##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|                                                |  |                                                                                                 
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|(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,
    2003
|                                               
|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 o          No þ

|                                                                                                        |  |   |            | 
|------------------------------------------------------------------------------------------------------- |  | - | ---------- | 
|Aggregate market value of voting stock held by
    non-affiliates of the registrant as of June 30, 2003 |  | $ | 54,263,000 | 
|Number of shares of common stock outstanding as
    of March 23, 2004                                   |  |   | 52,232,000 | 

DOCUMENTS INCORPORATED BY REFERENCE:

The information required by Part III of this
Report, to the extent not set forth herein, is incorporated
herein by reference from the registrants definitive proxy
statement relating to the annual meeting of stockholders to be
held in 2004, which definitive proxy statement shall be filed
with the Securities and Exchange Commission within 120 days
after the end of the fiscal year to which this Report relates.



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TABLE OF CONTENTS

|                                      |  |                                                                                                        |  |      |    | 
|------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                      |  |                                                                                                        |  | Page
|                                      |  |                                                                                                        |  |     
|PART I                               
|Item 1.                               |  | Business                                                                                               |  |      | 2  | 
|Item 2.                               |  | Properties                                                                                             |  |      | 8  | 
|Item 3.                               |  | Legal Proceedings                                                                                      |  |      | 8  | 
|Item 4.                               |  | Submission of Matters to a
    Vote of Security Holders                                                |  |      | 8  | 
|PART II                              
|Item 5.                               |  | Market for Registrants
    Common Stock and Related Stockholder Matters                               |  |      | 9  | 
|Item 6.                               |  | Selected Financial Data                                                                                |  |      | 10 | 
|Item 7.                               |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |      | 13 | 
|Item 7A.                              |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |  |      | 38 | 
|Item 8.                               |  | Financial Statements and
    Supplementary Data                                                        |  |      | 39 | 
|Item 9.                               |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |      | 76 | 
|Item 9A.                              |  | Controls and Procedures                                                                                |  |      | 76 | 
|PART III                             
|Item 10.                              |  | Directors and Executive
    Officers of the Registrant                                                 |  |      | 76 | 
|Item 11.                              |  | Executive Compensation                                                                                 |  |      | 76 | 
|Item 12.                              |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |      | 76 | 
|Item 13.                              |  | Certain Relationships and
    Related Transactions                                                     |  |      | 77 | 
|Item 14.                              |  | Principal Accountant Fees
    and Services                                                             |  |      | 77 | 
|PART IV                              
|Item 15.                              |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |  |      | 78 | 
|                                      |  | Signatures                                                                                             |  |      | 81 | 
|CONSENT OF PRICEWATERHOUSECOOPERS LLP
|CERTIFICATION OF CEO                 
|CERTIFICATION OF CFO                 
|CERTIFICATION OF CEO                 
|CERTIFICATION OF CFO                 



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##### Table of Contents






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 stated,
implied, or suggested 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 these factors as well as 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 2004. 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

Overview.Viewpoint
Corporation (Viewpoint or the Company)
is a leading provider of interactive media technologies and
services. Its graphics operating platform, the Viewpoint Media
Player, has been licensed by Fortune 500 companies and others
for use in online, offline and embedded applications serving a
wide variety of needs, including: marketing campaigns, rich
media online advertising, product presentations, and business
process visualizations.

On March 17, 2004, Viewpoint entered the
internet search business by launching a toolbar search product
which the Company calls the Viewpoint Toolbar. The
Viewpoint Toolbar attaches to the Internet Explorer browser,
enabling web surfers to conduct internet searches without
leaving the web page they are viewing. When a user enters a term
or phrase in the search field of the Viewpoint Toolbar, search
results appear not only as text links listed on a search results
page but also as thumbnail icons of the web pages themselves in
a tray that descends from the Viewpoint Toolbar.
Search results delivered to users of the Viewpoint Toolbar are
supplied by Yahoo! Inc. and its wholly-owned subsidiary,
Overture Services, Inc. Under its Agreement with
Yahoo!/Overture, Viewpoint receives a share of the fees
advertisers pay to Yahoo!/Overture to be listed in the search
results as a sponsored link.

Viewpoint also offers an online advertising
campaign management and deployment product known as
Creative Innovator. Creative Innovator permits
publishers, advertisers, and their agencies to manage the
process of deploying online advertising campaigns. This process
includes creating the advertising assets, selecting the sites on
which the advertisements will be deployed, setting the metrics
(ad rotation, the frequency with which an ad may be deployed,
and others) associated with the campaign, ad deployment, and
tracking of campaign results. Creative Innovator enables users
to manage advertising campaigns across many sites. In March
2004, Viewpoint announced the availability of
AirTime, an extension of Creative Innovator that
permits users to manage and deploy online video advertising
campaigns.

Until December 1999, the Company was primarily
engaged in the development, marketing, and sales of pre-packaged
software graphics products. Its principal products were computer
graphics painting tools and photo imaging 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 rich media on the
Internet. In June 1999, the Company formed Metastream
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
pre-packaged software business. The Company discontinued these
operations in April 2000 and Metastream merged with and into the
Company in November 2000.

The Viewpoint
Platform.The Viewpoint Platform
allows web sites and other media publishers to integrate a full
range of interactive graphics media technologies onto regular
web pages or through other

2



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digital formats. Available media types include:
photo-realistic 3D, video, audio, ZoomView  a
data on demand 2D image that users may pan and drill
into, text annotations and animations, Macromedia®
FlashTM-compatible vector graphics animations, object
movies, and immersive surround pictures. These interactive
digital media types can add dimension, contextual information,
animation, realistic color, shadows and real-time reflections,
movement and robust interactivity to static web objects. The
Viewpoint Platform enables users to better access and interact
with images and objects, mixing the narrative drive of more
traditional media with the interaction of the web, such that
users can rotate objects, view extended, narrowband friendly
presentations, configure colors, patterns and other options, all
while experiencing visual dimension and accuracy. The
interaction between the user and Viewpoint content can educate
users about a particular product, message or brand.


The Viewpoint Media Player (VMP) is
Viewpoints software product that resides on end
users computers  that is, on the client
side  that plays back digital content broadcast
from the servers of Viewpoints clients through the
Internet into end users browser and
non-browser environments.

The key principle behind Viewpoints
client-side software is to permit servers to transmit highly
compressed, digital information, rather than large files of
digital information with numerous pictures and text. Once this
compressed information is delivered and resident on the local
computer, the VMP then taps the power of the end users CPU
to decompress, display, and process this information
locally on that CPU. A user can then examine,
configure, interact with, and explore digital content without
requiring multiple trips to the server. The Company
believes that the VMPs ability to exploit client-side CPU
power is a significant competitive advantage.

Like Sun Microsystem, Inc.s Java or
Microsoft Corporations .NET platform, with which VMP can
interoperate, the Viewpoint Platform is a fundamentally
extensible web services architecture  a
graphics operating system for the web  focused on
high visual quality, multimedia integration, and data
visualization. Viewpoint media technologies are entirely
server-less, meaning deployment of such content
requires only standard HTTP servers on the broadcast end.

The Viewpoint platform employs an extensible
mark-up language (or XML) media
envelope, which enables Viewpoint content to
exchange data with back-end servers in real time and to perform
dynamic content configuration. Through this XML data description
format, Viewpoint digital content can seamlessly download and
extend new graphics services, which in turn may interpret and
convert different and new media types and formats that may be
referenced or embedded in digital content. This fundamental
extensibility is a key architecture advantage that has allowed
the Company to extend the feature set of the VMP continually
since its launch in the summer of 2000, providing an
instant upgrade ability. This design prevents the
lowest common denominator syndrome that affects web
technologies as they mature  with the Viewpoint
Platform, web publishers and content authors can be assured that
users have the latest features and enhancements of the VMP
platform.

As a form of efficient visual communication, the
Company believes the commercial applications of Viewpoint
technology are numerous. However, the Companys marketing
and sales initiatives have been in the following key areas:
website marketing and product presentations (particularly in the
automotive and consumer electronics vertical markets); online
advertising; enterprise applications, which entails building new
or enhancing existing software applications; and, recently, the
internet search business.

Viewpoint Professional Services

Viewpoint provides 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 group uses the Viewpoint Platform, as
well as a spectrum of tools and other technologies to create
enhanced rich media solutions for the clients particular
purpose, whether over the web, intranet systems or offline media
and applications. Our professional

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services group provides the support our clients
need to implement the rich media content, to fully utilize the
enhanced software, or to maximize the branding potential of the
advertising opportunity.


In addition to providing web services, our
professional services group also develops realistic digital
effects and animation for the entertainment and game industries,
film producers, major brands, advertising agencies and
commercial production houses.

Viewpoint Advertising

In 2002, the Company began tailoring its
offerings for use in online advertising. Viewpoint provides
advertisers the ability to utilize Viewpoint content to deliver
advertising over the Internet, either in-page within
a publishers standard advertising unit or
out-of-page through a pop-up, pop-under or separate
page. The Company believes that the Viewpoint Platform delivers
compelling interactive ad formats, tapping into a large
selection of media types and enabling advertisers to select from
a wide array of options for deploying creative and effective
advertisements.

In late 2002, the Company began development of
its Creative Innovator product which enables advertisers,
publishers, and their agencies to deploy and manage online
advertising campaigns. Through Creative Innovator, advertisers
can deploy content in the Viewpoint format as well as content in
other formats.

Viewpoint designed Creative Innovator to be the
first management system to integrate creative assembly with
campaign management and detailed performance analysis. Its
features include:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | Creative assembly for all industry-standard
    formats and technologies;               
|
| |  | Integration of multiple media types including 3D,
    Flash animations, audio and video;
|
| |  | Online video ad delivery;                                                               
|
| |  | Near real-time reporting; and                                                           
|
| |  | Detailed tracking and analysis.                                                         

Creative Innovator and its AirTime extension
entered the market formally with the announcement in February
2004 of the Companys one-year agreement with CBS
Sportsline.com, Inc. Viewpoint is currently marketing use
of Creative Innovator to publishers and advertisers and their
agencies and is pursuing other applications for Creative
Innovator as the market matures beyond strictly rich
media advertising.

Viewpoint Search

Viewpoints Graphically Enhanced Search
(GES) technology incorporates methods for
rendering, streaming, updating, and
skinning that were first developed for the VMP. Like
other offerings of its type, the Viewpoint Toolbar enables
consumers to search the Internet for goods, services and
information. Unlike other toolbars, however, Viewpoint
Toolbars architecture enables features such as visual
representations of search results and bookmarked
internet sites, automatic updating, generation of desktop
animations, and a bin for holding pop-up
advertisements while viewing web pages. Viewpoints
Graphically Enhance Search includes a tray that descends from
the Viewpoint Toolbar and presents side-by-side thumbnail-sized
images of the actual web pages comprising the search results.
This presentation provides users with graphical representations
of search results and enables users to canvas through search
results from left to right.

Search results delivered to users of the
Viewpoint Toolbar are supplied by Yahoo! and its wholly-owned
subsidiary, Overture Services, Inc., under an two-year
agreement in which Viewpoint receives a share of the revenue
from advertisers who pay Yahoo! for preferential positions in
the search results list.

Viewpoints Business Model

Licensing.The
Companys historic licensing model has differed from those
of other companies that have developed web site design and
content-creation software for sale or license to a target market
of Internet professionals including web site developers,
interactive agencies, solutions integrators, application service

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providers and content developers, as well as
professionals working in-house at e-merchants and other web site
owners. Instead of selling tools exclusively to Internet
professionals  a relatively small market 
the Company has sought to also license technology to the much
larger market of e-commerce merchants, web site owners and
others who benefit most from communicating visually in the
digital domain.


The Companys licensing strategy focuses on
charging customers for the right to broadcast digital content in
the Viewpoint format. Viewpoints technology is designed so
that content in the Viewpoint format that is broadcast or
otherwise distributed without a valid key can be
spoiled by a watermarking image.

We make available on our web site, without
charge, the core software necessary to develop Viewpoint
content, as well as extensive tutorials and related materials.
However, we are currently developing a content authoring
software product that we expect will improve upon the currently
available tools and make the process of authoring content in the
Viewpoint format easier. We anticipate that this product will be
available in 2004. We intend to license the product for a fee in
conjunction with broadcast licensing rights.

Another cornerstone of the business model is that
the VMP, representing the required client-side playback engine,
is free for users to play broadcasted content. After downloading
the player, users can receive all updates of the media player
software for free, seamlessly and without interruption of the
content.

Services.The
Companys professional services group plays an integral
role in its overall strategy. Professional services provide a
significant revenue opportunity through the sale of complete
solutions comprising technology and content creation services to
customers who have licensed our software and desire a single
vendor solution. At the same time, the group increases our
ability to sell licenses by enabling us to offer Viewpoint
content to clients who are impressed by the advantages of the
Viewpoint Platform but who do not wish to create Viewpoint
content themselves or trust that creation to others. Also, the
groups 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.
The Company is not totally reliant on its own content creation
services, however, as it has cultivated a network of thousands
of independent content developers trained to provide those
services as well.

The Companys professional services group
also performs specific 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 web sites, engineering
services create or alter software to enable clients to design
products, improve process workflow or enhance customer service
experiences.

Online Advertising.The Company offers use of its Creative Innovator ad deployment
system in the industry-standard manner of charging a fee based
on the number of times an advertisement is deployed (i.e., on a
CPM basis). CPM fees vary by type of advertisement,
with static ads realizing relatively low fees and rich media ads
realizing higher fees.

Search.Results of
Internet searches conducted through the Viewpoint Toolbar are
supplied by Yahoo! Inc. and its wholly-owned subsidiary Overture
Services, Inc. Under its Agreement with Yahoo!/Overture,
Viewpoint receives a share of the fees advertisers pay to
Yahoo!/Overture to be listed in the search results as a
sponsored link.

Competition

The Companys current software licensing
competitors (and some of their products) include:
Macromedia, Inc. (Flash and Shockwave) and Cycore AB
(Cult3D). Competitors for the Companys Creative Innovator
product include DoubleClick, ValueClick, Avenue A, and MSN.
Competitors for the Companys Search business include
Google Inc., Yahoo! (who offers its own search toolbar in
addition to supplying search results to Viewpoint for use with
the Viewpoint Toolbar), MSN, AskJeeves, Inc., Looksmart,
Ltd., FindWhat, and InfoSpace.

Some of the Companys competitors have
longer operating histories and significantly greater financial,
management, technology, development, sales, marketing and other
resources than the Company. As the

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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 with opportunities to
obtain a substantial market share in the Companys markets.

The Companys competitors may be able to
develop products or technologies comparable or superior to those
of the Company, or may be able to develop new products or
technologies more quickly. 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.
Such competition would adversely affect the Companys
business.

See the section headed Factors That May
Affect Future Results of Operations below for additional
information regarding competition.

Product Development

The continual development of new products and
enhancements to our existing products is critical to our
success. The Companys principal current product
development efforts are focused on the development of the
Viewpoint Platform and other technologies like Creative
Innovator and Graphically Enhanced Search. From time to time,
the Company may also acquire basic software technologies that it
considers complimentary to its offerings.

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.

The Companys research and development
expenses, exclusive of non-cash stock compensation charges, were
approximately $3,377,000, $3,636,000 and $6,926,000, for 2003,
2002 and 2001, 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. In addition, the Company
has filed U.S. and international patent applications covering
certain aspects of its proprietary technologies. 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.
In the past, the Company has licensed, 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.

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Employees

As of March 5, 2004, Viewpoint had 95 full
time employees, including 16 in sales and marketing;
29 in creative services; 29 in research, development
and quality assurance; and 21 in administration. This
compares to 141 full-time employees at March 28, 2003
including 40 in sales and marketing, 37 in creative
services, 49 in research, development and quality assurance
and 15 in administration. 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.

Executive Officers of the Registrant

The following table sets forth certain
information regarding the Companys executive officers as
of March 5, 2003:

|                    |  |     |    |          |  |                                          
|------------------- |  | --- | -- | -------- |  | -----------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|Jerry S. Amato      |  |     | 44 |          |  | President and Chief Executive Officer    
|William H. Mitchell |  |     | 46 |          |  | Chief Financial Officer                  
|Brian J. ODonoghue |  |     | 40 |          |  | Senior Vice President and General Counsel
|Robert E. Rice      |  |     | 49 |          |  | Executive Chairman                       

Jerry S. Amato, President and Chief Executive
Officer

Mr. Amato has been a director of the Company
and its Chief Executive Officer since August 2003. From July
1995 through September 1998, Mr. Amato served as President
and Chief Operating Officer of Vanstar Corporation, a leading
provider of services and products designed to build, manage and
enhance personal computer network infrastructures with 1998
revenues exceeding $2.8 billion. From September 1998 until
joining the Company in August 2003, Mr. Amato served as a
principal of the Flatiron Group in New York, a business
strategy and planning advisory service. In March 1998,
Mr. Amato led the formation of Technology Access Action
Coalition/ ACT, a Washington-based organization promoting
innovation and growth in the technology sector, and served as
its Chairman until November 1999.

William H. Mitchell, Chief Financial
Officer

Mr. Mitchell has served as Chief Financial
Officer of the Company since August 2003. From July 2002 to
August 2003, Mr. Mitchell served as Chief Financial Officer
of MaxWorldwide, Inc., an Internet-based provider of
marketing solutions for advertisers and web publishers. From
January 2001 to July 2002, Mr. Mitchell served as Chief
Financial Officer for Tally Systems, Inc., a software
development company. He served as Executive Vice President and
Chief Financial Officer of Bigfoot Interactive, an Internet
advertising company, from July 1999 to January 2001, and as
Chief Operating Officer of Bigfoot International from October
1998 to July 1999. Mr. Mitchell graduated with an A.B. from
Dartmouth College, MS and MS/ M.B.A. degrees from Northeastern
University and obtained his certified public accountant license
in 1982.

Brian J. ODonoghue, Senior 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. Mr. ODonoghue
received his Juris Doctorate from Fordham University School of
Law in 1995.

Robert E. Rice, Executive Chairman

Mr. Rice has been Executive Chairman since
August 2003. Prior to that Mr. Rice served as President and
Chief Executive Officer of Viewpoint 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

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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.







|        |           
|------- | ----------
|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 72 personnel, including substantially
all of the Companys general and administrative and
research and development personnel as well as a 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 18 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
searching for a sublease tenant for the property. The Company
has recorded a partial impairment for the costs associated with
maintaining this facility until it is able to sublease it.






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






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

The Annual Meeting of Stockholders of Viewpoint
Corporation was held on December 10, 2003. A proposal to
elect six (6) members of the Board of Directors to serve
for a one-year term expiring at the annual meeting of
stockholders in 2004 was approved by the stockholders. The
nominees received the following votes:

|                     |  |           |            |                |  |  |           | 
|-------------------- |  | --------- | ---------- | -------------- |  |  | --------- | 
|Name                 |  | Votes For |            | Votes Withheld
|                     |  |           |            |               
|Jerry S. Amato       |  |           | 28,754,306 |                |  |  | 1,049,010 | 
|Thomas Bennett       |  |           | 29,656,701 |                |  |  | 146,615   | 
|James Crabbe         |  |           | 29,687,860 |                |  |  | 115,456   | 
|Stephen Duff         |  |           | 29,699,583 |                |  |  | 103,733   | 
|Samuel H. Jones, Jr. |  |           | 29,647,437 |                |  |  | 155,879   | 
|Robert E. Rice       |  |           | 28,522,198 |                |  |  | 1,281,118 | 

In addition, stockholders ratified the
appointment of PricewaterhouseCoopers LLP as independent public
accountants of the Company for the 2003 fiscal year. This
proposal received 29,640,704 votes in favor and 143,899 against,
with 18,713 abstaining.

8



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##### Table of Contents






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 23,
2004, there were 324 holders of record of our common stock. Some
of the holders of record of Viewpoint common stock are brokers
and other institutions that hold stock on behalf of their
customers. We estimate that approximately 10,000 stockholders
hold shares of Viewpoint common stock through the brokers and
other institutions. The following table sets forth, for the
periods indicated, the range of high and low closing sales
prices per share of our common stock:

|            |  |      |      |     |  |   |      | 
|----------- |  | ---- | ---- | --- |  | - | ---- | 
|            |  | High |      | Low
|            |  |      |      |    
|2003        |  |      |      |     |  |   |      | 
|4th Quarter |  | $    | 1.01 |     |  | $ | 0.68 | 
|3rd Quarter |  |      | 1.64 |     |  |   | 0.72 | 
|2nd Quarter |  |      | 1.37 |     |  |   | 0.43 | 
|1st Quarter |  |      | 1.83 |     |  |   | 0.30 | 
|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 | 

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 2004 annual meeting of
stockholders and is incorporated herein by reference.

9



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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,             
|                                                                      |                                                                                                                |                                      
|                                                                      |                                                                                                                | 2003                                  |         | 2002   |   | 2001 |         | 2000   |   | 1999
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |     
|                                                                      |                                                                                                                |                                      
|                                                                      |                                                                                                                | (In thousands, except per share data)
|Statements of Operations Data                                         |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Revenues:                                                             |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|                                                                      | Licenses                                                                                                       |                                       | $       | 2,283  |   |      | $       | 5,039  |   |      | $       | 8,148  |   |   | $       | 1,421  |   |   | $       | 1,868 |  
|                                                                      | Related party licenses                                                                                         |                                       |         | 1,729  |   |      |         | 7,554  |   |      |         | 1,533  |   |   |         |       |   |   |         | 950   |  
|                                                                      | Services                                                                                                       |                                       |         | 4,291  |   |      |         | 3,302  |   |      |         | 3,500  |   |   |         | 1,659  |   |   |         | 25    |  
|                                                                      | Related party services                                                                                         |                                       |         | 5,226  |   |      |         | 2,244  |   |      |         | 827    |   |   |         | 500    |   |   |         | 250   |  
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Total revenues                                                        |                                                                                                                |                                       | 13,529  |        |   |      | 18,139  |        |   |      | 14,008  |        |   |   | 3,580   |        |   |   | 3,093   |      
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Cost of Revenues:                                                     |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|                                                                      | Licenses                                                                                                       |                                       |         | 97     |   |      |         | 353    |   |      |         | 309    |   |   |         | 76     |   |   |         |      |  
|                                                                      | Services                                                                                                       |                                       |         | 5,776  |   |      |         | 3,587  |   |      |         | 3,283  |   |   |         | 1,467  |   |   |         |      |  
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|                                                                      | Total cost of revenues                                                                                         |                                       |         | 5,873  |   |      |         | 3,940  |   |      |         | 3,592  |   |   |         | 1,543  |   |   |         |      |  
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Gross profit                                                          |                                                                                                                |                                       | 7,656   |        |   |      | 14,199  |        |   |      | 10,416  |        |   |   | 2,037   |        |   |   | 3,093   |      
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Operating expenses:                                                   |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|                                                                      | Sales and marketing                                                                                            |                                       |         | 8,723  |   |      |         | 16,682 |   |      |         | 17,521 |   |   |         | 18,616 |   |   |         | 3,000 |  
|                                                                      | Research and development                                                                                       |                                       |         | 4,209  |   |      |         | 4,348  |   |      |         | 9,846  |   |   |         | 10,559 |   |   |         | 5,055 |  
|                                                                      | General and administrative                                                                                     |                                       |         | 11,549 |   |      |         | 10,334 |   |      |         | 10,423 |   |   |         | 9,814  |   |   |         | 6,993 |  
|                                                                      | Depreciation                                                                                                   |                                       |         | 1,543  |   |      |         | 1,962  |   |      |         | 1,804  |   |   |         | 801    |   |   |         | 406   |  
|                                                                      | Amortization of intangible assets(1),(2)                                                                       |                                       |         | 10     |   |      |         | 664    |   |      |         | 3,325  |   |   |         | 1,258  |   |   |         | 75    |  
|                                                                      | Amortization of goodwill(1)                                                                                    |                                       |         |       |   |      |         |       |   |      |         | 14,128 |   |   |         | 1,767  |   |   |         |      |  
|                                                                      | Restructuring charges(3)                                                                                       |                                       |         | 2,023  |   |      |         |       |   |      |         |       |   |   |         |       |   |   |         |      |  
|                                                                      | 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(4)                                                                        |                                       |         |       |   |      |         |       |   |      |         |       |   |   |         | 19,998 |   |   |         |      |  
|                                                                      | Acquired in-process research and development
    costs(1)                                                      |                                       |         |       |   |      |         |       |   |      |         |       |   |   |         | 963    |   |   |         |      |  
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Total operating expenses                                              |                                                                                                                |                                       | 28,057  |        |   |      | 40,265  |        |   |      | 64,972  |        |   |   | 66,098  |        |   |   | 15,529  |      
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Loss from operations                                                  |                                                                                                                |                                       | (20,401 | )      |   |      | (26,066 | )      |   |      | (54,556 | )      |   |   | (64,061 | )      |   |   | (12,436 | )    
|Other income (expense):                                               |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|                                                                      | Interest and other income, net                                                                                 |                                       |         | 254    |   |      |         | 153    |   |      |         | 1,064  |   |   |         | 2,180  |   |   |         | 2,286 |  
|                                                                      | Interest expense(5)                                                                                            |                                       |         | (958   | ) |      |         |       |   |      |         |       |   |   |         |       |   |   |         |      |  
|                                                                      | Changes in fair values of warrants to purchase
    common stock and conversion options of convertible notes(5) |                                       |         | 1,209  |   |      |         |       |   |      |         |       |   |   |         |       |   |   |         |      |  
|                                                                      | Loss on early extinguishment of debt(5)                                                                        |                                       |         | (1,682 | ) |      |         |       |   |      |         |       |   |   |         |       |   |   |         |      |  
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Other income (expense)                                                |                                                                                                                |                                       | (1,177  | )      |   |      | 153     |        |   |      | 1,064   |        |   |   | 2,180   |        |   |   | 2,286   |      
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Loss before provision for income taxes                                |                                                                                                                |                                       | (21,578 | )      |   |      | (25,913 | )      |   |      | (53,492 | )      |   |   | (61,881 | )      |   |   | (10,150 | )    
|Provision for income taxes                                            |                                                                                                                |                                       | 81      |        |   |      | 107     |        |   |      |        |        |   |   |        |        |   |   | 5,481   |      
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Loss before minority interest in loss of
    subsidiary               |                                                                                                                |                                       | (21,659 | )      |   |      | (26,020 | )      |   |      | (53,492 | )      |   |   | (61,881 | )      |   |   | (15,631 | )    
|Minority interest in loss of subsidiary                               |                                                                                                                |                                       |        |        |   |      |        |        |   |      |        |        |   |   | 4,429   |        |   |   | 1,048   |      
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Net loss from continuing operations                                   |                                                                                                                |                                       | (21,659 | )      |   |      | (26,020 | )      |   |      | (53,492 | )      |   |   | (57,452 | )      |   |   | (14,583 | )    
|Discontinued operations:                                              |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Loss from discontinued operations                                     |                                                                                                                |                                       |        |        |   |      |        |        |   |      |        |        |   |   |        |        |   |   | (14,811 | )    
|Adjustment to net loss on disposal of
    discontinued operations     |                                                                                                                |                                       | 157     |        |   |      | 127     |        |   |      | 1,122   |        |   |   | 1,496   |        |   |   | (21,260 | )    
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Net income (loss) from discontinued operations(4)                     |                                                                                                                |                                       | 157     |        |   |      | 127     |        |   |      | 1,122   |        |   |   | 1,496   |        |   |   | (36,071 | )    
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Net loss                                                              |                                                                                                                |                                       | (21,502 | )      |   |      | (25,893 | )      |   |      | (52,370 | )      |   |   | (55,956 | )      |   |   | (50,654 | )    
|Accretion of mandatorily redeemable preferred
    stock of subsidiary |                                                                                                                |                                       |        |        |   |      |        |        |   |      |        |        |   |   | (438    | )      |   |   |        |      
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Net loss applicable to common stockholders                            |                                                                                                                | $                                     | (21,502 | )      |   | $    | (25,893 | )      |   | $    | (52,370 | )      |   | $ | (56,394 | )      |   | $ | (50,654 | )    
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Basic and diluted net loss per common share:                          |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|                                                                      | Net loss per common share from continuing
    operations                                                       |                                       | $       | (0.47  | ) |      | $       | (0.64  | ) |      | $       | (1.37  | ) |   | $       | (2.01  | ) |   | $       | (0.59 | )
|                                                                      | Net income (loss) per common share from
    discontinued operations                                            |                                       |         | 0.00   |   |      |         | 0.00   |   |      |         | 0.03   |   |   |         | 0.05   |   |   |         | (1.47 | )
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Net loss per common share                                             |                                                                                                                | $                                     | (0.47   | )      |   | $    | (0.64   | )      |   | $    | (1.34   | )      |   | $ | (1.96   | )      |   | $ | (2.06   | )    
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      
|Weighted average number of shares
    outstanding  basic and diluted |                                                                                                                |                                       | 45,280  |        |   |      | 40,759  |        |   |      | 39,077  |        |   |   | 28,718  |        |   |   | 24,581  |      
|                                                                      |                                                                                                                |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |      

