<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K



                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                       SECURITIES AND EXCHANGE ACT OF 1934

(Mark One)

|X|   ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934.

      For the fiscal year ended December 31, 2002

OR

| |   TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934.

      For the transition period from _____________ to _____________

                        Commission File Number 000-23415
                           Princeton Video Image, Inc.
             (Exact Name of Registrant as Specified in its Charter)

          Delaware                                                22-3062052
(State or Other Jurisdiction of                               (I.R.S. Employer
 Incorporation or Organization)                              Identification No.)

                15 Princess Road, Lawrenceville, New Jersey 08648
               (Address of Principal Executive Offices) (Zip Code)

                                  609-912-9400
              (Registrant's Telephone Number, Including Area Code)

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

<TABLE>
<CAPTION>
                                             Name of Each Exchange
                  Title of Each Class         on Which Registered
                  -------------------        ---------------------
                  <S>                        <C>
                         None                         None
</TABLE>

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

                          Common Stock, $.001 par value
                              (Title of Each Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |

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

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

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter: $11,006,379 based on the last sales price on June 28, 2002.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 18,418,865 shares of Common
Stock, $.001 par value per share,
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were outstanding on March 25, 2003.

                       DOCUMENTS INCORPORATED BY REFERENCE

The definitive Proxy Statement for the 2003 Annual Meeting of Stockholders is
incorporated by reference in Part III of this Form.


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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

Princeton Video Image, Inc. ("PVI", "we", "us") is a Delaware corporation with
principal offices located in Lawrenceville, New Jersey. PVI was founded in 1990
to develop and market a real-time video insertion system. Through our patented
computer vision technology and proprietary hardware and software system, known
as the Live Video Insertion System (L-VIS(R)), we are able to place
computer-generated electronic images into live and pre-recorded television
broadcasts of sports and entertainment programming. These electronic images
range from simple corporate names or logos to sophisticated multi-media 3-D
animated productions. During the broadcast of a sports or entertainment program,
for example, an image can be placed to appear in various high visibility
locations in the stadium, on the playing field, or as part of the natural
landscape of the scene. The L-VIS(R) System has been used to insert images,
including advertising images and program enhancements, into both live and
pre-recorded television broadcasts.

We believe that our L-VIS(R) System, which is an integrated hardware and
software system, can benefit (i) advertisers, through the placement of their ads
in high visibility, in-program locations and by the ability to provide specific
advertising to specific geographical regions; (ii) broadcasters and program
producers, through a new revenue stream from additional inventory of advertising
space or program enhancements; and (iii) teams and leagues, through increased
revenue streams and greater flexibility and control over in-stadium advertising.
PVI has provided video insertion services for thousands of live telecasts
worldwide, including broadcasts of Major League Baseball, National Football
League, professional soccer, motor sports, and other live events. Since 1999,
PVI has been the exclusive virtual advertising provider for NFL International
broadcasts. The following events and advertisers are representative of PVI's
customer base; CBS, ESPN, Televisa, TV Azteca, Philadelphia Eagles, Dallas
Cowboys, Philadelphia Phillies, Indy Racing League, Volkswagen, TelCel,
Heineken, Ford, Kodak and FedEx. We market our L-VIS(R) Systems on a worldwide
basis through licensing and royalty agreements, together with our wholly-owned
subsidiary, Publicidad Virtual, S.A. de C.V. ("Publicidad"), which is
headquartered in Mexico City, Mexico.

As part of our product development program, we are developing a series of
products to allow viewers to interact with live or recorded video programming
delivered to the home via the Internet or through interactive television. These
applications will enable the viewer to influence the on-screen presentation of a
broadcast which utilizes the L-VIS(R) System by using a mouse or other pointer,
for example, to indicate areas of interest. We are also developing other
applications of technology for the sports and entertainment fields.

PVI's objective is to become the leading provider of virtual advertising to the
broadcasters of sports and entertainment programming worldwide.

This document includes certain forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
In some cases, you can identify these so-called "forward-looking statements" by
such words as "may," "will," "should," "expects," "plans," "anticipates,"
"estimates," "believes," "predicts," "intends," "potential," or "continue," or
the negative of those words or phrases of similar expression. You should be
aware that these forward-looking statements are only our predictions and are
subject to various assumptions, risks and uncertainties. Actual events or
results may differ materially from those anticipated by the statements we make.
Factors described in this Annual Report on Form 10-K, including without
limitation those identified in this Item 1, "Business" and in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" could cause our actual results to differ materially from those
expressed in any forward-looking statement we make. We do not promise to update
forward-looking information or any other information to reflect actual results
or changes in

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assumptions or other factors that could affect those statements.

We were incorporated in New Jersey on July 23, 1990 and became a Delaware
corporation on September 13, 2001.

OVERVIEW OF THE TELEVISION ADVERTISING AND SPONSORSHIP MARKET

According to the latest figures from CMR, a member of the Taylor Nelson Sofres
media company group and a leading provider of strategic advertising and
marketing communications information, total advertising expenditure for all
media in 2002 totaled $117 billion. Network, spot, cable and syndicated TV
represented approximately $48 billion of the total spending. In the IEG
Sponsorship Report, a newsletter published by IEG, Inc, it is projected that
sponsorship spending worldwide for 2003 will be $26.2 billion, of which $7.21
billion will be spent in the sports category for the sponsoring of specific
teams, stadium locations and sporting events.

The cost of a television commercial spot is normally a function of the nature
and size of the expected audience of the event to be broadcast. Accordingly, a
spot in a national broadcast of a major sporting event, such as the Super Bowl
or a World Series game, sells for a price many times that of a spot in a regular
season game broadcast only locally or regionally. Television broadcasters
(including national television and cable networks, regional cable networks, and
local television and cable operators) purchase television broadcast rights to
sporting events from the holders of those rights, which include individual teams
as well as various leagues, federations, associations and other organizations
representing both professional and amateur sports. Rights to specific games or
events may be held by teams, leagues, associations, or any combination thereof,
depending on the arrangements under which each sport is organized.

We believe that the growth of sports advertising and sponsorship is largely
driven by the desire on the part of advertisers to be "in the game" by having
their brands and products visible during the broadcast of televised live or
pre-recorded sporting events. The L-VIS(R) System enables the advertiser to be
"in the game" by exposing the television viewer to the brand or message during
an event. As the advertisement can be placed strategically to appear on the
television screen where traditional signage may not be available or practical,
the advertiser is more confident that its message will actually be seen by the
viewer and not "zapped" away during a commercial break.

Sponsorship generally entails associating the sponsor's name with the event or
stadium as well as signage rights, i.e., the prominent display of the sponsor's
name and products in specified locations in the stadium or broadcast. Sponsors
purchase sponsorship rights from the holders of those rights. Like broadcast
rights, the ownership of sponsorship rights depends on the specific sport and
the event or location. In some cases, the owner of the venue at which an event
is staged holds the sponsorship rights to the event. In other cases, the team
owner may own the sponsorship rights, including signage. Advertisers negotiate
sponsorship arrangements directly with sponsorship rights holders and not with
broadcasters. Since broadcasters historically have not shared in sponsorship
revenue, they traditionally have not assisted sponsorship programs. In order to
interest broadcasters in the capabilities of the L-VIS(R) System, we have made
program enhancements available, such as the virtual first down line in football
(which we now offer as a branded or unbranded enhancement), the virtual kick
circle and distance to goal in soccer and the speed of the pitch in baseball.

The success of the L-VIS(R) System requires that we enter into satisfactory
commercial arrangements with advertisers, rights holders and broadcasters. To
date, many of the major broadcasters and a limited number of the broadcast
rights holders and advertisers have agreed to use our L-VIS(R) System during
live and pre-recorded sports and entertainment broadcasts. Our continued
expansion will depend on, among other things, our ability to identify markets,
to manage growth, and to hire and retain skilled personnel. Some press coverage
of our technology has raised concerns about its desirability and potential
misuse relating to television tampering, ethics, and over commercialization.
There can be no assurance that the use of our L-VIS(R) System will


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be accepted by television viewers or that we will be able to combat effectively
potential future negative publicity regarding ours or similar technology. To the
extent that we are unable to more successfully market the L-VIS(R) System our
business might not develop as quickly or to the extent necessary to support our
intended level of operations.

ABILITIES OF THE L-VIS(R) SYSTEM

We believe that the L-VIS(R) System provides advantages when compared to
traditional 30-second advertising spots and other forms of advertising, because
the L-VIS(R) System:

      -     Allows for in-program advertising. The L-VIS(R) System allows an
            advertiser to be "in the game" or broadcast, by having their brands
            and products visible within the broadcast of televised live and
            pre-recorded sports and entertainment programming;

      -     Reduces the effect of channel surfing and viewer muting. Because the
            L-VIS(R) System allows for "in the game" advertising, the negative
            effect of channel surfing, which often occurs during traditional
            30-second advertising spots, may be reduced;

      -     Allows placement of advertising in high visibility locations. The
            L-VIS(R) System allows for the insertion of images into places that
            might otherwise not be used and have high impact and recall for
            television viewers;

      -     Creates new inventory for advertising rights holders. The L-VIS(R)
            System allows for new advertising by providing for the insertion of
            images in locations that are unavailable for conventional
            billboards, such as the racetrack in a motor sports event, or the
            natural landscape or background during news and other entertainment
            programming;

      -     Allows for "narrow casting" of specific advertising to specific
            geographical regions. The L-VIS(R)System also allows for specific
            advertising to specific geographical regions. Thus, a rights holder
            can sell the same advertising space to different advertisers in
            different markets; for instance, the Canadian feed of the 2003
            broadcast of the Super Bowl included different inserted
            advertisements on the field and in the end zone than the Mexican
            broadcast of the same game;

      -     Provides for animation and audio-video advertising. The L-VIS(R)
            System may be used, when appropriate, to insert 3-dimensional
            animation and audio-video advertising within the program to enhance
            the impact of the advertising;

      -     Allows branding of an event. Insertions made during a live broadcast
            will be captured, or branded, on recordings of the event and may
            then be shown around the world in re-broadcasts and highlight films
            of the event. An advertiser will benefit from every re-broadcast,
            such as re-broadcasts which occur during the sports segment of most
            news programs; and

      -     Provides advertising to otherwise advertising-free environments. Our
            technology can be used to insert advertising into otherwise
            advertising-free environments, e.g., pay-per-view concerts, sports
            and entertainment programming.


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THE L-VIS(R) SYSTEM TECHNOLOGY

Our L-VIS(R) System is a system that contains proprietary hardware and software
which we have designed to insert electronic images into live and pre-recorded
television broadcasts of sports and entertainment programming. The inserted
images may be two or three dimensional, static or animated, opaque or
semi-transparent and may be placed so that the inserted images appear to exist
on the playing field, in the stadium or venue where a game or sporting event is
being played, or in the background or natural landscape in entertainment
programming. If a player or other object moves in front of an image that is
inserted on a wall, in the background, or on a playing field, the L-VIS(R)
System is programmed so that the passing object occludes that portion of the
inserted image. The L-VIS(R) System can also be used to insert a freestanding
image so that the image will occlude a person or other object which "passes
behind" it.

The basic L-VIS(R) System, also referred to as the "Vision" system, relies on
computer vision techniques that recognize features in the television picture and
track the motion of the scene. This L-VIS(R) System and its operator may be
located at the site of the event, at the network studios of the broadcaster or
at an individual station or cable system head-end carrying the broadcast. Before
the broadcast, the advertising images to be inserted are prepared and the
operator identifies the location in the broadcast scene where the images will be
inserted. The Vision system is designed to recognize the broadcast scene in real
time during the broadcast and to insert the image as instructed each time the
broadcast scene containing the insert location appears. The operator controls
which of several images is selected for insertion and when it will be inserted.
Since the Vision system can be used at any point in the distribution path of the
broadcast signal, a broadcaster can, by installing a system in their main
broadcast facility, use one system to insert advertising in broadcasts
originating from multiple locations. This makes the system a very efficient and
powerful tool for generating incremental advertising revenue.

We have designed software that allows for the use of the L-VIS(R) System using
this computer vision technology in the live broadcasts of soccer, football,
baseball, golf, auto racing, hockey and entertainment programming. For instance,
in baseball our software allows images to be inserted on the wall behind home
plate, the outfield wall or the area above the outfield wall. To the television
viewer, an advertisement inserted with the L-VIS(R) Vision system, such as an
advertisement on the wall behind home plate, appears to be part of the original
scene, in proper perspective and fixed in the scene as the camera pans, tilts
and zooms, and as players move in front of the image. Furthermore, because an
inserted image is not present at the actual site of a sporting event, any
distraction caused to the players by other types of advertising such as
scrolling billboards will not be present. Because the Vision system must be
powerful and fast enough to insert images in live broadcasts in real-time, it is
also extremely efficient when used to insert advertisers' logos and products in
pre-recorded programming. This permits distributors of pre-recorded
entertainment programming to offer advertisers unique, in-program product
integration that can be targeted by market or changed from year to year without
altering the master recording of the broadcast. A camera sensor enhanced version
of the L-VIS(R) System can be used on almost any live event including basketball
and tennis broadcasts.

Our iPoint(TM) technology enables advertising, promotional material and program
enhancements to be inserted locally - on the television or personal computer -
so the individual viewer will see advertising and features designed specifically
for him or herself. Using digital set top box technology developed to run our
software, Internet delivered advertisements and features can be inserted into
the individual television broadcast based on customer preferences. These
advertisements and features can be interactive, as well, allowing the viewer to
customize their viewing experience by selecting particular enhancements or
options. An iPoint(TM)enhanced baseball game, for instance, would allow viewers
to select such virtual enhancements as "clickable" player statistics or a
virtual strike zone. Entertainment programs could include interactive objects or
virtual products, giving the user instant pricing, detailed information or the
opportunity to make purchases interactively without leaving the program. This
first phase of


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development has been completed and the next step will be the incorporation of
the iPoint(TM)product into set top boxes used by cable companies to deliver
television programming into households. Our first efforts in that regard have
begun with Cablevision Systems Corporation ("Cablevision"), PVI's largest
stockholder and a major cable system operator serving over 3 million households
in the New York metropolitan area.

Because we operate in a rapidly developing commercial and technological
environment, our success will depend in part upon our ability to develop
products for the Internet and interactive television as well as product
enhancements that keep pace with continuing changes in technology and customer
preferences. Our failure to develop these products on a timely basis would limit
the growth potential of our business and thus have an adverse effect on our
business, financial condition and the results of our operations. The video,
electronics, data processing, broadcast television and cable television
industries are changing rapidly due to, among other things, technological
improvements, consolidations of companies and changes in consumer preferences.
In particular, the live video image insertion market is relatively new and
continues to adapt to the changing preferences and customs of the broadcasters,
rights holders, and the ultimate television viewer. We anticipate that as the
market develops, we will continue to be affected by technological change and
product improvements as well as changes in industry broadcast standards.

STRATEGY

Our objective is to become the leading provider of electronic advertising and
program enhancements to the broadcasters of sports and entertainment programming
as well as to television advertising markets worldwide. We are positioning PVI
not just as a technology provider, but as a company that provides media and
marketing services for television advertisers and generates incremental revenue
for broadcasters and rights holders. The key elements of our strategy are:

      -     Developing relationships with rights owners. We intend to continue
            developing our relationships with rights owners such as the National
            Football League ("NFL"), Major League Baseball ("MLB"), National
            Basketball Association ("NBA"), International Federation of Football
            Associations (" FIFA"), Indy Racing League (" IRL"), specific teams
            and other sports governing bodies as well as the owners of first run
            and syndicated entertainment programs;

      -     Developing relationships with television broadcasters and
            distributors. We intend to continue to develop the relationships we
            currently have with national network broadcasters such as NBC, CBS,
            ABC, ESPN, and FOX and cable operators and programmers such as
            Cablevision and their affiliated programming entities;

      -     Developing relationships with non-sports owners of first run and
            syndicated entertainment programming. We intend to continue to
            develop software used for virtual product integration in television
            programming and to convince television sponsors and broadcasters to
            use the L-VIS(R) System in their programming;

      -     Working directly with high-profile advertisers. To promote
            acceptance of the L-VIS(R)System, our marketing executives are
            actively discussing the unique uses and benefits of our
            L-VIS(R)System directly with high-profile advertisers. Our efforts
            in this area continue to expand because of the success of this
            approach in building a profitable business outside the United States
            working directly with the advertising community, and the potential
            benefits we believe would result from the endorsement of our
            technology by the advertising community; and

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      -     Enhancing and developing additional L-VIS(R)System software and
            deploying new technology. In addition to enhancing our existing
            Vision software for use of the L-VIS(R)System during soccer,
            football, baseball, basketball and hockey games, we are developing
            software which would allow us to use the L-VIS(R)System during the
            broadcast of additional sports and other entertainment programming.
            Our recent acquisition of Scidel's patented video insertion
            technology will also enable us to offer video insertion to a wider
            variety of clients. We are also continuing to develop our
            iPoint(TM)product in cooperation with Cablevision in order to expand
            the use of our technology on the Internet and in interactive
            television.

OWNERSHIP OF VIDEO INSERTION RIGHTS

The broadcast of soccer, football, baseball, basketball, hockey and any other
type of sporting event is governed by agreements among the applicable teams,
leagues, broadcasters and the sports federation, if any. In the NFL, for
example, all television, video insertion and national sponsorship rights are
controlled by the league for all regular season games, the playoffs, the Super
Bowl and the Pro Bowl. Such rights are controlled by individual NFL teams with
respect to all pre-season games. In baseball, MLB holds all television,
sponsorship and video insertion advertising rights with respect to regular
season nationally broadcast games, the All Star Game, playoff games, the World
Series and the international distribution of regular season games.

The broadcast of pre-recorded, entertainment programming such as sitcoms,
variety shows and award shows can be controlled by agreements among copyright
holders, production companies, distributors, broadcasters and/or cablecasters,
and sponsors.

Impediments to the use of our L-VIS(R) System during the broadcast of programs
covered by any of these agreements could have a material adverse effect on our
business, financial condition and the results of our operations by limiting its
acceptance and use in television programming. In many instances, these
agreements provide that different persons control the copyrights to the
broadcasts in differing circumstances, for instance, regular season play versus
playoffs in sports, or first run versus syndication for situation comedies.
Agreements often govern permitted forms of advertising and modifications to the
broadcast. Use of video insertion technology is not specifically discussed in
some existing agreements and under these circumstances it is not clear whose
permission must be obtained to use the L-VIS(R) System. If we use our L-VIS(R)
System without the permission of the appropriate parties, such use can be
challenged in a court of law. The defense and prosecution of copyright suits are
both costly and time-consuming and current broadcast copyright holders might not
agree to amend current agreements to allow for or facilitate the use of our
technology on terms acceptable to us.

SALES AND MARKETING

While our emphasis is to generate increased sales from sharing advertising
revenue with rights holders and broadcasters, we expect to continue to generate
revenues from royalties received for the licensing of our technology and from
contractual or production revenue earned from fees paid by broadcasters for
program enhancements.

The L-VIS(R) System has been used during the broadcast of, among other events,
(i) hundreds of broadcasts of soccer matches in Latin America and Europe, (ii)
the international broadcast of the Super Bowl every year beginning with Super
Bowl XXXIII in January 1999, (iii) 2002 MLB World Series, 2002 MLB home games of
the Philadelphia Phillies and 2001, 2000 and 1999 MLB home games of the
Philadelphia Phillies and the San Diego Padres, (iv) NFL regular season and
playoff games broadcast by CBS Sports since 1999, (v) ESPN Sunday Night Baseball
games during the

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1999, 2000, 2001 and 2002 regular seasons, and (vi) the IRL national telecast of
the Indianapolis 500 in May of 2002 and IRL national telecasts on ABC and ESPN
for their 2000 and, 2001 series, including the Indianapolis 500 in May of both
years.

On February 14, 2001, we entered into a license agreement with Cablevision which
grants Cablevision and its affiliates the right to use our L-VIS(R) System and
related proprietary rights in its business in exchange for license fees and
royalties. Since that time, L-VIS(R) Systems were installed in two Cablevision
properties - Madison Square Garden (MSG) in New York City and Rainbow Networks
Communications (RNC) in Bethpage, New York, which is Cablevision's programming
origination and distribution center. With the installation of the system at RNC,
we have expanded the applications of our technology to include NCAA college
hockey games, where virtual advertising has been used during the game on the
glass panels behind the goal. The system at MSG has been used to test the
insertion of virtual images off-air in six New York Rangers hockey games and to
insert virtual images in one live Rangers broadcast. Cablevision owns Madison
Square Garden and the New York Rangers, as well as the New York Knicks
basketball team. On June 25, 2002, subsequent to this agreement, PVI entered
into a Note Purchase and Security Agreement (the "Note Purchase Agreement") with
PVI Holding, LLC, a subsidiary of Cablevision Systems Corporation (See Note 4 of
our Notes to the Consolidated Financial Statements).

There can be no assurance, however, that we will be successful in establishing
or maintaining a relationship with any of these parties.

As discussed above, the right to insert electronic images for advertising
purposes into a live or pre-recorded broadcast, and hence the right to sell
advertising using the L-VIS(R) System, is held by different groups depending, in
most cases, on the programming event or sport involved, the status of the game,
i.e., pre-season, regular season or post-season, and whether the programming or
game is to be broadcast internationally, nationally or locally. These rights may
be sold for specific programming events or games and/or entire seasons to
another party, most notably a broadcaster who pays the rights holder an up-front
fee for such rights. In each case, we must negotiate for the use of the L-VIS(R)
System with the rights holder or holders, typically in exchange for a percentage
of the advertising revenue generated using the L-VIS(R) System or for a
contracted fee. When the L-VIS(R) System uses the live feed from the broadcaster
to insert its electronic images, such broadcaster must also approve the use of
the L-VIS(R) System. Accordingly, arrangements with several parties including
the rights holder and the broadcaster must be established.

The ultimate customers of our L-VIS(R) System are expected to continue to be
advertisers, sponsors, broadcasters and rights holders. Revenues flow from the
advertisers and sponsors to the rights holders who pay a share of those revenues
or a contracted fee to us. We provide the L-VIS(R) System and support services
to the rights holders and we are paid by the rights holders either a percentage
of the advertising revenues derived from use of the L-VIS(R) System or an agreed
upon fixed fee for services provided. The rights holders enter into agreements
with broadcasters to provide the services necessary for use of our L-VIS(R)
System. In some cases, advertising space using the L-VIS(R) System is then sold
either by the rights owner or by the broadcaster, depending on the specific
arrangement between such parties, and the advertising revenues are shared among
the rights owner, the broadcaster and us. As a result, we often rely upon the
marketing and advertising staffs of these rights holders and broadcasters, which
typically target the manufacturers or producers of nationally distributed
products. The broadcast rights holders have been only moderately successful in
selling L-VIS(R) System advertising. If the broadcast rights holders are unable
to enter into higher paying or a greater number of arrangements with
advertisers, this failure could inhibit the growth in our revenue stream. In
order to mitigate this dependency on third parties, we are actively promoting
the advantages of the L-VIS(R) System directly to major advertisers. We believe
that promotion is important in influencing market acceptance of the L-VIS(R)
System among potential advertisers.


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Over the past several years, we have focused our sales and marketing efforts on
those sports that account for a significant amount of the United States or
worldwide advertising and sponsorship expenditures and in a growing number of
entertainment programming applications. The following is an explanation of our
sales and marketing strategy for several of our target markets:

SOCCER

Soccer is the most popular, marketable and widely seen sport in the world.
Although sales from soccer television advertising in the United States
historically have been very small, the majority of our revenues are derived from
this sport worldwide, with Latin America being the leader. We intend to strongly
pursue and continue marketing the L-VIS(R) System for use in soccer matches in
Asia and Latin America.

The basic soccer application software was initially designed to insert an image
onto the center circle of a soccer field, but has now evolved to insert images
in the grass near the goal posts, above the billboard signs and practically
anywhere on the field that an advertiser would want, subject to FIFA's (soccer's
governing body) rules. The L-VIS(R) System has been used both nationally and
internationally in soccer broadcasts. In March 2000, our then Latin American
licensee, Publicidad (which became our wholly-owned subsidiary on September 20,
2001), entered into multi-year agreements with Televisa and TV Azteca, Mexico's
two largest television networks, for the use of the L-VIS(R) System. The
agreements include the telecast of games of the Mexican National Soccer Team.

On March 26, 2002, PVI acquired the assets of SciDel Technologies, Ltd.,
including several key agreements for virtual advertising in European soccer
league broadcasts. PVI intends to utilize the proprietary technology it acquired
from Scidel, along with our own L-VIS(R) technology, to expand the use of
virtual advertising for soccer in Europe and elsewhere.

It is our understanding that FIFA continues to evaluate its position on the use
of virtual imaging. We continue to explore ways to encourage FIFA to grant
permission for its expanded use. There can be no assurance that FIFA will grant
such expanded permission, and without the permission of FIFA, our potential
revenue from soccer would be substantially reduced.

FOOTBALL

PVI has developed several successful commercial and enhancement applications for
professional football. For the preseason games of the Dallas Cowboys, virtual
ads were placed in high impact positions in the crowd, in each end zone and
around the goalpost regions. These ads were animated for greater effect.

During the regular NFL seasons in 2002, 2001, 2000 and 1999, we used the
L-VIS(R) technology to insert a first down line in CBS national broadcasts,
including post season playoff games. The first down line appears to be popular
with the viewing audience and similar technology can be used to put advertising
on the field, in the form of a "branded" first down line, for example, when the
rights owner permits it. This was first done domestically with CBS in college
football during the 2002 college football season. Although the NFL does not
permit signage in the broadcasts of its regular season games at the present
time, we continue to pursue this possibility. PVI has inserted a branded first
down line in domestic broadcasts of championship games for NFL's Europe League
in 2000, college football's Sun Bowl in 2001 and regular season collegiate
Southeastern Conference games in 2002.

PVI also sells advertising in the international feed of the Super Bowl. In this
"feed", PVI and its partners in Canada and Mexico sell advertising intended for
their own market. This "narrowcasting" approach increases revenues and has
featured international advertisers such as FedEx, Charles Schwab, Volkswagen,
Ford and Nextel.


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<PAGE>
BASEBALL

Baseball stadiums have perhaps the most valuable piece of real estate in
sports--the wall behind home plate. We believe that this high impact position
has great recall among viewers and is a coveted position for advertisers. Under
agreement with ESPN, PVI has placed virtual ads in their national broadcasts of
Sunday Night Baseball. The virtual ads change every half inning and have
appeared in a minimum of twenty games in each of the last two seasons.
Advertisers that have used the service include Claritin, Century 21, Gateway and
Buick. We provided the same service to MLB for the 2001 All Star Game and the
2002 World Series. The Philadelphia Phillies have used the system for several
years with advertisers such as Coca-Cola, Toyota and Mobil making use of unique
animated features like "speed of the pitch" in which a logo changes to reveal
the speed of the last pitch. We are continuing our efforts to contract with
other baseball teams to use our technology and to renew existing relationships
with the individual teams and the national broadcasters. We also intend to
develop our Internet and interactive software products for potential use in
baseball and other sports. During a Chicago Cubs broadcast against the San Diego
Padres, we provided virtual advertising insertions behind home plate, which were
made interactive by RespondTV, a leading infrastructure provider for interactive
television content. During this broadcast, viewers with internet enabled set-top
boxes were able to interact on their personal computers with the broadcast.
Despite our marketing efforts and development of such innovative products,
however, there can be no assurance that we will be successful in creating
greater interest for use of the L-VIS(R) System in MLB.

MOTOR SPORTS

The Indy Racing League (IRL) was the first major motor sport to utilize virtual
advertising during its broadcasts. Their races are telecast over either ABC or
ESPN and include the broadcast of the Indianapolis 500 in May of each year. The
L-VIS(R) System has been used to insert virtual images into the natural
landscape of the IRL race broadcast, both in the middle of the field and on the
race track. During the Indianapolis 500 in May 2002, an expanded package of
virtual enhancements was used including a virtual radar gun registering the
speed of selected cars and a virtual picture of the winning driver on the
start/finish line during the final lap of the race.

OTHER SPORTS AND ENTERTAINMENT PROGRAMMING

In addition to the major sports described above, we have also provided services
using the L-VIS(R) System in other sports and entertainment programming. The
L-VIS(R) System was used for the first time in televised golf during the
telecast of Shell's Wonderful World of Golf broadcast by ESPN in October 2000.
Virtual enhancements, including a virtual flagstick indicating where the cup is
located, and a white circle highlighting the cup when a player is putting, were
inserted onto the golf course. As part of the international broadcast of the NBA
finals in 2001, virtual signage made its debut in basketball with the insertion
of signage on the interior walls of the basketball court as well as on the
scoreboards.

During the 2000, 2001 and 2002 Grammy Awards broadcasts on CBS each February,
the L-VIS(R) System was used to insert virtual advertisements on the walkways
into the building prior to the award show. PVI also expanded its work in
entertainment programming in 2002 through our work with Comedy Central.

We are also expanding our services into the area of entertainment programming.
Unlike live sporting events, virtual product integration inserts virtual
products into half hour sitcoms, movies or other pre-recorded media. The
company has developed a post-production system based on L-VIS(R) that can add
products to pre-recorded television shows in much the same way as we do in live
sporting events. The company intends to earn revenues by selling the
opportunity to insert products or brands directly to advertisers and to share
any revenue with the broadcaster and rights holder. The company had already
completed a deal with Hallmark to insert products into some made for TV movies.

Our strategic relationship with Cablevision has also led to many new
opportunities to expand the array of applications of our technology to include
NCAA college hockey games, where virtual advertising has been used during the
game on the glass panels behind the goal. A system was installed at Madison
Square Garden which was used to test the insertion of virtual images off-air in
six New York Rangers hockey games and to insert virtual images in one live
Rangers broadcast. Cablevision owns Madison Square Garden and the New York
Rangers, as well as the New York Knicks basketball team.


                                       11
<PAGE>
INTERNATIONAL BUSINESS STRATEGY

Our strategy with respect to sports and entertainment programming originating
outside of the United States is to enter into revenue sharing agreements either
with foreign broadcast and sports marketing experts or by the formation of
foreign subsidiaries either majority or wholly-owned by PVI. We expect that the
largest international market for the L-VIS(R) System will be for soccer matches
and entertainment programming.

Publicidad Virtual S.A. de C.V. ("PV"), which has marketed the L-VIS(R) System
throughout Mexico, Central and South America and the Spanish-speaking markets in
the Caribbean basin since 1993, has become the largest and most successful
virtual advertising company worldwide. Televisa, one of Mexico's two largest
television networks, had been performing advertising sales functions for PV
dealing directly with advertisers selling PV's virtual insertion inventory. In
1999-2000, PV began purchasing inventory from Televisa and selling directly to
advertisers. This was part of PV's strategy to position itself not just as a
technology provider, but as a company that provides media and marketing services
for television advertisers and generates incremental revenue for broadcasters
and rights holders, and led to a dramatic increase in sales. The L-VIS(R) System
has been used by the clients of PV to place insertions into broadcasts of
hundreds of soccer matches, tennis matches, bullfights and entertainment
programming including concerts. In September 2001, we acquired PV and it is now
a wholly-owned subsidiary of PVI.

On March 26, 2002, PVI acquired the assets of SciDel Technologies, Ltd., an
Israeli virtual signage company specializing in downstream applications.
SciDel's downstream technology complements PVI's efforts in moving towards total
vision based applications. In addition, SciDel has ongoing operating
relationships with three of Europe's major soccer leagues.

In South Africa, PVI is producing advertising and game enhancements for
Sportscast, a South African sports marketing agency acting as PVI's agent, and
the South African Broadcasting Corporation (SABC), the leading public television
channel in South Africa, which are used in SABC's live broadcasts of rugby,
cricket, soccer, boxing, motor sports, horse racing, golf and other athletic
broadcasts.

See Note 25 of our Notes to the Consolidated Financial Statements for
additional industry segment, geographical and customer information.

There can be no assurance that we will be able to enter into or maintain
favorable relationships with any partners or licensees, that any partners or
licensees will establish a market for the L-VIS(R) System, that any
relationships will generate any revenue for us, or that any partners or
licensees will act in good faith and perform their obligations to us. To the
extent that we have entered into these exclusive arrangements in a particular
market, we are dependent upon these partners or licensees to generate revenues
for us. Their failure could preclude us from generating material revenues in
such geographical area or with respect to a specific sport, as the case may be.

There are certain risks inherent in doing business in international markets,
such as unexpected changes in regulatory requirements, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, political
instability, fluctuations in currency exchange rates, reduced protection for
intellectual property rights in some countries, seasonal reductions in business
activity during the summer months in Europe and certain other parts of the
world, and potentially adverse tax consequences. These and other factors,
including the failure to integrate into our operations any foreign businesses
such as Publicidad and SciDel Technologies which we have acquired or may
acquire, may prevent us from creating a material business internationally. We
have granted some parties exclusive rights to territories or specific sporting
events, which means that we must rely on their success in these areas. Their
failure could greatly reduce the potential

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<PAGE>
growth of our international business.

PRODUCT DEVELOPMENT

The L-VIS(R) System is designed using a Flex-Card hardware platform. This
platform is more powerful than previous platforms and allows for software
re-configuration. We have designed the Flex-Card L-VIS(R) System to provide
multiple insertion capability, multiple camera capability and an expanded zoom
range, and we have created a simplified graphical user interface. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Product Development", regarding the costs associated with our
product development during the year ended December 31, 2002 and in each of the
last three fiscal years.

We are continuing to improve existing software for use of the L-VIS(R) System
during the broadcast of soccer, football, baseball, basketball and hockey games,
as well as golf and motor sports. Further, we are developing software to permit
the use of our L-VIS(R) System during the broadcast of other sports. We have
also made the L-VIS(R) System available for use with other events such as award
shows, pay-per-view boxing and concerts. We intend to continue our development
of our iPoint(TM)product, as we believe there may be important applications of
our technology as it relates to entertainment and sports programs when viewed
with interactive television and/or the Internet.

The L-VIS(R) System can still only be used for some programs under certain
circumstances. During live events, we often must have the cooperation of the
broadcaster to obtain acceptable results. In the past, the L-VIS(R) System has
been operated mainly by our personnel but increasingly is operated by operators
trained by us. We are working to develop additional software and hardware and
train personnel to achieve a more user-friendly product with wider potential
use.

Recently, development of future versions of L-VIS(R) has been directed toward
vision-only applications. These applications rely primarily on computer vision
and image processing to precisely and rapidly determine the position and
orientation of the virtual insert, and do not require attachment of sensors to
the broadcast lens or tripod. Such applications therefore may be operated
remotely from the event site. When operated in this way, the cost associated
with providing this service is significantly reduced, in part because of the
reduced need to send operators to the event site. In addition, we are beginning
a slow migration of the L-VIS(R) hardware system to a hybrid structure, based in
part on the existing FLEX architecture, and in part on a desktop personal
computer ("PC"). As part of this effort, we are developing a PC based FLEX board
equivalent.

