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|UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
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|FORM 10-Q                                                            
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|(Mark One)                                                                 
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|Commission file number: 0-27168                                            
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|VIEWPOINT CORPORATION(Exact name of registrant as specified in its charter)
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|Delaware                                                             |  | 95-4102687                          
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|(State or other jurisdiction of 
     incorporation or organization) |  | (I.R.S. Employer Identification No.)

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|498 Seventh Avenue, Suite 1810, New York, NY 10018(Address of principal executive offices and zip code)                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                         
|(212) 201-0800 (Registrants telephone number, including area code)                                                                                                                                                                                                                                                                                      
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|                                                                                                                                                                                                                                                                                                                                                         
|Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
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|Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) 
Yes S No £                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                         
|As of August
      4, 2005, 59,487,000 shares of $0.001 par value common stock were outstanding.                                                                                                                                                                                                                                                         
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TABLE OF CONTENTS
PagePART I - FINANCIAL INFORMATIONItem 1.
    
    Consolidated Financial Statements
    
    3Consolidated Balance Sheets  June 30, 2005and December 31, 2004 (unaudited)
    
    3Consolidated Statements of Operations  Three and six monthsended June 30, 2005 and 2004 (unaudited)
    
    4Consolidated
      Statements of Cash Flows  Six months endedJune 30, 2005 and 2004 (unaudited)
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial    Condition and Results of Operations
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    39Item 4.
    
    Controls and Procedures
    
    39PART II  OTHER INFORMATIONItem 6.
    
    Exhibits
    
    40Signatures
    
    412
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
VIEWPOINT CORPORATIONCONSOLIDATED BALANCE SHEETS(in thousands, except per share amounts)(Unaudited)
June 30,
      2005
    
    December 31,
      2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,529
    
    $
    5,905Marketable securities
    
    
    1,086
    
    
    2,757Accounts receivable, net of reserve of $404 and $430, respectively
    
    
    4,048
    
    
    2,583Related party accounts receivable
    
    
    26
    
    
    26Prepaid expenses and other current assets
    
    
    541
    
    
    421Total current assets
    
    
    9,230
    
    
    11,692Restricted cash
    
    
    220
    
    
    320Property and equipment, net
    
    
    1,445
    
    
    1,485Goodwill, net
    
    
    33,409
    
    
    31,276Intangible assets, net
    
    
    4,393
    
    
    230Other assets, net
    
    
    180
    
    
    270Total assets
    
    $
    48,877
    
    $
    45,273LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,104
    
    $
    1,218Accrued expenses
    
    
    1,311
    
    
    244Deferred revenues
    
    
    393
    
    
    431Related party deferred revenues
    
    
    2,144
    
    
    4,607Current portion of notes payable
    
    
    518
    
    
    Accrued incentive compensation
    
    
    545
    
    
    545Current liabilities related to discontinued operations
    
    
    231
    
    
    231Total current liabilities
    
    
    7,246
    
    
    7,276Deferred rent
    
    
    373
    
    
    365Warrants to purchase common stock
    
    
    456
    
    
    1,286Subordinated notes
    
    
    2,417
    
    
    2,388Unicast notes
    
    
    1,676
    
    
    Total liabilities
    
    
    12,168
    
    
    11,315Stockholders equity:Preferred stock, $.001 par value; 5,000 shares authorized - no shares
     issued and outstanding at June 30, 2005 and December 31, 2004
    
    
    
    
    
    Common stock, $.001 par value; 100,000 shares authorized - 58,295
     shares issued and 58,135 shares outstanding at June 30,
     2005, and 56,704 shares issued and 56,544 shares outstanding
     at December 31, 2004
    
    
    58
    
    
    57Paid-in capital
    
    
    294,206
    
    
    290,260Deferred compensation
    
    
    (4
    )
    
    (5
    )Treasury stock at cost; 160 at June 30, 2005 and December 31, 2004
    
    
    (1,015
    )
    
    (1,015
    )Accumulated other comprehensive loss
    
    
    (66
    )
    
    (60
    )Accumulated deficit
    
    
    (256,470
    )
    
    (255,279
    )Total stockholders equity
    
    
    36,709
    
    
    33,958Total liabilities and stockholders equity
    
    $
    48,877
    
    $
    45,273The accompanying notes are an integral part of these consolidated financial statements.
3
VIEWPOINT CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)(Unaudited)
Three Months Ended
      June 30,
    
    Six Months Ended
      June 30,2005
    
    2004
    
    2005
    
    2004Revenues:Search
    
    $
    2,393
    
    $
    
    
    $
    4,573
    
    $
    8Advertising systems
    
    
    1,163
    
    
    37
    
    
    1,895
    
    
    37Services
    
    
    1,564
    
    
    1,066
    
    
    2,807
    
    
    2,589Related party services
    
    
    354
    
    
    686
    
    
    749
    
    
    1,600Licenses
    
    
    227
    
    
    144
    
    
    382
    
    
    384Related party licenses
    
    
    872
    
    
    872
    
    
    1,745
    
    
    1,779Total revenues
    
    
    6,573
    
    
    2,805
    
    
    12,151
    
    
    6,397Cost of revenues:Search
    
    
    49
    
    
    
    
    
    95
    
    
    Advertising systems
    
    
    847
    
    
    6
    
    
    1,365
    
    
    6Services
    
    
    1,026
    
    
    792
    
    
    1,836
    
    
    1,543Licenses
    
    
    1
    
    
    3
    
    
    3
    
    
    4Total cost of revenues
    
    
    1,923
    
    
    801
    
    
    3,299
    
    
    1,553Gross profit
    
    
    4,650
    
    
    2,004
    
    
    8,852
    
    
    4,844Operating expenses:Sales and marketing
    
    
    1,228
    
    
    945
    
    
    2,503
    
    
    1,996Research and development
    
    
    1,147
    
    
    860
    
    
    2,353
    
    
    1,773General and administrative
    
    
    2,654
    
    
    1,845
    
    
    4,741
    
    
    3,727Depreciation
    
    
    220
    
    
    205
    
    
    453
    
    
    424Amortization of intangible assets
    
    
    179
    
    
    1
    
    
    357
    
    
    4Restructuring charges (release)
    
    
    
    
    
    
    
    
    
    
    
    (17
    )Total operating expenses
    
    
    5,428
    
    
    3,856
    
    
    10,407
    
    
    7,907Loss from operations
    
    
    (778
    )
    
    (1,852
    )
    
    (1,555
    )
    
    (3,063
    )Other income (expense), net:Interest and other income; net
    
    
    32
    
    
    27
    
    
    56
    
    
    46Interest expense
    
    
    (339
    )
    
    (236
    )
    
    (655
    )
    
    (486
    )Changes in fair values of warrants to purchase common stock and
        conversion options of convertible notes
    
    
    648
    
    
    3,050
    
    
    830
    
    
    (3,553
    )Loss on conversion of debt
    
    
    
    
    
    (212
    )
    
    
    
    
    (810
    )Total other income (expense)
    
    
    341
    
    
    2,629
    
    
    231
    
    
    (4,803
    )Income (loss)
      before provision for income taxes
    
    
    (437
    )
    
    777
    
    
    (1,324
    )
    
    (7,866
    )Provision for income taxes
    
    
    9
    
    
    25
    
    
    12
    
    
    35Net income (loss) from continuing operations
    
    
    (446
    )
    
    752
    
    
    (1,336
    )
    
    (7,901
    )Adjustment to net income (loss) on disposal of discontinued
     operations, net of tax
    
    
    
    
    
    20
    
    
    145
    
    
    39Net income (loss)
    
    $
    (446
    )
    $
    772
    
    $
    (1,191
    )
    $
    (7,862
    )Basic and diluted net income (loss) per common share:Net income (loss) per common share from continuing operations
    
    $
    (0.01
    )
    $
    0.01
    
    $
    (0.02
    )
    $
    (0.15
    )Net income (loss) per common share
    
    $
    (0.01
    )
    $
    0.01
    
    $
    (0.02
    )
    $
    (0.15
    )Weighted average number of shares outstanding  basic and diluted
    
    
    58,014
    
    
    52,651
    
    
    57,835
    
    
    51,433The accompanying notes are an integral part of these consolidated financial statements.
4
VIEWPOINT CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)
Six Months Ended
      June 30,2005
    
    2004Cash flows from operating activities:Net loss
    
    $
    (1,191
    )
    $
    (7,862
    )Adjustments to reconcile net loss to net cash used in
     operating activities:Non-cash stock-based compensation charges
    
    
    595
    
    
    282Restructuring charges (release)
    
    
    
    
    
    (17
    )Depreciation and amortization
    
    
    810
    
    
    428Provision for bad debt
    
    
    62
    
    
    (4
    )Interest expense paid using common stock
    
    
    
    
    
    18Changes in fair values of warrants to purchase common stock and
          and conversion feature of convertible debt
    
    
    (830
    )
    
    3,553Amortization of debt discount and issuance costs
    
    
    563
    
    
    310Loss on conversion of debt
    
    
    
    
    
    330Issuance of stock below market price on conversion of debt
    
    
    
    
    
    480Changes in operating assets and liabilities, net ofacquisitions:Accounts receivable
    
    
    527
    
    
    (315
    )Related party accounts receivable
    
    
    
    
    
    860Prepaid expenses
    
    
    (43
    )
    
    278Accounts payable
    
    
    (1,300
    )
    
