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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
(Mark One)
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES AND EXCHANGE ACT OF 1934

[ ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934.
     For the fiscal year ended ____________
OR

[X]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934.
     For the transition period from July 1, 2001 to December 31, 2001.

                        Commission File Number 000-23415

                           Princeton Video Image, Inc.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

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


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

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

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

                                                      Name of Each Exchange
     Title of Each Class                               on Which Registered
     -------------------                              ---------------------
            None                                               None

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

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

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

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

     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant computed by reference to the price at
which the common equity was sold, or the average bid and asked price of such
common equity, as of a specified date within the past 60 days: $20,237,424,
based upon the last sales price on March 28, 2002.

     Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 18,418,865 shares of
Common Stock, .001 par value per share, were outstanding on March 28, 2002.


                      DOCUMENTS INCORPORATED BY REFERENCE

     The definitive Proxy Statement for the 2002 Annual Meeting of Stockholders
is incorporated by reference in Part III of this Form.

<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

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

     We believe that our L-VIS(R) System, which is an integrated hardware and
software system, can benefit (i) advertisers, through the placement of their ads
in high visibility, in-program locations and by the ability to provide specific
advertising to specific geographical regions; (ii) broadcasters and program
producers, through a new revenue stream from additional inventory of advertising
space or program enhancements; and (iii) teams and leagues, through increased
revenue streams and greater flexibility and control over in-stadium advertising.
PVI has provided video insertion services for thousands of live telecasts
worldwide, including broadcasts of Major League Baseball, National League
Football, professional soccer, motor sports, and other live events. Since 1999,
PVI has been the exclusive virtual advertising provider for NFL International
broadcasts. Beyond sports venues, PVI's virtual imaging technology provides
virtual in program, promotional signage for the Early Show on CBS. These
enhancements, which appear as CBS Early Show logos inserted on blank surfaces in
the television picture, include virtual billboards, building signage and
marquees. The following events and advertisers are representative of PVI's
customer base: CBS, ESPN, MTV, Televisa, TV Azteca, Canal + Belgium, Comcast
Cable, Rainbow Sports, Philadelphia Eagles, Philadelphia Phillies, Minnesota
Vikings, Indy Racing League, Volkswagen, Adidas, Heineken, Nissan, Kodak and
FedEx. We market our L-VIS(R) Systems on a worldwide basis through licensing and
royalty agreements, through our majority-owned subsidiary, Princeton Video Image
Europe, N.V. ("PVI Europe"), which is headquartered in Brussels, Belgium, and
through our wholly-owned subsidiary, Publicidad Virtual, S.A. de C.V.
("Publicidad"), which is headquartered in Mexico City, Mexico.

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

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

     This document includes certain forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. In some cases, you can identify these so-called "forward-looking
statements" by such words as "may," "will," "should," "expects,"


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"plans," "anticipates," "estimates," "believes," "predicts," "intends,"
"potential," or "continue," or the negative of those words or phrases of similar
expression. You should be aware that these forward-looking statements are only
our predictions and are subject to various assumptions, risks and uncertainties.
Actual events or results may differ materially from those anticipated by the
statements we make. Factors described in this Annual Report on Form 10-K,
including without limitation those identified in this Item 1, "Business" and in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" could cause our actual results to differ materially from those
expressed in any forward-looking statement we make. We do not promise to update
forward-looking information or any other information to reflect actual results
or changes in assumptions or other factors that could affect those statements.

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


OVERVIEW OF THE TELEVISION ADVERTISING AND SPONSORSHIP MARKET

     According to the latest figures from CMR, a member of the Taylor Nelson
Sofres media company group and a leading provider of strategic advertising and
marketing communications information, total advertising expenditure for all
media in 2001 totaled $94.3 billion. Network, spot, cable and syndicated TV
represented half of the total spending with a total of $48.0 billion. In the
2001 IEG Sponsorship Report, an annual newsletter published by IEG, Inc, it is
projected that sponsorship spending worldwide would be $24.6 billion, of which
$6.51 billion would be spent in the sports category for the sponsoring of
specific teams, stadium locations and sporting events.

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

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

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


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virtual first down line in football, the virtual kick circle and distance to
goal in soccer and the speed of the pitch in baseball.

     The success of the L-VIS(R) System requires that we enter into satisfactory
commercial arrangements with advertisers, rights holders and broadcasters. To
date, many of the major broadcasters and a limited number of the broadcast
rights holders and advertisers have agreed to use our L-VIS System during live
and pre-recorded sports and entertainment broadcasts. Our continued expansion
will depend on, among other things, our ability to identify markets, to manage
growth, and to hire and retain skilled personnel. Some press coverage of our
technology has raised concerns about its desirability and potential misuse
relating to television tampering, ethics, and over commercialization. There can
be no assurance that the use of our L-VIS System will be accepted by television
viewers or that we will be able to combat effectively potential future negative
publicity regarding ours or similar technology. To the extent that we are unable
to more successfully market the L-VIS System our business might not develop as
quickly or to the extent necessary to support our intended level of operations.


ABILITIES OF THE L-VIS SYSTEM

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

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

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

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

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

     o    Allows for "narrow casting" of specific advertising to specific
          geographical regions. The L-VIS System also allows for specific
          advertising to specific geographical regions. Thus, a rights holder
          can sell the same advertising space to different advertisers in
          different markets; for instance, the Canadian feed of the 2002
          broadcast of the Super Bowl included different inserted advertisements
          on the field and in the end zone than the Mexican broadcast of the
          same game;

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

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


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          news programs; and

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


THE L-VIS SYSTEM TECHNOLOGY

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

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

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

     Our iPoint(TM) technology enables advertising, promotional material and
program enhancements to be inserted locally - on the television or personal
computer - so the individual viewer will see advertising and features designed
specifically for him or herself. Using digital set top


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box technology that is being developed to run our software, Internet delivered
advertisements and features can be inserted into the individual television
broadcast based on customer preferences. These advertisements and features can
be interactive, as well, allowing the viewer to customize their viewing
experience by selecting particular enhancements or options. An iPoint enhanced
baseball game, for instance, would allow viewers to select such virtual
enhancements as "clickable" player statistics or a virtual strike zone.
Entertainment programs could include interactive objects or virtual products,
giving the user instant pricing, detailed information or the opportunity to make
purchases interactively without leaving the program. In May 2000, we entered
into an agreement with RealNetworks, Inc. ("RealNetworks") in which we agreed to
jointly develop the software necessary to permit insertion of Internet delivered
advertisements and features into streaming media on individual personal
computers. This first phase of development has been completed and the next step
will be the incorporation of the iPoint product into set top boxes used by cable
companies to deliver television programming into households. Our first efforts
in that regard have begun with Cablevision Systems Corporation ("Cablevision"),
PVI's largest stockholder and a major cable system operator serving over 3
million households in the New York metropolitan area.

     In January 2001, PVI, the CBS Technology Corporation ("CBS") and Core
Digital Technologies, Inc. ("CDT") organized a limited liability company called
the Revolution Company, LLC whose purpose is to develop, market and render
entertainment technical production services. The Revolution Company has
developed a television production system referred to as "EyeVision" which has
the technological capability to produce three-dimensional replays from
multi-camera angles. For example, using cameras synchronized on a particular
sports player or players on the field of play in football, the EyeVision system
is able to provide views of approximately 270 degrees around the player and has
stop-action capability. The first live uses of the EyeVision system were during
the broadcast of Super Bowl XXXV and the NHL Stanley Cup in 2001.

     On September 20, 2001, we entered into a joint collaboration and license
agreement with Cablevision Systems Corporation ("Cablevision") pursuant to which
we will work with Cablevision to develop, market and deploy technological
applications to create virtual, in-content, interactive and targeted advertising
and enhancement products for use with television distribution.

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


STRATEGY

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

     o    Developing relationships with rights owners. We intend to continue
          developing our


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

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

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

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

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


OWNERSHIP OF VIDEO INSERTION RIGHTS

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

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

     Impediments to the use of our L-VIS(R) System during the broadcast of
programs covered by any of these agreements could have a material adverse effect
on our business, financial condition and the results of our operations by
limiting its acceptance and use in television programming. In


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many instances, these agreements provide that different persons control the
copyrights to the broadcasts in differing circumstances, for instance, regular
season play versus playoffs in sports, or first run versus syndication for
situation comedies. Agreements often govern permitted forms of advertising and
modifications to the broadcast. Use of video insertion technology is not
specifically discussed in some existing agreements and under these circumstances
it is not clear whose permission must be obtained to use the L-VIS System. If we
use our L-VIS System without the permission of the appropriate parties, such use
can be challenged in a court of law. The defense and prosecution of copyright
suits is both costly and time-consuming and current broadcast copyright holders
might not agree to amend current agreements to allow for or facilitate the use
of our technology on terms acceptable to us.


SALES AND MARKETING

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

     The L-VIS System has been used during the broadcast of, among other events,
(i) hundreds of broadcasts of soccer matches in Latin America and Europe, (ii)
the international broadcast of the Super Bowl every year beginning with Super
Bowl XXXIII in January 1999, (iii) the CBS News' Early Show in its daily weekday
news programming under a multi-year agreement beginning in November 1999, (iv)
2001, 2000 and 1999 MLB home games of the Philadelphia Phillies and the San
Diego Padres, (iv) NFL regular season and playoff games broadcast by CBS Sports
since 1999, (vi) ESPN Sunday Night Baseball games during the 1999, 2000 and 2001
regular seasons, and (vii) IRL national telecasts on ABC and ESPN for their 2000
and 2001 series, including the Indianapolis 500 in May of both years.

     On February 14, 2001, we entered into a license agreement with Cablevision
Systems Corporation which grants Cablevision and its affiliates the right to use
our L-VIS System and related proprietary rights in its business in exchange for
license fees and royalties. Since that time, L-VIS Systems have been installed
in two Cablevision properties - Madison Square Garden (MSG) in New York City and
Rainbow Networks Communications (RNC) in Bethpage, New York, which is
Cablevision's programming origination and distribution center. With the
installation of the system at RNC, we have expanded the applications of our
technology to include NCAA college hockey games, where virtual advertising has
been used during the game on the glass panels behind the goal. The system at MSG
has been used to test the insertion of virtual images off-air in six New York
Rangers hockey games and to insert virtual images in one live Rangers broadcast.
Cablevision owns Madison Square Garden and the New York Rangers, as well as the
New York Knicks basketball team. We have also begun providing services to Bravo,
one of Cablevision's many cable programming properties, for insertion of
advertising logos and products in selected Bravo programs.

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

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


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advertising revenue generated using the L-VIS System or for a contracted fee.
When the L-VIS System uses the live feed from the broadcaster to insert its
electronic images, such broadcaster must also approve the use of the L-VIS
System. Accordingly, arrangements with several parties including the rights
holder and the broadcaster must be established.

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

     During the past year, we made significant new efforts to increase our focus
on sales and marketing, including increasing our sales staff, opening new
offices in New York City and retaining new sales and marketing advisors,
including a new public relations firm.

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


     SOCCER

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

     The basic soccer application software was initially designed to insert an
image onto the center circle of a soccer field, but has now evolved to insert
images in the grass near the goal posts, above the billboard signs and
practically anywhere on the field that an advertiser would want, subject to
FIFA's (soccer's governing body) rules. The L-VIS System has been used both
nationally and internationally in soccer broadcasts. In March 2000, our then
Latin American licensee, Publicidad (which became our wholly-owned subsidiary on
September 20, 2001), entered into a multi-year agreement with Televisa and TV
Azteca, Mexico's two largest television networks, for the use of the L-VIS
System. The agreement includes the telecast of World Cup 2002 qualifying games.

     In February 2001, PVI Europe entered into an agreement with Canal + Belgium
to produce virtual game enhancements in over sixty games of the Belgian Premier
Soccer League, through June of 2002. Among the enhancements being produced are
club logos, scores in the center circle, distance to the goal and a virtual
off-side line. In July 2001, the L-VIS System was used to insert


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virtual advertising in Major League Soccer's All Star Game played in California
and broadcast by ABC Sports. Logos for Pepsi and Subway were inserted outside of
the playing field throughout the broadcast. PVI and MLS entered into an
Agreement to expand the use of the LVIS system throughout the 2002 season. PVI
has also provided virtual advertising in domestic soccer broadcasts seen on
Telemundo this year.

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

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


     FOOTBALL

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

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

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

     In 2001, we entered into a joint venture with CBS Sports and Core Digital
to introduce EyeVision, a technology able to produce three dimensional replays
from multi-camera angles. EyeVision was deployed for the first time in the 2001
Super Bowl.


     BASEBALL

     Baseball stadiums have perhaps the most valuable piece of real estate in
sports--the wall behind home plate. We believe that this high impact position
has great recall among viewers and is a coveted position for advertisers. Under
agreement with ESPN, PVI has placed virtual ads in their national broadcasts of
Sunday Night Baseball. The virtual ads change every half inning and have
appeared in a minimum of twenty games in each of the last two seasons.
Advertisers that have used the service include Claritin, Century 21, Gateway and
Buick. We provided the same service to MLB for the 2001 All Star Game. The
Philadelphia Phillies and the San Diego Padres have used the system for several
years with advertisers such as Coca-Cola, Toyota and Mobil making use of unique
animated features like "speed of the pitch" in which a logo changes to reveal
the speed of the last pitch.


                                       10

<PAGE>

     We are continuing our efforts to contract with other baseball teams to use
our technology and to renew existing relationships with the individual teams and
the national broadcasters. We also intend to develop our Internet and
interactive software products for potential use in baseball and other sports.
During a Chicago Cubs broadcast against the San Diego Padres, we provided
virtual advertising insertions behind home plate which were made interactive by
RespondTV, a leading infrastructure provider for interactive television content.
During this broadcast, viewers with internet enabled set-top boxes were able to
interact on their personal computers with the broadcast. Despite our marketing
efforts and development of such innovative products, however, there can be no
assurance that we will be successful in creating greater interest for use of the
L-VIS System in MLB.


     MOTOR SPORTS

     The IRL was the first major motor sport to utilize virtual advertising
during its broadcasts. Their races are telecast over either ABC or ESPN and
include the broadcast of the Indianapolis 500 in May of each year. The L-VIS
System has been used to insert virtual images into the natural landscape of the
IRL race broadcast, both in the middle of the field and on the race track.
Additionally, during the Indianapolis 500 in May 2001, an expanded package of
virtual enhancements was used including a virtual radar gun registering the
speed of selected cars and a virtual picture of the winning driver on the
start/finish line during the final lap of the race.


     OTHER SPORTS AND ENTERTAINMENT PROGRAMMING

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

     During the 2000, 2001 and 2002 Grammy Awards broadcast on CBS each
February, the L-VIS System was used to insert virtual advertisements on the
walkways into the building prior to the award show. PVI also expanded its work
in entertainment programming in 2001 with the use of the L-VIS System on a daily
basis in MTV's "Total Request Live" and through our work with Comedy Central,
USA Network, and The Hallmark Channel.

     Our strategic relationship with Cablevision has also led to many new
opportunities to expand the array of applications of our technology to include
NCAA college hockey games, where virtual advertising has been used during the
game on the glass panels behind the goal. A system recently installed at Madison
Square Garden has been used to test the insertion of virtual images off-air in
six New York Rangers hockey games and to insert virtual images in one live
Rangers broadcast. Cablevision owns Madison Square Garden and the New York
Rangers, as well as the New York Knicks basketball team. We have also begun
providing services to Bravo, one of Cablevision's many cable programming
properties, for insertion of advertising logos and products in selected Bravo
programs.


INTERNATIONAL BUSINESS STRATEGY

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


                                       11

<PAGE>

     Publicidad, which has marketed the L-VIS System throughout Mexico, Central
and South America and the Spanish-speaking markets in the Caribbean basin since
1993, has become the largest and most successful virtual advertising company
worldwide. The L-VIS System has been used by the clients of Publicidad to place
insertions into broadcasts of hundreds of soccer matches, tennis matches,
bullfights and entertainment programming including concerts. In September 2001,
we acquired Publicidad, and it is now a wholly-owned subsidiary of PVI.

     In June 2000, we formed PVI Europe, a majority-owned subsidiary
headquartered in Belgium, for the purpose of marketing our L-VIS System
throughout all of Europe with the exception of Spain and Portugal. PVI Europe
provided virtual game enhancements in the NFL Europe World Bowl 2000 marking the
first time a branded virtual first-down-line was seen by a worldwide audience.
In February 2001, PVI Europe reached an agreement with Canal + Belgium to
produce virtual game enhancements including club logos, scores in the
center-circle and a virtual offside line, for live broadcasts of the Belgian
Premier Soccer League. This agreement with Canal + Belgium, a pay-tv station and
part of the French based Canal + Group owned by Vivendi Universal, will continue
through June of 2002 and marks the first time a broadcaster in Belgium used
virtual imaging in its broadcasts.

     Recently, PVI Europe's operations have been streamlined. Costs have been
reduced substantially, and PVI Europe's focus is now only on those markets in
Europe that offer the most potential.

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

     In South Africa, PVI is in discussions with SABC, the leading public
television channel in South Africa to produce advertising and game enhancements
in live rugby, cricket, soccer, boxing, motor sports, horse racing, golf and
other athletics broadcasts.

     In Korea, PVI is represented by Virtual Media Lab, Inc., a subsidiary of
Cybersmart, a multimedia software development company based in Korea, which has
been our licensee since 1999. PVI Korea has been instrumental in working with
the Korean government to change the laws regarding the utilization of virtual
signage, and recently demonstrated our technology to Korean broadcasters for
potential use for Korean broadcasts of the 2002 World Cup.

     See Note 22 of Notes to Consolidated Financial Statements for additional
industry segment, geographical and customer information.

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

     There are certain risks inherent in doing business in international
markets, such as unexpected changes in regulatory requirements, tariffs and
other trade barriers, difficulties in staffing and managing foreign operations,
political instability, fluctuations in currency exchange rates, reduced
protection for intellectual property rights in some countries, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world, and potentially adverse tax


                                       12

<PAGE>

consequences. These and other factors, including the failure to integrate into
our operations any foreign businesses such as Publicidad and SciDel Technologies
which we have acquired or may acquire, may prevent us from creating a material
business internationally. We have granted some parties exclusive rights to
territories or specific sporting events, which means that we must rely on their
success in these areas. Their failure could greatly reduce the potential growth
of our international business.