10



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##### Table of Contents



|                                                           |  |                |        |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |        | 
|---------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- |  |  | - | ------ | 
|                                                           |  |               
|                                                           |  | December 31,  
|                                                           |  |               
|                                                           |  | 2003           |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                           |  |                |        |      |  |      |        |      |  |     
|                                                           |  |               
|                                                           |  | (In thousands)
|Balance Sheet Data                                         |  |                |        |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |        | 
|Cash, cash equivalents and marketable
    securities(4)(7) |  | $              | 9,488  |      |  | $    | 11,568 |      |  | $    | 15,122 |  |  | $ | 29,033  |  |  | $ | 37,247 | 
|Working capital(3)(5)(7)                                   |  |                | 3,324  |      |  |      | 9,051  |      |  |      | 11,765 |  |  |   | 34,313  |  |  |   | 33,638 | 
|Total assets(1)(2)(5)                                      |  |                | 45,743 |      |  |      | 53,352 |      |  |      | 61,917 |  |  |   | 102,349 |  |  |   | 50,574 | 
|Convertible notes, subordinated notes and
    warrants(6)  |  |                | 4,748  |      |  |      | 7,000  |      |  |      |       |  |  |   |        |  |  |   |       | 
|Stockholders equity(1)(4)(7)                              |  |                | 27,467 |      |  |      | 38,352 |      |  |      | 52,737 |  |  |   | 96,339  |  |  |   | 29,901 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 fiscal 2003, the Company implemented three
    restructuring plans. The first plan, implemented in February
    2003, reduced operating expenses by closing the Companys
    Utah office and terminating 28 employees in that office who were
    primarily engaged in sales and marketing activities. In
    accordance with SFAS No. 146 Accounting for
    Costs Associated with Exit or Disposal Activities, the
    Company recorded restructuring charges of $1,211,000. The
    restructuring charges represent the fair value of remaining
    lease commitments reduced by estimated sublease rental income,
    employee severance and termination benefits, the write-off of
    the net book value of certain fixed assets used in the Utah
    office, and other miscellaneous charges. Subsequent to the
    restructuring, the Company re-evaluated market conditions
    surrounding its efforts to sub-lease the Utah office space and
    increased the restructuring charge by $249,000 related to the
    fair value of remaining lease commitments reduced by estimated
    sublease rental income. The Company believes that it may be
    necessary to adjust our estimate of sublease income in the
    future as our ability to sublease the property is contingent
    upon real estate and other market conditions in Utah.

11



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The second plan was implemented in September
    2003, and was designed to streamline the business. Under the
    plan the Company eliminated 24 research and development, sales
    and marketing, and general and administrative positions. The
    Company incurred a restructuring charge of $463,000 related to
    severance. The charge is recorded on our income statement as a
    restructuring and impairment charge. The second restructuring
    plan was completed by September 30, 2003. In November 2003,
    however, the Company increased the restructuring charge by
    $50,000 in settlement of an action brought by one of the
    terminated employees.
|
| | The third plan was implemented in December 2003,
    and was designed to consolidate international operations to the
    New York office. Accordingly the Company closed the London,
    England office incurring a restructuring charge of $52,000
    primarily related to severance. The charge is recorded on the
    income statement as a restructuring charge. The third
    restructuring plan was completed by December 31, 2003.                                                                                                                                                                                                                                     



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | 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.
|   
|(5) | In December 1999, the Board of Directors of the
    Company approved a plan to focus exclusively on the
    Companys 3D and rich media visualization and marketing
    technologies, and to correspondingly divest itself of all its
    prepackaged graphics software business. Consequently, the
    results of operations of the prepackaged graphics software
    business have been classified as net income (loss) from
    discontinued operations for the years ended December 31,
    1997 through 2002.                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(6) | On December 31, 2002, the Company completed
    a debt financing in which it issued to three investors,
    4.95% convertible notes having an aggregate principle
    amount of $7,000,000, and warrants to purchase
    726,330 shares of Company common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 25, 2003 the Company redeemed an
    aggregate of $3,300,000 principal amount of the outstanding
    convertible notes, exchanged an aggregate of $1,000,000
    principal amount of the outstanding convertible notes for shares
    of the Companys common stock, and exchanged the remaining
    $2,700,000 principal amount of outstanding convertible notes for
    $2,700,000 principal amount of new convertible notes.
|
| | In connection with the redemption of the
    convertible notes the Company recorded a $1,682,000 loss on the
    early extinguishment of debt.                                                                                                                                                                                                                                                                                          
|
| | On March 26, 2003, the Company entered into
    a Securities Purchase Agreement with three other accredited
    investors pursuant to which it received $3,500,000 in exchange
    for an aggregate of $3,500,000 principal amount of subordinated
    notes and 3,614,756 shares of Viewpoint common stock.                                                                                                                            



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7) | In November 2003, the Company sold
    3,125,000 shares of common stock, in a private placement to
    Federal Partners, L.P., an affiliate of The Clark
    Estates, Inc. for $2,500,000 or $0.80 per share. Under
    the terms of the investment, the Company was obliged to file a
    registration statement covering the resale of the shares within
    45 days of the closing date, which occurred on
    November 12, 2003. The Company filed the registration
    statement on December 27, 2003.

12



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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. 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 2004.
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

Overview.Viewpoint
Corporation (Viewpoint or the Company)
is a leading provider of interactive media technologies and
services. Its graphics operating platform, the Viewpoint Media
Player, has been licensed by Fortune 500 companies and others
for use in online, offline and embedded applications serving a
wide variety of needs, including: marketing campaigns, rich
media online advertising, product presentations, and business
process visualizations.

On March 17, 2004, Viewpoint entered the
internet search business by launching a toolbar search product
which the Company calls the Viewpoint Toolbar. The
Viewpoint Toolbar attaches to the Internet Explorer browser,
enabling web surfers to conduct internet searches without
leaving the web page they are viewing. When a user enters a term
or phrase in the search field of the Viewpoint Toolbar, search
results appear not only as text links listed on a search results
page but also as thumbnail icons of the web pages themselves in
a tray that descends from the Viewpoint Toolbar.
Search results delivered to users of the Viewpoint Toolbar are
supplied by Yahoo! Inc. and its wholly-owned subsidiary,
Overture Services, Inc. Under its Agreement with
Yahoo!/Overture, Viewpoint receives a share of the fees
advertisers pay to Yahoo!/Overture to be listed in the search
results as a sponsored link.

Viewpoint also offers an online advertising
campaign management and deployment product known as
Creative Innovator. Creative Innovator permits
publishers, advertisers, and their agencies to manage the
process of deploying online advertising campaigns. This process
includes creating the advertising assets, selecting the sites on
which the advertisements will be deployed, setting the metrics
(ad rotation, the frequency with which an ad may be deployed,
and others) associated with the campaign, ad deployment, and
tracking of campaign results. Creative Innovator enables users
to manage advertising campaigns across many sites. In March
2004, Viewpoint announced the availability of
AirTime, an extension of Creative Innovator that
permits users to manage and deploy online video advertising
campaigns.

Until December 1999, the Company was primarily
engaged in the development, marketing, and sales of pre-packaged
software graphics products. Its principal products were computer
graphics painting tools and photo imaging 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 rich media on the
Internet. In June 1999, the Company formed Metastream
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
pre-packaged software business. The Company discontinued these
operations in April 2000 and Metastream merged with and into the
Company in November 2000.

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##### Table of Contents



Viewpoint has a limited operating history upon
which an evaluation of the Company and its prospects can be
based. Viewpoint has had significant quarterly and annual
operating losses since its inception, and, as of
December 31, 2003, had an accumulated deficit of
$245,579,000. 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.

14



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##### Table of Contents



Results of Operations

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

|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |     |  
|--------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------ | ---- | ---- | - | ---- | ---- | -- | - |  | ---- | --- | -
|                                                                      |                                                                                                             |                         
|                                                                      |                                                                                                             | Years Ended December 31,
|                                                                      |                                                                                                             |                         
|                                                                      |                                                                                                             | 2003                     |      | 2002 |   | 2001
|                                                                      |                                                                                                             |                          |      |      |   |     
|Statements of Operations Data                                         |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Revenues:                                                             |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|                                                                      | Licenses                                                                                                    |                          |      | 17   | % |      |      | 28 | % |  |      | 58  | %
|                                                                      | Related party licenses                                                                                      |                          |      | 13   |   |      |      | 42 |   |  |      | 11  |  
|                                                                      | Services                                                                                                    |                          |      | 32   |   |      |      | 18 |   |  |      | 25  |  
|                                                                      | Related party services                                                                                      |                          |      | 38   |   |      |      | 12 |   |  |      | 6   |  
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Total revenues                                                        |                                                                                                             |                          | 100  |      |   |      | 100  |    |   |  | 100  |    
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Cost of revenues:                                                     |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|                                                                      | Licenses                                                                                                    |                          |      | 1    |   |      |      | 2  |   |  |      | 2   |  
|                                                                      | Services                                                                                                    |                          |      | 42   |   |      |      | 20 |   |  |      | 24  |  
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Total cost of revenues                                                |                                                                                                             |                          | 43   |      |   |      | 22   |    |   |  | 26   |    
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Gross profit                                                          |                                                                                                             |                          | 57   |      |   |      | 78   |    |   |  | 74   |    
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Operating expenses:                                                   |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|                                                                      | Sales and marketing (including non-cash
    stock-based compensation charges)                               |                          |      | 64   |   |      |      | 92 |   |  |      | 125 |  
|                                                                      | Research and development (including non-cash
    stock-based compensation charges)                          |                          |      | 32   |   |      |      | 24 |   |  |      | 70  |  
|                                                                      | General and administrative (including non-cash
    stock-based compensation charges)                        |                          |      | 86   |   |      |      | 56 |   |  |      | 73  |  
|                                                                      | Depreciation                                                                                                |                          |      | 11   |   |      |      | 11 |   |  |      | 13  |  
|                                                                      | Restructuring charges related to office closure                                                             |                          |      | 15   |   |      |      |   |   |  |      |    |  
|                                                                      | Amortization of intangible assets                                                                           |                          |      |     |   |      |      | 4  |   |  |      | 24  |  
|                                                                      | Amortization of goodwill                                                                                    |                          |      |     |   |      |      |   |   |  |      | 101 |  
|                                                                      | Impairment of goodwill and other intangible assets                                                          |                          |      |     |   |      |      | 35 |   |  |      | 57  |  
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Total operating expenses                                              |                                                                                                             |                          | 208  |      |   |      | 222  |    |   |  | 463  |    
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Loss from operations                                                  |                                                                                                             |                          | (151 | )    |   |      | (144 | )  |   |  | (389 | )  
|Other income (expense):                                               |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|                                                                      | Interest and other income, net                                                                              |                          |      | 2    |   |      |      | 1  |   |  |      | 7   |  
|                                                                      | Interest expense                                                                                            |                          |      | (7   | ) |      |      |   |   |  |      |    |  
|                                                                      | Changes in fair values of warrants to purchase
    common stock and conversion options of convertible notes |                          |      | 9    |   |      |      |   |   |  |      |    |  
|                                                                      | Loss on early extinguishment of debt                                                                        |                          |      | (12  | ) |      |      |   |   |  |      |    |  
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Other income (expense)                                                |                                                                                                             |                          | (8   | )    |   |      | 1    |    |   |  | 7    |    
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Loss before provision for income taxes                                |                                                                                                             |                          | (159 | )    |   |      | (143 | )  |   |  | (382 | )  
|Provision for income taxes                                            |                                                                                                             |                          | 1    |      |   |      | (1   | )  |   |  |     |    
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Loss before minority interest in loss of
    subsidiary               |                                                                                                             |                          | (160 | )    |   |      | (144 | )  |   |  | (382 | )  
|Minority interest in loss of subsidiary                               |                                                                                                             |                          |     |      |   |      |     |    |   |  |     |    
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Net loss from continuing operations                                   |                                                                                                             |                          | (160 | )    |   |      | (144 | )  |   |  | (382 | )  
|Adjustment to net loss on disposal of
    discontinued operations     |                                                                                                             |                          | 1    |      |   |      | 1    |    |   |  | 8    |    
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Net loss                                                              |                                                                                                             |                          | (159 | )    |   |      | (143 | )  |   |  | (374 | )  
|Accretion of mandatorily redeemable preferred
    stock of subsidiary |                                                                                                             |                          |     |      |   |      |     |    |   |  |     |    
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    
|Net loss applicable to common stockholders                           |                                                                                                             |                          | (159 | )%   |   |      | (143 | )% |   |  | (374 | )% 
|                                                                      |                                                                                                             |                          |      |      |   |      |      |    |   |  |      |    

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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 principles 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 expenses, and related disclosure of contingent
assets and liabilities. 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.

Described below are the areas where we believe
that the estimates, judgments or assumptions that we have made,
if different, would have yielded the most significant
differences in our financial statements:



| |                         
| | ------------------------
| | Percentage of Completion

The Company recognizes revenue in accordance with
Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended, Emerging Issues Task
Force (EITF) Issue No. 00-21 Revenue
Arrangements with Multiple Deliverables, Staff Accounting
Bulletin (SAB) No. 101 Revenue
Recognition in Financial Statements and SAB No. 104
Revenue Recognition. Per SOP 97-2 and SAB
No. 101, the Company recognizes revenue when the following
criteria are met: (a) persuasive evidence of an arrangement
exists, (b) delivery has occurred or services have been
rendered, (c) the Companys fee is fixed or
determinable, and (d) collectibility is reasonably assured.

Fee-based professional services for customized
software development are performed on a fixed-fee or
time-and-materials basis under separate service arrangements.
Revenues for fixed-fee arrangements are recognized over the
pattern of performance in accordance with the provisions of SAB
No. 101. The pattern of performance for service
arrangements is measured by the percentage of costs incurred and
accrued to date for each contract, which primarily consist of
direct labor costs, cost of outsourcing, and overhead, to the
estimated total cost for each contract at completion. The
percentage approximates the percentage of a customers
contract that has been completed and would be available for the
customer to use at that point in time. Use of this method is
based on the availability of reasonably dependable estimates. If
reasonably dependable estimates are not available due to the
complexity of the services to be performed, the Company defers
recognition of any revenues for the project until the project is
completed, delivered and accepted by the customer, provided all
other revenue recognition criteria are met and no further
significant obligations exist.



| |                     
| | --------------------
| | Reserve for Bad Debt

The Company performs ongoing credit evaluations
of our customers and adjusts credit limits based upon payment
history and the customers current credit worthiness, as
determined by a review of their current credit information. The
Company regularly monitors collections and payments from the
customers and maintains a provision for estimated credit losses
based upon historical experience and any specific customer
collection issues that have been identified.



| |                                                
| | -----------------------------------------------
| | Valuation of Goodwill and Intangible
    Assets

Effective January 1, 2002, we adopted
SFAS No. 142, Goodwill and Other Intangible
Assets and SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets.
SFAS 142 eliminates the amortization of goodwill and
indefinite-lived intangible assets, addresses the amortization
of intangible assets with finite lives and addresses impairment
testing and recognition for goodwill and intangible assets.
SFAS No. 144 establishes a single model for the
impairment of long-lived assets.

We assess goodwill for impairment annually unless
events occur that require more frequent reviews. Long-lived
assets, including amortizable intangibles, are tested for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Discounted cash flow

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##### Table of Contents



analyses are used to assess nonamortizable
intangible impairment while undiscounted cash flow analyses are
used to assess long-lived asset impairment. If an assessment
indicates impairment, the impaired asset is written down to its
fair market value based on the best information available.
Estimated fair market value is generally measured with
discounted estimated future cash flows. Considerable management
judgment is necessary to estimate undiscounted and discounted
future cash flows. Assumptions used for these cash flows are
consistent with internal forecasts.


On an on-going basis, management reviews the
value and period of amortization or depreciation of long-lived
assets, including goodwill and other intangible assets. During
this review, we re-evaluate the significant assumptions used in
determining the original cost of long-lived assets. Although the
assumptions may vary from transaction to transaction, they
generally include revenue growth, operating results, cash flows
and other indicators of value. Management then determines
whether there has been an impairment of the value of long-lived
assets based upon events or circumstances that have occurred
since acquisition. The impairment policy is consistently applied
in evaluating impairment for each of our wholly owned
subsidiaries and investments.



| |            
| | -----------
| | Investments

We record an impairment charge when we believe an
investment asset has experienced a decline in value that is
other than temporary. Future adverse changes in market
conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying
value of the investments that may not be reflected in an
investments current carrying value, thereby possibly
requiring an impairment charge in the future.



| |            
| | -----------
| | Derivatives

The Company accounts for the fair values of
warrants to purchase common stock and conversion options of its
convertible notes in accordance with SFAS No. 133
Accounting for Derivative Instruments and Hedging
Activities, and EITF Issue No. 00-19 Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock, which requires the
Company to bifurcate and separately account for its embedded
derivatives contained in the Companys convertible notes.
The Company is required to carry these embedded derivatives on
its balance sheet at fair value and the unrealized changes in
the value of these embedded derivatives are reflected in net
loss as changes in fair values of warrants to purchase common
stock and conversion options of convertible notes. Valuation
determined using certain assumptions related to the volatility
and risk free interest rate.



| |                             
| | ----------------------------
| | Contingencies and Litigation

We evaluate contingent liabilities including
threatened or pending litigation in accordance with
SFAS No. 5, Accounting for Contingencies
and record accruals when the outcome of these matters is deemed
probable and the liability is reasonably estimable. We make
these assessments based on the facts and circumstances and in
some instances based in part on the advice of outside legal
counsel.



| |                         
| | ------------------------
| | Restructuring Activities

Restructuring activities are accounted for in
accordance with SFAS No. 146. SFAS No. 146
requires, with respect to the recognition of severance expenses,
management approval of the restructuring plan, the determination
of the employees to be terminated, communication of benefit
arrangements to employees and, with respect to costs associated
with lease terminations, an estimation of sublease payments.

Financial Performance Summary

During 2003, we experienced a 25% reduction in
revenues to $13,529,000 and a 46% reduction in gross profit to
$7,656,000, as compared to the prior year. Sales for large
long-term licenses of our software decreased substantially. This
was due to our difficulties in selling large long-term license
arrangements, difficulties that Value Added Resellers
(VARs) had selling our software in 2003, and the
execution of a long term license arrangement with AOL in 2002.
We experienced growth in services revenues during 2003 as
certain long term

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##### Table of Contents



licensees, including AOL, utilized our services
team to help them develop content for use with their Viewpoint
licenses. This increased reliance on lower margin services
revenue led to a reduction in our gross profit margin to 57% in
2003 compared to 78% in 2002.


Our net loss in 2003 was $21,502,000 compared to
$25,893,000 in 2002. Our total operating expenses decreased by
approximately $12,208,000 to $28,057,000 in 2003. This reduction
in expenses was attributable to a reduction in operating
department expenses of $6,883,000 due to reductions in the
number of employees including a $2,715,000 reduction in non-cash
stock-based compensation charges. The reduction in employees was
largely attributable to steps we took to reduce expenses as
demand for software license purchases decreased. Additionally,
we recorded a non-recurring impairment charge on goodwill of
$6,275,000 in 2002. These cost reductions were offset by
increases in costs for restructurings of $2,023,000 that were
initiated in 2003.

Our net loss per common share decreased 27% to
$0.47 in 2003 compared to $0.64 in 2002. This reduction came as
a result of the decreased net loss and an increase in weighted
average shares outstanding to 45,280,000 in 2003 from 40,759,000
in 2002. The increase in common shares was principally due to
three private placements of common stock in 2003. The Company
refinanced $7,000,000 of convertible debt in 2003 from the
issuance of approximately 1,400,000 shares of common stock,
$2,700,000 of debt convertible to 2,600,000 shares of
common stock, and $3,500,000 of subordinated debt. We also
raised $2,500,000 through the private sale of
3,125,000 shares of common stock in November 2003.

The Company concluded 2003 with a cash and
marketable securities balance of $9,488,000. Our net cash loss
for 2003 (defined as our net loss excluding non-cash or
non-recurring items including depreciation of $1,543,000 for the
year and $238,000 for the fourth quarter, amortization of
$10,000 for the year and $1,000 for the fourth quarter, non-cash
stock-based compensation charges of $2,707,000 for the year and
$327,000 for the fourth quarter, changes in fair values of
warrants to purchase common stock and conversion feature of
convertible notes related to income of $1,209,000 for the year
and $199,000 for the fourth quarter, loss on early
extinguishment of debt of $1,682,000 for the year and $0 for the
fourth quarter, and restructuring charges of 2,023,000 for the
year and $138,000 for the fourth quarter) was $14,746,000 of
which $2,703,000 occurred during the fourth quarter of 2003. The
Company may need to pay up to $1,775,000 to redeem its
convertible notes after June 30, 2004 if our stock price
falls below the conversion price applicable to the notes of
either $1.00 or $1.10 for 25 consecutive trading days on or
after June 30, 2004.

In March 2004, the Company sold
1,500,000 shares of common stock, in a private placement to
an institutional investor, for $3,675,000 or $2.45 per
share. The institutional investor was one of the holders of the
Companys convertible notes. Prior to the closing of the
private placement the institutional investor converted $926,000
of outstanding notes with Company common stock.

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. In the event the Company is unable to obtain adequate
financing or profitable operations in future periods, operations
will need to be scaled back or discontinued.

18



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##### Table of Contents





| |         
| | --------
| | Revenues

|                       |  |                        |        |          |  |      |     |          |  |      |        |  |  |  |     |    |  |   |        | 
|---------------------- |  | ---------------------- | ------ | -------- |  | ---- | --- | -------- |  | ---- | ------ |  |  |  | --- | -- |  | - | ------ | 
|                       |  | 2003                   |        | % Change |  | 2002 |     | % Change |  | 2001
|                       |  |                        |        |          |  |      |     |          |  |     
|                       |  |                       
|                       |  | (Dollars in thousands)
|Licenses               |  | $                      | 2,283  |          |  |      | (55 | )%       |  | $    | 5,039  |  |  |  | (38 | )% |  | $ | 8,148  | 
|Related party licenses |  |                        | 1,729  |          |  |      | (77 | )%       |  |      | 7,554  |  |  |  | 393 | %  |  |   | 1,533  | 
|Services               |  |                        | 4,291  |          |  |      | 30  | %        |  |      | 3,302  |  |  |  | (6  | )% |  |   | 3,500  | 
|Related party services |  |                        | 5,226  |          |  |      | 133 | %        |  |      | 2,244  |  |  |  | 171 | %  |  |   | 827    | 
|                       |  |                        |        |          |  |      |     |          |  |      |        |  |  |  |     |    |  |   |        | 
|Total revenues         |  | $                      | 13,529 |          |  |      | (25 | )%       |  | $    | 18,139 |  |  |  | 29  | %  |  | $ | 14,008 | 

The Company recognizes revenue in accordance with
SOP 97-2, Software Revenue Recognition, as
amended, EITF 00-21 Revenue Arrangements with
Multiple Deliverables, SAB No. 101 Revenue
Recognition in Financial Statements and SAB No. 104
Revenue Recognition.

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 decreased by $2,756,000, or 55%,
for 2003 compared 2002. The decrease was principally due to the
decrease in the sale of licenses for extended periods for
certain customers. In addition, in 2003 there was a sharp
decline in the sales to VARs of the rights to license our
software to third parties as compared to the prior year.

Related party license revenues decreased by
$5,825,000, or 77% for 2003 compared with 2002. The decrease was
caused by a 2002 amendment to an AOL contract that originated in
2001. The 2002 amendment resulted in the Company recording
revenues when payments were due, as compared to the partial
deferral of those payments which would have otherwise occurred.
This amendment resulted in the Company recognizing $5,825,000 in
license revenues in 2002 as opposed to $2,700,000 if the
contract had not been amended. In October 2003, the Company
entered into an amended license agreement with AOL which
provided for payments by AOL of $10,000,000 which were all
received during the fourth quarter of 2003. The agreement
contains multiple elements consisting of a perpetual broadcast
license, a perpetual source code license, quarterly updates to
the source code through December 2005, and maintenance and
consulting services. In 2003, the Company recognized license
revenue of $669,000, and service revenue of $154,000 related to
this contract. The Company will recognize the remaining
$9,177,000 of revenue from this agreement ratably as license and
services revenue, through December 31, 2005, which
represents the duration of the Companys obligation for
post-contract customer support of the source code element
including quarterly upgrades and maintenance requirements.

Service revenues increased $989,000, or 30%, for
2003 compared to 2002. The increase was caused by an expanded
use of our services group by long term licensees and companies
licensing our software on a project basis.