    (262
    )Accrued expenses
    
    
    (410
    )
    
    (246
    )Deferred revenues
    
    
    (38
    )
    
    (111
    )Related party deferred revenues
    
    
    (2,463
    )
    
    (2,431
    )Net cash used in operating activities
    
    
    (3,718
    )
    
    (4,709
    )Cash flows from investing activities:Proceeds from sales and maturities of marketable securities
    
    
    6,980
    
    
    3,450Purchases of marketable securities
    
    
    (5,307
    )
    
    (9,971
    )Net decrease in restricted cash
    
    
    100
    
    
    69Purchases of property and equipment
    
    
    (296
    )
    
    (166
    )Acquisition of Unicast, net of cash acquired
    
    
    (512
    )
    
    Purchases of patents and trademarks
    
    
    (12
    )
    
    (38
    )Net
      cash provided by (used in) investing activities
    
    
    953
    
    
    (6,656
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    
    
    
    3,675Proceeds from exercise of stock options
    
    
    386
    
    
    222Net cash provided by financing activities
    
    
    386
    
    
    3,897Effect of exchange rates changes on cash
    
    
    3
    
    
    (3
    )Net decrease in cash and cash equivalents
    
    
    (2,376
    )
    
    (7,471
    )Cash and
      cash equivalents at beginning of period
    
    
    5,905
    
    
    8,130Cash and
      cash equivalents at end of period
    
    $
    3,529
    
    $
    659The accompanying notes are an integral part of these consolidated financial statements.
5
VIEWPOINT CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)
Six Months Ended
      June 30,2005
    
    2004Supplemental disclosure of cash flow activities:Cash paid during the year for income taxes
    
    $
    12
    
    $
    35Cash paid during the year for interest
    
    
    136
    
    
    80Supplemental disclosure of non-cash investing
     and financing activities:Non-cash financing activities related to the Unicast acquistionSupplemental disclosure of non-cash investing and financing
       activities:Net assets acquired in Unicast acquisitionAccounts receivable, net
    
    $
    684
    
    $
    Prepaids
    
    
    7
    
    
    Other assets
    
    
    22
    
    
    Fixed assets
    
    
    128
    
    
    Intangible assets
    
    
    4,508
    
    
    Accounts payable
    
    
    (1,485
    )
    
    Unicast Debt
    
    
    (1,702
    )
    
    Non-cash cost of Unicast acquisitionCommon stock
    
    
    1
    
    
    APIC
    
    
    2,967
    
    
    Issuance of common stock in repayment of convertible notes
    
    
    
    
    
    2,700Cancellation of common stock option awards
    
    
    
    
    
    17Deferred compensation recognized related to adjustment
     of an option grant
    
    
    
    
    
    32Closing costs for convertible notes and subordinated
      notes accrued and not yet paid
    
    
    
    
    
    175Unrealized gains (losses) on marketable securities
    
    
    2
    
    
    11The accompanying notes are an integral part of these consolidated financial statements.
6
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, consistent in all material
respects with those applied in the Companys Annual Report on Form 10-K for the year ended December
31, 2004. The interim financial information is unaudited, but reflects all adjustments which are,
in the opinion of management, necessary for a fair presentation of the financial position and operating
results of Viewpoint Corporation (Viewpoint or the Company) for the interim
periods.
These unaudited consolidated financial statements have been prepared in accordance with the instructions
to Rule 10-01 of Regulation S-X and, therefore, do not include all of the information and footnotes
normally provided in annual financial statements. As a result, these unaudited consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes thereto,
together with managements discussion and analysis of financial condition and results of operations,
contained in Viewpoints Annual Report on Form 10-K for the year ended December 31, 2004. The
results of operations for the six months ended June 30, 2005 are not necessarily indicative of the
results to be expected for the year ending December 31, 2005 or other future periods.
Certain reclassifications have been made to the 2004 consolidated financial statements to conform to
the 2005 presentation.
Liquidity
The Company had cash, cash equivalents and marketable securities of $4.6 million at June 30, 2005.
During the six months ended June 30, 2005, net cash used in operations amounted to $3.7 million.
As of June 30, 2005, the Company had an accumulated deficit of $256.5 million. There can be no assurance
that Viewpoint will achieve or sustain positive cash flows from operations or profitability.
The Company believes that its current cash, cash equivalents, and marketable securities balances and
cash provided by expected future operations are sufficient to meet its operating cash flow needs
and anticipated capital expenditure requirements through the next twelve months.
The Company has contingency plans for 2005 if expected revenue targets are not achieved. These plans

include further workforce reductions as well as reductions in overhead and capital expenditures.

The Company may seek additional funds when necessary through public or private equity financing
or
from other sources to fund operations and pursue growth, although there are no assurances that
the
Company can obtain such financing with reasonable terms.
As discussed in the subsequent events footnote, on July 27, 2005, the Company and a holder of the Companys
subordinated debt entered into a Stock Purchase Agreement, under which the Company issued 1.3 million
shares of common stock in a private placement to the holder at a purchase price of $1.55 per share
(resulting in aggregate gross proceeds of $2.0 million). The Company currently has no commitment
for additional financing and may experience difficulty in obtaining additional financing on favorable
terms, if at all. Any financing the Company obtains may contain covenants that restrict the Companys
freedom to operate the business or may have rights, preferences or privileges senior to the Companys
common stock and may dilute the Companys current shareholders ownership interest in Viewpoint.
If the Company is unable to achieve profitable operations and/or raise additional capital, future
operations will need to be scaled back further or discontinued.
At
  June 30, 2005 the Company classified $2.4 million of short-term debt as long-term.
  This amount represented the carrying value of the amended note (see note 4 below).
  Settlement of this note is not expected to require the use of working capital
  in the next twelve months, as the Company has both the intent and the ability
  to refinance this debt on a long-term basis.
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended, Emerging Issues Task Force (EITF) No. 00-21 Revenue
Arrangements with Multiple Deliverables, and Staff Accounting Bulletin (SAB) No.
101 Revenue Recognition in Financial
7
Statements as amended by SAB No. 104 Revenue Recognition. Per SOP 97-2 and SAB No.
101, as amended by SAB No. 104, the Company recognizes revenue when the following criteria are met:
(a) persuasive evidence of an arrangement exists, (b) delivery has occurred or services have been
rendered, (c) the Companys fee is fixed or determinable, and (d) collectibility is reasonably
assured.
Viewpoint has generated revenues through four sources: (a) search advertising, (b) advertising systems
revenue, (c) software licenses, and (d) services. Search revenue is derived from a share of the fees
charged by its search results provider Yahoo Corporation (Yahoo!) to advertisers who
pay for sponsored links when a customer clicks on the paid link on the results provided by the Viewpoint
Toolbar. Advertising systems revenue is generated by charging customers to host advertising campaigns
based on a cost per thousand (CPM) impressions. License revenues are generated from licensing
the rights to use products directly to customers and indirectly through Value Added Resellers (VARs).
Service revenues are generated from fee-based professional services, customer support services (maintenance
arrangements), and training services performed for customers that license the Companys products.
Search revenue is generated when a customer uses the Viewpoint Toolbar to search the internet, and

clicks on a sponsored advertisement included in the search results. The Viewpoint Toolbars

search results are provided by Yahoo!, who collects a fee from the advertiser and remits a percentage

of the fee to Viewpoint. Revenue generated is a function of the number of Viewpoint Toolbars performing

searches, the number of searches that are sponsored by advertisers, the number of advertisements

that are clicked on by Viewpoint Toolbar searchers, the rate advertisers pay for those advertisements,

and the percentage retained by Yahoo! for providing the results.
Viewpoint also offers an online advertising campaign management and deployment product. This advertising
system permits publishers, advertisers, and their agencies to manage the process of deploying online
advertising campaigns. The Company charges customer on a cost per thousand (CPM) impression
basis, and recognizes revenue when the impressions are served, so long as all other revenue recognition
criteria are satisfied. The Company also provides another advertising services product whereby the
Company purchases media space from web-site publishers and re-sells that space to advertisers. The
Company acts as a principal party in the transaction, assumes the title to the inventory purchased,
and assumes the risks of collection and therefore recognizes the entire amount billed to the customer
as revenue.
Fee-based professional services for customized software development are performed on a fixed-fee or
time-and-materials basis under separate service arrangements. Revenues for fixed-fee arrangements
are recognized over the pattern of performance in accordance with the provisions of SAB No. 104.
The pattern of performance for service arrangements is measured by the percentage of costs incurred
and accrued to date for each contract, which primarily consist of direct labor costs, cost of outsourcing,
and overhead, to the estimated total cost for each contract at completion. The percentage approximates
the percentage of a customers contract that has been completed and would be available for the
customer to use at that point in time. Use of this method is based on the availability of reasonably
dependable estimates. If reasonably dependable estimates are not available due to the complexity
of the services to be performed, the Company defers recognition of any revenues for the project until
the project is completed, delivered and accepted by the customer, provided all other revenue recognition
criteria are met and no further significant obligations exist. Revenues from customer support services
are recognized ratably over the term of the contract. Revenues from training services are recognized
as services are performed.
License revenues from direct customers included sales of perpetual and term-based licenses for broadcasting

