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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON D.C. 20549

                                   FORM 10-K

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

                      FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                         COMMISSION FILE NO. 000-23361

                                  INTERVU INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                      <C>
                DELAWARE                                33-0680870
    (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                IDENTIFICATION NO.)
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                201 LOMAS SANTA FE DRIVE, SOLANA BEACH CA 92075
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 350-1600

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK (PAR VALUE $.001 PER SHARE)
                                (TITLE OF CLASS)

     Indicate by check mark whether Registrant (1) has filed all reports to be
filed by section 13 or 15(d) of the Securities 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 the Registrant's knowledge, in a 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]

     The aggregate market value of Common Stock held by non-affiliates of the
Registrant on February 27, 1998 was $38,199,832 based on a average of the high
and low sales for the Common Stock on such date. For purposes of this
computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that such
executive officers and directors are, in fact, affiliates of the Registrant.

     The number of shares outstanding of the Registrant's Common Stock on
February 27, 1998 was 9,377,404.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The information called for in Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held June 22, 1998, which will be filed with the Securities and Exchange
Commission not later than 120 days after January 1, 1998.

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                           FORWARD-LOOKING STATEMENTS

    This Annual Report on Form 10-K contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a new "safe harbor" for these types of statements. To the
extent statements in this Annual Report involve, without limitation, the
Company's expectations for growth, estimates of future revenue, expenses,
profit, cash flow, balance sheet items or any other guidance on future periods,
these statements are forward-looking statements. These risks and uncertainties
include those identified in this Form 10-K in Item 1 - "Business - Factors That
May Affect Future Performance" and other risks identified for time to time in
the Company's filing with the Securities and Exchange Commission, press releases
and other communications. The Company assumes no obligation to update
forward-looking statements.

                                     PART I

ITEM 1.  BUSINESS

INTRODUCTION

    InterVU Inc. (the "Company") is a specialized service company seeking to
establish a leadership position in the Internet video delivery market. The
Company utilizes a proprietary software system for routing and distributing high
quality video over the Internet at rapid speeds. Unlike traditional Web site
based video delivery solutions, the Company's system moves the video delivery
mechanism away from the owner's Web site and on to the Company's network of
specialized video servers strategically situated on the InterVU Network(TM). The
Company's proprietary approach allows the Company to deliver video quickly to
end-users and allows Web site owners and advertisers to provide video on the
Internet without having to invest in costly hardware and software or to maintain
a staff of employees with video delivery expertise.

    InterVU's technologies decrease the time required for video transmission
over the Internet. The InterVU Network is made up of specialized video servers
which have been strategically situated on the Internet and which have been
designed to deliver video quickly to the greatest number of end-users. Among
other things, InterVU's All Eyes(TM) and EyeQ(TM) technologies allow end-users
to view video in a variety of digital encoding formats regardless of the
specific hardware or software end-users might have. Other innovations, such as
the Company's InstaVU video player software, allow real-time multimedia
transmissions to end-users using 28.8 Kbps or faster modems over the Internet.
The Company believes that the long wait time traditionally associated with video
transmission over the Internet is one of the primary barriers to widespread
adoption of Internet video. As a result, the Company believes that its
technological solutions could play a significant role in increasing Internet
video use.

     The Company's target customers are the increasing number of Web site owners
that seek a means of adding video presentations to their Web pages in an easily
implemented and cost effective manner and advertisers that wish to incorporate
video into banners and other Internet advertisements. The Company believes that
multimedia-rich Web sites, capable of delivering high quality video content
quickly to the end-user, can generate significant marketing differentiation and
"top of mind" awareness in consumer buying decisions. Web site owners that have
used the Company's services include NBC Multimedia, Major League Baseball, CNN,
Intel, the Lifetime Television Network (Hearst/ABC-Viacom Entertainment
Service), Yachting Magazine (Times Mirror Magazines), Turner Classic Movies
(Turner Broadcasting System), Court TV, Speedvision Online (Cable Network
Services) and NET-Political Talk. The Company's video banner advertising
technology, V-Banner(TM) has been used to promote Goldwin Golf on the Golfonline
Web site, the Columbia Pictures movie "Air Force One," and Volvo cars on the
Yahoo! Web site, Anheuser Busch on the Major League Baseball Web site, United
Airlines on the IntelliTrip.com site, and Tabasco, on the E!Online site.


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     As part of the Company's strategy to provide video delivery services to the
top tier of Internet multimedia content sites, in October 1997 the Company
entered into a strategic alliance with NBC Multimedia. Pursuant to the strategic
alliance, the Company became the exclusive provider of technology and services
for the distribution of certain NBC entertainment audio/video content by means
of NBC Web sites on the Internet. Pursuant to the Strategic Alliance Agreement
between the Company and NBC Multimedia, the Company will store NBC entertainment
audio/visual content on the InterVU Network and transmit such content to
end-users via the Internet at their request. See "-Strategic Alliance with NBC
Multimedia."

     The Company offers its services to Web site owners and advertisers for fees
based on the volume of video content delivered, for flat fees or for a
combination thereof. The Company expects to generate additional revenues in the
future from selling advertising space on Web pages when Web site owners offer
such space on their pages in exchange for a sharing of fees or for video
encoding and delivery services performed by the Company. The Company also
generally charges its customers fees for encoding analog video into digital form
for transmission over the Internet.

INDUSTRY BACKGROUND

     Growth of Internet Usage and Content. The Internet and many Internet
software, hardware and service providers have experienced dramatic growth over
the last three years. Unprecedented commercial and end-user interest in the
Internet has been spurred by the introduction of key technologies including Web
browsers and powerful search engines. These technologies, along with consistent
usage of Universal Resource Locators ("URLs"), have enabled end-users of the
Internet to quickly and smoothly navigate to sites around the world.
Accordingly, the Internet has been widely accepted as a communications medium.

    Existing Internet Video Technologies. Until recently, Internet video
delivery has been of low quality and slow speed due to traffic congestion on the
Internet and the limitations of video server storage and delivery resources,
desktop storage capabilities and desktop processing power available for video
decoding and playback. As a result, most commercial Web site owners have been
reluctant to employ video on their sites and most advertisers have been
reluctant to add video to their advertisements because existing technologies
have not provided sufficient quality and cost-effective results.

     The primary barrier to achieving interactive video delivery over the
Internet is a function of the large size of video files relative to standard
hypertext markup language ("HTML") data files. The large size of video files
exacerbates four distinct challenges to quality, high speed delivery: (i)
transmission time delays from Web server to end-user which are due to the
Internet's infrastructure, (ii) the capacity of the end-user's modem, (iii)
logistical problems and costs attendant to maintaining video delivery at the Web
site, and (iv) the potential for overloading a Web site owner's host server due
to increased video file delivery.

     The primary approaches pursued to date by others to address video file
delivery challenges have focused on the ongoing development of
compression/decompression algorithms ("codecs"), and to a lesser extent, a
variety of strategies for optimizing server capacities and reducing Internet
traffic congestion such as the development of specialized transmission
protocols.

     Codecs are used to compress and decompress video files, effectively
reducing the size of a video file so that it can be transmitted or downloaded
with increased speed and quality. Codecs were introduced during the evolution of
the CD-ROM market to enable dynamic video presentations. Codecs, however, have
technological limitations in that they alone cannot optimize all of the
variables required to produce high quality video.

     Although the continued development of codecs and other technologies to
improve transmission of video data over the Internet has led to significant
improvements in Internet video delivery, the Company believes that such
technologies do not address bottlenecks inherent in the Internet's
infrastructure. In fact, the Company believes that Internet technologies that
improve transmission speed and quality ultimately will increase end-user use of
the Internet, placing more stress on the most frequently used Internet
transmission channels. As a result, the Company

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believes that video delivered from single sites will continue to be subject to
delays associated with transmission of such video over the Internet.

THE INTERVU SOLUTION

     Unlike companies that have introduced video delivery mechanisms requiring a
Web site owner to purchase proprietary software and hardware in order to deliver
video from a single site, InterVU has moved the video delivery mechanism away
from the owner's Web site and on to Company servers dedicated to video delivery.
The Company has developed a software system for routing and distributing video
on the Internet that allows the Company to link the Company's specialized video
servers to one another, to Web sites and to Internet end-users, creating the
InterVU Network. The Company has strategically placed its video servers on the
Internet to minimize the number of routers or "hops" video content must traverse
before reaching the end-user.

     The InterVU Network is designed to be platform, browser and software player
independent, which allows Web site owners to use a variety of codecs with the
assurance that such codecs will be compatible with most platforms, browsers and
software players an end-user may be utilizing. The InterVU Network is also
scalable which will allow the Company to accommodate additional content from
customers as demand increases. In addition, the InterVU Network is Internet
connection independent, which allows the Company to support a variety of
telecommunication, cable, wireless and intranet solutions in order to maximize
the number of end-users who may wish to view video messages. The InterVU Network
provides high throughput delivery of video messages to end-users through the
Internet over a range of connection speeds (ranging from 28.8 Kbps modems to
cable modems).

     The Company also has developed its own video player software, InstaVU(TM),
to improve end-users' viewing experiences. Among other things, InstaVU provides
users with a preview of the full video in the form of a slide show synchronized
to real-time audio that plays during the download of the remainder of the video
file to the end-user's personal computer.

STRATEGY

     The Company's objective is to leverage its technology and market focus to
become a leading Internet video delivery company. The Company's strategy
includes the following key elements:

     Achieve Significant Market Penetration and Promote Market Expansion. The
Company intends to attract and retain Web site owners with significant video
delivery volume requirements in the sports, entertainment,
information/education, advertising and sales promotions and Internet video
product sales industries. By using the InterVU Network, Web site owners and
advertisers can deliver video without the start-up costs associated with
software and hardware and the recurring maintenance costs associated with
delivering video from one delivery site. As part of the Company's strategy to
provide video delivery services to the top tier of Internet multimedia content
sites, in October 1997 the Company entered into a strategic alliance with NBC
Multimedia. Pursuant to the strategic alliance, the Company became the exclusive
provider of technology and services for the distribution of most NBC
entertainment audio/video content by means of NBC Web sites on the Internet. The
Company also has begun to develop relationships with Web site developers to
increase awareness of the Company's services. Web site developers, in turn, will
be able to use the Company's video delivery technology to expand their product
offerings to Web site owners. The Company's sales force promotes V-Banners (real
time audio and video in the space of an Internet advertising banner) to
advertisers and advertising agencies. The Company intends to increase its
in-house sales force and expand its marketing and sales efforts to Web site
owners, Web site developers, advertisers and advertising agencies. In addition,
the Company intends to develop strategic alliances with leading advertising
agencies to promote video advertising over the Internet. One such alliance was
announced in January 1998 when InterVU and MatchLogic, Inc. ("MatchLogic"), a
leading on-line advertising management company, introduced trueVU(TM), a service
which teams the speed and capacity of the InterVU Network with MatchLogic's
targeting technology to serve, monitor and measure advertising traffic.

     Maintain Technological Leadership. The Company's strategy is to continue to
develop advanced technological solutions to increase the speed and quality of
Internet video delivery. The Company continually works to develop its

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proprietary InterVU Network to further reduce the number of network bottlenecks
that video content must traverse before it reaches the end-user. The Company
also seeks to refine, among other things, its Smart Mirror(TM) technology, All
Eyes software, InstaVU video player and EyeQ software, which together deliver
video to the end user from the "electronically closest" server, increase the
number of end-users a Web site owner or advertiser can reach with its video
content and improve end-users' video viewing experience. The Company intends to
extend the functionality and uses of its core video delivery technologies by
continuing to invest in research and development.

     Offer Full-Service Approach to Video Delivery. The Company's strategy is to
offer Web site owners and advertisers a simple, cost-effective method of adding
video to their Internet presentations. The Company's network approach allows
customers to display video on the Internet without having to invest in hardware
and software or to hire a staff to establish and maintain a system for video
delivery. Instead, the Company offers a simple, turn-key solution for video
delivery. Customers need only send the Company video tapes containing video to
be included on their Web sites and the Company will place the video on the
InterVU Network and establish a link between the customer's Web site or
advertisement site and the InterVU Network. Upon the request of an end-user at a
participating Web site, the Company's network transmits video messages directly
to the viewer.

    Live Broadcast Capabilities. The Company's strategy is to offer remote video
encoding and integration services for live Internet broadcast events. Increasing
numbers of Web-site owners are seeking to integrate live broadcast video events
with other web content. Live broadcast events require real-time encoding of
video content to be streamed to the viewer's desktop. The Company offers on-site
encoding for live events which are delivered from the InterVU Network. The
Company has encoded and delivered several live events, including the Golden
Globe Awards and New Year's Eve in Times Square.

     Maintain Internet Connection Independence. The Company's strategy is to
continue to develop and maintain Internet video delivery products and services
that support a variety of Internet connections. The Company currently supports
major telecommunication, cable, wireless and intranet connections to the
Internet. The Company intends to maintain the functionality of its video
delivery technologies as new Internet connections are developed in order to
reach the maximum number of end-users.

     Build Brand Awareness. The Company's marketing strategy is to penetrate
markets for Internet video delivery services by creating awareness for the
"InterVU" brand. The Company seeks to make the "InterVU" name synonymous with
fast, high quality video on the Internet. The Company intends to promote,
advertise and increase its brand visibility through excellent service and a
variety of marketing and promotional techniques, including advertising, trade
show involvement, the InterVU Web site, various marketing and sales materials
and Internet promotions to market the Company's services. In February 1998, the
Company began actively marketing a CD-Rom version of its EyeQ software for both
PC and MAC. Previously available only by download, customers may now purchase
EyeQ online for a nominal fee. The Company believes the introduction of the EyeQ
CD-Rom product will increase consumer and Web-site owner awareness of the
Company's products and services.

TECHNOLOGY OVERVIEW

     The Company has designed the InterVU Network to meet the needs of Web site
owners and advertisers who wish to deliver video content over the Internet. The
Company believes that the InterVU Network provides an attractive service to Web
site owners and advertisers by accelerating video transmission and reception
times and by providing a method to incorporate video presentations into Web
pages easily and in a cost-effective manner. InterVU's technology is based on a
proprietary software operating system which links a distributed network of
servers, using open communication standards and commercially available
components. The use of open standards allows the Company to accommodate a
variety of customer hardware and software configurations.

     Network Solution. The InterVU Network and the Company's Virtual URL(TM)
technology allow Web site owners and advertisers to provide video content to
end-users without the costs and inconvenience usually associated with video on
the Internet. Instead of managing large video files and maintaining expensive
hardware, Web site owners and advertisers deliver video directly to the Company.
The Company then digitizes the video and places it on the InterVU Network. To an
end-user visiting a Web site, the video appears to come from the Web site
because of

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software code the Company places on the customer's Web site to link the end-user
to the InterVU Network. The Virtual URL technology makes such redirection of
video invisible to the end-user.

     Avoiding Transmission Bottlenecks. The Company's configuration of
distributed video servers located along the Internet provides significant
advantages in video delivery. The InterVU Network is designed to ensure that
once an end-user requests video from a Web site, the video is transmitted from
the server on the InterVU Network that can deliver the data most quickly. This
result is achieved through the use of the Company's proprietary Smart Mirror
technology. The InterVU Network helps users bypass bottlenecks on the Internet
by determining which of its servers is electronically closest to the end-user
and sending the video from that location.

     Another significant component of the Company's video delivery system is the
Fast Track Network Analyzer, which allows end-users to optimize video delivery
performance. The Fast Track Analyzer "polls" selected servers on the InterVU
Network to determine which server will provide the end-user with the best
overall video performance. From information based on end-users who have
downloaded InterVU's Fast Track end-user client software, the Company has
created a model of Internet data flow which allows the Company to accelerate
video delivery over the InterVU Network by storing video files on servers at
strategically located Internet sites. Performance data has been accumulated and
analyzed for most top Internet service providers, allowing the Company to
identify and integrate the services of nine providers (UUNET, Bell Technology
Group, TCG Cerfnet, DIGEX, Exodus, GTE, GlobalCenter, IXL and SuperNet) to offer
distributed, high performance video delivery.

     Optimizing and Managing the InterVU Network Servers. The servers on the
InterVU Network consist of a title manager and multiple video pumps which are
designed to optimize and manage the delivery of video over the Internet. The
video pumps are computers that have been customized to accelerate video
delivery. The title manager optimizes the amount of replication of video content
on each video pump and directs end-users' requests for video content to the
video pump capable of responding most quickly to the request.