Related party service revenues increased by
approximately $2,982,000, or 133%, for 2003 compared to 2002.
The increase was caused by an increased demand by AOL to utilize
our services group to produce creative material for use by AOL
in part due to their launch of new software in 2003, as well as
post-contract customer support for software licensed by AOL in
2002 and 2003.

Total related party revenues for the year ended
December 31, 2003 were $6,955,000 and were for services and
licenses provided to AOL. The Company considered AOL a related
party from November 2000 through December 10, 2003 because
an employee of AOL served on the Companys board of
directors during that time, and AOL held 1,775,000 shares
of Company common stock.

License revenues decreased approximately
$3,109,000, or 38%, for 2002 compared to 2001. The decrease was
caused by revenue generated by our digital content library which
decreased 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-

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time, leading distributor of 3D animation
software. During the year ended December 31, 2001, the
Company recorded revenue of $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 of signing. 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, 2003 and 2002, the minimum revenue
targets were not met and the Company received no revenue share.
Due to the previous years performance, the Company does
not expect to earn significant revenue from this sublicense
arrangement in 2004.


Related party license revenues increased by
approximately $6,021,000, or 393%, for 2002 compared to 2001. A
portion of the increase was attributable to a March 2002
amendment to a contract with AOL. This amendment caused the
Company to record revenues of $3,125,000 when payments became
due under the contract, as contrasted to the partial deferral of
those payments, which would otherwise have occurred. In
addition, the Company recorded $1,518,000 in related party
license revenue related to two new contracts entered into with
AOL in 2002. In 2002, the Company also recorded $125,000 in
revenue related to an amendment to a 2000 contract with Adobe
Systems, Incorporated. The Company considered Adobe a
related party from November 2000 through January 31, 2003
because the Chief Executive Officer of Adobe served as a
director of the Company during that time and Adobe held
approximately 1,500,000 shares of Company common stock.

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 was primarily related to our then-expanding
relationship with AOL, which accounted for a $1,837,000 increase
in service revenues related to a number of different projects.
This increase was partially offset by a $420,000 decrease in
service revenues with Computer Associates
International, Inc. (CA) primarily due to the
expiration of an engineering service contract from 1999 in 2002.
The Company has considered CA a related party since 1999 because
an employee of CA served as a director of the Company during
that time, and CA has held between 8% and 16% of the
Companys common stock during that time. CA held 9% of the
Companys common stock at December 31, 2003.

Total related party revenues for the year ended
December 31, 2002, were $9,337,000, $336,000, and $125,000
related to AOL, Computer Associates, and Adobe, respectively,
all of whom had representatives on the Companys Board of
Directors. Total related party revenues for the year ended
December 31, 2001, were $1,507,000, and $853,000, related
to AOL and Computer Associates, respectively, both of whom had
representatives on the Companys Board of Directors.



| |                 
| | ----------------
| | Cost of Revenues

|                    |                                |                                |    |          |    |      |     |          |   |      |     |       |    |   |    |   |   |   |     |       |    |  
|------------------- | ------------------------------ | ------------------------------ | -- | -------- | -- | ---- | --- | -------- | - | ---- | --- | ----- | -- | - | -- | - | - | - | --- | ----- | -- | -
|                    |                                | 2003                           |    | % Change |    | 2002 |     | % Change |   | 2001
|                    |                                |                                |    |          |    |      |     |          |   |     
|                    |                                |                               
|                    |                                | (dollars in thousands)        
|Licenses            |                                | $                              | 97 |          |    |      | (73 | )%       |   | $    | 353 |       |    |   | 14 | % |   | $ | 309 |      
|                    | Percentage of license revenues |                                |    | 2        | %  |      |     |          |   |      |     | 3     | %  |   |    |   |   |   |     | 3     | % 
|Three months ended: |                                |                                |    |          |    |      |     |          |   |      |     |       |    |   |    |   |   |   |     |      
|                    | Services                       |                                | $  | 5,776    |    |      |     | 61       | % |      | $   | 3,587 |    |   |    | 9 | % |   | $   | 3,283 |   
|                    |                                | Percentage of service revenues |    |          | 61 | %    |     |          |   |      |     |       | 65 | % |    |   |   |   |     |       | 76 | %

Cost of revenues consists primarily of salaries,
consulting fees and overhead for those who provide fee-based
content creation and engineering professional services. Cost of
license revenues in 2003 decreased by $256,000 or, 73%, compared
to 2002. The reduction in cost of licenses revenues was due to
the reduction in license sales made to VARs during 2003. Cost of
service revenues in 2003 increased by $2,189,000, or 61%,
compared to 2002. This increase was directly attributable to an
increase in service revenues of 72%.

Cost of revenues (licenses and services) during
2002 increased $348,000, or 10%, compared to 2001. This increase
was directly attributable to an increase in services revenues of
28% during the same period.

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| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Sales and Marketing (Including Non-Cash
    Stock-Based Compensation Charges Totaling $523 in 2003, $3,187
    in 2002, and $2,335 in 2001)

|                             |  |                        |       |          |  |      |     |          |  |      |        |   |  |  |    |    |  |   |        |  
|---------------------------- |  | ---------------------- | ----- | -------- |  | ---- | --- | -------- |  | ---- | ------ | - |  |  | -- | -- |  | - | ------ | -
|                             |  | 2003                   |       | % Change |  | 2002 |     | % Change |  | 2001
|                             |  |                        |       |          |  |      |     |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Sales and Marketing          |  | $                      | 8,723 |          |  |      | (48 | )%       |  | $    | 16,682 |   |  |  | (5 | )% |  | $ | 17,521 |  
|Percentage of total revenues |  |                        | 64    | %        |  |      |     |          |  |      | 92     | % |  |  |    |    |  |   | 125    | %

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
$7,959,000, or 48%, in 2003 compared to 2002. This decrease was
principally attributable to a decrease in salaries and related
fringes of approximately $4,688,000 due to a decreased demand
for our products and a corresponding reduction in our sales and
marketing efforts. An additional $2,665,000 reduction in sales
and marketing expenses was due to a decrease in non-cash
stock-based compensation as employees associated with these
charges either left the company before their options fully
vested or the options became fully vested in 2003; a $612,000
decrease due to bad debt expense associated with certain officer
loans that were written off in 2002, and a $500,000 reduction
was due to a curtailment of marketing efforts stemming from the
slowdown in demand for our products. These decreases were offset
by an increase in consulting expense of $780,000 due to the
reliance of our services on outside consultants after the 2003
restructurings. A quarterly reduction in total expense of
approximately $538,000 in sales and marketing costs were
realized in the fourth quarter of 2003 compared to the third
quarter of 2003 largely resulting from the Companys office
consolidation and workforce reductions which occurred during the
third quarter of 2003.

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, 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. 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 were then 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 represented 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. In January 2003 the
officer defaulted on the loan and the Company took possession of
the collateral.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Research and Development (Including
    Non-Cash Stock-Based Compensation Charges Totaling $832 in 2003,
    $712 in 2002 and $2,920 in 2001

|                             |  |                        |       |          |  |      |    |          |  |      |       |   |  |  |     |    |  |   |       |  
|---------------------------- |  | ---------------------- | ----- | -------- |  | ---- | -- | -------- |  | ---- | ----- | - |  |  | --- | -- |  | - | ----- | -
|                             |  | 2003                   |       | % Change |  | 2002 |    | % Change |  | 2001
|                             |  |                        |       |          |  |      |    |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Research and development     |  | $                      | 4,209 |          |  |      | (3 | )%       |  | $    | 4,348 |   |  |  | (56 | )% |  | $ | 9,846 |  
|Percentage of total revenues |  |                        | 32    | %        |  |      |    |          |  |      | 24    | % |  |  |     |    |  |   | 70    | %

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

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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
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.


The Companys research and development
efforts are primarily directed at improving the overall quality
of the Viewpoint Media Player and its proprietary software tools
for creating digital content. During 2003, the Company developed
an advertising deployment system for clients publishing
advertising content, significant enhancements to the video
playback functionality of Viewpoint Media Player (functionality
the company first made available in June 2003), Computer Aided
Design (CAD) workflow solutions and technology for
converting CAD data into Viewpoint content, expanded capability
of the Video Media Player onto new platforms, developed new
configuration capabilities for user interfaces, and enhancements
to the Viewpoint Media Player that allow print quality images to
be generated from interactive online content. In 2002, the
Company developed a color swapping feature of its
graphics operating system that permits end users to change the
colors of textures on static two-dimensional images, developed
audio features for its graphics operating system, improved the
quality of its ability to play back vector graphics animation
files, built an infrastructure for the delivery of online
advertising products and began researching the feasibility of
building a tool bar for internet searches.

Research and development expenses decreased
$139,000, or 3%, in 2003 compared to 2002 due to a $227,000
decrease in compensation and fringes associated with a reduction
of employees in the research and development area as the company
narrowed its focus on research and development efforts and
certain employees were assigned to other departments. This
decrease was offset by an increase of $120,000 in non-cash
stock-based compensation charges associated with the
re-assignment of certain employees from other departments into
research and development.

Research and development expenses decreased
$5,498,000, or 56%, in 2002 compared to 2001 due to a decrease
in non-cash stock-based compensation charges of $2,208,000,
salaries and benefits of $1,421,000, 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 were then
reflected in sales and marketing due to a change in the nature
of their duties in addition to a $1,200,000 reclass from R&D
to G&A due to a reclass of certain departments. Salaries and
benefits also 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.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | General and Administrative (Including
    Non-Cash Stock-Based Compensation Charges Totaling $1,352 in
    2003, $1,523 in 2002, and $1,918 in 2001)

|                             |  |                        |        |          |  |      |    |          |  |      |        |   |  |  |    |    |  |   |        |  
|---------------------------- |  | ---------------------- | ------ | -------- |  | ---- | -- | -------- |  | ---- | ------ | - |  |  | -- | -- |  | - | ------ | -
|                             |  | 2003                   |        | % Change |  | 2002 |    | % Change |  | 2001
|                             |  |                        |        |          |  |      |    |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|General and Administrative   |  | $                      | 11,549 |          |  |      | 12 | %        |  | $    | 10,334 |   |  |  | (1 | )% |  | $ | 10,423 |  
|Percentage of total revenues |  |                        | 86     | %        |  |      |    |          |  |      | 57     | % |  |  |    |    |  |   | 73     | %

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 increased
$1,215,000, or 12%, in 2003 compared to 2002 due to a $750,000
increase in severance costs related to an unfavorable legal
decision regarding an officer loan, bad debt

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expense of $419,000 associated with an increase
in the number of large license receivables that were written
off, and $226,000 of internal use software that was determined
to be obsolete after a review of future utility in the third
quarter of 2003. These were offset by a decrease of $214,000 in
facilities costs associated with the closure of our Utah office.


A quarterly reduction in total general and
administrative expenses of approximately $780,000, excluding a
reduction in non-cash stock-based compensation charges was
realized during the fourth quarter following our restructuring
in the third quarter of 2003. Many of the expense reductions
were due to fewer employees in the department following the
restructuring.

General and administrative expenses decreased
$89,000, or 1%, 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. Non-cash stock-based
compensation charges decreased because the Company generally did
not grant stock options to employees at below fair market value
on the date of the grant and certain employees who were granted
stock below fair market value left the Company before their
options vested. Decreases were offset by a $1,200,000 increase
in salaries and benefits due to a reclass of certain departments.



| |             
| | ------------
| | Depreciation

|                             |  |                        |       |          |  |      |     |          |  |      |       |   |  |  |   |   |  |   |       |  
|---------------------------- |  | ---------------------- | ----- | -------- |  | ---- | --- | -------- |  | ---- | ----- | - |  |  | - | - |  | - | ----- | -
|                             |  | 2003                   |       | % Change |  | 2002 |     | % Change |  | 2001
|                             |  |                        |       |          |  |      |     |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Depreciation                 |  | $                      | 1,543 |          |  |      | (21 | )%       |  | $    | 1,962 |   |  |  | 9 | % |  | $ | 1,804 |  
|Percentage of total revenues |  |                        | 11    | %        |  |      |     |          |  |      | 11    | % |  |  |   |   |  |   | 13    | %

Depreciation expense decreased $419,000, or 21%,
in 2003 compared to 2002 due to the reduction of depreciable
equipment associated with the reduction in staffing stemming
from our restructurings and the retirement of equipment at the
conclusion of its useful life. Depreciation expense increased
$158,000, or 9% in 2002 compared to 2001 due to increases in
property and equipment additions.



| |                                      
| | -------------------------------------
| | Amortization of Intangible
    Assets

|                                  |  |                        |    |          |  |      |     |          |  |      |     |   |  |  |     |    |  |   |       |  
|--------------------------------- |  | ---------------------- | -- | -------- |  | ---- | --- | -------- |  | ---- | --- | - |  |  | --- | -- |  | - | ----- | -
|                                  |  | 2003                   |    | % Change |  | 2002 |     | % Change |  | 2001
|                                  |  |                        |    |          |  |      |     |          |  |     
|                                  |  |                       
|                                  |  | (Dollars in thousands)
|Amortization of intangible assets |  | $                      | 10 |          |  |      | (98 | )%       |  | $    | 664 |   |  |  | (80 | )% |  | $ | 3,325 |  
|Percentage of total revenues      |  |                        |   | %        |  |      |     |          |  |      | 4   | % |  |  |     |    |  |   | 24    | %

Amortization of intangible assets decreased
$654,000, or 98%, in 2003 compared to 2002 and $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 Goodwill

|                             |  |                        |   |          |  |      |     |          |  |      |   |   |  |  |      |    |  |   |        |  
|---------------------------- |  | ---------------------- | - | -------- |  | ---- | --- | -------- |  | ---- | - | - |  |  | ---- | -- |  | - | ------ | -
|                             |  | 2003                   |   | % Change |  | 2002 |     | % Change |  | 2001
|                             |  |                        |   |          |  |      |     |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Amortization of goodwill     |  | $                      |  |          |  |      | N/A |          |  | $    |  |   |  |  | (100 | )% |  | $ | 14,128 |  
|Percentage of total revenues |  |                        |  | %        |  |      |     |          |  |      |  | % |  |  |      |    |  |   | 101    | %

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.

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| |                      
| | ---------------------
| | Restructuring Charges

|                             |  |                        |       |          |  |      |     |          |  |      |   |   |  |  |     |  |  |   |   |  
|---------------------------- |  | ---------------------- | ----- | -------- |  | ---- | --- | -------- |  | ---- | - | - |  |  | --- |  |  | - | - | -
|                             |  | 2003                   |       | % Change |  | 2002 |     | % Change |  | 2001
|                             |  |                        |       |          |  |      |     |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Restructuring charges        |  | $                      | 2,023 |          |  |      | N/A |          |  | $    |  |   |  |  | N/A |  |  | $ |  |  
|Percentage of total revenues |  |                        | 15    | %        |  |      |     |          |  |      |  | % |  |  |     |  |  |   |  | %

The Company implemented three restructuring plans
in 2003. The first plan, implemented in February 2003, reduced
operating expenses by closing the Companys Utah office and
related to the termination of 28 employees in that office who
were primarily engaged in sales and marketing activities. In
accordance with SFAS No. 146 Accounting for
Costs Associated with Exit or Disposal Activities, the
Company recorded restructuring charges of $1,211,000. The
restructuring charges represent the fair value of remaining
lease commitments reduced by estimated sublease rental income,
employee severance and termination benefits, the write-off of
the net book value of certain fixed assets used in the Utah
office, and other miscellaneous charges. Subsequent to the
restructuring, the Company re-evaluated market conditions
surrounding its efforts to sub-lease the Utah office space and
increased the restructuring charge by $249,000 due to the
reduction of estimated sublease rental income.

The second plan was implemented in September
2003, and was designed to streamline the business. Under the
plan the Company eliminated 24 sales and marketing, research and
development, and general and administrative positions. The
Company incurred a restructuring charge of $463,000 related to
one-time severance arrangements. The second restructuring plan
was completed by September 30, 2003. In November 2003,
however, the Company increased the restructuring charge by
$50,000 in settlement of an action filed by one of the
terminated employees, in addition to making a $2,000 decrease to
the reserve related to a decreased estimate.

The third plan was implemented in December 2003
and was designed to consolidate international operations to the
New York office. Accordingly the Company closed the London,
England office incurring a restructuring charge of $52,000
primarily related to severance. The charge is recorded on our
income statement as a restructuring charge. The third
restructuring plan was completed by December 31, 2003.



| |                                                       
| | ------------------------------------------------------
| | Impairment of Goodwill and Other Intangible
    Assets

|                                                   |  |                        |   |          |  |      |      |          |  |      |       |   |  |  |     |    |  |   |       |  
|-------------------------------------------------- |  | ---------------------- | - | -------- |  | ---- | ---- | -------- |  | ---- | ----- | - |  |  | --- | -- |  | - | ----- | -
|                                                   |  | 2003                   |   | % Change |  | 2002 |      | % Change |  | 2001
|                                                   |  |                        |   |          |  |      |      |          |  |     
|                                                   |  |                       
|                                                   |  | (Dollars in thousands)
|Impairment of goodwill and other intangible assets |  | $                      |  |          |  |      | (100 | )%       |  | $    | 6,275 |   |  |  | (21 | )% |  | $ | 7,925 |  
|Percentage of total revenues                       |  |                        |  | %        |  |      |      |          |  |      | 35    | % |  |  |     |    |  |   | 57    | %

In the first and second quarter of the year ended
December 31, 2003, the market value of the Companys
equity securities declined below the Companys carrying
value indicating the existence of a potential goodwill
impairment. In accordance with SFAS No. 142, the
Company performed the first step of the goodwill impairment test
as of March 31, 2003. The fair value of the Company was
determined to exceed its carrying value using a market-based
approach with selected multiples ranging from 1.5 to
2.0 times revenues and 1.8 to 2.5 times gross profit.
In accordance with SFAS No. 142, the second step of
the impairment test was unnecessary, and no goodwill impairment
charges were recorded. Subsequent to March 31, 2003, the
market value of the Company recovered and increased to a value
in excess of its carrying value through December 2003.

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,
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.

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The fair value of the Viewpoint Digital assets
was estimated using the expected present value of future cash
flows. 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 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.



| |                                   
| | ----------------------------------
| | Interest and Other Income,
    Net

|                               |  |                        |     |          |  |      |    |          |  |      |     |   |  |  |     |    |  |   |       |  
|------------------------------ |  | ---------------------- | --- | -------- |  | ---- | -- | -------- |  | ---- | --- | - |  |  | --- | -- |  | - | ----- | -
|                               |  | 2003                   |     | % Change |  | 2002 |    | % Change |  | 2001
|                               |  |                        |     |          |  |      |    |          |  |     
|                               |  |                       
|                               |  | (Dollars in thousands)
|Interest and other income, net |  | $                      | 254 |          |  |      | 66 | %        |  | $    | 153 |   |  |  | (86 | )% |  | $ | 1,064 |  
|Percentage of total revenues   |  |                        | 2   | %        |  |      |    |          |  |      | 1   | % |  |  |     |    |  |   | 7     | %

Interest and 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.

Interest and other income increased $101,000, or
66%, in 2003 compared to 2002 and decreased by $911,000, or 86%,
in 2002 compared to 2001 based on the change in average cash,
cash equivalents and marketable securities balances as well as
the change in interest rates.



| |                 
| | ----------------
| | Interest Expense

|                             |  |                        |      |          |  |      |     |          |  |      |   |   |  |  |     |  |  |   |   |  
|---------------------------- |  | ---------------------- | ---- | -------- |  | ---- | --- | -------- |  | ---- | - | - |  |  | --- |  |  | - | - | -
|                             |  | 2003                   |      | % Change |  | 2002 |     | % Change |  | 2001
|                             |  |                        |      |          |  |      |     |          |  |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|Interest Expense             |  | $                      | (958 | )        |  |      | N/A |          |  | $    |  |   |  |  | N/A |  |  | $ |  |  
|Percentage of total revenues |  |                        | (7   | )%       |  |      |     |          |  |      |  | % |  |  |     |  |  |   |  | %

Interest expense consists of interest paid and
accrued, and amortization of debt discount and debt issue costs
on the Companys outstanding convertible and subordinated
notes. The Company issued convertible notes with a principal
balance of $7,000,000 on December 31, 2002, then
subsequently redeemed $3,300,000 of the notes at par, exchanged
$1,000,000 of the notes for common stock and exchanged
$2,700,000 of the notes for new notes on March 25, 2003.
Additionally, the Company issued $3,500,000 of subordinated
notes on March 26, 2003. The $6,200,000 aggregate principal
balances of the convertible and subordinated notes, which were
outstanding at December 31, 2003, bear interest at a rate
of 4.95%.

In March 2004, one of the institutional investors
holding the convertible notes converted three convertible notes
totaling $926,000 into Company common stock at $1.00, $1.00, and
$1.10, respectively. In connection with this conversion, the
Company issued the investor 898,000 shares of Company
common stock.

25



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##### Table of Contents





| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Changes in Fair Value of Warrants to
    Purchase Common Stock and Conversion Options of Convertible
    Notes

|                                                                                                           |  |                        |       |          |  |      |     |          |  |      |   |   |  |  |     |  |  |   |   |  
|---------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | -------- |  | ---- | --- | -------- |  | ---- | - | - |  |  | --- |  |  | - | - | -
|                                                                                                           |  | 2003                   |       | % Change |  | 2002 |     | % Change |  | 2001
|                                                                                                           |  |                        |       |          |  |      |     |          |  |     
|                                                                                                           |  |                       
|                                                                                                           |  | (Dollars in thousands)
|Changes in fair value of warrants to purchase
    common stock and conversion options of convertible notes |  | $                      | 1,209 |          |  |      | N/A |          |  | $    |  |   |  |  | N/A |  |  | $ |  |  
|Percentage of total revenues                                                                               |  |                        | 9     | %        |  |      |     |          |  |      |  | % |  |  |     |  |  |   |  | %

Based on the provisions of SFAS No. 133
Accounting for Derivative Instruments and Hedging
Activities, and EITF Issue No. 00-19 Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock, the Company
recorded a gain for 2003 based on the changes in fair values of
the conversion options of the convertible notes of $1,031,000
and warrants to purchase common stock of $178,000.



| |                                         
| | ----------------------------------------
| | Loss on Early Extinguishment of
    Debt

|                                     |  |                        |        |          |  |      |     |          |  |      |   |   |  |  |     |  |  |   |   |  
|------------------------------------ |  | ---------------------- | ------ | -------- |  | ---- | --- | -------- |  | ---- | - | - |  |  | --- |  |  | - | - | -
|                                     |  | 2003                   |        | % Change |  | 2002 |     | % Change |  | 2001
|                                     |  |                        |        |          |  |      |     |          |  |     
|                                     |  |                       
|                                     |  | (Dollars in thousands)
|Loss on early extinguishment of debt |  | $                      | (1,682 | )        |  |      | N/A |          |  | $    |  |   |  |  | N/A |  |  | $ |  |  
|Percentage of total revenues         |  |                        | (12    | )%       |  |      |     |          |  |      |  | % |  |  |     |  |  |   |  | %

On March 25, 2003, the Company entered into
Redemption, Amendment and Exchange Agreements with the three
institutional investors with whom it had completed a $7,000,000
private placement of convertible notes and warrants on
December 31, 2002. Pursuant to these agreements, the
Company redeemed an aggregate of $3,300,000 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.

In accordance with the provisions of Accounting
Principals Board (APB) Opinion No. 26
Early Extinguishment of Debt, and EITF 96-19
Debtors Accounting for a Modification or Exchange of
Debt Instruments, the Company recorded a loss on the early
extinguishment of the original convertible notes in the amount
of $1,682,000 of which $650,000 related to the write-off of
deferred loan costs. The carrying value of the convertible notes
at the time of the exchange was $5,643,000, inclusive of
$55,000, which represented the fair value of the conversion
options. In conjunction with the extinguishment, the Company
paid $3,300,000, issued new convertible notes in the principal
amount of $2,700,000 and issued 1,351,351 shares of its
common stock with a market value of $675,000. The difference
between (i) the carrying value of the outstanding
convertible notes exchanged and (ii) cash paid and the fair
value of the common stock and new convertible notes issued,
amounted to $1,032,000 and was included in the loss on early
extinguishment of debt.

The Company charged the loss on early
extinguishment of debt to operations as such loss did not
qualify for classification as extraordinary based on the
provisions of SFAS No. 145 Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, and APB 30
Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Adjustment to Net Loss on Disposal of
    Discontinued Operations, Net of Tax

|                                                                              |  |                        |     |          |  |      |    |          |  |      |     |   |  |  |     |    |  |   |       |  
|----------------------------------------------------------------------------- |  | ---------------------- | --- | -------- |  | ---- | -- | -------- |  | ---- | --- | - |  |  | --- | -- |  | - | ----- | -
|                                                                              |  | 2003                   |     | % Change |  | 2002 |    | % Change |  | 2001
|                                                                              |  |                        |     |          |  |      |    |          |  |     
|                                                                              |  |                       
|                                                                              |  | (Dollars in thousands)
|Adjustment to net loss on disposal of
    discontinued operations, net of tax |  | $                      | 157 |          |  |      | 24 | %        |  | $    | 127 |   |  |  | (89 | )% |  | $ | 1,122 |  
|Percentage of total revenues                                                  |  |                        | 1   | %        |  |      |    |          |  |      | 1   | % |  |  |     |    |  |   | 8     | %

26



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##### Table of Contents



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

During the years ended December 31, 2003,
2002 and 2001, the Company recorded an adjustment to net loss on
disposal of discontinued operations, net of tax, of $157,000,
$127,000 and $1,122,000, respectively, as a result of changes in
estimates related to accounts receivable and liabilities 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.

Factors That May Affect Future Results of
Operations

An investment in Viewpoint involves a high degree
of risk. You should consider carefully the following information
about these risks, together with the other information contained
or incorporated by reference in this prospectus, before you
decide to invest in Viewpoint. If any of the following risks
actually occur, our business, financial condition or results of
operations would likely suffer. In this case, the market price
of our common stock could decline, and you could lose all or
part of your investment.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | 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, 2003, we had an accumulated deficit of
approximately $245,579,000. We believe that we will continue to
incur operating losses in the future, which may cause our share
price to decline.



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We May Be Required to Redeem $1,774,000 in
    Outstanding Convertible Debt as Early as June 2004 and Doing so
    Could Adversely Affect Our Ability to Fund
    Operations.

