but not limited to:
i) failure to have the Companys registration
statement declared effective by the SEC, ii) event of
delisting from The Nasdaq National Market or other national
exchange, iii) change in control, iv) event of
conversion default such as lack of authorized capital, v) event
of bankruptcy, vi) failure to pay principal and interest on
the convertible notes when payments become due,
vii) judgements against the Company in excess of $1,000,000
and viii) breach of any representation, warranty, covenant or
other term. Upon an event of default, the convertible notes will
become immediately due and payable, after a grace period to cure
the default lapses.

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On February 28, 2003, the Company received a
notice of default, from two of the three investors based upon an
alleged breach of representation and warranties by the Company.

On March 25, 2003, the Company entered into
Redemption, Amendment and Exchange Agreements with the three
institutional investors with whom it had completed a private
placement of convertible notes and warrants on December 31,
2002. Pursuant to these agreements, the notice of default was
withdrawn and Viewpoint redeemed an aggregate of
$3,300,000 million principal amount of the outstanding
convertible notes, exchanged an aggregate of $1,000,000
principal amount of the outstanding convertible notes for shares
of Viewpoint common stock at $0.74 per share, and exchanged the
remaining $2,700,000 principal amount of outstanding convertible
notes for $2,700,000 principal amount of new convertible notes.
The warrants to purchase 726,330 shares of Company common
stock, which were issued to these investors on December 31,
2002, remain outstanding.

Interest on the new convertible notes is payable
quarterly in arrears in cash or, at the option of the Company,
in shares of Company common stock, provided the Company
satisfies certain financial and other conditions. If interest is
paid in shares of Company common stock, the number of shares to
be issued shall be calculated by dividing the interest payable
by 95% of the arithmetic average of the dollar volume-weighted
average price of Company common stock on each of the five
consecutive trading days immediately preceding the interest
payment date. The new convertible notes mature on
December 31, 2007, unless earlier converted into shares of
Company common stock. The new convertible notes will be
convertible as follows: (i) one third of the notes will
have a conversion price equal to the arithmetic average of the
dollar volume-weighted average price of Company common stock for
the ten trading days following May 16, 2003, (ii) one
third of the notes will have a conversion price equal to such
average for the ten trading days following August 16, 2003,
and (iii) one third of the notes will have a conversion
price equal to such average for the ten trading days following
November 16, 2003, provided, that the conversion price in
each case shall not be less than $1.00 nor more than $2.26.

The Company is required to file a registration
statement by April 14, 2003, covering the resale of all of
the shares of common stock issued to the investors in exchange
for the $1,000,000 principal of convertible notes, and all the
shares of common stock issuable to the investors upon the
conversion of the new convertible notes and exercise of the
warrants issued and to be issued, (including any interest shares
under the new convertible notes) and have the registration
statement declared effective no later than June 30, 2003.
The Company is required to pay cash penalties if the
registration statement is not filed or declared effective on
time.

If the Company raises capital after
March 31, 2003, up to 20% of the net proceeds will be used,
at the investors option, to redeem outstanding notes at
par plus accrued interest.

The Company has the right at any time to redeem
up to all of the outstanding notes at par plus accrued and
unpaid interest. If the redemption is after April 30, 2003,
concurrently with any such redemption, the Company is required
to deliver to the investors warrants, with an exercise price of
$1.00 and a term equal to the remaining term of the notes being
redeemed, to subscribe for a number of shares of common stock
equal to X% of the principal amount being redeemed divided by
the conversion price of the notes then in effect. X%
means (i) before May 31, 2003, 50% and (ii) after
May 31, 2003, 100%.

The investors may require the Company to sell
additional 4.95% convertible notes having an aggregate principal
amount of up to $2,800,000, and warrants to purchase up to
290,533 shares of Company common stock prior to
December 31, 2003 or later if the registration statement is
not effective by a certain date.

The Company has the right to sell additional
4.95% convertible notes having an aggregate principal amount of
up to $7,000,000 and warrants to purchase up to 726,330 shares
of Company common stock prior to June 30, 2003, if the
dollar volume-weighted average price of Company common stock
exceeds $3.25 on each of not less than 15 trading days in any 20
consecutive trading-day period.

Under the terms of the amended agreement, certain
covenants and events of default were restructured as follows:
the failure to have its registration statement declared
effective by the SEC and the requirement to

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remain listed on The Nasdaq National Market or
other national exchange, both of which were waived through March
2004, unless the Company receives a going concern or qualified
opinion from its auditors. If such a qualified report is
received from the Companys auditors through March 2004,
the original events of default remain effective.


The Nasdaq National Market notified us on
March 20, 2003 that our common stock may be delisted from
Nasdaq for failure to maintain a minimum bid price of $1.00 and
that we will be provided until September 16, 2003 to regain
compliance with National Market standards. If we are unable to
regain compliance with the minimum bid price we may be eligible
to transfer our common stock to listing on The Nasdaq SmallCap
Market if we meet applicable listing standards and thereby gain
an additional 180 days to regain compliance with the
minimum bid price requirement. In response to the potential
delisting of our common stock due to the failure to meet the
Nasdaq National Markets minimum bid price requirement, we
may ask our stockholders to authorize a reverse stock split at
our annual meeting in 2003. If the reverse stock split is
approved by our stockholders and we effect the reverse stock
split, we would reduce the number of outstanding shares of
common stock. With fewer shares outstanding, we would expect our
stock price to increase. While a reverse stock split may enable
us to cure the minimum bid price deficiency, share prices of
companies effecting reverse stock splits often decline and we
cannot assure you that our stock price would not decline after a
reverse stock split.

On March 26, 2003, Viewpoint Corporation
entered into a Securities Purchase Agreement with three other
institutional investors, pursuant to which it received
$3,500,000 and issued an aggregate of $3,500,000 principal
amount of 4.95% subordinated notes and 3,614,756 shares of
Viewpoint common stock.

Interest on these notes is payable quarterly in
arrears in cash. The notes contain certain events of default,
including, but not limited to: i) failure to pay principal
and interest on the notes when payments become due,
ii) judgements against the Company in excess of $1,000,000,
iii) event of bankruptcy and iv) breach of any
representation, covenant or other term. Upon an event of
default, the notes will become immediately due and payable.

The Company is required to file a registration
statement by May 9, 2003, covering the resale of all of the
shares of common stock issued and have the registration
statement declared effective no later than July 23, 2003.
The Company is required to pay cash penalties if the
registration statement is not filed or declared effective on
time.

The Company has the right at any time to redeem
up to all of the outstanding notes at par plus accrued and
unpaid interest.

Pursuant to the purchase of all of the
outstanding capital stock of Viewpoint Digital on
September 8, 2000, the Company issued two contingent
promissory notes to Computer Associates each in the maximum
amount of $15,000,000, but subject to reduction on the basis of
the performance of the Viewpoint Digital assets. During 2001,
the Company entered into certain agreements with Computer
Associates whereby Computer Associates agreed to accept
newly-issued shares of Viewpoint common stock having a value of
$4,000,000, in partial repayment of the first contingent
promissory note due June 8, 2001. In addition, Computer
Associates agreed to accept, at the Companys election,
either cash or newly-issued shares of Viewpoint common stock at
an issue price of $4.00 per share in repayment of any additional
amounts due under the promissory note due June 8, 2001, and
the first $8,943,000 of the $15,000,000 contingent promissory
note due April 30, 2002.

In June 2002, Viewpoint issued
909,093 shares of Viewpoint common stock to Computer
Associates in full satisfaction of the first contingent
promissory note due June 8, 2001. The amount due Computer
Associates under the promissory note due April 30, 2002 is
approximately $2,928,000 and is reflected in due to related
parties in the Companys consolidated balance sheet at
December 31, 2002. The Company expects to make this payment
in newly issued shares of Viewpoint common stock.

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As of December 31, 2002, the Company had
cash commitments totaling approximately $18,324,000 through
2010, related to long-term convertible notes, current promissory
notes related to the Viewpoint Digital acquisition, and future
minimum lease payments for office space, equipment, and an
executives vehicle.

|                                                |  |                        |        |         |  |           |       |           |  |         |       |  |  |   |       |  |  |   |       | 
|----------------------------------------------- |  | ---------------------- | ------ | ------- |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                                |  |                       
|                                                |  | Payments Due By Period
|                                                |  |                       
|                                                |  |                        |        | 1 Year  |  |           |       | More Than
|                                                |  | Total                  |        | or Less |  | 2-3 Years |       | 4-5 Years |  | 5 Years
|                                                |  |                        |        |         |  |           |       |           |  |        
|Long-Term Debt Obligations                      |  | $                      | 7,000  |         |  | $         |      |           |  | $       |      |  |  | $ | 7,000 |  |  | $ |      | 
|Operating Lease Obligations                     |  |                        | 6,663  |         |  |           | 1,117 |           |  |         | 2,033 |  |  |   | 1,917 |  |  |   | 1,596 | 
|Interest Payments on Long Term-Debt Obligations |  |                        | 1,733  |         |  |           | 347   |           |  |         | 693   |  |  |   | 693   |  |  |   |      | 
|Promissory Note due to Computer Associates(1)   |  |                        | 2,928  |         |  |           | 2,928 |           |  |         |      |  |  |   |      |  |  |   |      | 
|                                                |  |                        |        |         |  |           |       |           |  |         |       |  |  |   |       |  |  |   |       | 
|Total                                           |  | $                      | 18,324 |         |  | $         | 4,392 |           |  | $       | 2,726 |  |  | $ | 9,610 |  |  | $ | 1,596 | 
|                                                |  |                        |        |         |  |           |       |           |  |         |       |  |  |   |       |  |  |   |       | 



---



|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(1) | The Company has the option to pay this promissory
    note in cash or company stock.

At the end of 2002 and during the first quarter
of 2003, the Company consolidated its operations and reduced its
workforce to a level of business that would not significantly
reduce cash resources while continuing to provide for investment
in new initiatives. The Company operates in a dynamic
environment and must remain responsive to changes as they occur.
The Company has configured its business with a substantial level
of variable costs, giving it the flexibility to reduce costs if
economic conditions deteriorate. The Company has the ability and
intention to reduce or delay these variable costs such that it
will have sufficient cash resources through December 31,
2003, however, there can be no assurance that the Company will
be able to adjust variable costs in sufficient time to respond
to revenue shortfalls should they occur.

The Company has contingency plans for 2003 if
expected revenue targets are not achieved. These plans include
further workforce reductions as well as reductions in overhead
and capital expenditures.

The Company believes that its current cash, cash
equivalents, and marketable securities balances and cash
provided by future operations, if any, are sufficient to meet
its operating cash flow needs and anticipated capital
expenditure requirements through at least the next twelve
months. The Company may seek additional funds before that time
through public or private equity financing or from other sources
to fund our operations and pursue our growth strategy. We have
no commitment for additional financing, and we may experience
difficulty in obtaining additional financing on favorable terms,
if at all. Any financing we obtain may contain covenants that
restrict our freedom to operate our business or may have rights,
preferences or privileges senior to our common stock and may
dilute our current shareholders ownership interest in
Viewpoint.






|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    About Market Risk

The Company is subject to concentration of credit
risk and interest rate risk related to cash, cash equivalents
and marketable securities. The Company does not have any
derivative financial instruments as of December 31, 2002.
Credit risk is managed by limiting the amount of securities
placed with any one issuer, investing in high-quality marketable
securities and securities of the U.S. government and limiting
the average maturity of the overall portfolio. The majority of
the Companys portfolio, which is classified as
available-for-sale, is composed of fixed income securities that
are subject to the risk of market interest rate fluctuations,
and all of the Companys securities are subject to risks
associated with the ability of the issuers to perform their
obligations under the instruments. The Company may suffer losses
in principal if forced to sell securities, which have declined
in market value due to changes in interest rates.

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##### Table of Contents








|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

1. Index to Financial Statements

The following financial statements are filed as
part of this Report:

|                                                                                                                        |  |      |    | 
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                        |  | Page
|                                                                                                                        |  |     
|Audited Financial Statements                                                                                            |  |      |    | 
|Report of Independent Accountants                                                                                       |  |      | 36 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                        |  |      | 37 | 
|Consolidated Statement of Operations for each of
    the three Years in the period ended December 31, 2002              |  |      | 38 | 
|Consolidated Statement of Stockholders Equity for
    each of the three years in the period ended December 31,
    2002 |  |      | 39 | 
|Consolidated Statement of Cash Flows for each of
    the three Years in the period ended December 31, 2002              |  |      | 40 | 
|Notes to Consolidated Financial Statements                                                                              |  |      | 42 | 

2. Index to Financial Statement
Schedule

|                                                    |  |      |    | 
|--------------------------------------------------- |  | ---- | -- | 
|                                                    |  | Page
|                                                    |  |     
|Schedule                                            |  |      |    | 
|Schedule II  Valuation and
    Qualifying Accounts |  |      | 70 | 

All other schedules are omitted because they are
not applicable, or not required, or because the required
information is included in the financial statements or notes
thereto.

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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

Viewpoint Corporation


In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of Viewpoint
Corporation and its subsidiaries at December 31, 2002 and
2001, 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. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule 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 Notes 2 and 6 to the consolidated
financial statements, on January 1, 2002, the Company
adopted the provisions of Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible
Assets.



| |                               
| | ------------------------------
| | /s/ PRICEWATERHOUSECOOPERS LLP

New York, New York

March 31, 2003


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VIEWPOINT CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                            |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |          |        | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | -------- | ------ |  | ------ | -------- | ------ | 
|                                            |                                                                                                                                                                                                                                |                                           
|                                            |                                                                                                                                                                                                                                | December 31,                              
|                                            |                                                                                                                                                                                                                                |                                           
|                                            |                                                                                                                                                                                                                                | 2002                                       |        | 2001    
|                                            |                                                                                                                                                                                                                                |                                            |        |         
|                                            |                                                                                                                                                                                                                                |                                           
|                                            |                                                                                                                                                                                                                                | (In thousands, except per                 
|                                            |                                                                                                                                                                                                                                | share data)                               
|ASSETS                                     
|Current assets:                             |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         
|                                            | Cash and cash equivalents                                                                                                                                                                                                      |                                            | $      | 10,678   |        |  | $      | 8,054    |       
|                                            | Marketable securities                                                                                                                                                                                                          |                                            |        | 890      |        |  |        | 7,068    |       
|                                            | Accounts receivable, net                                                                                                                                                                                                       |                                            |        | 2,925    |        |  |        | 2,959    |       
|                                            | Related party accounts receivable, net                                                                                                                                                                                         |                                            |        | 838      |        |  |        | 1,137    |       
|                                            | Notes receivable, net                                                                                                                                                                                                          |                                            |        | 750      |        |  |        | 750      |       
|                                            | Prepaid expenses and other current assets                                                                                                                                                                                      |                                            |        | 599      |        |  |        | 836      |       
|                                            | Current assets related to discontinued operations                                                                                                                                                                              |                                            |        |         |        |  |        | 141      |       
|                                            |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         
|                                            |                                                                                                                                                                                                                                | Total current assets                       |        |          | 16,680 |  |        |          | 20,945 | 
|Restricted cash                             |                                                                                                                                                                                                                                |                                            | 987    |          |        |  | 291    |         
|Property and equipment, net                 |                                                                                                                                                                                                                                |                                            | 3,591  |          |        |  | 4,662  |         
|Goodwill, net                               |                                                                                                                                                                                                                                |                                            | 31,276 |          |        |  | 33,042 |         
|Intangibles assets, net                     |                                                                                                                                                                                                                                |                                            | 165    |          |        |  | 2,361  |         
|Loans to officers, net                      |                                                                                                                                                                                                                                |                                            |       |          |        |  | 595    |         
|Other assets                                |                                                                                                                                                                                                                                |                                            | 653    |          |        |  | 21     |         
|                                            |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         
|                                            |                                                                                                                                                                                                                                | Total assets                               |        | $        | 53,352 |  |        | $        | 61,917 | 
|                                            |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         
|                                           
|LIABILITIES AND STOCKHOLDERS
    EQUITY   
|Current liabilities:                        |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         
|                                            | Accounts payable                                                                                                                                                                                                               |                                            | $      | 2,962    |        |  | $      | 1,314    |       
|                                            | Accrued expenses                                                                                                                                                                                                               |                                            |        | 759      |        |  |        | 1,304    |       
|                                            | Due to related parties, net                                                                                                                                                                                                    |                                            |        | 2,920    |        |  |        | 4,764    |       
|                                            | Deferred revenues                                                                                                                                                                                                              |                                            |        | 334      |        |  |        | 381      |       
|                                            | Related party deferred revenues                                                                                                                                                                                                |                                            |        | 249      |        |  |        | 526      |       
|                                            | Accrued incentive compensation                                                                                                                                                                                                 |                                            |        | 545      |        |  |        | 545      |       
|                                            | Current liabilities related to discontinued
    operations                                                                                                                                                                     |                                            |        | 231      |        |  |        | 346      |       
|                                            |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         
|                                            |                                                                                                                                                                                                                                | Total current liabilities                  |        |          | 8,000  |  |        |          | 9,180  | 
|Convertible notes                           |                                                                                                                                                                                                                                |                                            | 6,712  |          |        |  |       |         
|Warrants to purchase common stock           |                                                                                                                                                                                                                                |                                            | 288    |          |        |  |       |         
|Commitments and contingencies (footnote 12) |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         
|Stockholders equity:                       |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         
|                                            | Preferred stock, $.001 par value;
    5,000 shares authorized  no shares issued and
    outstanding at December 31, 2002 and 2001                                                                                             |                                            |        |         |        |  |        |         |       
|                                            | Common stock, $.001 par value;
    75,000 shares authorized  41,179 shares
    issued and 41,019 shares outstanding at December 31,
    2002, and 39,620 shares issued and 39,460 shares
    outstanding at December 31, 2001 |                                            |        | 41       |        |  |        | 40       |       
|                                            | Paid-in capital                                                                                                                                                                                                                |                                            |        | 267,569  |        |  |        | 263,157  |       
|                                            | Deferred compensation                                                                                                                                                                                                          |                                            |        | (4,130   | )      |  |        | (11,279  | )     
|                                            | Treasury stock at cost; 160 at December 31,
    2002 and 2001                                                                                                                                                                  |                                            |        | (1,015   | )      |  |        | (1,015   | )     
|                                            | Accumulated other comprehensive income (loss)                                                                                                                                                                                  |                                            |        | (36      | )      |  |        | 18       |       
|                                            | Accumulated deficit                                                                                                                                                                                                            |                                            |        | (224,077 | )      |  |        | (198,184 | )     
|                                            |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         
|                                            |                                                                                                                                                                                                                                | Total stockholders equity                 |        |          | 38,352 |  |        |          | 52,737 | 
|                                            |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         
|                                            |                                                                                                                                                                                                                                | Total liabilities and stockholders equity |        | $        | 53,352 |  |        | $        | 61,917 | 
|                                            |                                                                                                                                                                                                                                |                                            |        |          |        |  |        |         

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

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##### Table of Contents



VIEWPOINT CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |        |  
|--------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                      |                                                                                                                                                      |                                
|                                                                      |                                                                                                                                                      | Years Ended December 31,       
|                                                                      |                                                                                                                                                      |                                
|                                                                      |                                                                                                                                                      | 2002                            |         | 2001   |   | 2000
|                                                                      |                                                                                                                                                      |                                 |         |        |   |     
|                                                                      |                                                                                                                                                      |                                
|                                                                      |                                                                                                                                                      | (In thousands, except per share
|                                                                      |                                                                                                                                                      | amounts)                       
|Revenues:                                                             |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|                                                                      | Licenses                                                                                                                                             |                                 | $       | 5,039  |   |      | $       | 8,148  |   |   | $       | 1,421  |  
|                                                                      | Related party licenses                                                                                                                               |                                 |         | 7,554  |   |      |         | 1,533  |   |   |         |       |  
|                                                                      | Services                                                                                                                                             |                                 |         | 3,302  |   |      |         | 3,500  |   |   |         | 1,659  |  
|                                                                      | Related party services                                                                                                                               |                                 |         | 2,244  |   |      |         | 827    |   |   |         | 500    |  
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Total revenues                                                        |                                                                                                                                                      |                                 | 18,139  |        |   |      | 14,008  |        |   |   | 3,580   |       
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Cost of Revenues:                                                     |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|                                                                      | Licenses                                                                                                                                             |                                 |         | 353    |   |      |         | 309    |   |   |         | 76     |  
|                                                                      | Services                                                                                                                                             |                                 |         | 3,587  |   |      |         | 3,283  |   |   |         | 1,467  |  
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Total cost of revenues                                                |                                                                                                                                                      |                                 | 3,940   |        |   |      | 3,592   |        |   |   | 1,543   |       
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Gross profit                                                          |                                                                                                                                                      |                                 | 14,199  |        |   |      | 10,416  |        |   |   | 2,037   |       
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Operating expenses:                                                   |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|                                                                      | Sales and marketing (including non-cash
    stock-based compensation charges totaling $3,187 in 2002, $2,335
    in 2001, and $5,122 in 2000)        |                                 |         | 16,682 |   |      |         | 17,521 |   |   |         | 18,616 |  
|                                                                      | Research and development (including non-cash
    stock-based compensation charges totaling $712 in 2002, $2,920
    in 2001, and $4,193 in 2000)     |                                 |         | 5,548  |   |      |         | 9,846  |   |   |         | 10,559 |  
|                                                                      | General and administrative (including non-cash
    stock-based compensation charges totaling $1,523 in 2002, $1,918
    in 2001, and $3,026 in 2000) |                                 |         | 9,134  |   |      |         | 10,423 |   |   |         | 9,814  |  
|                                                                      | Depreciation                                                                                                                                         |                                 |         | 1,962  |   |      |         | 1,804  |   |   |         | 801    |  
|                                                                      | Amortization of intangible assets                                                                                                                    |                                 |         | 664    |   |      |         | 3,325  |   |   |         | 1,258  |  
|                                                                      | Amortization of goodwill                                                                                                                             |                                 |         |       |   |      |         | 14,128 |   |   |         | 1,767  |  
|                                                                      | Impairment of goodwill and other intangible assets                                                                                                   |                                 |         | 6,275  |   |      |         | 7,925  |   |   |         |       |  
|                                                                      | Compensation charge related to forgiveness of an
    officer loan                                                                                    |                                 |         |       |   |      |         |       |   |   |         | 2,322  |  
|                                                                      | Non-cash sales and marketing charges                                                                                                                 |                                 |         |       |   |      |         |       |   |   |         | 19,998 |  
|                                                                      | Acquired in-process research and development costs                                                                                                   |                                 |         |       |   |      |         |       |   |   |         | 963    |  
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Total operating expenses                                              |                                                                                                                                                      |                                 | 40,265  |        |   |      | 64,972  |        |   |   | 66,098  |       
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Loss from operations                                                  |                                                                                                                                                      |                                 | (26,066 | )      |   |      | (54,556 | )      |   |   | (64,061 | )     
|Other income                                                          |                                                                                                                                                      |                                 | 153     |        |   |      | 1,064   |        |   |   | 2,180   |       
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Loss before provision for income taxes                                |                                                                                                                                                      |                                 | (25,913 | )      |   |      | (53,492 | )      |   |   | (61,881 | )     
|Provision for income taxes                                            |                                                                                                                                                      |                                 | 107     |        |   |      |        |        |   |   |        |       
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Loss before minority interest in loss of
    subsidiary               |                                                                                                                                                      |                                 | (26,020 | )      |   |      | (53,492 | )      |   |   | (61,881 | )     
|Minority interest in loss of subsidiary                               |                                                                                                                                                      |                                 |        |        |   |      |        |        |   |   | 4,429   |       
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Net loss from continuing operations                                   |                                                                                                                                                      |                                 | (26,020 | )      |   |      | (53,492 | )      |   |   | (57,452 | )     
|Adjustment to net loss on disposal of
    discontinued operations     |                                                                                                                                                      |                                 | 127     |        |   |      | 1,122   |        |   |   | 1,496   |       
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Net loss                                                              |                                                                                                                                                      |                                 | (25,893 | )      |   |      | (52,370 | )      |   |   | (55,956 | )     
|Accretion of mandatorily redeemable preferred
    stock of subsidiary |                                                                                                                                                      |                                 |        |        |   |      |        |        |   |   | (438    | )     
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Net loss applicable to common shareholders                            |                                                                                                                                                      | $                               | (25,893 | )      |   | $    | (52,370 | )      |   | $ | (56,394 | )     
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Basic and diluted net loss per common share:                          |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|                                                                      | Net loss per common share from continuing
    operations                                                                                             |                                 | $       | (0.64  | ) |      | $       | (1.37  | ) |   | $       | (2.01  | )
|                                                                      | Net income per common share from discontinued
    operations                                                                                         |                                 |         |       |   |      |         | 0.03   |   |   |         | 0.05   |  
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Net loss per common share                                             |                                                                                                                                                      | $                               | (0.64   | )      |   | $    | (1.34   | )      |   | $ | (1.96   | )     
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Weighted average number of shares
    outstanding  basic and diluted |                                                                                                                                                      |                                 | 40,759  |        |   |      | 39,077  |        |   |   | 28,718  |       
|                                                                      |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       