     Reaching Maximum End-Users. The Company has designed its proprietary All
Eyes software to allow its customers to reach almost all end-users, regardless
of the video player software used. All Eyes is an intelligent software
application written in the Java and JavaScript programming language that
determines the capabilities of the end-user's software and ensures that any
video sent out can be played by the end-user's video player software. Even
end-users with no multimedia capabilities will usually receive a graphic image,
instead of a broken icon signifying the presence of content that they cannot
see. By contrast, traditional methods of video delivery limit the number of
end-users able to view video content to those who have the appropriate software
for a specific encoding format. In addition, All Eyes is designed to deliver
video in the appropriate format even if the end-user has not downloaded any
InterVU software.

     End-User Software Technologies. InterVU's EyeQ multimedia manager software
package includes the Company's InstaVU and MPEG video players, as well as a
software utility called Get Smart. InstaVU allows multimedia streaming on a 28.8
Kbps or faster modem. The InstaVU multimedia streaming algorithm displays a
pre-selected slide show of video frames at the same time as real-time audio
while the remainder of the video is downloaded to the end-user's computer for
subsequent viewings. Get Smart installs and manages the EyeQ multimedia software
and keeps end-users' computers current with other multimedia software players,
such as Microsoft NetShow, Vivo, VDO, Apple QuickTime, and VXtreme Web Theatre
to take advantage of InterVU's service. With a single mouse click, Get Smart
downloads and installs software updates to the end-user's computer from the
Internet.

CUSTOMER SERVICES

     The Company employs a full service approach to providing its video delivery
services which includes (i) ease of integration of video content into Web
presentations, (ii) encoding services, including remote encoding for live
events, (iii) network distribution, hosting and delivery and (iv) usage reports
providing delivery volume and other data.

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     To date, the Company has generated most of its revenues from monthly fees
charged to customers for video delivery and encoding services. Certain of the
Company's Web site customers also have traded advertising space on their pages
for video delivery services. The Company's economic model, however, calls for
the Company to generate substantially all of its revenues from charging Web site
owners and advertisers volume-based fees for video delivery services. By
providing customers with a variable cost structure which is a function only of
the amount of video content delivered, the Company plans to relieve Web site
owners of the challenge of generating economies of scale relative to fixed costs
(bandwidth), capital investments (hardware and software), and incremental
logistical staffing. The rate structure is variable, with the Company's
customers receiving reduced per-megabyte costs as delivery volumes surpass
certain average daily levels. Although the Company believes its rate structure
offers significant value to its customers, the Company's pay-per-delivery
concept remains unproven.

     To allow Web site owners and advertisers to more easily integrate video
into Web sites, InterVU has developed the V-Banner, which turns the ordinary
Internet advertising banner into a video display. With V-Banners, advertisers
can provide real time video and audio through their advertising banners instead
of just a few static pictures. The Company believes that it is currently the
only company to offer banners that include video. The Company has incorporated
its All Eyes technology into its V-Banners to make them compatible with most
video players currently used by end-users. As a result, the Company offers its
advertising customers the ability to reach a wide variety of end-users with
their video advertisements. The Company can create V-Banners using video
supplied by its customers in digital or analog format.

     When using the Company's video delivery services, Web site owners may
digitize and compress video messages themselves or send analog VHS or Beta tapes
to InterVU for encoding services using a variety of different codec formats. All
major codec standards, such as MPEG, Quicktime, AVI, Vivo, RealPlayer, and
Microsoft Net Show are supported by InterVU. The Company also offers its InstaVU
format, an advanced digital encoding technique specifically designed for the
delivery of enjoyable, high quality audio and video messages. Customers' video
files are dynamically balanced to provide high quality video and audio, full
audio/video synchronization and flexible encoding rates to match specific
requirements.

STRATEGIC ALLIANCE WITH NBC MULTIMEDIA

     In October 1997 the Company entered into a strategic alliance with NBC
Multimedia. Pursuant to the strategic alliance, the Company became the exclusive
provider of technology and services for the distribution of certain NBC
entertainment audio/video content by means of NBC Web sites on the Internet.
Under the Strategic Alliance Agreement between the Company and NBC Multimedia,
the Company will store NBC entertainment audio/video content on the InterVU
Network servers and transmit this content to users via the Internet in response
to requests from end-users.

    NBC Multimedia has agreed to use commercially reasonable efforts to promote
the Company and the InterVU Network in connection with Internet advertising
promotions involving the Company's dissemination of NBC entertainment
audio/video content. NBC Multimedia has reserved the right to determine, in its
reasonable discretion, when such promotion of the Company is appropriate. The
Company has agreed to include in the Company's EyeQ multimedia manager an "NBC"
icon that links end-users to the NBC Web site. The Company and NBC Multimedia
also have agreed to place links on their Web sites connecting end-users with the
other party's site. In addition, NBC Multimedia has agreed to use commercially
reasonable efforts to introduce the Company to the television stations
associated with the NBC Television Network and to refer other programming
opportunities for the Internet to the Company, all to the extent that NBC
Multimedia reasonably deems appropriate. NBC Multimedia would receive a 10%
commission for each such referral.

     Under the Strategic Alliance Agreement, the Company will receive 30% of
NBC's net revenues from advertisements on a new area to be placed on the
"NBC.com" Web site that will contain, among other things, the NBC audio/video
content (the "Revenue Sharing Area"). If NBC receives advertising space or other
barter in return for placing advertisements in the Revenue Sharing Area, NBC
will allocate 30% of bartered advertising space to InterVU or make available an
equivalent amount of space on one or more Internet sites controlled by NBC. NBC


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Multimedia may opt out of revenue sharing by paying for the Company's video
delivery services at rates at least as favorable as the most favorable rates
offered by the Company to third parties, other than special promotional rates.
NBC Multimedia will reimburse the Company for the costs incurred by the Company
in connection with the delivery of audio/video content, provided that NBC
Multimedia will not reimburse the Company for any costs in excess of $10,000 per
month that it has not expressly approved.

     The Strategic Alliance Agreement provides for an exclusive term of two
years that will automatically extend to four years if certain cost and revenue
goals to be mutually agreed upon in the future are established and met. The
Company's exclusive rights to deliver NBC content from NBC Web sites do not
apply to sports, news or other non-entertainment programs, nor do they apply to
video clips of less than five seconds in length. NBC Multimedia also has
reserved the right to permit other companies to distribute NBC video content
from Web sites and areas not controlled by NBC.

    As consideration for the strategic alliance, the Company issued to NBC
1,280,000 shares of the Company's Series G Preferred pursuant to the Preferred
Stock Purchase Agreement (the "Purchase Agreement"). These shares represented
approximately 10% of the Company's outstanding capital stock prior to the
Company's initial public offering in November 1997 (the "IPO"). The Company has
granted NBC rights to include shares of Common Stock issuable upon conversion of
the Series G Preferred in certain future registrations of the Company's Common
Stock, as well as the right to demand on one occasion only that the Company
register such shares of Common Stock after the Company becomes eligible to use
Form S-3 under the Act. NBC has agreed that neither it, nor its affiliates, will
acquire or seek to acquire any of the Company's securities for a period of one
year from October 10, 1997, the date of the Purchase Agreement.

    NBC Multimedia purchased, in a direct offering concurrent with the IPO,
210,526 shares of the Company's Common Stock for $2,000,000 (the "Direct
Offering"). After the consummation of the IPO and the Direct Offering, NBC
Multimedia and NBC together own approximately 10.8% of the outstanding shares of
capital stock of the Company.

    The Company is obligated to pay to NBC Multimedia a total of $2,000,000 in a
series of non-refundable payments over the three calendar quarters following the
Direct Offering (the "Prepayments") as payment for the costs of producing and
operating the Revenue Sharing Area (the "Production Costs") and the costs of
advertising and promotions to be placed by the Company on Web sites controlled
by NBC ("InterVU Advertising"). The first payment in the amount of $750,000 was
paid upon the completion of the Direct Offering. Production costs may include,
but shall not be limited to, costs related to NBC Multimedia's personnel costs,
out-of-pocket costs, costs for content needed for the Revenue Sharing Area,
reasonable allocated overhead costs and a management fee to be paid to NBC in
return for its services equal to 20% of all production and operating costs. The
Company would be charged for InterVU Advertising at NBC Multimedia's customary
rates and would be responsible for the expenses related to placing the
advertising on the designated Web site. The Company would not be permitted to
post InterVU Advertising at any time that advertising space were unavailable or
if all of the amounts paid by the Company to NBC already had been allocated to
Production Costs.

     During the exclusive term, NBC Multimedia may terminate the Strategic
Alliance Agreement without cause by giving 90 days written notice to the Company
and returning 600,000 shares of Series G Preferred or the shares of Common Stock
into which they would be convertible if the termination occurs at any other time
during the first two years of the agreement. NBC Multimedia would not be
required to return any shares upon exercise of its early termination right until
the Company had made all of the required Prepayments described above. Upon a
material breach by NBC Multimedia, the Company would be entitled to terminate
the Strategic Alliance Agreement and NBC Multimedia would be required to return
the same portion of the shares as if NBC Multimedia had exercised its early
termination right. Upon a material breach by the Company, NBC Multimedia could
terminate the Strategic Alliance Agreement with no obligation to return shares.
In no event shall NBC Multimedia be required to refund any of the Prepayments.

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MARKETING AND SALES

  Marketing Strategy

     The Company's marketing strategy is to position InterVU as a leading
Internet company providing video delivery services. The Company employs a
full-service approach to marketing which focuses on Internet video delivery from
a network rather than from one delivery site or Internet backbone. Additionally,
by offering a full-service approach, the Company presents Web site owners and
advertisers with the opportunity to not only forego their own capital and fixed
cost investments in new technologies, but to be placed in the continuum of
receiving the Company's most current enhancements as they become available. The
Company employs a mix of techniques including advertising, trade show
involvement, the InterVU Web site, various marketing and sales materials and
Internet promotions to market the Company's services. The Company has identified
five target markets for its services: (i) content providers (Web site owners),
(ii) advertisers, (iii) advertising agencies, (iv) Web site developers and (v)
Internet service providers.

     Content Providers. One of the Company's primary markets is delivering video
for content providers such as Web site owners. The Company believes that video
can be successfully employed by content providers to increase Web site
promotional effectiveness to consumers. In addition, the Company gives its
customers the ability to reach end-users almost without regard to the video
player software used by such end-users. The Company's All Eyes technology
intelligently determines which of a number of digital video formats will be
compatible with a particular end-user's video player software and sends the
content provider's video presentation to the end user in the appropriate format.

     The Company believes its approach to video delivery appeals to content
providers because the Company eliminates the need for content providers to
purchase software servers, hardware servers or communication bandwidth. The
Company also gives Web site owners the ability to deliver video without first
acquiring digital video expertise. The Company can create a digital video
presentation from an analog video tape or provide remote on-site encoding
services for live broadcasts. In addition, the Company allows Web site owners to
experiment with using video because the Company typically charges only for video
delivered, thereby obviating the need for Web site owners to make a commitment
to delivering video before they have an opportunity to gauge end-user response.

    Advertisers. The Company believes that Internet advertisements that include
video will be entertaining to consumers and, as a result, valuable to
advertisers. The Company's V-Banners automatically display a small video
presentation in a portion of the banner when an end-user visits a Web page. The
Company believes its V-Banners are especially appealing to advertisers
because consumers with video player capability need not take any affirmative
steps to view the video or wait for it to download. Moreover, the Company
believes that many of the advantages the Company offers to Web site owners also
apply to advertisers. Advertisers can use video on their Internet advertisements
without having to learn how to work with video delivery technologies and without
burdening their servers or those of their host Web site with video.

     Advertising Agencies. The Company has begun to establish relationships with
certain major advertising agencies, including Saatchi & Saatchi, Foote Cone &
Belding and Think New Ideas, and specialized Internet advertising agencies,
which primarily provide advertising banners, in an effort to make advertisers
more aware of the services the Company offers. The Company believes that
advertising agencies will want to market themselves and the Company to
advertisers by incorporating Internet video promotions into their media
proposals to clients. In January 1998, the Company entered into a three-year
strategic alliance with MatchLogic, Inc. ( the "MatchLogic Alliance"), an online
advertising management firm. The MatchLogic Alliance will combine MatchLogic's
proprietary targeting technology with InterVU's multimedia advertising
capabilities.

     Web Site Developers. The Company's approach to video delivery allows Web
site developers to add video to Web pages without the need for extensive video
delivery expertise. The Company manages encoding, recommends codecs compatible
with customers' needs and handles distribution. As a result, Web site developers
that work with the Company can offer a broader range of services to their
customers without investing time and money into learning and applying video
delivery technologies.

                                                                               9
<PAGE>   10
     Internet Service Providers. The Company established nonexclusive
promotional agreements with nine Internet service providers (UUNET, Bell
Technology Group, TCG Cerfnet, DIGEX, Exodus, GTE, GlobalCenter, IXL and
SuperNet) pursuant to which the service providers may market their performance
(as verified by the Fast Track Network Analyzer results) and the Company's
integration of their infrastructures into the InterVU Network.

  Sales Strategy

     The Company's sales strategy is to attract and retain Web site owners with
significant video delivery volume requirements in the entertainment,
information/education, advertising and sales promotions and Internet video
product sales industries. The Company currently has targeted the entertainment
industry, specifically cable TV, broadcast programmers and sports leagues,
advertising agencies and major advertisers as primary customer groups. The
Company believes that cable TV and broadcast programmers in particular currently
(i) have the best understanding of the InterVU Network capability, (ii) are
dedicated to achieving differentiation in their Web site offerings by delivering
video that they have developed or otherwise possess, (iii) are in a position to
quickly expand their video delivery volumes once they are satisfied with
delivery results and (iv) serve as highly credible references for the Company.
The Company's sales force also has begun actively to promote its V-Banners to
advertisers and advertising agencies.

  VUTOPIA Service

     Although InterVU currently provides global delivery of video messages, the
Company intends to introduce a complementary, more distributed regional service
(the "VUTOPIA Service") which the Company believes will be an attractive vehicle
for the delivery of localized content. The VUTOPIA Service will utilize the
existing InterVU Network to offer faster delivery of high quality video messages
and is designed to include a home channel specifically tailored to individual
markets which will allow Web site owners to target their video programs to
specific market areas. VUTOPIA Service will allow the Company's customers to
obtain further enhancements in video delivery speed and incur lower delivery
costs relative to global delivery rates.

     The VUTOPIA Service will utilize the Company's Virtual URL technology which
re-directs each viewer's mouse click request for video messages to regionally
distributed servers which are expected to be located directly at the viewer's
dial up point or POP. By hosting content on multiple distributed servers located
at various POPs, the Company intends to deliver video messages over local access
lines, thereby eliminating Internet bandwidth charges and avoiding other
Internet congestion challenges. The Company is currently testing the VUTOPIA
Service with a cable provider and a cellular service provider.

COMPETITION

     The market for Internet services is highly competitive, and the Company
expects competition to increase significantly. In addition, the Company expects
the market for the delivery of video over the Internet, to the extent it
develops, to be intensely competitive. The Company faces substantial competition
from companies that provide the hardware, digital video encoding software and
know-how necessary to allow Web site owners and advertisers to utilize video in
their Internet marketing and advertising activities. Several companies offer
services that compete or may compete with those offered by the Company,
including, among others, RealNetworks, Inc. (formerly Progressive Networks,
Inc.) (RealVideo), VDOnet Corp. (VDOLive), and VXtreme, Inc. (Web Theater),
AudioNet Inc. (AudioNet) and At Home Corporation (@Home Experience). In August
1997, RealNetworks and MCI Communications Corporation ("MCI") announced a
strategic alliance involving the introduction of a service, called
"RealNetwork," that will deliver audio and video broadcasts over the Internet.
The RealNetwork will reportedly permit end-users to simultaneously receive video
broadcasts by distributing copies of digital video programs to multiple points
on MCI's Internet backbone. The strategic alliance between RealNetworks and MCI
appears to be a service-based marketing strategy similar to that being
implemented by the Company. In addition, Microsoft Corporation ("Microsoft") has
made significant investments in Internet video delivery technologies and has
disclosed a multimedia strategy of broadening the market for video compression
solutions. In August 1997, Microsoft announced (i) the release of its NetShow
2.0 multimedia server which incorporates technology for video and audio

                                                                              10

<PAGE>   11
delivery over the Internet and corporate intranets, (ii) an agreement with
leading video compression software companies, including Progressive Networks and
VDOnet Corp., to cooperate in defining future standards based on the Microsoft
Active Streaming Format and (iii) the acquisition of VXtreme, Inc. Microsoft
also holds significant equity positions in RealNetworks and VDOnet Corp. In
addition, as was the case with VXtreme, Inc., RealNetworks and VDOnet Corp.,
providers of Internet delivery video services may be acquired by, receive
investments from or enter into other commercial relationships with, larger,
well-established and well-financed companies, such as Microsoft and MCI. Greater
competition resulting from such relationships could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations. Because the operations and strategic plans of existing and future
competitors are undergoing rapid change, it is extremely difficult for the
Company to anticipate which companies are likely to offer competitive services
in the future.