During 2002, significant progress was made in the development of the hybrid
system and the application was tested live (on air) in several CBS productions
of NFL games during the 2002 season, and several college football games in the
fall of 2002 and the first quarter of 2003. Our ability to locate the system
downstream (i.e., in the broadcast studio rather then at the venue) is a
significant cost savings over the traditional on-site production method.

On March 26, 2002, we acquired the assets of SciDel Technologies, Ltd., an
Israeli-based virtual advertising company, including their patent portfolio and
proprietary hardware and software. The acquired technology works in vision mode
by reliably recognizing lines in a television picture - such as lines on a
basketball or tennis court - and derives data there from that enables the
positioning of inserted images. The technology cannot, however, store that
information in order to ensure that the insertions continue to be properly
positioned when those lines are not visible. By adapting PVI's tracking
technology for use with this line-finding system, we can overcome this problem
and improve tracking performance in many situations. We have recently made
significant progress in merging the SciDel recognition technology with PVI's
tracking technology and have performed an on-site demonstration in a Mexican
soccer game.


                                       13
<PAGE>
COMPETITION

PVI believes three other companies have developed or are trying to develop
processes and equipment to pursue a business similar to our own. These
organizations are Symah Vision-SA ("Symah"), Orad Hi Tech Systems Ltd. ("Orad"),
and Sportvision, Inc. ("Sportvision").

Symah is owned by the LaGardere Group, which controls Matra-Hachette, a large
French defense and publishing company. Symah has demonstrated its system
publicly and is actively marketing its system in Europe. We believe that Symah's
system has been used in Europe during the broadcast of over 300 sporting events.

Orad was founded in 1993 as part of the ORMAT Group, an Israeli company
originally established to create alternative energy power stations. Orad's
primary business is selling virtual sets and is responsible for the worldwide
marketing of their virtual advertising system, "ImADgine". The Orad system has
been used during some live commercial broadcasts. We believe Orad has one or
more patents or patent applications relating to real-time video insertion.

Sportvision is using camera sensor technology for inserting viewer enhancements,
such as a first down line in football, into live television broadcasts. As far
as we know, Sportvision has been minimally active in the advertising part of the
business. In February 2002, PVI, FOX and Sportvision entered into a cross
license agreement, which relates to the use by each company of certain patents
of the other company.

Although we believe that use of the L-VIS(R) System does not infringe the United
States or other patents of third parties, there can be no assurance that
competitors will not initiate a patent infringement action against us.

In addition to these known competitors, we expect substantial competition from
established broadcast business participants, if the market for video insertion
technology, including virtual advertisements, proves successful. These potential
competitors will likely have substantially greater financial, technical,
marketing and other resources and many more highly skilled individuals than we
do. Furthermore, such potential competitors may have greater name recognition
and extensive customer bases that could be utilized to gain significant market
share, to our detriment. Our competitors may be able to produce superior
products, including products with new features, undertake more extensive
promotional activities, offer more attractive terms to customers and adopt more
aggressive pricing policies than we can. There is no assurance that we will be
able to compete effectively with current or future competitors.

In addition to the products of these competitors, the L-VIS(R) System will
compete with advertisers' use of traditional 30-second advertising spots, which
remain the standard in the television advertising industry, and traditional
signage and sponsorship programs. Our revenues will be partially dependent upon
television sports advertisers allocating a portion of their advertising budgets
to use the L-VIS(R) System. There can be no assurance that advertisers will
allocate their advertising expenses in the manner currently anticipated by us.
Existing advertisers may be reluctant to use a new technology. Advertisers may
not believe that their sales will increase as a result of the use of our
technology. The competition is likely to be more intense where we are competing
for television advertising and sponsorship dollars that are currently spent on
traditional media, such as 30-second spots or scrolling billboards. We need the
cooperation of the sponsorship advertising sales departments of team owners,
other rights holders and broadcasters. We rely on these entities for the sale of
our products to advertisers, but they may have incentives to sell alternative
advertising or sponsorship inventory rather than our services. The reluctance by
advertisers and sales forces to embrace our technology and assist in the sale of
virtual advertising could have a material adverse effect on our business,
financial condition and results of operations by stifling the potential growth
of our business.


                                       14
<PAGE>
The L-VIS(R) System will also compete with advertisers' use of conventional
billboard products, including advertising placed on playing surfaces (such as
outfield walls, football fields, ice hockey rinks and soccer fields) and
scrolling billboards, physically located at the site of an event, which can
display sequentially a series of static advertisements. These scrolling
billboards are currently marketed and used in professional baseball, basketball
and other sports. These products achieve an effect that is similar to those
L-VIS(R) System insertions that are static and two-dimensional, and their use
generally does not require broadcaster participation.

During the 2002 MLB season, 26 MLB teams had scrolling billboards located behind
home plate. The existence of these scrolling billboards and other advertising
behind home plate currently limits the marketability of the L-VIS(R) System in
baseball. We believe that one manufacturer of scrolling billboards used in
stadiums has included restraints in its contracts that inhibit or prohibit the
use of video insertion technology in television broadcasts. Other agreements
among advertisers, sponsors, syndicators, promoters, broadcasters and cable
operators may include similar provisions. These restrictions may have a material
adverse effect on our business, financial condition and results of operations by
reducing the number of potential users of the L-VIS(R) System.

In the sports advertising arena, we continue to generate revenue primarily by
attracting new advertisers and sponsors to the sports advertising and
sponsorship market and by causing existing advertisers and sponsors to use the
L-VIS(R) System. There can be no assurance that total advertising and
sponsorship expenditures will increase as a result of the availability of the
L-VIS(R) System. As we continue to compete for television advertising and
sponsorship dollars that are currently allocated to traditional media, such as
30-second spots or scrolling billboards, the competition is likely to become
more intense. We will be able to compete effectively with existing advertising
and sponsorship alternatives only with the cooperation of broadcasters and the
advertising sales departments of team owners and broadcasters, on which we must
sometimes rely for sales to advertisers. Because certain L-VIS(R) System rights
holders may also own traditional television advertising rights or sponsorship
rights, which may provide such rights holders with a greater percentage of the
revenues received from the sale of such advertising or sponsorship rights than
does the sale of L-VIS(R) System advertisements, incentives may exist in some
cases to sell alternative advertising or sponsorship inventory prior to the sale
of L-VIS(R) System advertising.

With regard to placing images in syndicated and first run television programs,
we have generated revenue through agreements with the program rights holders and
distributors to place advertising logos or products within the programs
themselves, prior to distribution. Advertising imbedded in the program may
create conflicts with the broadcasters of the programs as it may compete with
traditional 30-second spot advertising sold by the broadcasters. This in turn
may affect our ability to develop a more robust business in this area.

In the case of program enhancements, we are making available to the broadcasters
a series of enhancements, which the broadcaster can use to increase the audience
appeal of its programs. We typically get a negotiated fixed fee for each use by
the broadcaster of such enhancements. There is no assurance that the
enhancements which we have developed or may develop in the future will be of
sufficient value to the broadcasters to make this a viable business segment for
us. Furthermore, competitors may drive down the fees to levels where we cannot
cover the costs of providing the enhancement services.

Our development of products related to the Internet and potential interactive
television business is an area where a large number of creative new companies
and existing well-financed companies have a significant interest. PVI believes
that its intellectual property offers an opportunity to participate effectively
in these new businesses. Under our joint collaboration and license agreement
reached with Cablevision, we will work to develop, market and deploy innovative
digital technological applications across the full range of Cablevision's media,
sports and entertainment properties. Our ability to play a meaningful role will
depend, in part, on our forming and


                                       15
<PAGE>
maintaining appropriate relationships with existing industry players, including
Cablevision. There is no assurance that our potential products will be embraced
by the industry or that we can utilize and develop the relationships we have
within the sports and media industries to create a successful business.

MANUFACTURING AND SUPPLY

We have built 37 L-VIS(R) System units (each, an " L-VIS(R) Unit"), of which
approximately 34 are being used from time-to-time by customers, potential
customers or foreign marketing partners. An L-VIS(R) Unit consists of standard
electronic equipment racks, containing both standard purchased components and
our proprietary circuit boards, assembled and tested by our own personnel. We
have also modified four of our existing L-VIS(R) Units to operate in the
downstream or hybrid mode, using image processing alone to perform the virtual
insertion. The modification consists primarily of adding a programmed PC to a
standard L-VIS(R) Unit.

REGULATIONS

We do not believe that any federal or state regulations currently directly
relate to or restrict the use of the L-VIS(R) System. There are existing
regulations imposed on broadcasters, which may require disclosure that the
L-VIS(R) System is being used in a particular broadcast. In addition, there can
be no assurance that there will not be any regulations or restrictions in the
future, which either directly, or indirectly through broadcaster regulations,
adversely affect the use of the L-VIS(R) System. Further, there can be no
assurance that regulatory agencies in foreign jurisdictions have not adopted, or
will not adopt in the future, regulations or restrictions affecting the use of
the L-VIS(R) System. If adopted, such regulations or restrictions might reduce
or eliminate the market for our products in any country where these regulations
or restrictions are adopted. This could have a material impact on our ability to
expand into both domestic and international markets if it prevents us from
providing our services in a particular sport, broadcast or entertainment market.

INTELLECTUAL PROPERTY

PATENTS

We own twelve issued U.S. patents relating to proprietary technology we use in
our business. These patents expire at various times, commencing in 2012. A
number of new patent applications are pending in the United States.

To date, we have filed patent applications in the European Patent Office and in
various non-European countries around the world where we expect to do business.
In 2002, our application with the European Patent Office, on EPO Application No.
9191562.8, for a basic pattern recognition patent, was successfully challenged
by Symah Vision, a French company and subsidiary of LaGardere.

In October 1999, we filed a request with the United States Patent and Trademark
Office ("USPTO") to correct the ownership of U.S. Patent 5,917,553, licensed to
Sportvision, Inc. on the basis of our belief that the basic subject matter of
this patent belongs to PVI. After we filed this action, Sportvision, Inc. and
Fox Sports Productions, Inc. ("Fox") filed a lawsuit against us in U.S. District
Court for the Northern District in California for infringement of the disputed
U.S. Patent 5,917,553, seeking injunctive relief and compensation including
damages. On January 29, 2002, the parties entered into a Settlement Agreement
regarding this matter and a dismissal with prejudice as to all parties was filed
on March 9, 2002. Pursuant to the Settlement Agreement, the parties entered into
a patent cross-license agreement. The cross-license agreement grants both
parties a royalty free license to the patent portfolio of the other party
subject, however, to the restriction that each party may only use the other's
technology to position and stabilize inserts when the actual insertion of the
virtual object into the video stream is


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<PAGE>
performed at the source of the programming, which usually is at the arena site
for sporting events. This restriction prevents Sportvision from using PVI
technology in a "downstream" configuration. For example, Sportvision is not
licensed to use PVI technology in the broadcast studio to stabilize insertions
in video transmitted form a remote venue. Also, this restriction prevents
Sportvision from using PVI's iPoint(TM)technology.

The degree of protection offered by our patents is not certain, and any patents
issued to us or our licensees in a foreign country may provide less protection
than provided in the United States. In addition, it is possible that our pending
patents will not issue.

We believe our patents will be important in our future business dealings, since
we believe that any system that is able to deliver the technical capabilities of
the L-VIS(R) System will depend on image processing technology that will,
therefore, fall within the scope of PVI's issued patents.

The validity and/or breadth of PVI's owned and licensed patents generally may be
tested in post-allowance court proceedings. (See Competition above). The two
court proceedings which have been undertaken relating to PVI's patent property
have both been settled. And accordingly there has been no completed court test
of any of the issued patents, the allowed patents or any of the pending
applications or foreign counterparts. We are aware of other companies that have
patents or patent applications in the field of electronic video insertion
technology. As was the case with Sportvision, these companies or others may
claim that we infringe the patents or rights of such third parties, or these
third parties may infringe our patents. In either event, patent litigation
involves complex legal and factual issues, and the outcome, consequently, is
highly uncertain. Furthermore, patent litigation entails considerable costs,
which could divert resources that otherwise could be used for our operations. We
cannot be certain that PVI or its licensors will be successful in enforcing our
rights, or that our products or processes do not or will not infringe the patent
or intellectual property rights of a third party. An adverse outcome in the
defense of any patent infringement action could subject PVI to significant
liabilities to third parties, require PVI to license disputed technology from
third parties, if possible, force PVI to try to redesign its products or
practices, or require PVI to cease selling its products. In the event our owned
or licensed patents were successfully challenged in court, our business,
financial condition and results of operations would be materially adversely
affected by limiting our ability to do business.

It is possible that one or more products developed by a competitor may be
marketed or used in a territory where we have patent protection. Competitors or
strategic partners may copy or independently develop technologies that are the
same or similar to our technologies. Because an image inserted through use of
video insertion technology often appears as if it exists as a physical
advertisement at the site of a sporting event, it may be difficult to know
whether, and which, video insertion technology is being used with respect to any
televised sporting event. Thus, infringement of our patents may be difficult to
monitor. Our failure to detect such an infringement may have a material adverse
effect on our business, financial condition and results of operations. In the
event we become aware of a potential patent infringement, we may be forced to
litigate to enforce our patent rights. Engaging in such an enforcement action
may be protracted and expensive and, therefore, have a material adverse effect
on our business, financial condition and results of operations.

GDM, a Spanish media company that licensed the L-VIS(R) System for use in
broadcasts in Spain and Portugal during a trial period which ended December
1996, received a letter from a Symah affiliate asserting that use of the
L-VIS(R) System in Spain would infringe one of Symah's patents. Although PVI and
GDM were advised that use of the L-VIS(R) System would not infringe Symah's
patent, there can be no assurance that Symah will not assert infringement claims
against PVI or its European licensees in the future or against PVI in the United
States for infringement of the U.S. counterpart (U.S. Patent 5,353,392) of
Symah's patent. We believe that the L-VIS(R) System does not infringe U.S.
Patent 5,353,392 and infringement of this patent has not been asserted against
us.


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<PAGE>
If the L-VIS(R) System were found to infringe any third party patent, we might
be required to modify the L-VIS(R) System or enter into an arrangement to
license such patent, if possible. There can be no assurance that we would be
able, under such circumstance, to modify the L-VIS(R) System or enter into a
license arrangement. We also rely in large part on un-patented trade secrets,
improvements and proprietary technology. We require our employees and some third
parties to enter into confidentiality agreements. Despite our efforts to
safeguard and maintain our proprietary rights, there can be no assurance that we
will be successful in doing so or that our competitors will not independently
develop similar technology, gain access to our technology, reverse engineer or
patent technologies that are substantially equivalent or superior to our
technologies. We also use copyright, trademark and trade secret protection.
These steps may not protect our trade secrets, know-how or other proprietary
information.

LICENSE GRANTS TO PVI

PVI has entered into the following license agreements relating to the L-VIS(R)
System:

David Sarnoff Research Center, Inc. ("Sarnoff") has granted PVI a worldwide
license to utilize Sarnoff's technology related to the electronic recognition of
landmarks, including an exclusive license covering the specific fields of
television advertising and television sports. We have also been granted a
non-exclusive license for use of the Sarnoff technology in all other fields
relating to sports or advertising.

During the term of the exclusive license for television advertising and
television sports applications, we are obligated to pay Sarnoff royalties based
upon a percentage of our gross revenues. During the first several years of the
agreement, all royalties were accrued as earned. Payments for all accrued
royalties through December 31, 1998 became due in January 1999 and were paid in
full by December 1999. Commencing in January 1999, minimum quarterly royalties
of $100,000 became due in order to maintain the license. For the calendar years
1999 and 2000 and the first quarter of 2001, we had the option of paying these
minimum royalties in cash or with PVI stock at its last issue price and,
accordingly, elected to issue stock for all royalties due for the years ended
December 31, 1999 and 2000 and the quarter ended March 31, 2001. Royalties
earned subsequent to March 31, 2001 are required to be paid in cash.

On September 20, 2002, we notified Sarnoff that we are no longer using the
technology and patents licensed to us by Sarnoff effective June 30, 2002.

Theseus Research, Inc. Theseus Research, Inc. ("Theseus") has granted PVI a
non-exclusive, worldwide license to use and sell Theseus' patented technology
for the warping of images in real time. During the term of the Theseus license,
we are required to pay Theseus a royalty on net sales of products, if any, that
incorporate the Theseus technology. PVI paid Theseus an up front license fee of
$50,000, which is creditable against these future obligations. The license,
which terminates with the expiration of the last of the patents included in the
licensed technology, may be terminated by PVI at any time. The technology
licensed to PVI by Thesus under this agreement is not used by PVI in any
commercial application.

TRADEMARKS

L-VIS(R), the mark under which we are marketing our live video insertion
products is a trademark of PVI which is registered with the U.S. Patent and
Trademark Office.

C-TRAK (TM) is a trademark of PVI. We have filed a U.S. trademark registration
application for C-TRAK(TM), the mark under which we are marketing our electronic
imaging system in which a part of the picture or image in a prerecorded or live
video signal is scanned, digitized, stored and tracked to thereby maintain the
position of one or more inserted images relative to other parts of the main
picture or image. We have filed a Statement of Use with respect to the C-TRAK
mark on July 5,


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<PAGE>
2001 and it was accepted by the U.S. Patent and Trademark Office on September 7,
2001. The trademark registration was issued on October 16, 2001.

COPYRIGHT AND TRADE SECRET

PVI relies upon copyright and trade secret protection to maintain the
proprietary nature of the computer software it develops that is not patented.
These steps may not protect our trade secrets, know how or other proprietary
information.

EMPLOYEES

As of March 1, 2003, we (together with our wholly-owned subsidiaries) had 101
full-time employees, 18 of whom were engaged in, or directly support, PVI's
hardware and software research, development and product engineering activities,
34 of whom assemble and operate our proprietary systems, 24 of whom were engaged
in marketing activities and 25 of whom were engaged in administrative
activities. In addition, we utilize part-time and seasonal employees as well as
outside contractors and consultants as needed. None of our employees are
represented by a labor union, and we believe our relations with our employees
are good. Our success depends on our ability to attract and retain qualified
financial, technical, marketing and other management personnel for which we face
competition.

Currently, all of our employees are required to execute an agreement pursuant to
which he or she assigns to PVI all patent rights and technical or other
information which pertain to PVI's business and are developed by the employee
during his or her employment with PVI, and agrees not to disclose any trade
secret or confidential information without the prior consent of PVI.

ITEM 2. PROPERTIES

We currently lease 17,000 square feet of office space in Lawrenceville, New
Jersey. The Lawrenceville facility is our main operations center, including
product, hardware and software design, manufacturing and product assembly,
product test and documentation, post production, customer training and customer
technical support. We have recently entered into an amendment of our current
lease pursuant to which, effective April 1, 2003, the space we lease in
Lawrenceville will be reduced by approximately 25% and the rent per square foot
will be reduced by approximately 33%. As amended, the Lawrenceville lease
expires on March 31, 2006. We currently lease 4,300 square feet of office space
in New York City for our sales, marketing and art department personnel. We also
currently lease or sublease approximately 6,000 square feet of office space in
Mexico City, which has an expiration date of October 31, 2006, and 1,700 square
feet of office space in Ra-anana, Israel, which has an expiration date of
December 31, 2003. These offices are the main operations centers of Publicidad,
and Princeton Video Image Israel, Ltd., respectively.

ITEM 3. LEGAL PROCEEDINGS

PVI is not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Our Annual Meeting of Stockholders (the "Annual Meeting") was held on December
19, 2002. At the Annual Meeting, our stockholders (i) elected each of the
persons listed below to serve as one of our directors until the Annual Meeting
of Stockholders to be held in 2003 and until their successors have been duly
elected and qualify, (ii) ratified the appointment of PricewaterhouseCoopers LLP
as our independent public accountants for the fiscal year ending December 31,
2002, and (iii) approved an amendment to our Amended 1993 Stock Option Plan to
increase the number of shares of our common stock which may be issued pursuant
to options granted under the Plan from 5,160,000 to


                                       19
<PAGE>
7,000,000 shares.

As of November 22, 2002, the record date for our Annual Meeting, 18,487,802
shares of our common stock were issued and outstanding and entitled to vote.
Present at our Annual Meeting, either in person or by proxy, were holders of
10,134,850 shares of our common stock. The following sets forth information
regarding the results of the voting at our Annual Meeting:

Election of Directors:

<TABLE>
<CAPTION>
                                                             Voting Shares
      DIRECTOR                  Voting Shares in Favor            Withheld
<S>                             <C>                          <C>
      Lawrence J. Burian                    10,114,465              20,385

      Joseph Decosimo                       10,114,465              20,385

      Donald P. Garber                      10,020,665             114,185

      Wilt Hildenbrand                      10,020,665             114,185

      Lawrence Lucchino                     10,020,665             114,185

      Jerome J. Pomerance                   10,020,665             114,185

      Emilio Romano                         10,020,665             114,185

      Eduardo Sitt                          10,114,465              20,385

      John B. Torkelsen                     10,020,665             114,185

      Brown F Williams                      10,114,465              20,385
</TABLE>

      Ratification of Appointment of Independent Public Accountants:

<TABLE>
<S>                                                                 <C>
      Votes in Favor:                                               10,013,060
      Votes Against:                                                   121,730
      Abstentions:                                                          60
</TABLE>

      Approval of amendment to our Amended 1993 Stock Option Plan:

<TABLE>
<S>                                                                  <C>
      Votes in Favor:                                                9,940,797
      Votes Against:                                                   178,880
      Abstentions:                                                      15,173
      Non-Votes:                                                             0
</TABLE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

      (a) Our common stock traded on The Nasdaq National Market (the "National
Market") from December 17, 1997 to January 6, 2003, and on the Nasdaq SmallCap
Market (the "SmallCap Market") from January 7, 2003 to March 12, 2003 under the
symbol "PVII." The following table sets forth, for the calendar periods
indicated, the range of high and low sale prices for our common stock on the
National Market:


                                       20
<PAGE>
<TABLE>
<CAPTION>
                 Period                                    High         Low
      --------------------------------                     -----       -----
<S>                                                        <C>         <C>
      2001     January 1 - March 31                        6.469       1.438
               April 1 - June 30                           5.230       3.090
               July 1 - September 30                       5.100       2.040
               October 1 - December 31                     2.990       1.910

      2002     January 1 - March 31                        2.380       1.381
               April 1 - June 30                           1.992        .880
               July 1 - September 30                       1.051        .571
               October 1 - December 31                      .712        .330
</TABLE>

Since March 13, 2003, our common stock has been quoted on the Over-the-Counter
(OTC) Bulletin Board and continues to trade under the ticker symbol PVII. Our
common stock was transferred from the National Market to the SmallCap Market on
January 7, 2003 pursuant to a Nasdaq decision, which required that, to maintain
the listing on the SmallCap Market, our common stock must evidence a closing bid
price of at least $1.00 per share on or before March 10, 2003. Our common stock
failed to achieve that bid price and effective with the close of business on
March 12, 2003, our common stock was delisted from The Nasdaq Stock Market. The
effects of this delisting may include limited news coverage and the limited
release of the market prices of our common stock. Delisting may diminish
investors' interest in our common stock, restrict the trading market and reduce
the price for our common stock. Delisting may also restrict us from issuing
additional securities or securing additional financing.

As of March 12, 2003, there were 325 holders of record of our common stock. On
March 12, 2003, the last sale price reported on the SmallCap Market for our
common stock was $.25 per share. The market prices of equity securities of
technology companies, such as PVI, have experienced substantial price volatility
in recent years for reasons both related and unrelated to the individual
performance of specific companies. Future sales of restricted securities (as
defined under Rule 144 of the Securities Act of 1933, as amended), common stock
under PVI's Stock Option Plan, and common stock issued upon the exercise of
outstanding warrants, in the public market could adversely affect the stock
price and our ability to raise funds in new stock offerings. To date, the
trading volume of our common stock has remained relatively small. As a result,
shareholders may experience difficulty selling or otherwise disposing of shares
of common stock at favorable prices, or at all.

Companies with low price stocks are governed by additional federal and state
regulatory requirements and could lose an effective trading market for their
stock. For instance, since our common stock has been delisted from The Nasdaq
Stock Market and the price of our common stock is less than $5.00 per share, the
sale or purchase of our common stock is subject to Rule 15g-9 under the
Securities Exchange Act of 1934. This rule requires that broker-dealers satisfy
special sales practice requirements before any transaction, including
suitability determinations and receiving a purchaser's written consent. The
additional burdens imposed upon broker-dealers may discourage broker-dealers
from effecting transactions in our common stock. This would reduce the liquidity
of our common stock. If these rules become applicable to our common stock, they
could have a material adverse effect on the trading market for our common stock.
In addition, our common stock could be deemed "penny stock" under the Securities
Enforcement and Penny Stock Reform Act of 1990. If this occurs, additional
disclosure would be required if a person wishes to make a trade in our common
stock. The disclosure includes the delivery of a disclosure schedule explaining
the nature and risks of the penny stock market. These requirements could
severely limit the liquidity of our common stock and the ability of purchasers
to sell their shares of our common stock in the secondary market.

We have neither paid nor declared any dividends on our common stock since our
inception. We expect to retain all earnings, if any, generated by our operations
for the development and growth of our business and do not anticipate paying any
cash dividends to our shareholders in the foreseeable future. The payment of
future dividends on the common stock and the rate of such dividends, if any,
will be determined in light of any applicable contractual restrictions limiting
our ability to pay dividends, our earnings, financial condition, capital
requirements and other factors deemed relevant by our Board of Directors.
Furthermore, pursuant to our Certificate of Incorporation, we are prohibited
from paying any dividends on the common stock until all accumulated dividends in
respect of the Series A preferred stock and Series B preferred stock have been
paid. As of December 31, 2002, the accrued dividends with respect to the shares
of Series A preferred stock and


                                       21
<PAGE>
Series B preferred stock totaled $30,686 and $34,643, respectively.

We are required to redeem the Series A preferred stock on a pro rata basis, at a
price of $4.50 per share plus all accrued but unpaid dividends, out of 30% of
the amount, if any, by which our annual net income after taxes in any year
exceeds $5 million, as shown on our audited financial statements. Subject to the
prior redemption of all of the Series A preferred stock, we are required to
redeem the Series B preferred stock, on a pro rata basis, at a price of $5.00
per share plus all accrued but unpaid dividends out of 20% of the amount, if
any, by which our annual net income after taxes in any year exceeds $5 million,
as shown on our audited financial statements. As of December 31, 2002, 11,363
shares of Series A preferred stock and 12,834 of Series B preferred stock were
outstanding. See Note 22 of our Notes to the Consolidated Financial Statements.

In December 2000, we entered into a reorganization agreement (the
"Reorganization Agreement") with Presencia en Medios S.A. de C.V. ("Presencia")
and certain of its affiliates, which agreement was later amended on February 4,
2001. On September 20, 2001 we completed the transaction contemplated by the
Reorganization Agreement (the "Presencia Transaction"), whereby Presencia and
its affiliates sold their shares of Publicidad to us and our affiliate Princeton
Video Image Latin America, LLC ("PVI Latin America"), and Publicidad became our
wholly-owned subsidiary. The acquisition, which was a stock-for-stock
transaction, was recorded using the purchase method of accounting. The total
purchase price of Publicidad was $6.4 million and consisted of the following
costs to PVI:

<TABLE>
<S>                                                                   <C>
Shares of PVI stock exchanged for Publicidad stock                     2,678,353
PVI average stock price a few days before
  and after the acquisition was agreed to                             $    1.518
Value of PVI stock issued for the acquisition                         $4,065,740
Fair value of warrants issued as for the acquisition                   1,455,553
Acquisition costs                                                        979,299
                                                                      ----------
                Total purchase price                                  $6,500,592
                                                                      ==========
</TABLE>

On November 8, 2001, we sold 615,385 shares of our common stock to Presencia for
an aggregate purchase price of $2,000,001. This sale was exempt from
registration under the Securities Act by virtue of Section 4(2) as a transaction
not involving a public offering. The securities were issued for investment only
and not for purposes of distribution. A legend to such effect was affixed to the
stock certificate issued. The purchaser received adequate information about our
business.

On February 27, 2002, we entered into an asset purchase agreement with SciDel
Technologies, Ltd., an Israeli corporation, and its subsidiary, SciDel USA Ltd
(collectively, "SciDel"). On March 26, 2002, we completed the transaction,
whereby Adco Imaging Ltd. ("Adco"), a newly created Israeli wholly owned
subsidiary of PVI, obtained certain assets and liabilities of SciDel in exchange
for the issuance of 1,288,000 shares of our common stock and warrants to
purchase 670,500 shares of our common stock. In April 2002, Adco changed its
name to Princeton Video Image Israel, Ltd. ("PVI Israel"). SciDel, which had
been engaged in the development and marketing of a system that enables
television broadcasters and the Internet to integrate advertisements into live
and pre-recorded televised sports events, sold certain of its assets to us and
we intend to continue to use the assets for this same purpose. PVI's primary
reasons for acquiring these assets included the value of SciDel's patent
portfolio, its sales relationships, including existing contracts in Europe, and
the know-how of the R&D personnel we retained. The acquisition, which was a
stock-for-assets transaction, was recorded using the purchase method of
accounting. The total purchase price of SciDel was approximately $3.7 million
and consisted of the following:

<TABLE>
<S>                                                                   <C>
Shares of PVI stock                                                    1,288,000
PVI average stock price three days before
  and after the acquisition was agreed to                             $     1.99
Value of PVI stock issued for the acquisition                         $2,560,176
Fair value of warrants issued as
  part of the acquisition (670,500)                                      775,557
Acquisition costs                                                        349,231
                                                                      ----------
                Total purchase price                                  $3,684,964
                                                                      ==========

</TABLE>


                                       22
<PAGE>
The warrants issued to SciDel vest over three years and may be exercised at an
initial exercise price of $9.00 per share. Our issuance of securities to SciDel
in connection with this transaction was exempt from registration under the
Securities Act by virtue of Section 4(2) as a transaction not involving a public
offering. The securities were issued for investment only and not for purposes of
distribution. A legend to such effect was affixed to the stock certificate and
warrant certificate issued. SciDel received adequate information about our
business.

On June 25, 2002, PVI entered into a Note Purchase and Security Agreement (the
"Note Purchase Agreement") with PVI Holding, LLC ("PVI Holding"), a subsidiary
of Cablevision Systems Corporation. Pursuant to the Note Purchase Agreement, PVI
issued to PVI Holding a $5,000,000 secured convertible promissory note (the
"Note"). The Note was amended and restated on February 18, 2003. As amended, the
Note is initially convertible into common stock of PVI at $.75 per share. In the
event that PVI sells any security (equity, debt or otherwise) in a qualifying
transaction (a "New Financing"), the holder of the Note would have the right to
convert the Note to PVI common stock at $.75 per share or into the security
being issued by PVI in the New Financing, on the same terms as such security is
being sold in the New Financing. Following the first New Financing, the common
stock conversion price of $.75 per share is increased to $2.50 per share. In
addition, the holder will have the right to convert the Note into any security
issued in any New Financing that occurs while the Note is outstanding, subject
to all of the terms of such New Financing. The holder of the Note is prohibited
from converting the Note under any circumstances at a price below $.38 per
share, the closing price of PVI's common stock on February 14, 2003. The
issuance of the Note was exempt from registration under the Securities Act by
virtue of Section 4(2) as a transaction not involving a public offering. The
Note was issued for investment only and not for purposes of distribution. A
legend to such effect was affixed to the Note issued. PVI Holding, LLC received
adequate information about our business.

ITEM 6. SELECTED FINANCIAL DATA

In December 2001, our board of directors elected to change our fiscal year end
from June 30 to December 31, commencing with the six month period ended December
31, 2001.

We have selected the following data derived from our consolidated financial
statements. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with our
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing
elsewhere in this report.

<TABLE>
<CAPTION>
                                            Fiscal
                                          Year Ended     Six months ended
                                          December 31,     December 31,               Fiscal Year Ended June 30
('000s except for loss per share)           2002 (4)         2001 (1)      2001 (2)       2000         1999         1998
                                          ------------   ----------------  --------     --------     --------     --------
<S>                                       <C>            <C>               <C>          <C>          <C>          <C>
Statement of Operations Data:

     Total revenue                          $ 10,812         $  5,578      $  4,664     $  3,046     $  1,222     $    696

     Impairment, restructuring and
       other charges (3)(7)                 $  4,887         $  1,061      $     --     $     --     $     --     $     --

     Total costs and expenses               $ 28,699         $ 12,353      $ 17,375     $ 16,793     $ 11,852     $  8,828

Operating loss                              $(17,886)        $ (6,776)     $(12,711)    $(13,748)    $(10,630)    $ (8,132)

Other (expense) income, net                 $    (31)        $    135      $    (52)    $      2     $     --     $     --

Interest expense                            $ (2,714)        $    (16)     $     (2)    $     (5)    $     --     $     --

Interest income                             $     95         $     75      $    609     $    684     $    976     $   (952)

Net loss applicable
   to common stock                          $(21,215)        $ (6,994)     $(11,692)    $(12,489)    $ (9,698)    $ (9,128)

Basic and diluted net
  loss per share                            $  (1.17)        $  (0.48)     $  (1.09)    $  (1.33)    $  (1.18)    $  (1.55)

Weighted average number of
     shares - basic and diluted               18,198           14,721        10,732        9,374        8,186        5,891

Balance Sheet Data:

Cash and cash equivalents                   $    937         $  8,360      $  2,672     $  8,388     $ 12,494     $ 21,553

Accounts receivable                         $  1,547         $  2,299      $  1,308     $    829     $    379     $    193

Property and equipment, net                 $  1,839         $  2,857      $  2,996     $  3,685     $  3,807     $  2,547

Patents, net                                $    795         $    528      $    556     $    587     $    547     $    493

Identifiable intangibles, net               $  2,328         $  3,024      $     --     $     --     $     --     $     --

Goodwill                                    $  3,896         $  5,339      $     --     $     --     $     --     $     --

Total assets                                $ 14,099         $ 31,220      $ 11,295     $ 15,725     $ 18,891     $ 25,426

Secured convertible debt (5)                $  5,137         $     --      $     --     $     --     $     --     $     --

Notes Payable (6)                           $    671         $  1,091      $     --     $     --     $     --     $     --

Refundable Cablevision advance
payment (5)                                 $  3,628         $     --      $     --     $     --     $     --     $     --

Redeemable preferred stock                  $    181         $    174      $    170     $  1,036     $    992     $    948

Minority interest                           $     --         $     --      $     94     $    312     $     --     $     --

Total stockholders'
(deficit)/equity                            $ (3,245)        $ 11,052      $  3,390     $  9,273     $ 12,143     $ 22,034

Other Data:

Capital expenditures                        $    323         $    389      $  1,170     $  1,495     $  2,514     $  2,094
</TABLE>


                                       23
<PAGE>
(1)   Results reflect the acquisition of Publicidad in September 2001 and the
      second closing of the Cablevision transaction as described in Note 4 of
      the Notes to the Consolidated Financial Statements.