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

37



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##### Table of Contents



VIEWPOINT CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

For the Years Ended December 31, 2002,
2001, and 2000


|                                                                                    |  |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |   |  |   |         |   |  |  |      |   |  |   |        |  
|----------------------------------------------------------------------------------- |  | --------------- | - | ------------ |  | ------- | - | -------- |  | -------------- | ------ | ------------ |  | ------ | -- | ------ |  | - | ------- | - |  | - | ------- | - |  |  | ---- | - |  | - | ------ | -
|                                                                                    |  |                 |   |              |  |         |   |          |  |                |        |              |  |       
|                                                                                    |  | Series A        |   |              |  |         |   |          |  |               
|                                                                                    |  | Preferred Stock |   | Common Stock |  |         |   |          |  | Treasury Stock
|                                                                                    |  |                 |   |              |  | Paid-In |   | Deferred |  |               
|                                                                                    |  | Shares          |   | Amount       |  | Shares  |   | Amount   |  | Capital        |        | Compensation |  | Shares |    | Amount
|                                                                                    |  |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |       
|                                                                                    |  |                
|                                                                                    |  | (In thousands) 
|Balances at December 31, 1999                                                       |  |                 |  |              |  | $       |  |          |  |                | 25,496 |              |  | $      | 25 |        |  | $ | 119,940 |   |  | $ |        |   |  |  |     |   |  | $ |       |  
|                                                                                    |  |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |   |  |   |         |   |  |  |      |   |  |   |        |  
|Issuance of common stock upon the exercise of
    stock options                     |  |                 |  |              |  |         |  |          |  |                | 2,678  |              |  |        | 3  |        |  |   | 12,601  |   |  |   |        |   |  |  |     |   |  |   |       |  
|Issuance of common stock in connection with the
    employee stock purchase plan    |  |                 |  |              |  |         |  |          |  |                | 47     |              |  |        |   |        |  |   | 242     |   |  |   |        |   |  |  |     |   |  |   |       |  
|Conversion of accrued compensation to equity upon
    exercise of certain options   |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   | 75      |   |  |   |        |   |  |  |     |   |  |   |       |  
|Change in interest gain related to subsidiary                                       |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   | 3,300   |   |  |   |        |   |  |  |     |   |  |   |       |  
|Issuance/cancellation of common stock option
    awards                             |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   | 22,925  |   |  |   | (22,925 | ) |  |  |     |   |  |   |       |  
|Amortization of deferred compensation                                               |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   | 330     |   |  |  |     |   |  |   |       |  
|Issuance of common stock in connection with
    Viewpoint Digital, Inc. acquisition |  |                 |  |              |  |         |  |          |  |                | 715    |              |  |        | 1  |        |  |   | 8,937   |   |  |   |        |   |  |  |     |   |  |   |       |  
|Non-cash sales and marketing charges in
    connection with strategic alliances     |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   | 19,998  |   |  |   |        |   |  |  |     |   |  |   |       |  
|Issuance of common stock in exchange for minority
    interest in subsidiary        |  |                 |  |              |  |         |  |          |  |                | 5,578  |              |  |        | 6  |        |  |   | 56,844  |   |  |   |        |   |  |  |     |   |  |   |       |  
|Issuance of common stock in exchange for
    subsidiary preferred stock             |  |                 |  |              |  |         |  |          |  |                | 3,450  |              |  |        | 3  |        |  |   | 19,836  |   |  |   |        |   |  |  |     |   |  |   |       |  
|Translation adjustment                                                              |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   |        |   |  |  |     |   |  |   |       |  
|Unrealized gain on marketable securities                                            |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   |        |   |  |  |     |   |  |   |       |  
|Net loss                                                                            |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   |        |   |  |  |     |   |  |   |       |  
|                                                                                    |  |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |   |  |   |         |   |  |  |      |   |  |   |        |  
|Balances at December 31, 2000                                                       |  |                 |  |              |  |         |  |          |  |                | 37,964 |              |  |        | 38 |        |  |   | 264,698 |   |  |   | (22,595 | ) |  |  |     |   |  |   |       |  
|                                                                                    |  |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |   |  |   |         |   |  |  |      |   |  |   |        |  
|Issuance of common stock upon the exercise of
    stock options                     |  |                 |  |              |  |         |  |          |  |                | 1,656  |              |  |        | 2  |        |  |   | 2,447   |   |  |   |        |   |  |  |     |   |  |   |       |  
|Issuance/cancellation of common stock option
    awards                             |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   | (4,975  | ) |  |   | 4,975   |   |  |  |     |   |  |   |       |  
|Amortization of deferred compensation                                               |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   | 6,341   |   |  |  |     |   |  |   |       |  
|Issuance of common stock options for services                                       |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   | 832     |   |  |   |        |   |  |  |     |   |  |   |       |  
|Conversion of accrued compensation to equity upon
    exercise of certain options   |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   | 1       |   |  |   |        |   |  |  |     |   |  |   |       |  
|Issuance of warrants to purchase shares of common
    stock                         |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   | 154     |   |  |   |        |   |  |  |     |   |  |   |       |  
|Receipt of common stock upon default of notes
    receivable                        |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   |        |   |  |  | (160 | ) |  |   | (1,015 | )
|Translation adjustment                                                              |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   |        |   |  |  |     |   |  |   |       |  
|Unrealized gain on marketable securities                                            |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   |        |   |  |  |     |   |  |   |       |  
|Net loss                                                                            |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   |        |   |  |  |     |   |  |   |       |  
|                                                                                    |  |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |   |  |   |         |   |  |  |      |   |  |   |        |  
|Balances at December 31, 2001                                                       |  |                 |  |              |  |         |  |          |  |                | 39,620 |              |  |        | 40 |        |  |   | 263,157 |   |  |   | (11,279 | ) |  |  | (160 | ) |  |   | (1,015 | )
|                                                                                    |  |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |   |  |   |         |   |  |  |      |   |  |   |        |  
|Issuance of common stock upon the exercise of
    stock options                     |  |                 |  |              |  |         |  |          |  |                | 650    |              |  |        |   |        |  |   | 1,387   |   |  |   |        |   |  |  |     |   |  |   |       |  
|Issuance of common stock in connection with
    Viewpoint Digital, Inc. acquisition |  |                 |  |              |  |         |  |          |  |                | 909    |              |  |        | 1  |        |  |   | 4,752   |   |  |   |        |   |  |  |     |   |  |   |       |  
|Issuance/cancellation of common stock option
    awards                             |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   | (2,010  | ) |  |   | 2,010   |   |  |  |     |   |  |   |       |  
|Amortization of deferred compensation                                               |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |         |   |  |   | 5,139   |   |  |  |     |   |  |   |       |  
|Issuance of common stock options for services                                       |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   | 283     |   |  |   |        |   |  |  |     |   |  |   |       |  
|Translation adjustment                                                              |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   |        |   |  |  |     |   |  |   |       |  
|Unrealized loss on marketable securities                                            |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   |        |   |  |  |     |   |  |   |       |  
|Net loss                                                                            |  |                 |  |              |  |         |  |          |  |                |       |              |  |        |   |        |  |   |        |   |  |   |        |   |  |  |     |   |  |   |       |  
|                                                                                    |  |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |   |  |   |         |   |  |  |      |   |  |   |        |  
|Balances at December 31, 2002                                                       |  |                 |  |              |  | $       |  |          |  |                | 41,179 |              |  | $      | 41 |        |  | $ | 267,569 |   |  | $ | (4,130  | ) |  |  | (160 | ) |  | $ | (1,015 | )
|                                                                                    |  |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |   |  |   |         |   |  |  |      |   |  |   |        |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                    |  |                |      |             |  |              |          |               |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | -------------- | ---- | ----------- |  | ------------ | -------- | ------------- |  | - | ------- | - |  | - | ------- | -
|                                                                                    |  | Accumulated    |      |             |  |              |          |              
|                                                                                    |  | Other          |      |             |  |              |          |              
|                                                                                    |  | Comprehensive  |      |             |  | Total        |          |              
|                                                                                    |  | Income         |      | Accumulated |  | Stockholders |          | Comprehensive
|                                                                                    |  | (Loss)         |      | Deficit     |  | Equity       |          | Loss         
|                                                                                    |  |                |      |             |  |              |          |              
|                                                                                    |  |               
|                                                                                    |  | (In thousands)
|Balances at December 31, 1999                                                       |  | $              | (206 | )           |  | $            | (89,858  | )             |  | $ | 29,901  |   |  | $ |        |  
|                                                                                    |  |                |      |             |  |              |          |               |  |   |         |   |  |   |         |  
|Issuance of common stock upon the exercise of
    stock options                     |  |                |     |             |  |              |         |               |  |   | 12,604  |   |  |   |        |  
|Issuance of common stock in connection with the
    employee stock purchase plan    |  |                |     |             |  |              |         |               |  |   | 242     |   |  |   |        |  
|Conversion of accrued compensation to equity upon
    exercise of certain options   |  |                |     |             |  |              |         |               |  |   | 75      |   |  |   |        |  
|Change in interest gain related to subsidiary                                       |  |                |     |             |  |              |         |               |  |   | 3,300   |   |  |   |        |  
|Issuance/cancellatio of common stock option awards                                  |  |                |     |             |  |              |         |               |  |   |        |   |  |   |        |  
|Amortization of deferred compensation                                               |  |                |     |             |  |              |         |               |  |   | 330     |   |  |   |        |  
|Issuance of common stock in connection with
    Viewpoint Digital, Inc. acquisition |  |                |     |             |  |              |         |               |  |   | 8,938   |   |  |   |        |  
|Non-cash sales and marketing charges in
    connection with strategic alliances     |  |                |     |             |  |              |         |               |  |   | 19,998  |   |  |   |        |  
|Issuance of common stock in exchange for minority
    interest in subsidiary        |  |                |     |             |  |              |         |               |  |   | 56,850  |   |  |   |        |  
|Issuance of common stock in exchange for
    subsidiary preferred stock             |  |                |     |             |  |              |         |               |  |   | 19,839  |   |  |   |        |  
|Translation adjustment                                                              |  |                | 137  |             |  |              |         |               |  |   | 137     |   |  |   | 137     |  
|Unrealized gain on marketable securities                                            |  |                | 81   |             |  |              |         |               |  |   | 81      |   |  |   | 81      |  
|Net loss                                                                            |  |                |     |             |  |              | (55,956  | )             |  |   | (55,956 | ) |  |   | (55,956 | )
|                                                                                    |  |                |      |             |  |              |          |               |  |   |         |   |  |   |         |  
|Balances at December 31, 2000                                                       |  |                | 12   |             |  |              | (145,814 | )             |  |   | 96,339  |   |  |   | (55,738 | )
|                                                                                    |  |                |      |             |  |              |          |               |  |   |         |   |  |   |         |  
|Issuance of common stock upon the exercise of
    stock options                     |  |                |     |             |  |              |         |               |  |   | 2,449   |   |  |   |        |  
|Issuance/cancellatio of common stock option awards                                  |  |                |     |             |  |              |         |               |  |   |        |   |  |   |        |  
|Amortization of deferred compensation                                               |  |                |     |             |  |              |         |               |  |   | 6,341   |   |  |   |        |  
|Issuance of common stock options for services                                       |  |                |     |             |  |              |         |               |  |   | 832     |   |  |   |        |  
|Conversion of accrued compensation to equity upon
    exercise of certain options   |  |                |     |             |  |              |         |               |  |   | 1       |   |  |   |        |  
|Issuance of warrants to purchase shares of common
    stock                         |  |                |     |             |  |              |         |               |  |   | 154     |   |  |   |        |  
|Receipt of common stock upon default of notes
    receivable                        |  |                |     |             |  |              |         |               |  |   | (1,015  | ) |  |   |        |  
|Translation adjustment                                                              |  |                | (27  | )           |  |              |         |               |  |   | (27     | ) |  |   | (27     | )
|Unrealized gain on marketable securities                                            |  |                | 33   |             |  |              |         |               |  |   | 33      |   |  |   | 33      |  
|Net loss                                                                            |  |                |     |             |  |              | (52,370  | )             |  |   | (52,370 | ) |  |   | (52,370 | )
|                                                                                    |  |                |      |             |  |              |          |               |  |   |         |   |  |   |         |  
|Balances at December 31, 2001                                                       |  |                | 18   |             |  |              | (198,184 | )             |  |   | 52,737  |   |  |   | (52,364 | )
|                                                                                    |  |                |      |             |  |              |          |               |  |   |         |   |  |   |         |  
|Issuance of common stock upon the exercise of
    stock options                     |  |                |     |             |  |              |         |               |  |   | 1,387   |   |  |   |        |  
|Issuance of common stock in connection with
    Viewpoint Digital, Inc. acquisition |  |                |     |             |  |              |         |               |  |   | 4,753   |   |  |   |        |  
|Issuance/cancellatio of common stock option awards                                  |  |                |     |             |  |              |         |               |  |   |        |   |  |   |        |  
|Amortization of deferred compensation                                               |  |                |     |             |  |              |         |               |  |   | 5,139   |   |  |   |        |  
|Issuance of common stock options for services                                       |  |                |     |             |  |              |         |               |  |   | 283     |   |  |   |        |  
|Translation adjustment                                                              |  |                | (9   | )           |  |              |         |               |  |   | (9      | ) |  |   | (9      | )
|Unrealized loss on marketable securities                                            |  |                | (45  | )           |  |              |         |               |  |   | (45     | ) |  |   | (45     | )
|Net loss                                                                            |  |                |     |             |  |              | (25,893  | )             |  |   | (25,893 | ) |  |   | (25,893 | )
|                                                                                    |  |                |      |             |  |              |          |               |  |   |         |   |  |   |         |  
|Balances at December 31, 2002                                                       |  | $              | (36  | )           |  | $            | (224,077 | )             |  | $ | 38,352  |   |  | $ | (25,947 | )
|                                                                                    |  |                |      |             |  |              |          |               |  |   |         |   |  |   |         |  

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

38



---



##### Table of Contents



VIEWPOINT CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                                                       |                                                            |                                           |       |       |         |         |        |        |         |         |        |        |         |  
|------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | ----- | ----- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | -
|                                                                                |                                                                       |                                                           
|                                                                                |                                                                       | Years Ended December 31,                                  
|                                                                                |                                                                       |                                                           
|                                                                                |                                                                       | 2002                                                       |                                           | 2001  |       | 2000   
|                                                                                |                                                                       |                                                            |                                           |       |       |        
|                                                                                |                                                                       |                                                           
|                                                                                |                                                                       | (In thousands)                                            
|Cash flows from operating activities:                                           |                                                                       |                                                            |                                           |       |       |         |         |        |        |         |         |       
|Net loss                                                                        |                                                                       | $                                                          | (25,893                                   | )     |       | $       | (52,370 | )      |        | $       | (55,956 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                       |                                                            |                                           |       |       |         |         |        |        |         |         |       
|                                                                                | Adjustment to net loss on disposal of
    discontinued operations     |                                                            |                                           | (127  | )     |         |         | (1,122 | )      |         |         | (1,496 | )     
|                                                                                | Non-cash stock-based compensation charges                             |                                                            |                                           | 5,422 |       |         |         | 7,173  |        |         |         | 12,341 |       
|                                                                                | Impairment of goodwill and other intangible assets                    |                                                            |                                           | 6,275 |       |         |         | 7,925  |        |         |         |       |       
|                                                                                | Depreciation and amortization                                         |                                                            |                                           | 2,626 |       |         |         | 19,257 |        |         |         | 4,789  |       
|                                                                                | Provision for bad debt                                                |                                                            |                                           | 741   |       |         |         | 544    |        |         |         |       |       
|                                                                                | Accrued interest income                                               |                                                            |                                           | (17   | )     |         |         | (20    | )      |         |         |       |       
|                                                                                | Loss on sale and disposal of equipment                                |                                                            |                                           | 45    |       |         |         | 12     |        |         |         |       |       
|                                                                                | Loss on sale of marketable securities                                 |                                                            |                                           | 6     |       |         |         |       |        |         |         |       |       
|                                                                                | Forgiveness, reserve and recovery of notes
    receivables            |                                                            |                                           | 612   |       |         |         | (665   | )      |         |         | 3,347  |       
|                                                                                | Non-monetary sale of software for marketable
    securities           |                                                            |                                           |      |       |         |         | (165   | )      |         |         |       |       
|                                                                                | Minority interest in loss of subsidiary                               |                                                            |                                           |      |       |         |         |       |        |         |         | (4,429 | )     
|                                                                                | Non-cash sales and marketing charges                                  |                                                            |                                           |      |       |         |         |       |        |         |         | 19,998 |       
|                                                                                | Changes in operating assets and liabilities, net
    of acquisitions: |                                                            |                                           |       |       |         |         |        |        |         |         |        |       
|                                                                                |                                                                       | Accounts receivable                                        |                                           |       | (707  | )       |         |        | (1,449 | )       |         |        | (1,285 | )      
|                                                                                |                                                                       | Related party accounts receivable                          |                                           |       | 299   |         |         |        | (887   | )       |         |        | 137    |        
|                                                                                |                                                                       | Prepaid expenses and other assets                          |                                           |       | 227   |         |         |        | 917    |         |         |        | (367   | )      
|                                                                                |                                                                       | Restricted cash                                            |                                           |       | (3    | )       |         |        | (291   | )       |         |        |       |        
|                                                                                |                                                                       | Accounts payable                                           |                                           |       | 1,186 |         |         |        | (2,038 | )       |         |        | 2,718  |        
|                                                                                |                                                                       | Accrued expenses                                           |                                           |       | (545  | )       |         |        | 443    |         |         |        | 110    |        
|                                                                                |                                                                       | Due to/from related parties                                |                                           |       | (19   | )       |         |        | 323    |         |         |        | (312   | )      
|                                                                                |                                                                       | Deferred revenues                                          |                                           |       | (47   | )       |         |        | (101   | )       |         |        | 517    |        
|                                                                                |                                                                       | Related party deferred revenues                            |                                           |       | (277  | )       |         |        | 526    |         |         |        | (250   | )      
|                                                                                |                                                                       | Net cash provided by (used in) discontinued
    operations |                                           |       | 153   |         |         |        | 6,488  |         |         |        | (8,607 | )      
|                                                                                |                                                                       |                                                            |                                           |       |       |         |         |        |        |         |         |       
|                                                                                |                                                                       |                                                            | Net cash used in operating activities     |       |       | (10,043 | )       |        |        | (15,500 | )       |        |        | (28,745 | )
|Cash flows from investing activities:                                           |                                                                       |                                                            |                                           |       |       |         |         |        |        |         |         |       
|Proceeds from sales and maturities of marketable
    securities                 |                                                                       |                                                            | 9,634                                     |       |       |         | 31,885  |        |        |         | 59,870  |       
|Purchases of marketable securities                                              |                                                                       |                                                            | (3,507                                    | )     |       |         | (23,042 | )      |        |         | (42,735 | )     
|Purchases of property and equipment                                             |                                                                       |                                                            | (936                                      | )     |       |         | (872    | )      |        |         | (4,233  | )     
|Sale of property and equipment                                                  |                                                                       |                                                            |                                          |       |       |         | 16      |        |        |         |        |       
|Purchases of patents and trademarks                                             |                                                                       |                                                            | (49                                       | )     |       |         | (120    | )      |        |         |        |       
|Issuance of notes receivable                                                    |                                                                       |                                                            |                                          |       |       |         |        |        |        |         | (1,500  | )     
|Repayment of notes receivable from related parties                              |                                                                       |                                                            |                                          |       |       |         | 520     |        |        |         | 1,000   |       
|Acquisition of minority interest in subsidiary                                  |                                                                       |                                                            |                                          |       |       |         |        |        |        |         | (507    | )     
|Acquisition of Viewpoint Digital Inc., net of
    cash acquired                 |                                                                       |                                                            |                                          |       |       |         |        |        |        |         | (10,225 | )     
|Net cash used in discontinued operations                                        |                                                                       |                                                            |                                          |       |       |         |        |        |        |         | (86     | )     
|                                                                                |                                                                       |                                                            |                                           |       |       |         |         |        |        |         |         |       
|                                                                                |                                                                       |                                                            | Net cash provided by investing activities |       |       | 5,142   |         |        |        | 8,387   |         |        |        | 1,584   |  

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|                                                                                                    |                   |                                       |                                           |      |   |       |        |   |     |       |        |         |       |        | 
|--------------------------------------------------------------------------------------------------- | ----------------- | ------------------------------------- | ----------------------------------------- | ---- | - | ----- | ------ | - | --- | ----- | ------ | ------- | ----- | ------ | 
|                                                                                                    |                   |                                      
|                                                                                                    |                   | Years Ended December 31,             
|                                                                                                    |                   |                                      
|                                                                                                    |                   | 2002                                  |                                           | 2001 |   | 2000 
|                                                                                                    |                   |                                       |                                           |      |   |      
|                                                                                                    |                   |                                      
|                                                                                                    |                   | (In thousands)                       
|Cash flows from financing activities:                                                               |                   |                                       |                                           |      |   |       |        |   |     |       |        |        
|Proceeds from issuance of convertible notes, net
    of issuance costs paid of $160                 |                   |                                       | 6,552                                     |      |   |       |       |   |     |       |       |        
|Proceeds from issuance of warrants to purchase
    common stock                                     |                   |                                       | 288                                       |      |   |       |       |   |     |       |       |        
|Restricted cash in escrow for interest on
    convertible notes                                     |                   |                                       | (693                                      | )    |   |       |       |   |     |       |       |        
|Proceeds from exercise of stock options                                                             |                   |                                       | 1,387                                     |      |   |       | 2,449  |   |     |       | 12,604 |        
|Issuance of loans to officers                                                                       |                   |                                       |                                          |      |   |       | (575   | ) |     |       |       |        
|Collection of subscription receivable related to
    common stock of subsidiary                     |                   |                                       |                                          |      |   |       |       |   |     |       | 3,500  |        
|Issuance of mandatorily redeemable preferred
    stock of subsidiary, net of issuance costs of $161 |                   |                                       |                                          |      |   |       |       |   |     |       | 19,839 |        
|Proceeds from exercise of subsidiary stock options                                                  |                   |                                       |                                          |      |   |       |       |   |     |       | 50     |        
|                                                                                                    |                   |                                       |                                           |      |   |       |        |   |     |       |        |        
|                                                                                                    |                   |                                       | Net cash provided by financing activities |      |   | 7,534 |        |   |     | 1,874 |        |         |       | 35,993 | 
|Effect of exchange rates changes on cash                                                            |                   |                                       | (9                                        | )    |   |       | (27    | ) |     |       | 8      |        
|                                                                                                    |                   |                                       |                                           |      |   |       |        |   |     |       |        |        
|Net increase (decrease) in cash and cash
    equivalents                                            |                   |                                       | 2,624                                     |      |   |       | (5,266 | ) |     |       | 8,840  |        
|Cash and cash equivalents at beginning of year                                                      |                   |                                       | 8,054                                     |      |   |       | 13,320 |   |     |       | 4,480  |        
|                                                                                                    |                   |                                       |                                           |      |   |       |        |   |     |       |        |        
|Cash and cash equivalents at end of year                                                            |                   | $                                     | 10,678                                    |      |   | $     | 8,054  |   |     | $     | 13,320 |        
|                                                                                                    |                   |                                       |                                           |      |   |       |        |   |     |       |        |        
|Supplemental disclosure of cash flow activities:                                                    |                   |                                       |                                           |      |   |       |        |   |     |       |        |        
|Cash paid during the year for income taxes                                                          |                   | $                                     | 153                                       |      |   | $     | 78     |   |     | $     |       |        
|Supplemental disclosure of non-cash investing and
    financing activities:                         |                   |                                       |                                           |      |   |       |        |   |     |       |        |        
|Unrealized gains (losses) on marketable
    securities                                              |                   | $                                     | (45                                       | )    |   | $     | 33     |   |     | $     | 81     |        
|Closing costs for convertible notes accrued and
    not yet paid                                    |                   |                                       | 462                                       |      |   |       |       |   |     |       |       |        
|Issuance of warrants to purchase shares of common
    stock                                         |                   |                                       |                                          |      |   |       | 154    |   |     |       |       |        
|Receipt of treasury stock as forgiveness of notes
    receivable                                    |                   |                                       |                                          |      |   |       | 1,015  |   |     |       |       |        
|Contingent consideration not yet issued in
    connection with the acquisition of Viewpoint Digital |                   |                                       | 2,928                                     |      |   |       | 4,753  |   |     |       |       |        
|Non-monetary purchase of marketable securities                                                      |                   |                                       |                                          |      |   |       | 165    |   |     |       |       |        
|Net assets acquired in connection with
    acquisition of Viewpoint Digital:                        |                   |                                       |                                           |      |   |       |        |   |     |       |        |        
|                                                                                                    |                   | Cash                                  |                                           |      |  |       |        |   |    |       |        |         | 6     |       
|                                                                                                    |                   | Accounts receivable, net              |                                           |      |  |       |        |   | 203 |       |        |         | 830   |       
|                                                                                                    |                   | Property and equipment                |                                           |      |  |       |        |   |    |       |        |         | 1,576 |       
|                                                                                                    |                   | Prepaid expenses and other assets     |                                           |      |  |       |        |   |    |       |        |         | 128   |       
|                                                                                                    |                   | Accounts payable and accrued expenses |                                           |      |  |       |        |   |    |       |        |         | (410  | )     
|Conversion of accrued compensation to equity upon
    exercise of certain options                   |                   |                                       |                                          |      |   |       | 1      |   |     |       | 75     |        
|Acquisition of minority interest:                                                                   |                   |                                       |                                           |      |   |       |        |   |     |       |        |        
|                                                                                                    | Goodwill          |                                       |                                           |     |   |       |        |  |     |       |        | 42,892  |      
|                                                                                                    | Minority interest |                                       |                                           |     |   |       |        |  |     |       |        | 14,465  |      
|                                                                                                    | Common stock      |                                       |                                           |     |   |       |        |  |     |       |        | (6      | )    
|                                                                                                    | Paid in capital   |                                       |                                           |     |   |       |        |  |     |       |        | (56,844 | )    
|Issuance of stock in connection with employee
    stock purchase plan                               |                   |                                       |                                          |      |   |       |       |   |     |       | 242    |        

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

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VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                          
|-- | -------------------------
|1. | Business and Organization

Viewpoint Corporation provides interactive media
technologies and digital content creation services for website
marketing, online advertising, and embedded applications. Our
graphics operating system has been licensed by Fortune 500
companies and others for use in online, offline and embedded
applications serving a wide variety of needs, including:
business process visualizations, marketing campaigns, rich media
advertising and product presentations.