digital content in the Viewpoint format. License revenues were recognized up-front provided no
further
significant obligations exist and the resulting receivable was deemed collectible by management.
Fees from licenses sold together with fee-based professional services were generally recognized upon
delivery of the software, provided that the payment of the license fees were not dependent upon the
performance of the services, and the services were not essential to the functionality of the licensed
software. If the services were essential to the functionality of the software, or payment of the
license fees were dependent upon the performance of the services, both the software license and service
fees were recognized in accordance with SOP 81-1 Accounting for Performance of Construction-Type
and Certain Production-Type Contracts. The percentage of completion method was used for those
arrangements in which reasonably dependable estimates were available. If reasonably dependable estimates
were not available due to the complexity of the services to be performed, the Company deferred recognition
of any revenues for the project until the project was completed, delivered and accepted by the customer,
provided all other revenue recognition criteria were met and no further significant obligations exist.
8
For arrangements involving multiple elements, the Company defers revenue for the undelivered elements

based on their relative fair value and recognizes the difference between the total arrangement
fee
and the amount deferred for the undelivered elements as revenue. The determination of fair
value
of each undelivered element in multiple element arrangements is based on the price charged
when the
same element is sold separately. For maintenance and technical support elements, the Company
uses
renewal rates to determine the price when sold separately. The Company accounts for multiple
element
arrangements which involve only fee-based professional services in accordance with EITF
00-21. For
licenses sold that include updates over a period of time the Company recognizes the
license revenue
over the period in which updates are provided.
Standard terms for service arrangements, which are typically billed and collected on an installment

basis, require final payment within 90 days of completion of the services. Standard terms for license

arrangements required payment within 90 days of the contract date, which typically coincided with

delivery. Probability of collection is based upon the assessment of the customers financial

condition through the review of their current financial statements and/or credit reports. For follow-on

sales to existing customers, prior payment history is also used to evaluate probability of collection.

The Companys arrangements with customers do not contain product return rights. If the fee
is
not fixed or determinable, revenue is recognized as payments become due or as cash is received
from
the customer. If a nonstandard acceptance period is required, revenues are recognized upon
the earlier
of customer acceptance or the expiration of the acceptance period.
Stock-Based Compensation
The Company accounts for stock option grants in accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, Financial Accounting Standards
Board (FASB) issued Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation, an Interpretation of APB Opinion No. 25 (FIN 44), and complies
with the disclosure provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148 Accounting
for Stock-Based CompensationTransition and Disclosure. Under APB Opinion No. 25, compensation
expense is recognized over the vesting period based on the difference, if any, between the fair value
of the Companys stock at the date of grant and the exercise price. The Company accounts for
stock issued to non-employees in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF)
Issue No. 96-18 Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.
Pro
  forma information regarding net income and earnings per share is required by
  SFAS No. 123, and has been determined as if the Company has accounted for its
  Stock Option Plans under the fair value method of SFAS No. 123. The fair value
  of options issued under the Plans was estimated at the date of grant using a
  Black-Scholes option-pricing model. For purposes of pro forma disclosures, the estimated fair value of the Company's options is amortized to expense over the options' vesting period. The Company's pro forma net loss and net loss per common share would approximate the following (in thousands, except per share amounts):
Three Months Ended
      June 30,
    
    Six Months Ended
      June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss), as reported
    
    $
    (446
    )
    $
    772
    
    $
    (1,191
    )
    $
    (7,862
    )Add: Non-cash stock-based employee
       compensation charges included in reported
       net loss, net of related tax effects
    
    
    581
    
    
    55
    
    
    595
    
    
    281Deduct: Non-cash stock-based employee
       compensation charges determined under
       fair value based method for all awards, net of
       related tax effects
    
    
    (945
    )
    
    (774
    )
    
    (1,926
    )
    
    (1,731
    )Pro forma net income (loss)
    
    $
    (810
    )
    $
    53
    
    $
    (2,522
    )
    $
    (9,312
    )Net income (loss) per share:Basic and diluted as reported
    
    $
    (0.01
    )
    $
    0.01
    
    $
    (0.02
    )
    $
    (0.15
    )Basic and diluted pro forma
    
    $
    (0.01
    )
    $
    0.00
    
    $
    (0.04
    )
    $
    (0.18
    )The effects of applying SFAS No. 123, as amended by SFAS No. 148, in this pro forma disclosure are
not indicative of future amounts. The Company anticipates grants of additional awards in future years.
9
On April 14, 2003, the Company granted 2.3 million non-statutory stock options to acquire Company common
stock, to certain executives of the Company at an exercise price equal to the fair market value of
the Companys common stock on the date of grant. Under the initial terms of the grant, twenty-five
percent of the options vest on the first anniversary of the date of grant and the remaining options
vest at the rate of 1/36th per month thereafter. On July 1, 2003, the Company modified the terms to accelerate the vesting of
a grant to one executive. In addition the Company also extended the life of the options vested at
the date of termination from three months to three years.
The executives employment terminated on June 30, 2005, at which time the Company recorded a charge
of $0.6 million as the modification to the options was determined to be beneficial to the executive
on the date of termination.
In November 2003, the Company modified the terms of six stock option grants to certain employees and
officers to reduce the vesting period from four years to two years. The Company may record a non-cash
stock-based compensation charge based upon the difference between the closing price on the day of
the modification and the closing price on the date of the grant for any of the 1.25 million options
modified. The weighted average grant price for these options is $0.76. Such charge would be recorded
if the executives are expected to derive a benefit from the acceleration. If any recipient ceases
employment before the end of the initially-established vesting period of four years, then the modification
to accelerate will be determined to be beneficial, resulting in a non-cash compensation charge of
less then $0.1 million.
Basic and Diluted Net Loss Per Common Share
Basic
  net loss per common share is computed using the weighted average number of shares
  of outstanding and diluted net loss per common share is computed using the weighted
  average number of shares of common and common equivalent shares outstanding.
  Common equivalent shares related to stock options totaling 7.0 million and 7.1
  million for the three and six months ended June 30, 2005 and common equivalent
  shares related to stock options and warrants totaling 7.6 million for the six
  months ended June 30, 2004, are excluded from the computation of diluted net
  loss per common share because their effect was anti-dilutive.
In March 2004, the Company sold 1.5 million shares of common stock, in a private placement to an institutional
investor for $3.7 million or $2.45 per share. The institutional investor was one of the holders of
the convertible notes. Prior to the closing of the March 2004 private placement the institutional
investor converted $0.9 million of outstanding notes and received 0.9 million shares of Company common
stock in the exchange.
In June 2004, the Company exercised its right to convert the remaining outstanding convertible notes
of $1.8 million and the related outstanding interest into 1.7 million shares of Viewpoint common
stock.
In December 2004, the Company sold 1.9 million shares of common stock in a private placement for $5.0
million or $2.65 per share.
Derivatives
In 2002 and 2003, the Company issued convertible notes and warrants which would require Viewpoint to
issue registered shares of common stock upon conversion of these securities. The Company accounts
for the fair values of these outstanding warrants to purchase common stock and conversion options
of its convertible notes in accordance with SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities, and EITF Issue No. 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, which requires
the Company to bifurcate and separately account for the conversion option and warrants as embedded
derivatives contained in the Companys convertible notes. The Company is required to carry these
embedded derivatives on its balance sheet at fair value and the unrealized changes in the value of
these embedded derivatives are reflected in net income as changes in fair values of warrants to purchase
common stock and conversion options of convertible notes. Such changes in fair value are recorded
as an adjustment to reconcile net loss to net cash used in operating activities in the consolidated
statement of cash flows. In 2004, all of the outstanding convertible notes were converted into shares
of common stock. At June 30, 2005, warrants to purchase 0.7 million shares of common stock remain outstanding.
10
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting

Standards (SFAS) No. 123 (revised 2004) (SFAS 123R), Share-Based
Payment,
which requires companies to expense the fair value of employee stock options and
other forms of stock-based
compensation for interim periods that begin after June 15, 2005. This
requirement represents a significant
change because stock option awards have not been recognized
as compensation expense in the Companys
historical consolidated financial statements under
Accounting Principles Board Opinion No. 25 (APB
25), Accounting for Stock Issued
to Employees. SFAS 123R requires the cost of an
award, based upon fair value on the date
of grant, to be recognized over the period during which
an employee is required to provide service
in exchange for the award (usually the vesting period).
The fair value of the award on the date
of grant will be estimated using option pricing models. In
April 2005, the Securities and Exchange
Commission (the SEC) delayed the effective date
of SFAS 123R for public companies until
the first annual period, rather than the first interim period,
that begins after June 15, 2005.
The Company will adopt SFAS 123R on January 1, 2006 and recognize
compensation expense prospectively
for non-vested stock options outstanding at December 31, 2005
and for all future stock option grants.
The effect of the adoption of SFAS No. 123(R) is expected
to be comparable to the effect disclosed
on a pro forma basis resulting from the application of the
current fair-value recognition provisions
of SFAS No. 123, as shown in Note 1.
In
  March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
  Asset Retirement Obligations (FIN 47), which clarifies that the
  term conditional asset retirement, as used in SFAS No. 143, Accounting
  for Asset Retirement Obligations, refers to a legal obligation to perform an
  asset retirement activity in which the timing and/or method of settlement are
  conditional on a future event that may or may not be within the control of the
  entity. FIN 47 requires that a liability be recognized for the fair value of
  a conditional asset retirement obligation when incurred, if the fair value of
  the liability can be reasonably estimated. Uncertainty about the timing and
  method of settlement of a conditional asset retirement obligation would be factored
  into the measurement of the liability when sufficient information exists. FIN
  47 is effective no later than the end of fiscal years ending after December
  15, 2005. Management believes that the future adoption of FIN 47 will not have
  a material impact on the Companys consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections - a replacement