     The bases of competition in markets for video delivery include transmission
speed, reliability of service, ease of access, price/performance, ease-of-use,
content quality, quality of presentation, timeliness of content, customer
support, brand recognition, number of end users directed to client websites
("Traffic Flow") and operating experience. The Company believes that it compares
favorably with its competitors with respect to each of these factors, except
brand recognition, Traffic Flow and operating experience, all of which have been
limited as a result of the Company's early stage of development. Many of the
Company's competitors and potential competitors have substantially greater
financial, technical, managerial and marketing resources, longer operating
histories, greater name recognition and/or more established relationships with
advertisers and content and application providers than the Company. Such
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and devote substantially more resources to
developing Internet services or online content than the Company. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures faced by the Company will
not materially adversely affect the Company's business, prospects, financial
condition and results of operations. Further, as a strategic response to changes
in the competitive environment, the Company may make certain pricing, service or
marketing decisions or enter into acquisitions or new ventures that could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.

RESEARCH AND DEVELOPMENT

     The market for the Company's services is characterized by rapidly changing
technology, evolving industry standards, and frequent new product introductions.
The Company believes that it can continue to improve its existing technologies
and services as well as develop new technologies and services. The Company
develops most of its technologies in house and maintains a highly trained
research and development staff that designs and develops InterVU's new services.
The Company had research and development expenses of $33,000, $1.4 million and
$1.7 million for the period from August 2, 1995 (Inception) to December 31,
1995, and the years ended December 31, 1996 and 1997, respectively. The
Company's primary objectives are to develop and maintain the Company's position
in Internet video delivery by being at the forefront of product and services
development. Additionally, the Company seeks to incorporate customer preferences
identified by InterVU's marketing and sales groups into development plans. The
Company attempts to integrate new enhancements into the Company's existing
services. These enhancements include extending the reach of InterVU's video
delivery, reducing the cost per megabyte of video delivered, developing new
methods of scaling existing services to changing client demands, and increasing
the robustness and reliability of all software and components created by
InterVU.

INTELLECTUAL PROPERTY

     The Company regards its technology as proprietary and attempts to protect
it with copyrights, trademarks, trade secret laws, restrictions on disclosure
and other methods. In addition, the Company has filed seven United States patent
applications and four international patent applications and is in the process of
preparing additional patent applications with respect to its technology. There
can be no assurance that any patent will issue from these applications or that,
if issued, any claims allowed will be sufficiently broad to protect the
Company's technology. In addition, there can be no assurance that any patents
that may be issued will not be challenged, invalidated or circumvented, or that
any rights granted thereunder would provide proprietary protection to the
Company. Failure of any patents to provide protection to the Company's
technology may make it easier for the Company's competitors to offer technology
equivalent or superior to the Company's technology. The Company also generally
enters into

                                                                              11

<PAGE>   12

confidentiality and non-disclosure agreements with its employees and
consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products, services or technology without authorization, or to develop
similar technology independently. There can be no assurance that the steps taken
by the Company will prevent misappropriation or infringement of its technology.
In addition, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's intellectual property
rights or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. The Company believes
that, due to the rapid pace of technological innovation for Internet products
and services the Company's ability to establish and maintain a position of
technology leadership in the industry depends more on the skills of its
development personnel than upon the legal protections afforded its existing
technology.

EMPLOYEES

     As of February 28, 1998, the Company employed 44 full-time and three
part-time people, of whom 30 were employed in research and development, twelve
were employed in sales and marketing and five were employed in administration.
None of the Company's employees is represented by a labor union, and the Company
considers its relations with its employees to be good. The Company's ability to
achieve its financial and operational objectives depends in large part upon the
continued service of its senior management and key technical personnel and its
continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such qualified personnel in the Company's
industry is intense, particularly in software development, network engineering
and product management personnel.

FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

     An investment in shares of the Company's Common Stock is speculative in
nature and involves a high degree of risk. The following factors should be
considered carefully in evaluating the Company and its business before
purchasing shares of Common Stock. The Company's actual results could differ
materially from those discussed in certain forward-looking statements made by
the Company from time to time as a result of certain factors, including, but not
limited to, those discussed below.

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES

     The Company was incorporated in August 1995 and launched the InterVU
Network in December 1996. The Company has a limited operating history on which
to base an evaluation of its business and prospects and currently is considered
a development stage company. Accordingly, the Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as the delivery of video over
the Internet. Such risks for the Company include, but are not limited to, an
evolving and unproven business model and the management of growth. To address
these risks, the Company must, among other things, maintain and significantly
increase its customer base, implement and successfully execute its business and
marketing strategy, continue to develop and upgrade its technology, provide
superior customer service, respond to competitive developments, and attract,
retain and motivate qualified personnel. There can be no assurance that the
Company will be successful in addressing these risks, and the failure to do so
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.

     Since inception, the Company has incurred significant losses and, as of
December 31, 1997, the Company had an accumulated deficit of approximately $7.6
million. To date, the Company has not generated any significant revenues and, as
a result of the significant expenditures that the Company plans to make in sales
and marketing, research and development and general and administrative
activities over the near term, the Company expects to continue to incur
significant operating losses and negative cash flows from operations on both a
quarterly and annual basis through at least the end of fiscal 1998 and for the
foreseeable future thereafter. For these and other reasons, there can be no
assurance that the Company will ever achieve or be able to sustain
profitability. The

                                                                              12
<PAGE>   13
Company had federal and California tax net operating loss carryforwards at
December 31, 1997 of approximately $7.1 million. The federal and California tax
loss carryforwards will begin to expire in 2010 and 2003, respectively, unless
previously utilized. The Company also has federal and California research tax
credit carry forwards of approximately $171,000 and $96,000, respectively, which
will begin to expire in 2011 and 2010, respectively unless previously utilized.
The utilization of these losses is contingent upon the Company's ability to
generate taxable income in the future. Because of that uncertainty, management
has recorded a full valuation allowance with respect to these deferred tax
assets.

     As consideration for the strategic alliance between the Company and NBC
Multimedia, Inc. ("NBC Multimedia"), a wholly owned subsidiary of National
Broadcasting Company, Inc. ("NBC"), the Company issued 1,280,000 shares of
Series G Convertible Preferred Stock ("Series G Preferred") to NBC, and NBC
Multimedia granted the Company exclusive rights to deliver most NBC audio/video
content from NBC Web sites. NBC Multimedia may terminate the Strategic Alliance
Agreement between the Company and NBC Multimedia without cause by giving 90 days
prior written notice and is required to return 600,000 shares of Series G
Preferred (or shares of Common Stock into which the such shares may in the
future be converted) if the termination occurs during the first two years of the
exclusive term of the Strategic Alliance Agreement. Notwithstanding the
foregoing, NBC Multimedia is not required to return any such shares until it has
received from the Company the $2.0 million of non-refundable payments described
below under "Risks Associated with Strategic Alliance with NBC Multimedia." The
Company will determine the fair value of the Series G Preferred issued to NBC on
the dates the requirements that NBC return some or all of the shares of Series G
Preferred upon termination of the Strategic Alliance Agreement lapse. Based on
these provisions, in January 1998, the Company charged $3,375,580 to expense for
the fair value of 680,000 shares of Series G Preferred and expects to charge the
then fair value of the remaining 600,000 shares of Series G Preferred to expense
in the quarter ending December 31, 1999. Should the Company renegotiate or waive
these provisions, removing NBC's obligation to return shares of Series G
Preferred (or Common Stock, as the case may be), the Company would expense the
fair value of the shares at that time. The Company believes that the fair value
of each share of Series G Preferred will roughly approximate the price per share
at which the Common Stock is then trading, multiplied by the .6298 conversion
ratio applicable to the Series G Preferred. These noncash charges are likely to
be substantial and are likely to have a material adverse impact on the Company's
results of operations in the periods such expenses are recognized.

POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; UNPREDICTABILITY OF
FUTURE REVENUES

     The Company's quarterly operating results may fluctuate significantly in
the future as a result of a variety of factors, many of which are outside the
Company's control. Factors that may affect the Company's quarterly operating
results include the future adoption rate of video content by Web site owners;
the Company's ability to retain existing customers (including, in particular,
NBC), attract new customers at a steady rate and maintain customer satisfaction;
the level of use of the Internet and the growth of the market for video
advertising on the Internet; the amount and timing of costs and expenditures
relating to the expansion of the Company's business; the introduction or
announcement of new Internet services by the Company and its competitors; price
competition or pricing changes in the Internet, cable and telecommunications
industries; technical difficulties or network downtime; general economic
conditions; and economic conditions specific to the Internet, Internet media,
corporate intranet and cable industries. As a result of the Company's limited
operating history and the emerging nature of the markets in which it competes,
the Company is unable to accurately forecast its revenues. In addition, the
Company plans to increase operating expenses to fund additional sales and
marketing, research and development and general and administrative activities.
To the extent that these expenses are not accompanied by an increase in
revenues, the Company would have to decrease or cease such expenditures or the
Company's operating results and financial condition could be materially
adversely affected. Due to all of the foregoing factors, it is possible that the
Company's operating results in one or more future quarters will fail to meet or
exceed the expectations of securities analysts or investors.

UNPROVEN ACCEPTANCE OF THE COMPANY'S FEE STRUCTURE

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<PAGE>   14
     The Company's business plan calls for it to generate revenues primarily
from fees charged to customers for the volume of video content delivered. To
date, however, the Company has generated most of its revenues from flat rate
monthly fees charged to customers based upon video delivery and encoding
services. In addition, certain of the Company's Web site customers have traded
advertising space on their Web pages for video delivery services provided by the
Company. Although monthly fees charged by the Company typically are based on
estimates of the amounts such customers would pay under the pay-per-delivery
approach, flat rate billing exposes the Company to the risk that end-users will
download customers' video content at higher-than-anticipated rates, causing the
Company to incur bandwidth expenses in excess of revenues. Likewise, trading
video delivery services for advertising space exposes the Company to the risk
that it will not generate sufficient proceeds from sales of advertising to cover
its costs of supplying video delivery services. The Company does not currently
have the expertise or staffing necessary to liquidate significant amounts of
Internet advertising inventory through the direct sale of advertising to clients
or the sale of advertising space to a reseller of such space, and there can be
no assurance that the Company will develop such expertise and staffing or that
the Company will establish a strategic relationship with a company having such
capacities. There can be no assurance that the Company's pay-per-delivery fee
structure will become widely accepted by Web site owners and advertisers, and
the failure of the Company to successfully implement its pay-per-delivery fee
structure or a profitable monthly fee equivalent would have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.

UNCERTAIN MARKET FOR THE COMPANY'S SPECIALIZED SERVICES

     Use of the Internet by consumers is at a very early stage of development,
and market acceptance of the Internet as a medium for information,
entertainment, commerce and advertising is subject to a high level of
uncertainty. The Company's success will depend in large part on the development
and acceptance of the Internet as an advertising medium and, specifically, the
use of advertising and Web sites which incorporate video. There can be no
assurance that a market for Internet video delivery services will develop or
that any such market, if developed, will offer significant revenue opportunities
for specialized video delivery service providers such as the Company. The
Company's customers have only limited experience, if any, with the Internet as a
marketing and advertising medium, and neither its customers nor their
advertising agencies have devoted a significant portion of their advertising
budgets to Internet-based marketing and advertising activities in the past. In
order for the Company to generate revenues from Web site owners and advertising
customers, Web site owners, advertisers and advertising agencies must direct a
portion of their budgets to Internet-based marketing and advertising activities
which incorporate video. There can be no assurance that Web site owners,
advertisers or advertising agencies will be persuaded to allocate or continue to
allocate portions of their budgets to Internet-based marketing and advertising
activities or, if so persuaded, that they will incorporate video in such
marketing and advertising activities. The Company's services are highly
specialized and designed solely to meet Web site owners' and advertisers'
Internet video delivery needs. Accordingly, if Internet-based marketing and
advertising activities incorporating video are not widely accepted by
advertisers and advertising agencies, the Company's business, prospects,
financial condition and results of operations would be materially adversely
affected.

     The Company's ability to achieve and maintain a leadership position in the
Internet video delivery market will depend, among other things, on the Company's
success in providing high-speed, high-quality video over the Internet, the
Company's marketing efforts and the reliability of the Company's networks and
services, none of which can be assured. If Web site owners and advertisers do
not perceive the Company's services to be of high quality, or if the Company
introduces new services or enters into new business ventures that are not
favorably received, the Company's business, prospects, financial condition and
results of operations would be materially adversely affected. Moreover, even if
a significant market for video delivery services develops, there can be no
assurance that Web site owners and advertisers will retain the Company to
provide video delivery services. Because of the specialized nature of the
Company's services, the absence of a market for video delivery services, or the
Company's failure to obtain a significant share of such market if it develops,
would have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.

     In order to attract early customers and achieve penetration of the market
for Internet video delivery, the Company initially provided up to 90 days of
free trial service to certain customers. Of the 20 customers who received such
discounts, all such customers have emerged from the free trial period, 16 have
continued using the

                                                                              14
<PAGE>   15
Company's services and four customers discontinued the Company's services. There
can be no assurance that the Company's customers will continue to utilize the
Company's services or that the Company will be able to attract and retain new
customers. The failure of the Company to retain customers after the free trial
period or the inability of the Company to attract and retain new customers could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.

RISKS ASSOCIATED WITH STRATEGIC ALLIANCE WITH NBC MULTIMEDIA

     As part of the Company's strategy to provide video delivery services to the
top tier of Internet multimedia content sites, in October 1997 the Company
entered into the Strategic Alliance Agreement with NBC Multimedia. The terms of
the Strategic Alliance Agreement subject the Company to a number of risks and
uncertainties, including the following:

     Issuance of Stock. As consideration for the strategic alliance, the Company
issued 1,280,000 shares of Series G Preferred to NBC pursuant to the terms of a
Preferred Stock Purchase Agreement among the Company, NBC and NBC Multimedia
(the "Series G Purchase Agreement"). No cash consideration was received by the
Company for the Series G Preferred. In addition, the Series G Purchase Agreement
granted NBC Multimedia the right to purchase $2.0 million of Common Stock at the
initial public offering price in a direct offering (the "Direct Offering"), and
NBC Multimedia exercised this right. In aggregate, NBC and NBC Multimedia hold
approximately 10.8% of the Company's Common Stock and Common Stock equivalents,
at December 31, 1997.

     InterVU Payment Obligations. InterVU is fully obligated to pay to NBC
Multimedia a total of $2.0 million in a series of non-refundable payments (the
"Prepayments"), the first of which was in the amount of $750,000 and was paid
immediately upon the completion of the Direct Offering. The Prepayments are
designed to cover certain production, operational and promotional costs. If the
Strategic Alliance Agreement is terminated for any reason, all unpaid
Prepayments become immediately due and payable to NBC. There can be no assurance
that NBC Multimedia will not terminate the Strategic Alliance Agreement, with or
without cause. The termination of the Strategic Alliance Agreement would have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. See "NBC Multimedia's Termination Rights"
below.

     Broad Discretionary Powers of NBC Multimedia. The Strategic Alliance
Agreement provides NBC Multimedia with broad discretion in a number of areas,
including (i) the determination of what materials and content will be made
available for downloading through the InterVU Network, (ii) the promotional
obligations of NBC Multimedia and (iii) the obligation of NBC Multimedia to
introduce the Company to television stations associated with the NBC television
network. The failure of NBC Multimedia to make a significant amount of
compelling material available for downloading through the InterVU Network and to
promote the Company and its Internet video delivery services could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.

     Limited Nature of Exclusive Rights. The Strategic Alliance Agreement
provides that, subject to certain exceptions, during the Exclusive Term (as
defined below), NBC Multimedia will not make available for transmission over the
Internet any entertainment (i.e., excluding sports, news and other
non-entertainment programming) audio/video content in any format to users via a
Web site operated or controlled by NBC ("NBC Internet Sites") other than
pursuant to the Strategic Alliance Agreement. The Strategic Alliance Agreement
expressly excludes from this provision audio/video content of less than five
seconds in length. In addition, NBC Multimedia is not restricted from making
such audio/video content available on any Internet site that is not an NBC
Internet Site. There can be no assurance that NBC Multimedia will not make its
audio/video content available on other Internet sites. A determination by NBC
Multimedia to make its audio/video content available on other Internet sites
could have a material adverse effect on the amount of revenues generated
pursuant to the Strategic Alliance Agreement and could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.