We issued three tranches of convertible notes in
amounts of $900,000 each in March 2003. Of the $2,700,000 in
debt issued, $1,774,000 is outstanding. Each tranche of the
notes is convertible into shares of Company common stock at
prices of $1.00, $1.00, and $1.10. Although the notes are due on
December 31, 2007, the holders may redeem all or part of
the notes at par between June 30, 2004 and
December 31, 2005 if the dollar volume-weighted average
price of Company common stock is less than the conversion price
applicable to the notes for any 25 consecutive trading days.
After December 31, 2005, the holders may redeem the notes
at 83% of par if the dollar volume-weighted average price of
Company common stock is less than the conversion price
applicable to the notes for any 25 consecutive trading days. If
the investors redeem convertible notes between June 30,
2004 and December 30, 2007 in accordance with the
foregoing, the Company may, at its option, pay up to 20% of the
amount to be redeemed in shares of Company common stock. Shares
issued by the Company in partial redemption would be issued at
95% of the dollar volume-weighted average price of Company
common stock for the 20 consecutive trading days immediately
preceding payment. If we are required to redeem the convertible
notes in accordance with the foregoing, our ability to fund our
operations will be materially adversely affected. If the
noteholders exercise their right to convert the notes to shares
of common stock or the Company exercises its right to redeem the
notes by issuing shares, our current stockholders
ownership interest in Viewpoint will be diluted.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | 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 financing through public
or private equity funding 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 stockholders ownership interest in
Viewpoint.

27



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| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Business Is Difficult to Evaluate
    Because We Have a Limited Operating History and Have Only
    Recently Launched Our Search Toolbar and Creative Innovator
    Products.

We began offering our Graphically Enhanced Search
toolbar services on March 17, 2004 and Creative Innovator
in November 2003. Accordingly, we have limited relevant
operating history upon which an investor can make an evaluation
of the likelihood of our success with these products. An
investor in our securities must consider the uncertainties,
expenses, and difficulties frequently encountered by companies
such as ours that are in the early stages of development. An
investor should consider the likelihood of our future success to
be highly speculative in light of our limited operating history,
as well as the problems, limited resources, expenses, risks, and
complications frequently encountered by similarly situated
companies in the early stages of development, particularly
companies in new and rapidly evolving markets, such as Internet
advertising, Internet search, and e-commerce.



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Business May Not Grow if the Internet
    Advertising Market Does Not Continue to Develop or If We Are
    Unable to Successfully Implement Our Business
    Model.

A significant part of our business model is to
generate revenue by providing interactive marketing solutions to
advertisers, ad agencies and web publishers. The profit
potential for this business model is unproven. For our business
to be successful, internet advertising will need to achieve
increasing market acceptance by advertisers, ad agencies and web
publishers. The intense competition among Internet advertising
sellers has led to the creation of a number of pricing
alternatives for Internet advertising. These alternatives make
it difficult for us to project future levels of advertising
revenue and applicable gross margin that can be sustained by us
or the Internet advertising industry in general.

Intensive marketing and sales efforts may be
necessary to educate prospective advertisers regarding the uses
and benefits of, and to generate demand for, our products and
services. Advertisers may be reluctant or slow to adopt a new
approach that may replace, limit or compete with their existing
systems. Acceptance of our new solutions will depend on the
continued emergence of Internet commerce, communication, and
advertising, and demand for its solutions. We cannot assure you
that use of the Internet will continue to grow or that current
uses of the Internet are sustainable.



| |                                                               
| | --------------------------------------------------------------
| | Our Failure to Successfully Compete May
    Hinder Our Growth.

The markets for Internet advertising and related
products and services are intensely competitive and such
competition is expected to increase. Our failure to successfully
compete may hinder our growth. Many of our competitors have
longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical
and marketing resources than ours. In addition, current and
potential competitors have established or may establish
cooperative relationships among themselves or with third parties
to increase the ability of their products or services to address
the needs of our prospective clients. We cannot be certain that
we will be able to successfully compete against current or
future competitors. In addition, the Internet must compete for a
share of advertisers total budgets with traditional
advertising media, such as television, radio, cable and print,
as well as content aggregation companies and other companies
that facilitate Internet advertising. To the extent that the
Internet is perceived to be a limited or ineffective advertising
or direct marketing medium, advertisers and direct marketers may
be reluctant to devote a significant portion of their
advertising budgets to Internet marketing.



| |                                                           
| | ----------------------------------------------------------
| | Our Revenues Will Be Subject to Seasonal
    Fluctuations.

We believe that our revenues will be subject to
seasonal fluctuations because advertisers generally place fewer
advertisements during the first and third calendar quarters of
each year and direct marketers mail substantially more marketing
materials in the third quarter of each year.
Furthermore, Internet user traffic typically drops during
the summer months, which reduces the number of advertisements to
sell and deliver and searches performed. Expenditures by
advertisers and direct marketers tend to vary in cycles that
reflect overall economic conditions as well as budgeting and
buying patterns. Our revenue could be materially reduced by a
decline in the economic prospects of advertisers, direct
marketers or the economy in general,

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##### Table of Contents



which could alter current or prospective
advertisers spending priorities or budget cycles or extend
our sales cycle. Due to such risks, you should not rely on
quarter-to-quarter comparisons of our results of operations as
an indicator of our 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.




| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Our Financial Performance and Reduction of
    Our Workforce May Affect the Morale and Performance of Our
    Personnel.

In an effort to reduce our cash expenses, we have
implemented certain restructuring initiatives in headcount and
other cost reductions. Additionally, trading levels of our
common stock have decreased the value of some stock options
previously granted to employees pursuant to our stock option
plans. As a result of these factors, our remaining personnel may
seek employment with larger, more stable companies they perceive
to have better prospects. Our failure to retain qualified
employees to fulfill our current and future needs could impair
our future growth and have a material adverse effect on our
business. In addition, we will need to attract and retain highly
qualified, technical personnel in order to maintain and update
our products and services and meet our business objectives.
Competition for such personnel is intense. We may not be
successful in attracting and retaining such qualified technical
personnel on a timely basis, on competitive terms, or at all. If
we are unable to attract and retain the necessary technical
personnel, it could have a material and adverse effect on our
business, prospects, financial condition and results of
operations.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 pursue expansion of 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.



| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We May Need to Develop New Products or
    Other Untested Methods of Increasing Sales with Our Existing
    Products or Distribution Network to Generate Sales and If We are
    Unsuccessful the Growth of Our Business May Cease or
    Decline.

Our license and services revenues have declined
over recent quarters. If this decrease in sales of our products
continues or our new products are unsuccessful, we will be
unable to generate sufficient revenues to offset current costs.
Accordingly, we may be required to develop new products or other
untested methods to increase sales. If these new products or
untested methods fail to increase sales, our business may cease
or decline.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | The Success of Our Graphically Enhanced
    Search Operations Depends on Users Satisfaction with
    Search Results Supplied by Yahoo!/ Overture.

We entered into an agreement with Yahoo!/
Overture which establishes Yahoo!/ Overture as our exclusive
supplier of search results for the Viewpoint Toolbar for two
years. The market for products that

29



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##### Table of Contents



enable and supply search results is relatively
new, intensely competitive, and rapidly changing. Yahoo!/
Overtures principal competitors for supplying search
results include Google Inc. and Microsoft. If these or other
competitors develop more popular search results, end users may
choose to use search toolbars or other search methods through
which results from these competitors are supplied.




| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | We Will Need to Keep Pace with Rapid
    Technological Change in the Internet Search and Advertising
    Industries.

In order to remain competitive, we will be
continually required to enhance and to improve the functionality
and features of our Graphically Enhanced Search and Creative
Innovator product lines, which could require us to invest
significant capital. If our competitors introduce new products
and services embodying new technologies, or if new industry
standards and practices emerge, our existing services,
technology, and systems may become obsolete and we may not have
the funds or technical know-how to upgrade our services,
technology, and systems. We may face material delays in
introducing new services, products, and enhancements. If such
delays occur, our users may forego use of our services and
select those of our competitors, in which event, our business,
prospects, financial condition and results of operations could
be materially adversely affected.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Our Ad Campaign Management and Deployment
    Solution May Not Be Successful and May Cause Business
    Disruption.

Creative Innovator is our proprietary ad
deployment technology. We must, among other things, ensure that
this technology will function efficiently at high volumes,
interact properly with our database, offer the functionality
demanded by our customers and assimilate our sales and reporting
functions. Customers may become dissatisfied by any system
failure that interrupts our ability to provide our services to
them, including failures affecting our ability to deploy
advertisements without significant delay to the viewer.
Sustained or repeated system failures would reduce the
attractiveness of our solutions to advertisers, ad agencies, and
web publishers and could result in contract terminations, fee
rebates and make-goods, thereby reducing revenue. Slower
response time or system failures may also result from straining
the capacity of our deployed software or hardware due to an
increase in the volume of advertising deployed through our
servers. To the extent that we do not effectively address any
capacity constraints or system failures, our business, results
of operations and financial condition could be materially and
adversely affected.



| |                                                             
| | ------------------------------------------------------------
| | We Might Experience Significant Defects in
    Our Products.

Software products frequently contain errors or
failures, especially when first introduced or when new versions
are released. We might experience significant errors or failures
in our products, or they might not work with other hardware or
software as expected, which could delay the growth of our
Graphically Enhanced Search toolbar or Creative Innovator
products, or which could adversely affect market acceptance of
our products. Any significant product errors or design flaws
would slow the adoption of our products and cause damage to our
reputation, which would seriously harm our business. If
customers were dissatisfied with product functionality or
performance, we could lose revenue or be subject to liability
for service or warranty costs and claims, and our business,
operating results and financial condition could be adversely
affected.



| |                                                                     
| | --------------------------------------------------------------------
| | Our Technical Systems are Vulnerable to
    Interruption and Damage.

A disaster could interrupt our services for an
indeterminate length of time and severely damage our business,
prospects, financial condition and results of operations. Our
systems and operations are vulnerable to damage or interruption
from fire, floods, power loss, telecommunications failures,
break-ins, sabotage, computer viruses, penetration of our
network by unauthorized computer users and hackers,
and similar events. The occurrence of a natural disaster or
unanticipated problems at our technical operations facilities
could cause material interruptions or delays in our business,
loss of data, or render us unable to provide services to
customers. Failure to provide the data communications capacity
we require, as a result of human error, natural disaster, or
other operational disruptions could cause interruptions in our
services and web sites.

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The occurrence of any or all of these events
could adversely affect our business, prospects, financial
condition and results of operations.


In addition, interruptions in our services could
result from the failure of our telecommunications providers to
provide the necessary data communications capacity in the time
frame we require. Our Creative Innovator technology resides on
computer systems located in our data centers hosted by IBM and
Cable & Wireless and use the networking capabilities of
these companies and Akamai. These systems continuing and
uninterrupted performance is critical to our success. Despite
precautions that we have taken, unanticipated problems affecting
our systems in the future could cause interruptions in the
delivery of our solutions. Our business, results of operations
and financial condition could be materially and adversely
affected by any damage or failure that interrupts or delays our
operations. To improve the performance and to prevent disruption
of our services, we may have to make substantial investments to
deploy additional servers or one or more copies of our web sites
to mirror our online resources. Although we believe we carry
property insurance with adequate coverage limits, our coverage
may not be adequate to compensate us for all losses,
particularly with respect to loss of business and reputation,
that may occur.



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

In addition, securities class action litigation
has often been brought against companies following periods of
volatility in the market price of their 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.



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

Our certificate of incorporation and by-laws
contain provisions that could 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 stockholder proposals for
consideration at an annual or special meeting are subject to
timing requirements, any third-party takeover not supported by
the board of directors would be subject to significant delays
and difficulties.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Market for Digital Visualization
    Solutions 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 solutions
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 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.

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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.



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



| |                                                                
| | ---------------------------------------------------------------
| | Regulatory and Legal Uncertainties Could
    Harm Our Business.

We are not currently subject to direct regulation
by any government agency other than laws or regulations
applicable generally to e-commerce. Due to the increasing
popularity and use of the Internet and other online services,
federal, state, and local governments may adopt laws and
regulations, or amend existing laws and regulations, with
respect to the Internet or other online services covering issues
such as user privacy, pricing, content, copyrights,
distribution, and characteristics and quality of products and
services. In 1998, the United States Congress established the
Advisory Committee on Electronic Commerce which is charged with
investigating, and making recommendations to Congress regarding,
the taxation of sales by means of the Internet. Furthermore, the
growth and development of the market for e-commerce may prompt
calls for more stringent consumer protection laws and impose
additional burdens on companies conducting business online. The
adoption of any additional laws or regulations may decrease the
growth of the Internet or other online services, which could, in
turn, decrease the demand for our services and increase our cost
of doing business, or otherwise have a material adverse effect
on our business, prospects, financial condition and results of
operations. Moreover, the relevant governmental authorities have
not resolved the applicability to the Internet and other online
services of existing laws in various jurisdictions governing
issues such as property ownership and personal privacy and it
may take time to resolve these issues definitively. Any new
legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply
to our business, or the application of existing laws and
regulations to the Internet and other online services could have
a material adverse effect on our business, prospects, financial
condition and results of operations.



| |                                                          
| | ---------------------------------------------------------
| | Internet Security Poses Risks to Our Entire
    Business.

The process of e-commerce aggregation by means of
our hardware and software infrastructure involves the
transmission and analysis of confidential and proprietary
information of the advertiser, as well as our own confidential
and proprietary information. The compromise of our security or
misappropriation of proprietary information could have a
material adverse effect on our business, prospects, financial
condition and results of operations. We rely on encryption and
authentication technology licensed from other companies to
provide the security and authentication necessary to effect
secure Internet transmission of confidential information, such
as credit and other proprietary information. Advances in
computer capabilities, new discoveries in the field of
cryptography, or other events or developments may result in a
compromise or breach of the technology used by us to protect
client transaction data. Anyone who is able to circumvent our
security measures could

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misappropriate proprietary information or cause
material interruptions in our operations. We may be required to
expend significant capital and other resources to protect
against security breaches or to minimize problems caused by
security breaches. To the extent that our activities or the
activities of others involve the storage and transmission of
proprietary information, security breaches could damage our
reputation and expose us to a risk of loss or litigation and
possible liability. Our security measures may not prevent
security breaches. Our failure to prevent these security
breaches may have a material adverse effect on our business,
prospects, financial condition and results of operations.


Recent Accounting Pronouncements

In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation
(FIN) No. 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting
Research Bulletin (ARB) No. 51,
Consolidated Financial Statements. FIN 46
clarifies the application of ARB 51 to certain entities in which
equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
FIN 46 explains how to identify variable interest entities
and how an enterprise assesses its interests in a variable
interest entity to decide whether to consolidate that entity. It
requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities
do not effectively disperse risks among parties involved. It
also requires certain disclosures by the primary beneficiary of
a variable interest entity and by an enterprise that holds
significant variable interests in a variable interest entity
where the enterprise is not the primary beneficiary. FIN 46
is effective for variable interest entities created after
January 31, 2003 and to variable interest entities in which
an enterprise obtains an interest after that date, and effective
for the first fiscal year or interim period beginning after
June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before
February 1, 2003. FIN 46 requires an entity to
disclose certain information regarding a variable interest
entity, if, when FIN 46 becomes effective, it is reasonably
possible that an enterprise will consolidate or have to disclose
information about that variable interest entity, regardless of
the date on which the variable entity interest was created. In
December 2003, the FASB published a revision to FIN 46
(FIN 46R) to clarify certain provisions of
FIN 46. FIN 46R is effective for the Companys
first quarter of fiscal 2004. FIN 46 and FIN 46R will
not have a material affect on the Companys consolidated
financial statements.

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies the accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under
SFAS No. 133. SFAS No. 149 is generally
effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of SFAS No. 149
did not have a material effect on the Companys financial
statements.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 requires that certain
financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include
mandatorily redeemable stock, certain financial instruments that
require or may require the issuer to buy back some of its shares
in exchange for cash or other assets and certain obligations
that can be settled with shares of stock. SFAS No. 150
is effective for all financial instruments entered into or
modified after May 31, 2003 and must be applied to the
Companys existing financial instruments effective
July 1, 2003, the beginning of the first fiscal period
after June 15, 2003. The Company adopted the provisions of
SFAS No. 150, which became effective on June 1,
2003. The adoption of this statement did not have a material
effect on the Companys financial statements. On
November 7, 2003, the FASB issued a FASB Staff Position
No. FAS 150-3, Effective Date for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities
and Certain Mandatorily Redeemable Noncontrolling Interests
under FAS 150, which deferred the effective date of
certain provisions of FAS 150 related to Mandatorily
Redeemable Noncontrolling Interests. The deferral did not effect
the Companys financial statements.

In December 2003, the SEC issued Staff Accounting
Bulletin No. 104, Revenue Recognition (SAB 104), which
updates the previously issued revenue recognition guidance in
SAB 101, based on the

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Emerging Issues Task Force Issue 00-21,
Revenue Arrangements with Multiple Deliverables. If the
deliverables in a sales arrangement constitute separate units of
accounting according to the EITFs separation criteria, the
revenue-recognition policy must be determined for each
identified unit. If the arrangement is a single unit of
accounting under the separation criteria, the
revenue-recognition policy must be determined for the entire
arrangement. The adoption of SAB 104 did not have a
significant impact on the financial results of the Company.


LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents, and marketable securities
totaled $9,488,000 at December 31, 2003, down from
$11,568,000 at December 31, 2002 and $15,122,000 at
December 31, 2001.

|                                      |  |      |        |      |  |      |         |   |  |   |         |  
|------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                      |  | 2003 |        | 2002 |  | 2001
|                                      |  |      |        |      |  |     
|Cash used in operating activities     |  | $    | (4,100 | )    |  | $    | (10,040 | ) |  | $ | (15,209 | )
|Cash provided by investing activities |  |      | 13     |      |  |      | 5,139   |   |  |   | 8,096   |  
|Cash provided by financing activities |  | $    | 1,966  |      |  | $    | 7,534   |   |  | $ | 1,87    |  



| |                     
| | --------------------
| | Operating Activities

In 2003, cash used in operating activities was
$4,100,000, a decrease of $5,940,000 compared to 2002. The
decrease is primarily due to an overall reduction in our
expenses due to our restructurings that resulted from our lower
level of sales and revenues. Additionally our October 2003
license sale to AOL resulted in our receipt of $10,000,000 in
payments for licenses and services that will be provided through
December 2005. At December 31, 2003, $9,177,000 of this
sale remained deferred.

In 2002, cash used by operating activities was
$10,040,000, a decrease of $5,169,000 compared to 2001. The
decrease resulted primarily from a decrease in departmental
operating expenses decreases of $6,426,000.

In 2001, cash used by operating activities was
$15,209,000 primarily resulting from our net loss of
$52,370,000, partially offset by non-cash items of $19,257,000
for depreciation and amortization, and $7,925,000 for impairment
of goodwill and other intangible assets in accordance with
FAS 142, in addition to cash provided by our discontinued
operations of $6,488,000. The amortization expense related to
the purchase of Viewpoint Digital in 2000, in addition to other
goodwill balances. In 2002 the Company discontinued amortizing
goodwill in accordance with FAS 142.



| |                     
| | --------------------
| | Investing Activities

In 2003, cash provided by investing activities
was $13,000 resulting primarily from cash released from
restricted stock of $566,000 offset by capital expenditures of
$461,000, and net purchases of marketable securities of $68,000.

In 2002, cash provided by investing activities
was $5,139,000, a decrease of $2,957,000 compared to 2001. The
decrease was primarily due to our improved operating performance
which required us to sell substantially fewer investments to
fund operations. Capital expenditures were $936,000.

In 2001, cash provided by investing activities
was $8,096,000 as we sold a net $8,843,000 of our investments to
fund our operations. Capital expenditures were $872,000.



| |                     
| | --------------------
| | Financing Activities

In 2003, net cash provided by financing
activities was $1,966,000. This primarily resulted from the
issuance of $3,306,000 of subordinated notes in March 2003 and
$2,500,000 from the sale of common stock in November 2003,
offset by $3,300,000 from the redemption of the convertible
notes issued in December 2002.

In 2002, net cash provided by financing
activities was $7,534,000. This primarily resulted from the
issuance of convertible notes and warrants of $6,552,000 and
$1,387,000 of proceeds from the exercise of stock options by the
Companys employees.

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In 2001, net cash provided by financing
activities was $1,874,000. This primarily resulted from
$2,449,000 of proceeds from the exercise of stock options by the
Companys employees, offset by $575,000 in loans to two
officers of the Company.

In 2004 cash provided from financing activities
will include $3,675,000 of proceeds from our sale of common
stock in March 2004.

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 in an aggregate principal amount of
$7,000,000, and warrants to purchase 726,330 shares of
Company common stock. Interest on the convertible notes was
payable quarterly in arrears in cash or, at the option of the
Company, in shares of Company common stock, provided the Company
satisfied certain financial and other conditions. The
convertible notes were to 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 immediately exercisable at a
price of $2.26 per share.

The Company was required to register under the
Securities Act of 1933 the shares of Company common stock
(i) underlying the convertible notes, (ii) underlying
the warrants, and (iii) issuable as payment of interest on
the notes.

The convertible notes defined several events of
default, including but not limited to: (i) failure of the
Companys registration statement to be declared effective
by the Securities and Exchange Commission (SEC),
(ii) 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) judgments against the Company in excess of $1,000,000
and (viii) material breach of any representation, warranty,
covenant or other term. Upon an event of default, the
convertible notes would become immediately due and payable,
after a grace period to cure the default lapsed.

On February 28, 2003, the Company received
notices of default from two of the three investors. The notices
alleged that the Company was in default of the notes because it
had breached certain representations and warranties in the
Securities Purchase Agreement pursuant to which the notes and
warrants were issued.

On March 25, 2003, the Company entered into
Redemption, Amendment and Exchange Agreements with the three
institutional investors with whom it had completed the 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
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 convertible notes
were issued in three tranches of $900,000 each and are scheduled
to mature on December 31, 2007. 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 conversion price of the first, second,
and third tranche were determined on the basis of the arithmetic
average of the dollar volume-weighted average price of Company
common stock for the ten trading days following May 16,
2003, August 16, 2003, and November 16, 2003,
respectively, in each case subject to a minimum conversion price
of $1.00 and a maximum conversion price of $2.26. The conversion
price of the first $900,000 tranche of notes is $1.10. The
conversion price of the second $900,000 tranche of notes is
$1.00. The conversion price of the third $900,000 tranche of
notes is $1.00.

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Subsequent to December 31, 2003, one of the
institutional investors holding the convertible notes, converted
three convertible notes totaling $926,000 into Company common
stock at $1.00, $1.00, and $1.10, respectively. In connection
with this conversion, the Company issued the investor
898,000 shares of Company common stock.


At the noteholders option, up to 20% of the
net proceeds from any new capital raises by the Company may be
used to redeem outstanding notes at par plus accrued interest.
On November 12, 2003, the Company sold
3,125,000 shares of common stock in a private placement to
Federal Partners, L.P., an affiliate of The Clark
Estates, Inc. for $2,500,000, or $0.80 per share. The
noteholders chose not to exercise their right to redeem their
notes in an amount up to 20% of the $2,500,000 received by the
Company within 10 days of the Companys public
announcement of the closing of the private placement.

Each tranche of the notes is redeemable by the
investors at any time on or after June 30, 2004 in cash at
par plus accrued and unpaid interest if the dollar
volume-weighted average price of Company common stock is less
than the conversion price applicable to the notes for any 25
consecutive trading days. Each tranche of the notes is
redeemable by the investors at any time after December 31,
2005, 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 the conversion price applicable to the notes for
any 25 consecutive trading days following December 31,
2005. 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.

The Company has the right at any time to redeem
up to all of the outstanding notes at par plus accrued and
unpaid interest. 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 100% of the principal amount
being redeemed divided by the conversion price of the notes then
in effect.

Each tranche of the notes is convertible at the
Companys election at any time after April 15, 2004 if
the dollar volume-weighted average price of Company common stock
exceeds 150% of the conversion price applicable to the notes for
any 25 consecutive trading days following April 15, 2004.

The investors could have required the Company to
sell to the investors an 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. This right expired on January 14, 2004.

The Company had 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 exceeded $3.25 on each of not less than
15 trading days in any 20 consecutive trading-day period. This
right expired unexercised on June 30, 2003.

The Company was required to file a registration
statement by April 14, 2003, covering the resale of the
shares of common stock issued to the investors in exchange for
the $1,000,000 principal amount of convertible notes redeemed,
the shares of common stock issuable to the investors upon the
conversion of the notes, the shares of common stock underlying
the warrants issued and to be issued, and any shares of common
stock that may be issued as payment of interest on the notes.
The Company was required to pay cash penalties if the
registration statement was not declared effective by
June 30, 2003. The registration statement was declared
effective July 14, 2003, and the Company paid penalties of
$183,000.

On March 26, 2003, Viewpoint Corporation
entered into a Securities Purchase Agreement with three other
accredited investors, pursuant to which it received $3,500,000
in exchange for an aggregate of $3,500,000 principal amount of
4.95% subordinated notes and 3,614,756 shares of
Viewpoint common stock. The notes are scheduled to mature on
March 31, 2006.

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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) judgments against the Company in excess of $1,000,000,
(iii) event of bankruptcy, and (iv) material breach of
representations, covenants or other terms. Upon an event of
default, the notes will become immediately due and payable.

The Company filed a registration statement
covering the resale of the issued shares on May 9, 2003.

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

In March 2004, the Company sold
1,500,000 shares of common stock, in a private placement to
an institutional investor, for $3,675,000 or $2.45 per
share. The noteholders chose not to exercise their right to
redeem their notes in an amount up to 20% of the $3,675,000
received by the Company within 10 days of the
Companys public announcement of the closing of the private
placement.

In November 2003, the Company sold
3,125,000 shares of common stock, in a private placement to
Federal Partners, L.P., an affiliate of The Clark
Estates, Inc. for $2,500,000 or $0.80 per share. Under
the terms of the investment, the Company was obliged to file a
registration statement covering the resale of the shares within
45 days of the closing date, which occurred on
November 12, 2003. The Company filed the registration
statement on December 27, 2003.

In October 2003, the Company entered into an
amended license agreement with AOL which provided for payments
by AOL of $10,000,000. The agreement contains multiple elements
consisting of a perpetual broadcast license, a perpetual source
code license, quarterly updates to the source code through
December 2005, and maintenance and consulting services. The
Company will recognize revenue from this agreement ratably,
through December 31, 2005, which represents the duration of
the Companys obligation for post-contract customer support
including quarterly upgrades and maintenance requirements.

The Company implemented three restructuring plans
in 2003. The first plan, implemented in February 2003, reduced
operating expenses by closing the Companys Utah office and
terminating 28 employees in that office who were primarily
engaged in sales and marketing activities. In accordance with
SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities, the Company recorded
restructuring charges of $1,211,000. The restructuring charges
represent the fair value of remaining lease commitments reduced
by estimated sublease rental income, employee severance and
termination benefits, the write-off of the net book value of
certain fixed assets used in the Utah office, and other
miscellaneous charges. Subsequent to the restructuring, the
Company re-evaluated market conditions surrounding its efforts
to sub-lease the Utah office space and increased the
restructuring charge by $249,000 related to the fair value of
remaining lease commitments reduced by estimated sublease rental
income. The Company believes that it may be necessary to adjust
our estimate of sublease income in the future as our ability to
sublease the property is contingent upon real estate and other
market conditions in Utah.