of APB Opinion No. 20 and SFAS No. 3. This statement provides guidance on the accounting
for
and reporting of accounting changes and error corrections. It requires, unless impracticable,
retrospective
application for reporting a change in accounting principle, unless the newly adopted
accounting principle
specifies otherwise, and reporting of a correction of an error. The provisions
of this statement
are effective for accounting changes and corrections of errors made in fiscal
years beginning after
December 15, 2005. The adoption of this statement is not expected to materially
impact the Companys
consolidated financial statements.
2. Unicast Acquisition
On December 1, 2004, Viewpoint Corporation entered into an agreement to acquire all of the outstanding

capital stock of Unicast Communications Corp. (Unicast). The transaction closed on
January
3, 2005, and Viewpoint assumed ownership of Unicast as a wholly owned subsidiary at that
date. The
aggregate purchase price for the acquisition was $3.5 million.
Under
  the terms of the agreement, Viewpoint issued an aggregate of 1.1 million shares
  of Viewpoint common stock, with a fair value of $3.0 million to the selling
  stockholders of Unicast and paid $0.4 million in cash and acquisition costs
  of $0.1 million. Viewpoint also assumed negative networking capital from Unicast
  of $1.2 million. Based upon the working capital calculation during the period
  following the acquisition Viewpoint has no additional obligation to issue shares
  or pay cash to the seller.
Additionally,
  long-term debt issued by Unicast (Unicast notes) remains outstanding
  at the Unicast subsidiary level following the closing. This debt is comprised
  primarily of two notes. Unicast issued an unsecured promissory note dated February
  27, 2004 in the principal amount of $1.0 million. This promissory note bears
  interest at 5% per annum, compounding annually, and matures in February 2011.
  No payments of principal or interest are due until the maturity date. In addition,
  Unicast issued an amended and restated secured promissory note dated February
  27, 2004 in the principal amount of $2.0 million. This promissory note bears
  interest of 5% per annum and is collateralized by substantially all of the Unicast
  subsidiarys assets. Concurrently with the closing of the Unicast acquisition,
  Viewpoint made a payment of $0.3 million to the secured note holder which was
  applied towards reducing the
11
amount outstanding under the promissory note. Viewpoint will become an additional obligor under the
promissory note and Viewpoints assets will become additional collateral to secure the obligations
if certain contingencies occur, such as Viewpoints failure to operate the Unicast ad-serving
business through the Unicast subsidiary or the ad-serving business fails to achieve certain revenue
targets. No payments under the secured promissory note are due until March 2006. All unpaid principal
and interest is payable in 60 equal monthly installments from March 2006 through March 2011 amounting
to $2.2 million
Viewpoint recorded all working capital assets and liabilities at their fair market value on the date

of the acquisition. Liabilities assumed included an obligation to make certain payments on behalf

of the selling stockholders in the maximum amount of $0.4 million, payable in equal bi-monthly
installments
over the one-year period following the closing.
Viewpoint assessed the values of assets other than working capital assets purchased in the acquisition.

Tangible equipment value was determined based on fair market value at the date of acquisition.
The
remaining useful life of this equipment was predominantly determined to be one year. Intangible
values
acquired included trademarks, acquired technology, website partner relationships and goodwill.
Acquired
technology was determined to have a life of three years while the other intangible values
were determined
to have a life of 5-10 years. Unicast had no in-process research and development.
Goodwill was determined based upon the residual value based upon fair value of the common stock issued,
the cash paid less the liabilities assumed less the identifiable asset values. Values assigned to
goodwill and other acquired assets and liabilities are preliminary and are subject to adjustment
based upon finalizing the fair values of acquired assets and liabilities. During the quarter ended
June 30, 2005, the Company changed its initial estimate of the fair value of the acquired website
relationships and certain liabilities the affect of which increased goodwill by less then $0.1 million
from the amounts recorded at March 31, 2005. Consideration paid for the acquisition amounted to $3.5
million, made up of cash consideration of $0.4 million, acquisition costs of $0.1 million and the
issuance of 1.1 million shares of common stock valued at $3.0 million. The following table which
is based on preliminary estimates and subject to change, summarizes amounts recorded associated with
the Unicast transaction, based upon the consideration paid.
(in thousands)Current assets
    $
    2,097Property and equipment
    
    128Intangible assets
    
    4,508Goodwill
    
    2,133Total assets acquired
    
    8,866Less: liabilities assumed
    
    (5,374
    )Total purchase price
    $
    3,492The results of operations of Unicast are included in the Companys Consolidated Statement of Operations
beginning in the first quarter of 2005.
The
  following unaudited pro forma results of operations have been prepared assuming
  that the acquisition of Unicast occurred at the beginning of the respective
  period presented. Pro forma financial information for the three and six months
  ended June 30, 2005 has been intentionally omitted as the Companys reported
  operating results for those periods include the operating results of Unicast
  for the beginning of the respective periods.
This pro forma financial information should not be considered indicative of the actual results that
would have been achieved had the acquisition been completed on the date indicated and does not purport
to indicate results of operations as of any future date or any future period.
12
Three
      MonthsEnded
      June 30,2004
    
    Six
      MonthsEnded
      June 30,2004Revenue
    
    
    
    $
    3,832
    
    $
    9,210Net loss
    
    
    
    
    (3
    )
    
    (9,108
    )Basic and
      diluted net loss per common share
    
    
    
    $
    (0.00
    )
    $
    (0.18
    )3. Goodwill and Intangible Assets
Goodwill is subject to impairment tests annually at January 1, or earlier if indicators of potential
impairment exist, using a fair-value-based approach. All other intangible assets will continue to
be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
On January 3, 2005, Viewpoint entered into an agreement to acquire all of the outstanding capital stock
of Unicast. See Note 2 for the determination method of the intangible assets.
The changes in the carrying amounts of goodwill and intangible assets during the three and six months
ended June 30, 2005, are as follows (in thousands):
Goodwill
    
    Intangible Assets
    
    TotalBalance as of December 31, 2004
    $
    31,276
    
    $
    230
    
    $
    31,506Additions during period
    
    
    
    
    9
    
    
    9Additions during period related
      to Unicast acquisition
    
    2,101
    
    
    5,170
    
    
    7,271Amortization
    
    
    
    
    (1
    )
    
    (1
    )Amortization related to
      Unicast acquisition
    
    
    
    
    (177
    )
    
    (177
    )Balance as of March 31, 2005
    $
    33,377
    
    $
    5,231
    
    $
    38,608Additions during period
    
    
    
    
    2
    
    
    2Fair value adjustments during the period
      related to Unicast acquisition
    
    32
    
    
    (662
    )
    
    (630
    )Amortization
    
    
    
    
    (1
    )
    
    (1
    )Amortization related to
      Unicast acquisition
    
    
    
    
    (177
    )
    
    (177
    )Balance as of June 30, 2005
    $
    33,409
    
    $
    4,393
    
    $
    37,802The changes in the carrying amounts of goodwill and intangible assets for the three and six months
ended June 30, 2004, are as follows (in thousands):
Goodwill
    
    Intangible Assets
    
    TotalBalance as of December 31, 2003
    $
    31,276
    
    $
    186
    
    $
    31,462Additions during period
    
    
    
    
    38
    
    
    38Amortization
    
    
    
    
    (3
    )
    
    (3
    )Balance as of March 31, 2004
    $
    31,276
    
    $
    221
    
    $
    31,497Additions during period
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    (1
    )
    
    (1
    )Balance as of June 30, 2004
    $
    31,276
    
    $
    220
    
    $
    31,496As of June 30, 2005 and December
31, 2004, the Companys intangible assets and related accumulated amortization consisted of
the following (in thousands):
13
June 30, 2005
    
    December 31, 2004Gross
    
    Accumulated
      Amortization
    
    Adjustment
    
    Net
    
    Gross
    
    Accumulated
      Amortization
    
    NetWebsite Partner Relationships -
        Unicast
    
    $
    4,100
    
    $
    (205
    )
    $
    (328
    )
    $
    3,567
    
    $
    
    
    $
    
    
    $
    Acquired Technology - Unicast
    
    
    630
    
    
    (105
    )
    
    (220
    )
    
    305
    
    
    
    
    
    
    
    
    Patents and Trademarks -
        Unicast
    
    
    440
    
    
    (44
    )
    
    (114
    )
    
    282
    
    
    
    
    
    
    
    
    Patents and Trademarks
    
    
    258
    
    
    (19
    )
    
    
    
    
    239
    
    
    247
    
    
    (17
    )
    230Total Intangible Assets
    
    $
    5,428
    
    $
    (373
    )
    $
    (662
    )
    $
    4,393
    
    $
    247
    
    $
    (17
    )
    $
    230Amortization of intangible assets is estimated to be $0.6 million a year for the next five years.
4. Long Term Debt
Convertible Notes
On December 31, 2002, the Company completed a private placement of convertible notes and warrants in
  which it issued to three institutional investors, 4.95% convertible notes having an aggregate principal
  amount of $7.0 million, and warrants to purchase 0.7 million shares of Company common stock. The
  warrants expire on December 31, 2006, and are exercisable at a price of $2.26 per share. As of June
  30, 2005 0.7 million warrants were outstanding.
On March 25, 2003, the Company entered into Redemption, Amendment and Exchange Agreements with the

three institutional investors with whom it had completed the private placement of convertible notes

and warrants on December 31, 2002, extinguishing the original convertible notes. In conjunction
with
the extinguishment, the Company paid $3.3 million, issued new convertible notes in the principal

amount of $2.7 million and issued $1.4 million shares of its common stock with a market value of