     The Exclusive Term is defined as the period commencing on October 10, 1997
and ending on October 10, 1999; provided that if certain mutually agreed cost
and revenue goals are established and met, then the Exclusive Term

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<PAGE>   16

shall be automatically extended until October 10, 2001. Although the Strategic
Alliance Agreement provides that the parties shall meet and consult with one
another in good faith and shall make good faith efforts to determine such cost
and revenue goals on or before October 10, 1998, there can be no assurance that
the Company and NBC Multimedia will be able to establish such mutually agreeable
cost and revenue goals. The failure of the Company and NBC Multimedia to reach
an agreement on this issue could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.

     NBC Multimedia's Termination Rights. During the Exclusive Term, NBC
Multimedia may terminate the Strategic Alliance Agreement without cause by
giving 90 days prior written notice to the Company. NBC Multimedia also has the
right to terminate the Strategic Alliance Agreement if, among other things, the
services provided by the Company pursuant to such agreement materially decline
below industry standards or fail to conform to the specifications set forth in
the Strategic Alliance Agreement and the Company is unable to cure such failure
within ten days of its receipt of notice. The Strategic Alliance Agreement
requires the Company to maintain a successful user connection rate of at least
98%. The failure to maintain such a connection rate could be deemed to be a
material breach by the Company of the Strategic Alliance Agreement, giving NBC
Multimedia the right to terminate the Strategic Alliance Agreement for cause.
Although the Company expects to maintain the required connection rate, there can
be no assurance that the Company can do so. The Company has represented to NBC
Multimedia in the Strategic Alliance Agreement that it will not use the InterVU
Network in connection with the encoding or distribution of adult video content.
Any such activity would constitute a breach of that representation and warranty
and could result in a determination by NBC Multimedia to terminate the Strategic
Alliance Agreement for cause. The termination of the Strategic Alliance
Agreement, or the announcement of an intent to terminate, would have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. Among other things, any such termination or announcement
of an intent to terminate could cause other customers of the Company, especially
NBC television affiliates then using the Company's video delivery services, if
any, to terminate their relationship with the Company and would also have a
negative impact on the Company's reputation in the market for Internet video
delivery services, which would have a material adverse effect on the Company's
ability to market its services to Web site owners and advertisers.

     If NBC Multimedia terminates the Strategic Alliance Agreement without cause
during the first two years of the Exclusive Term, then NBC or NBC Multimedia
would be required to return to the Company 600,000 shares of the Company's
Series G Preferred (or the shares of Common Stock into which such shares may in
the future be converted) if the termination occurs at any time during the first
two years of the Exclusive Term; provided that NBC or NBC Multimedia would not
be required to return any shares until the Company had made the $2.0 million of
Prepayments. NBC Multimedia is not obligated to return any shares to the Company
if the Strategic Alliance Agreement is terminated by NBC Multimedia for cause.

     Limited Nature of Revenue Sharing Rights. The Strategic Alliance Agreement
provides for the establishment of a new "area" (the "Revenue Sharing Area") to
be created and placed by NBC Multimedia on its Web site to allow, among other
things, the distribution of NBC audio/video clips and the promotion of the
business relationship between the Company and NBC Multimedia. The Company is
entitled to receive 30% of the actual NBC cash receipts, if any, from
advertising, transactions and subscriptions directly attributable to any Revenue
Sharing Area less certain costs and expenses associated with the Revenue Sharing
Area. Since no Revenue Sharing Areas have yet been established, no revenues have
been generated. There can be no assurance that any revenues will be generated by
the Revenue Sharing Area. In addition, the Strategic Alliance Agreement permits
NBC Multimedia to opt out of its 30% revenue sharing obligation by paying for
the Company's video delivery services at rates at least as favorable as the most
favorable rates offered by the Company to third parties, other than special
promotional rates. NBC Multimedia would have an incentive to exercise its right
to opt out of the revenue sharing obligation if the costs to NBC Multimedia of
sharing revenue exceed the amount that NBC Multimedia would be required to pay
the Company based on its most favorable video delivery rates.

                                                                              16

<PAGE>   17
DEPENDENCE ON KEY PERSONNEL

     The Company's future performance and development will depend, in large
part, upon the efforts and abilities of certain members of senior management,
including Harry E. Gruber, its Chief Executive Officer and Chairman of the
Board, and Brian Kenner, its Vice President and Chief Technology Officer. The
loss of service of one or more members of senior management could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. The Company does not have employment
agreements with any of its officers or employees. The Company, however, has
obtained a key man life insurance policy on the life of Mr. Kenner in the amount
of $1.0 million, of which the Company is the sole beneficiary. The Company does
not have key man life insurance on Dr. Gruber. In addition, the Company believes
that its future success will depend upon its continuing ability to identify,
attract, motivate, train and retain other highly skilled managerial, financial,
engineering, sales and marketing and other personnel. Competition for such
personnel is intense. There can be no assurance that the Company will be
successful in identifying, attracting, motivating, training and retaining the
necessary personnel, and the failure to do so could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.

DEPENDENCE ON INCREASED USAGE AND STABILITY OF THE INTERNET

     The future of the Internet as a center for information exchange,
advertising, entertainment and commerce will depend in significant part on
continued rapid growth in the number of households and commercial, educational
and government institutions with access to the Internet, in the level of usage
by individuals and businesses, and in the number and quality of products and
services designed for use on the Internet. Because usage of the Internet as a
medium for on-line exchange of information, advertising, entertainment and
commerce is a recent phenomenon, it is difficult to predict whether the number
of users drawn to the Internet will continue to increase. There can be no
assurance that Internet usage patterns will not decline as the novelty of the
medium recedes or that the quality of products and services offered on-line will
improve sufficiently to continue to support user interest.

     Moreover, critical issues regarding the stability of the Internet's
infrastructure remain unresolved. The rapid rise in the number of Internet users
and increased transmission of audio, video, graphical and other multimedia
content over the Web has placed increasing strains on the Internet's
communications and transmission infrastructures. Continuation of such trends
could lead to significant deterioration in transmission speeds and reliability
of the Internet and could reduce the usage of the Internet by businesses and
individuals. Any failure of the Internet to support the ever-increasing number
of users due to inadequate infrastructure, or otherwise, could materially and
adversely affect the acceptance of the Company's products and services which
would, in turn, materially and adversely affect the Company's business,
prospects, financial condition and results of operations.

RISKS OF TECHNOLOGICAL CHANGE

     The markets for Internet services are characterized by rapid technological
developments, frequent new product introductions and evolving industry
standards. The emerging nature of Internet products and services and their rapid
evolution will require that the Company continually improve the performance,
features and reliability of the InterVU Network and the Company's customer
service, particularly in response to competitive offerings. There can be no
assurance that the Company will be successful in responding quickly, cost
effectively and sufficiently to these developments. There can be no assurance
that the Company will be successful in achieving widespread acceptance of its
services before competitors offer products and services with speed and
performance similar to the Company's current offerings. In addition, the
widespread adoption of new Internet or telecommunications technologies or
standards could require substantial expenditures by the Company to modify or
adapt its video delivery service and could fundamentally affect the character,
viability and frequency of Internet-based advertising, either of which could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. In addition, new services or enhancements
offered by the Company may contain design flaws or other defects that could have
a material adverse effect on the Company's business, prospects, financial
condition and results of operations.

                                                                              17
<PAGE>   18

SECURITY RISKS

     Despite the implementation of security measures, the Company's networks may
be vulnerable to unauthorized access, computer viruses and other disruptive
problems. Internet Service Providers ("ISPs") and On-line Service Providers
("OSPs") have in the past experienced, and may in the future experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees or others. Although the Company
intends to continue to implement industry-standard security measures,
industry-standard security measures have been circumvented in the past, and
there can be no assurance that measures implemented by the Company will not be
circumvented in the future. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
the Company's customers and end-users, which could have a material adverse
effect on the Company's business, prospects, financial condition and results of
operations.

RISKS OF ENCODING AND DISTRIBUTING ADULT VIDEO CONTENT

     While the Company does not currently provide its services to Web sites that
host adult videos, the Company may in the future provide services to such sites.
In determining whether to encode and/or deliver adult video content through the
InterVU Network, the Company intends to take into account the overall costs of
providing such services, including the potential adverse impact on its strategic
alliance with NBC Multimedia and other possible negative reaction from its
existing and potential Web site and advertising customers. The Company has
represented to NBC Multimedia in its Strategic Alliance Agreement that it will
not use the InterVU Network in connection with the encoding or distribution of
adult video content. Any such activity would constitute a breach of that
representation and warranty and could result in a determination by NBC
Multimedia to terminate the Strategic Alliance Agreement. The Company could also
be exposed to liability for encoding and hosting adult content deemed to be
indecent or obscene. Although the United States Supreme Court has upheld lower
court decisions declaring the anti-indecency provisions of the
Telecommunications Act of 1996 unconstitutional, the law relating to liability
for transmitting obscene or indecent material over the Internet remains
unsettled.

     The loss of customers as a result of the Company's becoming associated with
adult Web sites could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. Such association could
result even if the Company does not use the InterVU Network in connection with
the encoding or distribution of adult video content. For example, if an end-user
utilizing an Internet browser attempts to view an adult video and such end-user
does not have the necessary software, or "plug-in," he or she will automatically
be directed to the browser's plug-in finder page which lists the particular
plug-ins, including the InterVU Player, that can display the video. If the
InterVU Player is selected by the end-user, or if the end-user has already
installed the InterVU Player, the adult video will be presented within the
InterVU Player and with the InterVU name displayed.

ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS

     Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws could discourage potential
acquisition proposals, could delay or prevent a change in control of the Company
and could make removal of management more difficult. Such provisions could
diminish the opportunities for a stockholder to participate in tender offers,
including tender offers that are priced above the then current market value of
the Common Stock. The provisions also may inhibit increases in the market price
of the Common Stock that could result from takeover attempts. These provisions
include a Board of Directors consisting of three classes; a limitation which
permits only the Board of Directors, the Chairman or the President of the
Company to call a special meeting of stockholders; a prohibition against the
stockholders acting by written consent; and certain advance notice procedures
for nominating candidates for election to the Board of Directors and for
proposing business before a meeting of stockholders. Additionally, the Board of
Directors of the Company, without further stockholder approval, may issue up to
3,720,000 shares of Preferred Stock, in one or more series, with such terms as
the Board of Directors may determine, including rights such as voting, dividend
and conversion rights which could adversely affect the voting power and other
rights of the holders of Common Stock. Preferred Stock may be issued quickly
with terms which delay or prevent the change in control of the Company or make
removal of management more

                                                                              18

<PAGE>   19
difficult. Also, the issuance of Preferred Stock may have the effect of
decreasing the market price of the Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

     Sales of a substantial number of shares of Common Stock in the public
market following the Offering could materially adversely affect the prevailing
market price of the Company's Common Stock. The Company has 9,377,404 shares of
Common Stock outstanding. The 2,000,000 shares offered in the IPO and the shares
offered in the Direct Offering are freely tradeable under the Securities Act of
1933, as amended (the "Securities Act"), unless held by "affiliates" of the
Company as defined in Rule 144 under the Securities Act. Of the remaining
7,166,878 shares of Common Stock, all will be eligible for sale under Rule 144
under the Securities Act, subject to certain volume and other limitations,
following expiration of the nine-month lockup agreements with Josephthal, Lyon &
Ross Incorporated ("Josephthal"). Josephthal may, in its sole discretion, and at
any time without notice, release all or any portion of the shares subject to
such lock-up agreements. In addition, the shares of Common Stock issuable upon
conversion of the Series G Preferred will become eligible for public sale under
Rule 144 in October 1998. The Company also intends to register on Form S-8
following the effective date of the Offering, a total of 1,889,400 shares of
Common Stock reserved for issuance or subject to outstanding options granted
under the Company's 1996 Stock Plan. The Company also sold to the Underwriters,
for nominal consideration, Advisors' Warrants to purchase from the Company
200,000 shares of Common Stock. The Advisors' Warrants are initially exercisable
at a price per share equal to 120% of the initial public offering price for a
period of four years commencing one year after the date of this Prospectus and
are restricted from sale, transfer, assignment or hypothecation for a period of
twelve months from the date hereof, except to officers of the Representatives.
The Advisors' Warrants also provide for adjustment in the number of shares of
Common Stock issuable upon the exercise thereof as a result of certain
subdivisions and combinations of the Common Stock. The Advisors' Warrants grant
to the holders thereof certain rights of registration for the securities
issuable upon exercise of the Advisors' Warrants.

CONTROL BY EXISTING STOCKHOLDERS

     As of February 27, 1998, members of the Board of Directors and the
executive officers of the Company, together with members of their families and
entities that may be deemed affiliates of or related to such persons or
entities, beneficially own approximately 42.1% of the outstanding shares of
Common Stock of the Company. Accordingly, these stockholders may be able to
elect all of the Company's Board of Directors and determine the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. This level of ownership may have a significant effect in delaying,
deferring or preventing a change in control of the Company and may adversely
affect the voting and other rights of other holders of the Common Stock.

MANAGEMENT'S DISCRETION OVER USE OF PROCEEDS OF THE OFFERING

     The Company expects to use the net proceeds of the Offering for expansion
of sales and marketing efforts, additional research and development expenditures
and general corporate purposes, including working capital and capital
expenditures. In addition, the Company intends to use a portion of the net
proceeds to fund obligations under its strategic alliance agreement with NBC
Multimedia. The Company may, if an opportunity arises, use an unspecified
portion of the net proceeds to acquire or invest in complementary businesses,
products and technologies. From time to time, in the ordinary course of
business, the Company expects to evaluate potential acquisitions of such
businesses, products or technologies. However, the Company has no present
understandings, commitments or agreements with respect to any material
acquisition or investment. Accordingly, management will have significant
flexibility in applying the net proceeds of the Offering. The failure of
management to apply such funds effectively could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.

GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES

     The Company is not currently subject to direct regulation by any domestic
or foreign governmental agency, other than regulations applicable to businesses
generally and laws or regulations directly applicable to the Internet.

                                                                              19
<PAGE>   20
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
pricing, content, copyrights, distribution and characteristics and quality of
products and services. Furthermore, the growth and development of Internet
markets may prompt calls for more stringent consumer protection laws that may
impose additional burdens on companies conducting business online. The adoption
of any additional laws or regulations may decrease the growth of Internet use,
which could, in turn, decrease the demand for the Company's services or increase
the cost of doing business, or otherwise have an adverse effect on the Company's
business, prospects, financial condition and results of operations. Moreover,
the applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Internet could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.

REQUIREMENTS FOR ADDITIONAL CAPITAL

     The Company believes that the net proceeds from the Offering, together with
its existing cash, cash equivalents, and capital lease financing, will be
sufficient to meet its working capital and capital expenditure requirements
through the end of 1998. However, the Company may need to raise substantial
additional funds if its estimates of working capital and/or capital expenditures
change or prove inaccurate or in order for the Company to respond to unforeseen
technological or marketing hurdles or to take advantage of unanticipated
opportunities. Over the longer term, it is likely that the Company will require
substantial additional funds to finance significant capital equipment
expenditures and lease commitments for additional servers to expand the InterVU
Network, as well as for product development, marketing, sales and customer
support needs. There can be no assurance that any such funds will be available
at the time or times needed, or available on terms acceptable to the Company. If
adequate funds are not available, or are not available on acceptable terms, the
Company may not be able to continue to develop new technologies and services or
otherwise respond to competitive pressures. Such inability could have a material
adverse effect on the Company's business, prospects, financial condition and
result of operations.

NO PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

     The trading price of the Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as actual or
anticipated variations in quarterly operating results, announcements of
technological innovations, new sales formats or new products or services by the
Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in Internet markets, changes in the market
valuations of other Internet companies, announcements by the Company or its
competitors of significant acquisitions, strategic partnerships, joint ventures
or capital commitments, additions or departures of key personnel, sales of
Common Stock and other events or factors, many of which are beyond the Company's
control. In addition, the stock market in general, and the market for
Internet-related and technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of such companies. The trading prices of many
technology companies' stocks are at or near historical highs and reflect price
earnings ratios substantially above historical levels. There can be no assurance
that these trading prices and price earnings ratios will be sustained. These
broad market and industry factors may materially and adversely affect the market
price of the Common Stock, regardless of the Company's operating performance. In
the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted against
such company. Such litigation, if instituted, could result in substantial costs
and a diversion of management's attention and resources, which would have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.