PRODUCT DEVELOPMENT

     The L-VIS(R) System is designed using a Flex-Card hardware platform. This
platform is more powerful than previous platforms and allows for software
re-configuration. We have designed the Flex-Card L-VIS(R) System to provide
multiple insertion capability, multiple camera capability and an expanded zoom
range, and we have created a simplified graphical user interface. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Product Development", regarding the costs associated with our
product development during the six months ended December 31, 2001 and in each of
the last three fiscal years.

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

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

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

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


COMPETITION

     PVI believes four other companies have developed or are trying to develop
processes and


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<PAGE>

equipment to pursue a business similar to our own. These organizations are Symah
Vision-SA ("Symah"), Orad Hi Tech Systems Ltd. ("Orad"), SciDel Technologies
Ltd. ("SciDel") and Sportvision, Inc. ("Sportvision").

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

     Orad was founded in 1993 as part of the ORMAT Group, an Israeli company
originally established to create alternative energy power stations. Orad's
primary business is selling virtual sets and are responsible for the worldwide
marketing of their virtual advertising system, "ImADgine".

     Both the Orad and SciDel systems have been used during some live commercial
broadcasts. We believe Orad has one or more patents or patent applications
relating to real-time video insertion. As described above, we have recently
acquired the assets of SciDel.

     Sportvision is using technology similar to our own for inserting viewer
enhancements, such as a first down line in football, into live television
broadcasts. As far as we know, Sportvision has been minimally active in the
advertising part of the business. In February 2002, PVI, FOX and Sportvision
entered into a cross license agreement which relates to the use by each company
of certain patents of the other company. (See Item 3 "Legal Proceedings.")

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

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

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


                                       14

<PAGE>

our business.

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

     During the 2001 MLB season, 26 MLB teams had scrolling billboards located
behind home plate. The existence of these scrolling billboards and other
advertising behind home plate currently limits the marketability of the L-VIS
System in baseball. We believe that one manufacturer of scrolling billboards
used in stadiums has included restraints in its contracts that inhibit or
prohibit the use of video insertion technology in television broadcasts. Other
agreements among advertisers, sponsors, syndicators, promoters, broadcasters and
cable operators may include similar provisions. These restrictions may have a
material adverse effect on our business, financial condition and results of
operations by reducing the number of potential users of the L-VIS(R) System.

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

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

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

     Our development of products related to the Internet and potential
interactive television business is an area where a large number of creative new
companies and existing well financed companies have a significant interest. PVI
believes that its intellectual property offers an opportunity to participate
effectively in these new businesses. Under our joint collaboration and license


                                       15

<PAGE>

agreement reached with Cablevision Systems Corporation, we will work to develop,
market and deploy innovative digital technological applications across the full
range of Cablevision's media, sports and entertainment properties. Our ability
to play a meaningful role will depend, in part, on our forming and maintaining
appropriate relationships with existing industry players, including Cablevision
Systems Corporation. There is no assurance that our potential products will be
embraced by the industry or that we can utilize and develop the relationships we
have within the sports and media industries to create a successful business.


MANUFACTURING AND SUPPLY

     We have built 41 L-VIS(R) System units (each, an "L-VIS Unit"), of which
approximately 30 are being used from time-to-time by customers, potential
customers or foreign marketing partners. An L-VIS Unit consists of standard
electronic equipment racks, containing both standard purchased components and
our proprietary circuit boards, assembled and tested by our own personnel.


REGULATIONS

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


INTELLECTUAL PROPERTY

     PATENTS

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

     To date, we have filed patent applications in the European Patent Office
and in various non-European countries around the world where we expect to do
business.

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

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

     The validity and/or breadth of PVI's owned and licensed patents generally
may be tested in post-allowance court proceedings. (See Competition above).
While one court proceeding has been settled and another is underway relating to
PVI's patent property, there has been no completed court test of any of the
issued patents, the allowed patents or any of the pending applications or
foreign


                                       16

<PAGE>

counterparts. We are aware of other companies that have patents or patent
applications in the field of electronic video insertion technology. As was the
case with Sportvision, these companies or others may claim that we infringe the
patents or rights of such third parties, or these third parties may infringe our
patents. In either event, patent litigation involves complex legal and factual
issues, and the outcome, consequently, is highly uncertain. Furthermore, patent
litigation entails considerable costs, which could divert resources that
otherwise could be used for our operations. We cannot be certain that PVI or its
licensors will be successful in enforcing our rights, or that our products or
processes do not or will not infringe the patent or intellectual property rights
of a third party. An adverse outcome in the defense of any patent infringement
action could subject PVI to significant liabilities to third parties, require
PVI to license disputed technology from third parties, if possible, force PVI to
try to redesign its products or practices, or require PVI to cease selling its
products. In the event our owned or licensed patents were successfully
challenged in court, our business, financial condition and results of operations
would be materially adversely affected by limiting our ability to do business.

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

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

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


LICENSE GRANTS TO PVI

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

     David Sarnoff Research Center, Inc. David Sarnoff Research Center, Inc.
("Sarnoff") has granted PVI a worldwide license to practice Sarnoff's technology
related to the electronic recognition


                                       17

<PAGE>

of landmarks, including an exclusive license covering the specific fields of
television advertising and television sports. We have also been granted a
non-exclusive license for use of the Sarnoff technology in all other fields
relating to sports or advertising, including video production, local video
insertion, private networks, medical and scientific applications and uses by the
United States Department of Defense or any other United States government
agency. The Sarnoff license will remain in effect until terminated by PVI,
provided that PVI remains current with respect to its royalty obligations to
Sarnoff. We may terminate the license at any time.

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

     Theseus Research, Inc. Theseus Research, Inc. ("Theseus") has granted PVI a
non-exclusive, worldwide license to use and sell Theseus' patented technology
for the warping of images in real time. During the term of the Theseus license,
we are required to pay Theseus a royalty on net sales of products, if any, that
incorporate the Theseus technology. PVI paid Theseus an up front license fee of
$50,000, which is creditable against these future obligations. The license,
which terminates with the expiration of the last of the patents included in the
licensed technology, may be terminated by PVI at any time.


     TRADEMARKS

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

     C-TRAK(TM) is a trademark of PVI. We have filed a U.S. trademark
registration application for C-TRAK, the mark under which we are marketing our
electronic imaging system in which a part of the picture or image in a
prerecorded or live video signal is scanned, digitized, stored and tracked to
thereby maintain the position of one or more inserted images relative to other
parts of the main picture or image. We have filed a Statement of Use with
respect to the C-TRAK mark on July 5, 2001 and it was accepted by the U.S.
Patent and Trademark Office on September 7, 2001. We believe the trademark
registration will issue shortly.


     COPYRIGHT AND TRADE SECRET

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


EMPLOYEES

     As of March 27, 2002, we (together with our wholly-owned subsidiaries) had
101 full-time employees, 54 of whom were engaged in, or directly supported,
PVI's hardware and software research, development and product engineering
activities, 9 of whom assemble and operate our proprietary systems, 17 of whom
were engaged in marketing activities and 21 of whom were engaged


                                       18

<PAGE>
in administrative activities. In addition, we utilize part-time and seasonal
employees as well as outside contractors and consultants as needed. None of our
employees are represented by a labor union, and we believe our relations with
our employees are good. Our success depends on our ability to attract and retain
qualified financial, technical, marketing and other management personnel for
which we face competition.

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


ITEM 2. DESCRIPTION OF PROPERTY.

     We currently lease 21,000 square feet of office space in two neighboring
buildings in Lawrenceville, New Jersey. The Lawrenceville facility is our main
operations center, including product, hardware and software design,
manufacturing and product assembly, product test and documentation, post
production, customer training and customer technical support. The leases in
Lawrenceville expire in September 2002. We are currently in negotiations to
renew our lease on approximately 17,000 square feet in Lawrenceville, New
Jersey. We currently lease 4,300 square feet of office space in New York City
for our sales, marketing and art department personnel. In addition, we currently
lease or sublease approximately 6,000 square feet of office space in Mexico
City, 9,300 square feet of office space in Brussels, Belgium and 3,600 square
feet of office space in Ra-anana, Israel. These offices are the main operations
centers of Publicidad, PVI Europe and Adco Imaging, Ltd. (PVI's Israeli
subsidiary), respectively.


ITEM 3. LEGAL PROCEEDINGS

     In October 1999, we filed a request with the United States Patent and
Trademark Office ("USPTO") to correct the ownership of U.S. Patent 5,917,553,
licensed to Sportvision, Inc. on the basis of our belief that the basic subject
matter of this patent belongs to PVI. After we filed this action, Sportvision,
Inc. and Fox Sports Productions, Inc. ("Fox") filed a lawsuit against us in U.S.
District Court for the Northern District in California for infringement of the
disputed U.S. Patent 5,917,553, seeking injunctive relief and compensation
including damages. Plaintiffs subsequently amended their complaint to add claims
for infringement of U.S. Patent Nos. 6,141,060 and 6,229,550. On August 28,
2001, we filed a counterclaim alleging that Sportvision is infringing our U.S.
Patent No. 5,264,933, and seeking injunctive relief and compensation including
damages. As of December 31, 2001, discovery was ongoing and a trial date had
been set for June 2, 2003. On January 29, 2002, the parties entered into a
Settlement Agreement regarding this matter and a dismissal with prejudice as to
all parties was filed on March 9, 2002. Pursuant to the Settlement Agreement,
the parties entered into a patent cross-license agreement.

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


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


                                       19

<PAGE>

     No matters were submitted to a vote of security holders during the last
quarter of the fiscal year covered by this report.


                                     PART II

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

     (a)  Our common stock trades on the Nasdaq National Market under the symbol
"PVII." The following table sets forth, for the calendar periods indicated, the
range of high and low sale prices for our common stock on the Nasdaq National
Market:

<TABLE>
<CAPTION>
             Period                                      High             Low
-------------------------------                         ------           -----
<S>     <C>                                             <C>              <C>
2000    January 1 - March 31                            14.500           7.000
        April 1 - June 30                                8.438           3.876
        July 1 - September 30                            6.375           4.031
        October 1 - December 31                          5.031           1.250

2001    January 1 - March 31                             6.469           1.438
        April 1 - June 30                                5.230           3.090
        July 1 - September 30                            5.100           2.040
        October 1 - December 31                          2.990           1.910
</TABLE>


     As of March 14, 2002, there were 355 holders of record of our common stock,
with beneficial shareholders in excess of 400. On March 14, 2002, the last sale
price reported on the Nasdaq National Market for the common stock was $1.78 per
share. The market prices of equity securities of technology companies, such as
PVI, have experienced substantial price volatility in recent years for reasons
both related and unrelated to the individual performance of specific companies.
Future sales of restricted securities (as defined under Rule 144 of the
Securities Act of 1933, as amended), common stock under PVI's Stock Option Plan,
and common stock issued upon the exercise of outstanding warrants, in the public
market could adversely affect the stock price and our ability to raise funds in
new stock offerings. To date, the trading volume of our common stock has
remained relatively small. As a result, shareholders may experience difficulty
selling or otherwise disposing of shares of common stock at favorable prices, or
at all.

     The continued listing of our common stock on the Nasdaq National Market
System ("NMS") will be conditioned upon our meeting certain asset, stock price
and other criteria set forth by such quotation system. Effective June 20, 2001,
the SEC approved certain changes the NMS made to its quantitative listing
standards. Among other things, the NMS changed the minimum $4,000,000 net
tangible assets requirement to $10,000,000 in stockholders' equity. As of
December 31, 2001, we were in compliance with all NMS listing criteria. If we
fail to meet any listing criteria, our common stock may be delisted from
quotation on such system. The effects of delisting include limited news coverage
and the limited release of the market prices of our common stock. Delisting may
diminish investors' interest in our common stock, restrict the trading market
and reduce the price for our common stock. Delisting may also restrict us from
issuing additional securities or securing additional financing.

     Companies with low price stocks are governed by additional federal and
state regulatory requirements and could lose an effective trading market for
their stock. For instance, if our common stock is delisted from the NMS and the
trading price of our common stock is less than $5.00 per share, our common stock
could be governed by Rule 15g-9 under the Securities Exchange Act of


                                       20

<PAGE>

1934. This rule requires that broker-dealers satisfy special sales practice
requirements before any transaction, including suitability determinations and
receiving any purchaser's written consent. The additional burdens imposed upon
broker-dealers may discourage broker-dealers from effecting transactions in our
common stock. This would reduce the liquidity of our common stock. If these
rules become applicable to our common stock, they could have a material adverse
effect on the trading market for our common stock. In addition, our common stock
could be deemed "penny stock" under the Securities Enforcement and Penny Stock
Reform Act of 1990. If this occurs, additional disclosure will be required if
you wish to make a trade in our common stock. The disclosure includes the
delivery of a disclosure schedule explaining the nature and risks of the penny
stock market. These requirements could severely limit the liquidity of our
common stock and the ability of purchasers to sell their shares of our common
stock in the secondary market.

     We have neither paid nor declared any dividends on our common stock since
our inception. We expect to retain all earnings, if any, generated by our
operations for the development and growth of our business and do not anticipate
paying any cash dividends to our shareholders in the foreseeable future. The
payment of future dividends on the common stock and the rate of such dividends,
if any, will be determined in light of any applicable contractual restrictions
limiting our ability to pay dividends, our earnings, financial condition,
capital requirements and other factors deemed relevant by our Board of
Directors. Furthermore, pursuant to our Certificate of Incorporation, we are
prohibited from paying any dividends on the common stock until all accumulated
dividends in respect of the Series A preferred stock and Series B preferred
stock have been paid. As of December 31, 2001, the accrued dividends with
respect to the shares of Series A preferred stock and Series B preferred stock
totaled $27,618 and $30,793, respectively.

     We are required to redeem the Series A preferred stock on a pro rata basis,
at a price of $4.50 per share plus all accrued but unpaid dividends, out of 30%
of the amount, if any, by which our annual net income after taxes in any year
exceeds $5 million, as shown on our audited financial statements. Subject to the
prior redemption of all of the Series A preferred stock, we are required to
redeem the Series B preferred stock, on a pro rata basis, at a price of $5.00
per share plus all accrued but unpaid dividends out of 20% of the amount, if
any, by which our annual net income after taxes in any year exceeds $5 million,
as shown on our audited financial statements. As of December 31, 2001, 11,363
shares of Series A preferred stock and 12,834 of Series B preferred stock were
outstanding. See Note 19 of Notes to Consolidated Financial Statements.

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


ITEM 6. SELECTED FINANCIAL DATA

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

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


                                       21

<PAGE>

<TABLE>
<CAPTION>
                                      Six months
                                        ended                       Fiscal Year Ended June 30,
                                     December 31,    --------------------------------------------------------
('000s except for loss per  share)      2001(1)       2001(2)      2000        1999        1998        1997
----------------------------------   ------------    --------    --------    --------    --------    --------
<S>                                    <C>           <C>         <C>         <C>         <C>         <C>
Statement of Operations Data:

Total revenue                          $  5,578      $  4,664    $  3,046    $  1,222    $    696    $    212

Severance and other charges (3)        $  1,061            $-          $-          $-          $-          $-

Total costs and expenses               $ 12,353      $ 17,375    $ 16,793    $ 11,852    $  8,828    $  6,026

Operating loss                         $ (6,776)     $(12,711)   $(13,748)   $(10,630)   $ (8,132)   $ (5,815)

Interest expense                       $     --      $     --    $     --    $     --    $ (1,814)   $     --

Other income, net                      $    194      $    555    $    681    $    976    $    862    $     84

Net loss applicable to common stock    $ (6,994)     $(11,692)   $(12,489)   $ (9,698)   $ (9,128)   $ (5,775)

Basic and diluted net loss per share   $  (0.48)     $  (1.09)   $  (1.33)   $  (1.18)   $  (1.55)   $  (2.18)

Weighted average number of shares -
   basic and diluted                     14,721        10,732       9,374       8,186       5,891       2,288

Balance Sheet Data:

Cash and cash equivalents              $  8,360      $  2,672    $  8,388    $ 12,494    $ 21,553    $    776

Accounts receivable                    $  2,299      $  1,308    $    829    $    379    $    193    $     87

Property and equipment, net            $  2,857      $  2,996    $  3,685    $  3,807    $  2,547    $  1,267

Patents, net                           $    528      $    556    $    587    $    547    $    493    $    389

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

Goodwill                               $  5,339      $     --    $     --    $     --    $     --    $     --

Total assets                           $ 31,220      $ 11,295    $ 15,725    $ 18,891    $ 25,426    $  2,761

Redeemable preferred stock             $    174      $    170    $  1,036    $    992    $    948    $    904

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

Total stockholders' (deficit)/equity   $ 11,052      $  3,390    $  9,273    $ 12,143    $ 22,034    $ (1,005)

Other Data:
Capital expenditures                   $    389      $  1,170    $  1,495    $  2,514    $  2,094    $    523
</TABLE>
---------------
(1)  Results reflect the acquisition of Publicidad in September 2001 and the
     second closing of the Cablevision transaction as described in Note 5 of
     the Notes to Consolidated Financial Statements.

(2)  Results reflect the first closing of the Cablevision transaction as
     described in Note 4 of the Notes to consolidated financial statements.

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


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

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


OVERVIEW


                                       22

<PAGE>

     Since our inception in 1990, we have devoted substantially all of our
resources to developing, testing, building and marketing the L-VIS(TM) System,
an electronic video insertion system based on patented proprietary technology
that was designed to modify broadcasts to television viewers by inserting
electronic video images. We have incurred substantial operating losses since our
inception and as of December 31, 2001, June 30, 2001 and 2000, we had an
accumulated deficit of approximately $69,396,000, $62,405,000 and $50,725,000,
respectively. This deficit is the result of product development expenses
incurred in the development and commercialization of the Live Video Insertion
System ("L-VIS(TM) System") and iPoint, an advanced application of PVI's
patented technology that supports state of the art in-program advertising over
the Internet or interactive television, expenses related to field testing of the
L-VIS System and its deployment pursuant to customer contracts, operating
expenses relating to our field operations and sales and marketing activities,
and general administrative costs. We expect to incur additional losses in the
next fiscal year as we strive to evolve into a sports and entertainment focused
global, media services company. We will continue our business strategy of
developing new products and increasing our penetration in both the domestic and
international markets in the field of real-time virtual image insertion.

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

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

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


                                       23

<PAGE>

capabilities of the L-VIS System and its increasing use in entertainment and
other non-sports related programming.

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

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

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


RESULTS OF OPERATIONS

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

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

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


                                       24

<PAGE>

both our European and domestic operations.