(2)   Results reflect the first closing of the Cablevision transaction as
      described in Note 4 of the Notes to the Consolidated Financial Statements.

(3)   Reflects severance payment to a former member of management and costs
      associated with streamlining our domestic, Israeli and European operations
      as described in Note 6 of the Notes to the Consolidated Financial
      Statements as well as the SFAS 142 and 144 Goodwill and identifiable
      intangible asset impairment charges.

(4)   Results reflect the acquisition of SciDel in March 2002 as described in
      Note 5 of the Notes to the Consolidated Financial Statements.

(5)   Results reflect the Note Purchase and Security Agreement in June 2002 (the
      "Note Purchase Agreement) as described in Note 4 of the Notes to the
      Consolidated Financial Statements.

(6)   Publicidad obtained a short-term loan, denominated in Mexican pesos, from
      a Mexican bank as described in Note 18 of the Notes to the Consolidated
      Financial Statements.

(7)   Results reflect the impairment of goodwill and certain identifiable
      intangible assets as described in Note 6 of the Notes to the Consolidated
      Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion should be read in conjunction with our consolidated
financial statements, the notes there to and the other financial information
included elsewhere in this report.

OVERVIEW

Since our inception in 1990, we have devoted substantially all of our resources
to developing, testing, building and marketing the L-VIS(R) System, an
electronic video insertion system based on patented proprietary technology that
was designed to modify broadcasts to television viewers by inserting electronic
video images. We have incurred substantial operating losses since our inception
and as of December 31, 2002, December 31, 2001, June 30, 2001 and 2000, we had
an accumulated deficit of approximately $90,603,384, $69,395,675,
$62,405,000,and $50,725,000, respectively. This deficit is the result of product
development expenses incurred in the development and commercialization of the
Live Video Insertion System ("L-VIS(R) System") and iPoint(TM), an advanced
application of PVI's patented technology that supports state of the art
in-program advertising over the Internet or interactive television, expenses
related to field testing of the L-VIS(R) System and its deployment pursuant to
customer contracts, operating expenses relating to our field operations and
sales and marketing activities, and general administrative costs. We expect to
incur additional losses in the next fiscal year as we strive to evolve into a
sports and entertainment focused global, media services company. We will
continue our business strategy of developing new products and increasing our
penetration in both the domestic and international markets in the field of
real-time virtual image insertion.


                                       24
<PAGE>
We intend to focus our efforts on increasing market acceptance of the L-VIS(R)
System by continuing to develop software applications, such as animated
insertions in event video streams. Such insertions include the virtual
first-down line in football, the virtual off sides line in soccer, and virtual
product placement in pre-recorded programming. Other software applications being
developed include Internet applications which will allow television viewers to
interact with live or recorded video programming. Under a joint collaboration
and license agreement entered into with Cablevision Systems Corporation, we
intend to work together to develop technology to create virtual, in-content,
interactive and targeted advertising and enhancement products for use with
television distribution. In order to increase our revenue generating user base
and to expand into domestic and international markets, we are marketing our
systems on a worldwide basis through licensing and royalty agreements and
through our wholly owned subsidiary, Publicidad Virtual, S.A. de C.V.
("Publicidad").

Our sales and marketing staff is responsible not only for reaching agreements
with teams, leagues and broadcasters, but also for promoting the L-VIS(R) System
to advertisers in order to create market awareness and acceptance and to
negotiate with potential licensees in yet untapped markets worldwide. While
purchases of advertising will typically be done through the rights holder or the
broadcaster, we hope to create advertiser interest and demand by promoting the
L-VIS(R) System directly to potential advertisers as well as third party
licensees. Therefore, we expect to incur substantial additional losses and to
experience substantial negative cash flow from operating activities through the
next 12 months or until such later time as we achieve revenues sufficient to
finance our ongoing capital expenditures and operating expenses. Our ability to
produce positive cash flow will be determined by numerous factors, including our
ability to reach agreements with, and retain, customers for use of the L-VIS(R)
System, as well as various factors outside of our control. Such factors may
include contractual restrictions on the use of video insertion technology,
adverse publicity and news coverage and the inability of third party sales
forces to sell L-VIS(R) System advertising.

We expect to continue generating revenue from ads sold by rights holders that
use the L-VIS(R) System. These revenues are expected to be shared with the
rights holders. Accordingly, in order to grow revenues from the use of the
L-VIS(R) System, we will need to enter into additional agreements with rights
holders. The agreements can take various forms, including revenue sharing
agreements under which we receive a percentage of the fee paid by the
advertisers and contractual arrangements whereby we receive an agreed upon fee
for our services. We recognize revenues when the respective advertisement is
inserted into a television broadcast. Due to the seasonal nature of sporting
events, the revenue generated from the insertion of advertising or program
enhancements in sports programming will fluctuate seasonally. This seasonality
is moderated by the multi-sport capabilities of the L-VIS(R) System and its
increasing use in entertainment and other non-sports related programming.

In addition to the revenue arising from advertising and contractual
arrangements, a second revenue source is the strategic licensing of the L-VIS(R)
System to third parties. These licenses may be territorial in nature or they may
cover individual major broadcast events. In the case of a territorial license,
the licensee is responsible for generating business within the territory and we
share in the business through one or more means including royalties, license
fees, and/or equity participation in the licensee. In the case of individual
events, we receive a flat fee or a fee based on revenues generated by the
licensee, depending on the nature of the license. These license fees are
recognized as revenue when all related commitments have been satisfied and the
fee is considered collectible.

A third revenue source is fees paid for the services provided by the L-VIS(R)
System which support the electronic insertion of visual aids in live sports and
entertainment programming, such as a virtual first-down line in football games,
and the use of logo and name branding during live weekday news programming. We
also offer an advanced post-production product whereby the L-VIS(R) System
technology can place products or logos within existing, pre-recorded television
programs, movie scenes or live television broadcasts. We recognize these
revenues when earned, which is when the enhancement or visual aid is inserted
into a live or pre-recorded television broadcast.

Because our operations relate to the continuing development and marketing of the
L-VIS(R) System, we work to convince advertisers, broadcasters and broadcast
rights holders of the value of the L-VIS(R) System. If we do not generate enough
revenues to cover our operating expenses, we will have to either raise
additional money or substantially reduce the scale of our operations. We may not
be able to obtain additional financing on acceptable terms, or at all. If we
cannot raise money, our business, financial condition and the results of our
operations will be adversely affected.


                                       25
<PAGE>
RESULTS OF OPERATIONS

In 2001, we changed our fiscal year from June 30 to December 31, effective with
the six months ended December 31, 2001. For comparative purposes, the following
is a presentation of our statement of operations for the years ended December
31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                                  For the years ended
                                                                      December 31,
                                                                2002              2001
                                                            ------------      ------------
                                                                               (unaudited)
<S>                                                         <C>               <C>
      Advertising and production revenue                    $ 10,108,170      $  5,440,830
      Royalties and license fees                                 704,200         2,199,604
                                                            ------------      ------------
                     Total revenue                            10,812,370         7,640,434
      Costs and expenses:
         Sales and marketing                                   8,728,018         5,773,031
         Product development                                   3,667,877         3,008,883
         Field operations and support                          4,949,792         5,662,634
         General and administrative                            6,466,416         5,400,768
         Impairment, restructuring and other charges           4,886,513         1,060,832
                                                            ------------      ------------
                     Total costs and expenses                 28,698,616        20,906,148
      Operating loss                                         (17,886,246)      (13,265,714)
         Other (expense) income, net                             (31,242)          106,211
         Interest expense                                     (2,713,727)          (44,818)
         Interest income                                          94,734           450,268
         Losses from equity investment                          (578,598)         (290,271)
         Loss from securities available for sale                      --          (500,000)
                                                            ------------      ------------
      Net loss before tax benefit and minority interest      (21,115,079)      (13,544,324)
         Tax (expense) benefit, net                              (92,630)          173,269
         Minority interest                                            --           241,932
                                                            ------------      ------------
      Net loss                                               (21,207,709)      (13,129,123)
      Accretion of preferred stock dividends                      (6,918)           (6,919)
                                                            ------------      ------------
      Net loss applicable to common stock                   $(21,214,627)     $(13,136,042)
                                                            ============      ============
</TABLE>

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31,
2001 (UNAUDITED)

REVENUES. Revenues are earned from both advertisers' use of the L-VIS(R) System
and under the terms of contractual arrangements for visual program enhancements,
as well as by license and royalty fees earned from use of the L-VIS(R) System
outside the United States. Total revenues for the year ended December 31, 2002
increased 42% to $10,812,370 from $7,640,430 for the year ended December 31,
2001 primarily due to the acquisition of Publicidad Virtual, S.A. de C.V. in
September 2001. Total royalties and license fees decreased 68% to $704,200 from
$2,199,604 for the year ended December 31, 2002 and 2001, respectively. Due to
the acquisition of Publicidad, we no longer receive royalties on the revenues
earned by Publicidad, but rather consolidate its revenues as a component of our
total advertising and production revenue, thus accounting for a significant
portion of these fluctuations. Royalty fees for the year ended December 31, 2001
include $1,590,173 from Publicidad. Advertising and production revenues for the
years ended December 31, 2002 and 2001 include Publicidad revenues of $7,747,719
and $3,217,143, respectively. In 2002, we recorded $403,462 of future license
fees revenue as a result of the termination of the agreements with Pineapplehead
Limited and our Korean Licensee. Total advertising and production revenue
increased 86% to $10,108,170 for the year ended December 31, 2002 from
$5,440,830 for the year ended December 31, 2001. The increase in advertising and
production revenues is due to revenue increases of approximately $5,348,000
primarily resulting from the consolidation of Publicidad and PVI Israel,
increased ad sales by the Philadelphia Phillies, virtual


                                       26
<PAGE>
advertisements behind home plate during FOX' broadcasts of the 2002 World
Series, and an increase in CBS football revenue as a result of the introduction
of the branded first down line in the Southeastern Conference college games.
These increases in advertising and production revenue were partially offset by
reductions of approximately $782,000, primarily due to reduced advertising
revenue from the Indy Racing League for the 2002 season, reduced ad revenue from
Super Bowl XXXVI and the non-renewal of our agreement with the San Diego Padres.

TOTAL COSTS AND EXPENSES. Total costs and expenses for the year ended December
31, 2002 increased 37% to $28,698,616 from $20,906,148 for the year ended
December 31, 2001.

SALES AND MARKETING. Sales and marketing expenses include salaries and travel
expenses of sales and marketing personnel, sales commissions, public relations,
trade shows, promotion, support personnel and allocated operating costs. Total
sales and marketing expenses for the year ended December 31, 2002 increased 51%
to $8,728,018 from $5,773,031 for the year ended December 31, 2001. This
resulted primarily from our consolidation of Publicidad's sales and marketing
expenses of approximately $5,384,000 for the year ended December 31, 2002, which
includes $4,710,000 for television airtime for virtual advertising in both
sports and entertainment programming along with $674,000 in other marketing
expenses compared to $2,125,000 for the year ended December 31, 2001, which
included $1,600,000 for television airtime along with $525,000 in other
marketing expenses. Also contributing to the increase was $665,000 of
amortization expense related to the value of the intangible assets, including
customer and distribution relationships and the Publicidad trade name, acquired
in the acquisitions of Publicidad and SciDel, and $168,000 in marketing charges
for warrants issued in connection with an agreement PVI entered into on
September 1, 2002 to provide digital product insertion (see Note 23 of our Notes
to the Consolidated Financial Statements). These increases were partially offset
by a decrease of approximately $488,000 in fees charged to obtain certain
international broadcast and programming rights, $119,000 in lower trade show
activities, and approximately $483,000 due to the reduction in staff and the use
of outside consultants.

PRODUCT DEVELOPMENT. Product development expenses include the costs associated
with all personnel, materials and contract personnel engaged in product
development activities to increase the capabilities of our hardware platforms,
including platforms for overseas use, and to create improved software programs
for individual sports and program enhancement services as well as for the
Internet and interactive television. Total product development costs increased
22% to $3,667,877 for the year ended December 31, 2002 from $3,008,883 for the
year ended December 31, 2001 primarily due to the inclusion of approximately
$332,000 for PVI Israel research costs, along with an increase of approximately
$327,000 in salaries, bonus, and overhead-related costs due to the redeployment
of resources.

FIELD OPERATIONS AND SUPPORT. Field operations and support expenses include the
costs associated with the material production, depreciation and operational
support of our systems for both domestic and international use, including
training costs for operators, maintenance of our mobile production units, and
support of our systems in the field. Total field operations and support costs
for the year ended December 31, 2002 decreased 13% to $4,949,792 from $5,662,634
for the year ended December 31, 2001. The decrease was due to reduced business
with the Indy Racing League, non-renewal of the San Diego Padres for the 2002
season, and streamlining our operations which resulted in shorter on-site setup
time required and the ability to provide our services with a reduced number of
personnel resulting in a production cost savings of approximately $663,000. Also
contributing to the decrease is the reduction of $149,000 in license fees and
lower depreciation expense for field equipment of $682,000. This decrease is
offset by the inclusion of approximately $944,000 for Publicidad's production
costs in 2002 compared to $307,000 in 2001, $144,000 for PVI Israel's production
costs, the costs associated with the sale of two L-VIS(R) systems to
Cablevision, and an increase in football production costs due to the increased
use by CBS in Southeastern Conference college games.

GENERAL AND ADMINISTRATIVE. Total general and administrative expenses increased
20% to $6,466,416 for the year ended December 31, 2002 from $5,400,768 for the
year ended December 31, 2001. This resulted primarily from the inclusion of
approximately $1,897,000 for Publicidad's general and administrative costs in
2002 compared to $310,000 in 2001, and $323,000 for PVI Israel. These increases
were offset by a reduction in salaries of $275,000 due to the redeployment and
reduction of resources, along with a reduction in Investor Relations of
$278,000 and Legal and Administrative Fees of $291,000.

IMPAIRMENT, RESTRUCTURING, AND OTHER CHARGES. During the year ended December 31,
2002, we recorded impairment, restructuring and other charges in the amount of
$4,886,513 compared to $1,060,832 for the year ended December 31, 2002. The


                                       27
<PAGE>
increase of $3,825,681 is primarily the result of a $4,444,876 charge relating
to the impairment of goodwill and certain identifiable intangibles, which was
partially mitigated by a $523,788 reduction relating to a settlement reached in
October 2002 with a former executive of the company, whereby the terms of the
severance package were renegotiated.

The following table displays the activity and balances of the restructuring
reserve account from December 1, 2001 to December 31, 2002:

<Table>
<Caption>

                                           Type of Cost
                                ---------------------------------------
                                  Employee     Facility        Asset
                                Separations    Closings     Impairments     Total
                                ------------------------------------------------------
<S>                            <C>          <C>           <C>             <C>
Additions                       $  980,983   $   79,849    $        --     $ 1,060,832
Deductions                              --         (870)            --            (870)
                                ------------------------------------------------------
Balance at December 31, 2001       980,983       78,979             --       1,059,962
Additions                          817,177      148,248      4,444,876       5,410,301
Adjustments                       (523,788)          --             --        (523,788)
Deductions                        (878,776)    (187,566)    (4,444,876)     (5,511,218)
                                ------------------------------------------------------
Balance at December 31, 2002    $  395,596   $   39,661    $        --     $   435,257
                                ======================================================
</Table>


OTHER (EXPENSE) INCOME, NET. Total other (expense), net was an expense of
$31,242 for the year ended December 31, 2002 as compared to $106,211 for the
year ended December 31, 2001. The increase was primarily a result of
Publicidad's foreign exchange loss on its US dollar denominated intercompany
payable to the parent company, which was offset by PVI Europe's foreign exchange
gain on its US dollar denominated intercompany payable to the parent company.

INTEREST EXPENSE. Total interest expense was $2,713,727 for the year ended
December 31, 2002 as compared to $44,818 for the year ended December 31, 2001.
This increase is primarily due to the $2,578,131 of interest expense related to
the Cablevision transaction dated June 25, 2002 (see Note 4 of our Notes to the
Consolidated Financial Statements), of which, $2,318,930 is non-cash, and the
balance of which will either be paid in cash or PVI common stock.

INTEREST INCOME. Total interest income was $94,734 for the year ended December
31, 2002 as compared to $450,268 of interest income for the year ended December
31, 2001. This decrease is a result of lower cash balances available for
investment.

LOSSES FROM EQUITY INVESTMENT. Losses from equity investment increased 99% to
$578,598 for the year ended December 31, 2002 from $290,271 for the year ended
December 31, 2001 primarily as a result of recording the write off of our
investment in the Revolution Company, LLC, which began operations in January
2001. In December, 2002, the Board concluded that the carrying amount of the
investment is not recoverable based on its undiscounted cash flows from
Revolution Company, LLC, and as such, the remaining investment balance of
$578,598 was written off.

LOSSES FROM SECURITIES INVESTMENT. Losses from securities available for sale was
$500,000 for the year ended December 31, 2001, related to an
other-than-temporary impairment loss. The investment was written down to $0 as
of December 31, 2001.

TAX (EXPENSE) BENEFIT, NET. Tax (expense) benefit, net was an expense of $92,630
for the year ended December 31, 2002 compared to a net benefit of $173,269 for
the year ended December 31, 2001. In the year ended December 31, 2001, the net
tax benefit comprised of a tax benefit of $333,993, net of $160,724 of other tax
expenses, of which, $126,348 was foreign withholding taxes based on our royalty
revenue from Publicidad. In the year ended December 2002, no tax benefit was
recognized, while incurring other tax expenses of $92,630, of which, $77,380
was related to the foreign withholding taxes based on our royalty revenue from
Publicidad. The tax benefit in 2001, was received from the sale of a portion of
our state net operating loss and research and development tax credits. The sale
was made under a plan developed by the State of New Jersey Economic Development
Authority and the amount received is a function of the total dollars available
under the plan and the number of companies applying for the tax benefit.

MINORITY INTEREST. Accumulated losses in PVI Europe have reduced the minority
interest to zero as of December 31, 2001. As such, no additional losses have
been allocated to the minority interest in the year ended December 31, 2002.

NET LOSS. As a result of the foregoing factors, our net loss increased 62% to
$21,207,709 for the year ended December 31, 2002 from $13,129,123 for the year
ended December 31, 2001.

OPTION REPRICING. On February 2, 2001, the Board of Directors voted to offer all
current employees who held outstanding stock options with an exercise price
greater than $5.00 the opportunity to reprice such options to $4.375. A total of
1,186,998 options held by employees were repriced. In addition, a total of
220,000 options held by directors were repriced. In accordance with FIN No. 44,
the repriced options are subject to variable accounting and thereby have been
adjusted to fair value at December 31, 2002, December 31, 2001 and June 30,
2001. A charge to earnings in the amount of $309,087 was recorded for the fiscal
year ended June 30, 2001 because the closing price of our common stock on June
30, 2001 was greater than the exercise price of $4.375. The deferred
compensation related to the unvested portion of the options was $640,000 as of
June 30, 2001. This charge was reversed during the six months ended December 31,
2001 because the closing price of our common stock on December 31, 2001 was less
than the exercise price of $4.375. The deferred compensation related to the
unvested portion of the options was $ -0- as of December 31, 2002 and 2001.


                                       28
<PAGE>
COMPARISON OF THE SIX MONTH PERIOD ENDED DECEMBER 31, 2001 TO THE SIX MONTH
PERIOD ENDED DECEMBER 31, 2000 (UNAUDITED)

REVENUES. Revenues are earned from both advertisers' use of the L-VIS(R) System
and under the terms of contractual arrangements for visual program enhancements,
as well as by license and royalty fees earned from use of the L-VIS(R) System
outside the United States. Total revenues for the six months ended December 31,
2001 increased 114% to $5,577,565 from $2,600,808 for the six months ended
December 31, 2000 primarily due to the acquisition of Publicidad Virtual, S.A.
de C.V. in September 2001. Total royalties and license fees decreased 18% to
$1,019,474 from $1,236,929 for the six months ended December 31, 2001 and 2000,
respectively. Total advertising and production revenue increased 234% to
$4,558,091 for the six months ended December 31, 2001 from $1,363,879 for the
six months ended December 31, 2000. Due to the acquisition of Publicidad, we no
longer receive royalties on the revenues earned by Publicidad, but rather
consolidate its revenues as a component of our total advertising and production
revenue, thus accounting for these fluctuations. The increases in revenue
resulting from our acquisition of Publicidad were partially offset by reduced
advertising revenue from our Major League Baseball contracts and the loss of our
contract for the NFL Today pre-game show.

TOTAL COSTS AND EXPENSES. Total costs and expenses for the six months ended
December 31, 2001 increased 40% to $12,353,428 from $8,821,890 for the six
months ended December 31, 2000 primarily as a result of increases in our sales
and marketing expenses and costs associated with severance payments to a former
member of management and the streamlining of both our European and domestic
operations.

SALES AND MARKETING. Sales and marketing expenses include salaries and travel
expenses of sales and marketing personnel, sales commissions, public relations,
trade shows, promotion, support personnel and allocated operating costs. Total
sales and marketing expenses for the six months ended December 31, 2001
increased 133% to $3,970,482 from $1,706,368 for the six months ended December
31, 2000. This resulted primarily from our consolidation of Publicidad's sales
and marketing expenses which included approximately $1.6 million in payments for
the purchase of television airtime for the use of virtual advertising in both
sports and entertainment programming.

PRODUCT DEVELOPMENT. Product development expenses include the costs associated
with all personnel, materials and contract personnel engaged in research and
development activities to increase the capabilities of the L-VIS(R) System
hardware platforms, including platforms for overseas use, and to create improved
software programs for individual sports and program enhancement services as well
as for the Internet and interactive television. Total product development costs
increased 13% to $1,584,834 for the six months ended December 31, 2001 from
$1,397,515 for the six months ended December 31, 2000. This increase represents
salaries and overhead related to our ongoing engineering process to migrate the
L-VIS(R) system to a PC platform as well as the continuing development of the
iPoint(TM) product.

FIELD OPERATIONS AND SUPPORT. Field operations and support expenses include the
costs associated with the material production, depreciation and operational
support of the L-VIS(R) System units for both domestic and international use,
including training costs for operators, maintenance of our mobile production
units, and support of the L-VIS(R) Systems in the field. Total field operations
and support costs for the six months ended December 31, 2001 increased 8% to
$3,128,220 from $2,885,651 for the six months ended December 31, 2000 primarily
due to the inclusion of approximately $300,000 for Publicidad's production
costs. This increase was partially offset by approximately $100,000 in savings
in our domestic production costs associated with the insertion of the first down
line for CBS during the 2001 NFL season. Experience in streamlining our
operations resulted in shorter on-site setup time required and the ability to
provide our services with a reduced number of personnel.

GENERAL AND ADMINISTRATIVE. Total general and administrative expenses decreased
8% to $2,609,060 for the six months ended December 31, 2001 from $2,832,356 for
the six months ended December 31, 2000. This resulted primarily from a decrease
of approximately $500,000 in legal fees incurred in connection with the
protection of our patent portfolio. Also contributing to the decrease was the
reversal of $309,000 related to prior period compensation expense. The original
expense was recorded within the year ended June 30, 2001, relating to the
variable accounting for options which were repriced in February 2001. The
expense was reversed in the six month period ended December 31, 2001 due to the
fact that the market value of the PVI common stock was less than the repriced
amount of $4.375 on December 31, 2001. These reductions in expense were offset
by the inclusion of Publicidad's general and administrative expenses of
approximately


                                       29
<PAGE>
$300,000 and an increase of approximately $150,000 in consulting fees paid for
legal and administrative services.

IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES. During the six months ended
December 31, 2001, we recorded impairment, restructuring and other charges in
the amount of $1,060,832. This resulted primarily from the recording of
approximately $980,000 in severance payments due to a former member of our
management team. These payments will be paid over the three year period November
2001 through October 2004. In addition, we recorded approximately $80,000 for
lease payments due on office space in our New Jersey and Belgium offices which,
due to the streamlining of our operations, will not be used after January 2002.

INTEREST INCOME. Total interest income decreased 76% to $75,000 for the six
months ended December 31, 2001 from $314,000 for the six months ended December
31, 2000 primarily as a result of lower cash balances available for investment.

LOSSES FROM EQUITY INVESTMENT. Losses from equity investment were $176,028 for
the six months ended December 31, 2001 as a result of our investment in the
Revolution Company, LLC, which began operations in January 2001. The loss of
$176,028 represents our share of the total net losses of Revolution Company,
LLC.

LOSSES FROM SECURITIES INVESTMENT. Losses from securities available for sale was
$500,000 for the six months ended December 31, 2001, related to an
other-than-temporary impairment loss. The investment was written down to $0 as
of December 31, 2001.

MINORITY INTEREST. Minority interest increased 35% to $94,280 for the six months
ended December 31, 2001 from $69,646 for the six month ended December 31, 2000
as a result of increased losses in our majority held subsidiary, PVI Europe.

NET LOSS. As a result of the foregoing factors, our net loss increased 26% to
$6,990,590 for the six months ended December 31, 2001 from $5,542,030 for the
six months ended December 31, 2000.

OPTION REPRICING. On February 2, 2001, the Board of Directors voted to offer all
current employees who held outstanding stock options with an exercise price
greater than $5.00 the opportunity to reprice such options to $4.375. A total of
1,186,998 options held by employees were repriced. In addition, a total of
220,000 options held by directors were repriced. In accordance with Financial
Standards Board Interpretation (FIN) No. 44, these repriced options are subject
to variable accounting and thereby have been marked to market at December 31,
2001. We recorded the reversal of a prior period compensation charge in the
amount of $309,087 as the closing price of the stock on December 31, 2001 was
less than the exercise price of $4.375. Future charges relating to this
repricing could have a significant effect on our results of operations in
subsequent periods.

COMPARISON OF THE YEAR ENDED JUNE 30, 2001 TO THE YEAR ENDED JUNE 30, 2000

REVENUES. Total revenue increased 53% to $4,663,677 for the fiscal year ended
June 30, 2001 ("Fiscal 2001") from $3,045,899 for the fiscal year ended June 30,
2000 ("Fiscal 2000".) Advertising and contract revenue increased 49% to
$2,242,236 in Fiscal 2001 from $1,508,664 in Fiscal 2000 primarily as a result
of the increased use of our L-VIS(R) System by ESPN during the broadcast of
Sunday Night Baseball games during the 2000 and 2001 MLB season, by CBS Sports
for the insertion of the virtual first down line in the national broadcast of
2000-2001 NFL regular and post-season games and by the Indy Racing League
("IRL") throughout their 2001 season. Also contributing to the increase was the
initial use of the L-VIS(R) System by CBS on their NFL Today pre-game show for
the 2000-2001 season, and by the National Basketball Association in the
international broadcast of the 2000-2001 season finals. Advertising and contract
revenues increased by approximately $370,000 from football broadcasts, $130,000
from auto racing broadcasts and $100,000 each, from baseball broadcasts and from
basketball and post-production activities. Royalties and license fees increased
58% to $2,421,441 in Fiscal 2001 from $1,537,235 in Fiscal 2000. Of this total,
royalties and license fees attributable to Publicidad totaled $2,142,927 and
$1,090,485 in Fiscal 2001 and 2000, respectively, an increase of approximately
$1.1 million year over year. This increase was partially offset by a decrease of
approximately $200,000 in license fees received from Sasani, a former South
African licensee.


                                       30
<PAGE>
SALES AND MARKETING. Total sales and marketing expenses decreased 15% to
$3,508,917 in Fiscal 2001 from $4,127,494 in Fiscal 2000 primarily as a result
of a reduction of approximately $800,000 in fees we are being charged to obtain
certain international broadcast and programming rights. In addition, during
Fiscal 2000, approximately $300,000 in non-cash compensation charges were
incurred in relation to the issuance of options for consulting services
associated with promoting the use of PVI's technology in soccer and the
television production community. These reductions were partially offset by an
increase in commission expense due to higher revenues, and increased personnel
and overhead expenses incurred largely as a result of opening our PVI Europe
facility.

PRODUCT DEVELOPMENT. Total product development costs increased 1% to $2,821,564
in Fiscal 2001 from $2,802,249 in Fiscal 2000 primarily due to the costs
associated with the use of an outside software development consultant and a
shift in the allocation of personnel related to the development of our iPointTM
software product, a streaming media product which will allow television viewers
to interact with live or recorded video programming delivered to the home via
the Internet or interactive television.

FIELD OPERATIONS AND SUPPORT. Total field operations and support expenses
decreased 4% to $5,420,065 in Fiscal 2001 from $5,641,355 in Fiscal 2000. This
decrease was primarily the result of our implementation of cost controls,
savings incurred by reduced shipping expenses and shorter on-site setup time
required since the purchase of our mobile production trucks and a reduction in
the number of additional L-VIS(R) Systems being built when all mobile production
trucks became fully operational. In addition, non-cash compensation expense
recorded for the issuance of common stock as payment for license fees decreased
by $120,000 in Fiscal 2001 due to the lower market price of our common stock on
the dates of stock issuance. These costs were partially offset by an increase of
approximately $100,000 for costs associated with the increased use of the
L-VIS(R) System for both golf and soccer demos as well as by the IRL and ESPN
during their 2000-2001 auto racing and Sunday Night Baseball seasons,
respectively.

GENERAL AND ADMINISTRATIVE. Total general and administrative expenses increased
33% to $5,624,064 in Fiscal 2001 from $4,222,364 in Fiscal 2000 due to an
increase of approximately $500,000 in legal fees paid to defend and protect our
patent portfolio. Other factors contributing to the increase included
approximately $307,000 in non-cash compensation charges incurred as a result of
repricing stock options issued to our employees and board of directors,
approximately $240,000 in increased investor relations activity supporting our
efforts to provide current information to the investment community and an
increase of $120,000 in withholding tax payable on international license and
royalty revenue resulting from increased sales.

OPTION REPRICING. On February 2, 2001, the Board of Directors voted to offer all
current employees who held outstanding stock options with an exercise price
greater than $5.00 the opportunity to reprice such options to $4.375. A total of
1,186,998 options held by employees were repriced. In addition, a total of
220,000 options held by directors were repriced. In accordance with Financial
Standards Board Interpretation (FIN) No. 44, these repriced options are subject
to variable accounting and thereby have been marked to market at June 30, 2001.
A charge to earnings in the amount of $309,087 was recorded, as the closing
price of the stock on June 30, 2001 was greater than the exercise price of
$4.375. Future charges relating to this repricing could have a significant
effect on our results of operations in subsequent periods.

INTEREST AND OTHER INCOME. Interest and other income decreased 18% to $555,316
in Fiscal 2001 from $681,185 in Fiscal 2000 primarily as a result of lower cash
reserves available for investment. This decrease was partially offset by the
recording of approximately $250,000 in interest income as a result of the
repayment of non-recourse related party loans. Due to the uncertainty of the
collectibility of these non-recourse notes receivable, we did not record
interest income on the transaction until it was settled in March 2001.

TAX BENEFIT. The total tax benefit decreased 38% to $371,999 in Fiscal 2001 from
$596,998 in Fiscal 2000. The tax benefit for both years was received from the
sale of a portion of our state net operating loss and research and development
tax credits. The sale was made under a plan developed by the State of New Jersey
Economic Development Authority and the amount received is a function of the
total dollars available under the plan and the number of companies applying for
the tax benefit.

LOSSES FROM EQUITY INVESTMENT. Losses from equity investments increased to
$114,243 in Fiscal 2001 from $0 in Fiscal 2000 as a result of our investment in
the Revolution Company, LLC which began operations in January 2001. The loss of
$114,243 represents our 25% share of total net losses.


                                       31
<PAGE>
MINORITY INTEREST. Total minority interest increased to $217,298 in Fiscal 2001
from $24,734 in Fiscal 2000 as a result of concluding a full year of operations
by PVI Europe which was formed in June 2000.

NET LOSS. As a result of the foregoing factors, our net loss decreased 6% to
$11,680,563 in Fiscal 2001 from $12,444,646 in Fiscal 2000.

SEGMENT REPORTING We operate on a worldwide basis in only one industry segment,
real-time video imaging which is broken out into geographical regions including
the United States, Latin America, Canada, Europe and all other regions. For the
year ended December 31, 2002, total revenues were $10,812,370. Of this total,
approximately $7.7 million was from our Latin American region and $1.9 million
was from the United States, and $1.2M from our other international regions. As a
result of our acquisition of Publicidad in September 2001, total revenues
increased dramatically between fiscal 1999 and 2001, and during the six months
ended December 31, 2001, and as a result of increased license and royalty fees
received from Publicidad prior to our acquiring their business in September
2001, and the inclusion of their advertising and production revenue on our
consolidated statement of operations since the date of acquisition. License and
royalty revenue decreased 68% to $704,200 from $2,199,604 for the year ended
December 31, 2002 and 2001, respectively. Due to the acquisition of Publicidad,
we no longer receive royalties on the revenues earned by Publicidad, but rather
consolidate its revenues as a component of our total advertising and production
revenue, thus accounting for a significant portion of this fluctuations.

CRITICAL ACCOUNTING POLICIES

PVI's discussion and analysis of its financial condition and results of
operations are based upon our 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
us to make estimates and judgments that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
our financial statements, and the reported amounts of revenue and expenses
during the reporting periods. There can be no assurance that actual results will
not differ from those estimates.

We have identified the policies below as critical to our business operations and
the understanding of our results of operations:

REVENUE. Royalty fee revenue relates to the fee received when our licensees have
royalty agreements pursuant to which we earn revenues from their use of our
technology. The minimum amounts are recorded when earned in accordance with the
contract terms. Amounts in excess of the minimum are recorded when the
conditions for earning the royalties in excess of the minimums are met.

Non-refundable license fees are recognized as revenue over the license term,
commencing when all commitments are satisfied. Additionally, under the terms of
certain agreements, we retain title to the L-VIS(R) System and receive a
non-refundable equipment fee which reflects reimbursement for the construction
cost of the system delivered to the licensee. These equipment fees are recorded
as license revenue on a straight-line basis over the shorter of the license term
or useful life of the equipment.

Advertising revenue is recognized when earned, which is when the respective
advertisements are inserted into a television broadcast.

Production revenue is earned from fees paid by broadcasters for static and
animated visual enhancements of sporting and other events. This type of revenue
is recognized when earned, which is when the enhancement is inserted into a live
or pre-recorded television broadcast.

MARKETABLE SECURITIES. PVI holds an investment in Pineapplehead Limited, an
Australian based company. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, we carry our investment at fair value, based on
quoted market prices, and unrealized gains and losses are included in
accumulated other comprehensive income, which is reflected as a separate
component of stockholders' equity. We have a policy in place to review our
equity holdings on a regular basis to evaluate whether or not each security has
experienced an other-than-temporary decline in fair value. Our policy includes,
but is not limited to, reviewing the company's


                                       32
<PAGE>
cash position, earnings/revenue outlook, stock price performance over the past
six months, liquidity and management/ownership. If we believe that an
other-than-temporary decline exists in our marketable securities, it is our
policy to write down this investment to the market value and record the related
write down as an investment loss on our consolidated statements of operations.