$0.7 million.
Pursuant to SFAS No. 133, the Company bi-furcated the fair value of the conversion options from the
new convertible notes since the conversion options were determined to not be clearly and closely
related to the debt host. In addition, since the effective registration of the securities underlying
the conversion options is an event outside of the control of the Company, pursuant to EITF Issue
No. 00-19, the Company recorded the fair value of the conversion options as long-term liabilities,
as it was assumed that the Company would be required to net-cash settle the underlying securities.
The Company recorded income or loss based on the decrease or increase, respectively, in the fair values

of the new conversion options and original warrants in the Companys consolidated statements

of operations. The amortization of discount on the new convertible notes and debt issue costs were

accounted for using the effective interest method.
On March 17, 2004, one of the institutional investors holding the convertible notes converted $0.9
million of outstanding notes for shares of the Companys common stock. In addition, on the same
day as the conversion, the Company sold 1.5 million shares of common stock in a private placement
to the institutional investor, for $3.7 million or $2.45 per share. The Company recorded a loss on
conversion of debt in the amount of $0.6 million, which represented the write-off of unamortized
loan discount and debt issuance costs of $0.1 million and the difference between the proceeds received
from the private placement and the fair value of the common stock issued based upon the closing price
of the Companys stock on the day of the sale of $0.5 million.
On June 18, 2004, the Company completed the conversion of the remaining outstanding convertible notes
of $1.8 million and the related outstanding interest into 1.7 million shares of Viewpoint common
stock.
For the three and six month period ended June 30, 2005, the Company recognized a gain from the change
in the fair value of the outstanding warrants of $0.6 million and $0.8 million, respectively, resulting
from a decrease in the fair market value of the Companys common stock. For the three and six
month period ended June 30, 2004, the Company recognized a gain or loss related to the change in
valuation for the converted notes and outstanding
14
warrants of $3.1 million and $3.6 million, respectively, resulting from the charge in the fair market
value of the Companys common stock.
Subordinated Notes
On March 26, 2003, Viewpoint Corporation entered into a Securities Purchase Agreement with three accredited
  investors, pursuant to which it received $3.5 million in exchange for an aggregate of $3.5 million
  principal amount of 4.95% subordinated notes and 3.6 million shares of Viewpoint common stock. The
  subordinated notes are scheduled to mature on March 31, 2006. Interest on these notes is payable
  quarterly in arrears in cash. The Company has the right at any time to redeem up to all of the outstanding
  notes at par plus accrued and unpaid interest.
The $3.5 million of proceeds was allocated to subordinated notes, common stock, and additional paid
in capital based on the market value of the Companys common stock on March 26, 2003. In accordance
with the provisions of APB Opinion No. 21, the Company recorded a debt discount of $2.0 million.
Debt issuance costs, which amounted to $0.2 million, were recorded as other assets in the Companys
consolidated balance sheet. The amortization of the discount on the subordinated notes and debt issue
costs totaled $0.2 million and $0.1 million for the three month periods ended June 30, 2005 and 2004,
respectively, and $0.4 million and $0.3 million for the six month periods ended June 30, 2005 and
2004, respectively, were accounted for using the effective interest method.
Amended and Restated Notes
On July 27, 2005, the Company and a holder of the subordinated debt amended the 4.95% subordinated

note in the principal amount of $3.1 million to extend the maturity date from March 31, 2006 to
March
31, 2008 in exchange for the payment by Viewpoint of $0.1 million to the holder of the subordinated

note. In addition, the Company and the holder entered into a Stock Purchase Agreement, dated as
of
July 27, 2005, under which the Company issued 1.3 million shares of Company common stock in
a private
placement to the holder at a purchase price of $1.55 per share (resulting in aggregate
gross proceeds
of $2.0 million). The securities offered and sold in the private placement have
not been registered
under the Securities Act of 1933, as amended and were sold in reliance upon
the exemption from securities
registration afforded by Regulation D. In connection with the private
placement, the Company entered
into a Registration Rights Agreement with the holder pursuant to
which the Company is required to
file a registration statement with the SEC covering the shares
within 45 days of the closing of the
private placement.
At
  June 30, 2005 the Company classified $2.4 million of short-term debt as long-term.
  This amount represented the carrying value of the amended note. Settlement of
  this note is not expected to require the use of working capital in the next
  twelve months as the Company has both the intent and the ability to refinance
  this debt on a long-term basis.
Unicast Notes
On
  January 3, 2005, as disclosed in Note 2, Viewpoint purchased Unicast and, as
  a result, assumed debt which included an unsecured note with a principal amount
  of $1.0 million due in December 2011 and a secured note with a principal balance
  of $1.8 million which matures in March 2011. This note is collateralized by
  the assets of Unicast. The debt was discounted to its fair value based upon
  the prevailing interest rates at the date of the acquisition, the term of the
  debt, the interest provisions of the debt and the credit risk associated with
  repayment. Viewpoint will accrete the notes based upon the interest-method,
  including interest payment requirements through maturity.
As
  of January 3, 2005, the date of acquisition, the fair value of the secured and
  unsecured notes amounted to $1.4 million and $0.3 million, respectively. The
  Company recorded interest expense on these notes of $0.1 million, and $0.2 million
  during the three and six months ended June 30, 2005 which increased the aggregate
  carrying value of these notes to $1.8 million as of June 30, 2005.
5. Related Party Transactions
During the three and six month periods ended June 30, 2005, the Company recorded revenues totaling
$1.2 million and $2.5 million respectively, primarily related to agreements with AOL that were entered
into prior to December 31, 2003. Comparative revenues of $1.6 million and $3.4 million were recorded
for the three and six month periods ended June 30, 2004 respectively. AOL had a representative on
the Companys Board of Directors
15
until December 2003. As of June 30, 2005, the Company has less then $0.1 million in related party accounts
receivable, and has $2.1 million in deferred revenues relating to transactions with AOL. At June
30, 2004, the Company had $0.1 million in accounts receivable and $7.2 million in deferred revenue
relating to transactions with both AOL and Computer Associates, Inc. (CA), who had a
representative on the Companys Board of Directors until September 2004.
In 2003, the Company entered into an amended license agreement with AOL which provides for payments
by AOL of $10.0 million which were all received during the fourth quarter of 2003. The agreement
contains multiple elements consisting of a perpetual broadcast license, a perpetual source code license,
quarterly updates to the source code through December 2005, and maintenance and consulting services.
The Company will recognize $9.0 million of revenue from this agreement ratably as license and services
revenue, through December 31, 2005, which represents the duration of the Companys obligation
for post-contract customer support of the source code element including quarterly upgrades and maintenance
requirements. License revenues will represent 85% of this $9.0 million portion of the revenue arrangement.
The Company recognized $0.9 million and $1.7 million in related party license revenue for the three
and six months ended June 30, 2005, respectively, and $0.4 million and $0.7 million in related party
service revenue for the three and six months ended June 30, 2005, respectively, relating to this
agreement. The Company recognized $0.9 million and $1.8 million in related party license revenue
for the three and six months ended June 30, 2004, respectively, and $0.2 million and $0.4 million
in related party service revenue for the three and six months ended June 30, 2004, respectively,
relating to this agreement.
6. Comprehensive Income (Loss)
Total comprehensive income (loss) for the three and six months ended June 30, 2005 and 2004 consisted
of the following (in thousands):
Three Months Ended
      June 30,
    
    Six Months Ended
      June 30,2005
    
    2004
    
    2005
    
    2004Net income
      (loss)
    
    $
    (446
    )
    $
    772
    
    $
    (1,191
    )
    $
    (7,862
    )Foreign currency translation adjustment
    
    
    3
    
    
    
    
    
    3
    
    
    (3
    )Unrealized loss on marketable securities
    
    
    (1
    )
    
    (2
    )
    
    (9
    )
    
    (9
    )Comprehensive net income (loss)
    
    $
    (444
    )
    $
    770
    
    $
    (1,197
    )
    $
    (7,874
    )7. Segment Reporting
In 2003, sales and production employees became dedicated to its License or Service business and each
business was managed separately. In 2004, the Company added Search and Advertising systems as businesses
that it managed separately. The Company manages and analyzes the business in four reportable segments,
and discloses these segments in accordance with SFAS 131. Search revenue is generated when a customer
uses the Viewpoint Toolbar to search the internet, and clicks on a sponsored advertisement included
in the search results. The Viewpoint Toolbars search results are provided by Yahoo! who collects
a fee from the advertiser and remits a percentage of the fee to Viewpoint. Advertising systems revenue,
including Unicast, is generated by charging customers to host advertising campaigns based on a cost
per thousand (CPM) impressions. The Service segment provides creative and support services
to customers who generally have purchased or received licenses to use the Viewpoint software platform.
Services are sold directly by the Companys sales team. Services revenues are earned by the
delivery of product created or provided by Company employees or third parties that the Company has
contracted to perform services under the guidance of the Company. The License segment sells software
licenses to use the Viewpoint software platform. Licenses are sold directly by the Companys
sales employees and indirectly through VARs, for which the Company pays a commission.
The accounting policies of the segments are the same as those described in the summary of significant
accounting policies. The Company does not currently evaluate the performance of its segments beyond
gross profit. The Company does not allocate research and development, sales and marketing or general
and administrative costs, specifically, to any segment as it does not use that information to make
key operating decisions and does not believe that allocating these expenses is necessary in evaluating
performance.
16
Three Months Ended
      June 30,
    