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

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

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

     Total general and administrative expenses decreased 8% to $2,609,060 for
the six months ended December 31, 2001 from $2,832,356 for the six months ended
December 31, 2000. This resulted primarily from a decrease of approximately
$500,000 in legal fees incurred in connection with the protection of our patent
portfolio. Also contributing to the decrease was the reversal of $309,000
related to prior period compensation expense. The original expense was recorded
within the year ended June 30, 2001, relating to the variable accounting for
options which were repriced in February 2001. The expense was reversed in the
six month period ended December 31, 2001 due to the fact that the market value
of the PVI common stock was less than the repriced amount of $4.375 on December
31, 2001. These reductions in expense were offset by the inclusion of
Publicidad's general and administrative expenses of approximately $300,000 and
an increase of approximately $150,000 in consulting fees paid for legal and
administrative services.

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


                                       25
<PAGE>

     Total net other income decreased 18% to $193,752 for the six months ended
December 31, 2001 from $237,407 for the six months ended December 31, 2000
primarily as a result of lower cash balances available for investment.

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

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

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

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

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


COMPARISON OF THE TWELVE MONTHS ENDED JUNE 30, 2001 TO THE TWELVE MONTHS ENDED
JUNE 30, 2000

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


                                       26

<PAGE>

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

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

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

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

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

     INTEREST AND OTHER INCOME. Interest and other income decreased 18% to
$555,316 in Fiscal 2001 from $681,185 in Fiscal 2000 primarily as a result of
lower cash reserves available for investment. This decrease was partially offset
by the recording of approximately $250,000 in interest income as a result of the
repayment of non-recourse related party loans. Due to the uncertainty of the


                                       27

<PAGE>

collectibility of these non-recourse notes receivable, we did not record
interest income on the transaction until it was settled in March 2001.

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

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

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

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


COMPARISON OF THE TWELVE MONTHS ENDED JUNE 30, 2000 TO THE TWELVE MONTHS ENDED
JUNE 30, 1999

     REVENUES. Total revenue increased 149% to $3,045,899 during the fiscal year
ended June 30, 2000 ("Fiscal 2000") from $1,222,213 for the fiscal year ended
June 30, 1999 ("Fiscal 1999"). Of this total, advertising and production revenue
increased 117% to $1,508,664 in Fiscal 2000 from $694,528 in Fiscal 1999
primarily as a result of the increased use of the L-VIS System by MLB during the
1999 and 2000 baseball seasons, revenues earned from CBS Sports for the
insertion of the virtual first down line in the national broadcast of 1999-2000
and 2000-2001 NFL regular season and playoff games, and contractual revenues
earned for program enhancement services provided to CBS News in the live
television broadcast of its CBS Early Show. Other factors contributing to the
increase included the use of the L-VIS System by the Indy Racing League in the
broadcast of their 2000 series auto races and by Turner Network Television in
its broadcast of the 2000 Winter Goodwill Games. Royalties and license fees
increased 191% to $1,537,235 from $527,685 in fiscal 1999 as a result of a
significant increase in royalties received from Publicidad due to the
restructuring of our license agreement which was then in effect with Publicidad.
In addition, the use by Canwest Global Communications of the L-VIS technology in
Canadian television broadcasts and by Sasani Limited in South Africa contributed
to the increase.

     SALES AND MARKETING. Total sales and marketing expenses increased 62% to
$4,127,494 in Fiscal 2000 from $2,545,738 in Fiscal 1999. This increase resulted
from several factors including non-cash compensation charges of approximately
$325,000 incurred in relation to the issuance of options for marketing
consulting services, and increase of $400,000 for license fees paid to obtain
certain international broadcast and programming rights, an increase of
approximately $400,000 for marketing personnel and related overhead in
supporting our continued focus on the sales and marketing of the L-VIS System,
and approximately $150,000 spent on increased trade show activity. During Fiscal
2000 we also instituted a commission program for sales and marketing executives
and recorded related expenses of approximately $130,000.

     PRODUCT DEVELOPMENT. Total product development expenses increased 86% in
Fiscal


                                       28

<PAGE>

2000 to $2,802,249 from $1,508,875 in Fiscal 1999 due primarily to a shift in
the allocation of new and existing engineering and management personnel and
related overhead to deployment of new applications of our core technology,
including our post production product for use in entertainment programming. Also
contributing to the increase were the costs associated with the ongoing
development of our iPoint product which will allow television viewers to
interact with live or recorded video programming delivered to the home via the
Internet or interactive television. Depreciation expense increased due to
additional L-VIS Systems being used to support in-house development projects.

     FIELD OPERATIONS AND SUPPORT. Field operations and support expenses
increased 27% in Fiscal 2000 to $5,641,355 from $4,431,759 in Fiscal 1999 as a
result of several principal factors. Depreciation expense increased
significantly as a result of the manufacture of additional L-VIS Systems and our
purchase of several mobile production trucks. The costs associated with program
enhancement services we provided for the live television broadcast of the CBS
Early Show as well as for the broadcast of the Indy Racing League 2000 auto
racing series, were also significant components of the increased expenses in
Fiscal 2000 over Fiscal 1999. Other cost increases resulted from increased
activity in Europe and our use of the L-VIS System in the ABC broadcast of the
Rose Bowl in January 2000.

     GENERAL AND ADMINISTRATIVE. Total general and administrative costs
increased 25% in Fiscal 2000 to $4,222,364 from $3,365,689 in Fiscal 1999
primarily as a result of the increased legal fees we are paying to increase our
patent portfolio and protect our patent property. In addition, we incurred
non-recurring legal, accounting and incorporation fees during the process of
forming PVI Europe, and continued to increase our investor relations activity
relating to our continuing effort to increase investor awareness of the L-VIS
System technology.

     INTEREST AND OTHER INCOME. Interest and other income decreased 28% to
$705,919 for Fiscal 2000 from $975,850 for Fiscal 1999 as a result of the lower
cash balances we had available for investment.

     TAX BENEFIT. The tax benefit increased to $596,998 from $0 for Fiscal 2000
and 1999, respectively, as a result of the sale of a portion of our state net
operating loss and research and development tax credits. The sale was made under
a plan developed by the New Jersey Economic Development Authority in the latter
part of 1999 and was not available during the year ended June 30, 1999.

     NET LOSS. As a result of the foregoing factors, our net loss increased 29%
to $12,444,646 for Fiscal 2000 from $9,653,998 for Fiscal 1999.


SEGMENT REPORTING

     We operate on a worldwide basis in only one industry segment, real-time
video imaging which is broken out into geographical regions including the United
States, Latin America, Canada, Europe and all other regions. For the six months
ended December 31, 2001, total revenues were $5,577,565. Of this total,
approximately $4 million was from our Latin American region and $1.3 million was
from the United States, As a result of our acquisition of Publicidad in
September 2001, total revenues increased dramatically between fiscal 1999 and
2001and during the six months ended December 31, 2001 as a result of increased
license and royalty fees received from Publicidad prior to our acquiring their
business in September 2001, and the inclusion of their advertising and
production revenue on our consolidated statement of operations since the date of
acquisition.

     License and royalty revenue increased 142% to $1,090,484 in Fiscal 2000
from $450,185 in Fiscal 1999 and an additional 97% to $2,142,927 in Fiscal 2001
over Fiscal 2000. These increases


                                       29

<PAGE>

were principally the result of more favorable royalty rates negotiated with
Publicidad allowing us to receive a share in their total revenues. A second
contributing factor was an increase in revenues paid to Publicidad by Televisa,
S.A. de C.V., Mexico's largest broadcaster, for their use of the L-VIS system in
soccer and entertainment programming.

     License and royalty fees from other geographic locations decreased from
$446,741 in Fiscal 2000 to $102,468 in Fiscal 2001 as a result of the
termination of a license agreement with our South African licensee, Sasani
Limited in June 2000. This decrease was partially offset by the inclusion of
revenues from PVI Europe of approximately $72,000 during their first year of
operations.


CRITICAL ACCOUNTING POLICIES

     PVI's discussion and analysis of its financial condition and results of
operations are based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
our financial statements, and the reported amounts of revenue and expenses
during the reporting periods. There can be no assurance that actual results will
not differ from those estimates.

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

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

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

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

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

     Marketable Securities. PVI holds an investment in Pineapplehead Limited, an
Australian based company. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, we carry our investment at fair value, based on
quoted market prices, and unrealized gains and losses are included in
accumulated other comprehensive income, which is reflected as a separate
component of stockholders' equity. We have a policy in place to review our
equity holdings on a regular basis to evaluate whether or not each security has
experienced an other-than-temporary decline in fair value. Our policy includes,
but is not limited to, reviewing the company's cash position, earnings/revenue
outlook, stock price performance over the past six months, liquidity and
management/ownership. If we believe that an other-than-temporary decline exists
in our marketable securities, it is our policy to write down this investment to
the market value and record the related writedown as an investment loss on our
consolidated statements of operations.

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

     Equity Investments. The Company has a direct investment in Revolution
Company, a privately-held company. Our investment is accounted for using the
equity method of accounting, and accordingly, the carrying balance of our
investment is adjusted to reflect our share of investment loss. We have a policy
in place to review the fair value of our investment on a regular basis to
evaluate the carrying value of the investment in Revolution Company. This policy
includes, but is not limited to, reviewing the company's business plan, revenue
expectations and operational performance. If we believe that the carrying value
of the investment is carried at an amount in excess of fair value, it is our
policy to record a reserve in addition to our equity method of accounting and
the related writedown is recorded as an investment loss on our consolidated
statements of operations. Estimating the fair value of non-marketable equity
investments in early-stage technology companies is inherently subjective and may
contribute to volatility in our reported consolidated statements of operations.

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


                                       30

<PAGE>
     Goodwill and Intangible Assets. In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires the
purchase method of accounting for all business combinations and that certain
acquired intangible assets in a business combination be recognized as assets
separate from goodwill. SFAS No. 142 requires that goodwill and other
intangibles determined to have an indefinite life are no longer to be amortized
but are to be tested for impairment at least annually. We have applied SFAS No.
141 in our preliminary allocation of the purchase price of the Publicidad
Acquisition. Accordingly, we identified and allocated a value to intangible
assets totaling $3.2 million related to customer and distributor relationships
and trademarks. We also recorded goodwill related to this acquisition of $5.3
million. The valuation of these intangible assets is inherently subjective and
requires the use of certain estimates and management's judgment. The annual
impairment testing required by SFAS No. 142 also requires the use of
management's judgment and could require us to write down the carrying value of
our goodwill and other intangible assets in future periods.

     For more information on our goodwill and intangible assets, please refer to
Note 4 and Note 12 of our Notes to Consolidated Financial Statements.


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

     Long-Lived Assets. Long-lived assets are comprised primarily of office
equipment and the Company's LVIS systems. The carrying value of these assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. An estimate of
undiscounted future cash flows produced by the asset is compared to the carrying
value to determine whether an impairment exists. If an asset is determined to be
impaired, the loss is measured based on quoted market prices in active markets,
if available. If quoted market prices are not available, the estimate of fair
value is based on various valuation techniques, including discounted value of
estimated future cash flows. Assets to be disposed are recorded at the lower of
carrying value or estimated net realizable value.

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


LIQUIDITY AND CAPITAL RESOURCES

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

     As of December 31, 2001, we had cash and cash equivalents of $8,360,353, an
increase of $5,688,125 from our balance at June 30, 2001. This increase was
primarily due to the inflow of cash from PVI Holding, LLC for Cablevision
advance payments and an equity investment in the net amount of approximately
$9.7 million.

     Net cash used in operating activities for the six months ended December 31,
2001 was $3,586,027. The main components are the net loss from operations and an
increase in trade accounts receivable and prepaid airtime from Televisa, offset
by an increase in accounts payable due to television networks and Presencia.
These fluctuations were primarily the result of the acquisition of Publicidad.

     Net cash used in investing activities for the six months ended December 31,
2001 was $608,974 and was used primarily for the purchase of property and
equipment.

     Net cash provided by financing activities for the six months ended December
31, 2001 totalled $9,878,765 primarily as a result of Cablevision's investment.

     Net cash used in operating activities decreased 16% to $7,860,263 in Fiscal
2001 from $9,307,098 in Fiscal 2000 as a result of several important factors.
The primary cause was the inflow of cash from PVI Holding, LLC for prepaid
royalties, net of a deferred revenue credit, in the amount of $1,362,822. A
second significant factor was the increase in unearned revenue of approximately
$300,000 representing license and equipment fees received at the inception of
our license agreement with Virtual Media Lab, a Korean marketing and software
company.


                                       31

<PAGE>

     Net cash used in investing activities increased 2% to $3,414,998 for the
year ended June 30, 2001 from $3,353,746 during the prior year period as a
result of several factors. Fees paid to obtain certain international broadcast
and programming rights decreased by $600,000 and purchases of property and
equipment fell by approximately $300,000 during Fiscal 2001 from Fiscal 2000.
This reduction was partially offset by our initial investment of $850,000 in the
Revolution Company LLC as described in Note 13 to the consolidated financial
statements.

     Net cash proceeds from financing activities decreased 35% to $5,568,946 in
Fiscal 2001 from $8,554,619 in Fiscal 2000. The cash provided during Fiscal 2000
was primarily the result of the receipt of net proceeds of approximately $8.3
million from a private equity offering of our common stock. The cash provided
during Fiscal 2001 was primarily from the net proceeds of approximately $5.5
million from PVI Holding, LLC, a subsidiary of Cablevision Systems Corporation,
representing an investment in our common stock.

     Payments due by period under long-term commitments are as follows:

<Table>
<Caption>
                                                      Within       Within       Within        Within       After
                                        Total         1 year      2 years       3 years      4 years      5 years
-------------------------------------------------------------------------------------------------------------------
<S>                                 <C>            <C>         <C>            <C>          <C>          <C>
Operating lease commitments           $2,036,793     $660,591    $ 216,840     $ 213,515    $ 185,340    $ 760,507
Capital lease commitments                 52,838       18,644       18,644        15,550            -            -
                                  ---------------------------------------------------------------------------------
                                      $2,089,631     $679,235    $ 235,484     $ 229,065    $ 185,340    $ 760,507
                                  ---------------------------------------------------------------------------------
</Table>

     The consolidated financial statements of PVI have been prepared on the
basis of accounting principles applicable to a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. We have incurred net losses of approximately $7.0 million,
$11.7 million, $12.4 million and $9.7 million for the six months ended December
31, 2001 and the years ended June 30, 2001, 2000 and 1999, respectively. Our
actual working capital requirements will depend on numerous factors, including
the progress of our product development programs, our ability to maintain our
customer base and attract new customers to use the L-VIS System, the level of
resources we are able to allocate to the development of greater marketing and
sales capabilities, technological advances, our ability to protect our patent
portfolio and the status of our competitors. We expect to incur costs and
expenses in excess of expected revenues during the ensuing fiscal year as we
continue to execute our business strategy of becoming a global, media services
company by adding to our sales and marketing management force both domestically
and internationally, and to strengthen existing relationships with rights
holders, broadcasters and advertisers.

     The factors noted in the above paragraph raise substantial doubt concerning
our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should we be unable to continue as a going
concern. Our ability to continue as a going concern is dependent upon the
support of our shareholders, creditors, and our ability to close debt or equity
transactions. In the event we are unable to liquidate our liabilities, planned
operations may be scaled back. Additional funding may not be available when
needed or on terms acceptable to us, which could have a material adverse effect
on our business, financial condition and results of operations. If adequate
funds are not available we may delay or eliminate some expenditures, discontinue
operations in selected U.S. or international markets or significantly downsize
our sales, marketing, research and development and administrative functions.
These activities could impact our ability to expand our business or meet our
operating needs. (See Note 2 - Liquidity). The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties. Our management is in the process of seeking additional financing
through a variety of options including bridge loans or equity financing with
existing shareholders, financial institutions or strategic investors. There is
no assurance, however, that any such transactions will provide sufficient
resources to support us until we generate sufficient cash flow to fund our
operations.


OTHER

     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS


                                       32

<PAGE>

     In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". This statement addresses financial accounting and reporting for
business combinations. All business combinations in the scope of this statement
are to be accounted for using only the purchase method. The provisions of this
statement apply to all business combinations initiated after June 30, 2001 and
those accounted for using the purchase method for which the date of acquisition
is July 1, 2001 or later. We have used this statement to account for the
Publicidad transaction.

     In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles". This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets. It addresses how intangible
assets that are acquired individually or with a group of other assets, but not
those acquired in a business combination, should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangibles should be accounted for after they have been initially
recognized in the financial statements. The provisions of this statement are to
be applied starting with fiscal years beginning after December 15, 2001. Early
application is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim financial statements have not
previously been issued. In addition, goodwill and intangible assets acquired
after June 30, 2001 will be subject immediately to the non-amortization and
amortization provisions of this statement. We have early adopted this statement
in our first quarter of 2002.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, this
liability is accreted to its present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The provisions of this statement will be
effective for financial statements issued for fiscal years beginning after June
15, 2002. We do not expect that the adoption of this statement will have a
material impact on our results of operations, financial position or cash flows.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The standard provides accounting and reporting
requirements for the impairment of all long-lived assets (including discontinued
operations) and it also extends the reporting requirements for discontinued
operations of APB 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," to all components of an entity.
The primary purpose of SFAS No. 144 is to establish guidelines to create a
consistent accounting model for the impairment of long-lived assets to be
disposed of and to clarify some implementation issues of SFAS No. 121. The
provisions of this Statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001, with early application
encouraged. We do not expect that the adoption of SFAS No. 144 will have a
material impact on our results of operations, financial position or cash flows.

     CHANGES IN NASDAQ LISTING STANDARDS. Our common stock is quoted on the
Nasdaq National Market System. The continued listing of our common stock is
conditioned upon our meeting certain asset, stock price and other criteria.
Effective June 29, 2001, the SEC approved certain changes the NMS made to its
quantitative listing standards. Among other things, the NMS changed the minimum
$4,000,000 net tangible assets requirement to $10,000,000 in stockholders'
equity. As


                                       33

<PAGE>

of December 31, 2001 we were in compliance with all NMS listing criteria. If we
fail any listing criteria, our common stock may be delisted. The effects of
delisting include limited news coverage and the limited release of the market
prices of our common stock. Delisting may also diminish investors' interest in
our common stock, restrict the trading market and reduce the price for our
common stock. Delisting may also restrict us from issuing additional securities
or securing additional financing at a price that is reasonable.

     NET OPERATING LOSS CARRYFORWARDS. As of December 31, 2001, we had net
operating loss carryforwards for federal income tax purposes of approximately
$47,660,000 which expire in the years 2006 through 2022.

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


EFFECT OF INFLATION

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


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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


ITEM 8. FINANCIAL STATEMENTS.