For more information on our marketable securities, please refer to Note 7 of our
Notes to Consolidated Financial Statements.

EQUITY INVESTMENTS. The Company has a direct investment in Revolution Company,
LLC, a privately held company. Our investment is accounted for using the equity
method of accounting, and accordingly, the carrying balance of our investment is
adjusted to reflect our share of investment loss. We have a policy in place to
review the fair value of our investment on a regular basis to evaluate the
carrying value of the investment in Revolution Company. This policy includes,
but is not limited to, reviewing the company's business plan, revenue
expectations and operational performance. If we believe that the carrying value
of the investment is carried at an amount in excess of fair value, it is our
policy to record a reserve in addition to our equity method of accounting and
the related write down is recorded as an investment loss on our consolidated
statements of operations. Estimating the fair value of non-marketable equity
investments in early-stage technology companies is inherently subjective and may
contribute to volatility in our reported consolidated statements of operations.
In December, 2002, the Board concluded that the carrying amount of the
investment is not recoverable from its undiscounted cash flows from Revolution
Company, LLC, and as such, the remaining investment balance of $578,598 was
written off.

For further information on our long-term equity investment, please refer to Note
13 of our Notes to Consolidated Financial Statements.

GOODWILL AND INTANGIBLE ASSETS. In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 requires the purchase
method of accounting for all business combinations and that certain acquired
intangible assets in a business combination be recognized as assets separate
from goodwill. We have applied SFAS No. 141 in our allocation of the purchase
price of the Publicidad Acquisition. Accordingly, we identified and allocated a
value to intangible assets totaling $3.2 million related to customer and
distributor relationships and trademarks. We also recorded goodwill related to
this acquisition of $5.3 million. SFAS No. 141 was also applied in our
allocation of the purchase price of the SciDel Acquisition. Accordingly, we
identified and allocated a value to intangible assets totaling $2.1 million
related to customer relationships, patents, and software technology. We also
recorded goodwill related to this acquisition of $1.4 million. The valuation of
these intangible assets is inherently subjective and requires the use of certain
estimates based on various valuation techniques, including discounted value of
estimated future cash flows, and management's judgment.

The provisions of SFAS No. 142 ("SFAS 142") require that a transitional
impairment test be performed as of the beginning of the year the statement is
adopted. The new criteria for recording intangible assets separate from goodwill
did not require the Company to reclassify any of its intangible assets effective
January 1, 2002. SFAS 142 also requires that goodwill and other intangibles
determined to have an indefinite life are no longer to be amortized into results
of operations, but instead are reviewed for impairment at least annually and an
impairment charge is recorded in the periods in which the recorded carrying
value of goodwill and certain intangibles is more than its estimated fair value.
The annual impairment test of goodwill was performed at the end of the Company's
fiscal year of December 31, 2002 and it indicated that there was an impairment
of goodwill.

The Company evaluates the recoverability and measures the potential impairment
of its goodwill under SFAS 142. The impairment test is a two-step process that
begins with the estimation of the fair value of the reporting units. The Company
performed its evaluation of goodwill in two reporting units, (i) Publicidad
Virtual S.A. de C.V. ("PV"), and (ii) consolidated Princeton Video Image Israel,
Ltd., Princeton Video Image, Inc., and Princeton Video Image Europe, N.V.
(collectively "PVI Other"). The first step screens for potential impairment and
the second step measures the amount of the impairment, if any. As part of the
first step to assess potential impairment, management compared the carrying
equity value for each reporting unit to its net present value based on
management's forecast of future cash flows. Key assumptions management used to
determine the net present value of the reporting units' forecasted cash flows
include, a) revenue with compounded annual growth rates of 6.8% for PV and 90.0%
for PVI Other, b) a royalty payment of approximately 10% of gross revenues from
PV to PVI Other for use of PVI Other technology, and c) discount rates of 22%
for PV and 50% for PVI Other. The high growth rate of PVI Other reflects
management's estimates of future contracts and contains a high degree of
uncertainty, therefore, the resulting cash flows were discounted at a rate of
50%. Since the carrying value of equity in both units were greater than the
estimated net present value, the Company then proceeded to the second step to
measure the impairment. The second step compares the implied fair value of
goodwill with its carrying value. The implied fair value is determined by
allocating the fair value of the reporting units to all of the assets and
liabilities of that unit as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit was the purchase
price paid to acquire the reporting unit. The excess of the fair value of the
reporting unit over the amounts assigned to its assets and liabilities is the
implied fair value of goodwill. Since the carrying amount of the reporting
units' goodwill was greater than its implied fair value, an impairment loss was
recognized in both reporting units. As a result, the company wrote down the
goodwill in both reporting units. In the PV reporting unit, the write down was
$1.4 million of the $5.3 million related goodwill balance, and in the PVI Other
reporting unit, the entire goodwill balance of $1.4 million was written off.

Effective January 1, 2002, the Company evaluates the possible impairment of its
long-lived assets, including intangible assets which are amortized pursuant to
the provisions of SFAS 142, under SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). The Company reviewed the
recoverability of its intangible assets concurrently with its review of SFAS
142. Evaluation of possible impairment was based on the Company's ability to
recover the asset from the expected future cash flows of the related operations.
Since the expected cash flows were less that the carrying amount of the assets,
an impairment loss was recognized for the difference between the estimated fair
value and book value of the asset. The evaluation of the company's intangible
assets in accordance with SFAS 144 resulted in an impairment loss in both
reporting units. In the PV reporting unit, write downs of $175,000 for the
intangible asset Customer Relationships and $533,000 for the intangible asset
Distribution were recorded. In PVI Other, write downs of $362,000 for the
intangible asset Patents and $533,000 for the intangible asset Software
Technology were recorded.

Common valuation practices require the use of certain estimates and assumptions.
While we believe that the estimates and assumptions made in our valuations for
both SFAS 142 and SFAS 144 are reasonable and appropriate for our Company,
changes to the estimates and assumptions could significantly change the outcome
of the analysis. Management believes its estimation methods are reasonable and
reflective of common valuation practices.

For the year ended December 31, 2002, we recognized $4,444,876 of total
goodwill and identifiable intangible assets impairments.

For more information on our goodwill and intangible assets, please refer to
Notes 5,6 and 12 of our Notes to the Consolidated Financial Statements.

PREPAID AIRTIME. Publicidad has obtained the rights to the virtual airtime of
two television networks in Mexico, Televisa, S.A. de C.V. ("Televisa") and TV
Azteca, S.A. de C.V. ("TV Azteca"). Prepaid airtime is recorded as an asset and
amortized as it is used, which is when ads are broadcast over the air.
Management believes that all amounts related to unused airtime are fully
recoverable during the current fiscal year.

For more information on our prepaid airtime, please refer to Note 9 of our Notes
to Consolidated Financial Statements.

PROPERTY AND EQUIPMENT. Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the respective assets.


                                       33
<PAGE>
The estimated useful lives of the L-VIS(R) Systems and their components are
three years, office and research and development equipment and software is five
years, and furniture and fixtures is seven years. When assets are retired or
otherwise disposed of, the cost and related depreciation are removed from the
accounts and any related gains or losses are included in the statement of
operations in the year of disposal. Expenditures for leasehold improvements are
capitalized and depreciated over the term of the underlying lease.

IMPAIRMENT OF LONG-LIVED ASSETS. The carrying value of these assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. An estimate of
undiscounted future cash flows produced by the asset is compared to the carrying
value to determine whether impairment exists. If an asset is determined to be
impaired, the loss is measured based on quoted market prices in active markets,
if available. If quoted market prices are not available, the estimate of fair
value is based on various valuation techniques, including discounted value of
estimated future cash flows. Assets to be disposed are recorded at the lower of
carrying value or estimated net realizable value.

For more information on our property and equipment, please refer to Note 11 of
our Notes to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

We have incurred significant operating losses and negative cash flows in each
year since we commenced operations, due primarily to the costs of developing,
testing and building L-VIS(R) Systems, and operating expenses relating to our
field operations and sales and marketing activities. Since our inception, we
have primarily financed our operations from (i) the net proceeds from private
placements of common stock, warrants and redeemable preferred stock, (ii) the
payment of a $2,000,000 licensing fee by Presencia en Medios, S.A. de C.V. in
consideration of the license we granted to Publicidad, (iii) the proceeds of a
bridge loan financing which closed in October 1997, (iv) the proceeds from the
initial public offering of our common stock which closed in December 1997, (v)
the investment in PVI and the prepayment of license fees by PVI Holding, LLC, a
subsidiary of Cablevision Systems Corporation (the "Cablevision transaction"),
(vi) revenues and license fees relating to use of the L-VIS(R) System, (vii)
investment income earned on cash balances and short term investments, and (viii)
the sale of a portion of our state net operating loss and research and
development tax credits.

As of December 31, 2002, we had cash and cash equivalents of $937,421, a
decrease of $7,422,932 from our balance at December 31, 2001. Net cash used in
operating activities increased to $10,882,580 for the year ended December 31,
2002 from $7,333,949 for the year ended December 31, 2001 due to several
important factors. The primary cause was an increase in net losses of
approximately $3.4 million. A second significant factor was the inflow of cash
from PVI Holding, LLC, a subsidiary of Cablevision, for prepaid royalties, net
of a deferred revenue credit of approximately $3.1 million during the year ended
December 31, 2001 with no corresponding transaction in the year ended December
31, 2002. Also contributing to the decrease in cash was a reduction in our
accounts payable and accrued expenses balance of approximately $5.7 million as
payments were made to television rights holders for virtual advertising rights.
These were partially offset by the reduction in the prepayment of approximately
$3.7 million of television network airtime, reduction in our accounts receivable
of $1.8M, reduction in the Notes Payable to Presencia of $553,000, an increase
in the non-cash Interest Expense from Cablevision of $2.3M, as well as an
increase in advertising and production advances of approximately $265,000 from
our customers.

Net cash used in investing activities decreased to $970,798 for the year ended
December 31, 2002 from $2,114,728 for the year ended December 31, 2001 as a
result of approximately $100,000 due to the absence of license payments which
occurred in the prior year, an approximately $545,000 reduction in purchases of
property, plant and equipment, and a reduction of approximately $490,000 in
merger costs related to the acquisition of Publicidad, which closed in September
2001, and the acquisition of the assets of SciDel Technologies, Ltd., which
closed in March 2002.

Net proceeds from financing activities decreased to $4,552,049 for the year
ended December 31, 2002 from $15,395,337 for the year ended December 31, 2001.
For the year ended December 31, 2001, we recorded net receipts of approximately
$14.8 million from Cablevision for their investment in our common stock and
warrants, and in June 2002 we recorded net receipts of approximately $4.9
million from Cablevision in consideration for the issuance of a secured
convertible note that matures on July 31, 2003 (See Note 2 of our Notes to the
Consolidated Financial Statements - Subsequent Events).


                                       34
<PAGE>
Payments due by period under long-term commitments are as follows:

<TABLE>
<CAPTION>
                                                 Within        Within       Within      Within         After
                                   Total         1 year        2 years      3 years     4 years       5 years
                                ----------     ----------     --------     --------     --------     --------
<S>                             <C>            <C>            <C>          <C>          <C>          <C>
Operating lease commitments     $3,108,869     $  636,012     $614,687     $586,512     $567,780     $703,878

Capital lease commitments           34,210         18,660       15,550           --           --           --

Secured convertible debt         5,137,427      5,137,427           --           --           --           --

Notes Payable                      671,300        671,300           --           --           --           --
                                ----------     ----------     --------     --------     --------     --------
                                $8,951,806     $6,463,399     $630,237     $586,512     $567,780     $703,878
                                ----------     ----------     --------     --------     --------     --------
</TABLE>

The consolidated financial statements of PVI have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. We have incurred net losses of approximately $21.2 million, $7.0
million, $11.7 million, $12.5 million and $9.7 million for the year ended
December 31, 2002, for the six months transition period ended December 31, 2001,
and the years ended June 30, 2001, 2000 and 1999, respectively. Our actual
working capital requirements will depend on numerous factors, including the
progress of our product development programs, our ability to maintain our
customer base and attract new customers to use the L-VIS(R) System, the level of
resources we are able to allocate to the development of greater marketing and
sales capabilities, technological advances, our ability to protect our patent
portfolio and the status of our competitors. We expect to incur costs and
expenses in excess of expected revenues during the ensuing fiscal year as we
continue to execute our business strategy of becoming a global, media services
company by adding to our sales and marketing management force both domestically
and internationally, and to strengthen existing relationships with rights
holders, broadcasters and advertisers.

The factors noted in the above paragraph raise substantial doubt concerning our
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should we be unable to continue as a going concern. Our ability to
continue as a going concern is dependent upon the support of our shareholders,
creditors, and our ability to close debt or equity transactions to raise cash.
In the event we are unable to liquidate our liabilities, planned operations may
be scaled back or discontinued. Additional funding may not be available when
needed or on terms acceptable to us, which could have a material adverse effect
on our business, financial condition and results of operations. If adequate
funds are not available, we may delay or eliminate some expenditures,
discontinue operations in selected U.S. or international markets or
significantly downsize our sales, marketing, research and development and
administrative functions. These activities could impact our ability to expand
our business or meet our operating needs, and may also cause PVI to file for
bankruptcy protection as a means to effectively deal with its creditors. In such
event the value of current shareholder equity may be severely impaired or lost.
In addition, we currently have outstanding three secured convertible promissory
notes in the aggregate principal amount of $6,500,000 (the "Secured Notes"),
pursuant to the Note Purchase and Security Agreement with Presencia en Medios,
SA de CV ("Presencia") and PVI Holding LLC, a subsidiary of Cablevision Systems
Corporation ("Cablevision"). The Secured Notes were issued in connection with
the amendment to the Note Purchase and Security Agreement on March 20, 2003 (See
Note 28 of our Notes to the Consolidated Financial Statements - Subsequent
Events). The Secured Notes mature on July 31, 2003 and are secured by a security
interest in all of our assets in favor of Presencia and Cablevision. Presencia
and Cablevision have the right to extend the maturity of the Secured Notes for
up to two years. In the event that either Presencia or Cablevision choose not to
extend the maturity date of the Secured Notes held by them and we are not able
to obtain additional funding, we will not be able to repay the debt under the
Secured Notes. This could result in a default and the exercise of their rights
as a secured debtor by either Presencia or Cablevision. (See Note 1 of our Notes
to the Consolidated Financial Statements - Liquidity). The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties. Our management is in the process of seeking additional financing
through a variety of options including bridge loans or equity financing with
existing shareholders, financial institutions or strategic investors. There is
no assurance, however, that any such transactions will provide sufficient
resources to repay the Secured Notes or support us until we generate sufficient
cash flow to fund our operations. In such event, PVI may not be able to continue
as a going concern and may have to file for bankruptcy protection as a means to
effectively deal with its creditors. In such event the value of current
shareholder equity may be severely impaired or lost.

OTHER

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," effective for fiscal years
beginning after May 15, 2002. SFAS No. 145 eliminates the requirement that gains
and losses from the extinguishment of debt be aggregated and classified as an
extraordinary item, net of tax, and makes certain other technical corrections.
SFAS No. 145 will not have a material effect on our Consolidated Financial
Statements.

On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". This statement addresses the recognition, measurement and reporting
of costs that are associated with exit and disposal activities. This statement
includes the restructuring activities that are currently accounted for pursuant
to the guidance set forth in Emerging Issues Task Force (EITF) 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to exit an
Activity (including Certain Costs Incurred in a Restructuring)", costs related
to terminating a contract that is not a capital lease and one-time benefit
arrangements received by employees who are involuntarily terminated. This
statement is effective for exit or disposal activities initiated after December
31, 2002 with earlier application encouraged. Previously issued financial
statements will not be restated. The provisions of EITF 94-3 shall continue to
apply for exit plans initiated prior to the adoption of SFAS No. 146. We will
adopt SFAS No. 146 for restructuring beginning after January 1, 2003.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation --


                                       35
<PAGE>
Transition and Disclosure -- an amendment of FASB Statement No. 123." This
standard provides alternate methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation and
requires more prominent disclosure about the method used. This statement is
effective for fiscal years ending after December 15, 2002. For PVI, this means
it is effective for the year ended December 31, 2002. Currently PVI applies the
disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and we do not expense our stock options. The adoption of the
disclosure provisions of SFAS No. 148 did not have an impact on PVI's results of
operations and financial position.

In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the separation and
allocation of consideration for arrangements that include multiple deliverables.
The EITF requires that when the deliverables included in this type of
arrangement meet certain criteria they should be accounted for separately as
separate units of accounting. This may result in a difference in the timing of
revenue recognition but will not result in a change in the total amount of
revenue recognized in a bundled sales arrangement. The allocation of revenue to
the separate deliverables is based on the relative fair value of each item. If
the fair value is not available for the delivered items then the residual method
must be used. This method requires that the amount allocated to the undelivered
items in the arrangement is their full fair value. This would result in the
discount, if any, being allocated to the delivered items. This consensus is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003, which, for PVI, is July 1, 2003. PVI is currently
evaluating the impact of this consensus on its results of operations, financial
position and cash flows. of operations, financial position or cash flows.

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that an entity issuing a
guarantee (including those embedded in a purchase or sales agreement) must
recognize, at the inception of the guarantee, a liability equal to the fair
value of the guarantee. The recording of this liability is not dependent on the
probability that the payments will be required. The offset to the liability will
depend on the circumstances under which the guarantee was issued, but could
include; cash/accounts receivable if it is a stand alone transaction, net
proceeds in a sales transaction, or expense if no compensation is received. FIN
45 also requires detailed information about each guarantee or group of
guarantees even if the likelihood of making a payment is remote. The disclosure
requirements of this interpretation are effective for financial statements of
periods ending after December 15, 2002, which makes them effective for PVI for
the year ended December 31, 2002. The recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. We do not believe that FIN 45 will have a
material impact on the future results of our operations, financial position or
cash flows.

CHANGES IN LISTING OF OUR COMMON STOCK. Our common stock was transferred from
The Nasdaq National Market to The Nasdaq SmallCap Market on January 7, 2003
pursuant to a Nasdaq decision, which required that, to maintain the listing on
The Nasdaq SmallCap Market, our common stock must evidence a closing bid price
of at least $1.00 per share on or before March 10, 2003. Our common stock failed
to achieve that bid price and on March 13, 2003, our common stock was delisted
from trading on The Nasdaq Stock Market. The effects of this delisting may
include limited news coverage and the limited release of the market prices of
our common stock. Delisting may diminish investors' interest in our common
stock, restrict the trading market and reduce the price for our common stock.
Delisting may also restrict us from issuing additional securities or securing
additional financing. Our common stock is now quoted on the Over-the-Counter
(OTC) Bulletin Board and continues to trade under the ticker symbol PVII.

NET OPERATING LOSS CARRYFORWARDS. As of December 31, 2002, we had net operating
loss carryforwards for federal income tax purposes of approximately $54,530,000,
which expire in the years 2006 through 2022. As of December 31, 2002, we had
foreign net operating loss carryforwards of approximately $4,843,000, which
primarily expire in the years 2006 through 2011.

Based upon the initial public offering of our common stock in December 1997, we
have undergone an additional "ownership change" within the meaning of Section
382 of the Internal Revenue Code of 1986, as amended (the "Code"). Under Section
382 of the Code, upon undergoing an ownership change, our right to use our then
existing net operating loss carryforwards as of the date of the ownership change
is limited during each future year to a percentage of the fair market value of
our then outstanding capital stock immediately before the ownership change and
if other ownership changes have occurred prior to this ownership change, the
utilization of such losses may be further limited. During the year ended 2002,
the Company may have undergone an additional ownership change as a result of
certain equity transactions. The timing and manner in which we may utilize our
net operating loss carryforwards in any year will be limited by Section 382 of
the Code.

EFFECT OF INFLATION

Domestic inflation has not had a significant impact on our sales or operating
results. However, inflation may have an impact upon business in a number of
international markets.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not have material exposure to market risk from market risk sensitive
instruments although we are


                                       36
<PAGE>
exposed to foreign currency fluctuations and interest rate changes. Our exposure
to market risk for changes in interest rates relates to the increase or decrease
in the amount of interest income we can earn on our investment portfolio. Under
our current policies, we do not use interest rate derivative instruments to
manage exposure to interest rate changes. We ensure the safety and preservation
of invested principal funds by limiting default risk, market risk and
reinvestment risk. We reduce default risk by investing in investment grade
securities. A hypothetical 100 basis point drop in interest rates along the
entire interest rate yield curve would not significantly affect the fair value
of our interest sensitive financial instruments at December 31, 2002, December
31, 2001, June 30, 2001 or June 30, 2000. Declines in interest rates over time
will, however, reduce our interest income. Other than intercompany transactions
between our domestic and foreign entities, we generally do not have significant
transactions denominated in a currency other than the functional currency
applicable to each entity.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Index to Financial Statements" on page F-1.

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited quarterly financial data for the four
quarters in our fiscal year ended December 31, 2002, the two quarters in our
transition period for the six months ended December 31, 2001 and the four
quarters in our fiscal years ended June 30, 2001. This unaudited quarterly
information has been prepared on the same basis as the audited financial
information presented elsewhere in this report and, in management's opinion,
includes all adjustments that we consider necessary for a fair presentation of
the information for the quarters presented.

<TABLE>
<CAPTION>

                                                                 QUARTER ENDED

('000's)                        Dec 31      Sep 30      Jun 30      Mar 31      Dec 31        Sep 30     Jun 30
                                2002(4)      2002        2002       2002(3)    2002(1)(2)      2001       2001
                              ----------  ----------  ----------  ----------  ------------  ----------  ---------
<S>                           <C>         <C>         <C>         <C>         <C>           <C>         <C>
Total revenue                 $    3,944  $    1,850  $    3,588  $    1,430  $      3,919  $    1,659  $   1,045


Sales and marketing                2,274       1,805       2,860       1,789         3,123         848        969
Product development                  764         897       1,047         960           889         696        653
Field operations and support       1,353         922       1,201       1,474         1,729       1,399      1,245
General and administrative         1,333       1,410       1,866       1,856         1,797         813      1,401
Impairment, restructuring and
 other charges                     4,230         411           -         246         1,061           -          -
                              ----------  ----------  ----------  ----------  ------------  ----------  ---------
Total costs and expenses           9,954       5,445       6,974       6,325         8,599       3,756      4,268
                              ----------  ----------  ----------  ----------  ------------  ----------  ---------

Operating loss                   (6,010)     (3,595)     (3,386)     (4,895)       (4,680)     (2,097)    (3,223)

Other income (expense), net          443       (475)         (4)           5           115          20       (54)
Interest expense                 (1,328)     (1,325)        (26)        (35)          (14)         (1)        (1)
Interest income                       15          32          17          31            33          42         54
Losses from equity
 investment                         (382)        (63)        (59)        (75)         (109)        (67)       (53)
Losses on securities
 available for sale                    -           -           -           -         (184)       (316)          -
                              ----------  ----------  ----------  ----------  ------------  ----------  ---------
Net loss before tax benefit
 and minority interest           (7,262)     (5,426)     (3,458)     (4,969)       (4,839)     (2,419)    (3,277)

Tax (expense) benefit, net            72        (66)        (55)        (43)           173           -          -
Minority Interest                      -           -           -           -            45          50         70
                              ----------  ----------  ----------  ----------  ------------  ----------  ---------
Net loss                      $  (7,190)  $  (5,492)  $  (3,513)  $  (5,012)  $    (4,621)  $  (2,369)  $ (3,207)
                              ==========  ==========  ==========  ==========  ============  ==========  =========

Basic and diluted net loss
 per share                    $   (0.39)  $   (0.30)  $   (0.19)  $   (0.29)  $      (.27)  $   (0.19)  $  (0.27)
                              ==========  ==========  ==========  ==========  ============  ==========  =========
</Table>

<Table>
<Caption>
('000's)                       Mar 31      Dec 31      Sep 30
                                2001        2000        2000
                              ----------  ----------  ----------
<S>                           <C>         <C>         <C>
Total revenue                 $    1,018  $    1,282  $    1,319


Sales and marketing                  833         851         855
Product development                  771         685         713
Field operations and support       1,289       1,436       1,450
General and administrative         1,391       1,508       1,324
Severance and other charges            -           -           -
                              ----------  ----------  ----------
Total costs and expenses           4,284       4,480       4,342
                              ----------  ----------  ----------

Operating loss                   (3,266)     (3,198)     (3,023)

Other income (expense), net           25        (73)           2
Interest expense                    (28)         (4)         (2)
Interest income                      321         194         120
Losses from equity
 investment                          (61)           -           -
Losses on securities
 available for sale                    -           -           -
                              ----------  ----------  ----------
Net loss before tax benefit
 and minority interest           (3,009)     (3,081)     (2,903)

Tax (expense) benefit, net             -         372           -
Minority Interest                     77          30          40
                              ----------  ----------  ----------
Net loss                      $  (2,932)  $  (2,679)  $  (2,863)
                              ==========  ==========  ==========

Basic and diluted net loss
 per share                    $   (0.27)  $   (0.27)  $   (0.37)
                              ==========  ==========  ==========
</Table>


<PAGE>
(1)   Results reflect the acquisition of Publicidad in September 2001 as
      described in Note 5 of the Notes to Consolidated Financial Statements.

(2)   Results reflect severance payment to a former member of management and
      costs associated with streamlining our domestic and European operations as
      described in Note 6 of the Notes to the Consolidated Financial Statements.

(3)   Results reflect the acquisition of SciDel in March 2002 as described in
      Note 5 of the Notes to the Consolidated Financial Statements.

(4)   Results reflect the impairment of Goodwill and certain identifiable
      intangibles as described in Note 6 of the Notes to the Consolidated
      Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not Applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

For information concerning this Item, see the information under "Election of
Directors," "Executive Officers" and "Section 16(a) Beneficial Owner Reporting
Compliance" in our Proxy Statement to be filed with respect to our 2003 Annual
Meeting of Stockholders, which information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

For information concerning this Item, see the information under "Executive
Compensation" in our Proxy Statement to be filed with respect to our 2003 Annual
Meeting of Stockholders, which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDERS MATTERS.

For information concerning this Item, see the information under "Security
Ownership of Certain Beneficial Owners and Management" in our Proxy Statement to
be filed with respect to our 2003 Annual Meeting of Stockholders, which
information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

For information concerning this Item, see the information under "Certain
Relationships and Related Transactions" in our Proxy Statement to be filed with
respect to our 2003 Annual Meeting of Stockholders, which information is
incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES.

(a)   Evaluation of disclosure controls and procedures. Within the 90 days prior
      to the date of this Annual Report on Form 10-K, our Co-Chief Executive
      Officers and our Principal Financial Officer evaluated the effectiveness
      of the Company's disclosure controls and procedures as defined in Rule
      13a-14(c) under the Securities Exchange Act of 1934, as amended (the
      "Exchange Act"). Based upon that evaluation, the Co-Chief Executive
      Officers and the Principal Financial Officer have concluded that the
      Company's current disclosure controls and procedures are adequate and
      effective to ensure that information required to be disclosed in the
      reports the Company files under the Exchange Act is recorded, processed,
      summarized and reported on a timely basis.

(b)   Changes in internal controls. There have been no significant changes in
      the Company's internal controls or in other factors that could
      significantly affect internal controls subsequent to the date of their
      evaluation by the Co-Chief Executive Officers and the Principal Financial
      Officer.


                                       38
<PAGE>
                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

            (a)   The following documents are included as part of this Annual
                  Report on Form 10-K.

                        1.    The financial statements required to be filed
                              pursuant to this Item 15(a)(1) are listed on the
                              "Index to Financial Statements" attached hereto,
                              which is incorporated by reference.

                        2.    All schedules are omitted as the information
                              required is inapplicable or the information is
                              presented in the consolidated financial statements
                              or the related notes.

                        3.    The exhibits required to be filed pursuant to this
                              Item 15(a)(3) are listed on the "Index to
                              Exhibits" attached hereto, which is incorporated
                              herein by reference.

            (b)   Reports on Form 8-K.

            None filed


                                       39
<PAGE>
                                    Signature

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                        PRINCETON VIDEO IMAGE, INC.

            March 28, 2003

                                        By:   /s/ David Sitt
                                        ----------------------------------------
                                        David Sitt
                                        Co-Chief Executive Officer

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

<TABLE>
<CAPTION>
SIGNATURES                      TITLE                                 DATE
----------                      -----                                 ----
<S>                             <C>                                   <C>

/s/ David Sitt                  Co-Chief Executive Officer            March 28, 2003
---------------------           (co-principal executive officer)
David Sitt

/s/ Roberto Sonabend            Co-Chief Executive Officer            March 27, 2003
---------------------           (co-principal executive officer)
Roberto Sonabend

/s/ James Green                 President, Chief Operating Officer    March 27, 2003
---------------------           (principal financial officer)
James Green

/s/ Brown F Williams            Director                              March 27, 2003
---------------------
Brown F Williams


/s/ Joseph Decosimo             Director                              March 26, 2003
---------------------
Joseph Decosimo


/s/ Lawrence Lucchino           Director                              March 27, 2003
---------------------
Lawrence Lucchino


/s/ Jerome J. Pomerance         Director                              March 28, 2003
---------------------
Jerome J. Pomerance


/s/ Emilio Romano               Director                              March 30, 2003
---------------------
Emilio Romano


/s/ Wilt Hildenbrand            Director                              March 28, 2003
---------------------
Wilt Hildenbrand


                                  Director                            March   , 2003
---------------------
Eduardo Sitt


/s/ Donald P. Garber            Director                              March 31, 2003
---------------------
Donald P. Garber


/s/ Lawrence J. Burian          Director                              March 28, 2003
---------------------
Lawrence J. Burian
</TABLE>


                                       40
<PAGE>
I, David Sitt, Co-Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Princeton Video Image,
Inc.;

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

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

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

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

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

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

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

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

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

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


                Dated: March 28, 2003     /s/ David Sitt
                                        ----------------------------------------
                                        David Sitt
                                        Co-Chief Executive Officer


                                       41
<PAGE>
I, Roberto Sonabend, Co-Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Princeton Video Image,
Inc.;

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

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

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

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

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

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

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

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

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

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


                Dated: March 27, 2003     /s/ Roberto Sonabend
                                        ----------------------------------------
                                        Roberto Sonabend
                                        Co-Chief Executive Officer


                                       42
<PAGE>
I, James Green, Chief Operating Officer and principal financial officer, certify
that:

1. I have reviewed this annual report on Form 10-K of Princeton Video Image,
Inc.;

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

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

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

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

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

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

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

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

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

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


                Dated: March 27, 2003     /s/ James Green
                                        ----------------------------------------
                                        James Green
                                        Chief Operating Officer
                                        (Principal Financial Officer)


                                       43
<PAGE>
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                          <C>
Report of Independent Accountants                                            F-1

Consolidated Balance Sheets as of December 31, 2002
    and 2001                                                                 F-2

Consolidated Statements of Operations for the
   year ended December 31, 2002, the six
   months ended December 31, 2001, and the
   years ended June 30, 2001 and 2000                                        F-3

Consolidated Statements of Cash Flows for the
   year ended December 31, 2002, the six
   months ended December 31, 2001, and the
   years ended June 30, 2001 and 2000                                        F-4

Consolidated Statements of Changes in Stockholders'
  (Deficit)/Equity for the year ended December 31, 2002,
   the six months ended December 31, 2001, and the
   years ended June 30, 2001 and 2000                                        F-5

Notes to Consolidated Financial Statements                                   F-7
</TABLE>
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Princeton Video Image, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' (deficit)/equity present fairly, in all material respects, the
financial position of Princeton Video Image, Inc. and its subsidiaries (the
"Company") at December 31, 2002 and 2001, and the results of its operations and
its cash flows for the year ended December 31, 2002, for the six months ended
December 31, 2001 and for the two years ended June 30, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.


The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring losses
from operations and has not generated sufficient cash flows from operations to
meet its operating and capital requirements, all of which raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

PricewaterhouseCoopers LLP
Florham Park, NJ
March 31, 2003


                                      F-1
<PAGE>
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                       as of
                                                                                            December 31,    December 31,
                                                                                                2002            2001
                                                                                            ------------    ------------
<S>                                                                                         <C>             <C>
ASSETS
Current Assets:
   Cash and cash equivalents                                                                $    937,421    $  8,360,353
   Restricted securities held to maturity                                                         63,476          63,476
   Accounts receivable, net of allowances of $64,694 and $0                                    1,546,547       2,298,897
   License rights                                                                                150,000          50,000
   Prepaid airtime                                                                               653,685       2,713,533
   Prepaid Cablevision discounts                                                               1,037,690              --
   Other current assets                                                                          486,911         887,795
                                                                                            ------------    ------------
              Total current assets                                                             4,875,730      14,374,054
Property and equipment, net                                                                    1,839,388       2,856,733
Patents, net                                                                                     794,996         527,682
Identifiable intangibles, net                                                                  2,328,210       3,024,167
Goodwill                                                                                       3,896,244       5,339,244
Investment in/Advances to Revolution Company LLC                                                      --         567,795
Cablevision deferred revenue credit                                                                   --       4,350,261
Other assets                                                                                     364,611         180,392
                                                                                            ------------    ------------
                   Total assets                                                             $ 14,099,179    $ 31,220,328
                                                                                            ============    ============

LIABILITIES, REDEEMABLE PREFERRED STOCK,
  AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable and accrued expenses                                                    $  5,260,963    $  5,999,393
   Accounts payable to television networks                                                     1,525,984       4,360,372
   Advertising and production advances                                                           202,607              --
   Secured convertible debt                                                                    5,137,427              --
   Notes payable                                                                                 671,300       1,090,608
   Payable to Presencia                                                                          333,789         637,465
   Unearned revenue                                                                              129,549         179,436
                                                                                            ------------    ------------
              Total current liabilities                                                       13,261,619      12,267,274
Refundable Cablevision advance payment                                                         3,627,790              --
Unearned revenue                                                                                      --         184,833
Cablevision advance payments                                                                          --       7,500,000
License obligations                                                                              200,000              --
Other liabilities                                                                                 74,443          42,511
                                                                                            ------------    ------------
              Total liabilities                                                               17,163,852      19,994,618
                                                                                            ------------    ------------
Commitments and contingencies (Notes 4,5,6,8,24)
</TABLE>
           See accompanying notes to Consolidated Financial Statements.