The second plan was implemented in September
2003, and was designed to streamline the business. Under the
plan the Company eliminated 24 research and development,
sales and marketing, and general and administrative positions.
The Company incurred a restructuring charge of $463,000 related
to severance. The charge is recorded on our income statement as
a restructuring charge. The second restructuring plan was
completed by September 30, 2003. In November 2003, however,
the Company increased the restructuring charge by $50,000 in
settlement of an action filed by one of the terminated
employees, in addition to making a $2,000 decrease to the
reserve related to a decreased estimate.

The third plan was implemented in December 2003
and was designed to consolidate international operations to the
New York office. Accordingly the Company closed the London,
England office incurring a restructuring charge of $52,000
primarily related to severance. The charge is recorded on the
income statement as a restructuring charge. The third
restructuring plan was completed by December 31, 2003.

Pursuant to the agreement under which the Company
acquired all of the outstanding capital stock of Viewpoint
Digital on September 8, 2000, the Company issued two
contingent promissory notes to Computer

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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 was
approximately $2,928,000 and was reflected in due to
related parties in the Companys consolidated balance
sheet at December 31, 2002. During December 2003, the
Company issued 682,000 shares of common stock to Computer
Associates in full satisfaction of this $2,928,000 contingent
promissory note and resolution of certain other outstanding
issues surrounding the acquisition of Viewpoint Digital.

As of December 31, 2003, the Company had
cash commitments totaling approximately $13,468,000 through
2010, related to long-term convertible notes, and future minimum
lease payments for office space, equipment.

|                                                |  |                        |        |                        |  |           |       |           |  |         |       |  |  |   |       |  |  |   |     | 
|----------------------------------------------- |  | ---------------------- | ------ | ---------------------- |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | ----- |  |  | - | --- | 
|                                                |  |                        |        |                        |  |          
|                                                |  |                        |        | Payments Due By Period |  |          
|                                                |  |                        |        |                        |  |          
|                                                |  |                        |        | 1 Year or              |  |           |       | More than
|                                                |  | Total                  |        | Less                   |  | 2-3 Years |       | 4-5 Years |  | 5 Years
|                                                |  |                        |        |                        |  |           |       |           |  |        
|                                                |  |                       
|                                                |  | (Dollars in thousands)
|Long-Term Debt Obligations                      |  | $                      | 6,200  |                        |  | $         |      |           |  | $       |      |  |  | $ | 6,200 |  |  | $ |    | 
|Operating Lease Obligations                     |  |                        | 5,397  |                        |  |           | 1,104 |           |  |         | 1,782 |  |  |   | 1,644 |  |  |   | 867 | 
|Interest Payments on Long-Term Debt Obligations |  |                        | 1,535  |                        |  |           | 307   |           |  |         | 614   |  |  |   | 614   |  |  |   |    | 
|Severance Commitments (Note 12)                 |  |                        | 208    |                        |  |           | 208   |           |  |         |      |  |  |   |      |  |  |   |    | 
|Purchase Obligations                            |  |                        | 128    |                        |  |           | 128   |           |  |         |      |  |  |   |      |  |  |   |    | 
|                                                |  |                        |        |                        |  |           |       |           |  |         |       |  |  |   |       |  |  |   |     | 
|Total                                           |  | $                      | 13,468 |                        |  | $         | 1,747 |           |  | $       | 2,396 |  |  | $ | 8,458 |  |  | $ | 867 | 
|                                                |  |                        |        |                        |  |           |       |           |  |         |       |  |  |   |       |  |  |   |     | 

The Company believes that its current cash, cash
equivalents, and marketable securities balances and cash
provided by future operations, are sufficient to meet its
operating cash flow needs and anticipated capital expenditure
requirements through at least the next twelve months. The
Company has contingency plans for 2004 if expected revenue
targets are not achieved and/or the redemption of the
convertible notes is required. These plans include further
workforce reductions as well as reductions in overhead and
capital expenditures. 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. In the event the Company is unable to
obtain adequate financing or profitable operations in future
periods, operations will need to be scaled back or discontinued.






|         |                                                              
|-------- | -------------------------------------------------------------
|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, 2003.
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

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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.





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 Auditors                                                                                           |  |      | 40 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                         |  |      | 41 | 
|Consolidated Statement of Operations for each of
    the three years in the period ended December 31, 2003               |  |      | 42 | 
|Consolidated Statement of Stockholders
    Equity for each of the three years in the period ended
    December 31, 2003 |  |      | 43 | 
|Consolidated Statement of Cash Flows for each of
    the three years in the period ended December 31, 2003               |  |      | 44 | 
|Notes to Consolidated Financial Statements                                                                               |  |      | 46 | 

2. Index to Financial Statement
Schedule

|                                                    |  |      |    | 
|--------------------------------------------------- |  | ---- | -- | 
|                                                    |  | Page
|                                                    |  |     
|Schedule                                            |  |      |    | 
|Schedule II  Valuation and
    Qualifying Accounts |  |      | 75 | 

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 AUDITORS

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, 2003 and
2002, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2003 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 17, 2004


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VIEWPOINT CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                              |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |        |        | 
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | -------- | ----- | ------ |  | -------- | ------ | ------ | 
|                                                              |                                                                                                                                                                                                                                |                                           
|                                                              |                                                                                                                                                                                                                                | December 31,                              
|                                                              |                                                                                                                                                                                                                                |                                           
|                                                              |                                                                                                                                                                                                                                | 2003                                       |          | 2002 
|                                                              |                                                                                                                                                                                                                                |                                            |          |      
|                                                              |                                                                                                                                                                                                                                |                                           
|                                                              |                                                                                                                                                                                                                                | (In thousands, except per                 
|                                                              |                                                                                                                                                                                                                                | share data)                               
|ASSETS                                                       
|Current Assets:                                               |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|                                                              | Cash and cash equivalents                                                                                                                                                                                                      |                                            | $        | 8,530 |        |  | $        | 10,678 |       
|                                                              | Marketable securities                                                                                                                                                                                                          |                                            |          | 958   |        |  |          | 890    |       
|                                                              | Accounts receivable, net of reserve of $1,611 and
    $1,557, respectively                                                                                                                                                     |                                            |          | 650   |        |  |          | 2,925  |       
|                                                              | Related party accounts receivable                                                                                                                                                                                              |                                            |          | 914   |        |  |          | 838    |       
|                                                              | Notes receivable, net                                                                                                                                                                                                          |                                            |          |      |        |  |          | 750    |       
|                                                              | Prepaid expenses                                                                                                                                                                                                               |                                            |          | 694   |        |  |          | 599    |       
|                                                              |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|                                                              |                                                                                                                                                                                                                                | Total current assets                       |          |       | 11,746 |  |          |        | 16,680 | 
|Restricted cash                                               |                                                                                                                                                                                                                                |                                            | 388      |       |        |  | 987      |       
|Property and equipment, net                                   |                                                                                                                                                                                                                                |                                            | 1,859    |       |        |  | 3,591    |       
|Goodwill, net                                                 |                                                                                                                                                                                                                                |                                            | 31,276   |       |        |  | 31,276   |       
|Intangible assets, net                                        |                                                                                                                                                                                                                                |                                            | 186      |       |        |  | 165      |       
|Other assets, net                                             |                                                                                                                                                                                                                                |                                            | 288      |       |        |  | 653      |       
|                                                              |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|                                                              |                                                                                                                                                                                                                                | Total assets                               |          | $     | 45,743 |  |          | $      | 53,352 | 
|                                                              |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY                     
|Current liabilities:                                          |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|                                                              | Accounts payable                                                                                                                                                                                                               |                                            | $        | 1,177 |        |  | $        | 2,962  |       
|                                                              | Accrued expenses                                                                                                                                                                                                               |                                            |          | 1,094 |        |  |          | 388    |       
|                                                              | Due to related parties, net                                                                                                                                                                                                    |                                            |          |      |        |  |          | 2,920  |       
|                                                              | Deferred revenues                                                                                                                                                                                                              |                                            |          | 423   |        |  |          | 334    |       
|                                                              | Related party deferred revenues                                                                                                                                                                                                |                                            |          | 4,952 |        |  |          | 249    |       
|                                                              | Accrued incentive compensation                                                                                                                                                                                                 |                                            |          | 545   |        |  |          | 545    |       
|                                                              | Current liabilities related to discontinued
    operations                                                                                                                                                                     |                                            |          | 231   |        |  |          | 231    |       
|                                                              |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|                                                              |                                                                                                                                                                                                                                | Total current liabilities                  |          |       | 8,422  |  |          |        | 7,629  | 
|Deferred rent                                                 |                                                                                                                                                                                                                                |                                            | 400      |       |        |  | 371      |       
|Related party deferred revenue                                |                                                                                                                                                                                                                                |                                            | 4,706    |       |        |  |         |       
|Convertible notes                                             |                                                                                                                                                                                                                                |                                            | 2,837    |       |        |  | 6,712    |       
|Warrants to purchase common stock                             |                                                                                                                                                                                                                                |                                            | 110      |       |        |  | 288      |       
|Subordinated notes                                            |                                                                                                                                                                                                                                |                                            | 1,801    |       |        |  |         |       
|                                                              |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|                                                              |                                                                                                                                                                                                                                | Total liabilities                          |          |       | 18,276 |  |          |        | 15,000 | 
|Commitments and contingencies (note 13)                       |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|Stockholders equity:                                         |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|                                                              | Preferred stock, $.001 par value;
    5,000 shares authorized  no shares issued and
    outstanding at December 31, 2003 and 2002                                                                                             |                                            |          |      |        |  |          |       |       
|                                                              | Common stock, $.001 par value; 75,000 shares
    authorized  49,965 shares issued and
    49,805 shares outstanding at December 31, 2003, and
    41,179 shares issued and 41,019 shares outstanding at
    December 31, 2002 |                                            |          | 50    |        |  |          | 41     |       
|Paid-in capital                                               |                                                                                                                                                                                                                                |                                            | 274,351  |       |        |  | 267,569  |       
|Deferred compensation                                         |                                                                                                                                                                                                                                |                                            | (275     | )     |        |  | (4,130   | )     
|Treasury stock at cost; 160 at December 31,
    2003 and 2002 |                                                                                                                                                                                                                                |                                            | (1,015   | )     |        |  | (1,015   | )     
|Accumulated other comprehensive income (loss)                 |                                                                                                                                                                                                                                |                                            | (65      | )     |        |  | (36      | )     
|Accumulated deficit                                           |                                                                                                                                                                                                                                |                                            | (245,579 | )     |        |  | (224,077 | )     
|                                                              |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|                                                              |                                                                                                                                                                                                                                | Total stockholders equity                 |          |       | 27,467 |  |          |        | 38,352 | 
|                                                              |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       
|                                                              |                                                                                                                                                                                                                                | Total liabilities and stockholders equity |          | $     | 45,743 |  |          | $      | 53,352 | 
|                                                              |                                                                                                                                                                                                                                |                                            |          |       |        |  |          |       

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

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VIEWPOINT CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |        |  
|----------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                              |                                                                                                                                                      |                                
|                                                                              |                                                                                                                                                      | Years Ended December 31,       
|                                                                              |                                                                                                                                                      |                                
|                                                                              |                                                                                                                                                      | 2003                            |         | 2002   |   | 2001
|                                                                              |                                                                                                                                                      |                                 |         |        |   |     
|                                                                              |                                                                                                                                                      |                                
|                                                                              |                                                                                                                                                      | (In thousands, except per share
|                                                                              |                                                                                                                                                      | amounts)                       
|Revenues:                                                                     |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|                                                                              | Licenses                                                                                                                                             |                                 | $       | 2,283  |   |      | $       | 5,039  |   |   | $       | 8,148  |  
|                                                                              | Related party licenses                                                                                                                               |                                 |         | 1,729  |   |      |         | 7,554  |   |   |         | 1,533  |  
|                                                                              | Services                                                                                                                                             |                                 |         | 4,291  |   |      |         | 3,302  |   |   |         | 3,500  |  
|                                                                              | Related party services                                                                                                                               |                                 |         | 5,226  |   |      |         | 2,244  |   |   |         | 827    |  
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Total revenues                                                                |                                                                                                                                                      |                                 | 13,529  |        |   |      | 18,139  |        |   |   | 14,008  |       
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Cost of revenues:                                                             |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|                                                                              | Licenses                                                                                                                                             |                                 |         | 97     |   |      |         | 353    |   |   |         | 309    |  
|                                                                              | Services                                                                                                                                             |                                 |         | 5,776  |   |      |         | 3,587  |   |   |         | 3,283  |  
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Total cost of revenues                                                        |                                                                                                                                                      |                                 | 5,873   |        |   |      | 3,940   |        |   |   | 3,592   |       
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Gross profit                                                                  |                                                                                                                                                      |                                 | 7,656   |        |   |      | 14,199  |        |   |   | 10,416  |       
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Operating expenses:                                                           |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|                                                                              | Sales and marketing (including non-cash
    stock-based compensation charges totaling $523 in 2003, $3,187
    in 2002, and $2,335 in 2001)          |                                 |         | 8,723  |   |      |         | 16,682 |   |   |         | 17,521 |  
|                                                                              | Research and development (including non-cash
    stock-based compensation charges totaling $832 in 2003, $712 in
    2002, and $2,920 in 2001)       |                                 |         | 4,209  |   |      |         | 4,348  |   |   |         | 9,846  |  
|                                                                              | General and administrative (including non-cash
    stock-based compensation charges totaling $1,352 in 2003, $1,523
    in 2002, and $1,918 in 2001) |                                 |         | 11,549 |   |      |         | 10,334 |   |   |         | 10,423 |  
|                                                                              | Depreciation                                                                                                                                         |                                 |         | 1,543  |   |      |         | 1,962  |   |   |         | 1,804  |  
|                                                                              | Amortization of intangible assets                                                                                                                    |                                 |         | 10     |   |      |         | 664    |   |   |         | 3,325  |  
|                                                                              | Restructuring charges                                                                                                                                |                                 |         | 2,023  |   |      |         |       |   |   |         |       |  
|                                                                              | Amortization of goodwill                                                                                                                             |                                 |         |       |   |      |         |       |   |   |         | 14,128 |  
|                                                                              | Impairment of goodwill and other intangible assets                                                                                                   |                                 |         |       |   |      |         | 6,275  |   |   |         | 7,925  |  
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Total operating expenses                                                      |                                                                                                                                                      |                                 | 28,057  |        |   |      | 40,265  |        |   |   | 64,972  |       
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Loss from operations                                                          |                                                                                                                                                      |                                 | (20,401 | )      |   |      | (26,066 | )      |   |   | (54,556 | )     
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Other income (expense), net                                                   |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|                                                                              | Interest and other income; net                                                                                                                       |                                 |         | 254    |   |      |         | 153    |   |   |         | 1,064  |  
|                                                                              | Interest expense                                                                                                                                     |                                 |         | (958   | ) |      |         |       |   |   |         |       |  
|                                                                              | Changes in fair values of warrants to purchase
    common stock and conversion options of convertible notes                                          |                                 |         | 1,209  |   |      |         |       |   |   |         |       |  
|                                                                              | Loss on early extinguishment of debt                                                                                                                 |                                 |         | (1,682 | ) |      |         |       |   |   |         |       |  
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Total other income (expense)                                                  |                                                                                                                                                      |                                 | (1,177  | )      |   |      | 153     |        |   |   | 1,064   |       
|Loss before provision for income taxes                                        |                                                                                                                                                      |                                 | (21,578 | )      |   |      | (25,913 | )      |   |   | (53,492 | )     
|Provision for income taxes                                                    |                                                                                                                                                      |                                 | 81      |        |   |      | 107     |        |   |   |        |       
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Net loss from continuing operations                                           |                                                                                                                                                      |                                 | (21,659 | )      |   |      | (26,020 | )      |   |   | (53,492 | )     
|Adjustment to net loss on disposal of
    discontinued operations, net of tax |                                                                                                                                                      |                                 | 157     |        |   |      | 127     |        |   |   | 1,122   |       
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Net loss applicable to common stockholders                                    |                                                                                                                                                      | $                               | (21,502 | )      |   | $    | (25,893 | )      |   | $ | (52,370 | )     
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Basic and diluted net loss per common share:                                  |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|                                                                              | Net loss per common share from continuing
    operations                                                                                             |                                 | $       | (0.47  | ) |      | $       | (0.64  | ) |   | $       | (1.37  | )
|                                                                              | Net income (loss) per common share from
    discontinued operations                                                                                  |                                 |         | 0.00   |   |      |         | 0.00   |   |   |         | 0.03   |  
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Net loss per common share                                                     |                                                                                                                                                      | $                               | (0.47   | )      |   | $    | (0.64   | )      |   | $ | (1.34   | )     
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       
|Weighted average number of shares
    outstanding  basic and diluted         |                                                                                                                                                      |                                 | 45,280  |        |   |      | 40,759  |        |   |   | 39,077  |       
|                                                                              |                                                                                                                                                      |                                 |         |        |   |      |         |        |   |   |         |       

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

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VIEWPOINT CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

For the Years Ended December 31, 2003,
2002, and 2001


|                              |                                                                                     |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |        |   |   |         |       |   |  |      |      |   |   |        |        |  
|----------------------------- | ----------------------------------------------------------------------------------- | --------------- | - | ------------ |  | ------- | - | -------- |  | -------------- | ------ | ------------ |  | ------ | -- | ------ |  | - | ------- | ------ | - | - | ------- | ----- | - |  | ---- | ---- | - | - | ------ | ------ | -
|                              |                                                                                     |                 |   |              |  |         |   |          |  |                |        |              |  |       
|                              |                                                                                     | 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, 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 gain on marketable securities                                            |                 |   |             |  |         |   |         |  |                |        |             |  |        |    |       |  |   |         |       |   |   |         |      |   |  |      |     |   |   |        |       |  
|                              | Net loss                                                                            |                 |   |             |  |         |   |         |  |                |        |             |  |        |    |       |  |   |         |       |   |   |         |      |   |  |      |     |   |   |        |       |  
|                              |                                                                                     |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |        |   |   |         |       |   |  |      |      |   |   |        |       
|Balances at December 31, 2002 |                                                                                     |                 |  |              |  |         |  |          |  |                | 41,179 |              |  |        | 41 |        |  |   | 267,569 |        |   |   | (4,130  | )     |   |  | (160 | )    |   |   | (1,015 | )     
|                              |                                                                                     |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |        |   |   |         |       |   |  |      |      |   |   |        |       
|                              | Issuance of common stock upon the exercise of
    stock options                     |                 |   |             |  |         |   |         |  |                |        | 13           |  |        |    |       |  |   |         | 10     |   |   |         |      |   |  |      |     |   |   |        |       |  
|                              | Issuance of common stock                                                            |                 |   |             |  |         |   |         |  |                |        | 3,125        |  |        |    | 3      |  |   |         | 2,497  |   |   |         |      |   |  |      |     |   |   |        |       |  
|                              | Issuance of common stock to CA in repayment of
    promissory note                  |                 |   |             |  |         |   |         |  |                |        | 682          |  |        |    | 1      |  |   |         | 2,728  |   |   |         |      |   |  |      |      |   |   |        |        |  
|                              | Issuance of common stock option awards                                              |                 |   |             |  |         |   |         |  |                |        |             |  |        |    |       |  |   |         | 14     |   |   |         | (14   | ) |  |      |     |   |   |        |       |  
|                              | Issuance/ cancellation of common stock option
    awards                            |                 |   |             |  |         |   |         |  |                |        |             |  |        |    |       |  |   |         | (1,162 | ) |   |         | 1,162 |   |  |      |     |   |   |        |       |  
|                              | Amortization of deferred compensation                                               |                 |   |             |  |         |   |         |  |                |        |             |  |        |    |       |  |   |         |       |   |   |         | 2,707 |   |  |      |     |   |   |        |       |  
|                              | Issuance of convertible debt                                                        |                 |   |             |  |         |   |         |  |                |        | 1,351        |  |        |    | 1      |  |   |         | 892    |   |   |         |       |   |  |      |      |   |   |        |        |  
|                              | Issuance of subordinated notes                                                      |                 |   |             |  |         |   |         |  |                |        | 3,615        |  |        |    | 4      |  |   |         | 1,803  |   |   |         |      |   |  |      |     |   |   |        |       |  
|                              | Translation adjustment                                                              |                 |   |             |  |         |   |         |  |                |        |             |  |        |    |       |  |   |         |       |   |   |         |      |   |  |      |     |   |   |        |       |  
|                              | Unrealized gain on marketable securities                                            |                 |   |             |  |         |   |         |  |                |        |             |  |        |    |       |  |   |         |       |   |   |         |      |   |  |      |     |   |   |        |       |  
|                              | Net loss                                                                            |                 |   |             |  |         |   |         |  |                |        |             |  |        |    |       |  |   |         |       |   |   |         |      |   |  |      |     |   |   |        |       |  
|                              |                                                                                     |                 |   |              |  |         |   |          |  |                |        |              |  |        |    |        |  |   |         |        |   |   |         |       |   |  |      |      |   |   |        |       
|Balances at December 31, 2003 |                                                                                     |                 |  |              |  | $       |  |          |  |                | 49,965 |              |  | $      | 50 |        |  | $ | 274,351 |        |   | $ | (275    | )     |   |  | (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, 2000 |                                                                                     | $              | 12  |             |   | $             | (145,814 | )             |   | $ | 96,339 |         |   | $ | (55,738 | )      
|                              |                                                                                     |                |     |             |   |               |          |               |   |   |        |         |   |   |         |        
|                              | Issuance of common stock upon the exercise of
    stock options                     |                |     |            |   |               |          |              |   |   |        | 2,449   |   |   |         |        |  
|                              | Issuance/ cancellation 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/ cancellation 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 gain 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 | )      
|                              |                                                                                     |                |     |             |   |               |          |               |   |   |        |         |   |   |         |        
|                              | Issuance of common stock upon the exercise of
    stock options                     |                |     |            |   |               |          |              |   |   |        | 10      |   |   |         |        |  
|                              | Issuance of common stock                                                            |                |     |            |   |               |          |              |   |   |        | 2,500   |   |   |         |        |  
|                              | Issuance of common stock to CA in repayment of
    promissory note                  |                |     |             |   |               |          |               |   |   |        | 2,729   |   |   |         |        |  
|                              | Issuance of common stock option awards                                              |                |     |            |   |               |          |              |   |   |        |        |   |   |         |        |  
|                              | Issuance/ cancellation of common stock option
    awards                            |                |     |            |   |               |          |              |   |   |        |        |   |   |         |        |  
|                              | Amortization of deferred compensation                                               |                |     |            |   |               |          |              |   |   |        | 2,707   |   |   |         |        |  
|                              | Issuance of convertible debt                                                        |                |     |             |   |               |          |               |   |   |        | 893     |   |   |         |         |  
|                              | Issuance of subordinated notes                                                      |                |     |            |   |               |          |              |   |   |        | 1,807   |   |   |         |        |  
|                              | Translation adjustment                                                              |                |     | (27         | ) |               |          |              |   |   |        | (27     | ) |   |         | (27     | )
|                              | Unrealized gain on marketable securities                                            |                |     | (2          | ) |               |          |              |   |   |        | (2      | ) |   |         | (2      | )
|                              | Net loss                                                                            |                |     |            |   |               |          | (21,502       | ) |   |        | (21,502 | ) |   |         | (21,502 | )
|                              |                                                                                     |                |     |             |   |               |          |               |   |   |        |         |   |   |         |        
|Balances at December 31, 2003 |                                                                                     | $              | (65 | )           |   | $             | (245,579 | )             |   | $ | 27,467 |         |   | $ | (21,531 | )      
|                              |                                                                                     |                |     |             |   |               |          |               |   |   |        |         |   |   |         |        