     The financial statements required to be filed pursuant to this Item 7 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Index to Financial Statements" on page F-1.


SELECTED QUARTERLY RESULTS OF OPERATIONS

     The following table sets forth unaudited quarterly financial data for the
two quarters in our transition period for the six months ended December 31, 2001
and the four quarters in our fiscal


                                       34

<PAGE>

years ended June 30, 2001 and 2000. This unaudited quarterly information has
been prepared on the same basis as the audited financial information presented
elsewhere in this report and, in management's opinion, includes all adjustments
that we consider necessary for a fair presentation of the information for the
quarters presented.

<TABLE>
<CAPTION>
                                                                                Quarter Ended
                                   Dec 31   ---------------------------------------------------------------------------------------
                                    2001     Sep 30    Jun 30    Mar 31    Dec 31    Sep 30    Jun 30    Mar 31    Dec 31   Sep 30
('000's)                           (1)(2)     2001      2001      2001      2000      2000      2000      2000      1999      1999
                                  -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
<S>                               <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Total revenue                     $ 3,919   $ 1,659   $ 1,045   $ 1,018   $ 1,282   $ 1,319   $ 1,176   $   790   $   572   $   508

Sales and marketing                 3,123       848       969       833       851       855       956       937     1,301       934

Product development                   889       696       653       771       685       713       795       802       624       582
Field operations and support        1,729     1,399     1,245     1,289     1,436     1,450     1,285     1,430     1,684     1,243

General and administrative          1,797       813     1,401     1,391     1,508     1,324     1,411       951       948       911

Severance and other charges         1,061        --
                                  -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
Total costs and expenses            8,599     3,756     4,268     4,284     4,480     4,342     4,447     4,120     4,557     3,670
                                  -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
Operating loss                     (4,680)   (2,097)   (3,223)   (3,266)   (3,198)   (3,023)   (3,271)   (3,330)   (3,985)   (3,162)

Other income, net                     134        61        (1)      319       117       120       164       193       186       138

Losses from equity investment        (109)      (67)      (53)      (62)       --        --        --        --        --        --

Losses on securities available
   for sale                          (184)     (316)

Minority interest                      45        50        70        77        30        40        25        --        --        --
                                  -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
Net loss before tax benefit        (4,794)   (2,369)   (3,207)   (2,932)   (3,051)   (2,863)   (3,082)   (3,137)   (3,799)   (3,024)

  Tax benefit                         173        --        --        --       372        --        --        --       597        --
                                  -------   -------   -------   -------   -------   -------   -------   -------   -------   -------
Net loss                          $(4,621)  $(2,369)  $(3,207)  $(2,932)  $(2,679)  $(2,863)  $(3,082)  $(3,137)  $(3,202)  $(3,024)
                                  =======   =======   =======   =======   =======   =======   =======   =======   =======   =======
Basic and diluted net loss
  per share                       $ (0.27)  $ (0.19)  $ (0.27)  $ (0.27)  $ (0.27)  $ (0.37)  $ (0.31)  $ (0.32)  $ (0.34)  $ (0.29)
                                  =======   =======   =======   =======   =======   =======   =======   =======   =======   =======
</TABLE>

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

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


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

     Not Applicable.

                                    PART III


ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.

     For information concerning this Item, see the information under "Election
of Directors," "Executive Officers" and "Section 16(a) Beneficial Owner
Reporting Compliance" in our Proxy Statement to be filed with respect to our
2002 Annual Meeting of Stockholders, which information is incorporated herein by
reference.


ITEM 11. EXECUTIVE COMPENSATION.


                                       35

<PAGE>

     For information concerning this Item, see the information under "Executive
Compensation" in our Proxy Statement to be filed with respect to our 2002 Annual
Meeting of Stockholders, which information is incorporated herein by reference.


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

     For information concerning this Item, see the information under "Security
Ownership of Certain Beneficial Owners and Management" in our Proxy Statement to
be filed with respect to our 2002 Annual Meeting of Stockholders, which
information is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     For information concerning this Item, see the information under "Certain
Relationships and Related Transactions" in our Proxy Statement to be filed with
respect to our 2002 Annual Meeting of Stockholders, which information is
incorporated herein by reference.


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

          (1)  The financial statements required to be filed pursuant to this
Item 14(a)(1) are listed on the "Index to Financial Statements" attached hereto,
which is incorporated by reference.

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

          (3)  The exhibits required to be filed pursuant to this Item 14(a)(3)
are listed on the "Index to Exhibits" attached hereto, which is incorporated
herein by reference.

     (b)  Reports on Form 8-K.

          On December 15, 2001, PVI filed an Amended Current Report on Form
          8-K/A amending its Current Report on Form 8-K dated September 20,
          2001, as filed with the Securities and Exchange Commission on October
          3, 2001, for the sole purpose of adding Item 7.

          On December 20, 2001, PVI filed a Current Report on Form 8-K
          announcing the change in its fiscal year end from June 30 to December
          31.


                                       36

<PAGE>

                                    SIGNATURE

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

                                        PRINCETON VIDEO IMAGE, INC.


                                        By: /s/ Brown F Williams
                                            ------------------------------------
                                            Brown F Williams
                                            Chairman of the Board

                                            Date:  March 25, 2002


     In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


SIGNATURES                     TITLE                              DATE
----------                     -----                              ----


/s/ David A. Sitt              Co-Chief Executive Officer         March 26, 2002
----------------------------   (co-prinicpal executive officer)
David A. Sitt


/s/ Roberto Sonabend           Co-Chief Executive Officer         March   , 2002
----------------------------   (co-prinicpal executive officer)
Roberto Sonabend


/s/ Lawrence L. Epstein        Chief Financial Officer and        March 25, 2002
----------------------------   Treasurer
Lawrence L. Epstein            (principal financial officer)


/s/ Brown F Williams              Director                        March 25, 2002
----------------------------
Brown F Williams


/s/ John B. Torkelsen             Director                        March 25, 2002
----------------------------
John B. Torkelsen


/s/ Lawrence Lucchino             Director                        March   , 2002
----------------------------
Lawrence Lucchino


/s/ Jerome J. Pomerance           Director                        March 28, 2002
----------------------------
Jerome J. Pomerance


/s/ Jaime Serra Puche             Director                        March   , 2002
----------------------------
Jaime Serra Puche


/s/ Emilio Romano                 Director                        March 27, 2002
----------------------------
Emilio Romano


37

<PAGE>

/s/ Wilt Hildenbrand              Director                        March 28, 2002
----------------------------
Wilt Hildenbrand


/s/ Eduardo Sitt                  Director                        March 26, 2002
----------------------------
Eduardo Sitt


/s/ Donald P. Garber              Director                        March 29, 2002
----------------------------
Donald P. Garber


/s/ Lawrence J. Burian            Director                        March 26, 2002
----------------------------
Lawrence J. Burian




                                       38

<PAGE>

                          INDEX TO FINANCIAL STATEMENTS
                          -----------------------------

Report of Independent Accountants                                            F-1

Consolidated Balance Sheets as of December 31, 2001
   and  June 30, 2001 and 2000                                               F-2

Consolidated Statements of Operations for the
   six months ended December 31, 2001 and the
   years ended June 30, 2001, 2000 and 1999                                  F-3

Consolidated Statements of Cash Flows for the
   six months ended December 31, 2001 and the
   years ended June 30, 2001, 2000 and 1999                                  F-4

Consolidated Statements of Changes in Stockholders'
  (Deficit)/Equity for the six months ended December 31,
   2001 and the years ended June 30, 2001, 2000 and 1999                     F-5

Notes to Consolidated Financial Statements                                   F-7







                                       39
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' (deficit)/equity present fairly, in all material respects, the
financial position of Princeton Video Image, Inc. and its subsidiaries (the
"Company") at December 31, 2001 and June 30, 2001 and 2000, and the results of
its operations and its cash flows for the six months ended December 31, 2001 and
for the three years ended June 30, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced recurring losses
from operations and has not generated sufficient cash flows from operations to
meet its operating and capital requirements, all of which raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

PricewaterhouseCoopers LLP
Florham Park, NJ
March 15, 2002
<PAGE>
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                  December 31,      June 30,       June 30,
                                                                                    2001              2001          2000
                                                                                  ------------    ------------    ------------
<S>                                                                               <C>             <C>             <C>
ASSETS
Current Assets:

   Cash and cash equivalents                                                      $  8,360,353    $  2,672,228    $  8,388,148
   Restricted securities held to maturity                                               63,476          60,347          60,847
   Available for sale securities                                                            --         314,943         846,167
   Accounts receivable                                                               2,298,897       1,308,486         829,329
   License rights                                                                       50,000         350,000         600,000
   Prepaid airtime                                                                   2,713,533              --              --
   Other current assets                                                                887,795         344,532         198,568
                                                                                  ------------    ------------    ------------
              Total current assets                                                  14,374,054       5,050,536      10,923,059
Property and equipment, net                                                          2,856,733       2,995,688       3,685,068
Patents, net                                                                           527,682         555,857         587,486
Identifiable intangibles, net                                                        3,024,167              --              --
Goodwill                                                                             5,339,244              --              --
Investment in/Advances to Revolution Company LLC                                       567,795         735,757              --
Acquisition related costs                                                                   --         706,501              --
Cablevision deferred revenue credit                                                  4,350,261       1,137,178              --
Other assets                                                                           180,392         113,890         529,195
                                                                                  ------------    ------------    ------------
                   Total assets                                                   $ 31,220,328    $ 11,295,407    $ 15,724,808
                                                                                  ============    ============    ============

LIABILITIES, REDEEMABLE PREFERRED STOCK,
  MINORITY INTEREST and STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable and accrued expenses                                          $  5,999,393    $  4,077,913    $  4,135,060
   Accounts payable to television networks                                           4,360,372              --              --
   Notes payable                                                                     1,090,608              --              --
   Payable to Presencia                                                                637,465              --              --
   Unearned revenue                                                                    179,436         418,304         293,819
                                                                                  ------------    ------------    ------------
              Total current liabilities                                             12,267,274       4,496,217       4,428,879

Unearned revenue                                                                       184,833         611,810         630,033
Cablevision advance payments                                                         7,500,000       2,500,000              --
Other liabilities                                                                       42,511          33,034          45,150
                                                                                  ------------    ------------    ------------
              Total liabilities                                                     19,994,618       7,641,061       5,104,062
                                                                                  ------------    ------------    ------------
Commitments and contingencies (Notes 4,5,6,8,22)
Redeemable preferred stock:

   Cumulative, Series A, conditionally redeemable, $4.50 par value,
     authorized, issued and outstanding 11,363 shares at December 31, 2001;
     authorized 167,000 shares, issued and outstanding 11,363 shares at
     June 30, 2001 and 67,600 shares at June 30, 2000 redemption value
     equal to carrying value (par plus all accrued but unpaid dividends)                78,751          77,217         439,950
   Cumulative, Series B, conditionally redeemable, $5.00 par value, authorized,
     issued and outstanding 12,834 shares at December 31, 2001; authorized
     93,300 shares, issued and outstanding 12,834 shares at June 30, 2001
     and 86,041 shares at June 30, 2000 redemption value equal to carrying
     value (par plus all accrued but unpaid dividends)                                  94,963          93,038         595,817
                                                                                  ------------    ------------    ------------
              Total redeemable preferred stock                                         173,714         170,255       1,035,767
Minority interest                                                                           --          94,279         311,583
Stockholders' Equity:
   Common stock, $.001 par value at December 31, 2001 and no par value, $.005
     stated value at June 30, 2000 and 2001; authorized 60,000,000 shares;
     17,130,865, 11,841,647 and 9,879,568 shares issued and outstanding, net of
     279,366, 279,366 and 0 treasury shares at par at December 31, 2001,
     June 30, 2001 and 2000, respectively                                               17,131          59,206          49,395
   Additional paid-in capital                                                       80,488,924      65,834,688      60,575,678
       Related party notes receivable                                                       --         (60,437)       (973,322)
       Deferred compensation                                                           (81,926)             --              --
       Other comprehensive income (loss)                                                23,542         (38,560)        346,167
   Accumulated deficit                                                             (69,395,675)    (62,405,085)    (50,724,522)
                                                                                  ------------    ------------    ------------
              Total stockholders' equity                                            11,051,996       3,389,812       9,273,396
                                                                                  ------------    ------------    ------------
                   Total liabilities, redeemable preferred stock,
                     minority interest and stockholders' equity                   $ 31,220,328    $ 11,295,407    $ 15,724,808
                                                                                  ============    ============    ============

</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-2
<PAGE>

PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                               For the
                                            Six months ended             For the years ended
                                              December 31                     June 30,
                                            ---------------- ----------------------------------------------
                                                 2001             2001            2000           1999
                                             ------------    ------------    ------------    ------------
<S>                                          <C>             <C>             <C>             <C>
Royalties and license fees                   $  1,019,474    $  2,421,441    $  1,537,235    $    527,685
Advertising and production revenue              4,558,091       2,242,236       1,508,664         694,528
                                             ------------    ------------    ------------    ------------
              Total revenue                     5,577,565       4,663,677       3,045,899       1,222,213

Costs and expenses:
   Sales and marketing                          3,970,482       3,508,917       4,127,494       2,545,738
   Product development                          1,584,834       2,821,564       2,802,249       1,508,875
   Field operations and support                 3,128,220       5,420,065       5,641,355       4,431,759
   General and administrative                   2,609,060       5,624,064       4,222,364       3,365,689
   Severance and other charges                  1,060,832
                                             ------------    ------------    ------------    ------------
              Total costs and expenses         12,353,428      17,374,610      16,793,462      11,852,061
Operating loss                                 (6,775,863)    (12,710,933)    (13,747,563)    (10,629,848)
   Other income, net                              193,752         555,316         681,185         975,850
   Losses from equity investment                 (176,028)       (114,243)             --              --
   Loss from securities available for sale       (500,000)             --              --              --
   Minority interest                               94,280         217,298          24,734              --
                                             ------------    ------------    ------------    ------------
Net loss before tax benefit                    (7,163,859)    (12,052,562)    (13,041,644)     (9,653,998)
   Tax benefit                                    173,269         371,999         596,998              --
                                             ------------    ------------    ------------    ------------
Net loss                                       (6,990,590)    (11,680,563)    (12,444,646)     (9,653,998)
   Accretion of preferred stock dividends          (3,459)        (11,801)        (44,112)        (44,050)
                                             ------------    ------------    ------------    ------------
Net loss applicable to common stock          $ (6,994,049)   $(11,692,364)   $(12,488,758)   $ (9,698,048)
                                             ============    ============    ============    ============

Basic and diluted net loss per share         $      (0.48)   $      (1.09)   $      (1.33)   $      (1.18)
                                             ============    ============    ============    ============
Weighted average number of shares of
       common stock outstanding                14,721,155      10,731,634       9,374,317       8,186,207
                                             ============    ============    ============    ============
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>

PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                       For the
                                                                     Six months
                                                                        ended
                                                                     December 31,              For the years ended June 30,
                                                                     ------------    --------------------------------------------
                                                                         2001            2001            2000             1999
                                                                     ------------    ------------    ------------    ------------
<S>                                                                  <C>             <C>             <C>             <C>
Cash flows from operating activities:
   Net loss                                                          $ (6,990,590)   $(11,680,563)   $(12,444,646)   $ (9,653,998)
   Adjustments to reconcile net loss to net cash used
     in operating activities (net of effects of acquisition)
            Amortization of unearned revenue                             (121,987)       (327,840)       (548,557)         34,190
            Depreciation expense                                          901,277       1,853,991       1,849,189       1,249,235
            Amortization of intangibles/license rights                    539,607         718,441       1,512,480         911,103
            Amortization of deferred compensation                          40,963              --              --              --
            (Credits) charges associated with stock,
               warrant and option grants                                 (309,087)        508,449         860,862         129,973
            Non-cash interest from related party notes                         --        (249,301)             --              --
            Non-cash loss from impairment of securities                   500,000              --              --              --
            Losses from equity investments                                176,028         114,243
            Gains on sale of fixed assets                                 (15,746)             --              --              --
            Minority interest                                             (94,280)       (217,298)        (24,734)

      Changes in assets and liabilities:
                 Trade accounts receivable                             (1,044,551)       (441,584)       (450,677)       (185,390)
                 Prepaid airtime from Televisa                         (1,971,541)             --              --              --
                 Other current assets                                    (226,419)        (99,990)        (21,471)         53,151
                 Cablevision deferred revenue credit and                       --              --              --
                   deferred royalty payment, net                        1,786,917       1,362,822
                 Other assets                                             (59,274)         22,967           2,868          89,127
                 Accounts payable and accrued expenses                    350,596         141,298         (83,494)      1,400,934
                 Accounts payable to television networks                3,777,419              --              --              --
                 Unearned revenue                                          12,498         434,102          16,775         278,200
                 Payable to Presencia                                    (847,334)             --              --              --
                 Miscellaneous other                                        9,477              --          24,307           4,142
                                                                     ------------    ------------    ------------    ------------
                 Net cash used in operating activities                 (3,586,027)     (7,860,263)     (9,307,098)     (5,689,333)
                                                                     ------------    ------------    ------------    ------------
Cash flows from investing activities:
   Proceeds from held-to-maturity investments                                  --              --          77,153              --
   Purchase of securities available for sale                                   --              --        (500,000)             --
   Investment in/Advances to Revolution Company LLC                        (8,066)       (850,000)
   Publicidad acquisition costs                                          (231,008)       (608,606)
   Purchases of property and equipment                                   (388,526)     (1,169,580)     (1,431,352)     (2,513,898)
   Proceeds from sale of fixed assets                                      54,225              --              --              --
   Purchases of license rights                                                 --        (700,000)     (1,300,000)       (400,000)
   Increase in patents                                                    (35,599)        (86,812)       (135,753)       (132,080)
                                                                     ------------    ------------    ------------    ------------
               Net cash used in investing activities                     (608,974)     (3,414,998)     (3,289,952)     (3,045,978)
                                                                     ------------    ------------    ------------    ------------


Cash flows from financing activities:
   Proceeds from sales of common stock, net                             9,280,526       5,480,560       8,310,869           5,837
   Cash received from related party notes receivable                       30,961          88,386         179,956        (328,780)
   Proceeds from issuance of notes payable                                567,278              --              --              --
                                                                     ------------    ------------    ------------    ------------
            Net cash provided by (used in) financing activities         9,878,765       5,568,946       8,490,825        (322,943)
                                                                     ------------    ------------    ------------    ------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
PRINCETON VIDEO IMAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                       For the
                                                                     Six months
                                                                        ended
                                                                     December 31,              For the years ended June 30,
                                                                     ------------    --------------------------------------------
                                                                         2001            2001            2000             1999
                                                                     ------------    ------------    ------------    ------------
<S>                                                                  <C>             <C>             <C>             <C>