Until December 1999, the Company (which was then
known as MetaCreations) was primarily engaged in the
development, marketing, and sales of prepackaged software
graphics products. Its principal products were computer graphics
painting tools, photo editing, and 3D graphics
software. With its acquisition of Real Time Geometry Corporation
in December 1996, the Company became involved, on a limited
basis, in the development of technologies designed to make
practical the efficient display and deployment of interactive
media on the Internet. In June 1999, the Company increased its
commitment to the development of interactive Internet
technologies and formed Metastream.com Corporation to operate a
business exploiting these technologies. In December 1999, the
Board of Directors of the Company approved a plan to focus
exclusively on the Internet technologies of Metastream and to
correspondingly divest the Company of all its prepackaged
software business. In September 2000, the Company acquired
Viewpoint Digital, Inc., a company primarily involved in the
licensing of a catalog of three-dimensional digital models and
providing digital content creation services. In November 2000,
the Company changed its name to Viewpoint Corporation. The
Companys primary initiatives include:



| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Licensing technology for specific marketing and
    e-commerce visualization solutions;                                                                                                                                                              
|
| |  | Providing a full range of fee-based digital asset
    content creation and engineering professional services for
    implementing visualization solutions for marketing and creating
    new and enhancing existing enterprise software applications;
|
| |  | Proliferating the Viewpoint format into digital
    advertisements on various digital media, primarily the Web and
    digital set-top cable boxes;                                                                                                  
|
| |  | Forging technological alliances with leading
    interactive agencies and Web content providers; and                                                                                                                                                 
|
| |  | Maximizing market penetration and name
    recognition, including distribution of the Companys
    client-side software graphics operating system, Viewpoint Media
    Player                                                                       

Viewpoint believes that its success will depend
largely on its ability to improve and enhance its interactive
media technologies. Accordingly, Viewpoint has and intends to
continue to invest in research and development and sales and
marketing. Revenues from continuing operations primarily have
been from the sale of technology licenses and fee-based
professional services, including digital content creation
service and engineering services to enhance and create new
enterprise software applications.

In light of its relatively recent change in
strategic focus from selling prepackaged software, Viewpoint has
a limited operating history upon which an evaluation of the
Company and its prospects can be based. Viewpoints
prospects must be considered in light of the risks and
difficulties frequently encountered by early stage technology
companies. There can be no assurance that Viewpoint will achieve
or sustain profitability. Viewpoint has had significant
quarterly and annual operating losses since its inception, and
as of December 31, 2002, had an accumulated deficit of
$224,077,000.

At the end of 2002 and during the first quarter
of 2003, the Company consolidated its operations and reduced its
workforce to a level of business that would not significantly
reduce cash resources while continuing to provide for investment
in new initiatives. The Company operates in a dynamic
environment and must remain responsive to changes as they occur.
The Company has configured its business with a substantial level
of variable costs, giving it the flexibility to reduce costs if
economic conditions deteriorate. The Company has

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the ability and intention to reduce or delay
these variable costs such that it will have sufficient cash
resources through December 31, 2003, however, there can be
no assurance that the Company will be able to adjust variable
costs in sufficient time to respond to revenue shortfalls should
they occur.

The Company has contingency plans for 2003 if
expected revenue targets are not achieved. These plans include
further workforce reductions as well as reductions in overhead
and capital expenditures.

On December 31, 2002, the Company completed
a private placement of convertible notes and warrants in which
it issued to three institutional investors, 4.95% convertible
notes having an aggregate principal amount of $7,000,000, and
warrants to purchase 726,330 shares of Company common stock. The
notes mature on December 31, 2007, unless earlier converted
into shares of Company common stock at a price of $2.26 per
share. The warrants expire on December 31, 2006, and are
exercisable at a price of $2.26 per share.

In conjunction with the issuance of convertible
notes and warrants on December 31, 2002, there were several
covenants with events of default, including but not limited to:
i) failure to have the Companys registration statement
declared effective by the Securities and Exchange Commission
(SEC), ii) event of delisting from The Nasdaq
National Market or other national exchange, iii) change in
control, iv) event of conversion default such as lack of
authorized capital, v) event of bankruptcy, vi) failure to pay
principal and interest on the convertible notes when payments
become due, vii) judgements against the Company in excess of
$1,000,000 and viii) breach of any representation, warranty,
covenant or other term. Upon an event of default, the
convertible notes will become immediately due and payable, after
a grace period to cure the default lapses.

On February 28, 2003, the Company received a
notice of default, from two of the three investors based upon an
alleged breach of representation and warranties by the Company.

On March 25, 2003, the Company entered into
Redemption, Amendment and Exchange Agreements with the three
institutional investors with whom it had completed a private
placement of convertible notes and warrants on December 31,
2002. Pursuant to these agreements, the notice of default was
withdrawn and Viewpoint redeemed an aggregate of
$3,300,000 million principal amount of the outstanding
convertible notes, exchanged an aggregate of $1,000,000
principal amount of the outstanding convertible notes for shares
of Viewpoint common stock at $0.74 per share, and exchanged the
remaining $2,700,000 principal amount of outstanding convertible
notes for $2,700,000 principal amount of new convertible notes.
The warrants to purchase 726,330 shares of Company common stock,
which were issued to these investors on December 31, 2002,
remain outstanding.

If the Company raises capital after
March 31, 2003, up to 20% of the net proceeds will be used,
at the investors option, to redeem outstanding notes at
par plus accrued interest.

Under the terms of the amended agreement, certain
covenants and events of default were restructured as follows:
the failure to have its registration statement declared
effective by the SEC and the requirement to remain listed on The
Nasdaq National Market or other national exchange, both of which
were waived through March 2004, unless the Company receives a
going concern or qualified opinion from its auditors. If such a
qualified report is received from the Companys auditors
through March 2004, the original events of default remain
effective.

The Nasdaq National Market notified us on
March 20, 2003 that our common stock may be delisted from
Nasdaq for failure to maintain a minimum bid price of $1.00 and
that we will be provided until September 16, 2003 to regain
compliance with National Market standards. If we are unable to
regain compliance with the minimum bid price we may be eligible
to transfer our common stock to listing on The Nasdaq SmallCap
Market if we meet applicable listing standards and thereby gain
an additional 180 days to regain compliance with the
minimum bid price requirement. In response to the potential
delisting of our common stock due to the failure to meet the
Nasdaq National Markets minimum bid price requirement, we

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

may ask our stockholders to authorize a reverse
stock split at our annual meeting in 2003. If the reverse stock
split is approved by our stockholders and we effect the reverse
stock split, we would reduce the number of outstanding shares of
common stock. With fewer shares outstanding, we would expect our
stock price to increase. While a reverse stock split may enable
us to cure the minimum bid price deficiency, share prices of
companies effecting reverse stock splits often decline and we
cannot assure you that our stock price would not decline after a
reverse stock split.

On March 26, 2003, Viewpoint Corporation
entered into a Securities Purchase Agreement with three other
institutional investors, pursuant to which it received
$3,500,000 and issued an aggregate of $3,500,000 principal
amount of 4.95% subordinated notes and 3,614,756 shares of
Viewpoint common stock.

The notes contain certain events of default,
including, but not limited to: i) failure to pay principal and
interest on the notes when payments become due, ii) judgements
against the Company in excess of $1,000,000, iii) event of
bankruptcy and iv) breach of any representation, covenant or
other term. Upon an event of default, the notes will become
immediately due and payable.

The Company believes that its current cash and
marketable securities balances and cash provided by future
operations, if any, are sufficient to meet its operating cash
flow needs and anticipated capital expenditure requirements
through at least the next twelve months. The Company may seek
additional funds before that time through public or private
equity financing or from other sources to fund our operations
and pursue our growth strategy. We have no commitment for
additional financing, and we may experience difficulty in
obtaining additional financing on favorable terms, if at all.
Any financing we obtain may contain covenants that restrict our
freedom to operate our business or may have rights, preferences
or privileges senior to our common stock and may dilute our
current shareholders ownership interest in Viewpoint.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



| |                      
| | ---------------------
| | Basis of Presentation

The consolidated financial statements include the
accounts of Viewpoint and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.

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

Use of 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.

Cash Equivalents and Marketable
Securities

The Company considers all highly liquid
investments purchased with an original maturity of three months
or less at date of acquisition to be cash equivalents.

The Company considers its marketable securities
portfolio available-for-sale as defined in SFAS No. 115
Accounting for Certain Investments in Debt and Equity
Securities. These available-for-sale securities are
accounted for at their fair value, and unrealized gains and
losses on these securities are reported as a separate component
of stockholders equity.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Company invests its cash in accordance with a
policy that seeks to maximize returns while ensuring both
liquidity and minimal risk of principal loss. The policy limits
investments to certain types of instruments issued by
institutions with investment grade credit ratings, and places
restrictions on maturities and concentration by type and issuer.
The majority of the Companys portfolio is composed of
fixed income securities that are subject to the risk of market
interest rate fluctuations, and all of the Companys
marketable securities are subject to risks associated with the
ability of the issuers to perform their obligations under the
instruments.

Restricted Cash

The convertible notes agreement entered into on
December 31, 2002, required the Company to set up an
interest escrow account containing the total interest to be paid
for the first two years the notes are outstanding. The balance
in the interest escrow account as of December 31, 2002 was
$693,000. Pursuant to the Redemption, Amendment and Exchange
Agreements entered into on March 25, 2003, $377,000 was
released from the escrow account to the Company.

Included in restricted cash at December 31,
2002, is $294,000, which was pledged as collateral to secure a
letter of credit used for a security deposit on the
Companys New York facility.

Goodwill and Intangible Assets

Effective January 1, 2002, the Company
completed the adoption of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. As
required by SFAS No. 142, the Company discontinued
amortizing the remaining balances of goodwill as of
January 1, 2002. All remaining and future acquired goodwill
will be subject to impairment tests annually, or earlier if
indicators of potential impairment exist, using a
fair-value-based approach. When evaluating goodwill for
potential impairment, the Company first compares the fair value
of the reporting unit, based on market values of the reporting
unit or on the present value of estimated future cash flows,
with its carrying amount. If the estimated fair value of the
reporting unit is less than its carrying amount, an impairment
loss calculation is prepared. The impairment loss calculation
compares the implied fair value of the reporting unit goodwill
with the carrying amount of that goodwill. If the carrying
amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. All other intangible assets will
continue to be amortized over their estimated useful lives and
assessed for impairment under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.

Property and Equipment

Property and equipment are stated at cost less
accumulated depreciation. Assets are depreciated on the
straight-line method over their estimated useful lives, which
range from 3 to 5 years. Leasehold improvements are
amortized over the shorter of the life of the lease or the life
of the asset. Upon sale, any gain or loss is included in the
consolidated statements of operations. Maintenance and minor
replacements are expensed as incurred.

Software Development Costs

In accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, the Company provides for
capitalization of certain software development costs once
technological feasibility is established. The costs capitalized
are amortized on a straight-line basis over the estimated
product life, or on the ratio of current revenue to total
projected product revenues, whichever is greater. To date, the
establishment of technological feasibility of the Companys
products and general release

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

have substantially coincided. As a result, the
Company has not capitalized any internal software development
costs since costs qualifying for such capitalization have not
been significant.

Software Developed for Internal Use

In accordance with SOP No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, the Company capitalizes costs
of software, consulting services, hardware and payroll-related
costs incurred to purchase or develop internal-use software,
when technological feasibility has been established, it is
probable that the project will be completed and the software
will be used as intended. The Company expenses costs incurred
during preliminary project assessment, research and development,
re-engineering, training and application maintenance.

In March 2000, the EITF of the FASB reached a
consensus on EITF Issue 00-02, Accounting for Web Site
Development Costs. This consensus provides guidance on
what types of costs incurred to develop Web sites should be
capitalized or expensed. The Company adopted this consensus on
July 1, 2000. The Companys policy for accounting for
costs incurred to operate the Companys Web site was not
impacted by the adoption of the pronouncement.

Stock-Based Compensation

The Company accounts for stock option grants in
accordance with Auditing Practices Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees and complies with the disclosure provisions of
SFAS No. 123, Accounting for Stock Based
Compensation, as amended by FAS No. 148
Accounting for Stock-Based Compensation 
Transition and Disclosure. Under APB Opinion No. 25,
compensation expense is recognized over the vesting period based
on the difference, if any, at the date of grant between the fair
value of the Companys stock and the exercise price. The
Company accounts for stock issued to non-employees in accordance
with SFAS No. 123 and EITF Issue No. 96-18
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.

In March 2000, the FASB issued Financial
Interpretation (FIN) No. 44, Accounting
for Certain Transactions Involving Stock Compensation,
which is an interpretation of APB Opinion No. 25. This
interpretation clarifies:



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | The definition of employee for purposes of
    applying APB Opinion No. 25;                                              
|
| |  | The criteria for determining whether a plan
    qualifies as a non compensatory plan;                                    
|
| |  | The accounting consequence of various
    modifications to the terms of a previously fixed stock option or
    award; and
|
| |  | The accounting for an exchange of stock
    compensation awards in a business combination.                               

The adoption of FIN No. 44 did not have a
material impact on the accompanying consolidated financial
statements.



| |                      
| | ---------------------
| | Pro Forma Information

Pro forma information regarding net income and
earnings per share is required by SFAS No. 123, and has
been determined as if the Company has accounted for its Stock
Option Plans under the fair value method

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##### Table of Contents



VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

of SFAS No. 123. The fair value of options issued
under the Plans was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted
average assumptions:

|                                        |  |                          |      |      |  |      |      |  |  |  |      | 
|--------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                                        |  |                         
|                                        |  | Years Ended December 31,
|                                        |  |                         
|                                        |  | 2002                     |      | 2001 |  | 2000
|                                        |  |                          |      |      |  |     
|Risk-free interest rate                 |  |                          | 3.8% |      |  |      | 4.6% |  |  |  | 6.0% | 
|Dividend yield                          |  |                          |     |      |  |      |     |  |  |  |     | 
|Volatility factor                       |  |                          | 1.00 |      |  |      | 1.00 |  |  |  | 1.00 | 
|Weighted average expected life in years |  |                          | 4.5  |      |  |      | 4.5  |  |  |  | 4.5  | 

The following summarizes the weighted average
fair value of options granted during the years ended
December 31, 2002, 2001 and 2000:

|                                       |  |                          |      |      |  |      |      |  |  |   |      | 
|-------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                       |  |                         
|                                       |  | Years Ended December 31,
|                                       |  |                         
|                                       |  | 2002                     |      | 2001 |  | 2000
|                                       |  |                          |      |      |  |     
|Exercise price equal to fair value     |  | $                        | 5.10 |      |  | $    | 3.28 |  |  | $ | 4.68 | 
|Exercise price greater than fair value |  |                          |     |      |  |      | 4.30 |  |  |   |     | 
|Exercise price less than fair value    |  |                          |     |      |  |      | 3.30 |  |  |   | 9.32 | 

For purposes of pro forma disclosures, the
estimated fair value of the Companys options is amortized
to expense over the options vesting period. The
Companys pro forma net loss and net loss per common share
would approximate the following (in thousands, except per share
amounts):

|                              |                                            |             |   |           |   |  |   |         |  
|----------------------------- | ------------------------------------------ | ----------- | - | --------- | - |  | - | ------- | -
|                              |                                            | As Reported |   | Pro Forma
|                              |                                            |             |   |          
|Year Ended December 31, 2002: |                                            |             |   |           |   |  |   |        
|                              | Non-cash stock-based compensation charges  |             | $ | 5,422     |   |  | $ | 11,037  |  
|                              | Net loss applicable to common shareholders |             |   | (25,893   | ) |  |   | (31,508 | )
|                              | Net loss per common share                  |             |   | (0.64     | ) |  |   | (0.77   | )
|Year Ended December 31, 2001: |                                            |             |   |           |   |  |   |        
|                              | Non-cash stock-based compensation charges  |             | $ | 7,173     |   |  | $ | 12,624  |  
|                              | Net loss applicable to common shareholders |             |   | (52,370   | ) |  |   | (57,821 | )
|                              | Net loss per common share                  |             |   | (1.34     | ) |  |   | (1.48   | )
|Year Ended December 31, 2000: |                                            |             |   |           |   |  |   |        
|                              | Non-cash stock-based compensation charges  |             | $ | 12,341    |   |  | $ | 21,023  |  
|                              | Net loss applicable to common shareholders |             |   | (56,394   | ) |  |   | (65,076 | )
|                              | Net loss per common share                  |             |   | (1.96     | ) |  |   | (2.27   | )

The effects of applying SFAS No. 123 in this
proforma disclosure are not indicative of future amounts. The
Company anticipates grants of additional awards in future years.

Foreign Currency Translation

The functional currency of each of the
Companys foreign subsidiaries is its local currency.
Financial statements of these foreign subsidiaries are
translated to U.S. dollars for consolidation purposes using
current rates of exchange for assets and liabilities and average
rates of exchange for revenues and expenses. The effects of
currency translation adjustments are included as a component of
accumulated other comprehensive income (loss) in the
statements of stockholders equity. Transaction gains and
losses arising from transactions denominated in a currency other
than the functional currency of the entity involved, are
included in other income in the statements of operations.

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##### Table of Contents



VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Revenue Recognition

The Company recognizes revenue in accordance with
SOP 97-2, Software Revenue Recognition, as amended,
and SAB No. 101 Revenue Recognition in Financial
Statements. We follow the very specific and detailed
guidelines of SOP 97-2 in measuring revenue; however, certain
judgments affect the application of our revenue policy.

Viewpoint generates revenues through two sources:
(a) software licenses and (b) services. License
revenues are generated from licensing the rights to use our
products directly to end-users and indirectly through VARs.
Service revenues are generated from fee-based professional
services, sales of customer support services (maintenance
contracts), and training services performed for customers that
license our products.

License revenues from end-users include sales of
perpetual and term based licenses for broadcasting digital
content in the Viewpoint format, and limited licenses for our
digital content library. License revenues are recognized over
the term of the license in a term-based broadcast license model
when the term is less than 15 months, and up-front in a
perpetual broadcast license model and a term-based broadcast
license model when the term is 15 months or longer,
providing that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management.
License revenues from VARs require either (i) an upfront,
non-refundable payment or (ii) a percentage royalty based on
sell through, or both, as consideration for the right to resell
our technology. Up-front, non-refundable payments are recognized
when the license right begins and the technology has been
delivered to the VAR, which is upon contract signing, provided
all other revenue recognition criteria are met and no further
obligations exist. For arrangements that do not call for an
up-front, non-refundable payment, revenue is recognized as the
royalties are earned, which is upon notification of sell
through, provided all other revenue recognition criteria are met
and no further obligations exist.

Fee-based professional services for customized
software development are performed on a time-and-material or
fixed-fee basis, under separate service arrangements. Revenues
for fixed-fee arrangements are recognized on a
percentage-of-completion basis in accordance with the provisions
of SOP 81-1 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
and SAB No. 101. Percentage-of-completion for service
contracts is measured principally by the percentage of costs
incurred and accrued to date for each contract, which
principally consist of direct labor costs and overhead, to the
estimated total cost for each contract at completion. Revenues
from customer support services are recognized ratably over the
term of the contract. Revenues from training services are
recognized as services are performed.

Fees from licenses sold together with fee-based
professional services are generally recognized upon delivery of
the software, provided that the payment of the license fees are
not dependent upon the performance of the services, and the
services are not essential to the functionality of the licensed
software. If the services are essential to the functionality of
the software, or payment of the license fees are dependent upon
the performance of the services, both the software license and
service fees are recognized on a percentage of completion method
of contract accounting.

For arrangements involving multiple elements, we
defer revenue for the undelivered elements based on their fair
value and recognize the difference between the total arrangement
fee and the amount deferred for the undelivered elements as
revenue. The determination of fair value of each undelivered
element in multiple element arrangements is based on the price
charged when the same element is sold separately. For
maintenance and technical support elements, we use renewal rates
to determine the price when sold separately.

Standard terms for license and service agreements
call for payment within 90 days. Probability of collection
is based upon the assessment of the customers financial
condition through the review of their current financial
statements and/or credit reports. For follow-on sales to
existing customers, prior payment history is also used to
evaluate probability of collection. Our agreements with
customers do not contain product return rights. If the fee is
not fixed or determinable, revenue is recognized as payments
become due

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##### Table of Contents



VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

from the customer. If a nonstandard acceptance
period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period.

The Company periodically enters into nonmonetary
arrangements whereby the Companys licenses or services are
exchanged for services of its customers. Nonmonetary revenues
are recognized at the estimated fair value of the services
received. Generally, nonmonetary revenues equal nonmonetary
expenses, however, due to timing, nonmonetary accounts
receivable and accounts payable may result.

Income Taxes

The Company accounts for income taxes using the
liability method as required by SFAS No. 109,
Accounting for Income Taxes. Under SFAS
No. 109, deferred income taxes are determined based on the
differences between the financial statement and tax bases of
assets and liabilities, using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.

Concentration of Risk

The Company is subject to concentration of credit
risk and interest rate risk related to cash, cash equivalents,
marketable securities, accounts receivable, and restricted cash.
Credit risk is managed by limiting the amount of marketable
securities placed with any one issuer, investing in high-quality
marketable securities and securities of the U.S. government and
limiting the average maturity of the overall portfolio. At
December 31, 2002, and periodically from 2000 through 2001,
the Company has maintained balances with various financial
institutions in excess of the federally insured limits.

Carrying amounts of financial instruments held by
the Company, which include cash and cash equivalents, marketable
securities, restricted cash, accounts receivable, accounts
payable, and accrued expenses, approximate fair value.

Net Loss Per Common Share

Basic net loss per common share is computed using
the weighted average number of shares of outstanding and diluted
net loss per common share is computed using the weighted average
number of shares of common and common equivalent shares
outstanding. Common equivalent shares related to stock options
and warrants totaling 6,346,000, 8,601,000 and 9,814,000 for the
years ended December 31, 2002, 2001, and 2000,
respectively, are excluded from the computation of diluted net
loss per common share because their effect was antidilutive.

Basic and diluted net loss per common share for
the years ended December 31, 2002 and 2001 include the
effect of 744,740 shares of common stock issued to Computer
Associates on June 24, 2002, as if the shares were issued
and outstanding on June 8, 2001.

Comprehensive Loss

In accordance with SFAS No. 130,
Reporting Comprehensive Income, all components of
comprehensive income (loss), including net income (loss), are
reported in the financial statements in the period in which they
are recognized. Comprehensive income (loss) is defined as
the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income
(loss) and other comprehensive income (loss), are reported
net of their related tax effect, to arrive at comprehensive
income (loss).

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Recent Accounting Pronouncements

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities which
requires the consolidation by primary beneficiaries of variable
interest entities (VIEs), as defined. Public
companies will generally be subject to its provisions effective
after January 31, 2003 for newly-acquired VIEs and the
first fiscal or interim period beginning after June 15,
2003 for VIE holdings acquired prior to February 1, 2003.
The adoption of FIN 46 is not expected to have a material effect
on the Companys financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This Statement
requires recognition of a liability for a cost associated with
an exit or disposal activity when the liability is incurred, as
opposed to when the entity commits to an exit plan under EITF
No. 94-3. SFAS No. 146 is to be applied prospectively
to exit or disposal activities initiated after December 31,
2002. The provisions of SFAS No. 146 will be applied to the
costs associated with the Companys consolidation of its
workforce into two main facilities, which occurred during the
first quarter of 2003.

In November 2002, the FASB issued FIN
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation
No. 34. FIN 45 expands on the disclosures to be made
by a guarantor in its interim and annual financial statements
about its obligations under guarantees issued. It also clarifies
that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions
are applicable to guarantees issued or modified after
December 31, 2002 and are not expected to have a material
effect on the Companys financial statements. The
disclosure requirements are effective for financial statements
of interim and annual periods ending after December 15,
2002.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation   Transition and Disclosure.
This Statement amends SFAS No. 123, Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The disclosure provisions of this
Standard are effective for fiscal years ending after
December 15, 2002 and have been incorporated into these
financial statements and accompanying footnotes.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                                                     
|-- | ----------------------------------------------------
|3. | Cash, Cash Equivalents and Marketable
    Securities

The cost and fair value of the Companys
cash, cash equivalents and marketable securities as of
December 31, 2002, by type of security, contractual
maturity, and its classification in the balance sheet, is as
follows (in thousands):

|                                 |  |           |        |            |  |            |   |            |  |          |   |  |  |   |        |  |  |  |      | 
|-------------------------------- |  | --------- | ------ | ---------- |  | ---------- | - | ---------- |  | -------- | - |  |  | - | ------ |  |  |  | ---- | 
|                                 |  |           |        | Gross      |  | Gross      |   |            |  |         
|                                 |  | Amortized |        | Unrealized |  | Unrealized |   |            |  |         
|                                 |  | Cost      |        | Gain       |  | (Loss)     |   | Fair Value |  | Maturity
|                                 |  |           |        |            |  |            |   |            |  |         
|Type of security:                |  |           |        |            |  |            |   |            |  |          |   |  |  |   |        |  |  |  |      | 
|Cash                             |  | $         | 7,292  |            |  | $          |  |            |  | $        |  |  |  | $ | 7,292  |  |  |  | 2003 | 
|Money Market Funds               |  |           | 1,485  |            |  |            |  |            |  |          |  |  |  |   | 1,485  |  |  |  | 2003 | 
|U.S. Government Agencies         |  |           | 2,790  |            |  |            | 1 |            |  |          |  |  |  |   | 2,791  |  |  |  | 2003 | 
|                                 |  |           |        |            |  |            |   |            |  |          |   |  |  |   |        |  |  |  |      | 
|                                 |  | $         | 11,567 |            |  | $          | 1 |            |  | $        |  |  |  | $ | 11,568 |  |  |  |      | 
|                                 |  |           |        |            |  |            |   |            |  |          |   |  |  |   |        |  |  |  |      | 
|Classification in Balance Sheet: |  |           |        |            |  |            |   |            |  |          |   |  |  |   |        |  |  |  |      | 
|Cash and Cash Equivalents        |  | $         | 10,678 |            |  | $          |  |            |  | $        |  |  |  | $ | 10,678 |  |  |  | 2003 | 
|Marketable Securities            |  |           | 889    |            |  |            | 1 |            |  |          |  |  |  |   | 890    |  |  |  | 2003 | 
|                                 |  |           |        |            |  |            |   |            |  |          |   |  |  |   |        |  |  |  |      | 
|                                 |  | $         | 11,567 |            |  | $          | 1 |            |  | $        |  |  |  | $ | 11,568 |  |  |  |      | 
|                                 |  |           |        |            |  |            |   |            |  |          |   |  |  |   |        |  |  |  |      | 

The cost and fair value of the Companys
cash, cash equivalents and marketable securities portfolio as of
December 31, 2001, by type of security, contractual
maturity, and its classification in the balance sheet, is as
follows (in thousands):

|                                 |  |           |        |            |  |            |    |            |  |          |    |   |  |   |        |  |  |  |      | 
|-------------------------------- |  | --------- | ------ | ---------- |  | ---------- | -- | ---------- |  | -------- | -- | - |  | - | ------ |  |  |  | ---- | 
|                                 |  |           |        | Gross      |  | Gross      |    |            |  |         
|                                 |  | Amortized |        | Unrealized |  | Unrealized |    |            |  |         
|                                 |  | Cost      |        | Gain       |  | (Loss)     |    | Fair Value |  | Maturity
|                                 |  |           |        |            |  |            |    |            |  |         
|Type of security:                |  |           |        |            |  |            |    |            |  |          |    |   |  |   |        |  |  |  |      | 
|Cash                             |  | $         | 666    |            |  | $          |   |            |  | $        |   |   |  | $ | 666    |  |  |  |      | 
|Money Market Funds               |  |           | 4,486  |            |  |            |   |            |  |          |   |   |  |   | 4,486  |  |  |  | 2002 | 
|U.S. Government Agencies         |  |           | 9,760  |            |  |            | 15 |            |  |          | (1 | ) |  |   | 9,774  |  |  |  | 2002 | 
|Equity Securities                |  |           | 165    |            |  |            | 31 |            |  |          |   |   |  |   | 196    |  |  |  | 2002 | 
|                                 |  |           |        |            |  |            |    |            |  |          |    |   |  |   |        |  |  |  |      | 
|                                 |  | $         | 15,077 |            |  | $          | 46 |            |  | $        | (1 | ) |  | $ | 15,122 |  |  |  |      | 
|                                 |  |           |        |            |  |            |    |            |  |          |    |   |  |   |        |  |  |  |      | 
|Classification in Balance Sheet: |  |           |        |            |  |            |    |            |  |          |    |   |  |   |        |  |  |  |      | 
|Cash and Cash Equivalents        |  | $         | 8,054  |            |  | $          |   |            |  | $        |   |   |  | $ | 8,054  |  |  |  | 2002 | 
|Marketable Securities            |  |           | 7,023  |            |  |            | 46 |            |  |          | (1 | ) |  |   | 7,068  |  |  |  | 2002 | 
|                                 |  |           |        |            |  |            |    |            |  |          |    |   |  |   |        |  |  |  |      | 
|                                 |  | $         | 15,077 |            |  | $          | 46 |            |  | $        | (1 | ) |  | $ | 15,122 |  |  |  |      | 
|                                 |  |           |        |            |  |            |    |            |  |          |    |   |  |   |        |  |  |  |      | 



|   |                        
|-- | -----------------------
|4. | Discontinued Operations

In December 1999, the Board of Directors of the
Company approved a plan to focus exclusively on its interactive
media technologies and digital content creation services and to
correspondingly divest itself of its prepackaged software
graphics business. Accordingly, these operations are reflected
as discontinued operations for all periods presented in the
accompanying consolidated statements of operations.