    Six Months Ended
      June 30,2005
    
    2004
    
    2005
    
    2004Revenues:Search
    
    $
    2,393
    
    $
    
    
    $
    4,573
    
    $
    8Advertising systems
    
    
    1,163
    
    
    37
    
    
    1,895
    
    
    37Services
    
    
    1,564
    
    
    1,066
    
    
    2,807
    
    
    2,589Related party services
    
    
    354
    
    
    686
    
    
    749
    
    
    1,600Licenses
    
    
    227
    
    
    144
    
    
    382
    
    
    384Related party licenses
    
    
    872
    
    
    872
    
    
    1,745
    
    
    1,779Total revenues
    
    
    6,573
    
    
    2,805
    
    
    12,151
    
    
    6,397Cost of Revenues:Search
    
    
    49
    
    
    
    
    
    95
    
    
    Advertising systems
    
    
    847
    
    
    6
    
    
    1,365
    
    
    6Services
    
    
    1,026
    
    
    792
    
    
    1,836
    
    
    1,543Licenses
    
    
    1
    
    
    3
    
    
    3
    
    
    4Total cost of revenues
    
    
    1,923
    
    
    801
    
    
    3,299
    
    
    1,553Gross profit
    
    
    4,650
    
    
    2,004
    
    
    8,852
    
    
    4,844Search advertising
    
    
    2,344
    
    
    
    
    
    4,478
    
    
    8Advertising systems
    
    
    316
    
    
    31
    
    
    530
    
    
    31Services
    
    
    892
    
    
    960
    
    
    1,720
    
    
    2,646Licenses
    
    
    1,098
    
    
    1,013
    
    
    2,124
    
    
    2,159Total gross profit
    
    $
    4,650
    
    $
    2,004
    
    $
    8,852
    
    $
    4,844Gross profit marginSearch advertising
    
    
    98
    %
    
    
    %
    
    98
    %
    
    100Advertising systems
    
    
    27
    
    
    84
    
    
    28
    
    
    84Services
    
    
    47
    
    
    55
    
    
    48
    
    
    63Licenses
    
    
    100
    
    
    100
    
    
    100
    
    
    100Total gross profit
    
    
    71
    %
    
    71
    %
    
    73
    %
    
    76The Company analyzes adjustments to net loss on its discontinued operations business by using the statement
of operations. In March 2005, a lawsuit was settled in the Companys favor, and resulted in
the Company being paid $0.1 million.
8. Subsequent Event
On July 27, 2005, the Company and a holder of the subordinated debt amended the 4.95% subordinated
note in the principal amount of $3.1 million to extend the maturity date from March 31, 2006 to March
31, 2008 in exchange for the payment by Viewpoint of $0.1 million to the holder of the subordinated
note. In addition, the Company and the holder entered into a Stock Purchase Agreement, dated as of
July 27, 2005, under which the Company issued 1.3 million shares of Company common stock in a private
placement to the holder at a purchase price of $1.55 per share (resulting in aggregate gross proceeds
of $2.0 million). The securities offered and sold in the private placement have not been registered
under the Securities Act of 1933, as amended and were sold in reliance upon the exemption from securities
registration afforded by Regulation D. In connection with the private placement, the Company entered
into a Registration Rights Agreement with the holder pursuant to which the Company is required to
file a registration statement with the SEC covering the shares within 45 days of the closing of the
private placement (see Note 1).
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and
notes thereto.
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties that could cause actual results to differ materially
from the results implied by the forward looking statements. Factors that might cause or contribute
to such differences include, but are not limited to, those discussed in the section entitled Factors
That May Affect Future Results of Operations. You should carefully review the risks described
in other documents we file from time to time with the Securities and Exchange Commission, including
any future reports to be filed in 2005 and our Annual Report on Form 10-K for 2004. When used in
this report, the words will, expects, anticipates, intends,
plans, believes, seeks, targets, estimates,
and similar expressions are generally intended to identify forward-looking statements. You should
not place undue reliance on these forward-looking statements, which speak only as of the date of
this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions
to the forwardlooking statements or reflect events or circumstances after the date of this document.
Overview
Viewpoint
  Corporation (Viewpoint or the Company) is a leading
  interactive media Company that focuses on using its graphical platforms
  capabilities to provide consumers, advertisers, and website publishers an enhanced
  internet experience. Since 2003 we have extended the historical imaging capabilities
  of our proprietary graphics technology to develop a search business that provides
  internet consumers a flexible graphical searching experience and an advertising
  delivery system that specializes in deploying video and rich media advertising.
  The Company supplements its revenues in these product segments by using its
  in-house services team to build sophisticated content that is used by customers
  in each product segment. Finally, the Company licenses its platform to internet
  publishers enabling them to deploy graphical sophisticated content at their
  websites.
On March 17, 2004, Viewpoint entered the internet search business by launching a toolbar search product
which the Company calls the Viewpoint Toolbar. The Viewpoint Toolbar attaches to the
Internet Explorer browser, enabling web surfers to conduct internet searches without leaving the
web page they are viewing. When a user enters a term or phrase in the search field of the Viewpoint
Toolbar, search results appear not only as text links listed on a search results page but also as
thumbnail icons of the web pages themselves in a tray that descends from the Viewpoint
Toolbar. Additionally, if a user visits certain internet search engine sites the Viewpoint Toolbar
will simultaneously receive a users search request and provide the user comparative thumbnail
search results in the Viewpoint Toolbar search results tray. Search results delivered to users of
the Viewpoint Toolbar are supplied by Yahoo! Inc. and its wholly-owned subsidiary, Overture Services,
Inc. (Yahoo!). Under its Agreement with Yahoo!, Viewpoint receives a share of the fees
advertisers pay to Yahoo! to be listed in the search results as a sponsored link.
On June 29, 2005, Viewpoint delivered Version 3.0 of the Viewpoint Toolbar to the market. Version 3.0
includes a digital photo management application built into the Toolbars features. Capabilities
of the application include a system to manage folders of photographs, edit photographs, send photographs
via email or store them online. Additionally, users may order prints or other related merchandise
and goods through an online service provider. Viewpoint manages the prices charged for photographic
orders and the online service provider remits to Viewpoint net proceeds charged for the products
after deducting for their standard costs for the products as provided to Viewpoint. We will begin
recognizing revenues for such orders in the third quarter of 2005.
Beginning in 2004 Viewpoint began offering an online advertising campaign management and deployment
product known as Creative Innovator. Creative Innovator permits publishers, advertisers,
and their agencies to manage the process of deploying online advertising campaigns. This process
includes creating the advertising assets, selecting the sites on which the advertisements will be
deployed, setting the metrics (ad rotation, the frequency with which an ad may be deployed, and others)
associated with the campaign, ad deployment, and tracking of campaign results. Creative Innovator
enables users to manage advertising campaigns across many sites. In March 2004, Viewpoint announced
the availability of AirTime, an extension of Creative Innovator that permits users to
manage and deploy online video advertising campaigns.
On January 3, 2005, Viewpoint purchased all the outstanding stock of Unicast Corporation (Unicast),
a leader in the delivery of interstitial and superstitial video internet advertisements. Unicast
delivered video
18
advertisements for its customers using a format that complements Viewpoints in-page and in-stream
video advertising provided by AirTime. Additionally, Unicast generated monthly revenues from dozens
of advertisers who purchased advertising on some of the internets most active websites including
Microsofts MSN, Yahoo! and America Online. Viewpoint believes that the addition of Unicast
will significantly accelerate the Companys growth in its advertising systems segment.
Viewpoint provides fee-based professional services for creating content and implementing visualization
solutions. Clients include both content-related licensees and advertisers who use Creative Innovator
as well as internal services provided to our marketing team. Our professional services group uses
the Viewpoint platform, as well as a spectrum of tools and other technologies to create enhanced
rich media solutions for a clients particular purpose, whether over the web, intranet systems
or offline media and applications. We provide the support our clients need to implement the rich
media content, to fully utilize the enhanced software, or to maximize the branding potential of the
advertising opportunity. Clients supported during the first six months of 2005 include America Online,
Toyota Motor Services, General Electric and Sony Electronics.
Viewpoint began business in 1987 as a software maker focused primarily on products that enabled content
authors to create images in three dimensions and to paint artistic images digitally.
Viewpoint initiated internet activities with the release of a beta version of the Viewpoint Media
Player in 1999. Simultaneously, Viewpoint released a suite of free content authoring tools specifically
designed to enable customers who published digital content on their websites to create material that
can be read or played back by the VMP. With the VMP residing on the web consumers
computer and interpreting instructions delivered by our customers web sites, web sites can
transmit relatively small files that can yield rich media on the end users computer.
In this way, website owners can deploy digital content representing three-dimensional views of their
products, include pre-set animations, and provide high-resolution two-dimensional views, video, audio,
text, and other media types. For example, several of our licensing and creative services customers
are auto manufacturers that deploy from their websites 3D representations of their vehicles which
viewers can interact with by opening doors, zooming in on features, configuring accessories,
or swapping colors.
Viewpoint has a limited operating history upon which an evaluation of the Company and its prospects
can be based. Viewpoint has had significant quarterly and annual operating losses since its inception,
and, as of June 30, 2005, had an accumulated deficit of $256.5 million. Viewpoints prospects
must be considered in light of the risks and difficulties frequently encountered by early stage technology
companies. There can be no assurance that Viewpoint will achieve or sustain profitability.
19
RESULTS OF OPERATIONS
The following table sets forth for the three and six months ended June 30, 2005 and 2004, the Companys
consolidated statements of operations expressed as a percentage of total revenues for the periods
indicated:
Three Months Ended
      June 30,
    