            Net increase (decrease) in cash and cash equivalents        5,683,764      (5,706,315)     (4,106,225)     (9,058,254)
Foreign exchange impact on cash                                             4,361          (9,605)
Cash and cash equivalents at beginning of period                        2,672,228       8,388,148      12,494,373      21,552,627
                                                                     ------------    ------------    ------------    ------------
Cash and cash equivalents at end of period                           $  8,360,353    $  2,672,228    $  8,388,148    $ 12,494,373
                                                                     ============    ============    ============    ============

Supplemental cash flow information:

  Fair value of warrants/stock issued in settlement of
    accrued obligation                                               $         --    $         --    $         --    $    100,445
  Stock issued for royalty payments                                  $         --    $    196,861    $    332,164    $    152,232
  Capital lease obligations incurred                                 $         --    $         --    $     85,220    $         --
  Fair value of warrants/stock issued in acquisition of Publicidad   $  5,521,293    $         --    $         --    $         --
</TABLE>




          See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>
Princeton Video Image, Inc.
Consolidated Statements of Changes in Stockholders' (Deficit)/Equity
For the years ended June 30, 1999, 2000 and 2001 and
for the six months ended December 31, 2001

<TABLE>
<CAPTION>

                                                                                     Common Stock
                                                                               -----------------------    Additional   Related Party
                                                                               Number of                    Paid-In          Notes
                                                                                  Shares       Amount       Capital       Receivable
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>            <C>        <C>             <C>

BALANCE AT JUNE 30, 1998                                                        8,173,552      $40,867    $51,443,856     $(824,498)

Net Loss

   Comprehensive loss

Issuance of common stock for option and warrant exercises                          11,541           58          5,779
Issuance of common stock for license rights, April 1999, $7.031 per share          14,286           71        100,374
Compensation expense associated with the issuance of 8,279 options
  for consulting services from October 1998 to June 1999                                                       29,529
Related party notes receivable issued in connection with
  delivery of L-VIS Systems to licensee                                                                                    (328,780)
Accretion of preferred stock dividends                                                                        (44,050)

------------------------------------------------------------------------------------------------------------------------------------
 BALANCE AT JUNE 30, 1999                                                       8,199,379       40,996     51,535,488    (1,153,278)

 Net Loss
Unrealized gain on securities available for sale

   Comprehensive loss

Issuance of common stock for option and warrant exercises                          30,318          151         81,567
Issuance of common stock for royalty payments                                      57,144          284        331,880
 Issuance of stock at $5.50 per share in connection with private
   equity financing, net of expenses                                            1,592,727        7,964      8,221,187
Compensation expense associated with the issuance of options for
   consulting services provided by third parties and the Board of Directors                                   449,668
Receipt of payments on notes outstanding                                                                                    179,956
Accretion of preferred stock dividends                                                                        (44,112)

------------------------------------------------------------------------------------------------------------------------------------
 BALANCE AT JUNE 30, 2000                                                       9,879,568       49,395     60,575,678      (973,322)

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

   Comprehensive loss

Issuance of common stock to Cablevision                                         2,007,909       10,040      6,146,911
Costs associated with the Cablevision transaction                                                          (1,212,142)
Issuance of common stock for option and warrant exercises                           8,823           45         24,002
Issuance of common stock for royalty payments                                      57,144          286        196,575
Issuance of common stock in exchange for preferred stock                          167,569          838        876,280
Compensation expense associated with the issuance of options for
   consulting services provided by the Board of Directors                                                       2,500
</TABLE>

(table continued)

<TABLE>
<CAPTION>

                                                                                                      Other
                                                                                    Deferred      Comprehensive    Accumulated
                                                                                  Compensation    Income (Loss)     (Deficit)
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>             <C>              <C>

BALANCE AT JUNE 30, 1998                                                                          $      -         $(28,625,878)

Net Loss                                                                                                             (9,653,998)

   Comprehensive loss

Issuance of common stock for option and warrant exercises
Issuance of common stock for license rights, April 1999, $7.031 per share
Compensation expense associated with the issuance of 8,279 options
  for consulting services from October 1998 to June 1999
Related party notes receivable issued in connection with
  delivery of L-VIS Systems to licensee
Accretion of preferred stock dividends

---------------------------------------------------------------------------------------------------------------------------------
 BALANCE AT JUNE 30, 1999                                                                                -          (38,279,876)

 Net Loss                                                                                                           (12,444,646)
Unrealized gain on securities available for sale                                                   346,167

   Comprehensive loss

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

---------------------------------------------------------------------------------------------------------------------------------
 BALANCE AT JUNE 30, 2000                                                                          346,167           (50,724,522)

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

   Comprehensive loss

Issuance of common stock to Cablevision
Costs associated with the Cablevision transaction
Issuance of common stock for option and warrant exercises
Issuance of common stock for royalty payments
Issuance of common stock in exchange for preferred stock
Compensation expense associated with the issuance of options for
   consulting services provided by the Board of Directors
</TABLE>


(table continued)

<TABLE>
<CAPTION>
                                                                                     Total
                                                                                   Stockholders'
                                                                                     Equity
                                                                                    (Deficit)
--------------------------------------------------------------------------------------------------
<S>                                                                               <C>

BALANCE AT JUNE 30, 1998                                                           $22,034,347

Net Loss                                                                            (9,653,998)
                                                                                  -------------
   Comprehensive loss                                                               (9,653,998)

Issuance of common stock for option and warrant exercises                                5,837
Issuance of common stock for license rights, April 1999, $7.031 per share              100,445
Compensation expense associated with the issuance of 8,279 options
  for consulting services from October 1998 to June 1999                                29,529
Related party notes receivable issued in connection with
  delivery of L-VIS Systems to licensee                                               (328,780)
Accretion of preferred stock dividends                                                 (44,050)

--------------------------------------------------------------------------------------------------
 BALANCE AT JUNE 30, 1999                                                           12,143,330

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

Issuance of common stock for option and warrant exercises                               81,718
Issuance of common stock for royalty payments                                          332,164
 Issuance of stock at $5.50 per share in connection with private
   equity financing, net of expenses                                                 8,229,151
Compensation expense associated with the issuance of options for
   consulting services provided by third parties and the Board of Directors            449,668
Receipt of payments on notes outstanding                                               179,956
Accretion of preferred stock dividends                                                 (44,112)

--------------------------------------------------------------------------------------------------
 BALANCE AT JUNE 30, 2000                                                            9,273,396

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

Issuance of common stock to Cablevision                                              6,156,951
Costs associated with the Cablevision transaction                                   (1,212,142)
Issuance of common stock for option and warrant exercises                               24,047
Issuance of common stock for royalty payments                                          196,861
Issuance of common stock in exchange for preferred stock                               877,118
Compensation expense associated with the issuance of options for
   consulting services provided by the Board of Directors                                2,500
</TABLE>



          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

Princeton Video Image, Inc.
Consolidated Statements of Changes in Stockholders' (Deficit)/Equity
For the years ended June 30, 1999, 2000 and 2001 and
for the six months ended December 31, 2001

<TABLE>
<CAPTION>

                                                                                      Common Stock
                                                                                -----------------------   Additional  Related Party
                                                                                Number of                   Paid-In        Notes
                                                                                   Shares       Amount      Capital     Receivable
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>            <C>         <C>         <C>
Receipt of payments on notes outstanding                                        (279,366)      (1,397)      (1,072,402)     933,299
Related party note issued in connection with delivery of L-VIS System
  upgrade to licensee                                                                                                       (20,414)

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

------------------------------------------------------------------------------------------------------------------------------------
 BALANCE AT JUNE 30, 2001                                                      11,841,647      $59,206     $65,834,688     $(60,437)

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

   Comprehensive loss

Issuance of common stock to Cablevision                                         1,992,091        1,992        2,118,741
Costs associated with the Cablevision transaction                                                              (910,173)
Issuance of warrants in connection with the Cablevision transaction                                           6,064,609
Issuance of common stock for the acquisition of Publicidad                      2,678,353        2,678        4,063,062
Issuance of vested warrants in connection with the acquisition of                                             1,455,553
  Publicidad
Issuance of unvested warrants in connection with the acquisition of                                             122,889
  Publicidad
Issuance of common stock to Presencia en Medios, S.A. de C.V.                     615,385          615        1,999,386
Issuance of common stock for stock option exercises                                 3,389           16            5,339

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

Compensation expense reversal associated with the issuance of repriced
  options to employees and the Board of Directors                                                              (309,087)
Change in common stock from $.005 stated value to $.001 par value                              (47,376)          47,376
Accretion of preferred stock dividends                                                                           (3,459)
------------------------------------------------------------------------------------------------------------------------------------
 BALANCE AT DECEMBER 31, 2001                                                  17,130,865      $17,131      $80,488,924      $    -
                                                                            ========================================================
</TABLE>

(table continued)

<TABLE>
<CAPTION>

                                                                                                 Other
                                                                               Deferred      Comprehensive    Accumulated
                                                                             Compensation    Income (Loss)     (Deficit)
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>             <C>              <C>
Receipt of payments on notes outstanding
Related party note issued in connection with delivery of L-VIS System
  upgrade to licensee

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

-------------------------------------------------------------------------------------------------------------------------------
 BALANCE AT JUNE 30, 2001                                                                        $(38,560)        $(62,405,085)

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

   Comprehensive loss

Issuance of common stock to Cablevision
Costs associated with the Cablevision transaction
Issuance of warrants in connection with the Cablevision transaction
Issuance of common stock for the acquisition of Publicidad
Issuance of vested warrants in connection with the acquisition of
  Publicidad
Issuance of unvested warrants in connection with the acquisition of                (122,889)
  Publicidad
Issuance of common stock to Presencia en Medios, S.A. de C.V.
Issuance of common stock for stock option exercises

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

Compensation expense reversal associated with the issuance of repriced
  options to employees and the Board of Directors
Change in common stock from $.005 stated value to $.001 par value
Accretion of preferred stock dividends
-------------------------------------------------------------------------------------------------------------------------------
 BALANCE AT DECEMBER 31, 2001                                                       $(81,926)    $23,542          $(69,395,675)
                                                                           ====================================================
</TABLE>
(table continued)

<TABLE>
<CAPTION>
                                                                            Total
                                                                          Stockholders'
                                                                            Equity
                                                                           (Deficit)
-----------------------------------------------------------------------------------------
<S>                                                                       <C>
Receipt of payments on notes outstanding                                         (140,501)
Related party note issued in connection with delivery of L-VIS System
  upgrade to licensee                                                             (20,414)

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

-------------------------------------------------------------------------------------------
 BALANCE AT JUNE 30, 2001                                                      $3,389,812

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

Issuance of common stock to Cablevision                                         2,120,733
Costs associated with the Cablevision transaction                                (910,173)
Issuance of warrants in connection with the Cablevision transaction             6,064,609
Issuance of common stock for the acquisition of Publicidad                      4,065,740
Issuance of vested warrants in connection with the acquisition of               1,455,553
  Publicidad
Issuance of unvested warrants in connection with the acquisition of                     -
  Publicidad
Issuance of common stock to Presencia en Medios, S.A. de C.V.                   2,000,001
Issuance of common stock for stock option exercises                                 5,355

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

Compensation expense reversal associated with the issuance of repriced
  options to employees and the Board of Directors                                (309,087)
Change in common stock from $.005 stated value to $.001 par value
Accretion of preferred stock dividends                                             (3,459)
-------------------------------------------------------------------------------------------
 BALANCE AT DECEMBER 31, 2001                                                  $11,051,996
                                                                          =================
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-7
<PAGE>

                          PRINCETON VIDEO IMAGE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   ORGANIZATION:

Princeton Video Image, Inc. ("PVI", "we", "us") developed and is marketing a
proprietary hardware and software system (the "L-VIS(R) System") that, through
patented computer vision technology, places computer-generated electronic images
into live and pre-recorded television broadcasts of sports and entertainment
programming. These electronic images range from simple corporate names or logos
to sophisticated multi-media 3-D animated productions. As part of our product
development program, we are developing a series of products to allow viewers to
interact with live or recorded video programming delivered to the home via the
Internet or through interactive television. These applications will enable the
viewer to influence the on-screen presentation of a broadcast which utilizes the
L-VIS System by using a mouse or other pointer, for example, to indicate areas
of interest. We are also developing other applications of technology for the
sports and entertainment fields.

We intend to focus our efforts on increasing market acceptance of the L-VIS
System by continuing to develop software applications, such as animated
insertions in event video streams. Such insertions include the virtual
first-down line in football, the virtual off sides line in soccer, and virtual
product placement in pre-recorded programming. Other software applications being
developed include Internet applications which will allow television viewers to
interact with live or recorded video programming. Under the terms of a joint
collaboration and license agreement we have entered into with Cablevision
Systems Corporation ("Cablevision"), we will work together to develop technology
to create virtual, in-content, interactive and targeted advertising and
enhancement products for use with television distribution.

We market our systems on a worldwide basis through licensing and royalty
agreements, through our majority-owned subsidiary, Princeton Video Image Europe,
N.V. ("PVI Europe"), which is headquartered in Belgium and through our
wholly-owned subsidiary, Publicidad Virtual, S.A. de C.V. ("Publicidad") which
is headquartered in Mexico City, Mexico.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CHANGE IN FISCAL YEAR

We changed our fiscal year from June 30 to December 31, effective with the six
months ended December 31, 2001. The following is a presentation of our statement
of operations:

<TABLE>
<CAPTION>
                                               For the Six Months Ended
                                                      December 31,
                                             ----------------------------
                                                 2001           2000
                                             ------------    ------------
                                                              (Unaudited)
<S>                                          <C>             <C>


Royalties and license fees                   $  1,019,474    $  1,236,929
Advertising and production revenue              4,558,091       1,363,879
                                             ------------    ------------
            Total revenue                       5,577,565       2,600,808
Costs and expenses:
   Sales and marketing                          3,970,482       1,706,368
   Product development                          1,584,834       1,397,515
   Field operations and support                 3,128,220       2,885,651
   General and administrative                   2,609,060       2,832,356
   Severance and other charges                  1,060,832              --
                                             ------------    ------------
            Total costs and expenses           12,353,428       8,821,890
</TABLE>


                                      F-8
<PAGE>


                          PRINCETON VIDEO IMAGE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                            <C>             <C>
Operating loss                                 (6,775,863)     (6,221,082)

   Other income, net                              193,752         237,407
   Losses from equity investment                 (176,028)             --
   Loss from securities available for sale       (500,000)             --

   Minority interest                               94,280          69,646
                                             ------------    ------------
Net loss before tax benefit                    (7,163,859)     (5,914,029)

   Tax benefit                                    173,269         371,999
                                             ------------    ------------
Net loss

                                               (6,990,590)     (5,542,030)
   Accretion of preferred stock dividends          (3,459)         (8,341)
                                             ------------    ------------
Net loss applicable to common stock          $ (6,994,049)   $ (5,550,371)
                                             ============    ============
</TABLE>


BASIS OF CONSOLIDATION

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

CASH AND CASH EQUIVALENTS

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

RESTRICTED SECURITIES HELD TO MATURITY

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

MARKETABLE SECURITIES

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

LICENSE RIGHTS

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

PROPERTY AND EQUIPMENT

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



                                      F-9
<PAGE>


                          PRINCETON VIDEO IMAGE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INTANGIBLE ASSETS

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

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

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

Goodwill is the excess of the purchase price over the fair value of net assets
acquired in business combinations accounted for under the purchase method. In
accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets", effective January 1, 2002, such goodwill will no longer be amortized,
but will continue to be tested for impairment.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", all long-lived assets held
and used by us are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. If the cash flows are less than
the carrying amount, an impairment loss would be recognized for the difference
between the estimated fair value and the carrying value.

INCOME TAXES

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

REVENUE

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

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

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

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

PRODUCT DEVELOPMENT COSTS


                                      F-10
<PAGE>

                          PRINCETON VIDEO IMAGE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

PER SHARE DATA

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

Since we incurred net losses for all periods presented, both basic and diluted
per share calculations are the same. Accordingly, options and warrants to
purchase 18,505,424, 4,199,479, 3,722,487 and 2,765,315 shares of common stock
that were outstanding at December 31, 2001, June 30, 2001, 2000 and 1999,
respectively, were not included in diluted per share calculations, as their
effect would be antidilutive. In addition, the accretion of preferred dividends
which could be paid out in common stock was not material for the three years
presented.

FOREIGN CURRENCY TRANSLATION

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

RECLASSIFICATIONS

To conform to the December 31, 2001 presentation we reclassified certain amounts
for previous years.

RISKS AND UNCERTAINTIES

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

LIQUIDITY

The consolidated financial statements of PVI have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. We have incurred net losses of approximately $7.0 million, $11.7
million, $12.4 million and $9.7 million for the six months ended December 31,
2001 and the years ended June 30, 2001, 2000 and 1999, respectively. Our actual
working capital requirements will depend on numerous factors, including the
progress of our product development programs, our ability to maintain our
customer base and attract new customers to use the L-VIS System, the level of
resources we are able to allocate to the development of greater marketing and
sales capabilities, technological advances, our ability to protect our patent
portfolio and the status of our competitors. We expect to incur costs and
expenses in excess of expected revenues during the ensuing fiscal year as we
continue to execute our business strategy of becoming a global, media services
company by adding to our sales and marketing management force both domestically
and internationally, and to strengthen existing relationships with rights
holders, broadcasters and advertisers.



                                      F-11
<PAGE>

                          PRINCETON VIDEO IMAGE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The factors noted in the above paragraph raise substantial doubt concerning
our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should we be unable to continue as a going
concern. Our ability to continue as a going concern is dependent upon the
support of our shareholders, creditors, and our ability to close debt or equity
transactions. In the event we are unable to liquidate our liabilities, planned
operations may be scaled back. Additional funding may not be available when
needed or on terms acceptable to us, which could have a material adverse effect
on our business, financial condition and results of operations. If adequate
funds are not available we may delay or eliminate some expenditures, discontinue
operations in selected U.S. or international markets or significantly downsize
our sales, marketing, research and development and administrative functions.
These activities could impact our ability to expand our business or meet our
operating needs. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties. Our management is in the
process of seeking additional financing through a variety of options including
bridge loans or equity financing with existing shareholders, financial
institutions or strategic investors. There is no assurance, however, that any
such transactions will provide sufficient resources to support us until we
generate sufficient cash flow to fund our operations.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Estimates are used for, but
not limited to, the accounting for: the future recoverability of the L-VIS
System costs, impairment of intangibles, depreciation and amortization and
accrued expenses.