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

43



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##### Table of Contents



VIEWPOINT CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                                                                                            |                                                            |                                           |        |        |        |         |       |       |         |         |        |        |         |  
|------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | ------ | ------ | ------ | ------- | ----- | ----- | ------- | ------- | ------ | ------ | ------- | -
|                                                                                |                                                                                                            |                                                           
|                                                                                |                                                                                                            | Years Ended December 31,                                  
|                                                                                |                                                                                                            |                                                           
|                                                                                |                                                                                                            | 2003                                                       |                                           | 2002   |        | 2001  
|                                                                                |                                                                                                            |                                                            |                                           |        |        |       
|                                                                                |                                                                                                            |                                                           
|                                                                                |                                                                                                            | (In thousands)                                            
|Cash flows from operating activities:                                           |                                                                                                            |                                                            |                                           |        |        |        |         |       |       |         |         |       
|Net loss                                                                        |                                                                                                            | $                                                          | (21,502                                   | )      |        | $      | (25,893 | )     |       | $       | (52,370 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                                                            |                                                            |                                           |        |        |        |         |       |       |         |         |       
|                                                                                | Adjustment to net loss on disposal of
    discontinued operations                                          |                                                            |                                           |       |        |        |         | (127  | )     |         |         | (1,122 | )     
|                                                                                | Non-cash stock-based compensation charges                                                                  |                                                            |                                           | 2,707  |        |        |         | 5,422 |       |         |         | 7,173  |       
|                                                                                | Other income from issuance of common stock to
    Computer Associates in settlement of a promissory note   |                                                            |                                           | (200   | )      |        |         |      |       |         |         |       |       
|                                                                                | Restructuring charges                                                                                      |                                                            |                                           | 2,023  |        |        |         |      |       |         |         |       |       
|                                                                                | Impairment of goodwill and other intangible assets                                                         |                                                            |                                           |       |        |        |         | 6,275 |       |         |         | 7,925  |       
|                                                                                | Depreciation and amortization                                                                              |                                                            |                                           | 1,554  |        |        |         | 2,626 |       |         |         | 19,257 |       
|                                                                                | Provision for bad debt                                                                                     |                                                            |                                           | 1,160  |        |        |         | 741   |       |         |         | 544    |       
|                                                                                | Accrued interest income                                                                                    |                                                            |                                           |       |        |        |         | (17   | )     |         |         | (20    | )     
|                                                                                | Loss on sale and disposal of equipment                                                                     |                                                            |                                           | 226    |        |        |         | 45    |       |         |         | 12     |       
|                                                                                | Loss on sale of marketable securities                                                                      |                                                            |                                           |       |        |        |         | 6     |       |         |         |       |       
|                                                                                | Forgiveness, reserve and recovery of notes
    receivables                                                 |                                                            |                                           | 750    |        |        |         | 612   |       |         |         | (665   | )     
|                                                                                | Non-monetary sale of software for marketable
    securities                                                |                                                            |                                           |       |        |        |         |      |       |         |         | (165   | )     
|                                                                                | Changes in fair values of warrants to purchase
    common stock and conversion feature of convertible debt |                                                            |                                           | (1,209 | )      |        |         |       |       |         |         |        |       
|                                                                                | Loss on early extinguishment of debt                                                                       |                                                            |                                           | 1,682  |        |        |         |       |       |         |         |        |       
|                                                                                | Amortization of debt discount and issuance costs                                                           |                                                            |                                           | 458    |        |        |         |       |       |         |         |        |       
|                                                                                | Changes in operating assets and liabilities, net
    of acquisitions:                                      |                                                            |                                           |        |        |        |         |       |       |         |         |        |       
|                                                                                |                                                                                                            | Accounts receivable                                        |                                           |        | 1,115  |        |         |       | (700  | )       |         |        | (1,449 | )      
|                                                                                |                                                                                                            | Related party accounts receivable                          |                                           |        | (76    | )      |         |       | 292   |         |         |        | (887   | )      
|                                                                                |                                                                                                            | Prepaid expenses                                           |                                           |        | (359   | )      |         |       | 227   |         |         |        | 917    |        
|                                                                                |                                                                                                            | Accounts payable                                           |                                           |        | (1,008 | )      |         |       | 1,186 |         |         |        | (2,038 | )      
|                                                                                |                                                                                                            | Accrued expenses                                           |                                           |        | (927   | )      |         |       | (545  | )       |         |        | 443    |        
|                                                                                |                                                                                                            | Due to/from related parties                                |                                           |        | 8      |        |         |       | (19   | )       |         |        | 323    |        
|                                                                                |                                                                                                            | Deferred revenues                                          |                                           |        | 89     |        |         |       | (40   | )       |         |        | (101   | )      
|                                                                                |                                                                                                            | Related party deferred revenues                            |                                           |        | 9,409  |        |         |       | (284  | )       |         |        | 526    |        
|                                                                                |                                                                                                            | Net cash provided by (used in) discontinued
    operations |                                           |        |       |        |         |       | 153   |         |         |        | 6,488  |        
|                                                                                |                                                                                                            |                                                            |                                           |        |        |        |         |       |       |         |         |       
|                                                                                |                                                                                                            |                                                            | Net cash used in operating activities     |        |        | (4,100 | )       |       |       | (10,040 | )       |        |        | (15,209 | )
|Cash flows from investing activities:                                           |                                                                                                            |                                                            |                                           |        |        |        |         |       |       |         |         |       
|Proceeds from sales and maturities of marketable
    securities                 |                                                                                                            |                                                            | 2,025                                     |        |        |        | 9,634   |       |       |         | 31,885  |       
|Purchases of marketable securities                                              |                                                                                                            |                                                            | (2,093                                    | )      |        |        | (3,507  | )     |       |         | (23,042 | )     
|Net (increase)/decrease in restricted cash                                      |                                                                                                            |                                                            | 566                                       |        |        |        | (3      | )     |       |         | (291    | )     
|Purchases of property and equipment                                             |                                                                                                            |                                                            | (461                                      | )      |        |        | (936    | )     |       |         | (872    | )     
|Sale of property and equipment                                                  |                                                                                                            |                                                            | 7                                         |        |        |        |        |       |       |         | 16      |       
|Purchases of patents and trademarks                                             |                                                                                                            |                                                            | (31                                       | )      |        |        | (49     | )     |       |         | (120    | )     
|Repayment of notes receivable from related parties                              |                                                                                                            |                                                            |                                          |        |        |        |        |       |       |         | 520     |       
|                                                                                |                                                                                                            |                                                            |                                           |        |        |        |         |       |       |         |         |       
|                                                                                |                                                                                                            |                                                            | Net cash provided by investing activities |        |        | 13     |         |       |       | 5,139   |         |        |        | 8,096   |  

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##### Table of Contents



|                                                                                                      |                                           |                          |        |       |  |      |        |       |  |   |        |       | 
|----------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------ | ------ | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                                                                                      |                                           |                         
|                                                                                                      |                                           | Years Ended December 31,
|                                                                                                      |                                           |                         
|                                                                                                      |                                           | 2003                     |        | 2002  |  | 2001
|                                                                                                      |                                           |                          |        |       |  |     
|                                                                                                      |                                           |                         
|                                                                                                      |                                           | (In thousands)          
|Cash flows from financing activities:                                                                 |                                           |                          |        |       |  |      |        |       |  |   |        |      
|Proceeds from issuance of common stock                                                                |                                           |                          | 2,500  |       |  |      |       |       |  |   |       |      
|Proceeds from issuance of convertible notes, net
    of issuance costs paid of $160                   |                                           |                          |       |       |  |      | 6,552  |       |  |   |       |      
|Proceeds from issuance of subordinated notes and
    common stock, net of issuance costs paid of $194 |                                           |                          | 3,306  |       |  |      |       |       |  |   |       |      
|Repayment of convertible notes                                                                        |                                           |                          | (3,300 | )     |  |      |       |       |  |   |       |      
|Proceeds from issuance of warrants to purchase
    common stock                                       |                                           |                          |       |       |  |      | 288    |       |  |   |       |      
|Payment of issuance costs on convertible notes                                                        |                                           |                          | (583   | )     |  |      |       |       |  |   |       |      
|Restricted cash in escrow for interest on
    convertible notes                                       |                                           |                          | 33     |       |  |      | (693   | )     |  |   |       |      
|Proceeds from exercise of stock options                                                               |                                           |                          | 10     |       |  |      | 1,387  |       |  |   | 2,449  |      
|Issuance of loans to officers                                                                         |                                           |                          |       |       |  |      |       |       |  |   | (575   | )    
|                                                                                                      |                                           |                          |        |       |  |      |        |       |  |   |        |      
|                                                                                                      | Net cash provided by financing activities |                          |        | 1,966 |  |      |        | 7,534 |  |   |        | 1,874 | 
|Effect of exchange rates changes on cash                                                              |                                           |                          | (27    | )     |  |      | (9     | )     |  |   | (27    | )    
|                                                                                                      |                                           |                          |        |       |  |      |        |       |  |   |        |      
|Net increase (decrease) in cash and cash
    equivalents                                              |                                           |                          | (2,148 | )     |  |      | 2,624  |       |  |   | (5,266 | )    
|Cash and cash equivalents at beginning of year                                                        |                                           |                          | 10,678 |       |  |      | 8,054  |       |  |   | 13,320 |      
|                                                                                                      |                                           |                          |        |       |  |      |        |       |  |   |        |      
|Cash and cash equivalents at end of year                                                              |                                           | $                        | 8,530  |       |  | $    | 10,678 |       |  | $ | 8,054  |      
|                                                                                                      |                                           |                          |        |       |  |      |        |       |  |   |        |      
|Supplemental disclosure of cash flow activities:                                                      |                                           |                          |        |       |  |      |        |       |  |   |        |      
|Cash paid during the year for income taxes                                                            |                                           | $                        | 139    |       |  | $    | 152    |       |  | $ | 78     |      
|Cash paid during the year for interest                                                                |                                           |                          | 316    |       |  |      |       |       |  |   |       |      
|Supplemental disclosure of non-cash investing and
    financing activities:                           |                                           |                          |        |       |  |      |        |       |  |   |        |      
|Unrealized gains (losses) on marketable
    securities                                                |                                           | $                        | 2      |       |  | $    | (45    | )     |  | $ | 33     |      
|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  |      
|Issuance of common stock in settlement of
    promissory note                                         |                                           |                          | 2,728  |       |  |      |       |       |  |   |       |      
|Issuance of 1,351,351 shares of common stock as
    partial repayment of convertible notes            |                                           |                          | 1,000  |       |  |      |       |       |  |   |       |      
|Non-monetary purchase of marketable securities                                                        |                                           |                          |       |       |  |      |       |       |  |   | 165    |      
|Rent credit received related to lease-hold
    improvements                                           |                                           |                          | 34     |       |  |      |       |       |  |   |       |      
|Accounts receivable, net, acquired in connection
    with acquisition of Viewpoint Digital            |                                           |                          |       |       |  |      |       |       |  |   | 203    |      
|Conversion of accrued compensation to equity upon
    exercise of certain options                     |                                           |                          |       |       |  |      |       |       |  |   | 1      |      

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

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##### Table of Contents



VIEWPOINT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Business and
Organization

Overview.Viewpoint
Corporation (Viewpoint or the Company)
is a leading provider of interactive media technologies and
services. Its graphics operating platform, the Viewpoint Media
Player, has been licensed by Fortune 500 companies and others
for use in online, offline and embedded applications serving a
wide variety of needs, including: marketing campaigns, rich
media online advertising, product presentations, and business
process visualizations.

On March 17, 2004, Viewpoint entered the
internet search business by launching a toolbar search product
which the Company calls the Viewpoint Toolbar. The
Viewpoint Toolbar attaches to the Internet Explorer browser,
enabling web surfers to conduct internet searches without
leaving the web page they are viewing. When a user enters a term
or phrase in the search field of the Viewpoint Toolbar, search
results appear not only as text links listed on a search results
page but also as thumbnail icons of the web pages themselves in
a tray that descends from the Viewpoint Toolbar.
Search results delivered to users of the Viewpoint Toolbar are
supplied by Yahoo! Inc. and its wholly-owned subsidiary,
Overture Services, Inc. Under its Agreement with
Yahoo!/Overture, Viewpoint receives a share of the fees
advertisers pay to Yahoo!/Overture to be listed in the search
results as a sponsored link.

Viewpoint also offers an online advertising
campaign management and deployment product known as
Creative Innovator. Creative Innovator permits
publishers, advertisers, and their agencies to manage the
process of deploying online advertising campaigns. This process
includes creating the advertising assets, selecting the sites on
which the advertisements will be deployed, setting the metrics
(ad rotation, the frequency with which an ad may be deployed,
and others) associated with the campaign, ad deployment, and
tracking of campaign results. Creative Innovator enables users
to manage advertising campaigns across many sites. In March
2004, Viewpoint announced the availability of
AirTime, an extension of Creative Innovator that
permits users to manage and deploy online video advertising
campaigns.

Until December 1999, the Company was primarily
engaged in the development, marketing, and sales of pre-packaged
software graphics products. Its principal products were computer
graphics painting tools and photo imaging 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 rich media on the
Internet. In June 1999, the Company formed Metastream
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
pre-packaged software business. The Company discontinued these
operations in April 2000 and Metastream merged with and into the
Company in November 2000.

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
2003 presentation.

Liquidity

The Company had cash, cash equivalents and
marketable securities of $9,488,000 at December 31, 2003.
During the year ended December 31, 2003, net cash used in
operations amounted to $4,100,000. Viewpoint has had significant
quarterly and annual operating losses since its inception, and
as of December 31, 2003, had

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

an accumulated deficit of $245,579,000. There can
be no assurance that Viewpoint will achieve or sustain cash
flows from operations or profitability.

The Company believes that its current cash, cash
equivalents, and marketable securities balances, and cash
obtained through a private equity financing of $3,675,000
received in March 2004 (see Note 20), will be sufficient to
meet its operating cash flow needs and anticipated capital
expenditure requirements through at least the next twelve months.

Holders of the Companys convertible notes
(see Note 9 for specific terms and conditions) which were
issued on March 25, 2003, may redeem notes on or after
June 30, 2004 if the Companys common stock trades
below the conversion price for 25 consecutive trading days,
subject to the terms and conditions of the notes described in
Note 9.

The Company has contingency plans for 2004 if
expected revenue targets are not achieved. These plans include
further workforce reductions as well as reductions in overhead
and capital expenditures. The Company may seek additional funds
when necessary through public or private equity financing or
from other sources to fund our operations and pursue our growth.

The Company currently has no commitment for
additional financing, and may experience difficulty in obtaining
additional financing on favorable terms, if at all. Any
financing obtained may contain covenants that restrict the
Companys freedom to operate the business or may have
rights, preferences or privileges senior to the common stock and
may dilute the current shareholders ownership interest in
Viewpoint. In the event the Company is unable to obtain adequate
financing or profitable operations in future periods, operations
will need to be scaled back or discontinued.

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.

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 principally 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.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The balance in the interest escrow account as of
December 31, 2003 and 2002 was $135,000 and $693,000,
respectively.

Included in restricted cash at December 31,
2003 and 2002 was $253,000 and $294,000, respectively, 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 (see note 6).

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 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. The
Companys capitalization policies are also in accordance
with EITF 00-02, Accounting for Web Site Development
Costs.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In 2003, the Company wrote off the remaining
$226,000 of internally developed software that had been
previously capitalized. The Company re-evaluated its estimate of
the softwares utility and concluded that the write-off of
the remaining balance was appropriate.

Stock-Based Compensation

The Company accounts for stock option grants in
accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees, Financial Accounting Standards Board
(FASB) issued Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25
(FIN 44), and complies with the disclosure provisions of
Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS 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 Emerging Issues Task Force
(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.

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 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:

|                                        |  |                         |      |      |  |      |      |   |  |  |      |  
|--------------------------------------- |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                        |  |                        
|                                        |  | Year Ended December 31,
|                                        |  |                        
|                                        |  | 2003                    |      | 2002 |  | 2001
|                                        |  |                         |      |      |  |     
|Risk-free interest rate                 |  |                         | 2.80 | %    |  |      | 3.80 | % |  |  | 4.60 | %
|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, 2003, 2002 and 2001:

|                                       |  |                     |      |      |  |      |      |  |  |   |      | 
|-------------------------------------- |  | ------------------- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                       |  |                    
|                                       |  | Options Outstanding
|                                       |  |                    
|                                       |  | 2003                |      | 2002 |  | 2001
|                                       |  |                     |      |      |  |     
|Exercise price equal to fair value     |  | $                   | 0.77 |      |  | $    | 5.10 |  |  | $ | 5.10 | 
|Exercise price greater than fair value |  |                     |     |      |  |      |     |  |  |   | 4.30 | 
|Exercise price less than fair value    |  |                     | 0.77 |      |  |      |     |  |  |   | 3.30 | 

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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):

|                                                                                                                                                    |  |              |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                                                    |  |             
|                                                                                                                                                    |  | December 31,
|                                                                                                                                                    |  |             
|                                                                                                                                                    |  | 2003         |         | 2002 |  | 2001
|                                                                                                                                                    |  |              |         |      |  |     
|Net Loss                                                                                                                                            |  | $            | (21,502 | )    |  | $    | (25,893 | ) |  | $ | (52,370 | )
|Add: Stock-based employee expense included in
    reported net loss, net of related tax effects                                                     |  |              | 2,707   |      |  |      | 5,139   |   |  |   | 6,340   |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |  |              | (5,471  | )    |  |      | (11,037 | ) |  |   | (12,624 | )
|                                                                                                                                                    |  |              |         |      |  |      |         |   |  |   |         |  
|                                                                                                                                                    |  |              | (24,266 | )    |  |      | (31,791 | ) |  |   | (58,654 | )
|Basic and diluted net loss per share 
    as reported                                                                                              |  | $            | (0.47   | )    |  | $    | (0.64   | ) |  | $ | (1.34   | )
|Basic and diluted net loss per share 
    pro forma                                                                                                |  | $            | (0.54   | )    |  | $    | (0.78   | ) |  | $ | (1.50   | )
|Weighted average number of shares
    outstanding  basic and diluted                                                                               |  |              | 45,280  |      |  |      | 40,759  |   |  |   | 39,077  |  

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

On April 14, 2003, the Company granted
2,300,000 non-statutory stock options to acquire Company common
stock, to certain executives of the Company at an exercise price
equal to the fair market value of the Companys common
stock on the date of grant. Twenty-five percent of the options
vest on the first anniversary of the date of grant and the
remaining options vest at the rate of 1/36th per month
thereafter. On July 1, 2003, the Company modified the terms
to accelerate the vesting of a grant to one executive. In
accordance with FIN 44, no compensation charge has been
recorded through December 31, 2003 since the Company
believes that this executive will not derive any benefit from
the acceleration. If the executives employment ends during
the original vesting period then the modification to accelerate
vesting would be determined to be beneficial to the executive
and a non-cash compensation charge of up to $360,000 would be
charged to operations.

In November 2003, the Company modified the terms
of six stock option grants to certain employees and officers to
reduce the vesting period from four years to two years. The
Company may record a non-cash stock-based compensation charge
based upon the difference between the closing price the day of
the modification and the closing price on the date of the grant
for any of the 1,250,000 options modified. The weighted
average grant price for these options is $0.76. Such charge
would be recorded if the executives are expected to derive a
benefit from the acceleration. If any executive ceases
employment during the original vesting period then the
modification to accelerate will be determined to be beneficial,
resulting in a non-cash compensation charge of up to $75,000.

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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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Revenue Recognition

The Company recognizes revenue in accordance with
Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended, EITF 00-21 Revenue
Arrangements with Multiple Deliverables, Staff Accounting
Bulletin (SAB) No. 101 Revenue
Recognition in Financial Statements and SAB No. 104
Revenue Recognition. Per SOP 97-2 and SAB
No. 101, the Company recognizes revenue when the following
criteria are met: (a) persuasive evidence of an arrangement
exists, (b) delivery has occurred or services have been
rendered, (c) the Companys fee is fixed or
determinable, and (d) collectibility is reasonably assured.

Viewpoint has generated revenues through two
sources: (a) software licenses and (b) services.
License revenues are generated from licensing the rights to use
our products directly to customers and indirectly through Value
Added Resellers (VARs). Service revenues are
generated from fee-based professional services, customer support
services (maintenance arrangements), and training services
performed for customers that license our products.

License revenues from direct customers include
sales of perpetual and term-based licenses for broadcasting
digital content in the Viewpoint format. License revenues are
recognized up-front provided no further significant obligations
exist and the resulting receivable is deemed collectible by
management. Arrangements with VARs require (i) an up-front,
non-refundable payment, (ii) a percentage royalty based on
sell-through, or (iii) both as consideration for the right
to resell our technology. Up-front, non-refundable payments are
recognized as license revenues when the VARs right to
resell our technology 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
significant obligations exist. For arrangements that do not call
for an up-front, non-refundable payment, revenues are recognized
as the royalties are earned, which is upon notification of
sell-through by the VAR, provided all other revenue recognition
criteria are met and no further significant obligations exist.

Fee-based professional services for customized
software development are performed on a fixed-fee or
time-and-materials basis under separate service arrangements.
Revenues for fixed-fee arrangements are recognized over the
pattern of performance in accordance with the provisions of SAB
No. 101. The pattern of performance for service
arrangements is measured by the percentage of costs incurred and
accrued to date for each contract, which primarily consist of
direct labor costs, cost of outsourcing, and overhead, to the
estimated total cost for each contract at completion. The
percentage approximates the percentage of a customers
contract that has been completed and would be available for the
customer to use at that point in time. Use of this method is
based on the availability of reasonably dependable estimates. If
reasonably dependable estimates are not available due to the
complexity of the services to be performed, the Company defers
recognition of any revenues for the project until the project is
completed, delivered and accepted by the customer, provided all
other revenue recognition criteria are met. 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 in accordance with SOP 81-1
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. The percentage of
completion method is used for those arrangements in which
reasonably dependable estimates are available.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

For arrangements involving multiple elements, the
Company defers revenue for the undelivered elements based on
their relative fair value and recognizes 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, the
Company uses renewal rates to determine the price when sold
separately. The Company accounts for multiple element
arrangements which involve only fee-based professional services
in accordance with EITF 00-21.

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.

Standard terms for license arrangements require
payment within 90 days of the contract date, which
typically coincides with delivery. Standard terms for service
arrangements, which are typically billed and collected on an
installment basis, require final payment within 90 days of
completion of the services. 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. Arrangements with customers do not contain product
return rights. If the fee is not fixed or determinable, revenue
is recognized as payments become due or as cash is received 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.

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, 2003, and periodically from 2002 through 2003,
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, 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 7,710,000, 6,346,000, and 8,601,000 for
the years ended December 31, 2003, 2002, and 2001,
respectively, are excluded from the computation of diluted net
loss per common share because their effect was antidilutive.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Basic and diluted net loss per common share for
the years ended December 31, 2003, 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.

In March 2004, the Company sold 1,500,000 shares
of common stock, in a private placement to an institutional
investor, for $3,675,000 or $2.45 per share. The institutional
investor was one of the holders of the Companys
convertible notes. Prior to the closing of the private placement
the institutional investor converted $926,000 of outstanding
notes with Company common stock.

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).

Recent Accounting Pronouncements

In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation
(FIN) No. 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting
Research Bulletin (ARB) No. 51,
Consolidated Financial Statements. FIN 46
clarifies the application of ARB 51 to certain entities in which
equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
FIN 46 explains how to identify variable interest entities
and how an enterprise assesses its interests in a variable
interest entity to decide whether to consolidate that entity. It
requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities
do not effectively disperse risks among parties involved. It
also requires certain disclosures by the primary beneficiary of
a variable interest entity and by an enterprise that holds
significant variable interests in a variable interest entity
where the enterprise is not the primary beneficiary. FIN 46
is effective for variable interest entities created after
January 31, 2003 and to variable interest entities in which
an enterprise obtains an interest after that date, and effective
for the first fiscal year or interim period beginning after
June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before
February 1, 2003. FIN 46 requires an entity to
disclose certain information regarding a variable interest
entity, if, when FIN 46 becomes effective, it is reasonably
possible that an enterprise will consolidate or have to disclose
information about that variable interest entity, regardless of
the date on which the variable entity interest was created. In
December 2003, the FASB published a revision to FIN 46
(FIN 46R) to clarify certain provisions of
FIN 46. FIN 46R is effective for the Companys
first quarter of fiscal 2004. FIN 46 and FIN 46R will
not have a material affect on the Companys consolidated
financial statements.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. SFAS
No. 149 is generally effective for contracts entered into
or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption
of SFAS No. 149 did not have a material effect on the
Companys financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 requires that certain financial instruments, which
under previous guidance were accounted for as equity, must now
be accounted for as liabilities. The financial instruments
affected include mandatorily redeemable stock, certain financial
instruments that require

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS
No. 150 is effective for all financial instruments entered
into or modified after May 31, 2003 and must be applied to
the Companys existing financial instruments effective
July 1, 2003, the beginning of the first fiscal period
after June 15, 2003. The Company adopted the provisions of
SFAS No. 150, which became effective on June 1, 2003.
The adoption of this statement did not have a material effect on
the Companys financial statements. On November 7,
2003, the FASB issued a FASB Staff Position No. FAS 150-3,
Effective Date for Mandatorily Redeemable Financial
Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests under
FAS 150, which deferred the effective date of certain
provisions of FAS 150 related to Mandatorily Redeemable
Noncontrolling Interests. The deferral did not effect the
Companys financial statements.

In December 2003, the SEC issued Staff Accounting
Bulletin No. 104, Revenue Recognition (SAB 104), which
updates the previously issued revenue recognition guidance in
SAB 101, based on the Emerging Issues Task Force
Issue 00-21, Revenue Arrangements with Multiple
Deliverables. If the deliverables in a sales arrangement
constitute separate units of accounting according to the
EITFs separation criteria, the revenue-recognition policy
must be determined for each identified unit. If the arrangement
is a single unit of accounting under the separation criteria,
the revenue-recognition policy must be determined for the entire
arrangement. The adoption of SAB 104 did not have a
significant impact on the financial results of the Company.

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, 2003, by type of security, contractual
maturity, and its classification in the balance sheet, are as
follows (in thousands):

|                                 |  |           |       |            |  |            |   |            |  |          |    |   |  |   |       |  |  |  |      | 
|-------------------------------- |  | --------- | ----- | ---------- |  | ---------- | - | ---------- |  | -------- | -- | - |  | - | ----- |  |  |  | ---- | 
|                                 |  |           |       | Gross      |  | Gross      |   |            |  |         
|                                 |  | Amortized |       | Unrealized |  | Unrealized |   |            |  |         
|                                 |  | Cost      |       | Gain       |  | (Loss)     |   | Fair Value |  | Maturity
|                                 |  |           |       |            |  |            |   |            |  |         
|Type of security:                |  |           |       |            |  |            |   |            |  |          |    |   |  |   |       |  |  |  |      | 
|Cash                             |  | $         | 314   |            |  | $          |  |            |  | $        |   |   |  | $ | 314   |  |  |  |      | 
|Money Market Funds               |  |           | 6,718 |            |  |            |  |            |  |          |   |   |  |   | 6,718 |  |  |  | 2004 | 
|Corporate Bonds and Notes        |  |           | 1,400 |            |  |            |  |            |  |          |   |   |  |   | 1,400 |  |  |  | 2004 | 
|Equity Securities                |  |           | 100   |            |  |            |  |            |  |          | (2 | ) |  |   | 98    |  |  |  |      | 
|U.S. Government Agencies         |  |           | 958   |            |  |            |  |            |  |          |   |   |  |   | 958   |  |  |  | 2004 | 
|                                 |  |           |       |            |  |            |   |            |  |          |    |   |  |   |       |  |  |  |      | 
|                                 |  | $         | 9,490 |            |  | $          |  |            |  | $        | (2 | ) |  | $ | 9,488 |  |  |  |      | 
|                                 |  |           |       |            |  |            |   |            |  |          |    |   |  |   |       |  |  |  |      | 
|Classification in Balance Sheet: |  |           |       |            |  |            |   |            |  |          |    |   |  |   |       |  |  |  |      | 
|Cash and Cash Equivalents        |  | $         | 8,532 |            |  | $          |  |            |  | $        | (2 | ) |  | $ | 8,530 |  |  |  |      | 
|Marketable Securities            |  |           | 958   |            |  |            |  |            |  |          |   |   |  |   | 958   |  |  |  |      | 
|                                 |  |           |       |            |  |            |   |            |  |          |    |   |  |   |       |  |  |  |      | 
|                                 |  | $         | 9,490 |            |  | $          |  |            |  | $        | (2 | ) |  | $ | 9,488 |  |  |  |      | 
|                                 |  |           |       |            |  |            |   |            |  |          |    |   |  |   |       |  |  |  |      | 

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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  |  |  |  |      | 
|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 |  |  |  |      | 
|Marketable Securities            |  |           | 889    |            |  |            | 1 |            |  |          |  |  |  |   | 890    |  |  |  |      | 
|                                 |  |           |        |            |  |            |   |            |  |          |   |  |  |   |        |  |  |  |      | 
|                                 |  | $         | 11,567 |            |  | $          | 1 |            |  | $        |  |  |  | $ | 11,568 |  |  |  |      | 
|                                 |  |           |        |            |  |            |   |            |  |          |   |  |  |   |        |  |  |  |      | 

4.     Discontinued
Operations

In December 1999, the Board of Directors of the
Company approved a plan to focus exclusively on its digital
marketing technologies and services and to correspondingly
divest itself of its prepackaged graphics software business.
Accordingly, these operations are reflected as discontinued
operations for all periods presented in the accompanying
consolidated statements of operations. During the years ended
December 31, 2003, 2002 and 2001 the Company recorded
adjustments to net loss on disposal of discontinued operations,
net of tax, of $157,000, $127,000 and $1,122,000, respectively,
as a result of changes in estimates related to assets and
liabilities of the discontinued business. Changes in estimates
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,
|                                               |  |             
|                                               |  | 2003         |        | 2002
|                                               |  |              |        |     
|Computer equipment and software                |  | $            | 4,627  |      |  | $ | 4,763  |  
|Office furniture and equipment                 |  |              | 1,453  |      |  |   | 1,754  |  
|Leasehold improvements                         |  |              | 1,515  |      |  |   | 1,580  |  
|Other                                          |  |              | 170    |      |  |   | 170    |  
|                                               |  |              |        |      |  |   |        |  
|                                               |  |              | 7,765  |      |  |   | 8,267  |  
|Less accumulated depreciation and amortization |  |              | (5,906 | )    |  |   | (4,676 | )
|                                               |  |              |        |      |  |   |        |  
|                                               |  | $            | 1,859  |      |  | $ | 3,591  |  
|                                               |  |              |        |      |  |   |        |  

Depreciation expense for the years ended
December 31, 2003, 2002, and 2001 was approximately
$1,543,000, $1,962,000, and $1,804,000, respectively.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

6.     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. 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. 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 adoption of the new Business Combination
rules, 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.