    Six Months Ended
      June 30,2005
    
    2004
    
    2005
    
    2004Statements of Operations DataRevenues:Search
    
    36
    %
    
    %
    38
    %
    0
    %Advertising Systems
    
    18
    
    1
    
    16
    
    1Services
    
    24
    
    39
    
    23
    
    40Related party services
    
    5
    
    24
    
    6
    
    25Licenses
    
    4
    
    5
    
    3
    
    6Related party licenses
    
    13
    
    31
    
    14
    
    28Total revenues
    
    100
    
    100
    
    100
    
    100Cost of revenues:Search
    
    1
    
    
    
    1
    
    Advertising Systems
    
    13
    
    
    
    11
    
    0Services
    
    15
    
    28
    
    15
    
    24Licenses
    
    0
    
    
    
    0
    
    0Total cost of revenues
    
    29
    
    28
    
    27
    
    24Gross profit
    
    71
    
    72
    
    73
    
    76Operating expenses:Sales and marketing
    
    19
    
    34
    
    21
    
    31Research and development
    
    18
    
    31
    
    19
    
    28General and administrative
    
    40
    
    66
    
    39
    
    58Depreciation
    
    3
    
    7
    
    4
    
    7Amortization of intangible assets
    
    3
    
    
    
    3
    
    Restructuring charges related to office closure
    
    
    
    
    
    
    
    Total operating expenses
    
    83
    
    138
    
    86
    
    124Loss from operations
    
    (11
    )
    (66
    )
    (13
    )
    (48
    )Other income (expense):Interest and other income, net
    
    0
    
    1
    
    0
    
    1Interest expense
    
    (5
    )
    (8
    )
    (5
    )
    (8
    )Changes in fair values of warrants to purchase common stock andconversion
      options of convertible notes
    
    10
    
    109
    
    7
    
    (56
    )Loss on conversion
    
    
    
    (8
    )
    
    
    (13
    )Other income (expense)
    
    5
    
    94
    
    2
    
    (76
    )Income (loss) before provision for income taxes
    
    (6
    )
    28
    
    (11
    )
    (124
    )Provision for income taxes
    
    0
    
    1
    
    
    
    1Net income (loss) from continuing operations
    
    (6
    )
    27
    
    (11
    )
    (125
    )Adjustment to net income (loss) on disposal of discontinued operations
    
    
    
    1
    
    1
    
    1Net income (loss)
    
    (6
    )%
    28
    %
    (10
    )%
    (124
    )%20
Critical Accounting Policies and Estimates
Viewpoints discussion
and analysis of its financial condition and results of operations are based upon its consolidated
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under
the circumstances though actual results may differ from these estimates under different assumptions
or conditions. For a complete description of the Companys accounting policies, see Note 2 to
the consolidated financial statements included in the Companys 2004 annual report on Form 10-K.
Described below are the areas where we believe that the estimates, judgments or assumptions that we
have made, if different, would have yielded the most significant differences in our financial statements:
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended, Emerging Issues Task Force (EITF) No. 00-21 Revenue
Arrangements with Multiple Deliverables, and Staff Accounting Bulletin (SAB) No.
101 Revenue Recognition in Financial Statements as amended by SAB No. 104 Revenue
Recognition. Per SOP 97-2 and SAB No. 101, as amended by SAB No. 104, the Company recognizes
revenue when the following criteria are met: (a) persuasive evidence of an arrangement exists, (b)
delivery has occurred or services have been rendered, (c) the Companys fee is fixed or determinable,
and (d) collectibility is reasonably assured.
Viewpoint generates revenues through four sources: (a) search advertising, (b) advertising systems,
(c) services, and (d) software licenses. Search revenue, as explained in more detail below, is derived
from a share of the fees charged by Yahoo! to advertisers who pay for sponsored links when a customer
clicks on the paid link on the results provided by the Viewpoint Toolbar. Advertising systems revenue
is generated by charging customers to host and/or deliver advertising campaigns based on a cost per
thousand (CPM) impressions. Service revenues are generated from fee-based professional
services, customer support services (maintenance arrangements), and training services performed for
customers that license the Companys products. License revenues are generated from licensing
the rights to use products directly to customers and indirectly through Value Added Resellers (VARs).
Search revenue is generated when a customer uses the Viewpoint Toolbar to search the internet, and

clicks on a sponsored advertisement included in the search results. The Viewpoint Toolbars

search results are provided by Yahoo!, who collects a fee from the advertiser and remits a percentage

of the fee to Viewpoint. Revenue generated is a function of the number of Viewpoint Toolbars performing

searches, the number of searches that are sponsored by advertisers, the number of advertisements

that are clicked on by Viewpoint Toolbar searchers, the rate advertisers pay for those advertisements,

and the percentage retained by Yahoo! for providing the results.
Viewpoint also offers an online advertising campaign management and deployment product. This advertising
system permits publishers, advertisers, and their agencies to manage the process of deploying online
advertising campaigns. The Company charges customer on a cost per thousand (CPM) impression
basis, and recognizes revenue when the impressions are served, so long as all other revenue recognition
criteria are satisfied. The Company also provides another advertising services product whereby the
Company purchases media space from web-site publishers and re-sell that space to advertisers. The
Company acts as a principal party in the transaction, assumes the title to the inventory purchased,
and assumes the risks of collection and therefore recognizes the entire amount billed to the customer
as revenue.
On June 14, 2005, Viewpoint announced that it was discontinuing the practice of charging customers
a license fee for the use of the Viewpoint Media Player and related technologies. The Viewpoint Media
Player will no longer require a broadcast key to display content, thereby giving all developers free
access to the Viewpoint Distribution Network. By providing the license for free, the Company plans
to extend the Viewpoint Media Players reach into new channels of distribution beyond the estimated
120 million computers it currently resides within. Viewpoint believes that this strategy supports
the advertising business - by potentially making the player more pervasive  as well as providing
strong backing to the search and photo management distribution strategies.
21
License revenues from direct customers included sales of perpetual and term-based licenses for broadcasting

digital content in the Viewpoint format. License revenues were recognized up-front provided no
further
significant obligations exist and the resulting receivable was deemed collectible by management.
Fees from licenses sold together with fee-based professional services were generally recognized upon
delivery of the software, provided that the payment of the license fees were not dependent upon the
performance of the services, and the services were not essential to the functionality of the licensed
software. If the services were essential to the functionality of the software, or payment of the
license fees were dependent upon the performance of the services, both the software license and service
fees were recognized in accordance with SOP 81-1 Accounting for Performance of Construction-Type
and Certain Production-Type Contracts. The percentage of completion method were used for those
arrangements in which reasonably dependable estimates were available. If reasonably dependable estimates
were not available due to the complexity of the services to be performed, the Company deferred recognition
of any revenues for the project until the project was completed, delivered and accepted by the customer,
provided all other revenue recognition criteria were met and no further significant obligations exist.
For arrangements involving multiple elements, the Company defers revenue for the undelivered elements

based on their relative fair value and recognizes the difference between the total arrangement
fee
and the amount deferred for the undelivered elements as revenue. The determination of fair
value
of each undelivered element in multiple element arrangements is based on the price charged
when the
same element is sold separately. For maintenance and technical support elements, the Company
uses
renewal rates to determine the price when sold separately. The Company accounts for multiple
element
arrangements which involve only fee-based professional services in accordance with EITF
00-21. For
licenses sold that include updates over a period of time the Company recognizes the
license revenue
over the period in which updates are provided.
Standard terms for service arrangements, which are typically billed and collected on an installment

basis, require final payment within 90 days of completion of the services. Standard terms for license

arrangements required payment within 90 days of the contract date, which typically coincided with

delivery. Probability of collection is based upon the assessment of the customers financial

condition through the review of their current financial statements and/or credit reports. For follow-on

sales to existing customers, prior payment history is also used to evaluate probability of collection.