                                   (CONTINUED)
<PAGE>
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED

<TABLE>
<CAPTION>
                                                                                                       as of
                                                                                            December 31,    December 31,
                                                                                                2002            2001
                                                                                            ------------    ------------
<S>                                                                                         <C>             <C>
Redeemable preferred stock:
   Cumulative, Series A, conditionally redeemable, $4.50 par value, authorized, issued
     and outstanding 11,363 shares at December 31, 2002 and 2001;
     redemption value equal to carrying value (par plus all accrued but unpaid dividends)         81,819          78,751
   Cumulative, Series B, conditionally redeemable, $5.00 par value, authorized, issued
     and outstanding 12,834 shares at December 31, 2002 and 2001;
     redemption value equal to carrying value (par plus all accrued but unpaid dividends)         98,813          94,963
                                                                                            ------------    ------------
              Total redeemable preferred stock                                                   180,632         173,714
                                                                                            ------------    ------------
Stockholders' Equity:
   Common stock,  $.001 par value at December 31, 2002 and 2001; authorized
     60,000,000 shares; 18,487,802 and 17,130,865 shares issued and outstanding, net of
     214,040 and 279,366 treasury shares at par December 31, 2002 and 2001, respectively          18,488          17,131
   Additional paid-in capital                                                                 87,330,153      80,488,924
       Deferred compensation                                                                          --         (81,926)
       Other comprehensive income                                                                  9,438          23,542
   Accumulated deficit                                                                       (90,603,384)    (69,395,675)
                                                                                            ------------    ------------
              Total stockholders' equity                                                      (3,245,305)     11,051,996
                                                                                            ------------    ------------
                   Total liabilities, redeemable preferred stock,
                   and stockholders' equity                                                 $ 14,099,179    $ 31,220,328
                                                                                            ============    ============
</TABLE>

          See accompanying notes to Consolidated Financial Statements.


                                      F-2
<PAGE>
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                         For the        For the six
                                                       year ended       months ended           For the years ended
                                                      December 31,      December 31,                 June 30,
                                                      ------------      ------------      ------------------------------
                                                          2002              2001              2001              2000
                                                      ------------      ------------      ------------      ------------
<S>                                                   <C>               <C>               <C>               <C>
Advertising and production revenue                    $ 10,108,170      $  4,558,091      $  2,242,236      $  1,508,664
Royalties and license fees                                 704,200         1,019,474         2,421,441         1,537,235
                                                      ------------      ------------      ------------      ------------
              Total revenue                             10,812,370         5,577,565         4,663,677         3,045,899
Costs and expenses:
   Sales and marketing                                   8,728,018         3,970,482         3,508,917         4,127,494
   Product development                                   3,667,877         1,584,834         2,821,564         2,802,249
   Field operations and support                          4,949,792         3,128,220         5,420,065         5,641,355
   General and administrative                            6,466,416         2,609,060         5,624,064         4,222,364
   Impairment, restructuring and other charges           4,886,513         1,060,832                --                --
                                                      ------------      ------------      ------------      ------------
              Total costs and expenses                  28,698,616        12,353,428        17,374,610        16,793,462
Operating loss                                         (17,886,246)       (6,775,863)      (12,710,933)      (13,747,563)
   Other (expense) income, net                             (31,242)          134,715           (52,444)            1,881
   Interest expense                                     (2,713,727)          (15,547)           (1,504)           (5,069)
   Interest income                                          94,734            74,584           609,264           684,373
   Losses from equity investment                          (578,598)         (176,028)         (114,243)               --
   Loss from securities available for sale                      --          (500,000)               --                --
                                                      ------------      ------------      ------------      ------------
Net loss before tax benefit and minority interest      (21,115,079)       (7,258,139)      (12,269,860)      (13,066,378)
    Tax (expense) benefit, net                             (92,630)          173,269           371,999           596,998
    Minority interest                                           --            94,280           217,298            24,734
                                                      ------------      ------------      ------------      ------------
Net loss                                               (21,207,709)       (6,990,590)      (11,680,563)      (12,444,646)
Accretion of preferred stock dividends                      (6,918)           (3,459)          (11,801)          (44,112)
                                                      ------------      ------------      ------------      ------------
Net loss applicable to common stock                   $(21,214,627)     $ (6,994,049)     $(11,692,364)     $(12,488,758)
                                                      ============      ============      ============      ============

Basic and diluted net loss per share                        ($1.17)           ($0.48)           ($1.09)           ($1.33)
                                                      ============      ============      ============      ============
Weighted average number of shares of
        common stock outstanding                        18,198,455        14,721,155        10,731,634         9,374,317
                                                      ============      ============      ============      ============
</TABLE>

          See accompanying notes to Consolidated Financial Statements.


                                      F-3
<PAGE>
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               For the        For the six
                                                             year ended       months ended          For the years ended
                                                            December 31,      December 31,                June 30,
                                                            ------------      ------------    -------------------------------
                                                                2002              2001             2001              2000
                                                            ------------      ------------     ------------      ------------
<S>                                                         <C>               <C>              <C>               <C>
Cash flows from operating activities:
   Net loss                                                 $(21,207,709)     $(6,990,590)     $(11,680,563)     $(12,444,646)
   Adjustments to reconcile net loss to net cash used
     in operating activities:
        Amortization of unearned revenue                        (473,199)        (121,987)         (327,840)         (548,557)
        Impairment of goodwill and identifiable
          intangibles                                          4,444,876               --                --                --
        Depreciation expense                                   1,371,352          901,277         1,853,991         1,849,189
        Amortization of intangibles/license rights             1,209,357          539,607           718,441         1,512,480
        Amortization of deferred compensation                     81,926           40,963                --                --
        Non-cash charges (credits) associated
        with stock, warrant and option grants                    496,269         (309,087)          508,449           860,862
        Non-cash loss from impairment of securities                   --          500,000                --                --
        Non-cash interest from related party notes                    --               --          (249,301)               --
        Losses from equity investments                           578,598          176,028           114,243                --
        Gain on sale of fixed assets                              (9,327)         (15,746)               --                --
        Non-cash interest expense                              2,318,930               --                --                --
        Non-cash transfer of inventory to Cablevision             73,290               --                --                --
        Provision for doubtful accounts                           79,852               --                --                --
        Minority interest                                             --          (94,280)         (217,298)          (24,734)
      Changes in assets and liabilities (net of effects
        of acquisitions):
             Trade accounts receivable                           616,599       (1,044,551)         (441,584)         (450,677)
             Prepaid airtime                                   1,770,693       (1,971,541)               --                --
             Other current assets                                456,685         (226,419)          (99,990)          (21,471)
             Cablevision deferred revenue credit and
               deferred royalty payment, net                          --        1,786,917         1,362,822                --
             Other assets                                        (77,719)         (59,274)           22,967             2,868
             Accounts payable and accrued expenses              (445,978)         350,596           141,298           (83,494)
             Accounts payable to television networks          (2,359,232)       3,777,419                --                --
             Advertising and production advances                 264,918               --                --                --
             Unearned revenue                                    229,549           12,498           434,102            16,775
             Payable to Presencia                               (294,241)        (847,334)               --                --
             Other liabilities                                    (8,069)           9,477                --            24,307
                                                            ------------      ------------     ------------      ------------
             Net cash used in operating activities           (10,882,580)      (3,586,027)       (7,860,263)       (9,307,098)
                                                            ------------      ------------     ------------      ------------

Cash flows from investing activities:
   Proceeds from held-to-maturity investments                         --               --                --            77,153
   Purchase of securities available for sale                                                                         (500,000)
   Investment in/Advances to Revolution Company LLC              (10,803)          (8,066)         (850,000)               --
   Acquisition costs                                            (349,231)        (231,008)         (608,606)               --
   Purchases of property and equipment                          (323,412)        (388,526)       (1,169,580)       (1,431,352)
   Proceeds from the sale of fixed assets                         68,862           54,225                --                --
   Purchases of license rights                                  (300,000)              --          (700,000)       (1,300,000)
   Increase in patents                                           (56,214)         (35,599)          (86,812)         (135,753)
                                                            ------------      ------------     ------------      ------------
             Net cash used in investing activities              (970,798)        (608,974)       (3,414,998)       (3,289,952)
                                                            ------------      ------------     ------------      ------------
</TABLE>

          See accompanying notes to Consolidated Financial Statements.

                                  (CONTINUED)
<PAGE>
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

<TABLE>
<CAPTION>
                                                               For the        For the six
                                                             year ended       months ended          For the years ended
                                                            December 31,      December 31,                June 30,
                                                            ------------      ------------    -------------------------------
                                                                2002              2001             2001              2000
                                                            ------------      ------------     ------------      ------------
<S>                                                         <C>               <C>              <C>               <C>
Cash flows from financing activities:
   Proceeds from sales of common stock, net                           --        9,280,526         5,480,560         8,310,869
   Proceeds from option exercises                                  5,705               --                --                --
   Proceeds from issuance of convertible debt, net             4,925,000               --                --                --
   Capitalized financing costs                                   (84,596)              --                --                --
   Proceeds from issuance of notes payable                            --          567,278                --                --
   Repayment of notes payable                                   (294,060)              --                --                --
   Cash received from related party notes receivable                  --           30,961            88,386           179,956
                                                            ------------      ------------     ------------      ------------
             Net cash provided by financing activities         4,552,049        9,878,765         5,568,946         8,490,825
                                                            ------------      ------------     ------------      ------------

             Net (decrease) increase in cash and
               cash equivalents                               (7,301,329)       5,683,764        (5,706,315)       (4,106,225)
Foreign exchange impact on cash                                 (121,603)           4,361            (9,605)               --
Cash and cash equivalents at beginning of period               8,360,353        2,672,228         8,388,148        12,494,373
                                                            ------------      ------------     ------------      ------------
Cash and cash equivalents at end of period                  $    937,421      $ 8,360,353      $  2,672,228      $  8,388,148
                                                            ============      ===========      ============      ============

Supplemental cash flow information:
   Additional fair value of warrant and debt issued
      to Cablevision (see note 4)                           $  2,415,283
   Non-cash exchange of iPoint license and equipment
      for reduction of Cablevision advance payments
      net of deferred revenue credit                        $    497,788
   Warrants issued for license agreements                   $    167,729
   Fair value of warrants/stock issued in
      acquisition of SciDel                                 $  3,335,733
   Fair value of warrants/stock issued in
      acquisition of Publicidad                                               $ 5,521,293
   Stock issued for royalty payment                                                            $    196,861      $    332,164
   Capital lease obligations incurred                                                                            $     85,220
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>
Princeton Video Image, Inc.
Consolidated Statements of Changes in Stockholders' (Deficit)/Equity

<TABLE>
<CAPTION>

                                                                                             Common Stock          Additional
                                                                                       Number of                    Paid-In
                                                                                         Shares        Amount       Capital
                                                                                      ----------     --------     ------------
<S>                                                                                   <C>            <C>          <C>
 BALANCE AT JUNE 30, 1999                                                              8,199,379       40,996       51,535,488

 Net Loss
Unrealized gain on securities available for sale

   Comprehensive loss

Issuance of common stock for option and warrant exercises                                 30,318          151           81,567
Issuance of common stock for royalty payments                                             57,144          284          331,880
Issuance of stock at $5.50 per share in connection with private
   equity financing, net of expenses                                                   1,592,727        7,964        8,221,187
Compensation expense associated with the issuance of options for
   consulting services provided by third parties and the Board of Directors                                            449,668

Receipt of payments on notes outstanding
Accretion of preferred stock dividends                                                                                 (44,112)

                                                                                      ----------     --------     ------------
 BALANCE AT JUNE 30, 2000                                                              9,879,568       49,395       60,575,678

 Net Loss
 Foreign currency translation adjustments
 Unrealized loss on securities available for sale

   Comprehensive loss

Issuance of common stock to Cablevision                                                2,007,909       10,040        6,146,911
Costs associated with the Cablevision transaction                                                                   (1,212,142)
Issuance of common stock for option and warrant exercises                                  8,823           45           24,002
Issuance of common stock for royalty payments                                             57,144          286          196,575
Issuance of common stock in exchange for preferred stock                                 167,569          838          876,280
Compensation expense associated with the issuance of options for
   consulting services provided by the Board of Directors                                                                2,500
Receipt of payments on notes outstanding                                                (279,366)      (1,397)      (1,072,402)
Related party note issued in connection with delivery of L-VIS System
  upgrade to licensee

Compensation expense associated with the issuance of repriced
  options to employees and the Board of Directors                                                                      309,087
Accretion of preferred stock dividends                                                                                 (11,801)

                                                                                      ----------     --------     ------------
 BALANCE AT JUNE 30, 2001                                                             11,841,647     $ 59,206     $ 65,834,688

 Net Loss
 Unrealized loss on securities available for sale
 Reversal of unrealized loss on securities held for sale
 Foreign currency translation adjustments

   Comprehensive loss

Issuance of common stock to Cablevision                                                1,992,091        1,992        2,118,741
Costs associated with the Cablevision transaction                                                                     (910,173)
</TABLE>

<TABLE>
<CAPTION>
                                                                                   Related Party                        Other
                                                                                      Notes         Deferred        Comprehensive
                                                                                    Receivable    Compensation      Income (Loss)
                                                                                   -----------    ------------      -------------
<S>                                                                                <C>             <C>               <C>
 BALANCE AT JUNE 30, 1999                                                           (1,153,278)                             --

 Net Loss
Unrealized gain on securities available for sale                                                                       346,167

   Comprehensive loss

Issuance of common stock for option and warrant exercises
Issuance of common stock for royalty payments
Issuance of stock at $5.50 per share in connection with private
   equity financing, net of expenses
Compensation expense associated with the issuance of options for
   consulting services provided by third parties and the Board of Directors

Receipt of payments on notes outstanding                                               179,956
Accretion of preferred stock dividends

                                                                                   -----------     ---------         ---------
 BALANCE AT JUNE 30, 2000                                                             (973,322)                        346,167

 Net Loss
 Foreign currency translation adjustments                                                                              146,497
 Unrealized loss on securities available for sale                                                                     (531,224)

   Comprehensive loss

Issuance of common stock to Cablevision
Costs associated with the Cablevision transaction
Issuance of common stock for option and warrant exercises
Issuance of common stock for royalty payments
Issuance of common stock in exchange for preferred stock
Compensation expense associated with the issuance of options for
   consulting services provided by the Board of Directors
Receipt of payments on notes outstanding                                               933,299
Related party note issued in connection with delivery of L-VIS System
  upgrade to licensee                                                                  (20,414)

Compensation expense associated with the issuance of repriced
  options to employees and the Board of Directors
Accretion of preferred stock dividends

                                                                                   -----------     ---------         ---------
 BALANCE AT JUNE 30, 2001                                                          $   (60,437)                      $ (38,560)

 Net Loss
 Unrealized loss on securities available for sale                                                                     (185,141)
 Reversal of unrealized loss on securities held for sale                                                               370,198
 Foreign currency translation adjustments                                                                             (122,955)

   Comprehensive loss

Issuance of common stock to Cablevision
Costs associated with the Cablevision transaction
</TABLE>

<TABLE>
<CAPTION>
                                                                                                       Total
                                                                                                   Stockholders'
                                                                                   Accumulated        Equity
                                                                                    (Deficit)        (Deficit)
                                                                                 -------------     -------------
<S>                                                                             <C>                <C>
 BALANCE AT JUNE 30, 1999                                                         (38,279,876)       12,143,330

 Net Loss                                                                         (12,444,646)      (12,444,646)
Unrealized gain on securities available for sale                                                        346,167
                                                                                                   ------------
   Comprehensive loss                                                                               (12,098,479)

Issuance of common stock for option and warrant exercises                                                81,718
Issuance of common stock for royalty payments                                                           332,164
Issuance of stock at $5.50 per share in connection with private
   equity financing, net of expenses                                                                  8,229,151
Compensation expense associated with the issuance of options for
   consulting services provided by third parties and the Board of Directors                             449,668

Receipt of payments on notes outstanding                                                                179,956
Accretion of preferred stock dividends                                                                  (44,112)

                                                                                -------------      ------------
 BALANCE AT JUNE 30, 2000                                                         (50,724,522)        9,273,396

 Net Loss                                                                         (11,680,563)      (11,680,563)
 Foreign currency translation adjustments                                                               146,497
 Unrealized loss on securities available for sale                                                      (531,224)
                                                                                                   ------------
   Comprehensive loss                                                                               (12,065,290)

Issuance of common stock to Cablevision                                                               6,156,951
Costs associated with the Cablevision transaction                                                    (1,212,142)
Issuance of common stock for option and warrant exercises                                                24,047
Issuance of common stock for royalty payments                                                           196,861
Issuance of common stock in exchange for preferred stock                                                877,118
Compensation expense associated with the issuance of options for
   consulting services provided by the Board of Directors                                                 2,500
Receipt of payments on notes outstanding                                                               (140,501)
Related party note issued in connection with delivery of L-VIS System
  upgrade to licensee                                                                                   (20,414)

Compensation expense associated with the issuance of repriced
  options to employees and the Board of Directors                                                       309,087
Accretion of preferred stock dividends                                                                  (11,801)

                                                                                -------------      ------------
 BALANCE AT JUNE 30, 2001                                                       $ (62,405,085)     $  3,389,812

 Net Loss                                                                          (6,990,590)       (6,990,590)
 Unrealized loss on securities available for sale                                                      (185,141)
 Reversal of unrealized loss on securities held for sale                                                370,198
 Foreign currency translation adjustments                                                              (122,955)
                                                                                                   ------------
   Comprehensive loss                                                                                (6,928,488)

Issuance of common stock to Cablevision                                                               2,120,733
Costs associated with the Cablevision transaction                                                      (910,173)
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>
<TABLE>
<CAPTION>

                                                                                             Common Stock          Additional
                                                                                       Number of                    Paid-In
                                                                                         Shares        Amount       Capital
                                                                                      ----------     --------     ------------
<S>                                                                                   <C>            <C>          <C>
Issuance of warrants in connection with the Cablevision transaction                                                  6,064,609
Issuance of common stock for the acquisition of Publicidad                             2,678,353        2,678        4,063,062
Issuance of vested warrants in connection with the acquisition of Publicidad                                         1,455,553
Issuance of unvested warrants in connection with the acquisition of Publicidad                                         122,889
Issuance of common stock to Presencia en Medios, S.A. de C.V.                            615,385          615        1,999,386
Issuance of common stock for stock option exercises                                        3,389           16            5,339

Amortization of deferred compensation
Receipt of payments on notes outstanding

Compensation expense reversal associated with the issuance of repriced
  options to employees and the Board of Directors                                                                     (309,087)
Change in common stock from $.005 stated value to $.001 par value                                     (47,376)          47,376
Accretion of preferred stock dividends                                                                                  (3,459)

                                                                                      ----------     --------     ------------
 BALANCE AT DECEMBER 31, 2001                                                         17,130,865     $ 17,131     $ 80,488,924

 Net Loss
 Foreign currency translation adjustments

   Comprehensive loss

Issuance of common stock for the acquisition of SciDel                                 1,288,000        1,288        2,558,888
Issuance of warrants for the acquisition of SciDel                                                                     775,557
Issuance of common stock for stock option exercises                                        3,611            4            5,701
Adjustment to Cablevision warrants in connection with financing transaction                                          2,780,607
Issuance of warrants for license agreements                                                                            167,729

Amortization of deferred compensation

Issuance of common stock in connection with company 401(k) match                          65,326           65          231,125
Compensation expense associated with the issuance of options for
   consulting services provided by third parties and the Board of Directors                                            195,296
Compensation expense associated with the extension of options
   to departing and severed officers and employees                                                                     133,244
Accretion of preferred stock dividends                                                                                  (6,918)

                                                                                      ----------     --------     ------------
 BALANCE AT DECEMBER 31, 2002                                                         18,487,802     $ 18,488     $ 87,330,153
                                                                                      ==========     ========     ============
</TABLE>

<TABLE>
<CAPTION>

                                                                                    Related Party                        Other
                                                                                       Notes         Deferred        Comprehensive
                                                                                     Receivable    Compensation      Income (Loss)
                                                                                    -----------    ------------      -------------
<S>                                                                                 <C>             <C>               <C>
Issuance of warrants in connection with the Cablevision transaction
Issuance of common stock for the acquisition of Publicidad
Issuance of vested warrants in connection with the acquisition of Publicidad
Issuance of unvested warrants in connection with the acquisition of Publicidad                       (122,889)
Issuance of common stock to Presencia en Medios, S.A. de C.V
Issuance of common stock for stock option exercises

Amortization of deferred compensation                                                                  40,963
Receipt of payments on notes outstanding                                                 60,437

Compensation expense reversal associated with the issuance of repriced
  options to employees and the Board of Directors
Change in common stock from $.005 stated value to $.001 par value
Accretion of preferred stock dividends

                                                                                    -----------     ---------         ---------
 BALANCE AT DECEMBER 31, 2001                                                       $        --     $ (81,926)        $  23,542

 Net Loss
 Foreign currency translation adjustments                                                                               (14,104)

   Comprehensive loss

Issuance of common stock for the acquisition of SciDel
Issuance of warrants for the acquisition of SciDel
Issuance of common stock for stock option exercises
Adjustment to Cablevision warrants in connection with financing transaction
Issuance of warrants for license agreements

Amortization of deferred compensation                                                                  81,926

Issuance of common stock in connection with company 401(k) match
Compensation expense associated with the issuance of options for
   consulting services provided by third parties and the Board of Directors
Compensation expense associated with the extension of options
   to departing and severed officers and employees
Accretion of preferred stock dividends

                                                                                    -----------     ---------         ---------
 BALANCE AT DECEMBER 31, 2002                                                       $        --     $      --         $   9,438
                                                                                    ===========     =========         =========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                           Total
                                                                                                       Stockholders'
                                                                                       Accumulated        Equity
                                                                                        (Deficit)        (Deficit)
                                                                                     -------------     -------------
<S>                                                                                 <C>                <C>
Issuance of warrants in connection with the Cablevision transaction                                       6,064,609
Issuance of common stock for the acquisition of Publicidad                                                4,065,740
Issuance of vested warrants in connection with the acquisition of Publicidad                              1,455,553
Issuance of unvested warrants in connection with the acquisition of Publicidad                                   --
Issuance of common stock to Presencia en Medios, S.A. de C.V                                              2,000,001
Issuance of common stock for stock option exercises                                                           5,355

Amortization of deferred compensation                                                                        40,963
Receipt of payments on notes outstanding                                                                     60,437

Compensation expense reversal associated with the issuance of repriced
  options to employees and the Board of Directors                                                          (309,087)
Change in common stock from $.005 stated value to $.001 par value
Accretion of preferred stock dividends                                                                       (3,459)

                                                                                    -------------      ------------
 BALANCE AT DECEMBER 31, 2001                                                       $ (69,395,675)     $ 11,051,996

 Net Loss                                                                             (21,207,709)      (21,207,709)
 Foreign currency translation adjustments                                                                   (14,104)
                                                                                                       ------------
   Comprehensive loss                                                                                   (21,221,813)

Issuance of common stock for the acquisition of SciDel                                                    2,560,176
Issuance of warrants for the acquisition of SciDel                                                          775,557
Issuance of common stock for stock option exercises                                                           5,705
Adjustment to Cablevision warrants in connection with financing transaction                               2,780,607
Issuance of warrants for license agreements                                                                 167,729

Amortization of deferred compensation                                                                        81,926

Issuance of common stock in connection with company 401(k) match                                            231,190
Compensation expense associated with the issuance of options for
   consulting services provided by third parties and the Board of Directors                                 195,296
Compensation expense associated with the extension of options
   to departing and severed officers and employees                                                          133,244
Accretion of preferred stock dividends                                                                       (6,918)

                                                                                    -------------      ------------
 BALANCE AT DECEMBER 31, 2002                                                       $ (90,603,384)     $ (3,245,305)
                                                                                    =============      ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>
                           PRINCETON VIDEO IMAGE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Princeton Video Image, Inc. ("PVI") is a developer of virtual image technology
that enables the insertion of computer-generated images into live or
pre-recorded video broadcasts. Through its patented computer vision technology,
Live Video Insertion System ("L-VIS(R)"), PVI has provided virtual
advertisements and programming enhancements for thousands of telecasts
worldwide. The L-VIS(R) advanced software and hardware platform incorporates
virtual images, ranging from corporate logos to sophisticated three-dimensional
animated video, into both live and pre-recorded broadcasts.

In the United States, PVI is in the process of migrating its technology from
camera-based systems, which are more expensive to build and operate, to less
expensive and easier to integrate "vision"-based technology, where the L-VIS(R)
platform resides downstream in the broadcast studio. Camera systems utilize
information from a broadcast camera in order to insert an image into a video
stream, which requires the costly enterprise of trucking equipment and crews to
the event. This migration is expected to substantially reduce PVI's costs and
expenses in the US. In Mexico, which is PVI's largest market, 100% of the
revenue is generated by downstream, vision-based systems.

In collaboration with Cablevision, PVI has developed iPoint(TM). iPoint(TM)
takes half of PVI's L-VIS(R) system and puts it in a set-top-box. This enables
in-program broadcast advertising to be targeted to individual homes with
customized video feeds delivered via cable, satellite, or online transmission.

PVI's sales and marketing strategy is focused on enhancing the company's current
relationships with its key constituents, which include rights holders,
syndicators, leading advertising agencies, sports leagues, and prominent
corporate sponsors, through a process of educating key decision-makers on the
inherent value of the company's offering. Accordingly, management emphasizes a
program of substantial personalized interaction between the company's sales,
marketing, product development, and engineering teams and those organizations
that will either adopt PVI's technology or influence the decision makers.

PVI's marketing approach is to demonstrate that virtual advertising can create
incremental advertising inventory for broadcasters, which they can use to
generate incremental ad revenues. PVI then participates in the new revenue
stream created by virtual advertising as opposed to being a source of additional
production cost.

We market our services on a worldwide basis through licensing and royalty
agreements, and through our wholly owned subsidiaries Publicidad Virtual, S.A.
de C.V. ("Publicidad") headquartered in Mexico City, Mexico and, Princeton Video
Image Israel, Ltd. ("PVI Israel") headquartered in Ra'ananna, Israel.

LIQUIDITY

The consolidated financial statements of PVI have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. We have incurred net losses of approximately $21.2 million, $7.0
million, $11.7 million, and $12.4 million for the year ended December 31, 2002,
for the six months ended December 31, 2001, and the years ended June 30, 2001,
and 2000, respectively. Our actual working capital requirements will depend on
numerous factors, including the progress of our product development programs,
our ability to maintain our customer base and attract new customers to use the
L-VIS(R) System, the level of resources we are able to allocate to the
development of greater marketing and sales capabilities, technological advances,
our ability to protect our patent portfolio and the status of our competitors.
We expect to incur costs and expenses in excess of expected revenues during the
ensuing fiscal year as we continue to execute our business strategy of becoming
a global, media services company by adding to our sales and marketing management
force both domestically and internationally, and to strengthen existing
relationships with rights holders, broadcasters and advertisers.


                                      F-7
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The factors noted in the above paragraph raise substantial doubt concerning our
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should we be unable to continue as a going concern. Our ability to
continue as a going concern is dependent upon the support of our shareholders
and creditors, and our ability to close debt or equity transactions to raise
cash. In the event we are unable to liquidate our liabilities, our operations
may be scaled back or discontinued. Additional funding may not be available when
needed or on terms acceptable to us, which could have a material adverse effect
on our business, financial condition and results of operations. If adequate
funds are not available we may delay or eliminate some expenditures, discontinue
or liquidate operations in the U.S. or international markets or significantly
downsize our sales, marketing, research and development and administrative
functions. These activities could impact our ability to expand our business or
meet our operating needs and may also cause PVI to file for bankruptcy
protection as a means to effectively deal with its creditors. In such event the
value of current shareholder equity may be severely impaired or lost. In
addition, we currently have outstanding three secured convertible promissory
notes in the aggregate principal amount of $6,500,000 (the "Secured Notes"),
pursuant to the Note Purchase and Security Agreement with Presencia en Medios,
S.A. de C.V. ("Presencia") and PVI Holding LLC, a subsidiary of Cablevision
Systems Corporation  ("Cablevision"). The Secured Notes were issued in
connection with the amendment to the Note Purchase and Security Agreement on
March 20, 2003 (See Note 28 of our Notes to the Consolidated Financial
Statements - Subsequent Events). The Secured Notes mature on July 31, 2003 and
are secured by a security interest in all of our assets in favor of Presencia
and Cablevision. Presencia and Cablevision have the right to extend the maturity
of the Secured Notes for up to two years. In the event that either Presencia or
Cablevision choose not to extend the maturity date of the Secured notes held by
them and we are not able to obtain additional funding, we will not be able to
repay the debt under the Secured Notes. This could result in a default and the
exercise of their right as a secured debtor by either Presencia or Cablevision.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties. Our management is in the process of seeking
additional financing through a variety of options including bridge loans or
equity financing with existing shareholders, financial institutions or strategic
investors. There is no assurance, however, that any such transactions will
provide sufficient resources to repay the Secured Notes or support us until we
generate sufficient cash flow to fund our operations. In such event, PVI may not
be able to continue as a going concern and may have to file for bankruptcy
protection as a means to effectively deal with its creditors. In such event the
value of current shareholder equity may be severely impaired or lost.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CHANGE IN FISCAL YEAR

In 2001, we changed our fiscal year from June 30 to December 31, effective with
the six months ended December 31, 2001. For comparative purposes, the following
is a presentation of our statement of operations for the years ended December
31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                                    For the years ended
                                                                        December 31,
                                                                   2002              2001
                                                               ------------      ------------
                                                                                  (unaudited)
<S>                                                            <C>               <C>
      Advertising and production revenue                       $ 10,108,170      $  5,440,830
      Royalties and license fees                                    704,200         2,199,604
                                                               ------------      ------------
                                  Total revenue                  10,812,370         7,640,434
      Costs and expenses:
         Sales and marketing                                      8,728,018         5,773,031
         Product development                                      3,667,877         3,008,883
         Field operations and support                             4,949,792         5,662,634
         General and administrative                               6,466,416         5,400,768
         Impairment, restructuring  and other charges             4,886,513         1,060,832
                                                               ------------      ------------
                                  Total costs and expenses       28,698,616        20,906,148
      Operating loss                                            (17,886,246)      (13,265,714)
         Other (expense) income, net                                (31,242)          106,211
         Interest expense                                        (2,713,727)          (44,818)
         Interest income                                             94,734           450,268
         Losses from equity investment                             (578,598)         (290,271)
         Loss from securities available for sale                         --          (500,000)
                                                               ------------      ------------
      Net loss before tax benefit and minority interest         (21,115,079)      (13,544,324)
          Tax (expense) benefit, net                                (92,630)          173,269
          Minority interest                                              --           241,932
                                                               ------------      ------------
      Net loss                                                  (21,207,709)      (13,129,123)
      Accretion of preferred stock dividends                         (6,918)           (6,919)
                                                               ------------      ------------
      Net loss applicable to common stock                      $(21,214,627)     $(13,136,042)
                                                               ============      ============
</TABLE>


                                      F-8
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

BASIS OF CONSOLIDATION

Our consolidated financial statements include all controlled subsidiaries. Our
investment in 25% of the units of Revolution Company LLC is accounted for using
the equity method. All significant intercompany balances and transactions have
been eliminated.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of petty cash on hand, checking accounts,
money market funds, and all highly liquid investments purchased with a maturity
of three months or less.

RESTRICTED SECURITIES HELD TO MATURITY

We have invested in U.S. Treasury Notes, which, at the time of purchase, had a
maturity greater than three months but less than one year and were restricted as
to use under the terms of an existing letter of credit. We intend to hold these
debt instruments to maturity and, accordingly, have classified them as
marketable securities held to maturity at their amortized cost basis.

MARKETABLE SECURITIES

Certain marketable securities have been categorized as available for sale and,
as a result, are stated at fair value in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Unrealized gains and losses are included in
shareholders' equity as other comprehensive income (loss). Declines in value,
which are deemed to be other than temporary, are recognized in the statement of
operations.

PREPAID AIRTIME

Prepaid Airtime represents advance payments to broadcasters for rights to
television airtime and is amortized as it is used, to sales and marketing
expense. It is common practice that unused airtime in a specific period,
considering the corresponding agreements, could be used in future events.
Management believes that all amounts related to unused airtime are fully
recoverable during the ensuing fiscal year.

LICENSE RIGHTS

License rights are amortized over the shorter of the license term or the
estimated useful life of the rights granted and are reviewed for impairment
whenever events or circumstances occur which indicates recorded cost might not
be recoverable.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets. The estimated useful lives of the
L-VIS(R) Systems and their components are three years, office and research and
development equipment and software is five years, and furniture and fixtures is
seven years. When assets are retired or otherwise disposed of, the cost and
related depreciation are removed from the accounts and any related gains or
losses are included in the statement of operations in the year of disposal.
Expenditures for leasehold improvements are capitalized and depreciated over the
shorter of the term of the underlying lease or the useful life.


                                      F-9
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

INTANGIBLE ASSETS

Intangible assets are recorded at cost and amortized using the straight-line
method over appropriate periods.

Legal costs and filing fees incurred to apply for patents are capitalized and
amortized over an estimated useful life of 7 years.

Identifiable intangible assets include customer relationships, distribution
relationships, trademarks and tradenames, and software technology acquired in
the Publicidad and SciDel acquisitions and are being amortized over their
estimated useful lives of 4, 5, 3, and 10 years, respectively.

Goodwill is the excess of the purchase price over the fair value of net assets
acquired in business combinations accounted for under the purchase method.

The provisions of SFAS 142 require that a transitional impairment test be
performed as of the beginning of the year the statement is adopted. We adopted
this statement in September 2001 with the acquisition of Publicidad. SFAS No.
142 also requires that goodwill and other intangibles determined to have an
indefinite life are no longer to be amortized into results of operations, but
instead are reviewed for impairment at least annually and an impairment charge
is recorded in the periods in which the recorded carrying value of goodwill and
certain intangibles is more than its estimated fair value. For the six months
ended December 31, 2001, there was no impairment of goodwill. The annual
impairment test of goodwill was performed at the end of the Company's fiscal
year of December 31, 2002 and it indicated that there was an impairment of
goodwill (see Note 6 of our Notes to the Consolidated Financial Statements).

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", all long-lived assets held and used by us and amortizing
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. If the cash flows are less than
the carrying amount, an impairment loss would be recognized for the difference
between the estimated fair value and the carrying value.

INCOME TAXES

We account for income taxes by recognizing deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the years in which the differences are expected to reverse.
We record a valuation allowance to reflect the estimated amount of deferred tax
assets, which, more likely than not, will not be realized.

REVENUE

Royalty fee revenue relates to the fee received when our licensees have royalty
agreements pursuant to which we earn revenues from their use of our technology.
The minimum amounts are recorded when earned in accordance with the contract
terms. Amounts in excess of the minimum are recorded when the conditions for
earning the royalties in excess of the minimums are met.

Non-refundable license fees are recognized as revenue over the license term,
commencing when all commitments are satisfied. Additionally, under the terms of
certain agreements, we retain title to the L-VIS(R) System and receive a
non-refundable equipment fee, which reflects reimbursement for the construction
cost of the system delivered to the licensee. These equipment fees are recorded
as license revenue on a straight-line basis over the shorter of the license term
or useful life of the equipment.

Advertising revenue is recognized when earned, which is when the respective
advertisements are inserted into a television broadcast.

Production revenue is earned from fees paid by broadcasters for static and
animated visual enhancements of sporting and other events. This type of revenue
is recognized when earned, which is when the enhancement is inserted into a live
or pre-recorded television broadcast.