The loss on disposal of discontinued operations,
which totaled approximately $21,260,000 for the year ended
December 31, 1999, consisted of the estimated future
results of operations of the discontinued business through the
estimated date of divestiture, the amounts expected to be
realized upon the sale of the discontinued business, severance
and related benefits, and asset write-downs. During April 2000,
the Company

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

completed the sale of a substantial portion of
the Companys graphics software product lines.
Specifically, Corel Corporation acquired MetaCreations
Painter, Kais Power Tools, KPT Vector Effects and Bryce
product lines; egi.sys AG acquired the Poser product line; and
fractal.com Corporation acquired the Headline Studio product
line for total consideration of $11,250,000, consisting of cash
and promissory notes, plus future royalties. The Company
recorded an adjustment to net loss on disposal of discontinued
operations of $1,496,000 during the year ended December 31,
2000, primarily as a result of better than expected net revenues
during the year from the discontinued business. During the years
ended December 31, 2002 and 2001, the Company recorded
adjustments to net loss on disposal of discontinued operations
of $127,000 and $1,122,000, respectively, as a result of changes
in estimates related to accounts receivable and accounts payable
of the discontinued business. Changes in estimates, which are
not expected to be significant, will be accounted for
prospectively and included in adjustment to net loss on disposal
of discontinued operations.



|   |                       
|-- | ----------------------
|5. | Property and Equipment

Property and equipment consist of the following
(in thousands):

|                                               |  |              |        |      |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |        | 2001
|                                               |  |              |        |     
|Computer equipment and software                |  | $            | 4,763  |      |  | $ | 3,935  |  
|Office furniture and equipment                 |  |              | 1,754  |      |  |   | 1,724  |  
|Leasehold improvements                         |  |              | 1,580  |      |  |   | 1,551  |  
|Other                                          |  |              | 170    |      |  |   | 233    |  
|                                               |  |              |        |      |  |   |        |  
|                                               |  |              | 8,267  |      |  |   | 7,443  |  
|Less accumulated depreciation and amortization |  |              | (4,676 | )    |  |   | (2,781 | )
|                                               |  |              |        |      |  |   |        |  
|                                               |  | $            | 3,591  |      |  | $ | 4,662  |  
|                                               |  |              |        |      |  |   |        |  

Depreciation expense for the years ended
December 31, 2002, 2001 and 2000 was approximately
$1,962,000, $1,804,000 and $801,000, respectively.



|   |                               
|-- | ------------------------------
|6. | Goodwill and Intangible Assets

In conjunction with the implementation of SFAS
No. 142, the Company completed a goodwill impairment review
as of January 1, 2002 and found no impairment on that date.

Upon the adoption of SFAS No. 141, an
assembled workforce no longer met the definition of an
identifiable intangible asset. As a result, the net balance of
$1,767,000, has been reclassified to goodwill on January 1,
2002.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In accordance with SFAS No. 142, the effect
of this accounting change is reflected prospectively.
Supplemental comparative disclosure as if the change had been
retroactively applied to the prior year periods is as follows
(in thousands, except per share amounts):

|                                          |                                                         |                                               |   |         |         |      |   |         |         |   |   |         |         |  
|----------------------------------------- | ------------------------------------------------------- | --------------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                          |                                                         |                                              
|                                          |                                                         | Year Ended December 31,                      
|                                          |                                                         |                                              
|                                          |                                                         | 2002                                          |   | 2001    |         | 2000
|                                          |                                                         |                                               |   |         |         |     
|Net loss:                                 |                                                         |                                               |   |         |         |      |   |         |         |   |   |        
|                                          | Reported net loss applicable to common
    shareholders |                                               | $ | (25,893 | )       |      | $ | (52,370 | )       |   | $ | (56,394 | )      
|                                          | Goodwill amortization(1)                                |                                               |   |        |         |      |   | 14,128  |         |   |   | 1,767   |        
|                                          |                                                         |                                               |   |         |         |      |   |         |         |   |   |        
|                                          |                                                         | Adjusted net loss                             |   | $       | (25,893 | )    |   | $       | (38,242 | ) |   | $       | (54,627 | )
|                                          |                                                         |                                               |   |         |         |      |   |         |         |   |   |        
|Basic and diluted net loss per
    share: |                                                         |                                               |   |         |         |      |   |         |         |   |   |        
|                                          | Reported net loss per share                             |                                               | $ | (0.64   | )       |      | $ | (1.34   | )       |   | $ | (1.96   | )      
|                                          | Goodwill amortization                                   |                                               |   |        |         |      |   | 0.36    |         |   |   | 0.06    |        
|                                          |                                                         |                                               |   |         |         |      |   |         |         |   |   |        
|                                          |                                                         | Adjusted basic and diluted net loss per share |   | $       | (0.64   | )    |   | $       | (0.98   | ) |   | $       | (1.90   | )
|                                          |                                                         |                                               |   |         |         |      |   |         |         |   |   |        



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|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes $1,060 and $353 in amortization of an
    assembled workforce for the years ended December 31, 2001
    and 2000, respectively.

The Company recorded $2,928,000 of additional
goodwill during the first quarter of 2002 in connection with a
contingent promissory note due Computer Associates on
April 30, 2002 for the acquisition of Viewpoint Digital. As
of March 31, 2002, due to the persistence of unfavorable
economic conditions along with lower-than-expected revenues
generated to date and reduced estimates of future performance of
the Viewpoint Digital assets, the Company performed an
additional impairment analysis on the goodwill and other
intangible asset balances recorded upon the acquisition of
Viewpoint Digital. In accordance with the provisions of SFAS
No. 142 and SFAS No. 144, the Company recorded
impairment charges totaling $6,275,000. The fair value of the
Viewpoint Digital assets were estimated using the expected
present value of future cash flows. The assumptions supporting
the cash flows, including a discount rate of 20%, were
determined using the Companys best estimates as of the
date the impairment was recorded.

The changes in the carrying amount of goodwill
and intangible assets during the year ended December 31,
2002 are as follows (in thousands):

|                                |                         |          |        |                   |   |       |       |        |   |   |        |        |  
|------------------------------- | ----------------------- | -------- | ------ | ----------------- | - | ----- | ----- | ------ | - | - | ------ | ------ | -
|                                |                         | Goodwill |        | Intangible Assets |   | Total
|                                |                         |          |        |                   |   |      
|Balance as of January 1, 2002   |                         | $        | 33,042 |                   |   | $     | 2,361 |        |   | $ | 35,403 |       
|                                | Additions during period |          |        | 2,928             |   |       |       | 49     |   |   |        | 2,977  |  
|                                | Impairment losses       |          |        | (4,694            | ) |       |       | (1,581 | ) |   |        | (6,275 | )
|                                | Amortization            |          |        |                  |   |       |       | (664   | ) |   |        | (664   | )
|                                |                         |          |        |                   |   |       |       |        |   |   |        |       
|Balance as of December 31, 2002 |                         | $        | 31,276 |                   |   | $     | 165   |        |   | $ | 31,441 |       
|                                |                         |          |        |                   |   |       |       |        |   |   |        |       

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

As of December 31, 2002 and 2001, the
Companys intangible assets and related accumulated
amortization consisted of the following (in thousands):

|                                |  |                   |     |                   |  |     |    |       |  |              |     |     |  |   |       |  |  |   |        |   |  |   |       | 
|------------------------------- |  | ----------------- | --- | ----------------- |  | --- | -- | ----- |  | ------------ | --- | --- |  | - | ----- |  |  | - | ------ | - |  | - | ----- | 
|                                |  |                   |     |                  
|                                |  | December 31, 2002 |     | December 31, 2001
|                                |  |                   |     |                  
|                                |  |                   |     | Accumulated       |  |     |    |       |  | Accumulated  |     |    
|                                |  | Gross             |     | Amortization      |  | Net |    | Gross |  | Amortization |     | Net
|                                |  |                   |     |                   |  |     |    |       |  |              |     |    
|Viewpoint Digital Technology    |  | $                 |    |                   |  | $   |   |       |  | $            |    |     |  | $ | 1,558 |  |  | $ | (519   | ) |  | $ | 1,039 | 
|Viewpoint Digital Customer List |  |                   |    |                   |  |     |   |       |  |              |    |     |  |   | 1,203 |  |  |   | (802   | ) |  |   | 401   | 
|Viewpoint Digital Trade Name    |  |                   |    |                   |  |     |   |       |  |              |    |     |  |   | 643   |  |  |   | (214   | ) |  |   | 429   | 
|Covenant Not To Compete         |  |                   |    |                   |  |     |   |       |  |              |    |     |  |   | 3,253 |  |  |   | (2,892 | ) |  |   | 361   | 
|Other Intangibles               |  |                   |    |                   |  |     |   |       |  |              |    |     |  |   | 18    |  |  |   | (6     | ) |  |   | 12    | 
|Patents and Trademarks          |  |                   | 168 |                   |  |     | (3 | )     |  |              | 165 |     |  |   | 119   |  |  |   |       |   |  |   | 119   | 
|                                |  |                   |     |                   |  |     |    |       |  |              |     |     |  |   |       |  |  |   |        |   |  |   |       | 
|Total Intangible Assets         |  | $                 | 168 |                   |  | $   | (3 | )     |  | $            | 165 |     |  | $ | 6,794 |  |  | $ | (4,433 | ) |  | $ | 2,361 | 
|                                |  |                   |     |                   |  |     |    |       |  |              |     |     |  |   |       |  |  |   |        |   |  |   |       | 

Aggregate amortization expense on intangible
assets was approximately $664,000, $3,325,000, and $1,258,000
for the years ended December 31, 2002, 2001, and 2000,
respectively. Amortization of intangible assets is estimated to
be $2,000 a year for the next five years.

During 2001, the Company assessed the impairment
of goodwill and intangible assets periodically in accordance
with the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. During 2001, the Company performed impairment
assessments on the goodwill and other intangible assets recorded
upon the acquisition of Viewpoint Digital and the acquisition of
Computer Associates minority interest in Metastream. As a
result of continuing poor economic conditions, which resulted in
a decrease in estimated undiscounted future cash flows, the
Company recorded a $7,925,000 goodwill impairment charge on the
Viewpoint Digital goodwill during the fourth quarter of 2001.
The charge was determined based upon the estimated discounted
cash flows over the remaining useful life of the goodwill using
a discount rate of 15%. The assumptions supporting the cash
flows including the discount rate were determined using the
Companys best estimates as of the date the impairment was
recorded.

During 2003 the market value of the
Companys stockholders equity fell below its carrying
value indicating the existence of a potential goodwill
impairment. The Company will assess the carrying value of its
goodwill in accordance with the provisions of SFAS No. 142,
during the first quarter of 2003.



|   |                           
|-- | --------------------------
|7. | Related Party Transactions

During 2002, the Company recorded revenues
totaling $9,798,000, related to agreements, including reseller
arrangements, with AOL, Computer Associates, and Adobe, all of
whom have representatives on the Companys Board of
Directors. In March 2002, the Company amended an AOL contract
entered into in July 2001, which resulted in the Company
recording revenues when payments are due, as compared to the
partial deferral of those payments, which would otherwise have
occurred. This amendment resulted in the Company recognizing
$5,825,000 in license revenues for this contract as opposed to
$2,700,000 if the contract had not been amended. As of
December 31, 2002, the Company has $838,000 in accounts
receivable and $249,000 in deferred revenues relating to
transactions entered into with these related parties.

During 2001, the Company recorded revenues
totaling $2,360,000, related to agreements, including reseller
arrangements, with AOL and Computer Associates. Accounts
receivable and deferred revenues as of December 31, 2001
relating to transactions entered into with these related parties
were $1,137,000 and $526,000, respectively. During 2000, the
Company recorded revenues totaling $500,000 relating to an
engineering services agreement with Computer Associates.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On May 31 2001, the Company loaned $200,000
to an officer of the Company, in accordance with the contractual
terms of the officers employment agreement. The loan,
which accrued interest annually at 5.07% and was payable on
May 31, 2005, was secured solely by the proceeds from the
sale of Company stock issuable upon exercise of the
officers stock options. The loan was non-recourse to the
officer, unless the Company terminated the officer for cause, in
which case the loan would have become fully recourse to the
officer. During 2002, the Company recorded a reserve of $212,000
against the loan as the value of the Companys stock fell
substantially below the exercise price of the options securing
the loan. The amount reserved represents the unsecured portion
of the loan and accrued interest as of December 31, 2002.
The officer resigned effective December 31, 2002, requiring
the loan to be repaid. The officer defaulted on the loan on
January 31, 2003, and the Company took possession of the
collateral.

On April 2, 2001, the Company loaned
$375,000 to an officer of the Company in accordance with the
contractual terms of the officers employment agreement.
The loan, which accrues interest annually at 4.94% and is
payable on April 2, 2005, is secured solely by the net,
after tax proceeds from the sale of Company stock issuable upon
exercise of the officers stock options. The loan is
non-recourse to the officer, unless the Company terminates the
officer for cause or the officer resigns without good reason, in
which case the loan will become fully recourse to the officer.
During 2002, the Company recorded a reserve of $400,000 against
the loan as the value of the Companys stock fell below the
exercise price of the options securing the loan. The amount
reserved represents the unsecured portion of the loan and
accrued interest as of December 31, 2002.

During 2000, the Company loaned $1,500,000 to a
former officer of the Company. The loan, which was non-interest
bearing and was due on May 1, 2004, was collateralized by
200,000 shares of restricted Company stock, as well as options
to purchase 790,000 shares of Company stock, is currently in
default. The loan, which was originally due on May 1, 2004,
became due 30 days after the officer ceased to be an
employee of the Company. As of December 31, 2000, the
Company recorded a reserve against the loan in the amount of
$750,000. The Company has commenced litigation to pursue
recovery of the full loan amount, statutory interest accruing
thereon since the date of default, as well as the cost of
litigation.

In connection with the acquisition of Real Time
Geometry Corp. (RTG) in December 1996, the Company
entered into a noncompetition agreement with one of RTGs
founders who was a former executive of the Company. In addition,
the Company loaned $2,000,000 to the former executive in
accordance with the contractual terms of the former
executives employment agreement. The loan, which accrued
interest semi-annually at 5.67% and was payable on
January 15, 2001, was collateralized by 160,000 shares of
Company stock owned by the former executive. The former
executive defaulted on the loan and the Company took possession
of the collateral on January 16, 2001. As a result, the
Company recorded treasury stock based on the closing price of
the Companys common stock on January 16, 2001. The
former executive and the Company entered into a consulting
agreement under which, among other things, the former executive
agreed to pay the Company $520,000 in outstanding obligations
under the loan. In July 2001, the Company received the $520,000
from the former executive.

The Company also loaned $1,000,000 to another of
RTGs founders, who is an officer and director of the
Company in accordance with the contractual terms of the
officers employment agreement. The loan, which accrued
interest semi-annually at 5.67% and was payable on
December 31, 2002, was secured solely by the net, after tax
proceeds from the sale of Company stock issuable upon the
exercise of the officers stock options. The loan was
forgiven in 2000 in accordance with the contractual terms of the
officers employment agreement, upon the merger of the
Company with Metastream. The Company recorded a compensation
charge of $2,322,000 during 2000 related to the forgiveness of
the loan and the income taxes thereon.

During 1998, the Company loaned $1,000,000 to an
officer and director of the Company. The loan, which was
non-interest bearing, was repaid in March 2000.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                                                         
|-- | --------------------------------------------------------
|8. | Mandatorily Redeemable Preferred Stock of
    Subsidiary

In June 2000, Metastream issued 1,500,000 shares
of Series A Convertible Preferred Stock to AOL for cash
consideration totaling $10,000,000. Prior to the merger of the
Company and Metastream, each share of Series A Convertible
Preferred Stock was exchanged by the Company, into a total of
1,725,000 shares of the Companys common stock. In
connection with the issuance of the shares of Series A
Convertible Preferred Stock to AOL and the simultaneous
execution of a licensing and distribution arrangement, the
Company recorded a one-time non-cash sales and marketing charge
of $5,740,000 for the year ended December 31, 2000 related
to the difference between the fair market value of the
Companys common shares into which AOL could have converted
the preferred shares on the date of issuance, and the
$10,000,000 cash consideration paid by AOL.

The Series A Convertible Preferred Stock
held by AOL also contained a put right whereby AOL could have
required the Company to purchase the preferred shares, unless
exchanged, at a price equal to the original purchase price paid
by AOL, plus interest.

In July 2000, Metastream issued 1,500,000 shares
of Series B Convertible Preferred Stock to Adobe for cash
consideration totaling $10,000,000. Prior to the merger of the
Company and Metastream, each share of Series B Convertible
Preferred Stock was exchanged by the Company, into a total of
1,725,000 shares of Company common stock. In connection with the
issuance of the shares of Series B Convertible Preferred
Stock to Adobe and the simultaneous execution of a licensing and
distribution arrangement, the Company recorded a one-time
non-cash sales and marketing charge of $14,258,000 for the year
ended December 31, 2000 related to the difference between
the fair market value of the Companys common shares into
which Adobe could have converted the preferred shares on the
date of issuance, and the $10,000,000 cash consideration paid by
Adobe.

The Series B Convertible Preferred Stock
held by Adobe also contained a put right whereby Adobe could
have required the Company to purchase the preferred shares,
unless exchanged, at a price equal to the original purchase
price paid by Adobe, plus interest.

Accretion for these mandatorily redeemable
securities totaled $438,000 prior to the date the preferred
stock was exchanged for Company common stock in November 2000.



|   |                  
|-- | -----------------
|9. | Convertible Notes

On December 31, 2002, the Company completed
a private placement of convertible notes and warrants in which
it issued to three institutional investors, 4.95% convertible
notes (Notes) having an aggregate principal amount
of $7,000,000, and warrants to purchase 726,330 shares of
Company common stock. Interest on the convertible notes is
payable quarterly in arrears in cash or, at the option of the
Company, in shares of Company common stock, provided the Company
satisfies certain financial and other conditions. If interest is
paid in shares of Company common stock, the number of shares to
be issued shall be calculated by dividing the interest payable
by 95% of the dollar volume-weighted average price of Company
common stock on each of the five consecutive trading days
immediately preceding the interest payment date. The convertible
notes mature on December 31, 2007, unless earlier converted
into shares of Company common stock at a price of $2.26 per
share. The warrants expire on December 31, 2006, and are
exercisable at a price of $2.26 per share,

The Company is required to file a registration
statement covering the resale of all of the shares of common
stock issuable to the investors upon conversion of the
convertible notes and exercise of the warrants issued,
(including any interest shares under the convertible notes) and
have the registration statement declared effective no later than
April 30, 2003.

At any time after June 30, 2004, the
investors may cause the Company to redeem up to all of the
outstanding convertible notes in cash at par plus accrued and
unpaid interest if the dollar volume-weighted

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

average price of Company common stock is less
than $2.26 for any 25 consecutive trading days. If the investors
redeem their convertible notes, up to 20% of the amount to be
redeemed may, at the Companys option, be paid in shares of
Company common stock, and said payment would be at 95% of the
dollar volume-weighted average price of Company common stock for
the 20 consecutive trading days immediately preceding payment.
At any time after December 31, 2005, the investors may
cause the Company to redeem up to all of the outstanding
convertible notes in cash at 83% of par plus accrued and unpaid
interest if the dollar volume-weighted average price of Company
common stock is less than $2.26 for any 25 consecutive trading
days following December 31, 2005.

At any time after April 15, 2004, the
Company has the right to require the investors to convert up to
all of the outstanding Notes at $2.26 if the dollar
volume-weighted average price of Company common Stock exceeds
$3.39 for any 25 consecutive trading days following
April 15, 2004. At any time following the 30 month
anniversary of the day the registration statement is declared
effective by the SEC, the Company has the right to redeem the
convertible notes at a price equal to the greater of
(i) par plus accrued and unpaid interest and (ii) a
value assigned to the convertible notes by an independent
investment bank or major financial institution.

The investors may require the Company to sell
additional 4.95% convertible notes having an aggregate principal
amount of up to $2,800,000, and warrants to purchase up to
290,533 shares of Company common stock prior to
December 31, 2003 or later if the registration statement is
not effective by a certain date.

The Company has the right to sell additional
4.95% convertible notes having an aggregate principal amount of
up to $7,000,000 and warrants to purchase up to 726,330 shares
of Company common stock prior to June 30, 2003, if the
dollar volume-weighted average price of Company common stock
exceeds $3.25 on each of not less than 15 trading days in
any 20 consecutive trading day period.

In conjunction with the issuance of convertible
notes and warrants on December 31, 2002, there were several
covenants with events of default, including but not limited to:
i) failure to have the Companys registration
statement declared effective by the SEC, ii) event of
delisting from The Nasdaq National Market or other national
exchange, iii) change in control, iv) event of
conversion default such as lack of authorized capital,
v) event of bankruptcy, vi) failure to pay principal and
interest on the convertible notes when payments become due, vii)
judgements against the Company in excess of $1,000,000 and viii)
breach of any representation, warranty, covenant or other term.
Upon an event of default, the convertible notes will become
immediately due and payable, after a grace period to cure the
default lapses.

Pursuant to SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities, the
Company bifurcated the fair value of the conversion options from
the convertible notes since the conversion options were
determined to not be clearly and closely related to the debt
host. In addition, since the effective registration of the
securities underlying the conversion options and warrants is an
event outside of the control of the Company, pursuant to EITF
Issue No. 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock, the Company recorded the fair
value of conversion options and warrants as long-term
liabilities, as it is assumed that the Company will be required
to net-cash settle the underlying securities. The fair value of
the convertible notes, conversion options, and warrants of
$5,535,000, $1,177,000, and $288,000, respectively, was
determined based on an independent appraisal using the following
assumptions: a 20% discount on the Companys Common stock
price at December 31, 2002, a credit spread of 20% over
five year LIBOR rates at December 31, 2002, and an
annualized stock volatility of 46%. The aggregate value of the
convertible notes and conversion options of $6,712,000, and the
warrants of $288,000 are recorded as long-term liabilities in
the Companys consolidated balance sheets at
December 31, 2002. Debt issue costs accrued and paid, which
amounted to $614,000, were recorded as other assets in the
Companys consolidated balance sheets as of
December 31, 2002, in accordance with APB Opinion
No. 21 Interest on Receivables and Payables.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Based on the provisions of SFAS No. 133 and
EITF Issue No. 00-19, the Company will report changes in
the fair value of the conversion options and warrants in
earnings. The discount on the convertible notes and the debt
issue costs will be accounted for in accordance with the
provisions of APB Opinion No. 21, which requires
amortization of the discount and debt issue costs using the
interest method. Since the convertible notes were issued on
December 31, 2002, the mark -to-market requirements
under SFAS No. 133 and amortization of interest charges
under APB Opinion No. 21, did not have any effect on
earnings during 2002.

On February 28, 2003, the Company received a
notice of default, from two of the three investors based upon an
alleged breach of representation and warranties by the Company.

On March 25, 2003, the company entered into
Redemption, Amendment and Exchange Agreements with the three
institutional investors with whom it had completed a private
placement of convertible notes and warrants on December 31,
2002. Pursuant to these agreements, the notice of default was
withdrawn and Viewpoint redeemed an aggregate of
$3,300,000 million principal amount of the outstanding
convertible notes, exchanged an aggregate of $1,000,000
principal amount of the outstanding convertible notes for shares
of Viewpoint common stock at $0.74 per share, and exchanged
the remaining $2,700,000 principal amount of outstanding
convertible notes for $2,700,000 principal amount of new
convertible notes. The warrants to purchase 726,330 shares of
Company common stock which were issued to these investors on
December 31, 2002 remain outstanding.