                                                                              20
<PAGE>   21
ITEM 2.  PROPERTIES

    The Company is headquartered in facilities consisting of approximately 7,800
square feet in Solana Beach, California, which the Company occupies under two
leases and one sublease. Both leases expire in 1999 and the sublease is on a
month to month basis. Additionally, the Company maintains a regional office in
New York City consisting of approximately 520 square feet under a sublease which
expires in 1999. The Company anticipates opening a select number of additional
regional sales offices in the future to address the demand for its video
delivery services. The Company is currently in negotiations to secure additional
office space in San Diego County of up to 25,000 square feet. If such
negotiations are successful the Company believes it will have sufficient space
to meet the Company's space requirements for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

    The Company is not a party to any legal proceedings.

ITEM 4.  SUBMISSIONS OF MATTER TO A VOTE OF THE SECURITY HOLDERS

    In November 1997, the Company submitted the following matters to a vote of
the stockholders by means of a written consent of stockholder to all
stockholders of record on October 31, 1997:

    1. To amend the restate the Company's certificate of incorporation to effect
a reverse stock split wherein each share of Common Stock would be converted to
 .6298 of one share of validly issued, fully paid and nonassessable Common Stock.

    Votes were cast as follows:

    In favor          5,563,874 shares (78%)

    Opposed           none

    2. To amend and restate the Company's certificate of Incorporation to
increase the number of shares of stock authorized for issuance to twenty five
million (25,000,000), divided as follows: (i) twenty million (20,000,000) shares
of Common Stock with a par value of $.001 per share and (ii) five million
(5,000,000) shares of Preferred Stock with a par value of $.001 per share, of
which one million two hundred eighty thousand were designated Series G
Convertible Preferred Stock.

    Votes were cast as follows:

    In favor          5,563,874 shares (78%)

    Opposed           none

                                                                              21

<PAGE>   22

    3. To amend and restate the Certificate Incorporation to provide for a
classified board of directors divided, as nearly as possible, into three equal
classes.

    Votes were cast as follows:

    In favor          5,563,874 shares (78%)

    Opposed           none

    4. To approve a form of indemnification agreement to be entered into by and
among the Company and its directors and officers.

    Votes were cast as follows:

    In favor          5,563,874 shares (78%)

    Opposed           none


                                                                              22
<PAGE>   23
                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS

    The Company's common stock is traded on The Nasdaq Stock MarketSM under the
symbol ITVU. Trading of the Company's stock commenced on November 23, 1997. The
following table represents the quarterly high and low sales prices of shares of
common stock as reported by The Nasdaq Stock Market since the stock commenced
trading.

<TABLE>
<CAPTION>
                                                            High         Low
                                                           ------       -----
       <S>                                                 <C>          <C>
        Calendar 1997
        Fourth Quarter (November 23,1997 to
          December 31, 1997)                               10 1/4       8 1/8
</TABLE>

        As of March 1, 1998, there were 127 holders of record of the Company's
common stock.

USE OF PROCEEDS

    In August 1997, the Company filed a registration statement under the
Securities Act of 1993 to sell up to 2.3 million shares of Common Stock in its
IPO. The effective date of registration of the IPO was November 19, 1997, under
Commission file No. 333-33521. The offering was managed by Josephthal Lyon &
Ross and Cruttenden Roth and closed on November 23, 1997 after selling an
aggregate of 2,210,526 shares of Common Stock in the IPO and Direct Offering.
Expenses related to the IPO and Direct Offering incurred through December
31,1997 were as follows:

<TABLE>
<CAPTION>

          <S>                                                     <C>           <C>
          Proceeds from IPO.....................................                $  19,000,000
          Proceeds from Direct Offering.........................                    2,000,000
                                                                                -------------
          TOTAL PROCEEDS........................................                   21,000,000

          Underwriters' Discount................................  $1,330,000
          Underwriter's advisor fee.............................     140,000
          Securities and Exchange Commission registration fee...       8,557
          NASD filing fee.......................................       2,625
          Nasdaq National Market listing fee....................      39,917
          Non-accountable expense allowance.....................     190,000
          Legal fees and expenses...............................     199,054
          Accounting fees and expenses..........................     190,800
          Printing and engraving expenses.......................     168,843
          Blue Sky fees and expenses............................      12,665
          Transfer agent and registrar fees.....................       3,131
          Miscellaneous.........................................     146,385
                                                                  ----------
            TOTAL OFFERING COSTS................................                    2,431,977
                                                                                -------------
          NET PROCEEDS..........................................                $  18,568,023
                                                                                =============
</TABLE>


                                                                             23
<PAGE>   24

   Since completion of the IPO and Direct Offering in November 1997, the Company
has used $1,322,062 of the proceeds in the following manner:

<TABLE>
<S>                                                <C>
Prepayment to NBC Multimedia, an
  affiliate of the Company, for production,
  operating and advertising costs
  associated with certain NBC
  websites .....................................   $  750,000
Purchase of equipment and property .............      173,937
General and Administrative and
  working capital ..............................      151,214
Research and Development expenditures ..........      123,972
Sales & Marketing expenditures .................      122,939
                                                   ----------
Total proceeds used through December 31, 1997 ..   $1,322,062
</TABLE>

   Except where noted, no proceeds were paid directly or indirectly to
directors, officers, general partners of the Company or to persons holding ten
percent or more of any class of equity security issued by the Company, or to any
other affiliate of the Company.

    The Company has never declared dividends or paid any cash dividends on its
capital stock. The Company currently intends to retain all future earnings, if
any, for use in the operation and development of its business and, therefore,
does not expect to declare or pay any cash dividends on its Common Stock in the
foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

   On January 24, 1997, the Company sold an additional 13,500 shares of Series E
Convertible Preferred Stock at $10 per share to various accredited individual
investors for a total consideration of $135,000.

   On February 4, 1997, the Company sold an additional 49,650 shares of Series E
Convertible Preferred Stock at $10 per share to various accredited individual
investors for a total consideration of $496,500.

   On February 27, 1997, the Company sold an additional 47,350 shares of Series
E Convertible Preferred Stock at $10 per share to various accredited individual
investors for a total consideration of $473,500.

   On July 16, 1997, the Company sold an additional 677,498 shares of Series F
Convertible Preferred Stock at $6 per share to various accredited individual
investors for a total consideration of $4,064,988.

   On August 8, 1997, the Company sold an additional 44,166 shares of Series F
Convertible Preferred Stock at $6 per share to various accredited individual
investors for a total consideration of $264,996.

   In October 1997, the Company issued 1,280,000 shares of Series G Convertible
Preferred Stock to NBC, an accredited institutional investor, for consideration
consisting of NBC Multimedia's making the Company the exclusive provider of
technology and services for the distribution of NBC's entertainment audio/visual
content by means of the Internet.

   Underwriters were not retained in connection with the sale of any of the
Company's currently outstanding securities. All sales were made in private
placements to employees or directors of the Company or to accredited individual
investors or accredited institutional investors. The Company relied upon an
exemption from registration under Section 4(2) of the Securities Act in
connection with each of these transactions.


                                                                              24

<PAGE>   25
ITEM 6.  SELECTED FINANCIAL DATA

   The selected financial data set forth below should be read in conjunction
with Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements and Notes in Item 8 -
Financial Statements and Supplementary Data. The statement of operations data
for the period from the date of August 2, 1995 (Inception) through December 31,
1995 and for the years ended December 31, 1996 and 1997, and the balance sheet
data as of December 31, 1995, 1996 and 1997 are derived from the Company's
financial statements audited by Ernst & Young LLP, independent auditors.

                       IN THOUSANDS EXCEPT PER SHARE DATA

<TABLE>
<CAPTION>
                                              PERIOD FROM
                                            AUGUST 2, 1995                YEAR ENDED
                                              (INCEPTION)                 DECEMBER 31,
                                             TO DECEMBER 31,     -------------------------------
                                                  1995               1996               1997
                                              ------------       ------------       ------------
<S>                                           <C>                <C>                <C>
STATEMENT OF OPERATIONS DATA:
  Total revenues .......................         $  --           $         --       $        144
  Operating expenses:
     Research and development ..........            33                  1,420              1,703
     Selling, general and
     administrative ....................            16                    910              3,898
                                                 -----           ------------       ------------
  Total operating expenses .............            49                  2,330              5,601
                                                 -----           ------------       ------------
  Loss from operations .................           (49)                (2,330)            (5,457)
  Interest income ......................             3                     52                192
                                                 -----           ------------       ------------
  Net loss .............................         $ (46)          $     (2,278)      $     (5,265)
                                                 =====           ============       ============
  Pro forma net loss per share .........                         $       (.66)      $       (.90)
                                                                 ============       ============
  Shares used in computing pro
     forma net loss per share(1) .......                            3,440,931          5,822,594
                                                                 ============       ============
</TABLE>

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                                   --------------------
                                                     1996        1997
                                                   --------    --------
<S>                                                <C>         <C>
BALANCE SHEET DATA:
  Cash and cash equivalents ................       $  2,508    $ 21,380
  Working capital ..........................          2,365      20,947
  Total assets .............................          2,776      22,130
  Long-term liabilities ....................             27           7
  Total stockholders'equity ................          2,597      21,532
</TABLE>

----------

(1) See Note 1 of Notes to Financial Statements for an explanation of the number
    of shares used in computing pro forma net loss per share.


                                                                              25

<PAGE>   26

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

     The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors include,
but are not limited to, the risks detailed under the caption "Factors that May
Affect Future Performance" Item 1. - Business.

OVERVIEW

     The Company was incorporated in August 1995 and launched the InterVU
Network in December 1996. The Company began recognizing revenue during 1997
through the delivery of video content over the InterVU Network and the provision
of related services to the Company's initial customers.

     The Company offers its services to Web site owners and advertisers for fees
based on the volume of video content delivered, for flat fees based on estimates
of video to be delivered or for a combination thereof. The Company expects to
generate additional revenues in the future from selling advertising space on Web
pages when Web site owners trade such space on their pages for video encoding
and delivery services performed by the Company. The Company also generally
charges its customers fees for encoding analog video into digital form for
transmission over the Internet.

     The Company has incurred net losses in each fiscal period since its
inception and, as of December 31, 1997, had an accumulated deficit of $7.6
million. To date, the Company has not generated any significant revenues, and,
as a result of the significant expenditures that the Company plans to make in
sales and marketing, research and development and general and administrative
activities over the near term, the Company expects to continue to incur
significant operating losses and negative cash flows from operations on both a
quarterly and annual basis through at least the end of fiscal 1998 and for the
foreseeable future thereafter. The Company is in the early stages of executing
its business model, and the profit potential of the Company's fee based model
for the delivery of video content or advertising is unproven in the Internet
industry. Because its success is dependent on the growth of the video market on
the Internet, as well as the growth of the Internet industry, the Company must,
among other things, develop services that are widely accepted by Web site
owners, advertisers and end-users at prices that will yield a profit. There can
be no assurance that the Company's services will achieve broad commercial or
consumer acceptance. See Item 1. - Business "Factors that May Affect Future
Performance -- Limited Operating History; Accumulated Deficit; Anticipated
Losses," "-- Potential Fluctuations in Quarterly Operating Results;
Unpredictability of Future Revenues," "-- Unproven Acceptance of the Company's
Fee Structure" and "-- Uncertain Market for the Company's Specialized Services."

   As consideration for the strategic alliance with NBC Multimedia, the Company
issued 1,280,000 shares of Series G Preferred to NBC, and NBC Multimedia granted
the Company exclusive rights to deliver most NBC audio/video content from NBC
Web sites. NBC Multimedia may terminate the Strategic Alliance Agreement between
the Company and NBC Multimedia without cause by giving 90 days prior written
notice and, following the completion of the Offering, is required to return (i)
all shares of Series G Preferred (or the shares of Common Stock into which such
shares may in the future be converted) if termination occurs prior to January
10, 1998 and NBC Multimedia has not, at a minimum, displayed a button or link
containing a copy of the Company's logo on the NBC Web site or (ii) 600,000
shares of Series G Preferred (or Common Stock, as the case may be) if the
termination occurs at any other time during the first two years of the exclusive
term of the Strategic Alliance Agreement. Notwithstanding the foregoing, NBC
Multimedia is not required to return any such shares until it has received from
the Company the $2.0 million of non-refundable payments described below under
"-- Liquidity and Capital Resources." The Company will determine the fair value
of the Series G Preferred issued to NBC on the dates the requirements that


                                                                             26

<PAGE>   27
NBC return some or all of the shares of Series G Preferred upon termination of
the Strategic Alliance Agreement lapse. Based on these provisions, the Company
has charged to expense in January 1998 for the fair value of 680,000 shares of
Series G Preferred in the amount of $3,375,580, and expects to charge the then
fair value of the remaining 600,000 shares of Series G Preferred to expense in
the quarter ending December 31, 1999. Should the Company renegotiate or waive
these provisions, removing NBC's obligation to return shares of Series G
Preferred (or Common Stock, as the case may be), the Company would expense the
fair value of the shares at that time. The Company believes that the fair value
of each share of Series G Preferred will roughly approximate the price per share
at which the Common Stock is then trading, multiplied by the .6298 conversion
ratio applicable to the Series G Preferred. These noncash charges are likely to
be substantial and are likely to have a material adverse impact on the Company's
results of operations in the periods such expenses are recognized.

     The Company's economic model is predicated upon achieving significant
economies of scale relative to variable and, to a lesser extent, fixed
telecommunications costs. The Company has developed a series of software tools
and a software system to analyze Internet performance, specifically related to
congestion points on the Internet. The Company's operating strategy is to reduce
the number of congestion points experienced by end-users through the redirection
of an individual's request for video content to the optimal server location. To
date, the Company has contracted for telecommunications capacity and services
primarily from major Internet Service Providers ("ISPs"). It is the Company's
intention to continue to contract with selected ISPs in the future for Internet
services as well as to procure and install selected servers over a variety of
Internet backbones and regional POPs. In addition, the Company may incur
significant capital equipment expenditures and lease commitments for additional
servers to expand the InterVU Network, although these expenditures would be less
significant than those required of ISPs. The amount and timing of such
expenditures will depend upon the level of demand for the Company's services.
The Company believes that as customer adoption rates for the Company's service
increases, the corresponding levels of video delivery volumes will allow the
Company to generate economies of scale relative to the expenses it incurs with
ISPs as well as the expenses emanating from the maintenance and amortization of
its servers. To the extent that such economies of scale are not realized, the
Company's business, prospects, financial condition and results of operations
will be materially adversely affected.

RESULTS OF OPERATIONS

     The financial results for the period from August 2, 1995 (Inception) to
December 31, 1997 reflect the Company's initial organizational efforts, research
and development activities, capital raising activities and initial deployment of
the Company's video delivery service. The Company believes that its limited
operating history makes prediction of future results of operations difficult
and, accordingly, that its operating results should not be relied upon as an
indication of future performance. The Company began to recognize revenue during
the 1997 and as such, the Company believes that any comparison of the results of
operations for the period from August 2, 1995 (Inception) to December 31, 1995
with the results for the twelve months ended December 31, 1996 and 1997 is not
meaningful.

     Total revenues consist of fees for delivery of video content over the
InterVU Network and related customer services. Revenues from fees from video
delivery are recognized at the time of delivery. Revenues from related customer
services are recognized during the period in which services are provided. Total
revenues were $143,500 for 1997, most of which was derived from delivery fees
and customer services provided to the Company's initial customers. In order to
attract early customers and achieve penetration of the market for Internet video
delivery, the Company initially provided up to 90 days of free trial service to
certain customers. Of the 20 customers who received such discounts, all such
customers have emerged from the free trial period, 16 have continued using the
Company's services and four customers discontinued the Company's services. There
can be no assurance that the Company's customers will continue to utilize the
Company's services or that the Company will be able to attract and retain new
customers. The Company is not currently offering free trial services and has
gained 20 new customers for its video hosting and V-Banner services since August
1997. The Company may elect to resume this or other sales practices in the
future if it determines they are warranted.


                                                                              27
<PAGE>   28
     Research and development expenses consist primarily of salaries and related
expenses for personnel, fees to outside contractors and consultants, the
allocated costs of facilities, and the depreciation and amortization of capital
equipment. Research and development expenses for the years ended December 31,
1996 and 1997 were $1.4 million, and $1.7 million, respectively. The increase in
expenses was attributable to the increase in personnel and related expenses.
Research and development expenses to date have focused in three areas: the
development of software tools and enabling platforms for the distribution of
video content, the development of tools to analyze Internet performance to
subsequently redirect individual end users to optimal servers, and the
development of new media player software. Research and development expenses have
been expensed as incurred.