PRODUCT DEVELOPMENT COSTS


                                      F-10
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Product development costs are expensed as incurred. Included are costs
associated with all personnel, materials and contract personnel engaged in
research and development activities to increase the capabilities of the L-VIS(R)
system hardware platforms, including platforms for overseas use, and to create
improved software programs for individual sports and program enhancement
services as well as for the internet and interactive television.

PROFORMA STOCK COMPENSATION

We apply the provisions of Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for our stock-based compensation plans. Accordingly, no compensation
has been recognized in the financial statements with respect to options and
warrants issued with an exercise price at or above the fair market value of the
stock on the grant date. Had compensation costs for such options and warrants
been determined based on the fair value approach promulgated by SFAS No. 123
"Accounting for Stock Based Compensation", our net loss applicable to Common
Stock would have been as follows:

<TABLE>
<CAPTION>
                                        For the            For the six
                                      year ended          months ended              For the year ended
                                     December 31,         December 31,                    June 30,
                                         2002                 2001                2001                2000
                                  ------------------    ----------------       -----------         -----------
<S>                               <C>                   <C>                  <C>                 <C>
Net loss applicable to
  common stock                       $(21,214,627)        $ (6,994,049)        (11,692,364)        (12,488,758)
SFAS 123 Compensation expense             950,178            1,276,650           2,253,115           2,855,846
                                     ------------         ------------         ------------        ------------
Proforma net loss applicable to      $(22,164,805)        $ (8,270,699)        $(13,945,479)       $(15,344,604)
  common stock                       ============         ============         ============        ============

Proforma net loss per share          $      (1.22)        $      (0.56)        $     (1.30)        $     (1.64)
                                     ============         ============         ============         ============
</TABLE>

The proforma compensation expense of $950,178, $1,276,650, $2,253,115 and
$2,855,846 for the year ended December 31, 2002, the six months ended December
31, 2001, and the fiscal years ended June 30, 2001 and 2000, respectively, was
calculated on the fair value of each option using the minimum value method for
those options issued prior to October 17, 1997 (the date of initial filing with
the SEC) and using the Black-Scholes method for those options issued on October
17, 1997 and later. The following weighted average assumptions were used in the
calculations:

<TABLE>
<CAPTION>
                                     December 31,                June 30,
                                  2002         2001         2001         2000
                               ----------   ----------   ----------   ----------
<S>                            <C>          <C>          <C>          <C>
Risk free interest rate             2.48%        4.72%        4.97%        6.28%
Expected option lives          4.24 years   5.71 years   6.09 years   6.33 years
Expected volatility                106.7%       113.0%       113.0%        70.0%
</TABLE>

PER SHARE DATA

SFAS No. 128 requires the presentation of basic and diluted per share amounts.
Basic per share amounts are computed by dividing net loss applicable to common
stock by the weighted average number of common shares outstanding during the
period. Diluted per share amounts are computed by dividing net loss applicable
to common stock by the weighted average number of common shares outstanding plus
the dilutive effect of common share equivalents.

Since we incurred net losses for all periods presented, both basic and diluted
per share calculations are the same. Accordingly, options and warrants to
purchase 21,113,508, 18,505,424, 4,199,479, and


                                      F-11
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3,722,487 shares of common stock that were outstanding at December 31, 2002 and
2001, and at June 30, 2001 and 2000, respectively, were not included in diluted
per share calculations, as their effect would be antidilutive. In addition, the
accretion of preferred dividends, which could be paid out in common stock, was
not material for the four periods presented.

FOREIGN CURRENCY TRANSLATION

For all foreign operations, the functional currency is the local currency.
Financial statements are translated using the current rate method, whereby
assets and liabilities are translated at year-end exchange rates and revenues
and expenses at average exchange rates for the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in other comprehensive income, a component of shareholders' equity.
Gains and losses from foreign currency transactions are included in results of
operations.

RECLASSIFICATIONS

To conform to the December 31, 2002 presentation we reclassified certain amounts
for previous years.

RISKS AND UNCERTAINTIES

We are subject to a number of risks common to companies in similar stages of
operations including, but not limited to, the lack of assurance of the
marketability of our product, intense competition, including entry of new
competitors and products into the market, the risk of technological
obsolescence, and the need to raise additional funds to support our business
operations.

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 dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Estimates are used for, but
not limited to, the accounting for: the future recoverability of the L-VIS(R)
System costs, impairment of intangibles, depreciation and amortization and
accrued expenses.

3. NEW PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections,"
effective for fiscal years beginning after May 15, 2002. SFAS No. 145 eliminates
the requirement that gains and losses from the extinguishment of debt be
aggregated and classified as an extraordinary item, net of tax, and makes
certain other technical corrections. SFAS No. 145 will not have a material
effect on our Consolidated Financial Statements.

On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". This statement addresses the recognition, measurement and reporting
of costs that are associated with exit and disposal activities. This statement
includes the restructuring activities that are currently accounted for pursuant
to the guidance set forth in Emerging Issues Task Force (EITF) 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to exit an
Activity (including Certain Costs Incurred in a Restructuring)", costs related
to terminating a contract that is not a capital lease and one-time benefit
arrangements received by employees who are involuntarily terminated. This
statement is effective for exit or disposal activities initiated after December
31, 2002 with earlier application encouraged. Previously issued financial
statements will not be restated. The provisions of EITF 94-3 shall continue to
apply for exit plans initiated prior to the adoption of SFAS No. 146. We will
adopt SFAS No. 146 for restructuring beginning after January 1, 2003.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure -- an amendment of FASB Statement No.
123." This standard provides alternate methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation and requires more prominent disclosure about the method used. This
statement is effective for fiscal years ending after December 15, 2002. For PVI,
this means it is effective for the year ended December 31, 2002. Currently PVI
applies the disclosure only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and we do not expense our stock options. The adoption
of


                                      F-12
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

the disclosure provisions of SFAS No. 148 did not have an impact on PVI's
results of operations, and financial position.

In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the separation and
allocation of consideration for arrangements that include multiple deliverables.
The EITF requires that when the deliverables included in this type of
arrangement meet certain criteria they should be accounted for separately as
separate units of accounting. This may result in a difference in the timing of
revenue recognition but will not result in a change in the total amount of
revenue recognized in a bundled sales arrangement. The allocation of revenue to
the separate deliverables is based on the relative fair value of each item. If
the fair value is not available for the delivered items then the residual method
must be used. This method requires that the amount allocated to the undelivered
items in the arrangement is their full fair value. This would result in the
discount, if any, being allocated to the delivered items. This consensus is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003, which, for PVI, is July 1, 2003. PVI is currently
evaluating the impact of this consensus on its results of operations, financial
position and cash flows.

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that an entity issuing a
guarantee (including those embedded in a purchase or sales agreement) must
recognize, at the inception of the guarantee, a liability equal to the fair
value of the guarantee. The recording of this liability is not dependent on the
probability that the payments will be required. The offset to the liability will
depend on the circumstances under which the guarantee was issued, but could
include; cash/accounts receivable if it is a stand alone transaction, net
proceeds in a sales transaction, or expense if no compensation is received. FIN
45 also requires detailed information about each guarantee or group of
guarantees even if the likelihood of making a payment is remote. The disclosure
requirements of this interpretation are effective for financial statements of
periods ending after December 15, 2002, which makes them effective for PVI for
the year ended December 31, 2002. The recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. We do not believe that FIN 45 will have a
material impact on the future results of our operations, financial position or
cash flows.

4. CABLEVISION

In February 2001, we entered into a stock and warrant purchase agreement (the
"Stock and Warrant Purchase Agreement") with PVI Holding, LLC ("PVI Holding") a
wholly owned subsidiary of Cablevision. The transaction contemplated by the
stock and warrant purchase agreement (the "Cablevision Transaction") was
completed in two parts. The first closing under the agreement was held in
February 2001, and PVI Holding purchased 2,007,909 shares of our common stock
for approximately $5 million. At the second closing, held in September 2001, PVI
Holding purchased an additional 1,992,091 shares of our common stock and
warrants to purchase 11,471,908 shares of our common stock for an aggregate
purchase price of approximately $5 million. In addition, 500,000 warrants were
issued to Presencia as part of the second closing. If we issue securities in the
future, PVI Holding will have the preemptive right to purchase sufficient shares
of our common stock to maintain its percentage of ownership as of the date of
issuance of the shares. For so long as PVI Holding beneficially owns at least
75% of its original investment, it has the right to designate one director to
our Board.

In connection with the Cablevision Transaction, PVI and Cablevision executed a
license agreement granting Cablevision and its affiliates the right to use our
L-VIS(R) System and related proprietary rights in its businesses. Under the
terms of the agreement, we received advance payments of $2.5 million and $5.0
million in February and September 2001, respectively. These advance payments are
creditable against the royalties and other payments due to PVI under the license
agreement and under the joint collaboration and license agreement described
below (the "Cablevision Agreements"). The license agreement provides that we
will receive royalties based on Cablevision's revenues from use of the L-VIS(R)
System, an equipment fee equal to our direct costs of manufacturing each
L-VIS(R) System we provide under the license, and enhancement fees for
electronic insertions for which Cablevision does not receive revenues based on
our direct costs of providing such insertions. If PVI terminates the license for
any reason, the unused portion of the advance payments and the undepreciated
value of the equipment are refundable to Cablevision.

We allocated the amounts received from the Cablevision Transaction and the
advance payments under the license agreement between common stock, warrants and
advance payments in proportion to their relative fair value. The fair value of
the warrants was determined using a Black-Scholes calculation. Based on this
methodology, we allocated $6.1 million and $2.1 million to common stock and
additional paid-in-capital for the first and second closings, respectively, and
$6.1 million to additional paid-in-capital for the issuance of warrants in the
second closing. The fair value assigned to the advance payments


                                      F-13

<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

received at the first and second closings was $1.4 million and $1.8 million,
respectively. In order to reflect the refundable advance payments at the maximum
amount refundable, a total of $7.5 million was recorded as advance payments and
$4.4 million was recorded as deferred revenue credits, which was to be amortized
as a reduction in revenue earned under the Cablevision Agreement.

Also in connection with the Cablevision Transaction, we entered into a joint
collaboration and license agreement with Cablevision, pursuant to which we will
be working together to develop technology to promote interactive use of, and
targeted advertising in, video delivery systems at various points in the
distribution system. In furtherance of the agreement, PVI and Cablevision are
cross-licensing to each other, on a non-exclusive basis, our current
technologies for use in the development phase of the project. For products and
technology developed under the agreement and which relate to interactive and
enhancement products specifically for use with television distribution,
Cablevision will pay us a royalty based on related revenues. We received a
license to use, commercialize and sub-license and Cablevision received a license
to use any technology and products developed under the joint collaboration and
license agreement.

Revenues of $19,737 and $-0- were recognized under the Cablevision Agreements in
2002 and the six months ended December 31, 2001, respectively.

On June 25, 2002, PVI entered into a Note Purchase and Security Agreement (the
"Note Purchase Agreement") with PVI Holding. Pursuant to the Note Purchase
Agreement, in consideration of $5,000,000 in cash PVI issued to PVI Holding a
$5,000,000 secured convertible note, which bears interest at 10% per annum and
matures on March 31, 2003 (the "Note"). The Note is secured by all of PVI's
assets. The holder may convert the Note into PVI's common stock at any time
prior to maturity at a price of $2.50 per share. If, prior to the maturity date,
PVI sells shares of its common stock resulting in aggregate cash proceeds of at
least $10.0 million, PVI may convert the note into shares of its common stock at
a price of $2.50 per share or, if such common stock is sold for an aggregate
weighted average price of less than $1.00 per share, at such weighted average
price. Pursuant to the Note Purchase Agreement, PVI also amended the warrants
that the Company issued to PVI Holding on September 20, 2001. The amendment
entitles PVI Holding to purchase 12,794,207 shares of PVI's common stock for a
purchase price of $7.00 per share at any time prior to June 25, 2006, and
contains anti-dilution provisions that require an adjustment to the number of
shares underlying the warrants and/or the exercise price upon the occurrence of
certain events.

Concurrent with the issuance of the Note, PVI granted Cablevision certain other
rights, including the following:

a) The conversion of a license for iPoint(TM) granted pursuant to the Joint
Collaboration and License Agreement to a fully paid up, non-exclusive,
perpetual, royalty free license, and sale of two L-VIS(R) units to Cablevision,
in consideration for an aggregate $3.8 million reduction in the balance of the
$7.5 million Cablevision advance payment, described above.

b) The L-VIS(R) License Agreement was amended to reduce charges for certain
services, and to provide, among other amendments, that PVI would be obligated to
refund any unused portion of the Cablevision advance payment if Cablevision
doesn't purchase products and services or generate royalty payments in the
following amounts by the following dates:

      -     The unused portion of $1 million must be refunded if unused by June
            30,2004

      -     The unused portion of $2.5 million must be refunded if unused by
            June 30, 2005

      -     The entire unused balance must be refunded if unused by January 1,
            2006


                                      F-14
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

c) PVI also granted Cablevision the option to purchase from PVI a sole,
exclusive, perpetual, fully paid up, royalty free US license for all of PVI's
technology at the appraised fair market value if PVI is unable to raise $10.0
million in the form of equity financing and/or certain other non-refundable cash
funding by March 31, 2003. If the option is exercised, we will only be able to
use or commercialize our technology outside of the US, unless we obtain a US
license from Cablevision.

Concurrent with the issuance of the Note, Publicidad and Presencia en Medios,
S.A. de C.V. ("Presencia"), an equity holder in PVI, also amended an existing
consulting services agreement (see Note 27 of our Notes to the Consolidated
Financial Statements), pursuant to which Presencia provides consulting services
to Publicidad and receives compensation in the form of a contingent service fee
and a commission override fee. Such fees are based upon a percentage of
Publicidad's operating margins, as defined in the agreement. The amendment
simplifies the formula for calculation of the payments to Presencia, and gives
Publicidad the option, under certain circumstances described in the amendment,
of paying the contingent service fee in PVI common stock.

We have recorded the issuance of convertible debt and the warrant modifications
at their estimated fair values of $4.6 million (net of issuance costs of $200
thousand) and $2.8 million, respectively. The fair value of the warrant
modifications, which was credited to additional paid-in capital, was determined
based on the difference in the Black-Scholes value of the warrants immediately
before and after the modifications. In accordance with Emerging Issues Task
Force Issue 01-09 "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)" the excess of the values
assigned to the convertible debt and warrant modifications ($2.4 million) over
the net proceeds received from Cablevision ($5.0 million) has been recorded as a
prepaid discount to Cablevision.

As part of the June 25, 2002 modifications to our License Agreement with
Cablevision, we transferred to Cablevision a fully paid, royalty free, perpetual
license of our iPoint(TM) technology and inventory with an agreed upon combined
value of $3.8 million, and reduced the Cablevision advance payments balance from
$7.5 million to $3.6 million. We also agreed to repay the remaining balance of
the advance payments in the event that Cablevision does not meet the purchase
levels described above. A net charge of $497,788 resulting from the
elimination of the deferred revenue credit of $4.3 million and reduction in the
advance payments balance of $3.8 million has also been recorded as a prepaid
discount to Cablevision.

The prepaid discount to Cablevision is being recognized as a dollar-for-dollar
reduction in revenues from Cablevision; however, to the extent that
straight-line amortization over the nine-month period to maturity of the
convertible debt exceeds the amount recognized as a revenue reduction in any
quarter, such excess will be recorded currently as interest expense. For the
year ended December 31, 2002, $2,578,131 was recognized as interest expense for
amortization of the discount, fair value accretion, and stated interest.

5. ACQUISITIONS OF BUSINESSES

PUBLICIDAD ACQUISITION

In December 2000, we entered into a reorganization agreement (the
"Reorganization Agreement") with Presencia en Medios S.A. de C.V. ("Presencia")
and certain of its affiliates, which agreement was later amended on February 4,
2001. On September 20, 2001 we completed the transaction contemplated by the
Reorganization Agreement (the "Presencia Transaction"), whereby Presencia and
its affiliates sold their shares of Publicidad to us and our wholly owned
subsidiary, Princeton Video Image Latin America, LLC ("PVI Latin America"), and
Publicidad became our wholly-owned subsidiary. The acquisition, which was a
stock-for-stock transaction, was recorded using the purchase method of
accounting. The total purchase price of Publicidad was $6.5 million and
consisted of the following costs to PVI:


                                      F-15
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<S>                                                                    <C>
      Shares of PVI stock exchanged for Publicidad stock                 2,678,353
      PVI average stock price a few days before and
        after the Acquisition was agreed to                            $     1.518
      Value of PVI stock issued for the acquisition                      4,065,740
      Fair value of vested warrants issued for the acquisition           1,455,553
      Acquisition costs                                                    979,299
                                                                       -----------
          Total Purchase Price                                         $ 6,500,592
                                                                       ===========
</TABLE>

The final allocation of the purchase price to the acquired assets and assumed
liabilities of Publicidad based on a fair value appraisal of the assets and
liabilities and acquisition costs is as follows:

<TABLE>
<S>                                                                    <C>
      Net book value of Publicidad after adjustments to eliminate
         balances and activities between entities                      $(2,038,652)
      Fair value adjustments:
         Customer relationships - 4 year life                            1,000,000
         Distribution relationships - 5 year life                        2,100,000
         Trademarks and tradenames - 3 year life                           100,000
         Goodwill - indefinite life                                      5,339,244
                                                                       -----------
                                                                       $ 6,500,592
                                                                       ===========
</TABLE>

Other than the fair value adjustments displayed in the table above, the net book
value of Publicidad's assets and liabilities at the date of acquisition
approximates fair value.

The purchase of Publicidad has been recorded with an effective date of September
30, 2001. The impact of results from September 20, 2001 through September 30,
2001 was immaterial and therefore not included in our consolidated results.

For the year ended December 31, 2002 and the six months ended December 31, 2001,
amortization expense of the intangible assets identified as part of the
Publicidad Virtual acquisition was $703,332 and $175,833, respectively.


                                      F-16
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SCIDEL ACQUISITION

On February 27, 2002, we entered into an asset purchase agreement with SciDel
Technologies, Ltd., an Israeli corporation, and its subsidiary, SciDel USA Ltd
(collectively, "SciDel"). On March 26, 2002, we completed the transaction,
whereby Adco Imaging Ltd. ("Adco"), a newly created Israeli wholly owned
subsidiary of PVI, obtained certain assets and liabilities of SciDel. In April
2002, Adco changed its name to Princeton Video Image Israel, Ltd. ("PVI
Israel"). SciDel, which had been engaged in the development and marketing of a
system that enables television broadcasters and the Internet to integrate
advertisements into live and pre-recorded televised sports events, sold certain
of its assets to us and we intend to continue to use the assets for this same
purpose. PVI's primary reasons for acquiring these assets included the value of
SciDel's patent portfolio, its sales relationships, including existing contracts
in Europe, and the know-how of the R&D personnel we retained. The acquisition,
which was a stock-for-assets transaction, was recorded using the purchase method
of accounting. The total purchase price of SciDel was approximately $3.7 million
and consisted of the following:

<TABLE>
<S>                                                <C>
Shares of PVI stock                                 1,288,000
PVI average stock price three days before
  and after the acquisition was agreed to          $     1.99
Value of PVI stock issued for the acquisition      $2,560,176
Fair value of warrants issued as
  part of the acquisition (670,500)                   775,557

Acquisition costs                                     349,231
                                                   ----------
                Total purchase price               $3,684,964
                                                   ==========
</TABLE>

The warrants are exercisable at $9.00 per share and have an expiration date five
years from the date of acquisition. The fair value of the warrants was
determined using a Black-Scholes calculation based on the following assumptions
in addition to the exercise price and exercise period:

<TABLE>
<S>                                 <C>
Stock price at time of grant:       $1.85
Risk-Free Interest rate:            4.285%
Volatility                          113%
</TABLE>

The final allocation of the purchase price to the acquired assets and assumed
liabilities of SciDel based on a fair value appraisal of the assets and
liabilities and acquisition costs is as follows:

<TABLE>
<S>                                                          <C>
Net book value of purchased SciDel assets & liabilities      $  146,088
Fair value adjustments:
     Patents - 10 year life                                     760,000
     Software Technology - 10 year life                       1,130,000
     Customer Relationships - 4 year life                       250,000
     Goodwill - indefinite life                               1,398,876
                                                             ----------
Total purchase price                                         $3,684,964
                                                             ==========
</TABLE>

The purchase of SciDel has been recorded with an effective date of March 26,
2002, and thus is included in operations from then forward.

For the year ended December 31, 2002, amortization expense of the intangible
assets identified as part of the SciDel acquisition was $188,625.

The following is a proforma summary of the results of operations as if the
acquisitions of SciDel and Publicidad had been completed on July 1, 2000:

<TABLE>
<CAPTION>
                                                 For the year ended          For the six months             For the year
                                                       ended                       ended                       ended
                                                 December 31, 2002           December 31, 2001             June 30, 2001
                                                 -----------------           -----------------             -------------
<S>                                              <C>                         <C>                           <C>
Revenues                                           $ 10,910,370                $  7,043,000                $ 11,939,000
Net Loss                                            (21,699,589)                 (9,795,000)                (22,108,000)
Net Loss Applicable to Common Stock                 (21,706,507)                 (9,798,000)                (22,120,000)
Basic and diluted net loss per share
   applicable to common stock                      $      (1.18)               $      (0.57)               $      (1.50)
Weighted average number of shares
   of common stock outstanding                       18,466,788                  17,125,136                  14,697,987
</TABLE>


                                      F-17
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES

In 2002 and 2001, we recorded $4,886,513 and $1,060,832, respectively, as an
expense to impairment, restructuring and other charges. The charges are
comprised of impairments of goodwill and certain identifiable intangible assets,
severance, and other charges.

IMPAIRMENT

For the year ended December 31, 2002, we realized $4,444,876 of asset
impairments, which was comprised of goodwill impairments of $2,841,876 and
identifiable intangible asset impairments of $1,603,000.

The Company evaluates the recoverability and measures the potential impairment
of its goodwill under SFAS 142. The impairment test is a two-step process that
begins with the estimation of the fair value of the reporting units. The Company
performed its evaluation of goodwill in two reporting units, (i) Publicidad
Virtual S.A. de C.V. ("PV"), and (ii) consolidated Princeton Video Image Israel,
Ltd., Princeton Video Image, Inc., and Princeton Video Image Europe, N.V.
(collectively "PVI Other"). The first step screens for potential impairment and
the second step measures the amount of the impairment, if any. As part of the
first step to assess potential impairment, management compared the carrying
equity value for each reporting unit to its net present value based on
management's forecast of future cash flows. Key assumptions management used to
determine the net present value of the reporting units' forecasted cash flows
include, a) revenue with compounded annual growth rates of 6.8% for PV and 90.0%
for PVI Other, b) a royalty payment of approximately 10% of gross revenues from
PV to PVI Other for use of PVI Other technology, and c) discount rates of 22%
for PV and 50% for PVI Other. The high growth rate of PVI Other reflects
management's estimates of future contracts and contains a high degree of
uncertainty, therefore, the resulting cash flows were discounted at a rate of
50%. Since the carrying value of equity in both units were greater than the
estimated net present value, the Company then proceeded to the second step to
measure the impairment. The second step compares the implied fair value of
goodwill with its carrying value. The implied fair value is determined by
allocating the fair value of the reporting units to all of the assets and
liabilities of that unit as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit was the purchase
price paid to acquire the reporting unit. The excess of the fair value of the
reporting unit over the amounts assigned to its assets and liabilities is the
implied fair value of goodwill. Since the carrying amount of the reporting
units' goodwill was greater than its implied fair value, an impairment loss was
recognized in both reporting units. As a result, the company wrote down the
goodwill in both reporting units. In the PV reporting unit, the write down was
$1.4 million of the $5.3 million related goodwill balance, and in the PVI Other
reporting unit, the entire goodwill balance of $1.4 million was written off.

Effective January 1, 2002, the Company evaluates the possible impairment of its
long-lived assets, including intangible assets which are amortized pursuant to
the provisions of SFAS 142, under SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). The Company reviewed the
recoverability of its intangible assets concurrently with its review of SFAS
142. Evaluation of possible impairment was based on the Company's ability to
recover the asset from the expected future cash flows of the related operations.
Since the expected cash flows were less that the carrying amount of the assets,
an impairment loss was recognized for the difference between the estimated fair
value and book value of the asset. The evaluation of the company's intangible
assets in accordance with SFAS 144 resulted in an impairment loss in both
reporting units. In the PV reporting unit, write downs of $175,000 for the
intangible asset Customer Relationships and $533,000 for the intangible asset
Distribution were recorded. In PVI Other, write downs of $362,000 for the
intangible asset Patents and $533,000 for the intangible asset Software
Technology were recorded.

Common valuation practices require the use of certain estimates and assumptions.
While we believe that the estimates and assumptions made in our valuations for
both SFAS 142 and SFAS 144 are reasonable and appropriate for our Company,
changes to the estimates and assumptions could significantly change the outcome
of the analysis. Management believes its estimation methods are reasonable and
reflective of common valuation practices.

RESTRUCTURING AND OTHER CHARGES

As a result of the streamlining of our operations in Belgium, Brazil, Israel and
the United States we incurred expenses equaling $441,637 and $1,060,832 for the
year ended December 31, 2002 and the six months ended December 2001,
respectively. During the year ended December 31, 2002, a total of nine, six,
eight and twenty-four positions were eliminated in our European, Brazilian,
Israeli and domestic offices, respectively, representing 100%, 100%, 57% and
approximately 35% of the total workforce in the respective regions. In
connection with the eliminated positions, we recorded an expense to impairment,
restructuring and other charges of $817,177 and $980,983 for the year ended
December 31, 2002 and the six months ended December 31, 2001, respectively. In
addition, we recorded an expense to impairment, restructuring and other charges
of $148,248 and $79,849 for the year ended December 31, 2002 and the six months
ended December 31, 2001, respectively, as a result of the closing of the Belgian
office.

On October 23, 2002, we reached an agreement with a former executive of the
company, whereby the terms of the severance package were renegotiated. In
accordance with the settlement, the cash obligation was reduced and an option to
purchase of 250,000 shares of PVI Common Stock was granted. The option was fully
vested upon the execution of the agreement, is exercisable for a period of four
years at an exercise price of $1.00 per share, and has a Black-Scholes value of
$95,625. The net result is a $523,788 adjustment to the severance accrual as of
December 31, 2002.

The following table displays the activity and balances of the restructuring
reserve account from December 1, 2001 to December 31, 2002:

<TABLE>
<CAPTION>
                                                   Type of Cost
                                  -----------------------------------------------
                                    Employee         Facility          Asset
                                  Separations        Closings        Impairments          Total
                                  ----------------------------------------------------------------
<S>                               <C>               <C>              <C>               <C>
Additions                          $ 980,983        $  79,849        $        --       $ 1,060,832
Deductions                                --             (870)                --              (870)
                                   ---------------------------------------------------------------
Balance at December 31, 2001         980,983           78,979                 --         1,059,962
Additions                            817,177          148,248          4,444,876         5,410,301
Adjustments                         (523,788)              --                 --          (523,788)
Deductions                          (878,776)        (187,566)        (4,444,876)       (5,511,218)
                                   ---------------------------------------------------------------
Balance at December 31, 2002       $ 395,596        $  39,661        $        --       $   435,257
                                   ===============================================================
</TABLE>

The balance as of December 31, 2002 will be paid out during the fiscal year
ending December 31, 2003.

7. MARKETABLE SECURITIES

On June 8, 2000, the company purchased 1,692,333 shares of Pineapplehead Limited
common stock. During the six months ended December 31, 2001, it was determined
that there had been a decline in value, which was not temporary in nature.
Accordingly, a $500,000 realized loss was recognized in the statement of
operations.

8. LICENSE RIGHTS

On July 25, 2002, we entered into an agreement with NFL International, a
division of NFL Enterprises, L.P., retroactively effective to February 4, 2002.
Under the terms of the agreement, we were granted exclusive rights to use
electronic insertion technology in certain NFL International broadcasts of


                                      F-18
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NFLI/NFLEL games during the 2002, 2003, and 2004 seasons and non-U.S. telecasts
of Super Bowl XXXVII, XXXVIII, and XXXIX. This agreement extended a previous
agreement we had with NFL International, which lasted one year and ended with
Super Bowl XXXVI. We recorded an intangible asset and a corresponding liability
on our balance sheet for the acquisition of the license rights under both
agreements. These rights are amortized on a straight line basis and payments are
made according to a pre-determined payment schedule set forth in the agreement.
For the year ended December 31, 2002, for the six months ended December 31,
2001, and for the years ended June 30, 2001 and 2000, the amortization expense
with respect to these rights totaled $187,500, $300,000, $600,000 and
$1,416,669, respectively. A total of $300,000, $-0-, $700,000 and $1,300,000 in
cash payments were made during the year ended December 31, 2002, the six months
ended December 31, 2001, and the years ended June 30, 2001 and 2000,
respectively. The remaining balance payable was $950,000, of which $750,000 is
current, at December 31, 2002 and $800,000, of which the entire balance was
current, at December 31, 2001 and June 30, 2001.

9. PREPAID AIRTIME

Publicidad has obtained the rights to the virtual airtime of two television
networks in Mexico, Televisa, S.A. de C.V. ("Televisa") and TV Azteca, S.A. de
C.V. ("TV Azteca"). Prepaid airtime is recorded as an asset and amortized as it
is used, which is when ads are broadcast over the air. Management believes that
all amounts related to unused airtime are fully recoverable during the current
fiscal year. The unused airtime as of December 31, 2002 and 2001 was as follows:

<TABLE>
<CAPTION>
                                       December 31,
                                   2002          2001
                                 --------     ----------
<S>                              <C>          <C>
      Televisa, S.A. de C.V      $653,685     $2,277,290
      TV Azteca, S.A. de C.V           --        436,243
                                 --------     ----------
           Prepaid airtime       $653,685     $2,713,533
                                 ========     ==========
</TABLE>

10. OTHER CURRENT ASSETS

Other current assets consisted of the following:

<TABLE>
<CAPTION>
                                             December 31,
                                          2002         2001
                                        --------     --------
<S>                                     <C>          <C>
      Prepaid insurance                 $244,847     $111,330
      Prepaid license fees                    --       23,679
      Prepaid and recoverable taxes       90,405      532,521
      Other assets                       151,659      220,265
                                        --------     --------
           Other current assets         $486,911     $887,795
                                        ========     ========
</TABLE>


                                      F-19
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. PROPERTY AND EQUIPMENT

The costs and accumulated depreciation of property and equipment are summarized
as follows:

<TABLE>
<CAPTION>
                                                                     December 31,
                                                                2002              2001
                                                            ------------      ------------
<S>                                                         <C>               <C>
      Furniture and fixtures                                $    324,959      $    312,691
      Leasehold improvements                                     174,134           148,727
      Office equipment                                         2,588,320         2,951,311
      Production Systems, rack components & spare parts        6,303,334         6,204,107
      Research and development equipment and software            572,017           569,751
      Vehicles                                                   498,681           500,035
                                                            ------------      ------------
           Total property and equipment                       10,461,445        10,686,622
      Less: accumulated depreciation                          (8,622,057)       (7,829,889)
                                                            ------------      ------------
           Property and equipment, net                      $  1,839,388      $  2,856,733
                                                            ============      ============
</TABLE>

Depreciation expense related to property and equipment amounted to $1,371,352,
$901,277, $1,853,991 and $1,849,189 for the year ended December 31, 2002, the
six months ended December 31, 2001 and for the years ended June 30, 2001 and
2000, respectively.

12. INTANGIBLE ASSETS

The costs and accumulated amortization of our patents and pending applications,
and other identifiable intangible assets are summarized as follows:

<TABLE>
<CAPTION>
                                                     December 31,
                                                 2002             2001
                                             -----------      -----------
<S>                                          <C>              <C>
      Patents                                $ 1,431,231      $   977,017
      Less: accumulated amortization            (636,235)        (449,335)
                                             -----------      -----------
           Patents, net                      $   794,996      $   527,682
                                             ===========      ===========

      Identifiable Intangibles:
        Customer relationships               $ 1,075,000      $ 1,000,000
        Distribution relationships             1,567,000        2,100,000
        Trademarks                               100,000          100,000
        Software Technology                      597,000               --
      Less: accumulated amortization          (1,010,790)        (175,833)
                                             -----------      -----------
           Identifiable Intangibles, net     $ 2,328,210      $ 3,024,167
                                             ===========      ===========
</TABLE>

Amortization expense related to the intangible assets amounted to $1,021,857,
$239,607, $118,567 and $95,813 for the year ended December 31, 2002, the six
months ended December 31, 2001 and for the years ended June 30, 2001 and 2000,
respectively.

As part of the Company's annual SFAS 142 and 144 impairment analyses, we
incurred a charge of $4,444,876 to impairment, restructuring and other charges
in the year ended December 31, 2002 (see Note 6 of our Notes to the
Consolidated Financial Statements).

The expected amortization expense for the next five years is as follows:

<Table>
<Caption>
                                                    Expected Amortization Expense
                                  2003       2004        2005         2006       2007       Total
                             ----------------------------------------------------------------------
<S>                          <C>         <C>         <C>         <C>         <C>         <C>
Customer Relationships       $  248,865  $  248,865  $  202,274  $   15,625  $       --  $  715,630
Distribution Relationships      277,867     277,867     277,867     208,400          --   1,042,000
Trademarks                       33,331      24,999          --          --          --      58,330
Software Technology              55,378      55,378      55,378      55,378      55,378     276,892
                             ----------------------------------------------------------------------
     Total expected
       amortization expense  $  615,442  $  607,109  $  535,519  $  279,403  $   55,378  $2,092,852
                             ======================================================================
</Table>

13. INVESTMENTS

On January 24, 2001, we entered into an operating agreement with CBS Technology
Corporation and Core Digital Technologies, Inc. to form Revolution Company, LLC.
The purpose of the Revolution Company is to develop, market and render
entertainment technical production services such as EyeVision, a technology able
to produce three-dimensional replays from multi-camera angles, which


                                      F-20
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

made its debut in Super Bowl XXXV. Under the terms of the operating agreement,
the percentage ownership interests of the parties is as follows:

<TABLE>
<S>                                                       <C>
            Princeton Video Image, Inc. .............     25%
            Core Digital Technologies, Inc. .........     35%
            CBS Technology Corporation ..............     40%
</TABLE>

Our initial contribution to the joint venture was $850,000. The structure of
this investment was for $25,000 to be considered as an equity contribution with
the remaining $825,000 to be a secured loan to the joint venture. We use the
equity method to account for our investment in the Revolution Company and,
accordingly, during the six months ended December 31, 2001 and the year ended
June 30, 2001 recorded our share of the losses in the amounts of $176,028 and
$114,243, respectively. As of December 31, 2002, the Board concluded that the
carrying amount of the investment is not recoverable from its undiscounted cash
flows from Revolution Company, LLC, and as such, the remaining investment
balance of $578,598 was written off.