3.   NEW PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations". This statement addresses financial accounting and
reporting for business combinations. All business combinations in the scope of
this statement are to be accounted for using only the purchase method. The
provisions of this statement apply to all business combinations initiated after
June 30, 2001. The acquisition of Publicidad, which closed in September 2001,
was accounted for in accordance with the provisions of this statement.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles".
This statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets. It addresses how intangible assets that
are acquired individually or with a group of other assets, but not those
acquired in a business combination, should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangibles should be accounted for after they have been initially
recognized in the financial statements. The provisions of this statement are to
be applied starting with fiscal years beginning after December 15, 2001. In
addition, goodwill and intangible assets acquired after June 30, 2001 will be
subject immediately to the non-amortization and amortization provisions of this
statement. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead will be reviewed
for impairment and an impairment charge will be recorded in the periods in which
the recorded carrying value of goodwill and certain intangibles is more than its
estimated fair value. We adopted this statement during the quarter ended
September 30, 2001 with respect to the acquisition of Publicidad. Prior to
adopting SFAS 142, we did not have any goodwill and thus the "as adjusted"
disclosure required by SFAS 142 is not included.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard requires that obligations associated with the
retirement of a tangible long-lived asset be recorded as a liability when those
obligations are incurred, with the amount of the liability initially measured at
fair value. Upon initially recognizing a liability for an asset retirement
obligation, an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, this liability is
accreted to its present value, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The provisions of this statement will be effective for
financial statements issued for fiscal years beginning after June 15, 2002. We
do not expect that the adoption of this statement will have a material impact on
our results of operations, financial position or cash flows.



                                      F-12
<PAGE>

                          PRINCETON VIDEO IMAGE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The standard provides accounting and reporting requirements for
the impairment of all long-lived assets (including discontinued operations) and
it also extends the reporting requirements for discontinued operations of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," to all components of an entity. The primary
purpose of SFAS No. 144 is to establish guidelines to create a consistent
accounting model for the impairment of long-lived assets to be disposed of and
to clarify some implementation issues of SFAS No. 121. We will adopt SFAS No.
144 effective January 1, 2002 and do not expect it have a material impact on our
results of operations, financial position or cash flows.

4.   CABLEVISION TRANSACTION

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

In connection with the Cablevision Transaction, PVI and Cablevision executed a
license agreement granting Cablevision and its affiliates the right to use our
L-VIS(TM) System and related proprietary rights in its businesses. Under the
terms of the agreement, we received advance payments of $2.5 million and $5
million in February and September 2001, respectively. The royalties and other
payments due to PVI under the license agreement and under the joint
collaboration and license agreement described below (the "Cablevision
Agreements") are creditable against these advance payments. The license
agreement provides that we will receive royalties based on Cablevision's
revenues from use of the L-VIS(TM) System, an equipment fee equal to our direct
costs of manufacturing each L-VIS(TM) System we provide under the license, and
enhancement fees for electronic insertions for which Cablevision does not
receive revenues based on our direct costs of providing such insertions. If PVI
terminates the license for any reason, the unused portion of the advance
payments and the undepreciated value of the equipment are refundable to
Cablevision.

With respect to the allocation of the proceeds to the individual components of
the transaction, we allocated the proceeds to the common stock warrants and
advance payments received in proportion to their relative fair value. The fair
value of the warrants were determined using a Black Scholes calculation. Based
on this methodology, we allocated $6.1 million and $2.1 million to common stock
and additional paid-in-capital for the first and second closings, respectively,
and $6.1 million to additional paid-in-capital for the issuance of warrants in
the second closing. In order to reflect the refundable advance payments received
at the first and second closings at their maximum refundable amounts, $1.4
million and $1.8 million, respectively, was allocated to deferred revenue and
divided into two components. A total of $7.5 million was recorded as advance
payments and a debit of $4.4 million was recorded as deferred revenue credits
which will be amortized as a reduction in revenue earned under the Cablevision
Agreement.



                                      F-13
<PAGE>
                          PRINCETON VIDEO IMAGE, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

No revenues were recognized under the Cablevision Agreements through December
31, 2001.

5.  PUBLICIDAD ACQUISITION:

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

<TABLE>

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

The preliminary allocation of the purchase price to the acquired assets and
assumed liabilities of Publicidad has been adjusted as the fair value appraisal
of the assets and liabilities and estimated acquisition costs have been
finalized. The adjusted allocation is as follows:

<TABLE>

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

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

We may make additional refinements to the allocation of the purchase price in
future periods as the related fair value appraisal of certain assets and
liabilities are finalized. The purchase of Publicidad has


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

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

The following is a proforma summary of the results of operations as if the
acquisition by PVI of Publicidad had been completed on July 1, 2000.

<TABLE>
<CAPTION>
                                              For the Six Months      For the year
                                                    Ended                 ended
                                              December 31, 2001       June 30, 2001
                                             --------------------- --------------------
<S>                                             <C>                    <C>
Revenues                                        $ --                    $ --
Net Loss
Net Loss Applicable to Common Stock
Basic and diluted net loss per share
   applicable to common stock                   $ --                    $ --
Weighted average number of shares
   of common stock outstanding
</TABLE>

6.  SEVERANCE AND OTHER CHARGES:

In November 2001 we recorded approximately $980,000 in severance payments due to
a former member of our management team. These payments will be paid over the
three year period from November 2001 through October 2004. In addition, we
recorded approximately $80,000 for future lease payments due on office space in
our New Jersey and Belgium offices which, due to the streamlining of our
operations, will not be used after January 2002. Both the severance and lease
payments were accrued during the six months ended December 31, 2001.

7.  MARKETABLE SECURITIES:

During the six months ended December 31, 2001, it was determined that there had
been a decline in value which was not temporary in nature. Accordingly, a
$500,000 unrealized loss was recognized in the statement of operations. As of
June 30, 2001 and 2000, the value of our available for sale securities was as
follows:

<TABLE>
<CAPTION>
                                                                                 June 30,
                                                                          ------------------------
                                                                            2001            2000
                                                                            ----            ----
<S>                                                                        <C>            <C>
Pineapplehead Limited
   1,692,333 shares       Cost                                           $ 500,000        $500,000
     common stock         Cumulative unrealized (loss) gain               (185,057)        346,167
                                                                         ----------       --------
                          Market value                                   $ 314,943        $846,167
                                                                         ==========       ========
</TABLE>

8.  LICENSE RIGHTS

On April 21, 2000, we entered into an agreement with NFL International, a
division of NFL Enterprises, L.P., retroactively effective to February 1, 2000.
Under the terms of the agreement, we were granted exclusive rights to use
electronic insertion technology in certain NFL International broadcasts of
NFL/NFLEL games during the 2000 and 2001 season and non-U.S. telecasts of Super
Bowl XXXV and XXXVI. This agreement extended a previous agreement we had with
NFL International which lasted one year and ended with Super Bowl XXXIV. We
recorded an intangible asset and a corresponding liability on our balance sheet
for the acquisition of the license rights under both agreements. These rights
are amortized on a straight line basis and payments are made over the term of
the license agreements according to a pre-determined payment schedule. For the
six months ended December 31, 2001, and for


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

the years ended June 30, 2001, 2000 and 1999, the amortization expense with
respect to these rights totaled $300,000, $600,000, $1,416,669 and $833,333,
respectively. A total of $ -0-, $700,000, $1,300,000 and $400,000 in cash
payments were made during the six months ended December 31, 2001 and the years
ended June 30, 2001, 2000 and 1999, respectively. The remaining balance payable
was $800,000 at December 31, 2001 and June 30, 2001 and $1,500,000 at June 30,
2000.

9.  PREPAID AIRTIME

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

<TABLE>

<S>                                                             <C>
       Televisa                                                 $    2,277,290
       TV Azteca                                                       436,243
                                                                --------------
            Total                                               $    2,713,533
                                                                ==============
</TABLE>

10.  OTHER CURRENT ASSETS

Other current assets consisted of the following:

<TABLE>
<CAPTION>
                                                                                   June 30,
                                                  December 31,        ---------------------------------
                                                      2001                 2001                 2000
                                                  ------------         -----------          -----------
<S>                                               <C>                  <C>                  <C>
     Prepaid and recoverable taxes                $   532,521          $    39,368          $         -
     Prepaid insurance                                111,330              103,584               70,128
     Prepaid license fees                              23,679               25,718                    -
     Other assets                                     220,265              175,862              128,440
                                                  -----------          -----------          -----------
          Other current assets                    $   887,795          $   344,532          $   198,568
                                                  ===========          ===========          ===========
</TABLE>




11.  PROPERTY AND EQUIPMENT:

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


<TABLE>
<CAPTION>
                                                                                        June 30,
                                                      December 31,          ---------------------------------
                                                          2001                  2001                 2000
                                                      ------------         -------------       -------------
<S>                                                  <C>                  <C>                  <C>

       Furniture and fixtures                         $    312,691         $     275,850       $     264,659
       Leasehold improvements                              148,727                99,357              91,824
       Office equipment                                  2,951,311             1,893,511           1,743,481
       LVIS Systems, rack components
         and spare parts                                 6,233,371             6,082,536           5,585,353
       Research and development
         equipment and software                            569,751               519,351             503,174
       Vehicles                                            470,771               322,395              87,930
                                                      ------------         -------------       -------------
            Total property and equipment                10,686,622             9,193,000           8,276,421
       Less: accumulated depreciation                   (7,829,889)           (6,197,312)         (4,591,353)
                                                      ------------         -------------       -------------
            Property and equipment, net               $  2,856,733         $   2,995,688       $   3,685,068
                                                      ============         =============       =============
</TABLE>



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


Depreciation expense amounted to $901,277, $1,853,991, $1,849,189 and $1,249,235
for the six months ended December 31, 2001 and for the years ended June 30,
2001, 2000 and 1999, respectively.

12.  INTANGIBLE ASSETS:

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

<TABLE>
<CAPTION>
                                                                                        June 30,
                                                      December 31,         ---------------------------------
                                                           2001                 2001                2000
                                                      -------------        -------------       -------------
<S>                                                        <C>                  <C>                 <C>
       Patents                                        $     977,017        $     941,418       $     854,606
       Less: accumulated amortization                      (449,335)            (385,561)           (267,120)
                                                      -------------        -------------       -------------
            Patents, net                              $     527,682        $     555,857       $     587,486
                                                      =============        =============       =============

       Identifiable intangibles:
         Customer relationships                       $   1,000,000        $           -       $           -
         Distribution relationships                       2,100,000                    -                   -
         Trademarks                                         100,000                    -                   -
       Less: accumulated amortization                      (175,833)
                                                      -------------        -------------       -------------
            Identifiable intangibles, net             $   3,024,167        $           -       $           -
                                                      =============        =============       =============
</TABLE>


Amortization expense amounted to $239,607, $118,567, $95,813 and $77,770 for the
six months ended December 31, 2001 and for the years ended June 30, 2001, 2000
and 1999, respectively.

13.  INVESTMENTS

On January 24, 2001, we entered into an operating agreement with CBS Technology
Corporation and Core Digital Technologies, Inc. to form Revolution Company, LLC.
The purpose of the Revolution Company is to develop, market and render
entertainment technical production services such as EyeVision, a technology able
to produce three-dimensional replays from multi-camera angles, which made its
debut in Super Bowl XXXV. Under the terms of the operating agreement, the
percentage ownership interests of the parties is as follows:

<TABLE>

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

Our initial contribution to the joint venture was $850,000. The structure of
this investment was for $25,000 to be considered as an equity contribution with
the remaining $825,000 to be a secured loan to the joint venture. We use the
equity method to account for our investment in the Revolution Company and,
accordingly, during the six months ended December 31, 2001 and the year ended
June 30, 2001 recorded our share of the losses in the amounts of $176,028 and
$114,243, respectively. Although we have no further commitment to fund the
operations of the Revolution Company or guarantee its debts, we contributed an
additional $8,066 during the six months ended December 31, 2001 as our
percentage share of a payment for legal services provided.


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



14.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

<TABLE>
<CAPTION>

                                                                           June 30,
                                             December 31,        ------------------------------
                                                 2001                2001              2000
                                             -------------       -------------    -------------
<S>                                          <C>                 <C>              <C>
         Accounts payable                    $   4,950,977       $   1,661,342    $   1,258,056
         License fees and royalties                412,463             990,774        1,625,215
         Legal and accounting fees                 441,050             463,622          348,683
         Other                                     194,903             962,175          903,106
                                             -------------       -------------    -------------
                                             $   5,999,393       $   4,077,913    $   4,135,060
                                             =============       =============    =============
</TABLE>


15.  ACCOUNTS PAYABLE TO TELEVISION NETWORKS

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

<TABLE>

<S>                                                         <C>
              Televisa                                      $   2,944,641
              Epesa                                               832,474
              TV Azteca                                           583,257
                                                            -------------
                   Total                                    $   4,360,372
                                                            =============
</TABLE>


16.  NOTES PAYABLE

Publicidad obtained a short-term loan, denominated in Mexican pesos, from a
Mexican bank which is payable in May 2002. The note, which is guaranteed by
Presencia, bears an interest rate of 10.9%. Proceeds from the loan are being
used to fund the installment payments due to Televisa and TV Azteca (see Note
15). The balance of the note payable at December 31, 2001 was $1,090,608 and is
expected to be paid in full when due.

17.  LICENSE AND ROYALTY FEES:

Under the terms of certain customer agreements, we retain title to the L-VIS
System and receive a non-refundable fee which reflects the construction cost of
the L-VIS system delivered to the licensee. These fees are recorded as license
revenue on a straight-line basis over the shorter of the license term or the
useful life of the equipment. Recognition of license revenue related to these
agreements amounted to $138,930, $227,840, $548,557 and $340,185 for the six
months ended December 31, 2001 and the years ended June 30, 2001, 2000, and
1999, respectively. The remaining unearned revenue related to these agreements
was $364,269 at December 31, 2001, of which $179,436 was current, $1,030,114 at
June 30, 2001, of which $418,304 was current, and $923,852 at June 30, 2000, of
which $293,819 was current. Included in the balances at June 30, 2001 was
$556,357 related to equipment being used by Publicidad. This unamortized balance
was reflected as a reduction in the purchase price of Publicidad at the date of
acquisition.

18.  INCOME TAXES:

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

<TABLE>
<CAPTION>

                                                                            June 30,
                                             December 31,        ------------------------------
                                                 2001                2001              2000
                                             -------------       -------------    -------------
<S>                                          <C>                                       <C>
          Current:
             Foreign                         $   145,318                               $  -
</TABLE>




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

<TABLE>

<S>                                            <C>                  <C>                       <C>
             Federal
             State                                  (318,587)       $   (371,999)             $(596,998)
          Deferred:
             Federal                                        -                   -                 -
             State                                          -                   -                 -

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


The $145,318 in foreign taxes is primarily due to the acquisition of
Publicidad. Other local and franchise taxes totaled $14,506.

Temporary differences which give rise to significant deferred tax assets and
liabilities at December 31, 2001, June 30, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>

                                                                               June 30,
                                                 December 31,      --------------------------------
          Deferred tax assets:                       2001                 2001              2000
                                               --------------      --------------    --------------
<S>                                            <C>                 <C>               <C>
            Capitalized start-up costs         $       18,731      $       21,406    $            -
            Fixed assets                              379,103             262,677           409,496
            Deferred revenue and other              1,194,763             840,860           457,227
            Equity investment                         340,566              38,843                 -
            Accrued expenses                          249,252              44,530                 -
            State taxes                               188,116             238,378                 -
            Other                                      55,803              93,126                 -
            NOL Carryforward - Foreign              3,384,640             871,248                 -
            NOL Carryforward - Federal             16,204,319          16,043,765        13,424,134
            NOL Carryforward - State taxes                  -                   -         3,522,398
            Valuation allowance - Foreign          (2,867,926)           (871,248)                -
            Valuation allowance - Federal         (16,872,766)        (17,159,313)      (14,095,008)
            Valuation allowance - State              (188,116)           (238,378)       (3,522,398)
                                               --------------      --------------    --------------
              Total deferred tax assets             2,086,485             185,894           195,849

          Deferred tax liabilities:
            Prepaid expenses                          816,137
            Intangibles                             1,270,348             185,894           195,849
                                               --------------      --------------    --------------
              Total deferred tax liabilities        2,086,485             185,894           195,849

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


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

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


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


As of December 31, 2001, we had net operating loss carryforwards for U.S.
federal income tax purposes of approximately $47,660,000 which expire in the
years 2006 through 2022. The timing and manner in which the U.S. net operating
loss carryforwards may be utilized in any year by us will be limited by Internal
Revenue Code Section 382. As of December 31, 2001, we had foreign net operating
loss carryforwards of approximately $9,144,000 which primarily expire in the
years 2006 through 2009.

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

19.  COMMON AND PREFERRED STOCK

COMMON STOCK

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

On July 1, 1999, we implemented a Company match under our 401(k) retirement plan
(the "Plan") whereby we agreed to match employee contributions with our common
stock at the rate of 50% of the amount an employee contributes, up to 5% of
salary. The contribution of stock is made on a monthly basis and matching
contributions vest over three years. We recorded an expense of $46,371, $87,089
and $68,782 and reserved 16,458, 22,878 and 10,992 shares of common stock to
participants for the six months ended December 31, 2001 and the years ended June
30, 2001 and 2000, respectively. At December 31, 2001, 46,203 of the contributed
shares were fully vested.

On September 20, 2001, we issued 1,992,091 shares of common stock in connection
with a Stock and Warrant Purchase Agreement entered into with PVI Holding, LLC
(see Note 4).

On September 20, 2001 we issued 2,678,353 shares of common stock in connection
with the acquisition of Publicidad (see Note 5).

On November 8, 2001, we completed the sale of 615,385 shares of common stock to
Presencia en Medios, S.A. de C.V. at $3.25 per share (see Note 24).