     Selling, general and administrative expenses consist primarily of salaries,
commissions, promotional expenses, professional services and general operating
costs. Also included are costs the Company incurs for Internet access and
telecommunications transport costs ("bandwidth"). These costs have both fixed
and variable factors. The Company believes that it will be able to negotiate
lower bandwidth charges as the InterVU Network expands. The expansion of the
InterVU Network will in some cases require capital equipment expenditures, the
cost of which will be amortized over the useful life of the asset. Selling,
general and administrative expenses were $910,000, and $3.9 million for the
years ended December 31, 1996 and 1997, respectively. The increase in selling,
general and administrative expenses incurred in 1997 over the comparable period
in 1996 was attributable primarily to an increase of approximately $1,178,000 in
personnel and associated costs, primarily related to sales and marketing,
$750,000 payment to NBC multimedia in accordance with the terms of the Direct
Offering, an increase of approximately $297,000 for expenditures for trade shows
and other public relations expenses, an increase of approximately $229,000 for
bandwidth costs , an increase of approximately $175,000 for travel and
entertainment expenses and an increase of approximately $256,000 in amortization
of deferred compensation.

     Interest income was $52,000 and $192,400 for the years ended December 31,
1996 and 1997, respectively. Interest income represents interest earned by the
Company on its cash and cash equivalents. The increase in interest income for
1997 was the result of higher cash and cash equivalents balances resulting from
sales of equity securities.

     The Company has not recorded any income tax benefit for net losses and
credits incurred for any period from inception to December 31, 1997 due to the
lack of earnings history of the Company and the uncertainty as to the timing and
amount of future earnings, if any. See Note 6 in Item 8. Financial Statements
and Supplementary Data of Notes to Financial Statements.

     The Company's net loss was $2.3 million and $5.3 million for 1996 and 1997,
respectively.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, the Company has financed its operations primarily through
sales of equity securities. Through December 31, 1997, the Company had raised
$28.8 million from the sale and issuance of preferred stock and common stock. At
December 31, 1997, the principal source of liquidity for the Company was $21.4
million of cash and cash equivalents.

     The Company has had significant negative cash flows from operating
activities since inception. Cash used in operating activities for the years
ended December 31, 1996 and 1997 was $2.1 million and $4.6 million,
respectively. Cash used in operating activities in each of these periods was
primarily the result of increased business activity and related operating
expenses.

     Cash used in investing activities for the years ended December 31,1996 and
1997 was $305,000 and $484,000, respectively, primarily representing capital
expenditures for equipment, software, and furniture and fixtures. Although the
Company has no material commitments for capital expenditures, the Company
expects to expend significant amounts for equipment, software and fixtures over
the next 24 months to expand the InterVU Network, much of which it plans to
finance through capital leases.


                                                                              28
<PAGE>   29
     Cash provided by financing activities for years ended December 31, 1996 and
1997 was $4.4 million and $23.9 million, respectively, resulting primarily from
the net proceeds received by the Company from the sale of preferred stock and
completion of the Company's IPO and the Direct Offering to NBC in November 1997.
Net proceeds from the IPO and Direct Offering aggregated $18.6 million.

     In connection with the strategic alliance with NBC entered into in October
1997, the Company became obligated to make $2,000,000 in non-refundable payments
to NBC Multimedia for certain production, operating and advertising costs
associated with certain NBC websites including payments of (i) $750,000 paid on
the completion of the initial public offering in November 1997, (ii) $500,000
due in February 1998, (iii) $500,000 due in May 1998, and (iv) $250,000 due in
August 1998; provided that all such payments will become immediately due and
payable to NBC Multimedia if the Strategic Alliance Agreement is terminated for
any reason.

     The Company believes that the net proceeds from the IPO and the Direct
Offering, together with existing cash and cash equivalents, will be sufficient
to meet its working capital and capital expenditure requirements through at
least the end of 1998. Thereafter, if cash generated by operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
need to sell additional equity or debt securities or obtain credit facilities.
The Company currently does not have any lines of credit. The sale of additional
equity or convertible debt securities may result in additional dilution to the
Company's stockholders. There can be no assurance that the Company will be able
to raise any such capital on terms acceptable to the Company or at all.

IMPACT OF YEAR 2000

    Some older computer programs were written using two digits rather that four
to define the applicable year. As a result, those computer programs have
time-sensitive software that recognizes a date using "00" as the year 1900
rather than 2000. This could cause a system failure or miscalculations causing
disruption of operations, including a temporary inability to process
transactions or engage in similar normal business activities.

    The Company is completing an assessment of whether it will have to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total Year
2000 project cost is not expected to be material. The Year 2000 project is
expected to be completed not later than December 31,1998, which is prior to any
anticipated impact on its operating systems. The Company believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made , or are
not completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.

    The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. There is no assurance that the systems of those other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems.

    The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing resources and other factors. However, there can be
no assurance that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.


                                                                              29
<PAGE>   30

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                  INTERVU INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                     PAGE
                                                                                                     ----
<S>                                                                                                  <C>
Report of Ernst & Young LLP, Independent Auditors..................................................   31

Balance Sheets as of December 31, 1996 and, 1997...................................................   32

Statements of Operations for the Period from August 2, 1995 (Inception)
  to December 31, 1995, the Years Ended December 31, 1996 and 1997,
  and the Period from August 2, 1995 (Inception) to December 31, 1997 .............................   33

Statement of Stockholders' Equity for the Period from August 2, 1995 (Inception)
  to December 31, 1995, and the Years Ended December 31, 1996 and 1997 ............................   34

Statements of Cash Flows for the Period from August 2, 1995 (Inception) to
  December 31, 1995, the Years Ended December 31, 1996 and 1997,
  and the Period from August 2, 1995 (Inception) to December 31, 1997 .............................   35

Notes to Financial Statements......................................................................   36
</TABLE>


                                                                             30
<PAGE>   31
                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND STOCKHOLDERS
INTERVU INC.

We have audited the accompanying balance sheets of InterVU Inc. (a development
stage company) as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity and cash flows for the period from August 2,
1995 (Inception) to December 31, 1995, for the years ended December 31, 1996 and
1997, and for the period from August 2, 1995 (Inception) to December 31, 1997.
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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InterVU Inc. (a development
stage company) at December 31, 1996 and 1997, and the results of its operations
and its cash flows for the period from August 2, 1995 (Inception) to December
31, 1995, for the years ended December 31, 1996 and 1997, and for the period
from August 2, 1995 (Inception) to December 31, 1997, in conformity with
generally accepted accounting principles.

                                       ERNST & YOUNG LLP


San Diego, California
February 19, 1998


                                                                              31
<PAGE>   32
                                  INTERVU INC.
                          (A DEVELOPMENT STAGE COMPANY)
                                 BALANCE SHEETS
                                     ASSETS

<TABLE>
<CAPTION>
                                                                                                    DECEMBER 31,
                                                                                            -----------------------------
                                                                                                1996             1997
                                                                                            ------------     ------------
Current assets:
<S>                                                                                         <C>              <C>
  Cash and cash equivalents ............................................................    $  2,507,822     $ 21,379,845
  Accounts receivable ..................................................................              --           88,685
  Prepaid and other current assets .....................................................          10,095           69,608
                                                                                            ------------     ------------
Total current assets ...................................................................       2,517,917       21,538,138
Property and equipment, net ............................................................         252,286          584,601
Other assets ...........................................................................           6,274            7,269
                                                                                            ------------     ------------
        Total assets ...................................................................    $  2,776,477     $ 22,130,008
                                                                                            ============     ============

                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable .....................................................................    $     87,084     $    437,064
  Accrued liabilities ..................................................................          65,970          142,018
  Current portion, lease commitments ...................................................              --           11,814
                                                                                            ------------     ------------
        Total current liabilities ......................................................         153,054          590,896
Lease commitments ......................................................................              --            7,608
Advances from stockholders .............................................................          26,500               --
Stockholders' equity:
  Preferred stock, $.001 par value: 5,000,000 shares authorized
    Series A convertible preferred stock, Designated -- 250,000 shares;
      Issued and outstanding -- 172,500 shares at December 31, 1996, Liquidation
      preference-- $172,500 at December 31, 1996 .......................................             173               --
    Series B convertible preferred stock, Designated-- 400,000 shares;
      Issued and outstanding -- 339,562 shares at December 31, 1996 Liquidation
      preference-- $431,243 at December 31, 1996 .......................................             340               --
    Series C convertible preferred stock, Designated-- 400,000 shares;
      Issued and outstanding -- 296,147 shares at December 31, 1996, Liquidation
      preference-- $814,404 at December 31, 1996 .......................................             296               --
    Series D convertible preferred stock, Designated-- 200,000 shares;
      Issued and outstanding -- 96,429 shares at December 31, 1996 ; Liquidation
       preference-- $675,003 at December 31, 1996 ......................................              96               --
    Series E convertible preferred stock, Designated-- 400,000 shares;
      Issued and outstanding -- 289,500 shares at December31, 1996; Liquidation
      preference--$4,000,000 at December 31, 1996 ......................................             290               --
    Series F convertible preferred stock, Designated-- 1,200,000
      shares ...........................................................................              --               --
    Series G convertible preferred stock, Designated-- 1,280,000 shares;
      Issued and outstanding -- 1,280,000 shares at December 31, 1997;
      Liquidation preference-- $10,240,000 .............................................              --            1,280
  Common stock, $0.001 par value Authorized-- 20,000,000 shares; Issued
      and outstanding 4,006,787 shares and 9,377,404 shares at
      December 31, 1996 and 1997, respectively .........................................           4,007            9,377
  Additional paid-in capital ...........................................................       5,324,591       29,821,121
  Notes receivable from common stockholders ............................................          (5,570)            (500)
  Deferred compensation ................................................................        (403,202)        (710,493)
  Deficit accumulated during the development stage .....................................      (2,324,098)      (7,589,281)
                                                                                            ------------     ------------
        Total stockholders' equity .....................................................       2,596,923       21,531,504
                                                                                            ------------     ------------
        Total liabilities and stockholders' equity .....................................    $  2,776,477     $ 22,130,008
                                                                                            ============     ============
</TABLE>

                             See accompanying notes.

                                                                              32


<PAGE>   33
                                  INTERVU INC.
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                  PERIOD FROM                                              PERIOD FROM
                                                AUGUST 2, 1995                YEARS ENDED                 AUGUST 2, 1995
                                                (INCEPTION) TO                DECEMBER 31,                (INCEPTION) TO
                                                 DECEMBER 31,       -------------------------------        DECEMBER 31,
                                                     1995               1996               1997                1997
                                                 ------------       ------------       ------------       ------------
<S>                                              <C>                <C>                <C>                <C>
Revenues ..................................      $         --       $         --       $    143,541       $    143,541
Operating expenses:
  Research and development ................            32,632          1,420,483          1,703,111          3,156,226
  Selling, general and administrative .....            16,542            910,040          3,898,014          4,824,596
                                                 ------------       ------------       ------------       ------------
Total operating expenses ..................            49,174          2,330,523          5,601,125          7,980,822
                                                 ------------       ------------       ------------       ------------
Loss from operations ......................           (49,174)        (2,330,523)        (5,457,584)        (7,837,281)
Interest income ...........................             3,154             52,445            192,401            248,000
                                                 ------------       ------------       ------------       ------------
Net loss ..................................      $    (46,020)      $ (2,278,078)      $ (5,265,183)      $ (7,589,281)
                                                 ============       ============       ============       ============
Basic and diluted net loss per
  Share ...................................                         $       (.66)      $       (.90)
                                                                    ============       ============
Shares used in calculating Basic
  and diluted net loss per share...........                            3,440,931          5,822,594
                                                                    ============       ============
</TABLE>

                             See accompanying notes.


                                                                              33
<PAGE>   34
                                  INTERVU INC.
                          (A DEVELOPMENT STAGE COMPANY)