Interest on the new convertible notes is payable
quarterly in arrears in cash or, at the option of the Company,
in shares of Company common stock, provided the Company
satisfies certain financial and other conditions. If interest is
paid in shares of Company common stock, the number of shares to
be issued shall be calculated by dividing the interest payable
by 95% of the arithmetic average of the dollar volume-weighted
average price of Company common stock on each of the five
consecutive trading days immediately preceding the interest
payment date. The new convertible notes mature on
December 31, 2007, unless earlier converted into shares of
Company common stock. The new convertible notes will be
convertible as follows: (i) one third of the notes will
have a conversion price equal to the arithmetic average of the
dollar volume-weighted average price of Company common stock for
the ten trading days following May 16, 2003, (ii) one
third of the notes will have a conversion price equal to such
average for the ten trading days following August 16, 2003,
and (iii) one third of the notes will have a conversion
price equal to such average for the ten trading days following
November 16, 2003, provided, that the conversion price in
each case shall not be less than $1.00 nor more than $2.26.

The Company is required to file a registration
statement by April 14, 2003, covering the resale of all of
the shares of common stock issued to the investors in exchange
for the $1,000,000 principal of convertible notes, and all the
shares of common stock issuable to the investors upon the
conversion of the new convertible notes and exercise of the
warrants issued and to be issued, (including any interest shares
under the new convertible notes) and have the registration
statement declared effective no later than June 30, 2003.
The Company is required to pay cash penalties if the
registration statement is not filed or declared effective on
time.

If the Company raises capital after
March 31, 2003, up to 20% of the net proceeds will be used,
at the investors option, to redeem outstanding notes at
par plus accrued interest.

The Company has the right at any time to redeem
up to all of the outstanding notes at par plus accrued and
unpaid interest. If the redemption is after April 30, 2003,
concurrently with any such redemption, the Company is required
to deliver to the investors warrants, with an exercise price of
$1.00 and a term equal to the remaining term of the notes
being redeemed, to subscribe for a number of shares of common
stock equal to X% of the principal amount being redeemed
divided by the conversion price of the notes then in effect.
X% means (i) before May 31, 2003, 50% and
(ii) after May 31, 2003, 100%.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The investors may require the Company to sell
additional 4.95% convertible notes having an aggregate principal
amount of up to $2,800,000, and warrants to purchase up to
290,533 shares of Company common stock prior to
December 31, 2003 or later if the registration statement is
not effective by a certain date.

The Company has the right to sell additional
4.95% convertible notes having an aggregate principal amount of
up to $7,000,000 and warrants to purchase up to 726,330 shares
of Company common stock prior to June 30, 2003, if the
dollar volume-weighted average price of Company common stock
exceeds $3.25 on each of not less than 15 trading days in
any 20 consecutive trading-day period.

Under the terms of the amended agreement, certain
covenants and events of default were restructured as follows:
the failure to have its registration statement declared
effective by the SEC and the requirement to remain listed on The
Nasdaq National Market or other national exchange, both of which
were waived through March 2004, unless the Company receives a
going concern or qualified opinion from its auditors. If such a
qualified report is received from the Companys auditors
through March 2004, the original events of default remain
effective.

The Nasdaq National Market notified us on
March 20, 2003 that our common stock may be delisted from
Nasdaq for failure to maintain a minimum bid price of $1.00 and
that we will be provided until September 16, 2003 to regain
compliance with National Market standards. If we are unable to
regain compliance with the minimum bid price we may be eligible
to transfer our common stock to listing on The Nasdaq SmallCap
Market if we meet applicable listing standards and thereby gain
an additional 180 days to regain compliance with the
minimum bid price requirement. In response to the potential
delisting of our common stock due to the failure to meet the
Nasdaq National Markets minimum bid price requirement, we
may ask our stockholders to authorize a reverse stock split at
our annual meeting in 2003. If the reverse stock split is
approved by our stockholders and we effect the reverse stock
split, we would reduce the number of outstanding shares of
common stock. With fewer shares outstanding, we would expect our
stock price to increase. While a reverse stock split may enable
us to cure the minimum bid price deficiency, share prices of
companies effecting reverse stock splits often decline and we
cannot assure you that our stock price would not decline after a
reverse stock split.

On March 26, 2003, Viewpoint Corporation
entered into a Securities Purchase Agreement with three other
institutional investors, pursuant to which it received
$3,500,000 and issued an aggregate of $3,500,000 principal
amount of 4.95% subordinated notes and 3,614,756 shares of
Viewpoint common stock.

Interest on these notes is payable quarterly in
arrears in cash. The notes contain certain events of default,
including, but not limited to: i) failure to pay principal
and interest on the notes when payments become due,
ii) judgements against the Company in excess of $1,000,000,
iii) event of bankruptcy and iv) breach of any
representation, covenant or other term. Upon an event of
default, the notes will become immediately due and payable.

The Company is required to file a registration
statement by May 9, 2003, covering the resale of all of the
shares of common stock issued and have the registration
statement declared effective no later than July 23, 2003.
The Company is required to pay cash penalties if the
registration statement is not filed or declared effective on
time.

The Company has the right at any time to redeem
up to all of the outstanding notes at par plus accrued and
unpaid interest.



|    |                                                              
|--- | -------------------------------------------------------------
|10. | Agreements with Computer Associates and
    Minority Interest

Beginning in June 1999, the Company entered into
a series of agreements with Computer Associates. The agreements
included a non-exclusive limited-use perpetual license to use
the Companys 3D related technologies and a service
agreement whereby the Company would provide a defined number of
development

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

personnel to Computer Associates on an as needed
basis. Concurrent with the license agreement, the Company also
granted Computer Associates a 20% equity interest in Metastream,
for certain non-monetary support as consideration. The Company
concluded that the series of transactions with Computer
Associates should be viewed in the aggregate and the monetary
consideration allocated to each component based on their fair
values. Since the limited-use license of related technologies
was a unique, one-time transaction, the Company did not have the
requisite evidence of its fair value pursuant to the provisions
of SOP No. 97-2. An independent valuation of the 20%
interest in Metastream indicated a fair value in excess of the
monetary consideration ascribed to Computer Associates
limited-use licensing rights; therefore, the Company concluded
the appropriate recognition for the transactions was to allocate
the committed monetary consideration to the equity component.
The Company allocated the consideration received of $7,000,000
between minority interest and change in interest
gain pursuant to the provisions of SAB No. 51. The
change in interest gain has been recorded to paid-in
capital in the Companys consolidated balance sheets.

For financial reporting purposes, the assets,
liabilities and earnings of Metastream are included in the
Companys consolidated financial statements. Computer
Associates and another minority shareholders
combined 20% interest in Metastream was recorded as minority
interest in the Companys consolidated balance sheets, and
the losses allocable to their 20% interest have been reported as
minority interest in the Companys consolidated statements
of operations.

In connection with the grant of stock options in
Metastream to certain employees and non-employee directors, the
Company recorded total deferred compensation of approximately
$24,206,000 and $16,811,000 for the years ended
December 31, 2000 and 1999, respectively. This deferred
compensation represented the difference between the fair value
of Metastream common stock and the exercise price of these
options at the date of grant. Minority interest in the
Companys consolidated balance sheets was credited with its
proportionate interest in stock-based compensation expense that
was recognized through November 30, 2000.

On August 10, 2000, the Company entered into
an Exchange Agreement (the Exchange Agreement) with
Computer Associates pursuant to which the Company issued to
Computer Associates 1.15 shares of the Companys
common stock in exchange for each share of common stock of
Metastream held by Computer Associates. On consummation of the
share exchange in November 2000, Computer Associates exchanged
its 4,800,000 shares of Metastream common stock for 5,520,000
newly issued shares of Company common stock.

The consideration paid by the Company in
connection with the exchange approximated $57,087,000,
consisting of the following:



| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The issuance of 5,520,000 shares of Company
    common stock valued at $10.25 per common share, which was
    the average market price of the Companys common stock for
    the two trading days before and after August 10, 2000, for
    equity consideration of $56,580,000; and
|
| |  | Transaction costs of $507,000.                                                                                                                                                                                                                                                      

The exchange of shares was accounted for as an
acquisition of minority interest under the purchase method of
accounting. Accordingly, the purchase price was allocated to
goodwill, net of the carrying value of Computer Associates
minority interest. The goodwill recorded was being amortized
over four years.

On completion of the share exchange with Computer
Associates and the preferred stock exchanges with AOL and Adobe,
the Company owned 99.8% of the outstanding capital stock of
Metastream. The other shareholder holding an interest in
Metastream was a former director of the Company who was issued
and subsequently exercised an option to purchase 50,000 shares
of Metastream common stock. This shareholders shares were
exchanged for 57,500 newly issued shares of Company common
stock, which was accounted for as an acquisition of minority
interest under the purchase method of accounting. Accordingly,
the purchase price of $270,000 was allocated to goodwill, net of
the carrying value of this shareholders minority interest.
The goodwill acquired was being amortized over four years.

59



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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Amortization expense related to the acquisitions
of minority interest totaled $10,723,000 and $894,000 for the
years ended December 31, 2001 and 2000, respectively. As
required by SFAS No. 142, the Company discontinued
amortizing the remaining balance of goodwill as of
January 1, 2002.

Subsequent to the acquisitions of minority
interest, the Company merged with Metastream.

On September 8, 2000, the Company purchased
all the outstanding capital stock of Viewpoint Digital, a wholly
owned subsidiary of Computer Associates. The acquisition was
accounted for under the purchase method of accounting. The
purchase price of $19,169,000, excluding contingent
consideration in the maximum amount of $30,000,000 in notes
payable, consisted of 715,000 shares of the Companys
common stock valued at $8,938,000, cash consideration of
$10,000,000 and $231,000 in direct acquisitions costs. The
contingent consideration consisted of two promissory notes each
in the maximum amount of $15,000,000. Both notes were contingent
upon the achievement of certain levels of future operating
results and employee retention through March 8, 2002.

During 2001, the Company entered into certain
agreements with Computer Associates whereby Computer Associates
agreed to accept newly-issued shares of Viewpoint common stock
having a value of $4,000,000, in partial repayment of the first
contingent promissory note due June 8, 2001. In addition,
Computer Associates agreed to accept, at the Companys
election, either cash or newly-issued shares of Viewpoint common
stock at an issue price of $4.00 per share in repayment of
any additional amounts due under the promissory note due
June 8, 2001, and the first $8,943,000 of the $15,000,000
contingent promissory note due April 30, 2002.

The amount due Computer Associates under the
promissory note due June 8, 2001, and the subsequent
agreements entered into in 2001, was approximately $4,657,000.
For repayment of the first $4,000,000, the number of common
shares to be issued was calculated on the basis of the average
closing price of Viewpoint common stock over the ten-day trading
period ending on and including June 8, 2001. The number of
shares to be issued to Computer Associates was 744,740. For
repayment of the remaining $657,000, the Company had the option
of paying cash or issuing unregistered shares of Viewpoint
common stock valued at $4.00 per share. In connection with this
promissory note, the Company recorded $4,753,000 of additional
goodwill and due to related parties in its consolidated balance
sheet based on the closing price of Viewpoint common stock on
June 8, 2001. In June 2002 Viewpoint issued Computer
Associates 909,093 shares of common stock in full satisfaction
of this promissory note. The amount due Computer Associates
under the second contingent promissory note due April 30,
2002 is approximately $2,928,000 and the Company recorded
additional goodwill and due to related parties in its
consolidated balance sheet. The additional goodwill was
immediately written off and is included in the $6,275,000
impairment of goodwill and other intangible assets in the
consolidated statements of operations.

The purchase price, in excess of the value of
tangible assets and liabilities assumed of $2,333,000, had been
allocated as follows: $3,253,000 to a covenant not to compete,
$3,180,000 to work force, $1,558,000 to technology, $1,203,000
to customer list, $963,000 to in-process research and
development, $643,000 to trade name and $13,717,000 to goodwill.
Goodwill and other intangibles, excluding in-process research
and development were being amortized over their expected periods
of benefit, which ranged from 1.5 to 4 years. Amortization
expense of $6,730,000 and $1,980,000 was recorded for the years
ended December 31, 2001 and 2000, respectively. As required
by SFAS No. 142, the Company discontinued amortizing the
remaining balance of goodwill as of January 1, 2002.
In-process research and development totaling $963,000, was
written off in 2000. The operating results of Viewpoint Digital
have been included in the accompanying consolidated financial
statements from the date of acquisition.

60



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##### Table of Contents



VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following unaudited pro forma consolidated
amounts give affect to the Viewpoint Digital acquisition and the
minority interest acquisitions, as if they all had taken place
on January 1, 2000. In managements opinion, the
following unaudited pro forma consolidated information is not
necessarily indicative of the actual results that would have
occurred had the acquisitions been consummated on
January 1, 2000, and should not be construed as being
representative of future operating results.

|                                                                           |  |                       |         |  
|-------------------------------------------------------------------------- |  | --------------------- | ------- | -
|                                                                           |  | Year Ended           
|                                                                           |  | December 31, 2000    
|                                                                           |  |                      
|                                                                           |  | (In thousands, except
|                                                                           |  | Per share amounts)   
|Revenues                                                                   |  | $                     | 8,244   |  
|Net loss from continuing operations applicable to
    common shareholders  |  | $                     | (79,207 | )
|Basic and diluted net loss per common share from
    continuing operations |  | $                     | (2.30   | )



|    |                       
|--- | ----------------------
|11. | Employee Benefit Plans



| |            
| | -----------
| | 401(k) Plan

In September 1995, the Company adopted a Defined
Contribution Plan (the 401(k) Plan).
Participation in the 401(k) Plan is available to substantially
all employees. Employees can contribute up to 20% of their
salary, up to the Federal maximum allowable limit, on a before
tax basis to the 401(k) Plan. Company contributions to the
401(k) Plan are discretionary. The Company made contributions
totaling $85,000, $96,000, and $91,000 to the 401(k) Plan during
the years ended December 31, 2002, 2001 and 2000,
respectively.

Stock Option Plans



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | 1994 Incentive Stock Option, Non-Qualified
    Stock Option and Restricted Stock Purchase Plan

The Companys 1994 Incentive Stock Option,
Non-Qualified Stock Option and Restricted Stock Purchase Plan
(the 1994 Plan) provided for the grant to employees
of incentive stock options and nonstatutory stock options and
for the sale of restricted common stock to employees and
consultants of the Company, with vesting provisions ranging up
to five years. Options granted under the 1994 Plan are
exercisable for a period of ten years. As of December 31,
2002, options to purchase an aggregate of 17,000 shares of
common stock were outstanding under the 1994 Plan. At
December 31, 2002, no shares of common stock were reserved
for additional grants of options or awards of restricted stock
under the 1994 Plan.



| |                
| | ---------------
| | 1995 Stock Plan

The Companys 1995 Stock Plan (the
1995 Plan) provides for the grant to employees
(including officers and employee directors) of incentive stock
options and for the grant to employees (including officers and
employee directors), non-employee directors and consultants of
nonstatutory stock options and stock purchase rights. Upon the
merger of the Company and Metastream, Metastreams Option
Plan was merged into the Companys 1995 plan. As of
December 31, 2002, options to purchase an aggregate of
7,677,000 shares of common stock were outstanding under the
1995 Plan, with vesting provisions ranging up to four years.
Options granted under the 1995 Plan are exercisable for a period
of ten years. At December 31, 2002, an aggregate of
261,000 shares of common stock were reserved for future
issuance under the 1995 Plan.



| |                          
| | -------------------------
| | 1995 Director Option Plan

The Companys 1995 Director Option Plan (the
Director Plan) provides for an automatic grant of
options to purchase shares of common stock to each non-employee
director of the Company. Options granted under the 1995 Director
Plan vest over one and a half to four and a half years and are
exercisable for a period

61



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##### Table of Contents



VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

of ten years. As of December 31, 2002,
110,000 options were outstanding under the 1995 Director Plan.
At December 31, 2002, an aggregate of 10,000 shares of
common stock were reserved for future issuance under the 1995
Director Plan.



| |                                        
| | ---------------------------------------
| | 1996 Nonstatutory Stock Option
    Plan

The Companys 1996 Nonstatutory Stock Option
Plan (the 1996 Nonstatutory Plan) provides for the
grant to employees (including officers and employee directors)
and consultants of nonstatutory stock options and stock purchase
rights. As of December 31, 2002, options to purchase an
aggregate of 1,701,000 shares of common stock were
outstanding under the 1996 Nonstatutory Plan, with vesting
provisions ranging up to four years. Options granted under the
1996 Nonstatutory Plan are exercisable for a period of ten
years. At December 31, 2002, an aggregate of
560,000 shares of common stock were reserved for future
issuance under the 1996 Nonstatutory Plan.



| |                       
| | ----------------------
| | Metastream Option Plan

Metastreams Stock Plan (the
Metastream Option Plan) provided for the grant to
employees (including officers and employee directors),
non-employee directors and consultants, of nonstatutory stock
options and stock purchase rights. Upon the merger of the
Company and Metastream, all outstanding options to purchase
Metastream common stock were converted into options to purchase
1.15 shares of Company common stock at an exercise price
equal to the exercise price of the converted option divided by
1.15, and the Metastream Option Plan was merged into the 1995
Plan.

Options Issued Under Stock Option
Plans

The following summarizes activity in the Stock
Option Plans for the years ended December 31, 2000, 2001
and 2002 (in thousands, except per share data):

|                                         |                                                      |           |       |                     |   |                |        |        |   |   |      |      | 
|---------------------------------------- | ---------------------------------------------------- | --------- | ----- | ------------------- | - | -------------- | ------ | ------ | - | - | ---- | ---- | 
|                                         |                                                      |           |       |                    
|                                         |                                                      |           |       | Options Outstanding
|                                         |                                                      | Options   |       |                    
|                                         |                                                      | Available |       | Number              |   | Weighted      
|                                         |                                                      | for       |       | of                  |   | Average       
|                                         |                                                      | Grant     |       | Shares              |   | Exercise Price
|                                         |                                                      |           |       |                     |   |               
|Options outstanding at December 31, 1999 |                                                      |           | 1,698 |                     |   |                | 6,459  |        |   | $ | 5.78 |     
|                                         | Shares reserved under plans                          |           |       | 7,250               |   |                |        |       |   |   |      |     | 
|                                         | Reduction in shares reserved under plans             |           |       | (9                  | ) |                |        |       |   |   |      |     | 
|                                         | Granted  exercise price equal to fair
    value     |           |       | (306                | ) |                |        | 306    |   |   |      | 7.77 | 
|                                         | Exchange of options as part of merger                |           |       | (9,222              | ) |                |        | 9,222  |   |   |      | 2.45 | 
|                                         | Exercised                                            |           |       |                    |   |                |        | (2,678 | ) |   |      | 4.69 | 
|                                         | Canceled                                             |           |       | 3,174               |   |                |        | (3,174 | ) |   |      | 5.54 | 
|                                         |                                                      |           |       |                     |   |                |        |        |   |   |      |     
|Options outstanding at December 31, 2000 |                                                      |           | 2,585 |                     |   |                | 10,135 |        |   | $ | 3.17 |     
|                                         | Reduction in shares reserved under plans             |           |       | (77                 | ) |                |        |       |   |   |      |     | 
|                                         | Granted  exercise price equal to fair
    value     |           |       | (2,887              | ) |                |        | 2,887  |   |   |      | 4.42 | 
|                                         | Granted  exercise price greater than
    fair value |           |       | (572                | ) |                |        | 572    |   |   |      | 6.07 | 
|                                         | Granted  exercise price less than fair
    value    |           |       | (26                 | ) |                |        | 26     |   |   |      | 2.83 | 
|                                         | Exercised                                            |           |       |                    |   |                |        | (1,657 | ) |   |      | 1.49 | 
|                                         | Canceled                                             |           |       | 1,566               |   |                |        | (1,566 | ) |   |      | 4.18 | 
|                                         |                                                      |           |       |                     |   |                |        |        |   |   |      |     
|Options outstanding at December 31, 2001 |                                                      |           | 589   |                     |   |                | 10,397 |        |   | $ | 3.79 |     
|                                         | Granted  exercise price equal to fair
    value     |           |       | (1,677              | ) |                |        | 1,677  |   |   |      | 5.10 | 
|                                         | Exercised                                            |           |       |                    |   |                |        | (650   | ) |   |      | 2.12 | 
|                                         | Canceled                                             |           |       | 1,919               |   |                |        | (1,919 | ) |   |      | 5.75 | 
|                                         |                                                      |           |       |                     |   |                |        |        |   |   |      |     
|Options outstanding at December 31, 2002 |                                                      |           | 831   |                     |   |                | 9,505  |        |   | $ | 3.75 |     
|                                         |                                                      |           |       |                     |   |                |        |        |   |   |      |     

62



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##### Table of Contents



VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following summarizes information about the
Companys stock options outstanding at December 31,
2002 (in thousands, except per share data and lives):

|                     |  |             |       |             |  |          |      |          |  |          |       |  |  |  |       |  |  |   |       | 
|-------------------- |  | ----------- | ----- | ----------- |  | -------- | ---- | -------- |  | -------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                     |  |             |       |            
|                     |  | Outstanding |       | Exercisable
|                     |  |             |       |            
|                     |  |             |       | Weighted    |  |          |      | Weighted
|                     |  |             |       | Average     |  |          |      | Average 
|                     |  |             |       | Average     |  | Exercise |      |          |  | Exercise
|Exercise Price Range |  | Shares      |       | Life(a)     |  | Price    |      | Shares   |  | Price   
|                     |  |             |       |             |  |          |      |          |  |         
|$0.87  $0.87        |  |             | 2,225 |             |  |          | 6.97 |          |  | $        | 0.87  |  |  |  | 1,931 |  |  | $ | 0.87  | 
|$1.87  $4.18        |  |             | 2,550 |             |  |          | 8.48 |          |  |          | 3.38  |  |  |  | 738   |  |  |   | 2.78  | 
|$4.25  $5.15        |  |             | 2,740 |             |  |          | 6.96 |          |  |          | 4.61  |  |  |  | 2,109 |  |  |   | 4.61  | 
|$5.38  $8.50        |  |             | 1,825 |             |  |          | 8.12 |          |  |          | 5.93  |  |  |  | 602   |  |  |   | 6.01  | 
|$8.56  $12.88       |  |             | 160   |             |  |          | 7.04 |          |  |          | 9.26  |  |  |  | 149   |  |  |   | 9.24  | 
|$25.13  $25.13      |  |             | 5     |             |  |          | 3.00 |          |  |          | 25.13 |  |  |  | 5     |  |  |   | 25.13 | 
|                     |  |             |       |             |  |          |      |          |  |          |       |  |  |  |       |  |  |   |       | 
|Total                |  |             | 9,505 |             |  |          | 7.59 |          |  | $        | 3.75  |  |  |  | 5,534 |  |  | $ | 3.36  | 
|                     |  |             |       |             |  |          |      |          |  |          |       |  |  |  |       |  |  |   |       | 



---



|    |                                             
|--- | --------------------------------------------
|(a) | Average contractual remaining life in years.

The Company accrued incentive compensation
expense for the difference between the grant price and the
deemed fair value of the common stock underlying options, which
were issued in connection with the RTG acquisition in December
1996. At December 31, 2002 and 2001 accrued incentive
compensation related to the options, which are fully vested
totaled $545,000.

The following summarizes options exercisable at
December 31, 2002, 2001 and 2000, (in thousands):

|                    |  |              |       |      |  |      |       |  |  |  |       | 
|------------------- |  | ------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                    |  |             
|                    |  | December 31,
|                    |  |             
|                    |  | 2002         |       | 2001 |  | 2000
|                    |  |              |       |      |  |     
|Options exercisable |  |              | 5,534 |      |  |      | 4,605 |  |  |  | 4,478 | 

Options Issued Under Metastream Option
Plan

The following summarizes activity in the
Metastream Option Plan for the years ended December 31,
1999 and 2000 (in thousands, except per share data):

|                                         |                                                  |           |       |                     |   |          |       |        |   |   |      |      | 
|---------------------------------------- | ------------------------------------------------ | --------- | ----- | ------------------- | - | -------- | ----- | ------ | - | - | ---- | ---- | 
|                                         |                                                  |           |       |                    
|                                         |                                                  |           |       | Options Outstanding
|                                         |                                                  |           |       |                    
|                                         |                                                  | Options   |       |                     |   | Weighted
|                                         |                                                  | Available |       | Number              |   | Average 
|                                         |                                                  | For       |       | of                  |   | Exercise
|                                         |                                                  | Grant     |       | Shares              |   | Price   
|                                         |                                                  |           |       |                     |   |         
|Options outstanding at December 31, 1999 |                                                  |           | 2,377 |                     |   |          | 3,623 |        |   | $ | 1.00 |     
|                                         | Shares reserved under plan                       |           |       | 2,000               |   |          |       |       |   |   |      |     | 
|                                         | Granted  exercise price below fair
    value    |           |       | (4,084              | ) |          |       | 4,084  |   |   |      | 4.01 | 
|                                         | Granted  exercise price equal to fair
    value |           |       | (421                | ) |          |       | 421    |   |   |      | 6.69 | 
|                                         | Exercised                                        |           |       |                    |   |          |       | (50    | ) |   |      | 1.00 | 
|                                         | Cancelled                                        |           |       | 59                  |   |          |       | (59    | ) |   |      | 3.01 | 
|                                         | Exchange of options as part of merger            |           |       | 8,019               |   |          |       | (8,019 | ) |   |      | 2.82 | 
|                                         | Termination of plan                              |           |       | (7,950              | ) |          |       |       |   |   |      |     | 
|                                         |                                                  |           |       |                     |   |          |       |        |   |   |      |     
|Options outstanding at December 31, 2000 |                                                  |           |      |                     |   |          |      |        |   | $ |     |     
|                                         |                                                  |           |       |                     |   |          |       |        |   |   |      |     

63



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##### Table of Contents



VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Deferred Compensation

In connection with the grant of stock options in
Metastream to certain employees and non-employee directors, the
Company recorded total deferred compensation of approximately
$26,024,000 and $16,811,000 for the years ended
December 31, 2000 and 1999, respectively. This deferred
compensation represented the difference between the fair value
of Metastream common stock and the exercise price of the options
at the date of grant. Minority interest in the Companys
consolidated balance sheets was credited for $12,011,000 and
$6,081,000 for the years ended December 31, 2000 and 1999,
respectively, which represented non-cash stock-based
compensation charges related to Metastream stock options.