PREFERRED STOCK

We are authorized to issue up to 1,000,000 shares of the preferred stock in one
or more series. Our Board of Directors is authorized to fix the relative rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, terms of redemption, redemption prices,
liquidation preferences, the number of shares constituting any series and the
designation of such series. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of our
Series A Preferred Stock, Series B Preferred Stock and Common Stock, including
the loss of voting control. Other than the shares of Series A Preferred Stock
and Series B Preferred


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

Stock, there are no shares of preferred stock currently issued and outstanding.
As of September 13, 2001, PVI was reincorporated as a Delaware corporation in
conjunction with the Cablevision transaction. As a Delaware corporation, we are
authorized to issue a total of 1,000,000 shares of preferred stock in one or
more series of which 11,363 and 12,834 shares of the Series A and Series B
Preferred stock, respectively, have been issued and are outstanding. The Board
of Directors is authorized to fix the relative rights, preferences, privileges
and restrictions of the remaining 975,803 issued shares of preferred stock.

Series A Preferred Stock

At December 31, 2001 we had issued a total of 67,600 shares of Series A
Redeemable Preferred Stock with a par value of $4.50 per share, of which 11,363
were outstanding. Dividends shall be paid either in cash or with our common
stock at a six percent per annum dividend rate. We have the right at any time
after the date of original issuance of the Series A Preferred Stock to redeem
the Series A Preferred Stock in whole or in part at a price of $4.50 per share
plus all accrued but unpaid dividends. We are required to redeem this preferred
stock in cash at par plus all accrued but unpaid dividends from thirty percent
of the amount by which our annual net income after taxes exceeds $5,000,000.

Dividends on the shares of Series A Preferred Stock are cumulative and must be
paid in the event of liquidation and before any distribution to holders of
common stock. Cumulative dividends in arrears at December 31, 2001, June 30,
2001 and 2000 totalled $27,618 (or $2.43 per share), $26,084 (or $2.30 per
share) and $137,750 (or $2.01 per share), respectively.

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

Series B Preferred Stock

At December 31, 2001 we had issued a total of 86,041 shares of Series B
Redeemable Preferred Stock with a par value of $5.00 per share, of which 12,834
shares were outstanding. Dividends shall be paid either in cash or with our
common stock at a six percent per annum dividend rate. We have the right at any
time after the date of original issuance of the Series B Preferred Stock, but
subject to the prior redemption of all of the Series A Preferred Stock, to
redeem the Series B Preferred Stock in whole or in part at a price of $5.00 per
share plus all accrued but unpaid dividends. We are required, subject to the
prior redemption of all of the Series A Preferred Stock, to redeem this
preferred stock in cash at par plus all accrued but unpaid dividends from twenty
percent of the amount by which our annual net income after taxes in any year
exceeds $5,000,000.

Dividends on the shares of Series B Preferred Stock are cumulative and must be
paid in the event of liquidation and before any distribution to holders of
common stock. No dividends may be paid with respect to this stock until all
cumulative dividends in respect of Series A Preferred Stock have been paid.
Cumulative dividends in arrears at December 31, 2001, June 30, 2001 and 2000,
totaled $30,793 (or $2.40 per share), $28,868 (or $2.25 per share) and $165,612
(or $1.92 per share), respectively.

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

On July 13, 2000, we offered all shareholders of the Series A Preferred stock
and Series B Preferred stock the opportunity to exchange their shares of
preferred stock for shares of our common stock. Under the terms of the exchange,
the preferred shares were exchanged for a number of common shares equal to the
par value of the preferred plus accrued but unpaid dividends, divided by the
average of the closing sales price of the common stock as quoted on the NASDAQ
National Market for the ten (10) business days immediately preceding the closing
date of the transaction. The holders of the Series A preferred


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

stock and the Series B preferred stock that elected to exchange their shares
received 1.2494 shares and 1.3296 shares of common stock, respectively, for each
share of the applicable series of preferred stock exchanged. The transaction
closed on August 17, 2000. Of the 67,600 shares of Series A Preferred which were
outstanding at the date of the offer, 56,237 shares were exchanged for 70,256
shares of common stock. Of the 86,041 shares of Series B Preferred which were
outstanding at the date of the offer, 73,207 shares were exchanged for 97,313
shares of common stock.

Changes in the preferred stock accounts were as follows:

<TABLE>
<CAPTION>
                                                Series A                      Series B
                                                  No. of                        No. of
                                                  Shares      Amount            Shares      Amount           Total
                                                ---------     ------          --------      ------           -----
<S>                                              <C>      <C>                  <C>      <C>             <C>
Balance at June 30, 1998                          67,600  $  403,450            86,041  $  544,155      $  947,605
Accretion of preferred stock dividends                        18,250                        25,800          44,050
                                                  ------   ---------            ------   ---------      ----------
Balance at June 30, 1999                          67,600     421,700            86,041     569,955         991,655
Accretion of preferred stock dividends                        18,250                        25,862          44,112
                                                  ------   ---------            ------   ---------      ----------
Balance at June 30, 2000                          67,600     439,950            86,041     595,817       1,035,767
Exchange of preferred stock
   for common stock                              (56,237)   (367,792)          (73,207)   (509,521)       (877,313)
Accretion of preferred stock dividends                         5,059                         6,742          11,801
                                                  ------   ---------            ------   ---------      ----------
Balance at June 30, 2001                          11,363   $  77,217            12,834   $  93,038      $  170,255
Accretion of preferred stock dividends                         1,534                         1,925           3,459
                                                  ------   ---------            ------   ---------      ----------
Balance at December 31, 2001                      11,363   $  78,751            12,834   $  94,963      $  173,714
                                                  ======   =========            ======   =========      ==========

</TABLE>

20.  WARRANTS AND OPTIONS:

WARRANTS

We had outstanding a total of 14,943,376, 1,307,130, 1,307,130 and 1,192,130
warrants to purchase common stock at December 31, 2001, June 30, 2001, 2000, and
1999, respectively. The exercise prices range from $2.31 to $20.00 per share and
the expiration of such warrants range from 2002 to 2007. The following is a
description of warrant activity for the six months ended December 31, 2001 and
the fiscal years ended June 30, 2001, 2000 and 1999.

In connection with a July 1994 issuance of common stock to Blockbuster
Entertainment Corporation ("Blockbuster"), we issued warrants with a five year
term to purchase 70,000 shares of common stock at an exercise price of $15.00
per share. These warrants expired unexercised in July 1999.

In October 1997, we issued warrants with a five year term to purchase 300,000
shares of common stock at an exercise price of $0.01 per share in connection
with a Bridge Financing. As of June 30, 2000, all of these warrants had been
exercised, with 10,000 and 15,700 being exercised during the fiscal years ended
June 30, 1999 and 2000, respectively.

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

In connection with the Reorganization Agreement we entered into with Presencia
and others as described in Note 5, a warrant to purchase 100,000 shares of our
common stock was issued to Allen & Co. as consideration for their issuance of a
fairness opinion in connection with this transaction. The warrant was issued
with an exercise price of $2.3065 and has an expiration date of December 20,
2005. The value of


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

this warrant was calculated using the Black Scholes method and a charge of
$100,762 was recorded as part of the acquisition. A second warrant to purchase
100,000 shares of common stock was issued to Allen & Co. on September 20, 2001,
upon the consummation of the transaction contemplated by the Reorganization
Agreement. This warrant, issued as consideration for financial advisory services
provided by Allen & Co. in connection with the transaction, was issued with an
exercise price of $3.91 per share and is exercisable for five years. The value
of this warrant was calculated using the Black Scholes method and a charge of
235,078 was recorded as an increase in additional paid in capital for the
issuance of the warrants and a corresponding decrease in additional paid in
capital as a cost of the transaction resulting in no net effect to the financial
statements.

In connection with the acquisition of Publicidad, as described in Note 9, on
September 20, 2001 we issued to Presencia and its affiliate Presence en Media
LLC ("Presence") warrants to purchase an aggregate of 1,036,825 shares of our
common stock, as consideration for Presencia and its affiliates selling to us
and our affiliate, PVI Latin America, all of their shares of Publicidad. The
warrants issued in this transaction were divided into eleven separate groups,
and they expire at various times, depending on the group, from December 16, 2002
to January 1, 2007, and have, again dependent upon the group, an exercise price
which ranges from $3.72 to $20.00 per share. 959,086 of these warrants were
vested and were included as part of the purchase price, while 77,739 of these
warrants were unvested and were recorded as deferred compensation and will be
recognized as compensation expense over the nine month vesting period beginning
October 1, 2001 and ending June 30, 2002 in accordance with Financial
Accounting Standards Board Interpretation (FIN) No. 44. This nine month period
represents the additional service provided.

In connection with the Stock and Warrant Purchase Agreement we entered into with
Cablevision, as described in Note 4, a warrant to purchase 11,471,908 shares of
our common stock was issued to PVI Holding, LLC. This warrant is exercisable for
three years from the date of issuance at an exercise price of $8.00, $9.00 and
$10.00 per share during the first, second and third years of the term,
respectively. These warrants were included in the fair value allocation
described in Note 4. Pursuant to the terms of the warrant, the number of shares
purchasable upon exercise of the warrant is automatically adjusted upon any
issuance by us of common stock so that the warrant represents the right to
purchase the same percentage of outstanding shares before the issuance as after.
Accordingly, a warrant adjustment to purchase an additional 427,513 shares of
our common stock was made on November 8, 2001, the date of the sale to Presencia
of 615,385 shares of common stock. The value of this warrant was calculated
using the Black Scholes method and a charge of $123,628 was recorded as an
increase in additional paid in capital for the issuance of the warrants and a
corresponding decrease in additional paid in capital as a reduction of the
proceeds of the transaction resulting in no net effect to the financial
statements.

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

STOCK OPTION PLAN

We adopted a Stock Option Plan (the "Plan") in July 1993 for our employees,
officers, directors, consultants and independent contractors. The Plan initially
reserved 360,000 shares of common stock for issuance upon the exercise of stock
options. The Plan was amended in 1995, 1996, 1997,1998 and 2001 to reserve
additional shares. As of June 30, 2001, 5,160,000 shares were reserved for the
Plan.

The Plan is administered by our Board of Directors, which determines the
distribution of all options. The Plan provides for the granting of options
intended to qualify as incentive stock options ("ISOs") as defined in Section
422A of the Internal Revenue Code of 1986, as amended, and non-qualified stock
options ("NQSOs") to our key employees as well as NQSOs to non-employee
directors, independent contractors and consultants who perform services for us.
The exercise price of all ISOs granted under the Plan may


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

not be less than the fair market value of the shares at the time the option is
granted. Options may be for a period of not more than ten years from the date of
grant and generally vest ratably over a three year period. Options are not
assignable or otherwise transferable except by will or the laws of descent and
distribution.

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

<TABLE>
<CAPTION>
                                                NUMBER OF                             WTD AVG
                                                  OPTIONS            OPTION    EXERCISE PRICE
                                              OUTSTANDING       PRICE RANGE         PER SHARE
                                              -----------       -----------   ---------------
<S>                                           <C>             <C>                       <C>
   Balance at June 30, 1998                     1,317,507      $2.50-$17.50             $8.35
   Granted                                        413,873
   Exercised                                       (1,541)
   Forfeitures                                   (156,654)
                                               ----------

   Balance at June 30, 1999                     1,573,185      $2.50-$17.50             $5.77
   Granted                                        642,981
   Exercised                                      (14,618)
   Forfeitures                                    (86,191)
                                               ----------

   Balance at June 30, 2000                     2,115,357      $2.50-$15.00             $5.57
   Granted                                      2,403,948
   Exercised                                       (8,823)
   Forfeitures                                 (1,618,133)
                                               ----------

   Balance at June 30, 2001                     2,892,349      $1.58-$14.00             $4.00
   Granted                                      1,133,982
   Exercised                                       (3,389)
   Forfeitures                                   (460,894)
                                               ----------

   Balance at December 31, 2001                 3,562,048      $1.58-$12.12             $3.93
                                                =========

   Exercisable at December 31, 2001             1,827,544
   Exercisable at June 30, 2001                 1,191,748
   Exercisable at June 30, 2000                 1,506,513
   Exercisable at June 30, 1999                 1,038,428

</TABLE>

   The options outstanding, by price range, are as follows:
<TABLE>


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


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

                  June 30, 2000          $2.50-$7.50              1,468,490
                                        $7.51-$12.50                626,867
</TABLE>


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

<TABLE>

<S>                                     <C>                       <C>
                                       $12.51-$15.00                 20,000
                                                                  ---------
                                               Total              2,115,357
                                                                  =========

                  June 30, 1999          $2.50-$7.50                623,391
                                        $7.51-$12.50                911,626
                                       $12.51-$17.50                 38,168
                                                                  ---------
                                               Total              1,573,185
                                                                  =========
</TABLE>

The weighted average remaining contractual lives of outstanding options at
December 31, 2001 was 5.71 years.

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

<TABLE>
<CAPTION>

                                  Six Months Ended           For the Year Ended June 30,
                                     December 31,     ----------------------------------------------
                                        2001               2001            2000             1999
                                  ----------------    ------------- -------------------  -----------
<S>                                <C>                  <C>             <C>              <C>
   Net loss applicable to
     common stock, as reported     $    (6,994,049)     (11,692,364)    (12,488,758)      (9,698,048)
   SFAS 123 Compensation
     expense                             1,276,650        2,253,115       2,855,846          423,466
                                   ---------------      -----------     -----------       ----------
                                        (8,270,699)     (13,945,479)    (15,344,604)     (10,121,514)
                                   ===============      ===========     ===========       ==========
   Net loss per share              $         (0.56)          $(1.30)         $(1.64)          $(1.24)
                                   ===============      ===========     ===========       ==========
</TABLE>



The pro forma compensation expense of $1,276,650, $2,253,115, $2,855,846 and
$423,466 for the six months ended December 31, 2001 and the fiscal years ended
June 30, 2001, 2000 and 1999, respectively, was calculated on the fair value of
each option using the minimum value method for those options issued prior to
October 17, 1997 (the date of initial filing with the SEC) and using the Black
Scholes method for those options issued on October 17, 1997 and later. The
following weighted average assumptions were used in the calculations:

<TABLE>
<CAPTION>
                                   December 31,                           June 30,
                                       2001              2001               2000            1999
                                   ------------       -----------        ----------      ----------
<S>                                 <C>                <C>               <C>              <C>
   Risk free interest rate               4.72%              4.97%             6.28%           5.87%
   Expected option lives            5.71 years         6.09 years        6.33 years       8.6 years
   Expected volatility                  113.0%             113.0%             70.0%           62.0%
</TABLE>

In November 1998, the Board of Directors approved the granting of two stock
options to our then current President and CEO. The first option was for 200,000
shares of common stock at an exercise price of $4.563 with vesting over a
three-year period. No compensation expense was recorded in connection with this
transaction as the exercise price of the option was not less than the fair
market value of our common stock on the date of the transaction. The second
option was for the purchase of an additional 200,000



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

shares of common stock at an exercise price equal to $7.00 per share with
vesting dependent upon the attainment of certain performance criteria based on
the revenues from operations during the fiscal years ending June 30, 2000
through June 30, 2002. Both option grants were for a term of ten years. In April
2000, our Board of Directors approved a modification of this second grant to
waive the performance criteria for 100,000 of these options as a precondition
for vesting, in recognition of commendable performance. No compensation expense
was recorded in connection with this transaction as the exercise price of such
options exceeded the fair market value of our common stock on the date of the
transaction. All options expired unexercised in February 2002.

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

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

On February 2, 2001, our Board of Directors voted to offer all current employees
who held outstanding stock options with an exercise price greater than five
dollars ($5.00) the opportunity to reprice such options to $4.375. Under the
terms of the offer, the prior vesting of options that were repriced was lost and
the repriced options began vesting again over three years. The exercise period
of the repriced options is ten years. A total of 1,186,998 options held by
employees were repriced. The current members of the Board of Directors were
offered the same opportunity to reprice their outstanding options. Prior vesting
of board members was not lost, although all other terms of the repricing were
identical to those offered the employees. A total of 220,000 options held by
directors were repriced. One member of our board of directors, Enrique F.
Senior, declined the offer to have his options repriced. Mr. Senior, who has
since resigned from our board of directors effective November 2001, had a total
of 40,000 options eligible for repricing. In accordance with FIN No. 44, the
repriced options are subject to variable accounting and thereby have been
adjusted to fair value at December 31, 2001 and June 30, 2001. A charge to
earnings in the amount of $309,087 was recorded for the fiscal year ended June
30, 2001 because the closing price of our common stock on June 30, 2001 was
greater than the exercise price of $4.375. The deferred compensation related to
the unvested portion of the options was $640,000 as of June 30, 2001. This
charge was reversed during the six months ended December 31, 2001 because the
closing price of our common stock on December 31, 2001 was less than the
exercise price of $4.375. The deferred compensation related to the unvested
portion of the options was $-0- as of December 31, 2001.

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

On March 30, 2001 our shareholders ratified an amendment to the Amended 1993
Stock Option Plan, authorized by our Board of Directors, to increase the
authorized number of shares which may be issued pursuant to options granted
under the Plan from 2,160,000 to 5,160,000 shares and to provide for the



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

automatic grant to each of our directors on July 1 of each year an option to
purchase 10,000 shares of our common stock for an exercise price equal to the
fair market value of our common stock on the date of the grant. The options will
vest, with respect to each director as to one-twelfth (1/12) of the shares on
the first day of each month following the date of grant as long as the holder is
then serving as a director.

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

On July 3, 2001, the Board of Directors authorized the issuance of stock options
to purchase 275,000 shares of common stock to certain members of the management
and technical staff. These options have an exercise price of $4.78, will vest
over three years and have a term of ten years. Issuance of these options was
conditioned upon the execution of new employment agreements by such members of
management and the technical staff, all of which were signed in October 2001. No
compensation expense was recorded upon the issuance of these options as the fair
market value of our stock was less than $4.78 on their date of issuance.

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

21.  COMMITMENTS AND CONTINGENCIES:

SARNOFF AGREEMENT

We entered into an agreement with David Sarnoff Research Center, Inc.
("Sarnoff") in November 1990, which was amended in August 1991 and June 1995,
granting to us an exclusive, worldwide license for use of the proprietary
Pyramid Image Processing technology developed by Sarnoff in the fields of
television advertising and for any purpose for television programming involving
sports. We may terminate this agreement at any time.

Under the terms of this agreement, we pay royalties of between 3% and 5% to
Sarnoff, based upon our gross revenues. All royalties accrue as earned, but no
cash payments were required to be made until the earlier of the date on which
cumulative gross revenues reached twenty million dollars or January 1, 1999.
Payments for all accrued royalties through December 31, 1998 became due in
January 1999 and were paid in full by December 1999.