                        STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                PREFERRED STOCK             COMMON STOCK
                                                                          ------------------------    ------------------------
                                                                            SHARES        AMOUNT        SHARES        AMOUNT
                                                                          ----------    ----------    ----------    ----------
<S>                                                                       <C>           <C>            <C>          <C>
  Issuance of common stock at $.0004 per share to
    founders for cash in August 1995 ...................................          --    $       --     2,398,278    $    2,398
  Issuance of Series A convertible preferred stock at
    $1.00 per share for cash in August 1995, net of
    issuance costs of $17,253 ..........................................     172,500           173            --            --
  Net loss .............................................................          --            --            --            --
                                                                          ----------    ----------    ----------    ----------
Balance at December 31, 1995 ...........................................     172,500           173     2,398,278         2,398
  Issuance of common stock at $.004 per share for cash
    and notes receivable in January 1996 ...............................          --            --       147,373           147
  Issuance of Series B convertible preferred stock at
    $1.27 per share for cash in February 1996, net of
    issuance costs of $12,758 ..........................................     339,562           340            --            --
  Issuance of Series C convertible preferred stock at
    $2.75 per share for cash in March 1996, net of
    issuance costs of $21,067 ..........................................     296,147           296            --            --
  Issuance of common stock at $.002 per share to
    founders for cash in March 1996 ....................................          --            --       886,758           887
  Issuance of Series D convertible preferred stock at
    $7.00 per share for cash in April 1996, net of
    issuance costs of $18,931 ..........................................      96,429            96            --            --
  Issuance of common stock at $.024 per share for cash
    and notes receivable in April 1996 .................................          --            --       444,639           445
  Issuance of Series E convertible preferred stock at
    $10.00 per share for cash from August through
    December 1996, net of issuance costs of $28,659 ....................     289,500           290            --            --
  Issuance of common stock at $.04 per share for cash
    and notes receivable in December 1996 ..............................          --            --       129,739           130
  Deferred compensation ................................................          --            --            --            --
  Amortization of deferred compensation ................................          --            --            --            --
Net loss ...............................................................          --            --            --            --
                                                                          ----------    ----------    ----------    ----------
Balance at December 31, 1996 ...........................................   1,194,138         1,195     4,006,787         4,007
  Issuance of Series E convertible preferred stock at
    $10.00 per share for cash in February 1997, net of
    issuance cost of $27,616 ...........................................     110,500           110            --            --
  Issuance of Series F convertible preferred stock at
    $6.00 per share for cash and conversion of advances
    from stockholders in July and August 1997, net of
    issuance costs of $11,105) .........................................     721,664           721            --            --
  Exercise of stock options at $0.04 per share for cash in July 1997 ...          --            --        31,490            31
  Repurchase of restricted stock at $0.024 per share
    for cash and cancellation of note receivable in September 1997 .....          --            --      (108,685)         (109)
  Repayments of notes receivable from common
    shareholders .......................................................          --            --            --            --
  Conversion of preferred stock ........................................  (2,026,302)       (2,026)    3,237,286         3,238
  Issuance of common stock in initial public offering at $9.50 per
    share, net of issuance cost of  $2,421,726 .........................          --            --     2,210,526         2,210
  Issuance of Series G convertible preferred stock net of issuance
    costs of $23,582 ...................................................   1,280,000         1,280            --            --
  Deferred compensation ................................................          --            --            --            --
  Amortization of deferred compensation ................................          --            --            --            --
  Net loss .............................................................          --            --            --            --
                                                                          ----------    ----------    ----------    ----------
Balance at December 31, 1997 ...........................................   1,280,000    $    1,280     9,377,404    $    9,377
                                                                          ==========    ==========    ==========    ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                       NOTES
                                                                                                    RECEIVABLE
                                                                                  ADDITIONAL           FROM
                                                                                    PAID-IN            COMMON          DEFERRED
                                                                                    CAPITAL         STOCKHOLDERS     COMPENSATION
                                                                                  ------------      ------------     ------------
<S>                                                                               <C>                <C>              <C>
  Issuance of common stock at $.0004 per share to
    founders for cash in August 1995 .......................................      $     (1,446)      $       --       $       --
  Issuance of Series A convertible preferred stock at
    $1.00 per share for cash in August 1995, net of
    issuance costs of $17,253 ..............................................           155,074               --               --
  Net loss .................................................................                --               --               --
                                                                                  ------------       ----------       ----------
Balance at December 31, 1995 ...............................................           153,628               --               --
  Issuance of common stock at $.004 per share for cash
    and notes receivable in January 1996 ...................................               438              (70)              --
  Issuance of Series B convertible preferred stock at
    $1.27 per share for cash in February 1996, net of
    issuance costs of $12,758 ..............................................           418,146               --               --
  Issuance of Series C convertible preferred stock at
    $2.75 per share for cash in March 1996, net of
    issuance costs of $21,067 ..............................................           793,041               --               --
  Issuance of common stock at $.002 per share to
    founders for cash in March 1996 ........................................               873               --               --
  Issuance of Series D convertible preferred stock at
    $7.00 per share for cash in April 1996, net of
    issuance costs of $18,931 ..............................................           655,976               --               --
  Issuance of common stock at $.024 per share for cash
    and notes receivable in April 1996 .....................................            10,145           (1,500)              --
  Issuance of Series E convertible preferred stock at
    $10.00 per share for cash from August through
    December 1996, net of issuance costs of $28,659 ........................         2,866,051               --               --
  Issuance of common stock at $.04 per share for cash
    and notes receivable in December 1996 ..................................             5,020           (4,000)              --
  Deferred compensation ....................................................           421,273               --         (421,273)
  Amortization of deferred compensation ....................................                --               --           18,071
Net loss ...................................................................                --               --               --
                                                                                  ------------       ----------       ----------
Balance at December 31, 1996 ...............................................         5,324,591           (5,570)        (403,202)
  Issuance of Series E convertible preferred stock at
    $10.00 per share for cash in February 1997, net of
    issuance cost of $27,616 ...............................................         1,077,074               --               --
  Issuance of Series F convertible preferred stock at
    $6.00 per share for cash and conversion of advances
    from stockholders in July and August 1997, net of
    issuance costs of $11,105) .............................................         4,318,158               --               --
  Exercise of stock options at $0.04 per share for cash in July 1997 .......             1,219               --               --
  Repurchase of restricted stock at $0.024 per share
    for cash and cancellation of note receivable in September 1997 .........            (2,479)           1,388               --
  Repayments of notes receivable from common
    shareholders ...........................................................                --            3,682               --
  Conversion of preferred stock ............................................            (1,212)              --               --
  Issuance of common stock in initial public offering at $9.50 per
    share, net of issuance cost of  $2,421,726 .............................        18,565,813               --               --
  Issuance of Series G convertible preferred stock net of issuance
    costs of $23,582 .......................................................           (24,862)              --               --
  Deferred compensation ....................................................           562,819               --         (562,819)
  Amortization of deferred compensation ....................................                --               --          255,528
  Net loss .................................................................                --               --               --
                                                                                  ------------       ----------       ----------
Balance at December 31, 1997 ...............................................      $ 29,821,121       $     (500)      $ (710,493)
                                                                                  ============       ==========       ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                 DEFICIT
                                                                                               ACCUMULATED
                                                                                                DURING THE                 TOTAL
                                                                                                DEVELOPMENT            STOCKHOLDERS'
                                                                                                   STAGE                   EQUITY
                                                                                               ------------            ------------
<S>                                                                                            <C>                     <C>
  Issuance of common stock at $.0004 per share to
    founders for cash in August 1995 ...............................................           $         --            $        952
  Issuance of Series A convertible preferred stock at
    $1.00 per share for cash in August 1995, net of
    issuance costs of $17,253 ......................................................                     --                 155,247
  Net loss .........................................................................                (46,020)                (46,020)
                                                                                               ------------            ------------
Balance at December 31, 1995 .......................................................                (46,020)                110,179
  Issuance of common stock at $.004 per share for cash
    and notes receivable in January 1996 ...........................................                     --                     515
  Issuance of Series B convertible preferred stock at
    $1.27 per share for cash in February 1996, net of
    issuance costs of $12,758 ......................................................                     --                 418,486
  Issuance of Series C convertible preferred stock at
    $2.75 per share for cash in March 1996, net of
    issuance costs of $21,067 ......................................................                     --                 793,337
  Issuance of common stock at $.002 per share to
    founders for cash in March 1996 ................................................                     --                   1,760
  Issuance of Series D convertible preferred stock at
    $7.00 per share for cash in April 1996, net of
    issuance costs of $18,931 ......................................................                     --                 656,072
  Issuance of common stock at $.024 per share for cash
    and notes receivable in April 1996 .............................................                     --                   9,090
  Issuance of Series E convertible preferred stock at
    $10.00 per share for cash from August through
    December 1996, net of issuance costs of $28,659 ................................                     --               2,866,341
  Issuance of common stock at $.04 per share for cash
    and notes receivable in December 1996 ..........................................                     --                   1,150
  Deferred compensation ............................................................                     --                      --
  Amortization of deferred compensation ............................................                     --                  18,071
Net loss ...........................................................................             (2,278,078)             (2,278,078)
                                                                                               ------------            ------------
Balance at December 31, 1996 .......................................................             (2,324,098)              2,596,923
  Issuance of Series E convertible preferred stock at
    $10.00 per share for cash in February 1997, net of
    issuance cost of $27,816 .......................................................                     --               1,077,184
  Issuance of Series F convertible preferred stock at
    $6.00 per share for cash and conversion of advances
    from stockholders in July and August 1997, net of
    issuance costs of $11,105 ......................................................                     --               4,318,879
  Exercise of stock options at $0.04 per share for cash in July 1997 ...............                     --                   1,250
  Repurchase of restricted stock at $0.024 per share
    for cash and cancellation of note receivable in September 1997 .................                     --                  (1,200)
  Repayments of notes receivable from common
    shareholders ...................................................................                     --                   3,682
  Conversion of preferred stock ....................................................                     --                      --
  Issuance of common stock in initial public offering at $9.50 per
    share, net of issuance cost of  $2,431,977 .....................................                     --              18,568,023
  Issuance of Series G convertible preferred stock net of issuance
    costs of $23,582 ...............................................................                     --                 (23,582)
  Deferred compensation ............................................................                     --                      --
  Amortization of deferred compensation ............................................                     --                 255,528
  Net loss .........................................................................             (5,265,183)             (5,265,183)
                                                                                               ------------            ------------
Balance at December 31, 1997 .......................................................           $ (7,589,281)           $ 21,531,504
                                                                                               ============            ============
</TABLE>

                             See accompanying notes.


                                                                              34

<PAGE>   35
                                  INTERVU INC.
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                PERIOD FROM                                                    PERIOD FROM
                                               AUGUST 2, 1995                                                 AUGUST 2, 1995
                                               (INCEPTION) TO            YEAR ENDED  DECEMBER 31,             (INCEPTION) TO
                                                 DECEMBER 31,        =================================         DECEMBER 31,
                                                    1995                 1996                 1997                1997
                                                ============         ============         ============         ============
<S>                                             <C>                  <C>                  <C>                  <C>
OPERATING ACTIVITIES
Net loss ....................................   $    (46,020)        $ (2,278,078)        $ (5,265,183)        $ (7,589,281)
Adjustments to reconcile net loss to
  net cash used in operating
  activities:
  Amortization of deferred
    compensation ............................             --               18,071              255,528              273,599
  Depreciation and amortization .............            678               59,305              178,544              238,527
  Changes in operating assets and
    liabilities:
    Accounts receivable .....................             --                   --              (88,685)             (88,685)
    Prepaid and other current
      assets ................................             --              (10,095)             (59,513)             (69,608)
    Accounts payable ........................             --               87,084              349,980              437,064
    Accrued liabilities .....................             --               65,970               76,048              142,018
                                                ------------         ------------         ------------         ------------
Net cash used in operating
  activities ................................        (45,342)          (2,057,743)          (4,553,281)          (6,656,366)
INVESTING ACTIVITIES
Purchases of property and
  equipment .................................        (13,344)            (298,925)            (483,373)            (795,642)
Other assets ................................             --               (6,274)                (995)              (7,269)
                                                ------------         ------------         ------------         ------------
Net cash used in investing
  activities ................................        (13,344)            (305,199)            (484,368)            (802,911)
FINANCING ACTIVITIES
Payments on capital leases ..................             --                   --               (8,064)              (8,064)
Issuance of common stock ....................            952               12,515           18,569,273           18,582,740
Issuance of preferred stock .................        155,247            2,429,124            3,335,981            5,920,352
Advances from stockholders ..................        411,241            1,920,371            2,010,000            4,341,612
Repurchase of common stock ..................             --                   --               (1,200)              (1,200)
Repayment of stockholder notes
  receivable ................................             --                   --                3,682                3,682
                                                ------------         ------------         ------------         ------------
Net cash provided by financing
  activities ................................        567,440            4,362,010           23,909,672           28,839,122
Net increase in cash and cash
  equivalents ...............................        508,754            1,999,068           18,872,023           21,379,845
Cash and cash equivalents at
  beginning of period .......................             --              508,754            2,507,822                   --
                                                ------------         ------------         ------------         ------------
Cash and cash equivalents at end of
  period ....................................   $    508,754         $  2,507,822         $ 21,379,845         $ 21,379,845
                                                ============         ============         ============         ============
SUPPLEMENTAL DISCLOSURE OF
  NONCASH INVESTING AND FINANCING
  ACTIVITIES:
  Capital lease obligations entered
    into for equipment ......................   $         --         $         --         $     27,486         $     27,486
                                                ============         ============         ============         ============
  Conversion of advances from
    stockholders to convertible
    preferred stock .........................   $         --         $  2,305,112         $  2,036,500         $  4,341,612
                                                ============         ============         ============         ============
  Issuance of common stock in
    exchange for notes receivable ...........   $         --         $      5,570         $         --         $      5,570
                                                ============         ============         ============         ============
  Cancellation of stockholder notes
    receivable ..............................   $         --         $         --         $      1,388         $      1,388
                                                ============         ============         ============         ============
  Issuance of Series G convertible
    preferred stock as consideration
    for the formation of strategic
    alliance ................................   $         --         $         --         $      1,280         $      1,280
                                                ============         ============         ============         ============
</TABLE>

                             See accompanying notes.


                                                                              35

<PAGE>   36

                                  INTERVU INC.
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   InterVU Inc. (the "Company") was incorporated in Delaware on August 2, 1995
to develop and market proprietary technologies and systems for delivering video
on the Internet. The Company utilizes a proprietary operating system for routing
and distributing high quality video over the Internet at high speeds. The
Company has commenced planned principal operations, however, as there has been
no significant revenue therefrom, the Company is considered to be in the
development stage.

BASIS OF PRESENTATION

   The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of business. Since inception, the Company has been engaged in
organizational activities, including recruiting personnel, establishing office
facilities, research and development and obtaining financing. Through December
31, 1997, the Company had incurred accumulated losses of $7,589,281. Successful
completion of the Company's development program and its transition to attaining
profitable operations is dependent upon obtaining financing adequate to fulfill
its research, development and market introduction activities, and achieving a
level of revenues adequate to support the Company's cost structure. While
management believes the Company has funds to meet its capital requirements for
the next twelve months, without the additional financing, the Company may be
required to delay, reduce the scope of or eliminate one or more of its research
and development projects or market introduction activities and significantly
reduce its expenditures on infrastructure and product upgrade programs that
enhance the InterVU network architecture.

CASH AND CASH EQUIVALENTS

   Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less when
purchased. The carrying value of these instruments approximates fair value. Such
investments are made in accordance with the Company's investment policy, which
establishes guidelines relative to diversification and maturities designed to
maintain safety and liquidity. The Company has not experienced any losses on its
cash and cash equivalents.

PROPERTY AND EQUIPMENT

   Property and equipment are stated at cost, net of accumulated depreciation
and depreciated over the estimated useful lives of the assets, ranging from
three to five years, using the straight-line method. Leasehold improvements are
stated at cost and amortized using the straight-line method over the shorter of
the estimated useful lives of the assets or the lease term. Amortization of
equipment under capital leases is reported with depreciation of property and
equipment.

SOFTWARE DEVELOPMENT COSTS

   Financial accounting standards provide for the capitalization of certain
software development costs after technological feasibility of the software is
attained. No such costs have been capitalized to date because costs incurred
subsequent to reaching technological feasibility have not been material.


                                                                              36

<PAGE>   37
                                  INTERVU INC.
                         (A DEVELOPMENT STAGE COMPANY)

                       NOTES TO THE FINANCIAL STATEMENTS

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 amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. Actual results could differ
from those estimates.

REVENUE RECOGNITION

   Revenue is generated primarily from video encoding and distribution services.
Revenue from video encoding services is recognized as the service is provided
and revenue from video distribution services is recognized at the time of
delivery.

CONCENTRATION OF CREDIT RISK

   Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required. Credit losses have been
minimal and such losses have been within management's expectations.

RESEARCH AND DEVELOPMENT COSTS

    Costs incurred in connection with research and development are charged to
operations as incurred.

IMPAIRMENT OF LONG-LIVED ASSETS

   In 1996, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
adoption had no impact on the Company's financial statements.

STOCK OPTIONS

     In 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes the use of the fair value based method of
accounting for stock-based compensation arrangements, under which compensation
cost is determined using the fair value of stock-based compensation determined
as of the grant date, and is recognized over the periods in which the related
services are rendered. SFAS No. 123 also permits companies to elect to continue
using the intrinsic value accounting method specified in Accounting Principles
Board (APB) Opinion No. 25 to account for stock-based compensation. The Company
has decided to retain the intrinsic value based method, and has disclosed the
pro forma effect of using the fair value based method to account for its
stock-based compensation (Note 4).

LOSS PER SHARE

    Loss per share is computed using the weighted average number of common
shares and common equivalent shares outstanding during the periods presented.
Common equivalent shares result from stock options, warrants and unvested
restricted stock of which 2,775,659 and 2,442,540 shares were excluded from the
computation of diluted earnings per share in 1996 and 1997, respectively, as the
effect would be anti-dilutive. For loss periods, common equivalent shares are
excluded from the computation as their effect would be anti-dilutive, except
that the Securities and Exchange Commission (SEC) has historically required
common and common share equivalents issued during the last twelve-month period
prior to the initial filing of a proposed public offering, to be included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and the initial public offering price).


                                                                              37
<PAGE>   38
                                  INTERVU INC.
                         (A DEVELOPMENT STAGE COMPANY)

                       NOTES TO THE FINANCIAL STATEMENTS

    In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, which supercedes APB opinion No. 15. SFAS No. 128
replaces the presentation of primary earnings per share (EPS) with "Basis EPS,"
which includes no dilution and is based on weighted average common shares
outstanding for the period. Companies with complex capital structures, including
InterVU, will also be required to present "Diluted EPS" that reflects the
potential dilution of securities such as employee stock options and warrants to
purchase common stock. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997. On February 2, 1998, the SEC issued
Staff Accounting Bulletin (SAB) No. 98 which revised the previous instructions
for determining the dilutive effects of earnings per share computations of
common stock and common stock equivalents at prices below the IPO price prior to
the effectiveness of the IPO.

     Included in the shares used in calculating Basic and Diluted net loss per
share for 1996 and 1997 are the weighted-average effect of assumed conversion
of preferred shares totaling 2,052,983 and 3,199,777, respectively, and
weighted-average common shares totaling 1,387,948 and 2,622,817, respectively.

NEW ACCOUNTING STANDARDS

    In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Segment Information. Both of
these standards are effective for the fiscal years beginning after December 15,
1997. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during the period from transactions and other events and circumstances
from non-owner sources. Net income and other comprehensive income, including
foreign currency translation adjustments, and unrealized gains and losses on
investment shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company does not believe that comprehensive income or
loss will be materially different than net income or loss. SFAS No. 131 amends
the requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined in SFAS No. 131 are components of an enterprise for which separate
financial information is available and is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance. The financial
information is required to be reported on the basis that is used internally for
evaluating the segment performance. The Company believes it operates in one
business and operating segment and does not believe adoption of this standard
will have a material impact on the Company's financial statements.

2. PROPERTY AND EQUIPMENT

   Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      -----------------------
                                                         1996          1997
                                                      ---------     ---------
<S>                                                   <C>           <C>
      Equipment ..................................    $      --     $  18,259
      Computers ..................................      228,729       606,619
      Furniture and fixtures .....................       61,676       104,531
      Equipment under capital lease ..............           --        27,486
      Leasehold improvements .....................       11,936        24,172
      Purchased software .........................        9,928        42,061
                                                      ---------     ---------
                                                        312,269       823,128
      Less accumulated depreciation ..............      (59,983)     (238,527)
                                                      ---------     ---------
                                                      $ 252,286     $ 584,601
                                                      =========     =========
</TABLE>

3. STOCKHOLDER ADVANCES

   At December 31, 1995, the Company received $411,241 in cash advances from
certain stockholders that was subsequently converted to Series B convertible
preferred stock in February 1996 at a per share price of $1.27. At December 31,
1996, the Company received $26,500 in cash advances from certain stockholders
that was subsequently converted into Series E convertible preferred stock in
January 1997 at a per share price of $10.00.


                                                                              38
<PAGE>   39
                                  INTERVU INC.
                         (A DEVELOPMENT STAGE COMPANY)

                       NOTES TO THE FINANCIAL STATEMENTS

4. STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK

    Upon completion of the Company's public offering, the Company had authorized
5,000,000 shares of preferred stock of which 1,280,000 shares were designated as
Series G convertible preferred shares. The Board of Directors is authorized,
without further stockholder approval, to issue the remaining 3,720,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges, and restrictions granted or imposed upon any unissued shares of
preferred stock and to fix the number of shares constituting any series and the
designation of such series.