In connection with the grant and cancellation of
stock options to certain employees and non-employee directors
subsequent to the merger of the Company and Metastream, the
Company reduced total deferred compensation by approximately
$2,010,000, $4,975,000, and $1,818,000 for the years ended
December 31, 2002, 2001, and 2000, respectively. Non-cash
stock-based compensation charges of $5,139,000, $6,341,000 and
$330,000 were recognized during the years ended
December 31, 2002, 2001, and 2000 respectively.

In connection with the issuance of stock options
to non-employees for services performed, the Company recorded
non-cash stock-based compensation charges of $283,000 and
$832,000 during the years ended December 31, 2002 and 2001,
respectively. The non-cash stock-based compensation charges
recorded for non-employees represents the fair value of options
using a Black-Scholes option-pricing model with the following
weighted average assumptions, varying with the specifics details
for each consultant agreement: risk-free interest rates ranging
from 1.19% to 1.83%, contractual life of three months to one
year, dividend yield of zero, and expected volatility ranging
from 74% to 100%.



|    |                              
|--- | -----------------------------
|12. | Commitments and Contingencies

Commitments

The Company leases its primary office space in
New York City pursuant to various lease agreements with terms
through February of 2010. In conjunction with the acquisition of
Viewpoint Digital in 2000, the Company also leases office space
in Salt Lake City, Utah and Los Angeles, California, with lease
terms through April of 2010 and December of 2004, respectively.

The Company also leases certain equipment and a
vehicle for an executive of the Company with lease terms of up
to three years. Rent expense for office space, equipment, and
the executives vehicle totaled approximately $1,208,000,
$2,202,000 and $2,259,000 for the years ended December 31,
2002, 2001 and 2000, respectively. Sublease income totaled
approximately $177,000 for the year ended December 31, 2000.

Future minimum lease payments under
non-cancelable operating leases for each twelve-month period
subsequent to December 31, 2002 are as follows (in
thousands):

|           |  |   |       | 
|---------- |  | - | ----- | 
|2003       |  | $ | 1,117 | 
|2004       |  |   | 1,125 | 
|2005       |  |   | 908   | 
|2006       |  |   | 951   | 
|2007       |  |   | 966   | 
|Thereafter |  |   | 1,596 | 
|           |  |   |       | 
|           |  | $ | 6,663 | 
|           |  |   |       | 

64



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##### Table of Contents



VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Legal Proceedings

The Company is engaged in certain legal actions
arising in the ordinary course of business. The Company believes
it has adequate legal defenses in legal actions in which it is
the defendant and believes that the ultimate outcome of such
actions will not have a material adverse effect on the
Companys consolidated financial position, results of
operations, or cash flows.



|    |                        
|--- | -----------------------
|13. | Concurrent Transactions

During the year ended December 31, 2001, the
Company established a strategic relationship with one of its
customers whereby the customer purchased licenses from the
Company and the Company agreed to purchase publicly traded
equities of the customers parent. The Company also entered
into a license agreement with another customer in exchange for
the customers mass distribution of the Viewpoint Media
Player to an important target audience.

The above transactions effectively include
nonmonetary sales of our software for equity securities and
services of our customers, and accordingly the Company used the
fair market value of the equities and services received in
determining the amount of revenues and expenses to record. Total
revenues and expenses for the year ended December 31, 2001,
were $429,000 and $264,000, respectively, related to these
transactions.



|    |             
|--- | ------------
|14. | Income Taxes

The components of the provision for income taxes
for the years ended December 31, 2002, 2001, and 2000 are
as follows (in thousands):

|          |         |                |     |      |     |      |   |   |   |   |   |   |   | 
|--------- | ------- | -------------- | --- | ---- | --- | ---- | - | - | - | - | - | - | - | 
|          |         |               
|          |         | Years Ended   
|          |         | December 31,  
|          |         |               
|          |         | 2002           |     | 2001 |     | 2000
|          |         |                |     |      |     |     
|Current:  |         |                |     |      |     |      |   |   |   |   |   |  
|          | Federal |                | $   |     |     |      | $ |  |   |   | $ |  |  
|          | State   |                |     | 45   |     |      |   |  |   |   |   |  |  
|          | Foreign |                |     | 62   |     |      |   |  |   |   |   |  |  
|          |         |                |     |      |     |      |   |   |   |   |   |  
|          |         | Total current  |     |      | 107 |      |   |   |  |   |   |   |  | 
|Deferred: |         |                |    |      |     |      |  |   |   |   |  |  
|          | Federal |                |     |     |     |      |   |  |   |   |   |  |  
|          | State   |                |     |     |     |      |   |  |   |   |   |  |  
|          | Foreign |                |     |     |     |      |   |  |   |   |   |  |  
|          |         |                |     |      |     |      |   |   |   |   |   |  
|          |         | Total deferred |     |      |    |      |   |   |  |   |   |   |  | 
|          |         |                |     |      |     |      |   |   |   |   |   |  
|          |         | $              | 107 |      |     | $    |  |   |   | $ |  |  
|          |         |                |     |      |     |      |   |   |   |   |   |  

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The differences between the statutory rate and
the Companys effective income tax rate are as follows:

|                                                                  |  |                          |        |      |  |      |        |    |  |  |        |   
|----------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | -- |  |  | ------ | --
|                                                                  |  |                         
|                                                                  |  | Years Ended December 31,
|                                                                  |  |                         
|                                                                  |  | 2002                     |        | 2001 |  | 2000
|                                                                  |  |                          |        |      |  |     
|Federal tax benefit at the statutory rate                         |  |                          | (34.00 | )%   |  |      | (34.00 | )% |  |  | (34.00 | )%
|State income taxes, net of federal income tax
    benefit         |  |                          | (4.44  | )    |  |      | (3.17  | )  |  |  | (3.03  | ) 
|Other                                                             |  |                          | 0.95   |      |  |      | 0.83   |    |  |  | (0.75  | ) 
|Amortization and impairment of goodwill and other
    intangibles |  |                          | 9.13   |      |  |      | 16.28  |    |  |  | 2.49   |   
|Prior period adjustment                                           |  |                          | (10.20 | )    |  |      | (3.30  | )  |  |  | (6.78  | ) 
|Non-cash sales and marketing charges                              |  |                          |       |      |  |      | (12.06 | )  |  |  | 12.06  |   
|Change in valuation reserve                                       |  |                          | 38.97  |      |  |      | 35.42  |    |  |  | 32.68  |   
|Minority interest                                                 |  |                          |       |      |  |      |       |    |  |  | (2.67  | ) 
|                                                                  |  |                          |        |      |  |      |        |    |  |  |        |   
|Effective income tax rate                                         |  |                          | 0.41%  |      |  |      | %     |    |  |  | %     |   
|                                                                  |  |                          |        |      |  |      |        |    |  |  |        |   

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes, together with net operating loss
and tax credit carryforwards. Significant components of the
Companys deferred tax assets and liabilities are as
follows (in thousands):

|                     |                                  |              |         |        |   |  |         |        |  
|-------------------- | -------------------------------- | ------------ | ------- | ------ | - |  | ------- | ------ | -
|                     |                                  |             
|                     |                                  | December 31,
|                     |                                  |             
|                     |                                  | 2002         |         | 2001  
|                     |                                  |              |         |       
|Deferred tax assets: |                                  |              |         |        |   |  |         |       
|                     | Accrued expenses                 |              | $       | 510    |   |  | $       | 542    |  
|                     | Tax credit carryforwards         |              |         | 3,413  |   |  |         | 3,247  |  
|                     | Basis differential               |              |         | 925    |   |  |         | 628    |  
|                     | Net operating loss carryforwards |              |         | 68,243 |   |  |         | 59,495 |  
|                     | Other                            |              |         | 61     |   |  |         | 455    |  
|                     |                                  |              |         |        |   |  |         |       
|                     |                                  |              | 73,152  |        |   |  | 64,367  |       
|Valuation allowance  |                                  |              | (70,643 | )      |   |  | (60,593 | )     
|                     |                                  |              |         |        |   |  |         |       
|                     | Net deferred tax assets          |              |         | 2,509  |   |  |         | 3,774  |  
|                     | Net deferred tax liabilities     |              |         | (2,509 | ) |  |         | (3,774 | )
|                     |                                  |              |         |        |   |  |         |       
|                     | Net deferred taxes               |              | $       |       |   |  | $       |       |  
|                     |                                  |              |         |        |   |  |         |       

The valuation allowance for deferred taxes
increased by approximately $10,050,000 and $18,549,000 during
2002 and 2001, respectively, providing a full valuation
allowance against the Companys net deferred tax assets.
The Companys net deferred tax assets include substantial
amounts of net operating loss carryforwards. Inability to
generate taxable income within the carryforward period would
affect the ultimate realizability of such assets. Consequently,
management determined that sufficient uncertainty exists
regarding the realizability of these assets to warrant the
establishment of the full valuation allowance. Managements
assessment with respect to the amount of deferred tax assets
considered realizable may be revised over the near term based on
actual operating results and revised financial statement
projections.

At December 31, 2001, the Company has net
operating loss and tax credit carryforwards of approximately
$168,236,000 and $3,413,000, respectively, for federal income
tax purposes, which begin to expire in 2011. The Companys
federal net operating loss carryforward relates to the
Companys acquisitions of RTG and Specular and the net
losses incurred by the Company. The Company also has net
operating loss and tax credit carryforwards for state income tax
purposes, which begin to expire in 2011. The Companys
state net operating

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

loss carryforward primarily relates to the net
losses incurred by the Company. Additionally, the Company has
net operating loss carryforwards of approximately $1,948,000 for
foreign income tax purposes, which begin to expire in 2006. The
net operating loss carryforwards may be used to offset any
future taxable income, subject to potential limitations on the
Companys ability to utilize such loss carryforwards
pursuant to the ownership rule changes of the Internal Revenue
Code, Section 382.



|    |                   
|--- | ------------------
|15. | Comprehensive Loss

Total comprehensive loss consisted of the
following (in thousands):

|                                                    |  |                          |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                    |  |                         
|                                                    |  | Years Ended December 31,
|                                                    |  |                         
|                                                    |  | 2002                     |         | 2001 |  | 2000
|                                                    |  |                          |         |      |  |     
|Net loss                                            |  | $                        | (25,893 | )    |  | $    | (52,370 | ) |  | $ | (55,956 | )
|Foreign currency translation adjustment             |  |                          | (9      | )    |  |      | (27     | ) |  |   | 137     |  
|Unrealized gain (loss) on marketable
    securities |  |                          | (45     | )    |  |      | 33      |   |  |   | 81      |  
|                                                    |  |                          |         |      |  |      |         |   |  |   |         |  
|Comprehensive loss                                  |  | $                        | (25,947 | )    |  | $    | (52,364 | ) |  | $ | (55,738 | )
|                                                    |  |                          |         |      |  |      |         |   |  |   |         |  



|    |                                                        
|--- | -------------------------------------------------------
|16. | Segment Information and Enterprise-Wide
    Disclosures

The Companys continuing operations are
focused on one business segment, e-commerce visualization. The
Company is organized into a single reporting segment, which is
evaluated by management for making operating decisions and
assessing performance. The Companys customers consist
primarily of companies located in the United States. The
Companys long-lived assets from continuing operations are
primarily located in the United States.

Major Customers

Customers whose revenues represent greater than
10 percent of the Companys consolidated revenues from
continuing operations for the years ended December 31,
2002, 2001 and 2000 are as follows:

|           |  |                          |    |      |  |      |    |   |  |  |    |  
|---------- |  | ------------------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  |                         
|           |  | Years Ended December 31,
|           |  |                         
|           |  | 2002                     |    | 2001 |  | 2000
|           |  |                          |    |      |  |     
|Customer A |  |                          | 51 | %    |  |      | 11 | % |  |  |   | %
|Customer B |  |                          |   | %    |  |      |   | % |  |  | 14 | %
|Customer C |  |                          |   | %    |  |      |   | % |  |  | 26 | %

Customers whose accounts receivable represent
greater than 10 percent of the Companys consolidated
net accounts receivable from continuing operations at
December 31, 2002 and 2001 are as follows:

|           |  |              |    |      |  |  |    |  
|---------- |  | ------------ | -- | ---- |  |  | -- | -
|           |  |             
|           |  | December 31,
|           |  |             
|           |  | 2002         |    | 2001
|           |  |              |    |     
|Customer A |  |              | 17 | %    |  |  |   | %
|Customer B |  |              |   | %    |  |  | 28 | %
|Customer D |  |              | 16 | %    |  |  |   | %

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                
|--- | -----------------------------------------------
|17. | Quarterly Results of Operations
    (Unaudited)

Summarized quarterly financial information for
the years 2002 and 2001 are as follows (in thousands, except per
share amounts):

|                  |                                                                   |               |   |         |   |              |   |             |   |  |   |         |   |  |   |         |  
|----------------- | ----------------------------------------------------------------- | ------------- | - | ------- | - | ------------ | - | ----------- | - |  | - | ------- | - |  | - | ------- | -
|                  |                                                                   |              
|                  |                                                                   | Quarter Ended
|                  |                                                                   |              
|                  |                                                                   | March 31      |   | June 30 |   | September 30 |   | December 31
|                  |                                                                   |               |   |         |   |              |   |            
|Fiscal year 2002: |                                                                   |               |   |         |   |              |   |             |   |  |   |         |   |  |   |        
|                  | Total revenues                                                    |               | $ | 4,858   |   |              | $ | 5,304       |   |  | $ | 5,326   |   |  | $ | 2,651   |  
|                  | Gross profit                                                      |               |   | 3,841   |   |              |   | 4,254       |   |  |   | 4,195   |   |  |   | 1,909   |  
|                  | Net loss from continuing operations                               |               |   | (10,984 | ) |              |   | (3,685      | ) |  |   | (4,009  | ) |  |   | (7,342  | )
|                  | Adjustment to net loss on disposal of
    discontinued operations |               |   |        |   |              |   | 93          |   |  |   | 9       |   |  |   | 25      |  
|                  | Net loss                                                          |               |   | (10,984 | ) |              |   | (3,592      | ) |  |   | (4,000  | ) |  |   | (7,317  | )
|                  | Basic and diluted net loss per share                              |               |   | (0.27   | ) |              |   | (0.09       | ) |  |   | (0.10   | ) |  |   | (0.18   | )
|Fiscal year 2001: |                                                                   |               |   |         |   |              |   |             |   |  |   |         |   |  |   |        
|                  | Total revenues                                                    |               | $ | 2,791   |   |              | $ | 2,751       |   |  | $ | 3,967   |   |  | $ | 4,499   |  
|                  | Gross profit                                                      |               |   | 1,885   |   |              |   | 2,116       |   |  |   | 2,998   |   |  |   | 3,417   |  
|                  | Net loss from continuing operations                               |               |   | (12,049 | ) |              |   | (12,532     | ) |  |   | (11,539 | ) |  |   | (17,372 | )
|                  | Adjustment to net loss on disposal of
    discontinued operations |               |   |        |   |              |   | 730         |   |  |   |        |   |  |   | 392     |  
|                  | Net loss                                                          |               |   | (12,049 | ) |              |   | (11,802     | ) |  |   | (11,539 | ) |  |   | (16,980 | )
|                  | Basic and diluted net loss per share                              |               |   | (0.32   | ) |              |   | (0.31       | ) |  |   | (0.29   | ) |  |   | (0.42   | )

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VIEWPOINT CORPORATION

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

For the Years Ended December 31, 2002,
2001 and 2000


|                                                   |                              |                |   |            |  |            |   |            |   |            |   |     |     |  |   |        |  |  |   |        | 
|-------------------------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | ---------- | - | ---------- | - | --- | --- |  | - | ------ |  |  | - | ------ | 
|                                                   |                              | Balance at     |   | Charged to |  |            |   |            |   | Balance at
|                                                   |                              | Beginning      |   | Costs and  |  | Charged to |   |            |   | End of    
|Description                                        |                              | of Period      |   | Expenses   |  | Other      |   | Deductions |   | Period    
|                                                   |                              |                |   |            |  |            |   |            |   |           
|                                                   |                              |               
|                                                   |                              | (In thousands)
|Allowance for Accounts Receivable:                 |                              |                |   |            |  |            |   |            |   |            |   |     |     |  |   |        |  |  |   |       
|                                                   | Year Ended December 31, 2002 |                | $ | 986        |  |            | $ | 741        |   |            | $ |    |     |  | $ | 169    |  |  | $ | 1,558  | 
|                                                   | Year Ended December 31, 2001 |                |   | 796        |  |            |   | 544        |   |            |   | 126 | (1) |  |   | 480    |  |  |   | 986    | 
|                                                   | Year Ended December 31, 2000 |                |   |           |  |            |   | 40         |   |            |   | 756 | (1) |  |   |       |  |  |   | 796    | 
|Allowance for Notes Receivable:                    |                              |                |   |            |  |            |   |            |   |            |   |     |     |  |   |        |  |  |   |       
|                                                   | Year Ended December 31, 2002 |                | $ | 750        |  |            | $ | 612        |   |            | $ |    |     |  | $ |       |  |  | $ | 1,362  | 
|                                                   | Year Ended December 31, 2001 |                |   | 2,192      |  |            |   | (665       | ) |            |   |    |     |  |   | 777    |  |  |   | 750    | 
|                                                   | Year Ended December 31, 2000 |                |   |           |  |            |   | 2,192      |   |            |   |    |     |  |   |       |  |  |   | 2,192  | 
|Allowances related to Discontinued
    Operations: |                              |                |   |            |  |            |   |            |   |            |   |     |     |  |   |        |  |  |   |       
|                                                   | Year Ended December 31, 2002 |                | $ | 595        |  |            | $ |           |   |            | $ |    |     |  | $ | 595    |  |  | $ |       | 
|                                                   | Year Ended December 31, 2001 |                |   | 2,416      |  |            |   |           |   |            |   |    |     |  |   | 1,821  |  |  |   | 595    | 
|                                                   | Year Ended December 31, 2000 |                |   | 14,745     |  |            |   |           |   |            |   |    |     |  |   | 12,329 |  |  |   | 2,416  | 
|Valuation Allowance for Deferred Tax
    Assets:   |                              |                |   |            |  |            |   |            |   |            |   |     |     |  |   |        |  |  |   |       
|                                                   | Year Ended December 31, 2002 |                | $ | 60,593     |  |            | $ | 10,050     |   |            | $ |    |     |  | $ |       |  |  | $ | 70,643 | 
|                                                   | Year Ended December 31, 2001 |                |   | 42,044     |  |            |   | 18,549     |   |            |   |    |     |  |   |       |  |  |   | 60,593 | 
|                                                   | Year Ended December 31, 2000 |                |   | 23,611     |  |            |   | 18,433     |   |            |   |    |     |  |   |       |  |  |   | 42,044 | 



---



|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Reserves established in connection with the
    acquisition of Viewpoint Digital, Inc. (Viewpoint
    Digital).

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

Not applicable.




PART III



|         |                                     
|-------- | ------------------------------------
|Item 10. | Directors and Executive
    Officers

The following table sets forth certain
information regarding the Companys directors and executive
officers as of April 28, 2003:

|                     |  |     |    |          |  |                                                                  
|-------------------- |  | --- | -- | -------- |  | -----------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Robert E. Rice       |  |     | 48 |          |  | Chairman, President and Chief Executive Officer                  
|Thomas Bennett       |  |     | 47 |          |  | Director                                                         
|James E. Crabbe      |  |     | 57 |          |  | Director                                                         
|Samuel H. Jones, Jr. |  |     | 69 |          |  | Director                                                         
|Lennert J. Leader    |  |     | 48 |          |  | Director                                                         
|Mark Gray            |  |     | 32 |          |  | Executive Vice President, Sales                                  
|Jeffrey J. Kaplan    |  |     | 54 |          |  | Executive Vice President, Business Affairs                       
|Sreekant Kotay       |  |     | 30 |          |  | Executive Vice President, Technology, Marketing,
    and Strategy
|Thomas Morgan        |  |     | 44 |          |  | Executive Vice President, Operations                             
|Brian ODonoghue     |  |     | 39 |          |  | Executive Vice President and General Counsel                     
|Anthony L. Pane      |  |     | 36 |          |  | Senior Vice President and Chief Financial Officer                

Robert E. Rice, Chairman, President and Chief
Executive Officer

Mr. Rice has been President and Chief
Executive Officer since March 2000 and Chairman of the
Companys Board of Directors since November 2000. At the
Company, he served as Vice President of Strategic Affairs until
September 1999. He served as the President and a Director of
Metastream since its formation in June 1999. Mr. Rice
co-founded Real Time Geometry Corporation and served as its
chairman until its sale to the Company in 1996. Before founding
Real Time Geometry, Mr. Rice was a partner at the law firm
of Milbank, Tweed, Hadley and McCloy LLP, where he advised on
various corporate, tax, and intellectual property issues.

Thomas Bennett, Director

Mr. Bennett has been a Director of the
Company since November 2000. He has been with Computer
Associates International, Inc. since 1988 and has been serving
as its Senior Vice President of Business Development since April
1997. On February 8, 2000, he became a director of
Metastream Corporation (a subsidiary of the Company from
Metastreams formation in June 1999 until its merger with
the Company in November 2000).

James E. Crabbe, Director

James E. Crabbe became a Director of the Company
on March 1, 2003. Mr. Crabbe served as president of the
Crabbe Huson Group, Inc., a registered investment advisor, from
1980 until the time of its sale to Liberty Financial Services,
Inc. in 1998. Crabbe Huson had over $5.5 billion in assets
under management at the time of its sale to Liberty Financial.
Mr. Crabbe remained an employee of Liberty until 2000.
Mr. Crabbe is currently chairman of the board of directors
of VendingData Corporation, a company in the business of
designing and manufacturing machines used in the gambling
industry.

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Samuel H. Jones, Jr., Director

Mr. Jones has been a Director of the Company
since April 1992. He has been President of S-J Venture
Capital Company since 1991. Mr. Jones founded
S-J Transportation Company, an industrial waste
transportation company, in 1971 and served as its President
until 2002. Mr. Jones is a director of Fulton Financial
Corp.

Lennert J. Leader, Director

Mr. Leader has been a Director of the
Company since November 2000. Mr. Leader became President of
AOL Time Warner Ventures upon the merger of America Online, Inc.
and Time Warner Inc. in January 2001. Prior to the merger,
Mr. Leader served as President of AOL Investments, a
division of America Online, Inc., beginning in February 1998.
Mr. Leader served as Senior Vice President, Chief Financial
Officer, and Treasurer of AOL from September 1989 until July
1998. Prior to joining AOL, Mr. Leader was Vice President
of Finance of LEGENT Corporation, a computer software and
services company, from March 1989 to September 1989, and Chief
Financial Officer of Morino, Inc., a computer software and
services company, from 1986 to March 1989 and Director of
Finance from 1984 to 1986. Prior to joining Morino, Inc. in
1984, he was an audit manager of Price Waterhouse.
Mr. Leader serves as a director of iVillage Inc.

Mark Gray, Executive Vice President,
Sales

Mr. Gray joined Viewpoint in January 2002 as
Vice President of Strategic Marketing. Before coming to
Viewpoint, Mr. Gray served as Vice President of Delivery
and Integration at Dotglu, a CRM focused agency. Before joining
Dotglu, Mr. Gray focused on managing and expanding existing
relationships, creating revenue-generating service lines, and
forming strategic partnerships and alliances in the positions of
Client Partner, Media and Entertainment Practice Lead, and
Director of Incubation Services at Viant, a digital professional
services provider. Before Viant, Mr. Gray was the
co-founder of the New York Metro office of USWeb, a web services
provider. Mr. Gray has also held positions at two global
advertising agencies, Ammirati Puris Lintas and J. Walter
Thompson, and oversaw production at Jersey Cow Software Company,
Inc., a producer of educational multimedia CD-ROMs.
Mr. Gray became Executive Vice President of Sales in August
2002.

Jeffrey J. Kaplan, Executive Vice President,
Business Affairs

Mr. Kaplan has been the Executive Vice
President of Business Affairs of the Company since November 2001
and was Executive Vice President and Chief Financial Officer
from February 2001 to November 2001. Mr. Kaplan served as
Executive Vice President and Chief Financial Officer of Rare
Medium Group, Inc. from September 1999 until joining the Company
and served as Executive Vice President, Chief Financial Officer
and Director of Safety Components International, Inc., a leading
manufacturer of airbag cushions and fabric from February 1997 to
August 1999. Safety Components filed for bankruptcy on
April 10, 2000 and emerged from bankruptcy on
October 11, 2000. From October 1993 to February 1997,
Mr. Kaplan served as Executive Vice President, Chief
Financial Officer and Director of International Post Limited, a
leading provider of post-production services for commercial and
advertising markets.

Sreekant Kotay, Executive Vice President,
Technology, Marketing, and Strategy

Mr. Kotay joined the Company as a Lead
Software Engineer in 1996 following the Companys
acquisition of Intrepid Systems, Inc. With the Companys
acquisition of Real Time Geometry later that year,
Mr. Kotay served as Director of Engineering, focusing on
the commercialization of RTGs research. Mr. Kotay
became Senior Vice President of Marketing and Strategy in 2001
and Executive Vice President of Technology, Marketing, and
Strategy in 2002. Mr. Kotay attended Yale University before
founding Intrepid Systems in 1991.

Thomas Morgan, Executive Vice President,
Operations

Mr. Morgan joined Viewpoint in March 2002 as
General Manager of Enterprise Solutions. Before joining
Viewpoint, Mr. Morgan was a senior partner of Fusion
Technologies, Inc., a multi-national IT consulting firm
specializing in web application development and integrated
offshore software development. In this role, he was

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responsible for all strategic and operational
activities of the company. Prior to entering the technology
industry, Mr. Morgan served as a corporate and finance
attorney in the Boston area. Mr. Morgan holds a Juris
Doctorate from Boston College Law School and a BA in Economics
from Harvard University.