Additionally, under terms of this agreement, commencing in January 1999, minimum
quarterly royalties of $100,000 became due in order to maintain the license. For
the calendar years 1999 and 2000, and for the quarter ended March 31, 2001, we
had the option of paying these minimum royalties in cash or with 14,286 shares
of our common stock. We elected to issue stock for royalties due for all of
these payments. Royalties earned subsequent to March 31, 2001 are required to be
paid in cash and, therefore, we have accrued the minimum cash royalty of
$100,000 for the quarters ended June 30, September 30 and December 31, 2001.
Accordingly, we recorded total royalty expense in the amount of $200,000,
$196,575, $332,164 and $152,232 for the six months ended December 31, 2001 and
the years ended June 30, 2001, 2000 and 1999, respectively. These charges
reflected the issuance of 57,144, 57,144 and 14,286 shares of common stock
during the years ended June 30, 2001, 2000 and 1999, respectively.



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


THESEUS AGREEMENT

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

LEASES

We lease our primary office space under an operating lease. In October 1997, we
entered into a five-year operating lease agreement for our office headquarters
in Lawrenceville, New Jersey. In July 1999, we entered into an operating lease
agreement for additional office space in Lawrenceville, New Jersey. This lease
is co-terminus with the October 1997 operating lease for our headquarters and
both will terminate in September 2002. We are currently in negotiations to renew
our original primary office space. In October 2001, we entered into an operating
lease for office space in New York City which terminates in November 2009. In
January 2001, we entered into an operating lease for our PVI Europe office in
Brussels, Belgium. This lease contains a termination option in December 2002,
December 2006 or December 2009. In order to terminate the lease, nine months
notice must be given to the landlord. In December 2001, Publicidad entered into
a sublease for our Mexico City office space which will terminate in November
2002. We expect to renew this lease in November 2002. In December 2001, we
entered into a one year operating lease for an apartment in New York City to be
used by visiting employees and guests of PVI and Publicidad. This lease
terminates on December 31, 2002.

Rent and equipment lease expense for the six months ended December 31, 2001 and
the years ended June 30, 2001, 2000, and 1999 was $311,894, $716,762, $472,947
and $400,956, respectively.

Future minimum rent and lease payments are as follows:

<TABLE>
<CAPTION>
                                               Year                Amount
                                               ----                ------
                                        <S>                     <C>
                                               2002               $660,591
                                               2003                216,840
                                               2004                213,515
                                               2005                185,340
                                         Thereafter                760,507
                                                                ----------
                                                                $2,036,793
                                                                ==========
</TABLE>



Under the terms of the five year lease signed in October 1997 for the
Lawrenceville, New Jersey headquarters, we are required to maintain an
irrevocable, unconditional $51,258 letter of credit throughout the term of the
lease. Under the terms of the lease for our New York office, we are required to
maintain a security deposit of approximately $65,000. Under the terms of the
lease for our Belgian office, we are required to maintain a security deposit of
approximately $45,000.

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

<TABLE>
<CAPTION>

                                                Year                  Amount
                                                ----                  -------
                                                <S>                   <C>
                                                2002                  $18,644
                                                2003                   18,644
                                                2004                   15,550
                                                                       ------
                                                                       52,838
</TABLE>



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

<TABLE>

<S>                                                                  <C>
                 Less:  Amount representing interest                  (7,731)
                                                                     --------
             Present value of minimum lease payments                 $45,107
                                                                     ========
</TABLE>


Legal Contingencies

In June 1999 we filed suit for patent infringement in U.S. District Court in
Delaware against SciDel USA Ltd., the U.S. subsidiary of the Israeli company,
SciDel Technologies, Ltd. We contended that SciDel's video imaging system for
electronically inserting advertising into live television broadcasts infringed
on PVI's U.S. Patent No. 5,264,933 and sought a permanent injunction prohibiting
infringement of our patent. The case was tried in late February 2001, and final
briefing was completed in April 2001. As of March 26, 2002, a decision had not
been rendered. On March 26, 2002, we completed the acquisition of certain assets
from SciDel Technologies, Ltd. In connection with that transaction, the parties
have agreed to file a dismissal of the action. (See Note 25 "Subsequent
Events").


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

22.  INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION

We operate on a worldwide basis in only one industry segment, real-time video
imaging. This segment is broken out into geographical regions including the
United States, Latin America, Canada, Europe and all other. During the years
ended June 30, 2000 and 1999, the majority of our operating expenses related to
our domestic activities and were not associated with our international licensing
and royalty agreements. With the formation of PVI Europe in June 2000 and the
acquisition of Publicidad in September 2001, operating expenses related to
international activities increased, accounting for approximately 8% and 31% of
total operating expenses for the year ended June 30, 2001 and the six months
ended December 31, 2001, respectively.

Geographic information is as follows:

<TABLE>
<CAPTION>

                                                                          PVI
(in 000's)                       U.S.     Latin America    Canada       Europe        Other        Total
                                ------    -------------    ------       ------        -----        -----
<S>                             <C>          <C>             <C>          <C>           <C>       <C>
Six months ended
   December 31, 2001
Advertising and
  production revenue            $1,276       $3,217           $ -          $66          $ -        $4,559
License and royalty fees             -          864            83           31           41         1,019
                                ------       ------           ---          ---          ---        ------
               Total            $1,276       $4,081           $83          $97          $41        $5,578
                                ======       ======           ===          ===          ===        ======
</TABLE>


Fiscal Years Ended June 30,



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

<TABLE>

<S>                             <C>          <C>            <C>          <C>          <C>         <C>
2001
Advertising and
  production revenue            $2,217       $    -          $ 25          $ -          $ -        $2,242
License and royalty fees             -        2,143           176           23           79         2,421
                                ------       ------          ----          ---          ---        ------
               Total            $2,217       $2,143          $201          $23          $79        $4,663
                                ======       ======          ====          ===          ===        ======


2000

Advertising and

  production revenue            $1,484       $    -          $  -          $ -         $ 25        $1,509
License and royalty fees             -        1,090             -            -          447         1,537
                                ------       ------          ----          ---         ----        ------
               Total            $1,484       $1,090          $  -          $ -         $472        $3,046
                                ======       ======          ====          ===         ====        ======

1999

Advertising and

  production revenue              $695       $    -          $  -          $ -          $ -          $695
License and royalty fees             -          450             -            -           78           528
                                ------       ------          ----          ---          ---        ------
               Total              $695       $  450          $  -          $ -          $78        $1,223
                                ======       ======          ====          ===          ===        ======
</TABLE>

All of our assets are based in the United States with the exception of certain
L-VIS Systems which are being used by our subsidiaries or licensees in
connection with foreign operations. The approximate value of these L-VIS Systems
located in the United States and foreign countries is as follows:

<TABLE>
<CAPTION>

 L-VIS Systems, rack
 components & spare parts           U.S.      Latin America        Canada        PVI Europe         Total
-------------------------        ----------   -------------       --------       -----------     ----------
<S>      <C> <C>                 <C>            <C>               <C>             <C>            <C>
December 31, 2001                $4,437,424     $865,004          $135,000        $691,472       $6,128,900
June 30, 2001                     4,825,535      430,529           135,000         691,472        6,082,536
June 30, 2000                     4,332,060      426,821           135,000         691,472        5,585,353
June 30, 1999                     3,934,257      620,634           135,000               -        4,689,891
</TABLE>

23.  CONCENTRATION OF SALES:

Sales to three customers accounted for approximately 74%, 72%, 62% and 51% of
revenues for the six months ended December 31, 2001 and the years ended June 30,
2001, 2000 and 1999, respectively.

24.  RELATED PARTY TRANSACTIONS:

A member of our Board of Directors, Eduardo Sitt, is also a principal
shareholder and the President of the Board of Directors of Presencia, which has
made several equity investments in PVI and is our former joint venture partner.
In addition, as described in Note 5, we have entered into a Reorganization
Agreement with Presencia and others pursuant to which we acquired Publicidad,
our former joint venture partner and current licensee, effective September 20,
2001. On November 8, 2001, we sold 615,385 shares of our common stock to
Presencia for an aggregate purchase price of $2,000,001. This sale was exempt
from registration under the Securities Act by virtue of Section 4(2) as a
transaction not involving a public offering. The securities were issued for
investment only and not for purposes of distribution.

A member of our Board of Directors is formerly the sole shareholder and
President of Princeton Venture Research, Inc., a company that has furnished
consulting services to us from time to time. This member of our Board of
Directors Company is also the President of PVR Securities. On June 28, 2000, we
entered



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

into a three month agreement with PVR Securities whereby PVR Securities would
act as non-exclusive financial advisor and assist us in raising additional
capital. As compensation, we agreed to pay PVR Securities a cash fee equal to 5%
of gross proceeds of any private sale of equity securities of PVI if the buyer
was introduced by PVR Securities. In addition, PVR Securities would receive
warrants to purchase twelve and one-half percent of the amount of the securities
sold to any purchasers introduced to us by PVR Securities at an exercise price
equal to 110% of the closing price of the equity securities sold. The agreement
expired in September 2000 and was not renewed.

A former member of our Board of Directors is also a Managing Director and
Executive Vice President of Allen & Company Incorporated, which is one of our
principal shareholders and furnishes financial advisory services to us from time
to time. Allen & Co. received commissions in the aggregate amount of
approximately $438,000, as well as warrants exercisable for 200,000 shares of
common stock for its services rendered on our behalf in connection with the
private equity offering completed in October 1999. On June 14, 2000 we entered
into an agreement with Allen & Co., which was amended as of December 20, 2000,
pursuant to which Allen & Co. would act as one of our financial advisors in
connection with certain stock purchase transactions, including the transaction
contemplated by the Reorganization Agreement between us, Presencia and others as
described in Note 5 of Notes to Consolidated Financial Statements. In July 2001
we issued to Allen & Co. a warrant to purchase 100,000 shares of our common
stock at $2.3065 as consideration for their issuance of a fairness opinion in
connection with this transaction. This warrant was issued with an expiration
date of December 20, 2005, or five years from the issuance date of their
fairness opinion. The value of these warrants has been calculated using the
Black Scholes method and the related charge of $100,762 has been recorded as a
component of the costs for the acquisition of Publicidad. Allen & Co. received a
second warrant to purchase an additional 100,000 shares of our common stock on
September 20, 2001 as consideration for financial advisory services provided in
connection with the acquisition of Publicidad.

In July 1997, two of our employees, Brown F Williams and Sam McCleery, signed
non-recourse promissory notes bearing an interest rate of 8.5% (the "Employee
Notes") for $655,000 as consideration for the exercise of warrants to purchase
262,000 shares of common stock at an exercise price of $2.50 per share.
Accordingly, a $360,250 charge to general and administrative expense was
recorded in July 1997 for the excess of the fair value of our common stock in
July 1997 over the exercise price of the underlying warrants. In December 1997,
these employees signed non-recourse promissory notes bearing an interest rate of
8.5% (the "Tax Notes") for $169,498 as consideration for funds received for the
express purpose of paying the tax liabilities incurred by each of them in
connection with the exercise of their warrants. The Employees concurrently
signed Pledge Agreements pursuant to which the 262,000 shares of common stock
purchased were pledged to PVI. On March 20, 2001, the Compensation Committee of
the Board of Directors authorized the repayment of these loans in exchange for a
portion of the PVI common stock each of the employees held. As of March 20,
2001, Mr. Williams owed PVI a total of $778,711, including $597,920 in principal
and $180,791 in accrued interest. As of March 20, 2001, Mr. McCleery owed PVI a
total of $295,088, including $226,578 in principal and $68,510 in accrued
interest. To satisfy these obligations in full, Mr. Williams exchanged 202,594
shares of common stock, 190,000 of which had been pledged as collateral on the
notes. Mr. McCleery exchanged 76,772 shares of common stock, 72,000 of which had
been pledged as collateral on the notes. The stock exchanged was valued at
$3.8437, the closing price of the stock on the date of the offer, and satisfied
in full the outstanding loan balances. Due to the uncertainty of the
collectibility of the non-recourse notes, we did not record interest income on
the transaction until it was settled. The total of 279,366 shares of common
stock received in this transaction have been recorded as treasury stock in the
shareholders' equity section of the balance sheet and are available for
reissuance.

In April 1999 and May 1999, Publicidad signed promissory notes to us for
$114,300 and $260,075, respectively as consideration for the equipment charge
associated with two L-VIS(TM) Systems delivered to Publicidad for use in
operations. Both notes were issued with an interest rate of 15% and had a term
of one (1) year and three (3) years, respectively. Both notes were paid in full
prior to our acquisition of



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

Publicidad. In February 2001 and July 2001, Publicidad signed promissory notes
to us for $387,047 and $764,859, respectively with respect to their payment of
royalties to us. Both notes were issued with an interest rate of 10%. The
February 2001 note was paid in full in August 2001 and the July 2001 note was
reflected as a reduction in the purchase price of Publicidad at the date of
acquisition.

On September 20, 2001, Emilio Romano was appointed to the Board of Directors as
a designee of Presencia. On November 15, 2001, we entered into a consulting
agreement whereby Mr. Romano would provide consulting services with respect to
our strategic planning and potential business development opportunities. In
exchange for these services, Mr. Romano is paid a fee of $10,000 and a ten-year
option to purchase 5,000 shares of common stock for each month of service
provided. Each option grant is fully vested upon issuance and is priced at the
closing market price on the date of grant. The value of the options issued to
Mr. Romano were calculated using the Black Scholes method and a compensation
charge of $14,028 was recorded. On February 15, 2002 this consulting agreement
was extended for an additional three months, to and including May 15, 2002.

25.  SUBSEQUENT EVENTS:

On March 26, 2002, we completed the acquisition of certain assets of Scidel
Technologies, Ltd., an Israeli company that inserts electronic virtual
advertisements into live and taped televised sporting events, in exchange for
the issuance of 1,228,000 shares of PVI's common stock and warrants to purchase
670,500 shares of its common stock. In connection with that transaction the
parties have agreed to file a dismissal of the legal action discussed in Note
21.

On January 29, 2002, PVI and Sportvision entered into a Settlement Agreement
regarding the legal matter (discussed in Note 21) and a dismissal with prejudice
as to all parties was filed on March 9, 2002. Pursuant to the Settlement
Agreement, the parties entered into a patent cross-license agreement.




                                      F-32




<PAGE>
                                    EXHIBITS

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

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

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

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

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

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

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

<PAGE>

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

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

10.3* --          Research Agreement, dated November 1, 1990, between the
                  Company and David Sarnoff Research Center, Inc., as amended by
                  Agreement dated August 9, 1991, letter dated July 1, 1992,
                  Letter Agreement dated July 9, 1992, letter dated November 30,
                  1992 and Agreement dated June 26, 1995 and effective as of
                  December 31, 1993 (Incorporated by reference to Exhibit 10.4
                  to the Company's Registration Statement on Form SB-2
                  (Registration No. 333-37725) which became effective on
                  December 16, 1997).

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

10.5+ --          Restated and Amended Employment Agreement, dated October 28,
                  2001, between the Company and Samuel A. McCleery.

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

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

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

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

<PAGE>

<TABLE>
<S>               <C>
10.10+ --         Restated and Amended Employment Agreement, dated as of October
                  28, 2001, between the Company and Lawrence Epstein.

10.11+ --         Employment Agreement, dated November 23, 1998, between the
                  Company and Dennis P. Wilkinson (Incorporated by reference to
                  the Company's Current Report on Form 8-K filed with the
                  Securities and Exchange Commission on December 2, 1998).

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

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

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

10.15   --        Amended 1993 Stock Option Plan. (Incorporated by reference to
                  Exhibit 10.21 to the Company's Annual Report on Form 10-K for
                  the fiscal year ended June 30, 2001).

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

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

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

10.19* --         L-VIS(TM) System License Agreement, dated February 4, 2001,
                  between the Company and Cablevision Systems Corporation.
                  (Incorporated by reference to Exhibit 10.4 to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended December
                  31, 2000 filed on February 14, 2001).
</TABLE>


<PAGE>

<TABLE>
<S>               <C>
10.20  --         Letter, dated February 27, 2001, amending Research Agreement
                  between the Company and David Sarnoff Research Center, as
                  amended. (Incorporated by reference to Exhibit 10.28 to the
                  Company's Annual Report Form 10-K for the fiscal year ended
                  June 30, 2001 filed on September 28, 2001).

10.21* --         Joint Collaboration and License Agreement, dated as of
                  September 20, 2001, between Princeton Video Image, Inc. and
                  Cablevision Systems Corporation. (Incorporated by reference to
                  Exhibit 10.31 to the Company's Annual Report on Form 10-K for
                  the fiscal year June 30, 2001).

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

10.23  --         Warrant Certificate, dated September 20, 2001, issued to PVI
                  Holding, LLC. (Incorporated by reference to Exhibit 10.6 to
                  the Company's Current Report on Form 8-K filed on October 3,
                  2001).

10.24+ --         Letter Agreement, dated November 8, 2001, between the Company
                  and Brown F Williams amending his Employment Agreement.

10.25  --         Warrant Adjustment Notice from the Company to PVI Holding LLC,
                  dated as February 13, 2002.

10.26  --         Patent Cross-License Agreement, dated as of January 29, 2002,
                  by and between Sportvision, Inc., Fox Sports Productions,
                  Inc., and Princeton Video Image, Inc.

10.27  --         Letter Agreement, dated as of January 1, 2002, among Princeton
                  Video Image, Inc., ERM & Associates, Inc. and Emilio Romano.

10.28+ --         Extension Letter Agreement, dated as of February 15, 2002,
                  among Princeton Video Image, Inc., ERM & Associates, Inc. and
                  Emilio Romano.

10.29+ --         Employment Agreement by and between the Company and Gene
                  Dwyer, dated as of October 28, 2001.

10.30+ --         Employment Agreement by and between the Company and Howard
                  Kennedy, dated as of October 28, 2001.

10.31+ --         Employment Agreement by and between the Company and Kevin
                  Harney, dated as of October 28, 2001.

10.32+ --         Employment Agreement by and between the Company and Darrell
                  DiCicco, dated as of October 28, 2001.
</TABLE>

<PAGE>

<TABLE>
<S>               <C>
10.33+ --         Employment Agreement by and between the Company and Peter Von
                  Kaenel, dated as of October 28, 2001.

10.34  --         Warrant Certificate, dated as of March 26, 2002, issued to
                  SciDel Technologies, Ltd. (Incorporated by reference to
                  Exhibit 4.1 to the Company's Currrent Report on Form 8-K
                  filed on March 29, 2002.)

21.    --         Subsidiaries

23.1   --         Consent of Independent Accountants
</TABLE>
-----------

*     Confidentiality has been granted with respect to a portion of this
      exhibit.

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