    In connection with the formation of a strategic alliance in October 1997,
the Company issued 1,280,000 shares of Series G preferred stock. The Series G
convertible preferred stock ($.001 par value) has an aggregate liquidation
preference of $10,240,000, a dividend rate of $.64 per share and a conversion
rate of .6298 common shares to one preferred share, subject to adjustment for
dilution. Noncumulative dividends are payable quarterly, when, as and if
declared by the Board of Directors. The Series G convertible preferred shares
are convertible at the option of the holder commencing July 10, 1998. The holder
of each share of Series G convertible preferred stock has the right to one vote
for each share of common stock into which it would convert.

COMMON STOCK

   In August 1995, 2,398,278 shares of common stock were issued to the founders
of the Company at a price of $.0004 per share under founder stock purchase
agreements. In March 1996, an additional 886,758 shares of common stock were
issued to three of the founders at a price of $.002 per share under the founder
stock purchase agreements. In January 1996, the Company issued 147,373 shares of
common stock to employees at $.004 per share under restricted stock agreements.
Also, in April and December 1996, the Company issued 444,639 and 129,739 shares
of common stock, respectively, to employees at $.024 and $.04 per share,
respectively, under restricted stock agreements. In connection with the founder
stock purchase agreements and the restricted stock agreements, the Company has
the option to repurchase, at the original issue price, unvested common shares in
the event of termination of employment. Shares issued under the agreements
generally vest 20% on the first anniversary of the employee's hire date and
daily thereafter for four years. At December 31, 1997, 1,521,293 shares were
subject to repurchase by the Company.

   In April 1996, the Board of Directors declared a two-for-one stock dividend
of the Company's common stock, effectuated as a stock split. Also, on July 16,
1997, the Company declared a two-for-one stock split of the Company's common
stock. All applicable share and stock option information have been restated to
reflect the split.

   In August 1997, the Board of Directors authorized management of the Company
to file a registration statement with the SEC permitting the Company to sell
shares of its common stock to the public. Concurrent with the closing of the
offering, all of the preferred stock outstanding, excluding 1,280,000 shares of
Series G convertible preferred stock, automatically converted into 3,328,717
shares of common stock

     On November 18, 1997, the Company effected a reverse stock split in which
 .6298 shares of common stock were exchanged for one share of common stock. All
applicable share and stock option information have been restated to reflect the
reverse stock split. Upon completion of the public offering, the Company had
authorized 20,000,000 shares of common stock.

STOCK OPTIONS

   The Company has established a stock option plan to grant options to purchase
common stock to consultants, employees, officers and directors of the Company.
The Company has authorized for grant under the plan stock options to purchase up
to 1,889,400 shares of its common stock.


                                                                              39
<PAGE>   40
                                  INTERVU INC.
                         (A DEVELOPMENT STAGE COMPANY)

                       NOTES TO THE FINANCIAL STATEMENTS

   Under the terms of the plan, non-qualified and incentive options may be
granted to consultants, employees, officers and directors at prices not less
than 100% of the fair value on the date of grant. Options generally vest 20%
after the first year of employment and daily thereafter for four years. The
options expire ten years from the date of grant.

   The following table summarizes the stock option activity for the period from
August 2, 1995 (Inception) to December 31, 1997:

<TABLE>
<CAPTION>
                                                                  WEIGHTED-
                                                                  AVERAGE
                                                    NUMBER OF     EXERCISE
                                                      SHARES       PRICE
                                                    ---------     --------
<S>                                                 <C>           <C>
        Granted .................................     156,820     $   0.04
                                                     --------     --------
      Balance at December 31, 1996 ..............     156,820         0.04

        Granted .................................     710,798         3.15
        Exercised ...............................     (31,490)        0.03
        Canceled ................................     (91,950)        0.03
                                                     --------     --------
      Balance at December 31, 1997 ..............     744,177     $   3.00
                                                     ========     ========
</TABLE>

   As of December 31, 1997, options for 77,260 common shares were exercisable.
The weighted average remaining contractual life of outstanding options was
approximately 9.25 years at December 31, 1997.

   Pro forma information regarding net income or loss is required to be
disclosed in accordance with SFAS No. 123, and has been determined as if the
Company has accounted for its employee stock options under the fair value method
prescribed in that Statement. For options granted in the year ended December 31,
1996 and through November 18, 1997, the fair value for the options was estimated
at the date of grant using the "minimum value" method for option pricing with
the following weighted average assumptions: risk-free interest rate of 6%,
dividend yield of 0%, and weighted average expected life of the option of seven
years. For options granted from November 18, 1997, to December 31, 1997, the
fair value of the options was estimated at the date of grant using the
"Black-Scholes" method for option pricing with the following weighted average
assumptions: risk free interest rate of 6%, dividend yield of 0%, expected
volatility of 75% and weighted average expected life of the option of seven
years.

   The minimum value pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor for volatility. In addition, option valuation
models require the input of highly speculative assumptions.

   Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the related options.
The Company's pro forma net loss was $46,020 for the period from August 2, 1995
(Inception) to December 31, 1995, $2,278,002 and $5,099,562 for the years ended
December 31, 1996 and 1997, respectively, and , $7,377,640 for the period from
August 2, 1995 (Inception) to December 31, 1997. The Company's pro forma basic
and diluted net loss per share was $(.66) and $(0.88) for the years ended
December 31, 1996 and 1997, respectively.

DEFERRED COMPENSATION

   Through December 31, 1997, the Company recorded deferred compensation for the
difference between the price per share of restricted stock issued or the
exercise price of stock options granted and the deemed fair value for financial
statement presentation purposes of the Company's common stock at the date of
issuance or grant. The deferred compensation will be amortized over the vesting
period of the related restricted stock or options, which is generally five
years. Gross deferred compensation at December 31, 1996 and 1997 totaled
$421,273 and $984,092,


                                                                              40
<PAGE>   41
                                  INTERVU INC.
                         (A DEVELOPMENT STAGE COMPANY)

                       NOTES TO THE FINANCIAL STATEMENTS

respectively, and related amortization expense totaled $18,071 and $255,528 in
1996 and 1997, respectively, and $273,599 for the period from August 2, 1995
(Inception) to December 31, 1997.

WARRANTS

    In connection with the Company's initial public offering, the Company issued
200,000 warrants to purchase common stock to its underwriters. Such warrants are
exercisable at $11.40 per share of common stock through November 19, 2002.

SHARES RESERVED FOR FUTURE ISSUANCE

   At December 31, 1997, the Company had reserved approximately 2.9 million
common shares for the conversion of preferred stock, the exercise of stock
options, the exercise of warrants and for stock options available for future
grant.

5. COMMITMENTS

   The Company leases its principal facilities under two noncancelable operating
leases which expire in 1999 with options to renew the leases for up to two
years. Total rent expense was $47,648 and $128,795 for the year ended December
31, 1996 and 1997, and $176,443 for the period from August 2, 1995 (Inception)
to December 31, 1997.

   Future annual minimum payments under noncancelable capital and operating
leases (with initial lease terms in excess of one year) consisted of the
following at December 31, 1997:

<TABLE>
<CAPTION>
                                                         OPERATING    CAPITAL
                                                           LEASES      LEASES
                                                         ---------    -------
<S>   <C>                                                  <C>         <C>
      1998 ...........................................     121,541     13,790
      1999 ...........................................      37,058      8,353
                                                          --------    -------
      Total minimum lease payments ...................    $158,599     22,143
                                                          ========    =======
      Less amounts representing interest .............                 (2,721)
                                                                      -------
      Present value of future minimum ................                 19,422
      lease payments
      Less current portion ...........................                (11,814)
                                                                      -------
      Capital lease obligation, net of current portion                $ 7,608
                                                                      =======
</TABLE>
\
6. INCOME TAXES

   Significant components of the Company's deferred tax assets as of December
31, 1996 and 1997 are shown below. A valuation allowance of $3,210,000 has been
recorded at December 31, 1997 to offset the net deferred tax assets as
realization is uncertain.

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                     -----------------------------
                                                         1996             1997
                                                     ------------     ------------
<S>                                                  <C>              <C>
      Deferred tax assets:
        Net operating loss carryforwards ........    $    920,000     $  2,883,000

        Research tax credit carryforwards .......          71,000          233,000

        Other ...................................          17,000           94,000
                                                     ------------     ------------
      Total deferred tax assets .................       1,008,000        3,210,000
      Valuation allowance .......................      (1,008,000)      (3,210,000)
                                                     ------------     ------------
      Net deferred tax assets ...................    $         --     $         --
                                                     ============     ============
</TABLE>

   The Company had federal and California tax net operating loss carryforwards
at December 31, 1997 of approximately $7.1 million. The federal and California
tax loss carryforwards will begin to expire in 2010 and 2003, respectively,
unless previously utilized. The Company also has federal and California research
tax credit carryforwards of approximately $171,000 and $96,000, respectively,
which will begin to expire in 2011 and 2010 respectively, unless previously
utilized.

   Pursuant to Internal Revenue Service Code Sections 382 and 383, use of the
Company's net operating loss and credit carryforwards may be limited because of
a cumulative change in ownership of more than 50% which occurred


                                                                              41
<PAGE>   42
                                  INTERVU INC.
                         (A DEVELOPMENT STAGE COMPANY)

                       NOTES TO THE FINANCIAL STATEMENTS

during 1996. However, the Company does not believe such limitation will have a
material impact on the Company's ability to use these carryforwards.

7. EMPLOYEE BENEFITS

   In 1996, the Company established a cafeteria benefits plan whereby it
contributes for each employee an amount equal to $3,000 plus a percentage of
each employee's base salary, as approved by the Board of Directors, up to a
maximum contribution of $9,000. The employer contribution goes towards the
purchase of various benefit packages selected by the employee. The employee may
contribute additional amounts as desired. Benefit packages include health care
reimbursement, dependent care assistance, various insurance premium payments and
a 401(k) plan. Company contributions to the cafeteria benefits plan were
$101,832 and $182,216 for the years ended December 31, 1996 and 1997,
respectively, and $284,048 for the period from August 2, 1995 (Inception) to
December 31,1997.

8. STRATEGIC ALLIANCES

   On October 10, 1997, the Company entered into a strategic alliance with NBC
Multimedia, Inc. ("NBC Multimedia"), a wholly-owned subsidiary of the National
Broadcasting Corporation, Inc. ("NBC") whereby the Company became the exclusive
provider of technology and services for the distribution of most NBC
entertainment audio/visual content by means of the Internet. As consideration
for the formation of the strategic alliance, the Company issued to NBC 1,280,000
shares of Series G convertible preferred stock. The Company is entitled to
receive 30% of certain advertising revenues generated under this alliance from
NBC websites or, at a minimum, payments from NBC Multimedia for the video
delivery services at rates at least as favorable as the most favorable rates
offered by the Company to third parties. The Company is obligated to make
$2,000,000 in non-refundable payments to NBC Multimedia for certain production,
operating and advertising costs associated with certain NBC websites including
payments of (i) $750,000 paid on the completion of the initial public offering
completed in November 1997, (ii) $500,000 due in February 1998, (iii) $500,000
due in May 1998, and (iv) $250,000 due in August 1998.

   NBC Multimedia may terminate the agreement without cause by giving 90 days
written notice and, is required to return (i) all shares of Series G convertible
preferred stock if termination occurs prior to January 10, 1998 and NBC
Multimedia has not promoted, at a minimum, the Company's logo on the NBC Web
site or (ii) 600,000 shares of Series G convertible preferred stock if the
termination occurs at any other time during the first two years of the exclusive
term. The Company will determine the fair value of the Series G convertible
preferred stock issued to NBC on the dates the requirements that NBC return some
or all of the shares of Series G convertible preferred stock lapse. Based on
these provisions, the Company currently expects to charge the then fair value of
680,000 shares of Series G convertible preferred stock to expense in the quarter
ending March 31, 1998 and the then fair value of the remaining 600,000 shares of
Series G convertible preferred stock to expense in the quarter ending December
31, 1999. Should the Company renegotiate or waive these provisions, removing
NBC's obligation to return shares of Series G convertible preferred stock, the
Company would expense the fair value of each share at that time. The Company
believes that the fair value of the shares of Series G convertible preferred
stock will roughly approximate the price at which the Company's common stock is
then trading, multiplied by the number of common shares into which such
outstanding shares of Series G convertible preferred stock would convert at the
 .6298 conversion rate. These noncash charges are likely to be substantial and
are likely to have a material adverse impact on the Company's results of
operations in the periods such expenses are recognized.

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

    None.


                                                                              42
<PAGE>   43
                                    PART III

    As indicated in the following table, the information required to be
presented in Part III of this report is hereby incorporated by reference to the
Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders
to be prepared in accordance with Schedule 14A and filed with the Securities and
Exchange Commission within 120 days of the end of the fiscal year covered by the
report.

   Material in Proxy Statement for 1998 Annual Meeting which is incorporated by
reference

<TABLE>
<CAPTION>
  Item No.    Item Caption                           Proxy Statement Caption
  --------    -----------------------------------    ----------------------------
<S>           <C>                                    <C>
     10       Directors and Executive Officers of    "Directors and Executive
              the Registrant                         Officers"

     11       Executive Compensation                 "Executive Compensation"

     12       Security Ownership of Certain          "Security Ownership of
              Beneficial Owners and Management       Stockholders and Management"

     13       Certain Relationships and Related      "Certain Transactions"
              Transactions
</TABLE>


                                                                              43
<PAGE>   44
ITEM 14.  EXHIBITS

                                  EXHIBIT INDEX

   The following exhibits are filed as part of this Annual Report on Form 10K.

<TABLE>
EXHIBIT
NUMBERS                           DESCRIPTION OF EXHIBIT
-------                           ----------------------
<S>          <C>
 3.1         Amended and Restated Certificate of Incorporation.(1)

 3.2         Amended and Restated Bylaws.(1)

 4.1         Form of Common Stock Certificate.(2)

10.1         1996 Stock Plan of InterVU Inc.(3)

10.2         Form of Indemnification Agreement.(4)


10.3         Form of Restricted Stock Purchase Agreement.(4)

10.4         Amended and Restated Vesting Agreement between the Company and
             Harry Gruber.(1)

10.5         Amended and Restated Vesting Agreement between the Company and
             Brian Kenner.(1)

10.6         Strategic Alliance Agreement dated as of October 10, 1997 between
             the Company and NBC Multimedia, Inc.(3)

10.7         Preferred Stock Purchase Agreement dated as of October 10, 1997
             among the Company, National Broadcasting Company, Inc. and NBC
             Multimedia, Inc.(3)

10.8         Strategic Alliance Agreement dated January 15, 1998 between the
             Company and MatchLogic Inc.*(1)

27.1         Financial Data Schedule.(1)
</TABLE>

----------
 *  Portions of this document have been redacted pursuant to a Request for
    Confidential Treatment filed concurrently herewith.

(1) Filed herewith.

(2) Incorporated by reference to Exhibit 4.1 to the Company's Registration
    Statement on Form 8-A filed with the Commission on November 12, 1997.

(3) Incorporated by reference to Amendment No. 1 to the Company's Registration
    Statement on Form S-1 filed with the Commission on October 24, 1997.

(4) Incorporated by reference to Amendment No. 2 to the Company's Registration
    Statement on Form S-1 filed with the Commission on November 12, 1997.


                                                                              44
<PAGE>   45
                                   SIGNATURES

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

                                                    InterVU Inc.

        Date:  March 31, 1998  By:                 /s/ Harry Gruber
               --------------       --------------------------------------------
                                                     Harry Gruber
                                              Chairman of the Board and
                                                Chief Executive Officer

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

<TABLE>
<CAPTION>
            Signature                              Title                         Date
            ---------                              -----                         ----
<S>                              <C>                                         <C>
/s/ Harry Gruber                 Chairman of the Board and Chief Executive
-------------------------------- Officer (Principal Executive Officer)       March 31, 1998
    Harry Gruber                                                             --------------

/s/ Kenneth Ruggiero             Vice President and Chief Financial Officer
-------------------------------- (Principal Financial and Accounting         March 31, 1998
    Kenneth Ruggiero             Officer)                                    --------------

/s/ J. William Grimes            Vice Chairman of the Board                  March 31, 1998
--------------------------------                                             --------------
    J. William Grimes

/s/ Edward David                 Director                                    March 31, 1998
--------------------------------                                             --------------
    Edward David

/s/ Mark Dowley                  Director                                    March 31, 1998
--------------------------------                                             --------------
    Mark Dowley

                                 Director
/s/ Alan Z. Senter                                                           March 31, 1998
--------------------------------                                             --------------
    Alan Z. Senter

/s/ Isaac Willis                 Director                                    March 31, 1998
--------------------------------                                             --------------
    Isaac Willis, M.D.
</TABLE>


                                                                              45