Brian ODonoghue, Executive Vice
President and General Counsel

Mr. ODonoghue was an attorney at
Milbank, Tweed, Hadley, and McCloy LLP, specializing in
corporate and litigation matters from 1995 until joining the
Company as General Counsel in May 2000. Before attending law
school, Mr. ODonoghue taught high school at Monsignor
McClancy High School in New York from 1988 through 1990 and
served as a New York City firefighter from 1990 through 1992.
Mr. ODonoghue received his Juris Doctorate from
Fordham University School of Law and his BA from Queens College
of the City University of New York. Mr. ODonoghue is
a member of the New York Bar Association.

Anthony L. Pane, Senior Vice President and
Chief Financial Officer

Mr. Pane joined the Company as Vice
President and Controller in August 2000 and has served as Senior
Vice President and Chief Financial Officer since November 2001.
From May 1999 to August 2000, Mr. Pane served as Controller
of Computer Generated Solutions, Inc. From July 1997 to March
1999, Mr. Pane was the Vice President and Controller of the
American Stock Exchange, Inc. From July 1994 to July 1997,
Mr. Pane served in various positions with Alliance
Entertainment Corp., including as Chief Financial Officer of its
subsidiary, Abbey Road Distributors. Mr. Pane also served
in various positions, including Manager, for six years at
PricewaterhouseCoopers and Ernst & Young.

There is no family relationship among any
directors or executive officers of the Company.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended, requires the Companys directors,
certain officers, and persons who own more than ten percent of a
registered class of the Companys securities, to file with
the SEC reports of ownership and changes in ownership of Common
Stock and other equity securities of the Company. Officers,
directors and greater-than ten percent stockholders are required
by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.

Based solely on a review of the copies of such
reports furnished to the Company and representations that no
other reports were required, the Company believes that during
the year ended December 31, 2002, its officers, directors,
and greater than 10% stockholders complied with all
Section 16(a) filing requirements, except that Mayer
Offman, Generic Trading of Philadelphia, LLC, Gabriel Capital,
LP, Ariel Fund Limited and Simaru Associates, LLC, whom the
Company believes became beneficial owners of greater than 10% of
the Company common stock in 2002, may have been required to file
Form 3s and Form 4s but have not done so. In addition,
the Company believes that RS Investment Management
Co. LLC, RS Investment Management, L.P.,
RS Diversified Growth Fund and G. Randall Hecht, whom
the Company believes became beneficial owners of greater than
10% of the Company common stock in 2002, may have been required
to file Form 3s but have not done so.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The following table presents certain information
with respect to annual compensation and long-term compensation
awarded during fiscal years 2000, 2001, and 2002 to the
Companys Chief Executive Officer and

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its five other most highly compensated executive
officers as of December 31, 2002 (collectively, the
Named Executive Officers).


Summary Compensation Table

|                            |                                      |      |      |                     |  |              |         |              |  |         |   |           |     |   |        |           |     |  |         |           | 
|--------------------------- | ------------------------------------ | ---- | ---- | ------------------- |  | ------------ | ------- | ------------ |  | ------- | - | --------- | --- | - | ------ | --------- | --- |  | ------- | --------- | 
|                            |                                      |      |      |                     |  |             
|                            |                                      |      |      | Annual Compensation |  | Securities  
|                            |                                      |      |      |                     |  | Underlying  
|                            |                                      |      |      |                     |  | Other Annual |         | Company     
|Name and Principal Position |                                      | Year |      | Salary              |  | Bonus        |         | Compensation |  | Options
|                            |                                      |      |      |                     |  |              |         |              |  |        
|Robert Rice                 |                                      |      | 2002 |                     |  | $            | 330,000 |              |  |         |  |           |     | $ | 29,517 | (1)       |     |  |        |          
|                            | Chairman, President and              |      |      | 2001                |  |              |         | 330,000      |  |         |   |          |     |   | $      | 18,004    | (2) |  |         | 1,200,000 | 
|                            | Chief Executive Officer              |      |      | 2000                |  |              |         | 275,000      |  |         |   | 1,309,959 | (3) |   | $      | 1,107,160 | (4) |  |         | 287,500   | 
|Paul Kadin                  |                                      |      | 2002 |                     |  |              | 200,000 |              |  |         |  |           |     |   |       |           |     |  |        |          
|                            | Executive Vice President,            |      |      | 2001                |  |              |         | 200,000      |  |         |   | 35,000    |     |   |        |          |     |  |         |          | 
|                            | Business Development                 |      |      | 2000                |  |              |         | 155,589      |  |         |   | 30,000    |     |   |        |          |     |  |         | 460,000   | 
|Jeff Kaplan                 |                                      |      | 2002 |                     |  |              | 206,083 |              |  |         |  |           |     |   |       |           |     |  |        |          
|                            | Executive Vice President,            |      |      | 2001                |  |              |         | 219,771      |  |         |   | 50,000    |     |   |        |          |     |  |         | 460,000   | 
|                            | Business Affairs                     |      |      |                     |  |              |         |              |  |         |   |           |     |   |        |           |     |  |         |           | 
|Sreekant Kotay              |                                      |      | 2002 |                     |  |              | 200,000 |              |  |         |  |           |     |   |       |           |     |  |        |          
|                            | Executive Vice President, Technology |      |      | 2001                |  |              |         | 200,000      |  |         |   |          |     |   |        |          |     |  |         |          | 
|                            | Marketing & Strategy                 |      |      | 2000                |  |              |         | 170,000      |  |         |   |          |     |   |        |          |     |  |         |          | 
|Brian ODonoghue            |                                      |      | 2002 |                     |  |              | 200,000 |              |  |         |  |           |     |   |       |           |     |  | 200,000 |          
|                            | Executive Vice President             |      |      | 2001                |  |              |         | 187,499      |  |         |   |          |     |   |        |          |     |  |         |          | 
|                            | and General Counsel                  |      |      | 2000                |  |              |         | 100,000      |  |         |   | 30,000    |     |   |        |          |     |  |         | 230,000   | 
|Anders Vinberg              |                                      |      | 2002 |                     |  |              | 200,000 |              |  |         |  |           |     |   |       |           |     |  |        |          
|                            | Executive Vice President,            |      |      | 2001                |  |              |         | 200,000      |  |         |   |          |     |   |        |          |     |  |         |          | 
|                            | Technology, Engineering and          |      |      | 2000                |  |              |         | 66,667       |  |         |   |          |     |   |        |          |     |  |         | 1,185,000 | 
|                            | Information Systems                  |      |      |                     |  |              |         |              |  |         |   |           |     |   |        |           |     |  |         |           | 



---



|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents auto allowance of $9,660 and
    reimbursement in 2002 for life insurance premiums for 2000 and
    2001 and taxes thereon ($5,488) and payment of life insurance
    premium and taxes thereon for period beginning in April 2002 and
    ending in April 2003 ($14,369).
|   
|(2) | Represents auto allowance.                                                                                                                                                                                                                                                           
|   
|(3) | Represents loan forgiveness of $1,244,959,
    triggered by contractually specified events which occurred
    during 2000, and annual bonus of $65,000.                                                                                                                              
|   
|(4) | Represents amount reimbursed for the payment of
    taxes due for the forgiveness of principal and interest on the
    loan described in footnote (3) and auto allowance of
    $30,500.                                                                                             

Stock Option Grants

The following table presents information
regarding stock options granted to the Named Executive Officers
during 2002. In accordance with the rules of the SEC, also shown
below is the potential realizable value over the term of the
option (the period from the grant date to the expiration date)
based on assumed rates of stock appreciation from the option
exercise price of 5% and 10%, compounded annually. These

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amounts do not represent the Companys
estimate of future stock price. Actual gains, if any, on stock
option exercises will depend on the future performance of
Company common stock.


Company Option Grants in 2002

|                 |  |                   |         |                             |  |             |       |                             |  |    |      |     |  |  |          |  |  |   |         |  |  |   |           | 
|---------------- |  | ----------------- | ------- | --------------------------- |  | ----------- | ----- | --------------------------- |  | -- | ---- | --- |  |  | -------- |  |  | - | ------- |  |  | - | --------- | 
|                 |  |                   |         |                             |  |            
|                 |  | Individual Grants |         |                            
|                 |  |                   |         | Potential Realizable Values
|                 |  | Number of         |         | Percent of                  |  |             |       | at Assumed Annual Rates    
|                 |  | Securities        |         | Total Options               |  |             |       | of Stock Price Appreciation
|                 |  | Underlying        |         | Granted to                  |  |             |       | for Option Term            
|                 |  | Options           |         | Employees in                |  | Exercise or |       | Expiration                  |  |   
|Name             |  | Granted           |         | Fiscal Year                 |  | Base Price  |       | Date                        |  | 5% |      | 10%
|                 |  |                   |         |                             |  |             |       |                             |  |    |      |    
|Brian ODonoghue |  |                   | 200,000 | (1)                         |  |             | 11.98 | %                           |  | $  | 4.08 |     |  |  | 08/08/12 |  |  | $ | 513,178 |  |  | $ | 1,300,494 | 



---



|    |                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Twenty-five percent (25%) of the shares subject
    to the option vest on the first anniversary of the date of grant
    and one thirty-sixth vests each month thereafter.

The following table presents information with
respect to options to purchase Company common stock exercised
during fiscal year 2002 by the Named Executive Officers, and the
value of unexercised options at December 31, 2002.

Company Option Exercises in 2002 and Fiscal
Year-End Option Values

|                 |  |             |        |          |  |                        |         |                         |  |             |           |               |  |  |           |  |  |   |         |  |  |   |         | 
|---------------- |  | ----------- | ------ | -------- |  | ---------------------- | ------- | ----------------------- |  | ----------- | --------- | ------------- |  |  | --------- |  |  | - | ------- |  |  | - | ------- | 
|                 |  |             |        |          |  |                        |         |                         |  |            
|                 |  |             |        |          |  | Number of Securities   |         |                        
|                 |  |             |        |          |  | Underlying Unexercised |         | Value of Unexercised   
|                 |  |             |        |          |  | Options at             |         | In-the-Money Options at
|                 |  | Shares      |        |          |  | December 31, 2002      |         | December 31, 2002(1)   
|                 |  | Acquired on |        | Value    |  |                        |         |                        
|Name             |  | Exercise    |        | Realized |  | Exercisable            |         | Unexercisable           |  | Exercisable |           | Unexercisable
|                 |  |             |        |          |  |                        |         |                         |  |             |           |              
|Robert E. Rice   |  |             |       |          |  |                        |        |                         |  |             | 1,431,644 |               |  |  | 1,328,021 |  |  | $ | 761,875 |  |  | $ | 100,625 | 
|Paul Kadin       |  |             |       |          |  |                        |        |                         |  |             | 352,667   |               |  |  | 107,333   |  |  |   |        |  |  |   |        | 
|Jeff Kaplan      |  |             |       |          |  |                        |        |                         |  |             | 210,833   |               |  |  | 249,167   |  |  |   |        |  |  |   |        | 
|Sreekant Kotay   |  |             | 25,200 |          |  | $                      | 124,526 |                         |  |             | 904,154   |               |  |  | 116,146   |  |  | $ | 702,675 |  |  | $ | 116,146 | 
|Brian ODonoghue |  |             |       |          |  |                        |        |                         |  |             | 164,834   |               |  |  | 265,166   |  |  |   |        |  |  |   |        | 
|Anders Vinberg   |  |             |       |          |  |                        |        |                         |  |             | 946,875   |               |  |  | 238,125   |  |  |   |        |  |  |   |        | 



---



|    |                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The value of unexercised, in-the-money options is
    the difference between the exercise price of the options and the
    fair market value of Company common stock at December 31,
    2002 ($1.87).

Compensation of Directors

The Company reimburses each of its non-employee
directors as follows: each non-employee director is paid
(i) $2,500 at the end of each fiscal quarter in which he or
she is a director, (ii) $1,000 for each regular Board
meeting he or she attends in person, and (iii) $500 for
each Board committee meeting he or she attends in person;
provided, however, that if more than one committee meeting is
held on the same day or a Board meeting and one or more
committee meetings are held on the same day, no more than the
initial $500 or $1,000, as the case may be, is paid to any
director for all such meetings attended by such director on such
date.

Non-employee directors participate in the
Companys 1995 Director Option Plan (the Director
Plan). Under the Director Plan, each non-employee director
who joins the Board is automatically granted a non statutory
option to purchase 20,000 shares of Common Stock on the
date upon which such person first becomes a director. In
addition, each non-employee director automatically receives a
non statutory option to purchase 5,000 shares of Common
Stock on January 1 of each year, provided the director has
been a member of the Board for at least six months. The exercise
price of each option granted under the Director Plan is equal to
the fair market value of the Common Stock on the date of grant.
The 20,000 share grant vests at a rate of one-eighth of the
option shares upon the end of the first six-month period after
the date of grant and one-forty-eighth of the remaining option
shares per month thereafter, provided the optionee remains a
director of the Company. The 5,000 share grant vests at the
rate of one-half of the option shares upon the end of the first
six-month period after the date of grant and one-twelfth of the
remaining option shares per month thereafter,

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provided the optionee remains a director of the
Company. Options granted under the Director Plan have a term of
ten (10) years unless terminated sooner, whether upon
termination of the optionees status as a director or
otherwise pursuant to the Director Plan.


Employment Agreements with Executive
Officers

The Company entered into employment agreements
with Messrs. Rice, Kaplan, Vinberg, Kadin, Kotay, and
ODonoghue.

The Company entered into an employment agreement
with Mr. Rice in December 2001 for a two-year term ending
December 31, 2003 which provides for an annual base salary
of $330,000. In addition, the Company granted Mr. Rice two
options to purchase shares of the Companys common stock at
a price of $3.88 per share, the fair market value of the
Companys common stock on the date of grant. One of the
stock option grants provides Mr. Rice with the option to
acquire 200,000 shares, with 25% of the total grant vesting
on the first anniversary of date of grant and the remainder
vesting at the rate of 1/36th per month thereafter. The second
option grant provides Mr. Rice with the option to acquire
1,000,000 shares (the Performance-Based
Option). Six and three-tenths percent (6.3%) of the
shares subject to the Performance-Based Option will vest at the
end of each fiscal quarter in which the Company achieves
financial goals established by the Board of Directors. If the
Company does not achieve such financial goals, the allotted
shares will not vest and Mr. Rice will have no right to
exercise the option with respect to the allotted shares except
in accordance with the following. If there is a change in
control of the Company (as defined in the employment agreement),
a percentage of the unvested portion of the Performance-Based
Option will vest equal to the multiple of the exercise price
received by the Company as consideration in the change in
control. For example, if the per share consideration received by
the Company in the change in control is twice the exercise price
of the Performance-Based Option, fifty percent of the unvested
portion of the Performance-Based Option will vest.

Mr. Rices employment agreement
provides that if his employment is terminated by the Company
without cause (as defined in the agreement), or by Mr. Rice
for good reason (as defined), he will be entitled to immediate
vesting of all of his unvested Company stock options (other than
the Performance-Based Option) and severance pay equal to twice
his annual base salary.

The Companys employment agreement with
Mr. Kaplan provides for his employment at a base salary of
$200,000 per year. Mr. Kaplan also received a signing bonus
of $50,000 upon the commencement of his employment, and a stock
option to purchase 460,000 shares of the Companys
common stock at an exercise price of $6.13 per share, which was
the closing price of the Companys common stock on the day
before Mr. Kaplan commenced employment. The option vests
over a four-year period, with 25% of the shares vesting on
February 15, 2002 and the balance vesting at the rate of
1/36th per month.

Under the employment agreement, the Company
loaned $375,000 to Mr. Kaplan. The loan bears interest at
4.94% per year, the applicable Federal rate established by
Section 1274(d) of the Internal Revenue Code on the day the
loan was made. The loan is secured solely by
Mr. Kaplans stock options in the Company and is
non-recourse to Mr. Kaplan, unless the Company fires
Mr. Kaplan for cause (as defined) or Mr. Kaplan quits
without good reason (as defined), in which case the loan will
become fully recourse to him.

Mr. Kaplans employment agreement
provides that if there is a change of control (as defined in the
agreement) of the Company, he will be entitled to immediate
vesting of the Company stock option described above. In
addition, if Mr. Kaplans employment is terminated by
the Company without cause (as defined) or if he terminates his
employment with good reason (as defined), he will be entitled to
severance pay equal to his annual base salary.

The Companys employment agreement with
Mr. Vinberg, who resigned effective December 31, 2002,
provided for his employment at a base salary of $200,000 per
year. Under the employment agreement, Mr. Vinberg also
received a stock option to purchase 1,035,000 shares of the
Companys common stock at an exercise price of $4.35 per
share. Twenty percent of the shares subject to the option vested
on his hire date, 20% vested on the first anniversary of his
hire date, and the balance vested at the rate of 1/36th per
month. In recognition of Mr. Vinbergs service as a
director of Metastream, the employment agreement provided that,

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for purposes of vesting of this option, the
option would vest as though Mr. Vinbergs hire date
was October 1999 if Mr. Vinberg remained employed by the
Company at least until February 28, 2001. Mr. Vinberg
satisfied this condition. Mr. Vinberg also received a stock
option to purchase 172,500 shares of the Companys
common stock at an exercise price of $8.56 per share. This
additional option was scheduled to vest over a four-year period,
with 25% vesting on September 6, 2002 and the balance
vesting at the rate of 1/36th per month. The employment
agreement provided that both stock options would fully vest
immediately upon a change of control of the Company (as defined).


Under the employment agreement, the Company
loaned $200,000 to Mr. Vinberg. The loan bore interest at the
rate of 5.07% per annum, the applicable Federal rate established
by Section 1274(d) of the Internal Revenue Code on the day
the loan was made. The loan was secured solely by, and was
recourse solely to, Mr. Vinbergs stock options in the
Company unless Mr. Vinbergs employment was terminated
by the Company for cause (as defined), in which case the loan
would have been fully recourse to Mr. Vinberg. The loan was
due on the earlier of the fourth anniversary of the date the
loan was made or within 30 days following the date on which
Mr. Vinbergs employment with the Company terminated.
Mr. Vinberg resigned from the Company on December 31,
2002. Under the terms of his note, repayment of the loan was due
January 31, 2003. Mr. Vinberg has not satisfied his
obligations under the note and the Company has foreclosed on the
collateral. The total amount of principal and interest due on
the date of foreclosure was $217,292.

Mr. Vinbergs employment agreement
provided that for the first three years of his employment, if
his employment was terminated by the Company after a change of
control without cause (as defined), or if he resigned from the
Company for good reason (as defined), he would be entitled to
base salary continuation, including medical benefits, for six
months following his termination.

Mr. Kadins employment agreement with
the Company provided for a starting base salary of $185,000 per
year, with an anticipated annual bonus of $35,000 for his first
year of employment and future bonuses as determined by the Board
of Directors. Mr. Kadin also received a signing bonus of
$30,000 and a stock option to purchase 460,000 shares of
the Companys common stock at an exercise price of $2.61
per share. This option was scheduled to vest over a four-year
period, with 20% vesting on the date of hire, 20% vesting on the
first anniversary of his hire date, and the balance vesting at
the rate of 1/36th per month. Mr. Kadins employment
agreement provided that if the Company terminated his employment
without cause (as defined), he would be entitled to a severance
payment equal to six months of his then-current base salary.
Mr. Kadin resigned effective March 20, 2003.

Mr. Kotay entered into an employment
agreement with the Company in 1998 under which Mr. Kotay
agreed to serve as a director of engineering and the Company
agreed to pay to Mr. Kotay a base salary of $170,000 and to
grant to Mr. Kotay an option to acquire 35,000 of the
Companys common stock. Mr. Kotays employment
agreement provides that any and all options granted to him will
vest immediately upon a change of control (as defined) of the
Company or if his employment is terminated by the Company
without cause (as defined).

Mr. ODonoghue entered into an
employment agreement with the Company in April 2000 under which
Mr. ODonoghue agreed to serve as General Counsel of
the Company and the Company agreed to pay to
Mr. ODonoghue a base salary of $150,000 per year and
to grant to Mr. ODonoghue an option to acquire
200,000 shares of the Companys common stock. The
agreement further provided for a bonus of $30,000 payable to
Mr. ODonoghue before the end of 2000. If, within the
first 36 months of his employment,
Mr. ODonoghues employment is terminated by the
Company without cause (as defined) or is terminated by Mr.
ODonoghue for good reason (as defined),
Mr. ODonoghue will receive base salary continuation
and medical benefits for 3 months and all stock options
held by Mr. ODonoghue will immediately vest and
become exercisable.

Severance Plan

The Board of Directors resolved in July 2002 to
provide the executive officers of the Company with certain
benefits in the event their employment is involuntarily
terminated within 12 months following a change in control
(as defined) of the Company or the executive officer remains
with the Company for 12 months

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following a change in control. Unless superior
benefits are otherwise provided in an employment agreement
between the Company and the executive officer, the executive
officer would be entitled to receive an amount equal to such
executive officers annual base salary in effect
immediately prior to a change in control and the unvested
portion of all options granted to such executive officer at any
time before the termination of employment will immediately vest
and remain exercisable by the executive officer for
6 months following termination of employment.


Compensation Committee Interlocks and Insider
Participation

The Compensation Committee of the Board of
Directors consists of Messrs. Bennett, Jones, and Crabbe.
None of the members of the Compensation Committee is a former or
current officer or employee of the Company. No interlocking
relationship exists between any member of the Compensation
Committee and any member of any other companys board of
directors or compensation committee.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The following table sets forth certain
information as of April 28, 2003 regarding the only persons
known by the Company to own, directly or indirectly, more than
five percent of the Companys Common Stock. Except as
otherwise indicated, each person has sole voting and investment
power with respect to all shares shown as beneficially owned,
subject to community property laws where applicable.

|                                      |  |           |           |               |  |  |      | 
|------------------------------------- |  | --------- | --------- | ------------- |  |  | ---- | 
|                                      |  | Number    |           | Percentage of
|Name and Address of Beneficial Owner  |  | of Shares |           | Class(1)     
|                                      |  |           |           |              
|G. Randall Hecht(2)                   |  |           | 5,466,300 |               |  |  | 11.8 | 
|RS Management Co. LLC                 |  |           |           |               |  |  |      | 
|RS Investment Management, L.P.        |  |           |           |               |  |  |      | 
|388 Market Street                     |  |           |           |               |  |  |      | 
|Suite 200                             |  |           |           |               |  |  |      | 
|San Francisco, CA 94111               |  |           |           |               |  |  |      | 
|Mayer Offman(3)                       |  |           | 4,929,291 |               |  |  | 10.7 | 
|1270 Ave. of the Americas, 12th Floor |  |           |           |               |  |  |      | 
|New York, NY 10020                    |  |           |           |               |  |  |      | 
|Computer Associates                   |  |           | 3,744,093 |               |  |  | 8.1  | 
|One Computer Associates Plaza         |  |           |           |               |  |  |      | 
|Islandia, NY 11749                    |  |           |           |               |  |  |      | 
|Kevin S. Moore(4)                     |  |           | 3,703,402 |               |  |  | 8.0  | 
|The Clark Estates                     |  |           |           |               |  |  |      | 
|One Rockefeller Plaza, 31st Floor     |  |           |           |               |  |  |      | 
|New York, NY 10020                    |  |           |           |               |  |  |      | 
|James E. Crabbe(5)                    |  |           | 3,055,600 |               |  |  | 6.6  | 
|1305 SW Myrtle Court                  |  |           |           |               |  |  |      | 
|Portland, OR 97201                    |  |           |           |               |  |  |      | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Beneficial ownership is determined in accordance
    with the rules of the SEC. In computing the number of shares
    beneficially owned by a person and the percentage ownership of
    that person, shares of common stock subject to options held by
    that person that are currently exercisable or exercisable within
    60 days of April 28, 2003 are deemed outstanding. Such
    shares, however, are not deemed outstanding for the purposes of
    computing the percentage ownership of any other person. Except
    as indicated in the footnotes to this table and pursuant to
    applicable community property laws, each stockholder named in
    the table has sole voting and investment power with respect to
    the shares set forth opposite such stockholders name.
    Percentage ownership is based on 45,985,507 shares of
    Common Stock outstanding on April 28, 2003.
|   
|(2) | According to information contained in the
    Schedule 13G filed with the Commission on February 14, 2003
    by RS Investment Management Co. LLC, RS Investment Management,
    L.P., RS Diversified Growth Fund and, these shares of the
    Companys Common Stock are beneficially owned by
    (i) RS Investment Management, L.P., a registered investment
    advisor, (ii) RS Diversified Growth Fund, a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | registered investment company, and (iii) RS
    Investment Management Co. LLC. RS Investment Management Co. LLC
    is the General Partner of RS Investment Management, L.P.
    G. Randall Hecht is a control person of RS Investment
    Management Co. LLC and RS Investment Management L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | According to information contained in the
    Schedule 13G filed with the Commission on August 16, 2002
    by Mayer Offman, Generic Trading of Philadelphia, LLC, Gabriel
    Capital, L.P., Ariel Fund Limited and Simaru Associates, LLC,
    these shares of the Companys Common Stock were
    beneficially owned by (i) Mr. Mayer Offman,
    (ii) Generic Trading of Philadelphia, LLC, of which
    Mr. Offman has the dispositive power as the authorized
    trader for the accounts held by Gabriel Capital, LP, Ariel Fund
    Limited and Simaru Associates, LLC, in which such shares are
    held and (iii) Gabriel Capital, LP, a Delaware limited
    liability company with which Mr. Offman serves as
    Vice-President of the managing member, Shear-Offman, Inc., a
    Delaware corporation.
|   
|(4) | According to information contained in the
    Schedule 13D filed with the Commission on April 7, 2003 by
    The Clark Estates, Inc., these shares of the Companys
    Common Stock are beneficially owned by (i) The Clark
    Estates, Inc., a New York corporation, and (ii) Federal
    Partners, L.P., a limited partnership, the general partner of
    which is Ninth Floor Corporation. The Clark Estates, Inc. has
    the sole power to vote or to direct the vote and to dispose of
    or direct the disposition of all the shares. Mr. Moore is
    the President and a Director of the Clark Estates.                                                                                                                                                                                                
|   
|(5) | According to information contained in the
    Schedule 13G filed with the Commission on February 10, 2003
    by James E. Crabbe, these shares of the Companys Common
    Stock were beneficially owned by (i) the James E.
    Crabbe Revocable Trust, of which Mr. Crabbe is the trustee,
    (ii) the Phileo Foundation, of which Mr. Crabbe has
    investment discretion, and (iii) the James E. Crabbe
    IRA, of which Mr. Crabbe has investment discretion.
    Mr. Crabbe does not directly own any shares of the issuer.                                                                                                                                                                                                                                                                                