14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

<TABLE>
<CAPTION>
                                            December 31,
                                        2002           2001
                                     ----------     ----------
<S>                                  <C>            <C>
      Accounts payable               $3,417,501     $4,665,797
      License fees and royalties      1,549,134        812,463
      Legal and accounting fees         219,404        441,050
      Other                              74,924         80,083
                                     ----------     ----------
      Accounts payable and
        accrued expenses             $5,260,963     $5,999,393
                                     ==========     ==========
</TABLE>

15. ACCOUNTS PAYABLE TO TELEVISION NETWORKS

Accounts payable to television networks at December 31, 2002 and 2001 consisted
of the following:

<TABLE>
<CAPTION>
                                                          December 31,
                                                      2002           2001
                                                   ----------     ----------
<S>                                                <C>            <C>
      Televisa, S.A. de C.V                        $1,086,691     $2,944,641
      TV Azteca, S.A. de C.V                          324,212        583,257
      Epesa, S.A. de C.V                              115,081        832,474
                                                   ----------     ----------
           Television network accounts payable     $1,525,984     $4,360,372
                                                   ==========     ==========
</TABLE>

16. ADVERTISING AND PRODUCTION ADVANCES

Advertising and production advances arise from prepayments by and contractual
advance billings to advertisers for the use of future virtual airtime. These
advances are reduced as airtime is used for virtual insertions.


                                      F-21
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. PAYABLE TO PRESENCIA

As a result of the merger with Publicidad, Publicidad entered into a consulting
services agreement with Presencia (see Note 27 of our Notes to the Consolidated
Financial Statements) through December 31, 2004. Pursuant to the agreement,
Presencia will render consulting services to Publicidad and receive compensation
in the form of a contingent service fee and a commission override fee. The
consulting services include guidance, advice and assistance in the development
of Publicidad's existing and prospective customers and the development and
maintenance of relationships with third parties to accomplish Publicidad's
business objectives. In addition, under the terms of a letter agreement in
consideration of the Reorganization Agreement and the transactions contemplated,
Publicidad was obligated to pay Presencia 2,000,000 Mexican Pesos plus 15% VAT
(approximately $255,000). The balance payable to Presencia under these
agreements was $333,789 and $637,465, on December 31, 2002 and December 31,
2001, respectively.

18. NOTES PAYABLE

In 2001, Publicidad obtained a short-term loan, denominated in Mexican pesos,
from a Mexican bank which was payable in May 2002. The note, which is guaranteed
by Presencia, bears an interest rate of 10.9%. Proceeds from the loan were used
to fund the installment payments due to Televisa and TV Azteca (see Note 15 of
our Notes to the Consolidated Financial Statements). On June 13, 2002,
Publicidad signed a promissory note to restructure the loan whereby Publicidad
will pay 1,000,000 Mexican pesos (approximately $100,000) per month for ten
months, starting October 7, 2002. The note is guaranteed by Presencia (see Note
27 of our Notes to the Consolidated Financial Statements) and matures on July 7,
2003. Monthly interest is payable at the end of each period at a variable rate
based on the interbank rate in Mexico plus three points (11.535% at December 31,
2002). The balance of the notes payable at December 31, 2002 and 2001 was
$671,300 and $1,090,608, respectively.

19. GUARANTEE OF PERFORMANCE BOND

In May 2002, PVI executed a guarantee of a performance bond purchased by
Publicidad. The performance bond guarantees advertisers who prepay Publicidad
that, if the advertiser fails to receive virtual advertising services in the
full amount of the advertiser's prepayment, the unused balance will be refunded.
As of December 31, 2002, the unused balance protected by the performance bond
was $6,505, which is included as a portion of the advertising and production
advances on the balance sheet.

20. LICENSE AND ROYALTY FEES

Under the terms of certain customer agreements, we retain title to the L-VIS(R)
System and receive a non-refundable fee, which reflects the construction cost of
the L-VIS(R) system delivered to the licensee. These fees are recorded as
license revenue on a straight-line basis over the shorter of the license term or
the useful life of the equipment. Recognition of license revenue related to
these agreements amounted to $473,199, $138,930, $227,840 and $548,557 for the
year ended December 31, 2002, the six months ended December 31, 2001 and the
years ended June 30, 2001 and 2000, respectively. The remaining unearned revenue
related to these agreements was $55,000 at December 31, 2002, all of which was
current, $364,269 at December 31, 2001, of which $179,436 was current, and
$1,030,114 at June 30, 2001, of which $418,304 was current. Included in the
balances at June 30, 2001 was $556,357 related to equipment being used by
Publicidad. This unamortized balance was reflected as a reduction in the
purchase price of Publicidad at the date of acquisition.


                                      F-22
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21. INCOME TAXES

The components of income tax (expense) benefit are as follows:

<TABLE>
<CAPTION>
                              For the      For the six
                            year ended     months ended     For the year ended
                           December 31,    December 31,          June 30,
                              2002            2001           2001        2000
                           ------------    ------------   ----------  ----------
<S>                          <C>            <C>           <C>         <C>
      Current:
        Foreign              $ (92,630)     $(145,318)    $       --   $      --
        Federal                     --             --             --          --
        State                       --        318,587        371,999     596,998
      Deferred:
        Foreign                     --             --            --           --
        Federal                     --             --            --           --
        State                       --             --            --           --
                             ---------      ---------     ---------    ---------

      Income tax (expense)
        benefit              $ (92,630)     $ 173,269     $ 371,999    $ 596,998
                             =========      =========     =========    =========
</TABLE>

The $92,630 and $145,318 in foreign taxes for the year ended December 31, 2002
and the six months ended December 31, 2001, respectively, are primarily due to
withholding tax on accrued intercompany royalties payable to PVI.

Temporary differences that give rise to significant deferred tax assets and
liabilities at December 31, 2002 and 2001, are as follows:

<TABLE>
<CAPTION>
                                                            December 31,
                                                       2002              2001
                                                   ------------      ------------
<S>                                                <C>               <C>
      Deferred tax assets:
        Capitalized start-up costs                 $    455,208      $     18,731
        Fixed assets                                    302,495           379,103
        Deferred revenue and other                    1,182,051         1,194,763
        Equity investment                               504,659           340,566
        Accrued expenses                                552,593           249,252
        State taxes                                   1,041,094           188,116
        Other                                           210,324            55,803
        NOL Carryforward - Foreign                    1,657,530         3,384,640
        NOL Carryforward - Federal                   18,542,253        16,204,319
        Valuation allowance - Foreign                (1,826,171)       (2,867,926)
        Valuation allowance - Federal               (20,362,171)      (16,872,766)
        Valuation allowance - State                  (1,041,094)         (188,116)
                                                   ------------      ------------
                Total deferred tax assets             1,218,771         2,086,485

      Deferred tax liabilities:
        Prepaid expenses                                168,657           816,137
        Intangibles                                   1,050,114         1,270,348
                                                   ------------      ------------
                Total deferred tax liabilities        1,218,771         2,086,485

                Net deferred taxes                 $         --      $         --
                                                   ============      ============
</TABLE>


                                      F-23
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Due to the uncertainty of the realization of the deferred tax assets, a full
valuation allowance has been provided. As a result of our reincorporation as a
Delaware corporation in connection with the Cablevision transaction, our state
net operating loss carryforwards as of September 2001, expired unutilized.
Therefore, our deferred state tax asset and corresponding valuation allowance
have been reduced to reflect the expiration of the state net operating loss
carryforwards.

The difference between the statutory U.S. federal income tax rate and our
effective tax rate for the year ended December 31, 2002 and the six months ended
December 31, 2001 is primarily due to the state tax benefit recognized upon the
sale of our unused state net operating losses and research and development tax
credits, foreign withholding taxes and the change in our valuation allowance.

As of December 31, 2002, we had net operating loss carryforwards for U.S.
federal income tax purposes of approximately $54,530,000, which expire in the
years 2006 through 2022. The timing and manner in which the U.S. net operating
loss carryforwards may be utilized in any year by us will be limited by Internal
Revenue Code Section 382. As of December 31, 2002, we had foreign net operating
loss carryforwards of approximately $4,843,000, which primarily expire in the
years 2006 through 2011.

In July 2000 and 2001, we filed applications with the New Jersey Economic
Development Authority ("NJEDA") to sell a portion of our unused state Net
Operating Loss ("NOL") carryover and unused Research and Development ("R&D") Tax
credits for a minimum of 75% of the value of the tax benefits. Under the terms
of this NJEDA program, developed in 1999, we are required to use the proceeds of
the sale for the purchase of fixed assets, working capital and any other
expenses determined by the NJEDA to be in conformity with the NJ Emerging
Technology and Biotechnology Financial Assistance Act. The final determination
of the amount we received was subject to adjustment by the State of New Jersey
based on the amount of the total applications received. In December 2001, 2000
and 1999, we sold $397,611, $495,998 and $795,997 of our total $1,636,483,
$1,668,792 and 1,812,019 of state tax benefit of unused state NOL and R&D tax
credits and received $333,993, $371,999 and $596,998, respectively. These
amounts were recognized as income tax benefits in the quarters ended December
31, 2001, 2000 and 1999, respectively.

22. COMMON AND PREFERRED STOCK

COMMON STOCK

Pursuant to our Certificate of Incorporation, we are prohibited from paying any
dividends on our Common Stock until all accumulated dividends in respect of the
Series A Preferred Stock and Series B Preferred Stock have been paid.

On July 1, 1999, we implemented a Company match under our 401(k) retirement plan
(the "Plan") whereby we agreed to match employee contributions with our common
stock at the rate of 50% of the amount an employee contributes, up to 5% of
salary. The contribution of stock is calculated on a monthly basis and matching
contributions vest over three years. We recorded an accrued expense of $92,062,
$46,371, $87,089 and $68,782 and reserved 112,172, 16,458, 22,878 and 10,992
shares of common stock to participants for the year ended December 31, 2002, the
six months ended December 31, 2001 and the years ended June 30, 2001 and 2000,
respectively. On May 10, 2002, we issued 65,326 shares of common stock in
connection with the Company match to the employee 401(k) retirement plan. At
December 31, 2002, 143,994 of the contributed shares were fully vested.

In connection with the SciDel acquisition as described in Note 5 of our Notes to
the Consolidated Financial Statements, on March 26, 2002, we issued 1,288,000
shares of common stock.


                                      F-24
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On March 20, 2002, we issued 3,611 shares of common stock in connection with the
exercise of a stock option.

PREFERRED STOCK

We are authorized to issue up to 1,000,000 shares of the preferred stock in one
or more series. Our Board of Directors is authorized to fix the relative rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, terms of redemption, redemption prices,
liquidation preferences, the number of shares constituting any series and the
designation of such series. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of our
Series A Preferred Stock, Series B Preferred Stock and Common Stock, including
the loss of voting control. Other than the shares of Series A Preferred Stock
and Series B Preferred Stock, there are no shares of preferred stock currently
issued and outstanding. As of September 13, 2001, PVI was reincorporated as a
Delaware corporation in conjunction with the Cablevision transaction. As a
Delaware corporation, we are authorized to issue a total of 1,000,000 shares of
preferred stock in one or more series of which 11,363 and 12,834 shares of the
Series A and Series B Preferred stock, respectively, have been issued and are
outstanding. The Board of Directors is authorized to fix the relative rights,
preferences, privileges and restrictions of the remaining 975,803 issued shares
of preferred stock.

Series A Preferred Stock

At December 31, 2002 we had issued a total of 67,600 shares of Series A
Redeemable Preferred Stock with a par value of $4.50 per share, of which 11,363
were outstanding. Dividends shall be paid either in cash or with our common
stock at a six percent per annum dividend rate. We have the right at any time
after the date of original issuance of the Series A Preferred Stock to redeem
the Series A Preferred Stock in whole or in part at a price of $4.50 per share
plus all accrued but unpaid dividends. We are required to redeem this preferred
stock in cash at par plus all accrued but unpaid dividends from thirty percent
of the amount by which our annual net income after taxes exceeds $5,000,000.

Dividends on the shares of Series A Preferred Stock are cumulative and must be
paid in the event of liquidation and before any distribution to holders of
common stock. Cumulative dividends in arrears at December 31, 2002 and 2001
totalled $30,686 (or $2.70 per share) and $27,618 (or $2.43 per share),
respectively.

The Series A Preferred Stock has no liquidation preference, no conversion rights
and no registration rights.

Series B Preferred Stock

At December 31, 2002 we had issued a total of 86,041 shares of Series B
Redeemable Preferred Stock with a par value of $5.00 per share, of which 12,834
shares were outstanding. Dividends shall be paid either in cash or with our
common stock at a six percent per annum dividend rate. We have the right at any
time after the date of original issuance of the Series B Preferred Stock, but
subject to the prior redemption of all of the Series A Preferred Stock, to
redeem the Series B Preferred Stock in whole or in part at a price of $5.00 per
share plus all accrued but unpaid dividends. We are required, subject to the
prior redemption of all of the Series A Preferred Stock, to redeem this
preferred stock in cash at par plus all accrued but unpaid dividends from twenty
percent of the amount by which our annual net income after taxes in any year
exceeds $5,000,000.

Dividends on the shares of Series B Preferred Stock are cumulative and must be
paid in the event of liquidation and before any distribution to holders of
common stock. No dividends may be paid with


                                      F-25
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

respect to this stock until all cumulative dividends in respect of Series A
Preferred Stock have been paid. Cumulative dividends in arrears at December 31,
2002 and 2001 totaled $34,643 (or $2.70 per share) and $30,793 (or $2.40 per
share), respectively.

The Series B Preferred Stock has no liquidation preference, no conversion rights
and no registration rights.

On July 13, 2000, we offered all shareholders of the Series A Preferred stock
and Series B Preferred stock the opportunity to exchange their shares of
preferred stock for shares of our common stock. Under the terms of the exchange,
the preferred shares were exchanged for a number of common shares equal to the
par value of the preferred plus accrued but unpaid dividends, divided by the
average of the closing sales price of the common stock as quoted on the NASDAQ
National Market for the ten (10) business days immediately preceding the closing
date of the transaction. The holders of the Series A preferred stock and the
Series B preferred stock that elected to exchange their shares received 1.2494
shares and 1.3296 shares of common stock, respectively, for each share of the
applicable series of preferred stock exchanged. The transaction closed on August
17, 2000. Of the 67,600 shares of Series A Preferred, which were outstanding at
the date of the offer, 56,237 shares were exchanged for 70,256 shares of common
stock. Of the 86,041 shares of Series B Preferred, which were outstanding at the
date of the offer, 73,207 shares were exchanged for 97,313 shares of common
stock.

Changes in the preferred stock accounts were as follows:

<TABLE>
<CAPTION>
                                            Series A                       Series B
                                          No. of Shares       Amount      No. of Shares       Amount            Total
                                          -------------     ---------     -------------     ---------        -----------
<S>                                       <C>               <C>           <C>               <C>              <C>
Balance at June 30, 1999                      67,600          421,700         86,041          569,955            991,655
Accretion of preferred stock dividends                         18,250                          25,862             44,112
                                             -------        ---------        -------        ---------        -----------
Balance at June 30, 2000                      67,600          439,950         86,041          595,817          1,035,767
Exchange of preferred stock
   for common stock                          (56,237)        (367,792)       (73,207)        (509,521)          (877,313)
Accretion of preferred stock dividends                          5,059                           6,742             11,801
                                             -------        ---------        -------        ---------        -----------
Balance at June 30, 2001                      11,363        $  77,217         12,834        $  93,038        $   170,255
Accretion of preferred stock dividends                          1,534                           1,925              3,459
                                             -------        ---------        -------        ---------        -----------
Balance at December 31, 2001                  11,363        $  78,751         12,834        $  94,963        $   173,714
Accretion of preferred stock dividends                          3,068                           3,850              6,918
                                             -------        ---------        -------        ---------        -----------
Balance at December 31, 2002                  11,363        $  81,819         12,834        $  98,813        $   180,632
                                             =======        =========        =======        =========        ===========
</TABLE>

23. WARRANTS AND OPTIONS

WARRANTS We had outstanding a total of 16,749,187, 14,943,376, 1,307,130 and
1,307,130 warrants to purchase common stock at December 31, 2002 and 2001, June
30, 2001 and 2000, respectively. The exercise prices range from $2.31 to $20.00
per share and the expiration of such warrants range from 2003 to 2007. The
following is a description of warrant activity for the year ended December 31,
2002, the six months ended December 31, 2001, and the fiscal years ended June
30, 2001 and 2000.

In October 1997, we issued warrants with a five year term to purchase 300,000
shares of common stock at an exercise price of $0.01 per share in connection
with a Bridge Financing. As of June 30, 2000, all of


                                      F-26
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

these warrants had been exercised, with 10,000 and 15,700 being exercised during
the fiscal years ended June 30, 1999 and 2000, respectively.

In connection with services rendered on our behalf with respect to a private
equity offering completed in October 1999, we issued warrants to purchase
200,000 shares of common stock at an exercise price of $6.05 to a financial
advisor.

In connection with the Reorganization Agreement we entered into with Presencia
and others as described in Note 5 of our Notes to the Consolidated Financial
Statements, a warrant to purchase 100,000 shares of our common stock was issued
to Allen & Co. as consideration for their issuance of a fairness opinion in
connection with this transaction. The warrant was issued with an exercise price
of $2.3065 and has an expiration date of December 20, 2005. The value of this
warrant was calculated using the Black-Scholes method and a charge of $100,762
was recorded as part of the acquisition. A second warrant to purchase 100,000
shares of common stock was issued to Allen & Co. on September 20, 2001, upon the
consummation of the transaction contemplated by the Reorganization Agreement.
This warrant, issued as consideration for financial advisory services provided
by Allen & Co. in connection with the Cablevision transaction, was issued with
an exercise price of $3.91 per share and is exercisable for five years. The
value of this warrant was calculated using the Black-Scholes method and a charge
of $235,078 was recorded. as an increase in additional paid in capital for the
issuance of the warrants and a corresponding decrease in additional paid in
capital as a cost of the transaction resulting in no net effect to the financial
statements.

In connection with the acquisition of Publicidad, as described in Note 5 of our
Notes to the Consolidated Financial Statements, on September 20, 2001 we issued
to Presencia and its affiliate Presence en Media LLC ("Presence") warrants to
purchase an aggregate of 1,036,825 shares of our common stock, as consideration
for Presencia and its affiliates selling to us and our wholly owned subsidiary,
PVI Latin America, all of their shares of Publicidad. The warrants issued in
this transaction were divided into eleven separate groups, and they expire at
various times, depending on the group, from December 16, 2002 to January 1,
2007, and have, again dependent upon the group, an exercise price which ranges
from $3.72 to $20.00 per share. 959,086 of these warrants were vested and were
included as part of the purchase price, while 77,739 of these warrants were
unvested and were recorded as deferred compensation and will be recognized as
compensation expense over the nine month vesting period beginning October 1,
2001 and ending June 30, 2002 in accordance with Financial Accounting Standards
Board Interpretation (FIN) No. 44. This nine-month period represents the
additional service provided. As of December 31, 2002, 108,987 of these warrants
expired unexercised.

In September 2001, we issued to Presencia a warrant to purchase 500,000 shares
of our common stock as partial consideration for waiving the participation
rights granted to it under the reorganization agreement with respect to the
issuance of securities in connection with the Cablevision Transaction. The
warrant is exercisable for three years from the date of issuance at an exercise
price of $8.00, $9.00 and $10.00 per share during the first, second and third
years of the term, respectively. The value of these warrants was calculated
using the Black-Scholes method and a charge of $241,462 was recorded as an
increase in additional paid in capital for the issuance of the warrants and a
corresponding decrease in additional paid in capital as a reduction of the
proceeds of the transaction resulting in no net effect to the financial
statements.

In connection with the Asset Purchase Agreement entered into with SciDel
Technologies, Ltd. as described in Note 5 of our Notes to the Consolidated
Financial Statements, on March 26, 2002 we issued to SciDel Technologies, Ltd. a
five year warrant to purchase 670,500 shares of our common stock. The warrant
issued to SciDel is exercisable over a five-year period at a price of $9.00 per
share. The value of this warrant was calculated using the Black-Scholes method
and a charge of $775,557 was included as part of the purchase price.


                                      F-27
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In connection with the Stock and Warrant Purchase Agreement we entered into with
Cablevision in 2001, a warrant to purchase 11,471,908 shares of our common stock
was issued to PVI Holding. This warrant was exercisable for three years from the
date of issuance at an exercise price of $8.00, $9.00 and $10.00 per share
during the first, second and third years of the term, respectively. Pursuant to
the terms of the warrant, we automatically adjust the number of shares
purchasable upon exercise of the warrant upon any issuance of common stock so
that the warrant represents the right to purchase the same percentage of
outstanding shares before the issuance as after. Accordingly, a warrant
adjustment to purchase an additional 427,513 shares of our common stock was made
on November 8, 2001, the date of the sale to Presencia of 615,385 shares of
common stock, and another warrant adjustment to purchase an additional 894,785
shares of our common stock was made on March 26, 2002, the date of the issuance
of 1,288,000 shares of our common stock to SciDel Technologies, Ltd. As
described in Note 4 of our Notes to the Consolidated Financial Statements, on
June 25, 2002, PVI entered into a Note Purchase Agreement with PVI Holding,
pursuant to which PVI amended these warrants so that they entitle PVI Holding to
purchase 12,794,206 shares of PVI's common stock for a purchase price of $7.00
per share at any time prior to June 25, 2006. The effect of this warrant
amendment is described in Note 4 of our Notes to the Consolidated Financial
Statements.

In connection with an agreement to provide digital product insertion effective
September 1, 2002, PVI agreed to grant its contract partner warrants to purchase
739,512 shares of PVI common stock at $2.50 per share. The warrants will be
exercisable for five years from the date of issuance and will vest in four
separate equal tranches. The first tranche vested upon the effective date of the
agreement. The second tranche vested on September 26, 2002 the date on which we
determined that the contract partner used commercially reasonable efforts to a)
secure permissions and approvals for, and b) to sell product insertions. The
third tranche will vest provided $5,000,000 worth of advertising sales has been
achieved by December 31, 2003. The fourth tranche will vest upon the sale of
product insertion into a specific television program by the contract partner.
Because PVI 's obligation to issue warrants arose during the year ended December
31, 2002 and the vesting criteria for the first and second tranches were
satisfied during that period, and no sales or term sheets had yet been executed,
PVI has recorded in that period marketing and sales expense of $166,316 based on
the Black-Scholes calculation of the value of the warrants. The fair value of
the remaining tranches, if vested, will be recorded as a discount and will
offset related revenues.

In connection with an agreement between PVI and the Dallas Cowboys Football
Club, Ltd. (the "Cowboys") to allow PVI to insert electronic image advertising
and electronic enhancements into telecasts of the Cowboys' pre-season home games
during the 2002 and 2003 NFL pre-seasons within the U.S., effective July 3, 2002
and extending through the conclusion of the 2003 NFL Pre-season, PVI agreed to
grant warrants to purchase PVI common stock as follows: (i) within 60 days of
the conclusion of each of the initial 2 years (i.e., the 2002 and 2003 NFL
Pre-seasons) of the agreement, PVI will issue to the Cowboys a warrant to
purchase 10,000 shares of PVI's common stock exercisable for a period of 3 years
at an exercise price of $7.00 per share; and (ii) to the extent the Cowboys
exercise their option to renew this agreement, within 60 days of the conclusion
of each renewal year (i.e., the 2004, 2005 and 2006 NFL Pre-seasons) of this
agreement, PVI will issue to the Cowboys a warrant to purchase 5,000 shares of
PVI's common stock exercisable for a period of 3 years at an exercise price of
$7.00 per share. On October 15, 2002, a warrant to purchase 10,000 shares of PVI
common stock was issued to the Cowboys. Because PVI 's obligation to issue the
warrant arose during the year ended December 31, 2002 and no revenue was
recognized, PVI has recorded in that period marketing and sales expense of
$1,413 based on the Black-Scholes calculation of the value of the warrants.

We issued warrants to purchase 400,000 shares of common stock at an exercise
price of $8.40 per share for a period of five years for financial advisory
services with respect to the initial public offering of our Common Stock in
December 1997. In December 2002, these warrants expired unexercised.


                                      F-28
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

STOCK OPTION PLAN

We adopted a Stock Option Plan (the "Plan") in July 1993 for our employees,
officers, directors, consultants and independent contractors. The Plan initially
reserved 360,000 shares of common stock for issuance upon the exercise of stock
options. The Plan was amended in 1995, 1996, 1997,1998, 2001 and 2002 to reserve
additional shares. As of December 31, 2002, 7,000,000 shares were reserved for
the Plan.

The Plan is administered by our Board of Directors, which determines the
distribution of all options. The Plan provides for the granting of options
intended to qualify as incentive stock options ("ISOs") as defined in Section
422A of the Internal Revenue Code of 1986, as amended, and non-qualified stock
options ("NQSOs") to our key employees as well as NQSOs to non-employee
directors, independent contractors and consultants who perform services for us.
The exercise price of all ISOs granted under the Plan may not be less than the
fair market value of the shares at the time the option is granted. Options may
be for a period of not more than ten years from the date of grant and generally
vest ratably over a three-year period. Options are not assignable or otherwise
transferable except by will or the laws of descent and distribution.

Information with respect to options under the Plan is as follows:

<TABLE>
<CAPTION>
                                           NUMBER OF                               WTD AVG
                                             OPTIONS             OPTION     EXERCISE PRICE
                                         OUTSTANDING        PRICE RANGE          PER SHARE
                                         -----------        -----------          ---------
<S>                                      <C>               <C>              <C>
Balance at June 30, 1999                   1,573,185       $2.50-$17.50              $5.77
Granted                                      642,981
Exercised                                    (14,618)
Forfeitures                                  (86,191)
                                          ----------
Balance at June 30, 2000                   2,115,357       $2.50-$15.00              $5.57
Granted                                    2,403,948
Exercised                                     (8,823)
Forfeitures                               (1,618,133)
                                          ----------
Balance at June 30, 2001                   2,892,349       $1.58-$14.00              $4.00
Granted                                    1,133,982
Exercised                                     (3,389)
Forfeitures                                 (460,894)
                                          ----------
Balance at December 31, 2001               3,562,048       $1.58-$12.12              $3.93
Granted                                    2,147,916
Exercised                                     (3,611)
Forfeitures                               (1,342,032)
                                          ----------
Balance at December 31, 2002               4,364,321       $0.42-$12.12              $2.59
                                          ==========

Exercisable at December 31, 2002           3,044,218
Exercisable at December 31, 2001           1,827,544
Exercisable at June 30, 2001               1,191,748
Exercisable at June 30, 2000               1,506,513
</TABLE>


                                      F-29
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The options outstanding, by price range, are as follows:

<TABLE>
<S>                            <C>                    <C>
       December 31, 2002         $1.58-$4.00          3,082,249
                                 $4.01-$6.00          1,158,703
                                $6.01-$14.00            123,369
                                                      ---------
                                       Total          4,364,321
                                                      =========

       December 31, 2001         $1.58-$4.00          1,577,295
                                 $4.01-$6.00          1,855,753
                                $6.01-$14.00            129,000
                                                      ---------
                                       Total          3,562,048
                                                      =========

           June 30, 2001         $1.58-$4.00            857,601
                                 $4.01-$6.00          1,848,248
                                $6.01-$14.00            186,500
                                                      ---------
                                       Total          2,892,349
                                                      =========

           June 30, 2000         $2.50-$7.50          1,468,490
                                $7.51-$12.50            626,867
                               $12.51-$15.00             20,000
                                                      ---------
                                       Total          2,115,357
                                                      =========
</TABLE>

The weighted average remaining contractual lives of outstanding options at
December 31, 2001 was 4.24 years.

In November 1998, the Board of Directors approved the granting of two stock
options to our then current President and CEO. The first option was for 200,000
shares of common stock at an exercise price of $4.563 with vesting over a
three-year period. No compensation expense was recorded in connection with this
transaction as the exercise price of the option was not less than the fair
market value of our common stock on the date of the transaction. The second
option was for the purchase of an additional 200,000 shares of common stock at
an exercise price equal to $7.00 per share with vesting dependent upon the
attainment of certain performance criteria based on the revenues from operations
during the fiscal years ending June 30, 2000 through June 30, 2002. Both option
grants were for a term of ten years. In April 2000, our Board of Directors
approved a modification of this second grant to waive the performance criteria
for 100,000 of these options as a precondition for vesting, in recognition of
commendable performance. No compensation expense was recorded in connection with
this transaction as the exercise price of such options exceeded the fair market
value of our common stock on the date of the transaction. All options expired
unexercised in February 2002.

In April 2000 the Board of Directors approved the grant of options with a
ten-year term to purchase up to 100,000 shares of common stock at an exercise
price of $5.938 to both our Chairman and our then current President and CEO. The
options will vest upon the attainment of performance goals to be established by
the Compensation Committee of the Board of Directors or, in any event, upon the
continued employment of the officers at the end of four (4) years. No options
were earned under the performance criteria during the six months ended December
31, 2001 or the fiscal years ended June 30, 2000 or 2001. The options issued to
our former President and CEO expired unexercised in February 2002.


                                      F-30
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In December 2000, the Board of Directors authorized the granting of
non-qualified stock options to all of its current employees. Option grants to
purchase a total of 589,000 shares of common stock were granted.

On February 2, 2001, our Board of Directors voted to offer all current employees
who held outstanding stock options with an exercise price greater than five
dollars ($5.00) the opportunity to reprice such options to $4.375. Under the
terms of the offer, the prior vesting of options that were repriced was lost and
the repriced options began vesting again over three years. The exercise period
of the repriced options for the employees was ten years. A total of 1,186,998
options held by employees were repriced. The current members of the Board of
Directors were offered the same opportunity to reprice their outstanding
options. Prior vesting and expiration periods of board members remained the
same, although the price was identical to that offered the employees. A total of
220,000 options held by directors were repriced. One member of our board of
directors, Enrique F. Senior, declined the offer to have his options repriced.
Mr. Senior, who has since resigned from our board of directors effective
November 2001, had a total of 40,000 options eligible for repricing. In
accordance with FIN No. 44, the repriced options are subject to variable
accounting and thereby have been adjusted to fair value at December 31, 2002,
December 31, 2001 and June 30, 2001. A charge to earnings in the amount of
$309,087 was recorded for the fiscal year ended June 30, 2001 because the
closing price of our common stock on June 30, 2001 was greater than the exercise
price of $4.375. The deferred compensation related to the unvested portion of
the options was $640,000 as of June 30, 2001. This charge was reversed during
the six months ended December 31, 2001 because the closing price of our common
stock on December 31, 2001 was less than the exercise price of $4.375. The
deferred compensation related to the unvested portion of the options was $ -0-
as of December 31, 2002 and 2001.

On March 22, 2001, the Compensation Committee of the Board of Directors
authorized the granting of options to purchase 200,000 shares of common stock to
Brown F Williams, our chairman, and options to purchase 75,000 shares of common
stock to Samuel A. McCleery, our Vice President of Business Development. These
options, granted in recognition of past services performed, have an exercise
price of $3.219, a term of ten years, and are fully vested at the date of grant.
The granting of these options was conditioned upon the consummation of the
Second Closing of the Cablevision transaction. These options were issued on
September 20, 2001, the date on which the Second Closing of the Cablevision
transaction took place. No compensation expense was recorded as the fair market
value of our stock was less than $3.219 on their date of issuance.

On March 30, 2001 our shareholders ratified an amendment to the Amended 1993
Stock Option Plan, authorized by our Board of Directors, to increase the
authorized number of shares which may be issued pursuant to options granted
under the Plan from 2,160,000 to 5,160,000 shares and to provide for the
automatic grant to each of our directors on July 1 of each year an option to
purchase 10,000 shares of our common stock for an exercise price equal to the
fair market value of our common stock on the date of the grant. The options will
vest, with respect to each director as to one-twelfth (1/12) of the shares on
the first day of each month following the date of grant as long as the holder is
then serving as a director.

On July 1, 2001, in accordance with the terms of the 1993 Amended Stock Option
Plan, an option grant to purchase 10,000 shares of common stock was issued to
each of our current board members. These option grants have an exercise price of
$5.05, vest over twelve months, and have a term of ten years. On September 20,
2001, an option grant to purchase 7,500 shares of our common stock was issued to
each of two new board members appointed under the terms of the Publicidad
acquisition. In November 2001, an option grant to purchase 6,667 shares of our
common stock was issued to a newly appointed board member. These option grants
represent the pro-rata number of shares issuable to board members based on
length of service during the July 1 through June 30 fiscal year period.

On July 3, 2001, the Board of Directors authorized the issuance of stock options
to purchase 275,000 shares of common stock to certain members of the management
and technical staff. These options have


                                      F-31
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

an exercise price of $4.78, will vest over three years and have a term of ten
years. Issuance of these options was conditioned upon the execution of new
employment agreements by such members of management and the technical staff, all
of which were signed in October 2001. No compensation expense was recorded upon
the issuance of these options as the fair market value of our stock was less
than $4.78 on their date of issuance.

In July 2001 and again in January 2002, the Board of Directors approved the
creation of an employee bonus pool of 100,000 incentive stock options, pursuant
to the Plan to be awarded during each of the calendar years 2001 and 2002, on a
discretionary basis, to individuals who are PVI employees at the time of grant
(other than officers), either as an incentive or in recognition of extraordinary
performance.

In December 2001, the Compensation Committee of the Board of Directors
authorized the issuance of a ten-year option to purchase up to 30,000 shares of
common stock to Emilio Romano (see Note 27 of our Notes to the Consolidated
Financial Statements), a member of our Board of Directors, for services provided
under a consulting agreement, which expired on May 15, 2002. Under the terms of
the agreement, Mr. Romano earned an option to purchase 5,000 shares of common
stock for each full month of service. Each option grant was issued on the tenth
day of the month following the month of service, was fully exercisable on the
date of grant, and at an exercise price equal to the fair market value of our
common stock on the date of grant. In accordance with this agreement, Mr. Romano
received an option to purchase 5,000 shares of common stock on each of January
10, February 10, March 10, April 10, May 10 and June 10, 2002 at an exercise
price of $2.22, $1.51, $1.77, $1.53, $1.13 and $1.05, respectively. Using the
Black-Scholes valuation method, a charge of $43,413 was recorded for the year
ended December 31, 2002.

In January 2002, the Compensation Committee of the Board of Directors authorized
the issuance of an option to purchase up to 120,000 shares of common stock to a
third party consultant. Under the terms of an agreement with the consultant, the
options will vest at the rate of 5,000 shares per full month of service, a per
share exercise price of $2.44 and a term of eight years. Using the Black-Scholes
valuation method, a charge of $120,672 was recorded for the year ended December
31, 2002.

In January 2002, the Compensation Committee of the Board of Directors authorized
the extension of the exercise period for an option grant previously issued to a
former employee of PVI. This option grant, issued for consulting services, was
valued using the Black-Scholes valuation method and a charge of $10,698 was
recorded for the year ended December 31, 2002. The options expired unexercised
in April 2002.