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 the discount rate, were determined
using the Companys best estimates as of the date the
impairment was recorded.

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,                      
|                                          |                                                         |                                              
|                                          |                                                         | 2003                                          |   | 2002    |         | 2001
|                                          |                                                         |                                               |   |         |         |     
|Net loss:                                 |                                                         |                                               |   |         |         |      |   |         |         |   |   |        
|                                          | Reported net loss applicable to common
    shareholders |                                               | $ | (21,502 | )       |      | $ | (25,893 | )       |   | $ | (52,370 | )      
|                                          | Goodwill amortization(1)                                |                                               |   |        |         |      |   |        |         |   |   | 14,128  |        
|                                          |                                                         |                                               |   |         |         |      |   |         |         |   |   |        
|                                          |                                                         | Adjusted net loss                             |   | $       | (21,502 | )    |   | $       | (25,893 | ) |   | $       | (38,242 | )
|                                          |                                                         |                                               |   |         |         |      |   |         |         |   |   |        
|Basic and diluted net loss per
    share: |                                                         |                                               |   |         |         |      |   |         |         |   |   |        
|                                          | Reported net loss per share                             |                                               | $ | (0.47   | )       |      | $ | (0.64   | )       |   | $ | (1.34   | )      
|                                          | Goodwill amortization                                   |                                               |   |        |         |      |   |        |         |   |   | 0.36    |        
|                                          |                                                         |                                               |   |         |         |      |   |         |         |   |   |        
|                                          |                                                         | Adjusted basic and diluted net loss per share |   | $       | (0.47   | )    |   | $       | (0.64   | ) |   | $       | (0.98   | )
|                                          |                                                         |                                               |   |         |         |      |   |         |         |   |   |        



---



|    |                                                                                    
|--- | -----------------------------------------------------------------------------------
|(1) | Includes $1,060 of an assembled workforce for the
    year ended December 31, 2001.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The changes in the carrying amount of goodwill
and intangible assets during the year ended December 31,
2003 are as follows (in thousands):

|                                |                         |          |        |                   |  |       |     |     |   |   |        |     |  
|------------------------------- | ----------------------- | -------- | ------ | ----------------- |  | ----- | --- | --- | - | - | ------ | --- | -
|                                |                         | Goodwill |        | Intangible Assets |  | Total
|                                |                         |          |        |                   |  |      
|Balance as of January 1, 2003   |                         | $        | 31,276 |                   |  | $     | 165 |     |   | $ | 31,441 |    
|                                | Additions during period |          |        |                  |  |       |     | 31  |   |   |        | 31  |  
|                                | Amortization            |          |        |                  |  |       |     | (10 | ) |   |        | (10 | )
|                                |                         |          |        |                   |  |       |     |     |   |   |        |    
|Balance as of December 31, 2003 |                         | $        | 31,276 |                   |  | $     | 186 |     |   | $ | 31,462 |    
|                                |                         |          |        |                   |  |       |     |     |   |   |        |    

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 |       
|                                |                         |          |        |                   |   |       |       |        |   |   |        |       

As of December 31, 2003 and 2002, the
Companys intangible assets and related accumulated
amortization consisted of the following (in thousands):

|                        |  |                   |     |                   |  |     |     |       |  |              |     |     |  |   |     |  |  |   |    |   |  |   |     | 
|----------------------- |  | ----------------- | --- | ----------------- |  | --- | --- | ----- |  | ------------ | --- | --- |  | - | --- |  |  | - | -- | - |  | - | --- | 
|                        |  |                   |     |                  
|                        |  | December 31, 2003 |     | December 31, 2002
|                        |  |                   |     |                  
|                        |  |                   |     | Accumulated       |  |     |     |       |  | Accumulated  |     |    
|                        |  | Gross             |     | Amortization      |  | Net |     | Gross |  | Amortization |     | Net
|                        |  |                   |     |                   |  |     |     |       |  |              |     |    
|Patents and Trademarks  |  | $                 | 196 |                   |  | $   | (10 | )     |  | $            | 186 |     |  | $ | 168 |  |  | $ | (3 | ) |  | $ | 165 | 
|                        |  |                   |     |                   |  |     |     |       |  |              |     |     |  |   |     |  |  |   |    |   |  |   |     | 
|Total Intangible Assets |  | $                 | 196 |                   |  | $   | (10 | )     |  | $            | 186 |     |  | $ | 168 |  |  | $ | (3 | ) |  | $ | 165 | 
|                        |  |                   |     |                   |  |     |     |       |  |              |     |     |  |   |     |  |  |   |    |   |  |   |     | 

Aggregate amortization expense on intangible
assets was approximately $10,000, $664,000, and $3,325,000, for
the years ended December 31, 2003, 2002, and 2001,
respectively. Amortization of intangible assets is estimated to
be $5,000 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.

7.     Related Party
Transactions

During 2003, the Company recorded revenues
totaling $6,955,000, related to agreements with AOL who had a
representative on the Companys Board of Directors until
December 2003. As of December 31, 2003, the Company has
$914,000 in accounts receivable and $9,658,000 in deferred
revenues relating to transactions with both AOL and Computer
Associates, Inc. (CA), who has a representative on
the Companys Board of Directors.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In October 2003, the Company entered into an
amended license agreement with AOL which provided for payments
by AOL of $10,000,000. The agreement contains multiple elements
consisting of a perpetual broadcast license, a perpetual source
code license, quarterly updates to the source code through
December 2005, and maintenance and consulting services. The
Company will recognize revenue from this agreement ratably,
through December 31, 2005, which represents the duration of
the Companys obligation for post-contract customer support
including quarterly upgrades and maintenance requirements.

During 2002, the Company recorded revenues
totaling $9,798,000, related to agreements, including reseller
arrangements, with AOL, CA, and Adobe, all of whom had
representatives on the Companys Board of Directors. The
$9,798,000 of revenues includes approximately $3,125,000 due to
a March 2002 amendment to a contract with AOL, which resulted in
the Company recording revenues when payments are due, as
contrasted to the partial deferral of those payments, which
would otherwise have occurred.

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 collateralized solely by the proceeds
from the sale of Company stock issuable upon exercise of the
officers 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
collateralizing the loan. The amount reserved represents the
uncollectible 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 in January 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 accrued 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 officers 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 unsecured portion of the loan and accrued interest as of
November 2002 as the value of the Companys stock fell
below the exercise price of the options securing the loan. In
September 2003, the officer was terminated, requiring the loan
to be re-paid. The officer defaulted on the loan in October
2003, and the Company took possession of the collateral.

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.

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, was 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 which occurred on January 5, 2001.
As of December 31, 2000, the Company recorded a reserve
against the

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

loan in the amount of $750,000. In September
2003, the Company recorded a loss of $750,000 on the write-off
of the remaining unreserved notes receivable after receiving an
unfavorable legal decision in a legal action to recover the loan
from the former officer.



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

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.

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. | Long Term Debt

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 was payable quarterly in arrears in cash or,
at the option of the Company, in shares of Company common stock,
provided the Company satisfied certain financial and other
conditions. The convertible notes were to 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 was required to provide registration
rights under the Securities Act of 1933 for shares of Company
common stock covering (i) the conversion of $7,000,000 in
principal, (ii) 726,330 warrants, and (iii) any
potential payment of interest in the form of common stock.

The convertible notes defined several events of
default, including but not limited to: (i) failure of the
Companys registration statement to be declared effective
by the Securities and Exchange Commission (SEC),
(ii) 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) judgments against the Company in excess of $1,000,000
and (viii) material breach of any representation, warranty,
covenant or other term. Upon an event of default, the
convertible notes would immediately become due and payable,
after a grace period to cure the default lapsed.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 was an event outside of the control of the Company,
pursuant to EITF Issue No. 00-19, the Company recorded the
fair value of conversion options and warrants as long-term
liabilities, as it was assumed that the Company will be required
to net-cash settle the underlying securities. The fair values of
the convertible notes, conversion options, and warrants of
$5,535,000, $1,177,000, and $288,000, respectively, were
determined by the Company using the following assumptions: a 20%
discount on the Companys common stock price at
December 31, 2002, a credit spread of 20% over 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 issuance costs,
which amounted to $668,000, were recorded as other assets in the
Companys consolidated balance sheets, in accordance with
APB Opinion No. 21 Interest on Receivables and
Payables. The amortization of discount on the convertible
notes and debt issue costs totaling $72,000 were accounted for
in accordance with the provisions of APB Opinion No. 21,
which requires amortization of the discount and debt issue costs
using the effective interest method.

On February 28, 2003, the Company received
notices of default from two of the three investors. The notices
alleged that the Company was in default of the notes because it
had breached certain representations and warranties in the
Securities Purchase Agreement.

On March 25, 2003, the Company entered into
Redemption, Amendment and Exchange Agreements with the three
institutional investors with whom it had completed the 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
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 convertible notes
were issued in three tranches of $900,000 each and are scheduled
to mature December 31, 2007. The warrants to purchase
726,330 shares of Company common stock, which were issued
to these investors on December 31, 2002, remain outstanding.

Based on the provisions of SFAS No. 133
and EITF Issue No. 00-19, the Company recorded income based
on the change in the fair value of the conversion options of the
original convertible notes as of March 24, 2003, which
amounted to $1,122,000, in the Companys consolidated
statements of operations for the three months ended
March 31, 2003.

In accordance with the provisions of APB Opinion
No. 26 Early Extinguishment of Debt, and EITF
Issue No. 96-19 Debtors Accounting for a
Modification or Exchange of Debt Instruments, the Company
recorded a loss on the early extinguishment of the original
convertible notes in the amount of $1,682,000 of which $650,000
related to the write-off of deferred loan costs. The carrying
value of the convertible notes at the time of the exchange was
$5,643,000, inclusive of $55,000, which represented the fair
value of the conversion options. In conjunction with the
extinguishment, the Company paid $3,300,000, issued new
convertible notes in the principal amount of $2,700,000 and
issued 1,351,351 shares of its common stock with a market
value of $675,000. The difference between (i) the carrying
value of the outstanding convertible notes exchanged and
(ii) cash paid and the fair value of the common stock and
new convertible notes issued, amounted to $1,032,000 and was
included in the loss on early extinguishment of debt.

The Company charged the loss on early
extinguishment of debt to operations as such loss did not
qualify for classification as extraordinary based on the
provisions of SFAS No. 145 Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, and APB 30

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions.

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 conversion price of the first, second,
and third tranche were determined on the basis of the arithmetic
average of the dollar volume-weighted average price of Company
common stock for the ten trading days following May 16,
2003, August 16, 2003, and November 16, 2003,
respectively, in each case subject to a minimum conversion price
of $1.00 and a maximum conversion price of $2.26. The conversion
price of the first $900,000 tranche of notes is $1.10. The
conversion price of the second $900,000 tranche of notes is
$1.00. The conversion price of the third $900,000 tranche of
notes is $1.00.

At the noteholders option, up to 20% of the
net proceeds from any new capital raises by the Company may be
used to redeem outstanding notes at par plus accrued interest.
On November 12, 2003, the Company sold
3,125,000 shares of common stock in a private placement to
Federal Partners, L.P., an affiliate of The Clark
Estates, Inc. for $2,500,000, or $0.80 per share. The
noteholders chose not to exercise their right to redeem their
notes in an amount up to 20% of the $2,500,000 received by the
Company within 10 days of the Companys public
announcement of the closing of the private placement (see
note 20 for capital raised subsequent to the balance sheet
date).

Each tranche of the notes is redeemable by the
investors at any time on or after June 30, 2004 in cash at
par plus accrued and unpaid interest if the dollar
volume-weighted average price of Company common stock is less
than the conversion price applicable to the notes for any 25
consecutive trading days. Each tranche of the notes is
redeemable by the investors at any time after December 31,
2005, 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 the conversion price applicable to the notes for
any 25 consecutive trading days following December 31,
2005. 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.

The Company has the right at any time to redeem
up to all of the outstanding notes at par plus accrued and
unpaid interest. 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 100% of the principal amount
being redeemed divided by the conversion price of the notes then
in effect.

Each tranche of the notes is convertible at the
Companys election at any time after April 15, 2004 if
the dollar volume-weighted average price of Company common stock
exceeds 150% of the conversion price applicable to the notes for
any 25 consecutive trading days following April 15, 2004.

The investors could have required the Company to
sell to the investors 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. This right expired on January 14, 2004.

The Company had 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 exceeded $3.25 on

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

each of not less than 15 trading days in any 20
consecutive trading-day period. This right expired unexercised
on June 30, 2003.

The Company was required to file a registration
statement by April 14, 2003, covering the resale of the
shares of common stock issued to the investors in exchange for
the $1,000,000 principal of convertible notes, the shares of
common stock issuable to the investors upon the conversion of
the notes, the shares of common stock underlying the warrants
issued and to be issued, and any shares of common stock that may
be issued as payment of interest on the notes. The Company was
required to pay cash penalties if the registration statement was
not declared effective by June 30, 2003. The registration
statement was declared effective July 14, 2003, and the
Company was required to pay penalties of $183,000, of which
$127,000 was charged to interest expense in the second quarter
of 2003 and $56,000 was charged to interest expense in the third
quarter of 2003.

Pursuant to SFAS No. 133, the Company
bifurcated the fair value of the conversion options from the new
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 is an event outside of the
control of the Company, pursuant to EITF Issue No. 00-19,
the Company recorded the fair value of the conversion options as
long-term liabilities, as it is assumed that the Company will be
required to net-cash settle the underlying securities. The fair
values of the new convertible notes and conversion options of
$2,361,000 and $339,000, respectively, were determined by the
Company using the following assumptions: the Companys
Common stock price at March 25, 2003, a credit spread of
30% over LIBOR rates at March 25, 2003, and an annualized
stock volatility of 65%. The value of the new convertible notes
and conversion options of $2,407,000 and $430,000, respectively
are recorded as long-term liabilities in the Companys
consolidated balance sheets at December 31, 2003. Debt
issuance costs, net of amortization, amounted to $66,000 and was
recorded as other assets in the Companys consolidated
balance sheets, in accordance with APB Opinion No. 21 at
December 31, 2003.

Based on the provisions of SFAS No. 133
and EITF Issue No. 00-19, the Company recorded income based
on the change in the fair values of the original warrants of
$178,000, and loss based on the change in the fair value of the
new conversion options of $92,000, in the Companys
consolidated statements of operations for the year ended
December 31, 2003. The amortization of discount on the new
convertible notes and debt issue costs totaling $55,000 were
accounted for using the interest method, in accordance with the
provisions of APB Opinion No. 21.

On March 26, 2003, Viewpoint Corporation
entered into a Securities Purchase Agreement with three other
accredited investors, pursuant to which it received $3,500,000
in exchange for an aggregate of $3,500,000 principal amount of
4.95% subordinated notes and 3,614,756 shares of
Viewpoint common stock. The subordinated notes are scheduled to
mature on March 31, 2006.

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) judgments against the Company in excess of $1,000,000,
(iii) event of bankruptcy, and (iv) material breach of
representations, covenants or other terms. Upon an event of
default, the notes will become immediately due and payable.

The Company filed a registration statement
covering the resale of the issued shares on May 9, 2003,
which was declared effective by the SEC on July 30, 2003.

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

The $3,500,000 of proceeds was allocated to
subordinated notes, common stock, and additional paid in capital
based on the market value of the Companys common stock on
March 26, 2003. In accordance with

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the provisions of APB Opinion No. 21, the
Company recorded a debt discount of $2,024,000. Debt issuance
costs, which amounted to $194,000, were recorded as other assets
in the Companys consolidated balance sheets. The
amortization of the discount on the subordinated notes and debt
issue costs totaling $329,000 for the year ended
December 31, 2003, were accounted for using the effective
interest method.



|    |                                                              
|--- | -------------------------------------------------------------
|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 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, that
consisted 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.                                                                                                                                                                                                                                                      

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.

Amortization expense related to the acquisitions
of minority interest totaled $10,723,000 for the year ended
December 31, 2001. 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 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 was
approximately $2,928,000 for which the Company recorded
additional goodwill and due to related parties in its
consolidated balance sheet. In December 2003, the Company issued
682,000 shares of common stock valued at $4.00 per
share in full satisfaction of this promissory note. In
connection with the satisfaction of this promissory note, the
Company recorded $2,728,000 in additional paid in capital. The
remaining $200,000

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

liability was forgiven in settlement of other
claims in conjunction with this transaction and was recorded as
other income.

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 was recorded for the year ended
December 31, 2001. As required by SFAS No. 142,
the Company discontinued amortizing the remaining balance of
goodwill as of January 1, 2002. The operating results of
Viewpoint Digital have been included in the accompanying
consolidated financial statements from the date of acquisition.



|    |                       
|--- | ----------------------
|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 $82,000,
$85,000, and $96,000 to the 401(k) Plan during the years ended
December 31, 2003, 2002, and 2001, 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,
2003, there were no outstanding options to purchase shares of
common stock under the 1994 Plan. At December 31, 2003, an
aggregate of 17,000 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, 2003, options to purchase an aggregate of
6,613,000 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, 2003, an aggregate of
1,312,000 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 of ten years. As of
December 31, 2003, 110,000 options were outstanding under
the 1995 Director Plan. At

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

December 31, 2003, 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, 2003, options to purchase an
aggregate of 2,214,000 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, 2003, an aggregate of
47,000 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 Outside the Option
    Plan

During 2003, the Company issued 1,600,000
non-qualified stock options outside the Option Plan in
connection with the hiring of executive management. Certain
options were issued at the opening price of the Companys
common stock on the grant date, resulting in the options
exercise price being less then the fair market value at the time
of the grant. In accordance with APB 25 and FIN 44,
compensation expense is recognized over the vesting period,
based on the difference at the date of grant between the fair
value of the Companys stock and the exercise price.

The terms and conditions of these grants are
similar to the terms and conditions of options granted under the
1996 Nonstatutory Plan, with the exception that they vest over
two years.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Options Issued Under Stock Option
Plans

The following summarizes activity in the Stock
Option Plans for the years ended December 31, 2001, 2002
and 2003 (in thousands, except per share data):

|                                         |                                                      |           |       |                     |   |          |        |        |   |   |      |      | 
|---------------------------------------- | ---------------------------------------------------- | --------- | ----- | ------------------- | - | -------- | ------ | ------ | - | - | ---- | ---- | 
|                                         |                                                      |           |       |                    
|                                         |                                                      |           |       | Options Outstanding
|                                         |                                                      |           |       |                    
|                                         |                                                      | Options   |       |                     |   | Weighted
|                                         |                                                      | Available |       | Number              |   | Average 
|                                         |                                                      | for       |       | of                  |   | Exercise
|                                         |                                                      | Grant     |       | Shares              |   | Price   
|                                         |                                                      |           |       |                     |   |         
|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 |     
|                                         | Granted  exercise price equal to fair
    value     |           |       | (6,052              | ) |          |        | 6,052  |   |   |      | 0.79 | 
|                                         | Granted  plan not approved by security
    holders  |           |       |                    |   |          |        | 1,600  |   |   |      | 0.73 | 
|                                         | Exercised                                            |           |       |                    |   |          |        | (13    | ) |   |      | 0.87 | 
|                                         | Canceled                                             |           |       | 6,607               |   |          |        | (6,607 | ) |   |      | 3.35 | 
|                                         |                                                      |           |       |                     |   |          |        |        |   |   |      |     
|Options outstanding at December 31, 2003 |                                                      |           | 1,386 |                     |   |          | 10,537 |        |   | $ | 1.84 |     
|                                         |                                                      |           |       |                     |   |          |        |        |   |   |      |     

The following summarizes information about the
Companys stock options outstanding at December 31,
2003 (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   
|                     |  |             |        |             |  |          |      |          |  |         
|$0.46  $0.74        |  |             | 2,649  |             |  |          | 7.44 |          |  | $        | 0.73  |  |  |  | 531   |  |  | $ | 0.74  | 
|$0.75  $0.80        |  |             | 1,599  |             |  |          | 1.76 |          |  |          | 0.76  |  |  |  | 74    |  |  |   | 0.78  | 
|$0.81  $0.82        |  |             | 2,244  |             |  |          | 9.88 |          |  |          | 0.82  |  |  |  | 1,000 |  |  |   | 0.82  | 
|$0.87  $2.61        |  |             | 1,593  |             |  |          | 6.12 |          |  |          | 1.24  |  |  |  | 1,537 |  |  |   | 1.23  | 
|$3.00  $5.09        |  |             | 1,564  |             |  |          | 6.45 |          |  |          | 4.41  |  |  |  | 1,173 |  |  |   | 4.50  | 
|$5.09  $12.88       |  |             | 883    |             |  |          | 7.07 |          |  |          | 6.13  |  |  |  | 524   |  |  |   | 6.34  | 
|$25.13  $25.13      |  |             | 5      |             |  |          | 2.00 |          |  |          | 25.13 |  |  |  | 5     |  |  |   | 25.13 | 
|                     |  |             |        |             |  |          |      |          |  |          |       |  |  |  |       |  |  |   |       | 
|Total                |  |             | 10,537 |             |  |          | 6.72 |          |  | $        | 1.84  |  |  |  | 4,844 |  |  | $ | 2.45  | 
|                     |  |             |        |             |  |          |      |          |  |          |       |  |  |  |       |  |  |   |       | 



---



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

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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, 2003 and 2002 accrued incentive
compensation related to the options, which are fully vested
totaled $545,000.

The following summarizes options exercisable at
December 31, 2003, 2002 and 2001 (in thousands):

|                    |  |              |       |      |  |      |       |  |  |  |       | 
|------------------- |  | ------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                    |  |             
|                    |  | December 31,
|                    |  |             
|                    |  | 2003         |       | 2002 |  | 2001
|                    |  |              |       |      |  |     
|Options exercisable |  |              | 4,844 |      |  |      | 5,534 |  |  |  | 4,605 | 

Deferred Compensation

In connection with the grant and cancellation of
stock options to certain employees and non-employee directors
the Company reduced total deferred compensation by approximately
$1,162,000, $2,010,000, and $4,975,000 for the years ended
December 31, 2003, 2002, and 2001, respectively. Non-cash
stock-based compensation charges of $2,707,000, $5,139,000, and
$6,341,000 were recognized during the years ended
December 31, 2003, 2002, and 2001 respectively.

In connection with the issuance of stock options
to non-employees for services performed, the Company did not
record a non-cash stock-based compensation charge during the
year ended December 31, 2003 as the fair value of options
issued were nominal. The Company recorded a non-cash stock-based
compensation charge of $283,000 and $832,000 for the years ended
December 31, 2002 and 2001, respectively. The non-cash
stock-based compensation charge 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 specific details for each
consultant agreement: risk-free interest rate of 1.19%
contractual life of three months to one year, dividend yield of
zero, and expected volatility of 100%.



|    |                                     
|--- | ------------------------------------
|12. | Restructuring and Impairment Charges

In 2003, the Company implemented three
restructuring plans. The first plan, implemented and completed
in February 2003, reduced operating expenses by closing the
Companys Utah office and related to the termination of 28
employees in that office who were primarily engaged in sales and
marketing activities. In accordance with SFAS No. 146
Accounting for Costs Associated with Exit or Disposal
Activities, the Company recorded restructuring charges of
$1,211,000. This charge is recorded on the income statement as
restructuring charges. The restructuring charges represent the
present value of remaining lease commitments discounted by the
Companys credit adjusted risk free interest rate of 20%
and reduced by estimated sublease rental income, employee
severance and termination benefits, the write-off of the net
book value of certain fixed assets used in the Utah office, and
other miscellaneous charges. Subsequent to the restructuring,
the Company re-evaluated market conditions surrounding its
efforts to sub-lease the Utah office space and increased the
restructuring charge by $249,000 related to the fair value of
the remaining lease commitment reduced by estimated sublease
rental income. The Company believes that it may be necessary to
adjust the estimate of sublease income in the future as the
ability to sublease the property is contingent upon real estate
and other market conditions in Utah.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The restructuring reserve activity for the first
plan for the year ended December 31, 2003 is as follows (in
thousands):

|                                     |                      |             |     |               |   |            |     |               |   |               |     |      |   |   |    |     |   |   |       |      |  
|------------------------------------ | -------------------- | ----------- | --- | ------------- | - | ---------- | --- | ------------- | - | ------------- | --- | ---- | - | - | -- | --- | - | - | ----- | ---- | -
|                                     |                      |             |     | Employee      |   |            |     |               |   |              
|                                     |                      |             |     | Severance and |   |            |     |               |   |              
|                                     |                      |             |     | Termination   |   | Asset      |     | Miscellaneous |   | Restructuring
|                                     |                      | Lease Costs |     | Benefits      |   | Write-offs |     | Charges       |   | Accrual      
|                                     |                      |             |     |               |   |            |     |               |   |              
|Restructuring and impairment charges |                      | $           | 459 |               |   | $          | 367 |               |   | $             | 361 |      |   | $ | 24 |     |   | $ | 1,211 |     
|                                     | Cash paid            |             |     | (200          | ) |            |     | (367          | ) |               |     |     |   |   |    | (24 | ) |   |       | (591 | )
|                                     | Restructuring charge |             |     | 249           |   |            |     |              |   |               |     |     |   |   |    |    |   |   |       | 249  |  
|                                     | Non-cash charges     |             |     |              |   |            |     |              |   |               |     | (361 | ) |   |    |    |   |   |       | (361 | )
|                                     |                      |             |     |               |   |            |     |               |   |               |     |      |   |   |    |     |   |   |       |     
|Balance at December 31, 2003         |                      | $           | 508 |               |   | $          |    |               |   | $             |    |      |   | $ |   |     |   | $ | 508   |     
|                                     |                      |             |     |               |   |            |     |               |   |               |     |      |   |   |    |     |   |   |       |     

The Company will make annual cash payments of
$129,000 through 2010.