Security Ownership of Management

The following table sets forth information with
respect to the beneficial ownership of the Companys Common
Stock, as of April 28, 2003, by the Companys
directors, nominees for election as directors, Named Executive
Officers, and all directors and executive officers as a group.
Except as otherwise indicated, each person has sole voting and
investment power with respect to all shares shown as
beneficially owned, subject to community property laws where
applicable.

|                                                                                                                  |  |           |           |            |  |                |           |               |  |  |            |  |  |  |      | 
|----------------------------------------------------------------------------------------------------------------- |  | --------- | --------- | ---------- |  | -------------- | --------- | ------------- |  |  | ---------- |  |  |  | ---- | 
|                                                                                                                  |  |           |           |            |  | Common         |           |              
|                                                                                                                  |  | Number    |           | Vested     |  | Stock and      |           | Percentage of
|Name                                                                                                              |  | of Shares |           | Options(1) |  | Vested Options |           | Class(2)     
|                                                                                                                  |  |           |           |            |  |                |           |              
|Samuel H. Jones, Jr.                                                                                              |  |           | 940,055   |            |  |                | 188,480   |               |  |  | 1,128,535  |  |  |  | 2.4  | 
|Thomas Bennett(3)                                                                                                 |  |           |          |            |  |                | 16,042    |               |  |  | 16,042     |  |  |  | *    | 
|James E. Crabbe                                                                                                   |  |           | 3,055,600 |            |  |                |          |               |  |  | 3,055,600  |  |  |  | 6.6  | 
|Lennert J. Leader(4)                                                                                              |  |           |          |            |  |                | 16,042    |               |  |  | 16,042     |  |  |  | *    | 
|Robert Rice                                                                                                       |  |           |          |            |  |                | 1,575,289 |               |  |  | 1,575,289  |  |  |  | 3.4  | 
|Jeffrey J. Kaplan                                                                                                 |  |           |          |            |  |                | 268,333   |               |  |  | 268,333    |  |  |  | *    | 
|Paul Kadin                                                                                                        |  |           | 3,500     |            |  |                |          |               |  |  | 3,500      |  |  |  | *    | 
|Anders Vinberg                                                                                                    |  |           |          |            |  |                |          |               |  |  |           |  |  |  | *    | 
|Brian ODonoghue                                                                                                  |  |           |          |            |  |                | 187,834   |               |  |  | 187,834    |  |  |  | *    | 
|Sreekant Kotay                                                                                                    |  |           |          |            |  |                | 996,029   |               |  |  | 996,029    |  |  |  | 2.2  | 
|All directors and executive officers as a group
    (10 persons)                                                  |  |           | 3,999,155 |            |  |                | 3,248,049 |               |  |  | 7,247,204  |  |  |  | 15.7 | 
|All directors and executive officers and Computer
    Associates International, Inc. and America Online,
    Inc. |  |           | 9,468,248 |            |  |                | 8,717,142 |               |  |  | 12,716,297 |  |  |  | 27.6 | 

78



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---



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| | * | Percentage of shares beneficially owned is less
    than one percent of total.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents shares issuable upon exercise of
    options to purchase Company Common Stock that are exercisable
    within 60 days of April 28, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | Beneficial ownership is determined in accordance
    with the rules of the SEC. In computing the number of shares
    beneficially owned by a person and the percentage ownership of
    that person, shares of common stock subject to options held by
    that person that are currently exercisable or exercisable within
    sixty (60) days of April 28, 2003 are deemed
    outstanding. Such shares, however, are not deemed outstanding
    for the purposes of computing the percentage ownership of any
    other person. Except as indicated in the footnotes to this table
    and pursuant to applicable community property laws, each
    stockholder named in the table has sole voting and investment
    power with respect to the shares set forth opposite such
    stockholders name. Percentage ownership is based on
    45,985,507 shares of Common Stock outstanding on
    April 28, 2003.
|   
|(3) | Mr. Bennett is Senior Vice President of
    Computer Associates International, Inc., which owns
    3,744,093 shares of Company Common Stock. Mr. Bennett
    disclaims beneficial ownership of the shares owned by Computer
    Associates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(4) | Mr. Leader is President of AOL Time Warner
    Ventures, a division of AOL Time Warner Inc. AOL Time Warner
    Inc. owns 1,725,000 shares of Company Common Stock.
    Mr. Leader disclaims beneficial ownership of the shares
    owned by AOL Time Warner Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Equity Compensation Plan Information

The following table summarizes the Companys
equity compensation plans as of December 31, 2002:

|                                                               |  |                      |           |                    |  |                             |      |  |  |  |         | 
|-------------------------------------------------------------- |  | -------------------- | --------- | ------------------ |  | --------------------------- | ---- |  |  |  | ------- | 
|                                                               |  |                      |           |                    |  | Number of Securities       
|                                                               |  | Number of Securities |           | Weighted Average   |  | Remaining Available for    
|                                                               |  | to be Issued         |           | Price of           |  | Future Issuance under      
|                                                               |  | Upon Exercise of     |           | Outstanding        |  | Equity Compensation        
|                                                               |  | Outstanding Options, |           | Options, Warrants, |  | Plans (Excluding Securities
|                                                               |  | Warrants, and Rights |           | and Rights         |  | Reflected in Column (a))   
|                                                               |  |                      |           |                    |  |                            
|Plan category                                                  |  | (a)                  |           | (b)                |  | (c)                        
|                                                               |  |                      |           |                    |  |                            
|Equity compensation plans approved by security
    holders     |  |                      | 9,504,595 |                    |  |                             | 3.75 |  |  |  | 830,858 | 
|Equity compensation plans not approved by
    security holders |  |                      |          |                    |  |                             |     |  |  |  |        | 
|Total                                                          |  |                      | 9,504,595 |                    |  |                             | 3.75 |  |  |  | 830,858 | 



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The Company extended loans to certain executive
officers in 2000, 2001, and in earlier years. Loans to executive
officers were made as part of the initial compensation package
offered to such executive officers and were offered as an
inducement to the executive officers to accept employment with
the Company. The Companys bylaws permit the Company to
extend such loans; however, the Company does not intend to
extend loans to officers in the future. Loans made to any
executive officer who has served as such in 2002 are described
below. The only loan to a current executive officer that is
outstanding as of April 28, 2003 is the loan to
Mr. Kaplan.

The Company extended to Mr. Rice a
$1,000,000 loan in December 1996, concurrently with the
acquisition by the Company of Mr. Rices interest in
Real Time Geometry Corp. and the execution of an employment
agreement between Mr. Rice and the Company covering the
period beginning on December 31, 1996 and ending on
December 31, 1999. The loan was secured solely by, and was
recourse solely to, shares of Company common stock underlying
options issued to Mr. Rice. The loan bore interest at the
rate of 5.67%, compounding semi-annually.

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Mr. Rice and the Company entered into a
subsequent employment agreement upon Mr. Rices
retention as the Chief Executive Officer of the Company in early
2000. In recognition of Mr. Rices role in forming
Metastream and Mr. Rices expected contributions in
leading the Company, the subsequent employment agreement
provided for forgiveness of the loan, including all interest
accrued thereon, if the Company merged with any other entity,
including Metastream, sold all or substantially all of its
assets to a third party, engaged in a primary public offering of
its capital stock, or if a third party acquired a majority of
the Companys capital stock. The Company further agreed to
reimburse Mr. Rice for Federal and state taxes that
Mr. Rice would be required to pay as a result of the
forgiveness of the loan.

The Company and Metastream merged in November
2000 and, accordingly, the Company forgave the principal amount
of the loan and accrued interest of $244,959, and made a payment
to Mr. Rice of $1,076,660 to reimburse him for payment of
Federal and state income taxes.

The Company extended a loan to Anders Vinberg in
the amount of $200,000 in accordance with the employment
agreement between Mr. Vinberg and the Company entered into
in September 2000. The loan was secured solely by, and was
recourse solely to, options issued to Mr. Vinberg. This
security arrangement provided Mr. Vinberg with a guaranteed
benefit of $200,000 while providing the Company with the
opportunity to recoup that amount to the extent the options
underlying the options were exercised. The loan bore interest at
the rate of 5.07% per annum, the applicable Federal rate
established by Section 1274(d) of the Internal Revenue Code
on the day the loan was made, and was due on the earlier of the
fourth anniversary of the date the loan was made or within 30
days following the date on which Mr. Vinbergs
employment with the Company terminated. Mr. Vinberg
resigned from the Company on December 31, 2002. Under the
terms of his note, repayment of the loan was due
January 31, 2003. Mr. Vinberg has not satisfied his
obligations under the note and the Company has foreclosed on the
collateral. The total amount of principal and interest due on
the date of foreclosure was $217,292.

The Company extended a loan to Mr. Kaplan in
the amount of $375,000 in accordance with the employment
agreement between Mr. Kaplan and the Company entered into
in January 2001. The loan was secured solely by, and was
recourse solely to, options issued to Mr. Kaplan. This
security arrangement provided Mr. Kaplan with a guaranteed
benefit of $375,000 while providing the Company with the
opportunity to recoup that amount to the extent the options
underlying the options are exercised. The loan bears interest at
the rate of 4.94% per annum, the applicable Federal rate
established by Section 1274(d) of the Internal Revenue Code
on the day the loan was made, and is due on the earlier of the
fourth anniversary of the date the loan was made or within
30 days following the date on which Mr. Kaplan ceases
to be an employee of the Company. As of December 31, 2002,
the amount due under the loan to Mr. Kaplan was $408,066.
As of March 31, 2003, this amount was $412,859.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

Within 90 days prior to the date of this
report (the Evaluation Date), the Companys President and
Chief Executive Officer and Senior Vice President and Chief
Financial Officer, carried out an evaluation of the
effectiveness of the Companys disclosure controls
and procedures (as defined in the Securities Exchange Act
of 1934 Rules 13a-14(c) and 15d-14(c)). Based on that
evaluation, these officers have concluded that as of the
Evaluation Date, the Companys disclosure controls and
procedures were adequate and designed to ensure that material
information relating to the Company and the Companys
consolidated subsidiaries would be made known to them by others
within those entities.

Changes in Internal Controls

There were no significant changes in the
Companys internal controls, or to the Companys
knowledge, in other factors that could significantly affect the
Companys disclosure controls and procedures subsequent to
the Evaluation Date.

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PART IV






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedule and
    Reports on Form 8-K

(a)     The following
documents are filed as part of this report:



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | 1.     Financial
    Statements. See Index to Financial Statements at Item 8
    on page 31 of this Report.        
|
| | 2.     Financial
    Statement Schedule. See Index to Financial Statements at
    Item 8 on page 31 of this Report.
|
| | 3.     Exhibits.                                                                                                   

Exhibit No. 2: Plan of Acquisition,
Reorganization, Arrangement, Liquidation or Succession

| |     |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1 |  |  | Form of Agreement and Plan of Merger by and
    between the Registrant and MetaTools, Inc., a California
    corporation (incorporated by reference from Exhibit 2.1 to
    the Registrants Registration Statement on Form SB-2,
    filed on December 11, 1995, as amended (File
    No. 33-98628LA))                                                                                                                                      
| | 2.2 |  |  | Stock Purchase Agreement between the Registrant
    and Real Time Geometry Corp. dated December 23, 1996
    (incorporated by reference from Exhibits 2.2, 10.22, 10.23,
    10.24 and 10.25 to the Registrants Current Report on
    Form 8-K, filed on January 15, 1997 (File
    No. 000-27168))                                                                                                                                         
| | 2.3 |  |  | Agreement and Plan of Reorganization, dated as of
    February 11, 1997, among MetaTools, Inc., a Delaware
    corporation, Fractal Design Corporation, a Delaware corporation,
    and Rook Acquisition Corp., a Delaware corporation and
    wholly-owned subsidiary of MetaTools (incorporated by reference
    from Annex A to the Registrants Registration Statement on
    Form S-4, filed on April 28, 1997 (File
    No. 333-25939))
| | 2.4 |  |  | Agreement and Plan of Merger among Fractal Design
    Corporation, a California corporation, and Rook Acquisition
    Corp., a Delaware corporation, dated as of May 29, 1997
    (incorporated by reference from Exhibit 2.2 to the
    Registrants Form 8-K, filed on June 13, 1997
    (File No. 000-27168))                                                                                                                             
| | 2.5 |  |  | Stock Purchase Agreement, dated as of
    August 23, 2000, by And between the Registrant and Computer
    Associates International, Inc. (incorporated by reference from
    Exhibit 2.1 to the Registrants Current Report on
    form 8-K, filed on September 8, 2000 (File
    No. 000-27168))                                                                                                                                            

Exhibit No. 3: Articles of
Incorporation and Bylaws

| |     |  |  |                                                                                                                                                                                                                                                   
| | --- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1 |  |  | Restated Certificate of Incorporation of
    Registrant (incorporated by reference from Exhibit 3.4 to
    the Registrants Annual Report on Form 10-K for the
    year ended December 31, 1995, filed on March 30, 1996
    (File No. 000-27168))
| | 3.2 |  |  | Certificate of Amendment of Restated Certificate
    of Incorporation of Registrant (incorporated by reference from
    Exhibit 2.3 to the Registrants Form 8-K, filed
    on June 13, 1997 (File No. 000-27168))                                
| | 3.3 |  |  | Bylaws of Registrant, as amended on July 24,
    1998 (incorporated by reference from Exhibit 3.6 to the
    Registrants Form 10-Q for the quarter ended
    June 30, 1998, filed on August 14, 1998 (File
    No. 000-27168))                   

Exhibit No. 4: Instruments Defining
the Rights of Security Holders

| |     |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.1 |  |  | Specimen of Common Stock Certificate of
    Registrant (incorporated by reference from Exhibit 2.4 to
    the Registrants Form 8-K, filed on June 13, 1997
    (File No. 000-27168))                                                                                                                                                                                                                                 
| | 4.2 |  |  | Amended and Restated Rights Agreement, dated as
    of June 24, 1999 between the Registrant and BankBoston,
    N.A., including form of Certificate of Designations, Rights
    Certificate and the Summary of Rights attached thereto as
    Exhibits A, B, and C respectively (incorporated by
    reference from Exhibit 4 to the Registrants
    Form 8-A/ A, filed on October 29, 1999 (File
    No. 000-27168))
| | 4.3 |  |  | Amendment No. 1 to Amended and Restated
    Rights Agreement, dated as of June 24, 1999 between the
    Registrant and BankBoston, N.A. (incorporated by reference from
    Exhibit 5 to the Registrants Form 8-A/A, filed
    on December 5, 2000 (File No. 000-27168))                                                                                                                                             

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Exhibit No. 10: Material
Contracts

Executive Compensation Plans and
Agreements

| |       |  |  |                                                                                                                                                                                                                                                                                          
| | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1  |  |  | 1994 Incentive Stock Option, Non-Qualified Stock
    Option and Restricted Stock Purchase Plan (incorporated by
    reference from Exhibit 10.4 to the Registrants
    Registration Statement on Form SB-2, filed on
    December 11, 1995, as amended
    (File No. 33-98628LA))       
| | 10.2  |  |  | 1995 Stock Plan, as amended on November 28,
    2000 (incorporated by reference from Exhibit 10.2 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2000 filed on March 30, 2001 (File
    No. 000-27168))                                          
| | 10.3  |  |  | 1995 Director Option Plan (incorporated by
    reference from Exhibit 10.7 to the Registrants
    Registration Statement on Form SB-2, filed on
    December 11, 1995, as amended (File No. 33-98628LA))                                                                                
| | 10.4  |  |  | 1996 Nonstatutory Stock Option Plan, as amended
    on June 29, 1999 (incorporated by reference from
    Exhibit 4.2 to the Registrants Registration Statement
    on Form S-8, filed on September 9, 1999 (File
    No. 333-86817))                                                    
| | 10.5  |  |  | Letter Agreement between the Registrant and
    Christopher Gentile, dated June 25, 1999 (incorporated by
    reference from Exhibit 10.19 to the Registrants
    Annual Report on Form 10-K for the year ended
    December 31, 2000 filed on March 30, 2001 (File
    No. 000-27168)) 
| | 10.6  |  |  | Letter Agreement between the Registrant and Paul
    J. Kadin, dated February 17, 2000 (incorporated by
    reference from Exhibit 10.18 to the Registrants
    Annual Report on Form 10-K for the year ended
    December 31, 2000 filed on March 30, 2001 (File
    No. 000-27168))   
| | 10.7  |  |  | Letter Agreement between the Registrant and
    Anders Vinberg, dated September 6, 2000 (incorporated by
    reference from the Registrants Form 10-Q for the
    quarter ended September 30, 2000, filed on
    November 14, 2000 (File No. 000-27168))                                
| | 10.8  |  |  | Letter Agreement between the Registrant and
    Jeffrey J. Kaplan, dated January 29, 2001 (incorporated by
    reference from Exhibit 10.17 to the Registrants
    Annual Report on Form 10-K for the year ended
    December 31, 2000 filed on March 30, 2001 (File
    No. 000-27168))
| | 10.9  |  |  | Promissory Issued by Jeffery J. Kaplan, dated
    April 2, 2001                                                                                                                                                                                                                          
| | 10.10 |  |  | Employment Agreement between the Registrant and
    Robert E. Rice dated December 17, 2001 (incorporated by
    reference from Exhibit 10.9 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    2001 filed on March 28, 2002 (File No. 000-27168))    
| | 10.11 |  |  | Letter Agreement between the Registrant and Mark
    S. Gray dated January 11, 2002 (incorporated by reference
    from Exhibit 10.10 to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002 filed on August 14, 2002 (File No. 000-27168))       
| | 10.12 |  |  | Letter Agreement between the Registrant and
    Thomas Morgan dated March 22, 2002 (incorporated by
    reference from Exhibit 10.11 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2002 filed on August 14, 2002 (File
    No. 000-27168))    

Other Material Contracts

| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                   
| | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.13 |  |  | Form of Indemnification Agreement for Executive
    Officers and Directors (incorporated by reference from
    Exhibit 10.1 to the Registrants Registration
    Statement on Form SB-2, filed on December 11, 1995, as
    amended (File No. 33-98628LA))                                                                                                        
| | 10.14 |  |  | Licensing and Services Agreement dated
    September 30, 1999 by and among MetaStream.com Corporation,
    Computer Associates International, Inc. and Registrant
    (incorporated by reference from Exhibit 10.27 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1999, filed on March 30, 2000 (File
    No. 000-27168))
| | 10.15 |  |  | Series A Preferred Stock Purchase Agreement
    and Related Exchange Agreement between the Registrant and
    American Online, Inc., dated June 12, 2000 (incorporated by
    reference from Exhibit 10.3 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2000, filed on August 21, 2000 (File
    No. 000-27168))       
| | 10.16 |  |  | Series B Preferred Stock Purchase Agreement
    and Related Exchange Agreement between the Registrant and Adobe
    Systems Incorporated dated July 18, 2000 (incorporated by
    reference from Exhibit 10.2 To the Registrants
    Form 10-Q for the quarter ended September 30, 2000,
    filed on November 14, 2000 (File No. 000-27168))                    

82



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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.17 |  |  | Exchange Agreement, dated as of August 10,
    2000, by and between the Registrant and Computer Associates
    International, Inc. (incorporated by reference from Annex A
    to the Registrants Proxy Statement filed on
    October 31, 2000 (File No. 000-27168))                                                                                                                                    
| | 10.18 |  |  | Securities Purchase Agreement, dated as of
    December 31, 2002, by and among The Registrant and the
    Buyers named therein, as amended by the Redemption, Amendment
    and Exchange Agreement, dated as of March 25, 2003, by and
    among the Registrant and the Buyers named therein (incorporated
    by reference from Exhibit 10.1 to Form 8-K filed by
    the Registrant on January 2, 2003).
| | 10.19 |  |  | Form of Replacement 4.95% Convertible Note of The
    Registrant, (incorporated by reference from Exhibit 10.2 to
    Form 8-K filed by the Registrant on January 2, 2003).                                                                                                                                                                                                                               
| | 10.20 |  |  | Form of Subsequent/ Additional 4.95% Convertible
    Note of The Registrant, (incorporated by reference from
    Exhibit 10.3 to Form 8-K filed by the Registrant on
    January 2, 2003).                                                                                                                                                                                                                
| | 10.21 |  |  | Form of Initial Warrant for Common Stock of The
    Registrant, (incorporated by reference from Exhibit 10.4 to
    Form 8-K filed by the Registrant on January 2, 2003).                                                                                                                                                                                                                                 
| | 10.22 |  |  | Form of Subsequent/ Additional Warrant for Common
    Stock of The Registrant, (incorporated by reference from
    Exhibit 10.5 to Form 8-K filed by the Registrant on
    January 2, 2003).                                                                                                                                                                                                              
| | 10.23 |  |  | Registration Rights Agreement, dated as of
    March 25, 2003, by and among The Registrant and the Buyers
    named therein, as amended by the Redemption, Amendment and
    Exchange Agreement, dated as of March 25, 2003, by and
    among the Registrant and the Buyers named therein, (incorporated
    by reference from Exhibit 10.6 to Form 8-K filed by
    the Registrant on January 2, 2003).  
| | 10.24 |  |  | Pledge Agreement, dated as of December 31,
    2002, by Viewpoint Corporation as Pledgor, in favor of
    Smithfield Fiduciary LLC as collateral agent, for the benefit of
    the holders named therein, (incorporated by reference from
    Exhibit 10.7 to Form 8-K filed by the Registrant on
    January 2, 2003).                                                                                   
| | 10.25 |  |  | Redemption, Amendment and Exchange Agreement,
    dated as of March 25, 2003, by and among the Registrant and
    Smithfield Fiduciary LLC (incorporated by reference from
    Exhibit 10.1 to Form 8-K filed by the Registrant on
    March 25, 2003).                                                                                                                                                   
| | 10.26 |  |  | Redemption, Amendment and Exchange Agreement,
    dated as of March 25, 2003, by and among The Registrant and
    Riverview Group, LLC (incorporated by reference from
    Exhibit 10.2 to Form 8-K filed by the Registrant on
    March 25, 2003).                                                                                                                                                       
| | 10.27 |  |  | Redemption, Amendment and Exchange Agreement,
    dated as of March 25, 2003, by and among The Registrant and
    Portside Growth & Opportunity Fund (incorporated by
    reference from Exhibit 10.3 to Form 8-K filed by the
    Registrant on March 25, 2003).                                                                                                                                         
| | 10.28 |  |  | Form of Redemption Warrant for Common Stock of
    The Registrant (incorporated by reference from Exhibit 10.9
    to Form 8-K filed by the Registrant on March 25, 2003).                                                                                                                                                                                                                                

Exhibit No. 21: Subsidiaries of the
Registrant

| |      |  |  |                                                                                                                                                                                                                                     
| | ---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 21.1 |  |  | Listing of Registrants Subsidiaries
    (incorporated by reference from Exhibit 21.1 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2000, filed on March 30, 2001 (File
    No. 000-27168))

Exhibit No. 23: Consents of Experts
and Counsel

| |      |  |  |                                                                   
| | ---- |  |  | ------------------------------------------------------------------
| | 23.1 |  |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants

Exhibit No. 24: Power of
Attorney

| |      |  |  |                                                                                           
| | ---- |  |  | ------------------------------------------------------------------------------------------
| | 24.1 |  |  | Power of Attorney (included on the signature
    pages of this Annual Report on Form 10-K)

Exhibit No. 99: Additional
Exhibits

| |      |  |  |                                                                                                                                
| | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------
| | 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.

(b) Reports on Form 8-K

None.

83



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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 31st day of March, 2003.



| |                      
| | ---------------------
| | VIEWPOINT CORPORATION



| |     |                   
| | --- | ------------------
| | By: | /s/ ROBERT E. RICE

| |                                          
| | -----------------------------------------
| |                                          
| | Robert E. Rice                           
| | President and Chief Executive
    Officer

Dated: March 31, 2003

POWER OF ATTORNEY

KNOW ALL PERSON BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Anthony L. Pane and Brian J. ODonoghue, his
attorneys-in-fact, with the power of substitution, for him and
any and all capacities, to sign any amendments to this Report on
Form 10-K, and to file same, with exhibits thereto and
other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitutes, may do or
cause to be done by virtue hereof.

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

|    |  |                                                                                                                                               |  |                      
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|By: |  | /s/ ROBERT E. RICERobert E. Rice
    Director, President and Chief Executive Officer (Principal
    Executive Officer)                        |  | Dated: March 31, 2003
|   
|By: |  | /s/ ANTHONY L. PANEAnthony L. Pane
    Senior Vice President and
    Chief Financial Officer (Principal
    Financial and Accounting Officer) |  | Dated: March 31, 2003
|   
|By: |  | /s/ THOMAS BENNETTThomas Bennett
    Director                                                                                                 |  | Dated: March 31, 2003
|   
|By: |  | /s/ JAMES CRABBEJames Crabbe
    Director                                                                                                     |  | Dated: March 31, 2003
|   
|By: |  | /s/ SAMUEL H. JONES, JR.Samuel H. Jones, Jr.
    Director                                                                                     |  | Dated: March 31, 2003
|   
|By: |  | Lennert J. Leader
    Director                                                                                                                |  |                      

84



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##### Table of Contents



CERTIFICATIONS

I, Robert E. Rice, certify that:

1. I have reviewed this annual report on
Form 10-K of Viewpoint 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
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and 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
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent 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
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                   
| | --- | ------------------
| | By: | /s/ ROBERT E. RICE

| |                                          
| | -----------------------------------------
| |                                          
| | Robert E. Rice                           
| | President and Chief Executive
    Officer

Dated: March 31, 2003

85



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##### Table of Contents



I, Anthony L. Pane, certify that:

1. I have reviewed this annual report on
Form 10-K of Viewpoint 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
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and 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
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent 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
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                    
| | --- | -------------------
| | By: | /s/ ANTHONY L. PANE

| |                          
| | -------------------------
| |                          
| | Anthony L. Pane          
| | Senior Vice President and
| | Chief Financial Officer  

Dated: March 31, 2003

86