In January 2002, the Board of Directors authorized the issuance of an option to
purchase up to 30,000 shares of common stock to a third party consultant at the
rate of 5,000 shares per full month of service. Under the terms of an agreement
with the consultant, the options will vest at the rate of 5,000 shares per full
month of service and have a term of three years. Using the Black-Scholes
valuation method, a charge of $20,513 was recorded for the year ended December
31, 2002.

In January 2002, the Compensation Committee of the Board of Directors approved
the creation of a discretionary option pool of 100,000 options, pursuant to the
1993 Amended Stock Option Plan, to be awarded during calendar year 2002, on a
discretionary basis, to individuals who are employees or consultants of PVI at
the time of grant, in recognition of extraordinary performance or in connection
with the execution of an initial or amended employment or consulting agreement.
In October 2002, the Compensation Committee approved that an additional 100,000
option shares be added to the discretionary option pool and authorized the use
of such pool be extended until December 31, 2002. As of December 31, 2002,
options to purchase a total of 71,851 shares of common stock had been granted
from this pool. No compensation expense was recorded in connection with options
granted to employees out of this option pool, as the exercise price of the
options was equal to the fair market value of our common stock on the date of
each grant. Options granted to consultants out of this pool are charged,


                                      F-32
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

using the Black-Scholes valuation method, to operations in the period in which
the services were rendered.

In March 2002, the Board of Directors authorized to grant to each of our
co-Chief Executive officers ("co-CEO"), an option to purchase 10,000 shares of
common stock, up to a maximum of 60,000 options each, for each calendar month of
service as co-CEO (subject to pro-ration for any shorter period). Each option
will be fully vested on the date of grant, have a term of ten years and an
exercise price equal to the fair market value of the common stock on the date of
grant. Effective October 30, 2002, the agreements between PVI and each of David
Sitt and Roberto Sonabend regarding their service as interim co-Chief Executive
Officers of PVI were amended to provide that the options to purchase shares of
PVI common stock which were to be granted to each of them at the rate of 10,000
shares for each calendar month in which he serves as interim co-Chief Executive
Officer through May 8, 2003, (subject to pro-ration for any shorter period) were
granted as of October 30, 2002, subject to vesting at the rate of 10,000 shares
for each calendar month (subject to pro-ration for any shorter period) in which
he serves as interim co-Chief Executive Officer through May 8, 2003. As of
December 31, 2002, each co-CEO had received options to purchase 180,000 shares
of common stock. No compensation expense was recorded in connection with these
transactions as the exercise price of the options was equal to the fair market
value of our common stock on the date of each grant.

On July 1, 2002, pursuant to the formula award provisions of PVI's Amended 1993
Stock Option Plan, each of the ten members of PVI's Board of Directors received
an option to purchase 10,000 shares of PVI common stock at an exercise price of
$1.07. No compensation expense was recorded in connection with these
transactions as the exercise price of the options was equal to the fair market
value of our common stock on the date of each grant. The options will vest in
twelve equal monthly installments.

In July 2002, the Board of Directors authorized the issuance of options to
purchase an aggregate of 114,500 shares of PVI's common stock for an exercise
price of $1.00 per share to certain senior managers whose salaries were reduced.
No compensation expense was recorded in connection with these transactions as
the exercise price of the options was equal to the fair market value of our
common stock on the date of each grant.

In September 2002, the Compensation Committee approved the granting of 59,630
non-qualified options to a former employee to replace options which were due to
expire as a result of the termination of his employment. Accordingly, we
recorded a compensation expense of $3,616 to reflect the value of those options,
which was determined using the Black-Scholes valuation method.

In September 2002, we issued 457,000 options to new members of senior management
according to the terms of their employment. No compensation expense was recorded
in connection with these transactions as the exercise price of the options was
equal to the fair market value of our common stock on the date of each grant.

In October 2002, we reached an agreement with a former executive of the company,
whereby the terms of the severance package were renegotiated. In accordance with
the settlement, the cash obligation was reduced and an option to purchase of
250,000 shares of PVI Common Stock was granted. The option was fully vested upon
the execution of the agreement, is exercisable for a period of four years at an
exercise price of $1.00 per share. Accordingly, we recorded an expense to
impairment, restructuring and other charges of $95,625 to reflect the value of
those options, which was determined using the Black-Scholes valuation method.

In October 2002, Lawrence Epstein stepped down from his position as our Chief
Financial Officer, VP Finance and Treasurer to pursue other opportunities. His
role and responsibilities were assumed by James Green, who is now the President,
the Chief Operating Officer and the acting Chief Financial Officer. The
Compensation Committee approved the granting of 124,582 non-qualified options to
Mr. Epstein to


                                      F-33
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

replace options which were due to expire as a result of the cessation of his
employment. Accordingly, we recorded an expense to impairment, restructuring and
other charges of $32,292 to reflect the value of those options, which was
determined using the Black-Scholes valuation method.

In October 2002, the Compensation Committee approved the granting of 21,090
non-qualified options to a former employee to replace options which were due to
expire as a result of the termination of his employment. Accordingly, we
recorded a compensation expense of $1,452 to reflect the value of those options,
which was determined using the Black-Scholes valuation method.

24. COMMITMENTS AND CONTINGENCIES

SARNOFF AGREEMENT

David Sarnoff Research Center, Inc. ("Sarnoff") has granted PVI a worldwide
license to practice Sarnoff's technology related to the electronic recognition
of landmarks, including an exclusive license covering the specific fields of
television advertising and television sports. We have also been granted a
non-exclusive license for use of the Sarnoff technology in all other fields
relating to sports or advertising.

During the term of the exclusive license for television advertising and
television sports applications, we are obligated to pay Sarnoff royalties based
upon a percentage of our gross revenues. During the first several years of the
agreement, all royalties were accrued as earned. Payments for all accrued
royalties through December 31, 1998 became due in January 1999 and were paid in
full by December 1999. Commencing in January 1999, minimum quarterly royalties
of $100,000 became due in order to maintain the license. For the calendar years
1999 and 2000 and the first quarter of 2001, we had the option of paying these
minimum royalties in cash or with PVI stock at its last issue price and,
accordingly, elected to issue stock for all royalties due for the years ended
December 31, 1999 and 2000 and the quarter ended March 31, 2001. Royalties
earned subsequent to March 31, 2001 are required to be paid in cash.
Accordingly, we recorded total royalty expense in the amount of $400,000,
$200,000, $196,575 and $332,164 for the year ended December 31, 2002, for the
six months ended December 31, 2001 and the years ended June 30, 2001 and 2000,
respectively. These charges reflected the issuance of 57,144 and 57,144 shares
of common stock during the years ended June 30, 2001 and 2000, respectively. As
of December 31, 2002, we had a payable balance of $700,000 to Sarnoff.

On September 20, 2002, we notified Sarnoff that we are no longer using the
technology and patents licensed to us by Sarnoff effective June 30, 2002.

THESEUS AGREEMENT

In December 1995, we entered into a license agreement with Theseus Research,
Inc. ("Theseus") whereby we were granted a non-exclusive worldwide license,
without the right of sublicense, to use Theseus technology in our system. A
prepayment was made at the time the agreement was executed and royalties earned
are offset against this prepayment. At December 31, 2002 and 2001, and June 30,
2001 and 2000, the prepaid balance was $ -0-, $23,679, $28,452 and $37,915,
respectively. As of December 31, 2002, the royalties earned were greater than
the initial prepayment, and as such, we recorded an accrual of $2,331 for the
difference. During the term of the license, we will pay royalties of between
..05% and .20% of net sales on a quarterly basis. The agreement terminates with
the expiration of the last of the patents included in the licensed technology.

PVI ISRAEL ROYALTY

Under Israeli law, PVI Israel is committed to pay royalties to the government of
Israel at the rate of 4-6% on the proceeds from the sale of products whose
research and development has been supported by the government in the form of
grants. The royalty commitment is limited in the aggregate to the amount of the
grants we have received, plus interest. As of December 31, 2002, we have
recorded an accrued royalty expense of $16,257 for this commitment.


                                      F-34
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

LEASES

We currently lease 17,000 square feet of office space in Lawrenceville, New
Jersey. The Lawrenceville facility is our main operations center, including
product, hardware and software design, manufacturing and product assembly,
product test and documentation, post production, customer training and customer
technical support. We have recently entered into an amendment of our current
lease pursuant to which, effective April 1, 2003, the space we lease in
Lawrenceville will be reduced by approximately 25% and the rent per square foot
will be reduced by approximately 33%. As amended, the Lawrenceville lease
expires on March 31, 2006. We currently lease 4,300 square feet of office space
in New York City for our sales, marketing and art department personnel. As part
of our closing of this facility, we exercised the option to terminate the lease
as of December 31, 2002. We also currently lease or sublease approximately 6,000
square feet of office space in Mexico City, which has an expiration date of
October 31, 2006, and 1,700 square feet of office space in Ra-anana, Israel,
which has an expiration date of December 31, 2003. These offices are the main
operations centers of Publicidad, and Princeton Video Image Israel, Ltd.,
respectively.

Rent and equipment lease expense for the year ended December 31, 2002, the six
months ended December 31, 2001, and the years ended June 30, 2001 and 2000, was
$774,666, $311,894, $716,762 and $472,947, respectively.

Future minimum rent and lease payments are as follows:

<TABLE>
<CAPTION>
          Year          Amount
          ----          ------
<S>                  <C>
          2003       $   636,012
          2004           614,687
          2005           586,512
          2006           567,780
    Thereafter           703,878
                     -----------
                     $ 3,108,869
                     ===========
</TABLE>

Under the terms of the Lawrenceville, New Jersey headquarters lease, we are
required to maintain an irrevocable, unconditional $51,258 letter of credit
throughout the term of the lease. Under the terms of the lease for our New York
office, we are required to maintain a security deposit of approximately $65,000.

In November 1999, we entered into a five-year capital lease for the purchase of
a mobile production truck. Future minimum lease payments under this capital
lease are as follows:

<TABLE>
<CAPTION>
                                      Year          Amount
                                      ----          ------
<S>                                              <C>
                                      2003       $    18,660
                                      2004            15,550
                                                 -----------
                                                      34,210
        Less: Amount representing interest            (3,406)
                                                 -----------
   Present value of minimum lease payments       $    45,107
                                                 ===========
</TABLE>

Legal Contingencies

In June 1999 we filed suit for patent infringement in U.S. District Court in
Delaware against SciDel USA Ltd., the U.S. subsidiary of the Israeli company,
SciDel Technologies, Ltd. We contended that SciDel's video imaging system for
electronically inserting advertising into live television broadcasts infringed
on PVI's U.S. Patent No. 5,264,933 and sought a permanent injunction prohibiting
infringement of our patent. The case was tried in late February 2001, and final
briefing was completed in April 2001. As of March 26, 2002, a decision had not
been rendered. On March 26, 2002, we completed the acquisition of certain


                                      F-35
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

assets from SciDel Technologies, Ltd. In connection with that transaction, the
parties have agreed to file a dismissal of the action.

In October 1999, we filed a request with the United States Patent and Trademark
Office ("USPTO") to correct the ownership of U.S. Patent 5,917,553, licensed to
Sportvision, Inc. on the basis of our belief that the basic subject matter of
this patent belongs to PVI. After we filed this action, Sportvision, Inc. and
Fox Sports Productions, Inc. ("Fox") filed a lawsuit against us in US District
Court for the Northern District in California for infringement of the disputed
U.S. Patent No. 5,917,553. Plaintiffs subsequently amended their complaint to
add claims for infringement of U.S. Patent Nos. 6,141,060 and 6,229,550. On
August 28, 2001, we filed a counterclaim alleging that Sportvision is infringing
our U.S. Patent No. 5,264,933, and seeking injunctive relief and compensation
including damages. As of December 31, 2001, discovery was ongoing and a trial
date had been set for June 2, 2003. On January 29, 2002, the parties entered
into a Settlement Agreement regarding this matter and a dismissal with prejudice
as to all parties was filed on March 9, 2002. Pursuant to the settlement
agreement, we have entered into a patent cross-license agreement with
Sportvision, which does not require any ongoing payments with either party.

25. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION

We operate on a worldwide basis in only one industry segment, real-time video
imaging. This segment is broken out into geographical regions including the
United States, Latin America, Europe and Israel.

Geographic information is as follows:

<TABLE>
<CAPTION>
                                         United States   Latin America        PVI             PVI       Corporate &    Consolidated
                                              PVI          Publicidad        Europe          Israel     Eliminations       Total
                                         -------------   -------------    -----------    -----------    ------------   ------------
<S>                                      <C>             <C>              <C>              <C>          <C>            <C>
TWELVE MONTHS ENDED DECEMBER 31, 2002
Revenue from external customers          $  2,718,125     $ 7,747,719     $    67,762    $   278,764     $      --     $ 10,812,370
Inter-company revenues                        535,379              --              --         82,500      (617,879)              --
Operating (loss)                          (10,913,313)     (1,084,231)     (2,772,410)    (3,116,292)           --      (17,886,246)
                                         ------------     -----------     -----------    -----------     ---------     ------------
SIX MONTHS ENDED DECEMBER 31, 2001
Revenue from external customers          $  2,263,498     $ 3,217,143     $    96,924    $        --     $      --     $  5,577,565
Inter-company revenues                        422,003              --              --             --      (422,003)              --
Operating (loss)                           (6,133,144)        475,143      (1,117,862)            --            --       (6,775,863)
                                         ------------     -----------     -----------    -----------     ---------     ------------
TWELVE MONTHS ENDED JUNE 30, 2001
Revenue from external customers          $  4,588,821     $        --     $    74,856    $        --     $      --     $  4,663,677
Inter-company revenues                             --              --              --             --            --               --
Operating (loss)                          (11,155,087)             --      (1,555,846)            --            --      (12,710,933)
                                         ------------     -----------     -----------    -----------     ---------     ------------
TWELVE MONTHS ENDED JUNE 30, 2000
Revenue from external customers          $  3,045,899     $        --     $        --    $        --     $      --     $  3,045,899
Inter-company revenues                             --              --              --             --            --               --
Operating (loss)                          (13,500,221)             --        (247,342)            --            --      (13,747,563)
                                         ------------     -----------     -----------    -----------     ---------     ------------
</TABLE>

26. CONCENTRATION OF SALES

Sales to three customers accounted for approximately 26%, 74%, 72% and 62% of
revenues for the year ended December 31, 2002, the six months ended December 31,
2001 and the years ended June 30,


                                      F-36
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2001 and 2000, respectively. The reduction of the concentration from 2001 to
2002 relates to the acquisition of Publicidad, which was our largest customer
prior to September, 2001.

27. RELATED PARTY TRANSACTIONS

A member of our Board of Directors, Eduardo Sitt, is also a principal
shareholder and the President of the Board of Directors of Presencia, which has
made several equity investments in PVI and is our former joint venture partner.
In addition, we have entered into a Reorganization Agreement with Presencia and
others pursuant to which we acquired Publicidad, our wholly owned subsidiary.
Mr. Eduardo Sitt is also the President of the Board of Publicidad, our Mexican
subsidiary. In September 2001, Publicidad entered into a consulting services
agreement with Presencia, the term of which will extend through December 31,
2004. Pursuant to the consultant services agreement, Presencia will provide
consulting services to Publicidad and is to receive compensation in the form of
a contingent service fee and a commission override fee. Such fees are based upon
a percentage of Publicidad's operating margins, as defined in the agreement. The
consultant services agreement will renew automatically for one-year periods
after the expiration of the initial term; however, the only fee payable after
the expiration of the initial term is the commission override fee. Presencia
received a payment of $1,020,000 from Publicidad in calendar 2001 pursuant to
this agreement. In July 2002, a payment for the 2001 commission override fee of
$69,107 was made to Presencia pursuant to this agreement. For the year ended
December 31, 2002, we have incurred $11,888 in accrued commission override fees
payable to Presencia pursuant to this agreement.

On November 8, 2001, David Sitt and Roberto Sonabend were appointed interim
Co-Chief Executive Officers of PVI for an initial period of six months. On July
17, 2002, David Sitt and Roberto Sonabend were authorized to continue to serve
as interim co-CEO's of PVI for an additional twelve months, up to and including
May 8, 2003. Also effective September 2001, David Sitt and Roberto Sonabend were
hired to serve as Corporate Vice Presidents of Publicidad. David Sitt and
Roberto Sonabend are also stockholders of Presencia.

On September 20, 2001, Emilio Romano, a Presencia shareholder, was appointed to
the Board of Directors of PVI as a designee of Presencia. On November 15, 2001,
we entered into a consulting agreement whereby Mr. Romano would provide
consulting services with respect to our strategic planning and potential
business development opportunities. In exchange for these services, Mr. Romano
was paid a fee of $10,000 and a ten-year option to purchase 5,000 shares of
common stock for each month of service provided. Each option grant is fully
vested upon issuance and is priced at the closing market price on the date of
grant. The value of the options issued to Mr. Romano was calculated using the
Black-Scholes method and a compensation charge of $29,385 was recorded for the
year months ended December 31, 2002. The consulting agreement expired May 15,
2002.

In July 2002, PVI engaged Broadband Capital Management LLC ("Broadband Capital")
to serve as its non-exclusive financial advisor. Acorn Technology Fund, L.P.
("Acorn") is a member of Broadband Capital Holdings LLC (an affiliate of
Broadband Capital), holding approximately 3% of the outstanding membership
interests. One of our former directors, John Torkelsen, is the Manager of Acorn
Technology Partners, LLC, Acorn's General Partner. We paid Broadband $50,000 as
a retainer. Additional compensation will be based on Broadband's success in
securing financing for PVI.

Publicidad's personnel are provided by Consultares Asociados Dasi, S.C.
("DASI"), a Mexican service company, of which David Sitt, one of our interim
co-CEO's, is a principal stockholder. Publicidad reimburses DASI the amount that
DASI pays in salaries, taxes, and other costs associated with the employment of
the individuals providing services to Publicidad.


                                      F-37
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

28. SUBSEQUENT EVENTS

On January 30, 2003, PVI filed a bankruptcy request in respect of its
subsidiary, PVI Europe NV, a Belgian corporation, with the Commercial Court in
Brussels. On February 5, 2003, PVI Europe NV was declared bankrupt by the
Commercial Court of Brussels.

On February 18, 2003, PVI entered into a Note Purchase and Security Agreement
and on March 20, 2003, the Note Purchase and Security Agreement was amended (as
so amended, the "Note Purchase Agreement") with Presencia en Medios, SA de CV
("Presencia") and PVI Holding, LLC ("PVI Holding"), a subsidiary of Cablevision
Systems Corporation ("Cablevision"). Pursuant to the Note Purchase Agreement,
PVI issued to (a) Presencia a $1,500,000 secured convertible note which bears
interest at 10% per annum and matures on July 31, 2003 (with the holder having
the right to extend the maturity date for up to two years), and (b) PVI Holding,
a $5,000,000 Amended and Restated secured convertible note, upon terms identical
to those of the Presencia note, in replacement of the $5,000,000 secured
convertible note issued to PVI Holding on June 25, 2002. The notes are initially
convertible by the holders into common stock of PVI at $.75 per share. In the
event that PVI sells any security (equity, debt or otherwise) in a qualifying
transaction (a "New Financing"), the holders of the notes would have the right
to convert the notes to PVI common stock at $.75 per share or into the security
being issued by PVI in the New Financing, on the same terms as such security is
being sold in the New Financing. Following the first New Financing, the common
stock conversion price of $.75 per share is increased to $2.50 per share. In
addition, the holders will have the right to convert the notes into any security
issued in any New Financing that occurs while the notes are outstanding, subject
to all of the terms of such New Financing. The holders of the notes are
prohibited from converting the notes under any circumstances at a price below
$.38 per share, the closing price of PVI's common stock on February 14, 2003. To
secure payment of its obligations under the notes, PVI has granted Presencia a
security interest in all of its assets, which security interest Presencia now
shares with PVI Holding on a pari passu basis. On March 20, 2003, concurrently
with the amendment to the Note Purchase Agreement, Presencia invested an
additional $500,000 on the same terms as described above. Presencia and/or its
designees have the right, exercisable upon written notice given to PVI on or
before March 31, 2003, to invest an additional $1,000,000 in PVI on the same
terms as described above.

Pursuant to and concurrently with the Note Purchase Agreement, PVI paid $150,000
to Presencia in partial payment of the contingent service fee for 2001 due under
the consultant services agreement between Publicidad Virtual and Presencia (see
Note 27 of our Notes to the Consolidated Financial Statements). In the event
that Presencia exercises the option to invest an additional $1,000,000 pursuant
to the Note Purchase Agreement, the remainder of the 2001 contingent service fee
(approximately $150,000) will be paid concurrently with the closing of such
additional investment.

Pursuant to and concurrently with the Note Purchase Agreement, PVI entered into
employment agreements with each of David Sitt and Roberto Sonabend, PVI's
co-CEOs. For their services as corporate vice presidents of Publicidad Virtual,
S.A. de C.V. ("PV"), each of Messrs. Sitt and Sonabend will be paid an annual
salary of $200,000. In addition, each of them have been granted 275,000 stock
options in lieu of options previously contemplated under the Reorganization
Agreement, dated as of December 28, 2000, as amended, by and among Presencia,
PVI, Messrs. Sitt and Sonabend and certain other parties. The exercise price for
such options is $.50 per share. Of such options, 75,000 are vested immediately
and the remainder will vest monthly over a twenty-four month period as long as
Messrs. Sitt or Sonabend, as the case may be, remain employees of PVI or PV.
With regard to their service as co-CEOs of PVI, the agreements for the issuance
of stock options for such service were amended to provide that of the 180,000
options which each of Messrs. Sitt and Sonabend received, 151,778 are currently
vested, while the remainder of such options will vest at the rate of 14,111 per
month beginning on March 10, 2003. The vested options are exercisable at various
prices depending on the market price of PVI's common stock in each month of
previous vesting, while the unvested options are exercisable at $.51 per share.
The employment agreements provide that Messrs. Sitt and Sonabend are employees
at will and are entitled to six months severance under certain specified
circumstances.


                                      F-38
<PAGE>
                           PRINCETON VIDEO IMAGE. INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In addition, PVI, Presencia, PVI Holding and Cablevision made conforming
amendments to certain outstanding agreements among them to reflect the amendment
of the maturity date of the note held by Cablevision from March 31, 2003 to July
31, 2003.

On March 13, 2003, PVI's common stock was delisted from trading on The Nasdaq
Stock Market. PVI's common stock is now quoted on the Over-the-Counter (OTC)
Bulletin Board and continues to trade under the ticker symbol PVII. PVI's common
stock had been transferred from The Nasdaq National Market to The Nasdaq
SmallCap Market and was ultimately delisted from The Nasdaq SmallCap Market for
failure to meet the minimum bid price requirement. In previous correspondence,
Nasdaq had informed PVI that its common stock must evidence a closing bid price
of at least $1.00 per share on or before March 10, 2003 to maintain its listing
on the SmallCap Market, and PVI's common stock failed to achieve that bid price.

PVI's employment agreement with its Chairman, Brown Williams, has been amended
to extend the term thereof to March 31, 2003. The term of the employment
agreement originally ended on January 31, 2003. PVI is currently negotiating an
amendment to the employment agreement with Mr. Williams.


                                      F-39
<PAGE>
                                    EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number                     Description
-------                    -----------
<S>               <C>
2.1 --            Reorganization Agreement, dated as of December 28, 2000, among
                  Presencia en Medios, S.A., Eduardo Sitt, David Sitt, Roberto
                  Sonabend, Presence en Media LLC, Virtual Advertisement LLC,
                  PVI LA, LLC, the Company and Princeton Video Image Latin
                  America, LLC (Incorporated by reference to Exhibit 2.1 to the
                  Company's Current Report on Form 8-K filed on January 5,
                  2001).

2.2 --            Amendment Agreement, dated as of February 4, 2001, among
                  Presencia en Medios, S.A., Eduardo Sitt, David Sitt, Roberto
                  Sonabend, Presence en Media LLC, Virtual Advertisement LLC,
                  PVI LA, LLC, the Company and Princeton Video Image Latin
                  America, LLC (amending Reorganization Agreement dated as of
                  December 28, 2001) (Incorporated by reference to Exhibit 2.2
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended December 31, 2000 filed on February 14, 2001).

2.3 --            Letter Agreement, dated as of July 23, 2001, among Presencia
                  en Medios, S.A., Eduardo Sitt, David Sitt, Roberto Sonabend,
                  Presence en Media LLC, Virtual Advertisement LLC, PVI LA, LLC,
                  the Company and Princeton Video Image Latin America, LLC
                  (amending the Reorganization Agreement dated as of December
                  28, 2001) (Incorporated by reference to Exhibit 2.1 to the
                  Company's Current Report on Form 8-K filed on July 30, 2001).

2.4 --            Asset Purchase Agreement, dated as of February 27, 2002
                  between Adco Imaging, Ltd., Princeton Video Image, Inc.,
                  SciDel Technologies, Ltd., and SciDel USA, Ltd. (Incorporated
                  by reference to Exhibit 2.1 to the Company's Current Report on
                  Form 8-K filed on March 29, 2002).

3.1 --            Certificate of Incorporation (Incorporated by reference to
                  Exhibit 3.1 to the Company's Current Report on Form 8-K filed
                  on September 17, 2001).

3.2 --            Amended and Restated Bylaws (Incorporated by reference to
                  Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
                  the quarter ended September 30, 2001 filed on November 14,
                  2001).

4.1 --            Amended and Restated Warrant Certificate dated June 25, 2002
                  issued to PVI Holding, LLC (Incorporated by reference to
                  Exhibit 4.1 to the Company's Current Report on Form 8-K filed
                  on July 9, 2002).

10.1 --           Form of Employee Confidentiality, Invention Assignment and
                  Non-Compete Agreement (Incorporated by reference to Exhibit
                  10.2 to the Company's
</TABLE>
<PAGE>
<TABLE>
<S>               <C>
                  Registration Statement on Form SB-2 (Registration No.
                  333-37725) which became effective on December 16, 1997).

10.2 --           Form of Consultant Confidentiality, Invention Assignment and
                  Non-Compete Agreement (Incorporated by reference to Exhibit
                  10.3 to the Company's Registration Statement on Form SB-2
                  (Registration No. 333-37725) which became effective on
                  December 16, 1997).

10.3+ --          Employment Agreement dated January 24, 1997 between the
                  Company and Brown F Williams (Incorporated by reference to
                  Exhibit 10.11 to the Company's Registration Statement on Form
                  SB-2 (Registration No. 333-37725) which became effective on
                  December 16, 1997).

10.4+ --          Restated and Amended Employment Agreement, dated October 28,
                  2001, between the Company and Samuel A. McCleery.
                  (Incorporated by reference to Exhibit 10.5 to the Company's
                  Annual Report on Form 10-K for the fiscal year ended December
                  31, 2002).

10.5 --           Lease Agreement, dated July 16, 1997, between the Company and
                  Princeton South at Lawrenceville One (Incorporated by
                  reference to Exhibit 10.20 to the Company's Registration
                  Statement on Form SB-2 (Registration No. 333-37725) which
                  became effective on December 16, 1997).

10.6 --           Assignment, dated January 22, 1992, by Roy Jonathon Rosser and
                  Martin Leach to the Company regarding a patent (Incorporated
                  by reference to Exhibit 10.25 to the Company's Registration
                  Statement on Form SB-2 (Registration No. 333-37725) which
                  became effective on December 16, 1997).

10.7 --           Assignment, dated October 22, 1993, by Roy Jonathon Rosser and
                  Brown F Williams to the Company regarding a patent
                  (Incorporated by reference to Exhibit 10.26 to the Company's
                  Registration Statement on Form SB-2 (Registration No.
                  333-37725) which became effective on December 16, 1997).

10.8 --           Assignment, dated January 30, 1995, by Roy Rosser, Subhodev
                  Das, Yi Tan and Peter von Kaenel to the Company regarding a
                  patent (Incorporated by reference to Exhibit 10.27 to the
                  Company's Registration Statement on Form SB-2 (Registration
                  No. 333-37725) which became effective on December 16, 1997).

10.9* --          Letter Agreement, dated July 19, 1999, between the Company and
                  CanWest Global Communications Corporation (Incorporated by
                  reference to Exhibit 10.1 to the Company's Current Report on
                  Form 8-K filed with the Securities and Exchange Commission on
                  August 18, 1999).

10.10* --         Agreement, dated August 9, 1999, between the Company and CBS
                  Sports, a division of CBS Corporation (Incorporated by
                  reference to Exhibit 10.2 to the
</TABLE>
<PAGE>
<TABLE>
<S>               <C>
                  Company's Current Report on Form 8-K filed with the Securities
                  and Exchange Commission on October 28, 1999).

10.11 --          Warrant Certificate, dated October 20, 1999, issued to Allen &
                  Company Incorporated (Incorporated by reference to Exhibit
                  10.4 to the Company's Quarterly Report on Form 10-Q for the
                  quarter ended December 31, 1999, filed on February 14, 2000).

10.12 --          Letter Agreement, dated April 21, 2000, between the Company
                  and NFL International, a division of NFL Enterprises, L.P.
                  (Incorporated by reference to Exhibit 10.1 to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended March 31,
                  2000, filed on May 12, 2000).

10.13* --         Amended and Restated Territory System License Agreement, dated
                  as of December 27, 2000, between the Company and Virtual Media
                  Lab, Inc. (Incorporated by reference to Exhibit 10.2 to the
                  Company's Quarterly Report on Form 10-Q for the quarter ended
                  December 31, 2000 filed on February 14, 2001).

10.14* --         Stock and Warrant Purchase Agreement, dated as of February 4,
                  2001, between the Company and PVI Holding, LLC. (Incorporated
                  by reference to Exhibit 10.3 to the Company's Quarterly Report
                  on Form 10-Q for the quarter ended December 31, 2000 filed on
                  February 14, 2001).

10.15 --          Letter Agreement, dated as of July 23, 2001, between the
                  Company and PVI Holding, LLC (amending the Stock and Warrant
                  Purchase Agreement dated as of February 4, 2001) (Incorporated
                  by reference to Exhibit 2.2 to the Company's Current Report on
                  Form 8-K filed on July 30, 2001).

10.16 --          Sublease with Southern Progress Corporation, dated September
                  21, 2001. (Incorporated by reference to Exhibits 10.1 to the
                  Company's Quarterly Report filed on Form 10-Q for the quarter
                  ended September 30, 2001 filed on November 14, 2001).

10.17+ --         Letter Agreement, dated November 8, 2001, between the Company
                  and Brown F Williams amending his Employment Agreement.
                  (Incorporated by reference to Exhibit 10.24 to the Company's
                  Annual Report on Form 10-K for the fiscal year ended December
                  31, 2002).

10.18 --          Patent Cross-License Agreement, dated as of January 29, 2002,
                  between Sportvision, Inc., Fox Sports Productions, Inc., and
                  Princeton Video Image, Inc. (Incorporated by reference to
                  Exhibit 10.26 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended December 31, 2002).

10.19 --          Letter Agreement, dated as of January 1, 2002, among Princeton
                  Video Image, Inc., ERM & Associates, Inc. and Emilio Romano.
                  (Incorporated by reference to
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                  Exhibit 10.27 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended December 31, 2002).

10.20+ --         Extension Letter Agreement, dated as of February 15, 2002,
                  among Princeton Video Image, Inc., ERM & Associates, Inc. and
                  Emilio Romano. (Incorporated by reference to Exhibit 10.28 to
                  the Company's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 2002).

10.21 --          Warrant Certificate, dated as of March 26, 2002, issued to
                  SciDel Technologies, Ltd. (Incorporated by reference to
                  Exhibit 10.34 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended December 31, 2002).

10.22+ --         Employment Agreement between the Company and Mervyn Trappler,
                  dated as of April 25, 2002. (Incorporated by reference to
                  Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
                  for the quarter ended March 31, 2002 filed on May 15, 2002).

10.23 --          Note Purchase and Security Agreement dated June 25, 2002
                  between the Company and PVI Holding, LLC (Incorporated by
                  reference to Exhibit 10.1 to the Company's Current Report on
                  Form 8-K filed on July 9, 2002).

10.24* --         Amended and Restated L-VIS(R)System License Agreement dated
                  June 25, 2002, between the Company and Cablevision Systems
                  Corporation (Incorporated by reference to Exhibit 10.3 to the
                  Company's Current Report on Form 8-K filed on July 9, 2002).

10.25* --         Amended and Restated Joint Collaboration and License Agreement
                  dated June 25, 2002, between the Company and Cablevision
                  Systems Corporation (Incorporated by reference to Exhibit 10.4
                  to the Company's Current Report on Form 8-K filed on July 9,
                  2002).

10.26 --          Proprietary Information Escrow Agreement dated June 25, 2002,
                  among the Company, Cablevision Systems Corporation and Kramer
                  Levin Naftalis & Frankel LLP. (Incorporated by reference to
                  Exhibit 10.5 to the Company's Current Report on Form 8-K filed
                  on July 9, 2002).

10.27 --          Option Agreement dated June 25, 2002, between the Company and
                  Cablevision Systems Corporation (Incorporated by reference to
                  Exhibit 10.6 to the Company's Current Report on Form 8-K filed
                  on July 9, 2002).

10.28 --          iPoint(TM) Technology License Agreement dated June 25, 2002,
                  between the Company and Cablevision Systems Corporation
                  (Incorporated by reference to Exhibit 10.7 to the Company's
                  Current Report on Form 8-K filed on July 9, 2002).
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10.29 --          Note Purchase and Security Agreement dated February 18, 2003,
                  among the Company, Presencia en Medios, S.A. de C.V., and PVI
                  Holding LLC.

10.30 --          Convertible Promissory Note dated February 18, 2003, to
                  Presencia en Medios, S.A. de C.V.

10.31 --          Amendment to Option Agreement dated February 18, 2003 between
                  the Company and Cablevision Systems Corp.

10.32 --          Amendment to Proprietary Information Escrow Agreement, dated
                  February 18, 2003, among the Company, Cablevision Systems
                  Corp., and Kramer Levin Naftalis & Frankel LLP.

10.33+ --         Offer of Employment Letter to David Sitt dated February 18,
                  2003.

10.34+ --         Offer of Employment Letter to Roberto Sonabend dated February
                  18, 2003.

10.35 --          Amended and Restated Convertible Promissory Note dated
                  February 18, 2003, to PVI Holding LLC.

10.36 --          Amendment to the Reorganization Agreement, among the Company,
                  Presencia en Medios, S.A., Eduardo Sitt, David Sitt, Roberto
                  Sonabend, Presence en Media LLC, PVI LA, LLC, and Princeton
                  Video Image Latin America, LLC

10.37 --          Amended 1993 Stock Option Plan

10.38+ --         Letter Agreement, dated March 14, 2003, between the Company
                  and Brown F Williams amending his Employment Agreement.

21.1 --           Subsidiaries

23.1 --           Consent of Independent Accountants

99.1              Certification Pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002.
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*     Confidentiality has been granted with respect to a portion of this
      exhibit.

+     Denotes a management contract or compensation plan or arrangement required
      to be filed as an exhibit pursuant to Item 14(a) of this Form 10-K.