The second plan was implemented in September
2003, and was designed to streamline the business. Under the
plan the Company eliminated 24 sales and marketing, research and
development, and general and administrative positions. The
Company incurred a restructuring charge of $463,000 related to
one-time severance arrangements. The charge is recorded on our
income statement as a restructuring and impairment charge. The
second restructuring plan was completed by September 30,
2003. In November 2003, however, the Company increased the
restructuring charge by $50,000 in settlement of an action filed
by one of the terminated employees in addition to making a
$2,000 decrease to the reserve related to a decreased estimate.

The restructuring reserve activity for the second
plan for the year ended December 31, 2003 is as follows (in
thousands):

|                                     |                                  |               |     |               |   |   |     |      |  
|------------------------------------ | -------------------------------- | ------------- | --- | ------------- | - | - | --- | ---- | -
|                                     |                                  | Employee      |     |              
|                                     |                                  | Severance and |     |              
|                                     |                                  | Termination   |     | Restructuring
|                                     |                                  | Benefits      |     | Accrual      
|                                     |                                  |               |     |              
|Restructuring and impairment charges |                                  | $             | 463 |               |   | $ | 463 |     
|                                     | Cash paid                        |               |     | (355          | ) |   |     | (355 | )
|                                     | Additional restructuring charges |               |     | 50            |   |   |     | 50   |  
|                                     | Non-cash adjustments             |               |     | (2            | ) |   |     | (2   | )
|                                     |                                  |               |     |               |   |   |     |     
|Balance at December 31, 2003         |                                  | $             | 156 |               |   | $ | 156 |     
|                                     |                                  |               |     |               |   |   |     |     

The accrued severance was paid out in the first
quarter of 2004.

The third plan was implemented in December 2003,
and was designed to consolidate international operations to the
New York office. Accordingly, the Company closed the
London, England office, incurring a restructuring charge of
$52,000 related to one-time severance arrangements. This
severance payment was made in January 2004. As the lease
relating to this office was up in February the Company did not
incur a charge related to rent expense. The severance charge is
recorded on the income statement as a restructuring charge. The
third restructuring plan was completed by December 31, 2003.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The restructuring reserve activity for the third
plan for the year ended December 31, 2003 is as follows (in
thousands):

|                                     |           |               |    |               |  |   |    |   | 
|------------------------------------ | --------- | ------------- | -- | ------------- |  | - | -- | - | 
|                                     |           | Employee      |    |              
|                                     |           | Severance and |    |              
|                                     |           | Termination   |    | Restructuring
|                                     |           | Benefits      |    | Accrual      
|                                     |           |               |    |              
|Restructuring and impairment charges |           | $             | 52 |               |  | $ | 52 |  
|                                     | Cash paid |               |    |              |  |   |    |  | 
|                                     |           |               |    |               |  |   |    |  
|Balance at December 31, 2003         |           | $             | 52 |               |  | $ | 52 |  
|                                     |           |               |    |               |  |   |    |  

The accrued severance was paid in the first
quarter of 2004.



|    |                              
|--- | -----------------------------
|13. | 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 $1,085,000,
$1,299,000, and $2,202,000 for the years ended December 31,
2003, 2002 and 2001, respectively.

Future minimum lease payments under
non-cancelable operating leases for each twelve-month period
subsequent to December 31, 2003 are as follows (in
thousands):

|           |  |   |       | 
|---------- |  | - | ----- | 
|2004       |  | $ | 1,104 | 
|2005       |  |   | 878   | 
|2006       |  |   | 904   | 
|2007       |  |   | 916   | 
|2008       |  |   | 729   | 
|Thereafter |  |   | 866   | 
|           |  |   |       | 
|           |  | $ | 5,397 | 
|           |  |   |       | 

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.



|    |                        
|--- | -----------------------
|14. | 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.

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.



|    |             
|--- | ------------
|15. | Income Taxes

The components of the provision for income taxes
for the years ended December 31, 2003, 2002, and 2001 are
as follows (in thousands):

|         |         |                |   |      |    |      |   |    |     |  |   |   |   | 
|-------- | ------- | -------------- | - | ---- | -- | ---- | - | -- | --- |  | - | - | - | 
|         |         |               
|         |         | Years Ended   
|         |         | December 31,  
|         |         |               
|         |         | 2003           |   | 2002 |    | 2001
|         |         |                |   |      |    |     
|Current: |         |                |   |      |    |      |   |    |     |  |   |  
|         | Federal |                | $ |     |    |      | $ |   |     |  | $ |  |  
|         | State   |                |   | 79   |    |      |   | 45 |     |  |   |  |  
|         | Foreign |                |   | 2    |    |      |   | 62 |     |  |   |  |  
|         |         |                |   |      |    |      |   |    |     |  |   |  
|         |         | Total current  |   |      | 81 |      |   |    | 107 |  |   |   |  | 
|Deferred |         |                |   |      |    |      |   |    |     |  |   |  
|         | Federal |                | $ |     |    |      | $ |   |     |  | $ |  |  
|         | State   |                |   |     |    |      |   |   |     |  |   |  |  
|         | Foreign |                |   |     |    |      |   |   |     |  |   |  |  
|         |         |                |   |      |    |      |   |    |     |  |   |  
|         |         | Total deferred |   | $    |   |      |   | $  |    |  |   | $ |  | 
|         |         |                |   |      |    |      |   |    |     |  |   |  

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

|                                                                  |  |                          |        |      |  |      |        |    |  |  |        |   
|----------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | -- |  |  | ------ | --
|                                                                  |  |                         
|                                                                  |  | Years Ended December 31,
|                                                                  |  |                         
|                                                                  |  | 2003                     |        | 2002 |  | 2001
|                                                                  |  |                          |        |      |  |     
|Federal tax benefit at the statutory rate                         |  |                          | (34.00 | )%   |  |      | (34.00 | )% |  |  | (34.00 | )%
|State income taxes, net of federal income tax
    benefit         |  |                          | (6.13  | )    |  |      | (4.44  | )  |  |  | (3.17  | ) 
|Other                                                             |  |                          | 1.38   |      |  |      | 0.94   |    |  |  | (2.44  | ) 
|Amortization and impairment of goodwill and other
    intangibles |  |                          |       |      |  |      | 9.13   |    |  |  | 16.28  |   
|Non-cash sales and marketing charges                              |  |                          |       |      |  |      |       |    |  |  | (12.09 | ) 
|Change in valuation reserve                                       |  |                          | 38.96  |      |  |      | 28.78  |    |  |  | 35.42  |   
|Minority interest                                                 |  |                          |       |      |  |      |       |    |  |  |       |   
|                                                                  |  |                          |        |      |  |      |        |    |  |  |        |   
|Effective income tax rate                                         |  |                          | 0.21   | %    |  |      | 0.41   | %  |  |  |       | % 
|                                                                  |  |                          |        |      |  |      |        |    |  |  |        |   

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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,                
|                     |                                  |                             
|                     |                                  | 2003                         |        | 2002   
|                     |                                  |                              |        |        
|Deferred tax assets: |                                  |                              |        |         |        |   |        |        
|                     | Balance sheet reserves           |                              | $      | 1,028   |        |   | $      | 987     |       
|                     | Accrued expenses                 |                              |        | 4,557   |        |   |        | 510     |       
|                     | Tax credit carryforwards         |                              |        | 3,413   |        |   |        | 3,412   |       
|                     | Net operating loss carryforwards |                              |        | 72,324  |        |   |        | 68,243  |       
|                     |                                  |                              |        |         |        |   |        |        
|                     |                                  |                              | 81,322 |         |        |   | 73,152 |        
|                     | Valuation allowance              |                              |        | (78,991 | )      |   |        | (70,643 | )     
|                     |                                  |                              |        |         |        |   |        |        
|                     |                                  | Net deferred tax assets      |        |         | 2,331  |   |        |         | 2,509  |  
|                     |                                  | Net deferred tax liabilities |        |         | (2,331 | ) |        |         | (2,509 | )
|                     |                                  |                              |        |         |        |   |        |        
|                     |                                  | Net deferred taxes           |        | $       |       |   |        | $       |       |  
|                     |                                  |                              |        |         |        |   |        |        

The valuation allowance for deferred taxes
increased by approximately $8,348,000 and $10,050,000 during
2003 and 2002, 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, 2003, the Company has net
operating loss and tax credit carryforwards of approximately
$175,516,000 and $1,838,000, 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 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.

72



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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                   
|--- | ------------------
|16. | Comprehensive Loss

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

|                                                |  |                          |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                |  |                         
|                                                |  | Years Ended December 31,
|                                                |  |                         
|                                                |  | 2003                     |         | 2002 |  | 2001
|                                                |  |                          |         |      |  |     
|Net loss                                        |  | $                        | (21,502 | )    |  | $    | (25,893 | ) |  | $ | (52,370 | )
|Foreign currency translation adjustment         |  |                          | (27     | )    |  |      | (9      | ) |  |   | (27     | )
|Unrealized gain (loss) on marketable securities |  |                          | (2      | )    |  |      | (45     | ) |  |   | 33      |  
|                                                |  |                          |         |      |  |      |         |   |  |   |         |  
|Comprehensive loss                              |  | $                        | (21,531 | )    |  | $    | (25,947 | ) |  | $ | (52,364 | )
|                                                |  |                          |         |      |  |      |         |   |  |   |         |  



|    |                                                        
|--- | -------------------------------------------------------
|17. | Segment Information and Enterprise-Wide
    Disclosures

During the year ended December 31, 2003, the
Company began to manage and analyze the business in two
segments. In 2003, sales and production employees became
dedicated to its License or Service business and each business
was managed separately. The License segment sells software
licenses to use the Viewpoint software platform. Licenses are
sold directly by the companys sales employees and
indirectly through VARs, for which the Company pays a
commission. The Service segment provides creative and support
services to customers who generally have purchased or received
licenses to use the Viewpoint software platform. Services are
generally sold directly by the companys sales team and
occasionally by VARs. Services revenues are generally
earned by the delivery of product created or provided by company
employees or third parties that the Company has contracted to
perform services under the guidance of the Company.

|                             |                        |                          |        |       |  |      |        |        |  |   |        |       | 
|---------------------------- | ---------------------- | ------------------------ | ------ | ----- |  | ---- | ------ | ------ |  | - | ------ | ----- | 
|                             |                        |                         
|                             |                        | Years Ended December 31,
|                             |                        |                         
|                             |                        | 2003                     |        | 2002  |  | 2001
|                             |                        |                          |        |       |  |     
|Revenues:                    |                        |                          |        |       |  |      |        |        |  |   |        |      
|                             | Licenses               |                          | $      | 2,283 |  |      | $      | 5,039  |  |   | $      | 8,305 | 
|                             | Related party licenses |                          |        | 1,729 |  |      |        | 7,554  |  |   |        | 1,376 | 
|                             | Services               |                          |        | 4,291 |  |      |        | 3,302  |  |   |        | 3,500 | 
|                             | Related party services |                          |        | 5,226 |  |      |        | 2,244  |  |   |        | 827   | 
|                             |                        |                          |        |       |  |      |        |        |  |   |        |      
|Total revenues               |                        |                          | 13,529 |       |  |      | 18,139 |        |  |   | 14,008 |      
|                             |                        |                          |        |       |  |      |        |        |  |   |        |      
|Cost of Revenues:            |                        |                          |        |       |  |      |        |        |  |   |        |      
|                             | Licenses               |                          |        | 97    |  |      |        | 353    |  |   |        | 309   | 
|                             | Services               |                          |        | 5,776 |  |      |        | 3,587  |  |   |        | 3,283 | 
|                             |                        |                          |        |       |  |      |        |        |  |   |        |      
|Total cost of revenues       |                        |                          | 5,873  |       |  |      | 3,940  |        |  |   | 3,592  |      
|                             |                        |                          |        |       |  |      |        |        |  |   |        |      
|Gross profit                 |                        |                          | 7,656  |       |  |      | 14,199 |        |  |   | 10,416 |      
|                             |                        |                          |        |       |  |      |        |        |  |   |        |      
|                             | Licenses               |                          |        | 3,915 |  |      |        | 12,240 |  |   |        | 9,372 | 
|                             | Services               |                          |        | 3,741 |  |      |        | 1,959  |  |   |        | 1,044 | 
|                             |                        |                          |        |       |  |      |        |        |  |   |        |      
|Total gross profit           |                        | $                        | 7,656  |       |  | $    | 14,199 |        |  | $ | 10,416 |      
|                             |                        |                          |        |       |  |      |        |        |  |   |        |      
|Gross profit margin Licenses |                        |                          | 98     | %     |  |      | 97     | %      |  |   | 97     | %    
|                             | Services               |                          |        | 39    |  |      |        | 35     |  |   |        | 24    | 
|                             |                        |                          |        |       |  |      |        |        |  |   |        |      
|Total gross profit           |                        |                          | 57     | %     |  |      | 78     | %      |  |   | 74     | %    
|                             |                        |                          |        |       |  |      |        |        |  |   |        |      

The accounting policies of the segments are the
same as those described in the summary of significant accounting
policies. The Company does not currently evaluate the
performance of its segments beyond gross profit. The Company
does not allocate research and development, sales and marketing
or general and

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VIEWPOINT CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

administrative costs, specifically, to either
segment as it does not use that information to make key
operating decisions and does not believe that allocating these
expenses is significant in evaluating performance.



|    |                
|--- | ---------------
|18. | 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,
2003, 2002, and 2001 are as follows:

|           |  |                          |    |      |  |      |    |   |  |  |    |  
|---------- |  | ------------------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  |                         
|           |  | Years Ended December 31,
|           |  |                         
|           |  | 2003                     |    | 2002 |  | 2001
|           |  |                          |    |      |  |     
|Customer A |  |                          | 51 | %    |  |      | 51 | % |  |  | 11 | %
|Customer B |  |                          | 0  | %    |  |      | 0  | % |  |  | 0  | %

Customers whose accounts receivable represent
greater than 10 percent of the Companys consolidated
net accounts receivable from continuing operations at
December 31, 2003 and 2002 are as follows:

|           |  |              |    |      |  |  |    |  
|---------- |  | ------------ | -- | ---- |  |  | -- | -
|           |  |             
|           |  | Years Ended 
|           |  | December 31,
|           |  |             
|           |  | 2003         |    | 2002
|           |  |              |    |     
|Customer A |  |              | 51 | %    |  |  | 17 | %
|Customer B |  |              | 0  | %    |  |  | 16 | %



|    |                                                
|--- | -----------------------------------------------
|19. | Quarterly Results of Operations
    (Unaudited)

Summarized quarterly financial information for
the years 2003 and 2002 are as follows (in thousands, except per
share amounts):

|                  |                                                                   |               |   |         |   |              |   |             |   |  |   |        |   |  |   |        |  
|----------------- | ----------------------------------------------------------------- | ------------- | - | ------- | - | ------------ | - | ----------- | - |  | - | ------ | - |  | - | ------ | -
|                  |                                                                   |              
|                  |                                                                   | Quarter Ended
|                  |                                                                   |              
|                  |                                                                   | March 31      |   | June 30 |   | September 30 |   | December 31
|                  |                                                                   |               |   |         |   |              |   |            
|Fiscal year 2003: |                                                                   |               |   |         |   |              |   |             |   |  |   |        |   |  |   |       
|                  | Total revenues                                                    |               | $ | 4,025   |   |              | $ | 4,474       |   |  | $ | 2,518  |   |  | $ | 2,512  |  
|                  | Gross profit                                                      |               |   | 2,802   |   |              |   | 2,074       |   |  |   | 1,078  |   |  |   | 1,702  |  
|                  | Net loss from continuing operations                               |               |   | (6,198  | ) |              |   | (4,904      | ) |  |   | (5,951 | ) |  |   | (3,348 | )
|                  | Adjustment to net loss on disposal of
    discontinued operations |               |   | 90      |   |              |   | 26          |   |  |   | 41     |   |  |   |       |  
|                  | Net loss                                                          |               |   | (6,506  | ) |              |   | (6,284      | ) |  |   | (5,518 | ) |  |   | (3,194 | )
|                  | Basic and diluted net loss per share                              |               |   | (0.16   | ) |              |   | (0.14       | ) |  |   | (0.12  | ) |  |   | (0.07  | )
|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  | )



|    |                  
|--- | -----------------
|20. | Subsequent Events

In March 2004, the Company sold
1,500,000 shares of common stock, in a private placement to
an institutional investor, for $3,675,000 or $2.45 per
share. The institutional investor was one of the holders of the
Companys convertible notes. Prior to the closing of the
private placement the institutional investor converted $926,000
of outstanding notes with Company common stock.

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VIEWPOINT CORPORATION

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

For the Years Ended December 31, 2003,
2002 and 2001


|                                           |                              |                |   |            |  |            |   |            |   |            |   |     |     |  |   |       |  |  |   |        | 
|------------------------------------------ | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | ---------- | - | ---------- | - | --- | --- |  | - | ----- |  |  | - | ------ | 
|                                           |                              | 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, 2003 |                | $ | 1,557      |  |            | $ | 1,187      |   |            | $ | 13  |     |  | $ | 1,146 |  |  | $ | 1,611  | 
|                                           | Year Ended December 31, 2002 |                |   | 986        |  |            |   | 858        |   |            |   | 3   |     |  |   | 290   |  |  |   | 1,557  | 
|                                           | Year Ended December 31, 2001 |                |   | 796        |  |            |   | 544        |   |            |   | 126 | (1) |  |   | 480   |  |  |   | 986    | 
|Allowance for Notes Receivable:            |                              |                |   |            |  |            |   |            |   |            |   |     |     |  |   |       |  |  |   |       
|                                           | Year Ended December 31, 2003 |                | $ | 1,362      |  |            | $ |           |   |            | $ |    |     |  | $ | 1,362 |  |  | $ |       | 
|                                           | Year Ended December 31, 2002 |                |   | 750        |  |            |   | 612        |   |            |   |    |     |  |   |      |  |  |   | 1,362  | 
|                                           | Year Ended December 31, 2001 |                |   | 2,192      |  |            |   | (665       | ) |            |   |    |     |  |   | 777   |  |  |   | 750    | 
|Allowance for Discontinued
    Operations: |                              |                |   |            |  |            |   |            |   |            |   |     |     |  |   |       |  |  |   |       
|                                           | Year Ended December 31, 2003 |                | $ |           |  |            | $ |           |   |            | $ |    |     |  | $ |      |  |  | $ |       | 
|                                           | Year Ended December 31, 2002 |                |   | 595        |  |            |   |           |   |            |   |    |     |  |   | 595   |  |  |   |       | 
|                                           | Year Ended December 31, 2001 |                |   | 2,416      |  |            |   |           |   |            |   |    |     |  |   | 1,821 |  |  |   | 595    | 
|Valuation for Deferred Tax Assets:         |                              |                |   |            |  |            |   |            |   |            |   |     |     |  |   |       |  |  |   |       
|                                           | Year Ended December 31, 2003 |                | $ | 70,643     |  |            | $ | 10,679     |   |            | $ |    |     |  | $ |      |  |  | $ | 81,322 | 
|                                           | Year Ended December 31, 2002 |                |   | 60,593     |  |            |   | 10,050     |   |            |   |    |     |  |   |      |  |  |   | 70,643 | 
|                                           | Year Ended December 31, 2001 |                |   | 42,044     |  |            |   | 18,549     |   |            |   |    |     |  |   |      |  |  |   | 60,593 | 



---



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

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##### Table of Contents








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

Not applicable.



|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

The Company, under the supervision and with the
participation of its management, including the Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of the Companys
disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer
concluded that the Companys disclosure controls and
procedures are effective in timely making known to them material
information relating to the Company and the Companys
consolidated subsidiaries required to be disclosed in the
Companys reports filed or submitted under the Exchange Act.

There have not been any changes in the
Companys internal control over financial reporting during
the quarter ended December 31, 2003 that have materially
affected, or are reasonably likely to materially affect, its
internal control over financial reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information regarding our Executive Officers
required by Item 10 of Part III is set forth in
Item 1 of Part I Business  Executive
Officers of the Registrant. Information required by
Item 10 of Part III regarding our Directors is
included in our Proxy Statement relating to our 2004 annual
meeting of stockholders, and is incorporated herein by
reference. Information relating to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is set
forth in the Proxy Statement relating to our 2004 annual meeting
of stockholders and is incorporated herein by reference.

Audit Committee Financial Expert

The Company has determined that Dennis R. Raney,
chairman of the Audit Committee of the Board of Directors,
qualifies as an audit committee financial expert as
defined in Item 401 (h) of Regulation S-K, and
that Mr. Raney is independent as that term is
used in Item 7(d)(3)(iv) of Schedule 14A under the
Securities Exchange Act.

Code of Business Conduct

The Company has adopted a Code of Business
Conduct and Ethics applicable to directors, officers, and all
employees of the Company. Viewpoints Code of Business
Conduct and Ethics is available on the Companys web site
at www.viewpoint.com under the Investor
Relations tab. The Company intends to post on its web site
any amendments to, or waivers from its Code of Business Conduct
and Ethics applicable to any employees.






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

Information required by Item 11 of
Part III is included in our Proxy Statement relating to our
2004 annual meeting of stockholders and is incorporated herein
by reference.






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

Information required by Item 12 of
Part III is included in our Proxy Statement relating to our
2004 annual meeting of stockholders and is incorporated herein
by reference.

76



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##### Table of Contents








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

Information required by Item 13 of
Part III is included in our Proxy Statement relating to our
2004 annual meeting of stockholders and is incorporated herein
by reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Information required by Item 14 of
Part III is included in our Proxy Statement relating to our
2004 annual meeting of stockholders and is incorporated herein
by reference.

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##### Table of Contents






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 |  |  | 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)
| | 2.2 |  |  | 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))                                                                                                                                            

Exhibit No. 10: Material
Contracts

| |      |  |  |                                                                                                                                                                                                                                                
| | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1 |  |  | 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))
| | 10.2 |  |  | 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))                                      
| | 10.3 |  |  | 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))          

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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.4  |  |  | 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))                                                                                                                     
| | 10.5  |  |  | Employment Agreement Amendment between the
    Registrant and Robert E. Rice, dated July 1, 2003
    (incorporated by reference From Exhibit 10.3 to
    Form 10-Q filed by the Registrant on November 14, 2003)                                                                                                                                                                                          
| | 10.6  |  |  | Employment Agreement between the Registrant and
    Jay S. Amato, dated August 7, 2003 (incorporated by
    reference from Exhibit 10.1 to Form 10-Q filed by the
    Registrant on November 14, 2003)                                                                                                                                                                                                    
| | 10.7  |  |  | Employment Agreement between the Registrant and
    William H. Mitchell dated July 18, 2003 (incorporated
    by reference from Exhibit 10.2 to Form 10-Q filed by
    Registrant on November 14, 2003)                                                                                                                                                                                                   
| | 10.8  |  |  | 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))                                                                                                                                                
| | 10.9  |  |  | 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))                                                                                                                                    
| | 10.10 |  |  | 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) 
| | 10.11 |  |  | 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)                                                                                                                                                                                                                            
| | 10.12 |  |  | 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)                                                                                                                                                                                                                 
| | 10.13 |  |  | 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)                                                                                                                                                                                                                                  
| | 10.14 |  |  | 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)                                                                                                                                                                                                               
| | 10.15 |  |  | Registration Rights 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 10.6 to Form 8-K filed by
    the Registrant on January 2, 2003)
| | 10.16 |  |  | 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)                                                                                    
| | 10.17 |  |  | 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)                                                                                                                                                    
| | 10.18 |  |  | 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)                                                                                                                                                        
| | 10.19 |  |  | 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)                                                                                                                                          
| | 10.20 |  |  | 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)                                                                                                                                                                                                                                 

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| |       |  |  |                                                                                                                                                                                                                                         
| | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.21 |  |  | Stock Purchase Agreement, dated as of
    November 12, 2003, by and between the Registrant and
    Federal Partners, L.P. (incorporated by reference from
    Exhibit 10.1 to Form 8-K filed by the Registrant on
    November 13, 2003)
| | 10.22 |  |  | Registration Rights Agreement dated as of
    November 12, 2003, by and between the Registrant and
    Federal Partners, L.P. (incorporated by reference from
    Exhibit 10.2 to Form 8-k filed by Registrant on
    November 13, 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
Independent Accountants 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)

Additional Exhibits

| |      |  |  |                                                                                                                                                          
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 |  |  | Certification of Chief Executive Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                   
| | 31.2 |  |  | Certification of Chief Financial Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                   
| | 32.1 |  |  | Certification of Chief Executive Officer Pursuant
    to 18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002
| | 32.2 |  |  | Certification of Chief Financial Officer 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

On November 12, 2003, the Company filed a
report on Form 8-K to furnish the Companys press
release regarding its results of operations for its fiscal third
quarter ended September 30, 2003.

On November 13, 2003, the Company filed a
report on Form 8-K to report the closing of a sale by
private placement of 3,125,000 shares of the Companys
common stock to Federal Partners, L.P.

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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 30th day of March,
2004.



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



| |     |                 
| | --- | ----------------
| | By: | /s/ JAY S. AMATO

| |                                          
| | -----------------------------------------
| |                                          
| | Jay S. Amato                             
| | President and Chief Executive
    Officer

Dated: March 30, 2004

POWER OF ATTORNEY

KNOW ALL PERSON BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
William H. Mitchell 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/ JAY S. AMATOJay S. Amato
    Director, President and Chief Executive Officer
    (Principal Executive Officer)    |  | Dated: March 30, 2004
|   
|By: |  | /s/ WILLIAM H. MITCHELLWilliam H. Mitchell
    Chief Financial Officer
    (Principal Financial Officer)              |  | Dated: March 30, 2004
|   
|By: |  | /s/ CHRISTOPHER C. DUIGNANChristopher C. Duignan
    Vice President and Controller
    (Principal Accounting Officer) |  | Dated: March 30, 2004
|   
|By: |  | /s/ THOMAS BENNETTThomas Bennett
    Director                                                                         |  | Dated: March 30, 2004
|   
|By: |  | /s/ STEPHEN DUFFStephen Duff
    Director                                                                             |  | Dated: March 30, 2004

81



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|    |  |                                                           |  |                      
|--- |  | --------------------------------------------------------- |  | ---------------------
|   
|By: |  | /s/ SAMUEL H. JONES, JR.Samuel H. Jones, Jr.
    Director |  | Dated: March 30, 2004
|   
|By: |  | /s/ JAMES CRABBEJames Crabbe
    Director                 |  | Dated: March 30, 2004
|   
|By: |  | /s/ DENNIS R. RANEYDennis R. Raney
    Director           |  | Dated: March 30, 2004
|   
|By: |  | /s/ ROBERT E. RICERobert E. Rice
    Director             |  | Dated: March 30, 2004

82