The Companys arrangements with customers do not contain product return rights. If the fee
is
not fixed or determinable, revenue is recognized as payments become due or as cash is received
from
the customer. If a nonstandard acceptance period is required, revenues are recognized upon
the earlier
of customer acceptance or the expiration of the acceptance period.
Percentage of Completion
The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended, Emerging Issues Task Force (EITF) Issue No. 00-21
Revenue Arrangements with Multiple Deliverables, Staff Accounting Bulletin (SAB)
No. 101 Revenue Recognition in Financial Statements and SAB No. 104 Revenue Recognition.
Per SOP 97-2 and SAB No. 101, the Company recognizes revenue when the following criteria are met:
(a) persuasive evidence of an arrangement exists, (b) delivery has occurred or services have been
rendered, (c) the Companys fee is fixed or determinable, and (d) collectibility is reasonably
assured.
Fee-based professional services for customized software development are performed on a fixed-fee or
time-and-materials basis under separate service arrangements. Revenues for fixed-fee arrangements
are recognized over the pattern of performance in accordance with the provisions of SAB No. 101.
The pattern of performance for service arrangements is measured by the percentage of costs incurred
and accrued to date for each contract, which primarily consist of direct labor costs, cost of outsourcing,
and overhead, to the estimated total cost for each contract at completion. The percentage approximates
the percentage of a customers contract that has been completed and would be available for the
customer to use at that point in time. Use of this method is based on the availability of reasonably
dependable estimates. If reasonably dependable estimates are not available due to the complexity
of the services to be performed, the Company defers recognition of any revenues for the project until
the project is completed, delivered and accepted by the customer, provided all other revenue recognition
criteria are met and no further significant obligations exist.
22
Reserve for Bad Debt
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment
history and the customers current credit worthiness, as determined by a review of their current
credit information. The Company regularly monitors collections and payments from our customers and
maintains a provision for estimated credit losses based upon historical experience and any specific
customer collection issues that have been identified.
Valuation of Goodwill and Intangible Assets
We assess goodwill for impairment annually unless events occur that require more frequent reviews.
Long-lived assets, including amortizable intangibles, are tested for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Discounted
cash flow analyses are used to assess non-amortizable intangible impairment while undiscounted cash
flow analyses are used to assess long-lived asset impairment. If an assessment indicates impairment,
the impaired asset is written down to its fair market value based on the best information available.
Estimated fair market value is generally measured with discounted estimated future cash flows. Considerable
management judgment is necessary to estimate undiscounted and discounted future cash flows. Assumptions
used for these cash flows are consistent with internal forecasts.
On an on-going basis, management reviews the value and period of amortization or depreciation of long-lived
assets, including goodwill and other intangible assets. During this review, we re-evaluate the significant
assumptions used in determining the original cost of long-lived assets. Although the assumptions
may vary from transaction to transaction, they generally include revenue growth, operating results,
cash flows and other indicators of value. Management then determines whether there has been an impairment
of the value of long-lived assets based upon events or circumstances that have occurred since acquisition.
The impairment policy is consistently applied in evaluating impairment for each of our wholly owned
subsidiaries and investments.
Investments
We record an impairment charge when we believe an investment asset has experienced a decline in value
that is other than temporary. Future adverse changes in market conditions or poor operating results
of underlying investments could result in losses or an inability to recover the carrying value of
the investments that may not be reflected in an investments current carrying value, thereby
possibly requiring an impairment charge in the future.
Derivatives
In 2002 and 2003, the Company issued convertible notes and warrants which would require Viewpoint to
issue shares of common stock upon conversion of these securities. The Company accounts for the fair
values of these outstanding warrants to purchase common stock and conversion options of its convertible
notes in accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities,
and EITF Issue No. 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock, which requires the Company to bifurcate and separately
account for the conversion option and warrants as embedded derivatives contained in the Companys
convertible notes. The Company is required to carry these embedded derivatives on its balance sheet
at fair value and the unrealized changes in the value of these embedded derivatives are reflected
in net income as changes in fair values of warrants to purchase common stock and conversion options
of convertible notes. Such changes in fair value are recorded as an adjustment to reconcile net loss
to net cash used in operating activities in the consolidated statement of cash flows. In 2004, the
convertible notes were converted into common stock.
Contingencies and Litigation
We evaluate contingent liabilities including threatened or pending litigation in accordance with SFAS
No. 5, Accounting for Contingencies and record accruals when the outcome of these matters
is deemed probable and the liability is reasonably estimable. We make these assessments based on
the facts and circumstances and in some instances based in part on the advice of outside legal counsel.
23
Restructuring Activities
Restructuring activities include the recognition of severance expenses upon management approval of
the restructuring plan, the determination of the employees to be terminated, communication of benefit
arrangements to employees and, with respect to costs associated with lease terminations, an estimation
of sublease payments.
Financial Results
Viewpoint reported total revenue of $6.6 million for the three months ended June 30, 2005, compared
to $2.8 million for the same period last year. Operating loss for the second quarter of 2005 was
$0.8 million compared to $1.9 million in the second quarter of 2004. The improvement in operating
loss compared to the second quarter 2004 resulted principally from the increase in revenue from our
search and ad systems segments offset by additional operating expenses incurred following our acquisition
of Unicast on January 3, 2005. Net loss for the second quarter 2005 was $0.4 million, or a loss of
$0.01 per share, compared to net income of $0.8 million, or a gain of $0.01 per share, in the second
quarter of 2004. The net loss in the second quarter of 2005 included a non-cash gain of $0.6 million
to recognize the impact of the Companys decreased stock price on its outstanding warrants.
Net income in the second quarter of 2004 included a non-cash gain of $3.1 million to recognize the
impact of the Companys decreased stock price on its outstanding conversion options related
to the Companys convertible debt and warrant financing.
Viewpoint reported total revenues of $12.2 million for the six months ended June 30, 2005, compared
to $6.4 million for the same period last year. Operating loss for the six months ended June 30, 2005
was $1.6 million compared to $3.1 million for the six months ended June 30, 2004. The improvement
in operating loss compared to the six months ended June 30, 2004 resulted principally from the increase
in revenue from the Companys search and ad systems segments offset by additional operating
expenses incurred following the acquisition of Unicast on January 3, 2005. Net loss for the six months
ended June 30, 2005 was $1.2 million, or a loss of $0.02 per share, compared to a net loss of $7.9
million, or a loss of $0.15 per share, in the six months ended June 30, 2004. The net loss in the
six months ended June 30, 2005 included a non-cash gain of $0.8 million to recognize the impact of
the Companys decreased stock price on its outstanding warrants. Net loss in the six months
ended June 30, 2004 included non-cash loss of $3.6 million to recognize the impact of the Companys
increased stock price on its outstanding conversion options related to the Companys convertible
debt and warrant financing, and the loss on the conversion of the Companys convertible debt
in 2004, amounting to a loss of $0.8 million.
Viewpoints cash, cash equivalents, and marketable securities as of June 30, 2005 were $4.6 million.
This can be compared to cash, cash equivalents, and marketable securities of $8.7 million at December
31, 2004. The decrease in cash, cash equivalents, and marketable securities can be attributed to
the completion of the Unicast acquisition which reduced the Companys cash position by $1.3
million related to amounts paid to the sellers and negative net working capital assumed and paid
as well as losses from operations and increases in accounts receivable associated with our growing
search and ad systems businesses.
Revenues
24
Months Ended
      June 30,
    
    %2005
    
    2004
    
    ChangeThree months ended:Search
    $
    2,393
    
    $
    
    
    
    N/AAdvertising Systems
    
    1,163
    
    
    37
    
    
    3,043Services
    
    1,564
    
    
    1,066
    
    
    47Related party services
    
    354
    
    
    686
    
    
    (48
    )Licenses
    
    227
    
    
    144
    
    
    58Related party licenses
    
    872
    
    
    872
    
    
    Total revenues
    $
    6,573
    
    $
    2,805
    
    
    134
    %Six months ended:Search
    $
    4,573
    
    $
    8
    
    
    57,063
    %Advertising Systems
    
    1,895
    
    
    37
    
    
    5,022Services
    
    2,807
    
    
    2,589
    
    
    8Related party services
    
    749
    
    
    1,600
    
    
    (53
    )Licenses
    
    382
    
    
    384
    
    
    (1
    )Related party licenses
    
    1,745
    
    
    1,779
    
    
    (2
    )Total revenues
    $
    12,151
    
    $
    6,397
    
    
    90
    %On March 17, 2004 Viewpoint entered the internet search business, by launching the Viewpoint Toolbar
on a test basis. In April 2004, the Company ended the test phase, and began delivering the Viewpoint
Toolbar Version 1.0. Search revenue is generated when a customer uses the Viewpoint Toolbar to search
the internet, and clicks on a sponsored advertisement included in the search results. The Viewpoint
Toolbars search results are provided by Yahoo!, who collects a fee from the advertiser and
remits a percentage of the fee to Viewpoint. Revenue generated is a function of the number of Viewpoint
Toolbars performing searches, the number of searches that are sponsored by advertisers, the number
of advertisements that are clicked on by Viewpoint Toolbar searchers, the rate advertisers pay for
those advertisements, and the percentage retained by Yahoo! for providing the results.
Viewpoint also offers an online advertising campaign management and deployment product. The product
permits publishers, advertisers, and their agencies to manage the process of deploying online advertising
campaigns. The Company charges customers on a cost per thousand impression (CPM) basis,
and recognizes revenue when the impressions are served, so long as all other revenue recognition
criteria are satisfied. On January 3, 2005 Viewpoint purchased Unicast Communications Corp., which
specializes in the ad systems business principally delivering video advertisements. Unicast generated
$6.1 million in revenues during 2004. The Company expects revenues from advertising systems to continue
to grow in future quarters.
Viewpoint has a creative services group that builds content in the Viewpoint format for customers.
Viewpoint charges customers fees for these services based on the estimated time and materials to
complete a creative project for the customer including an acceptable profit margin. Revenue is recognized
on a percentage-of-completion basis if all other revenue recognition criteria are satisfied. During
2005, the Company continued its strategy of concentrating on executing larger creative projects which
improved overall financial performance of the segment.
The Company also generated revenues by selling licenses to the Viewpoint graphical platform principally
to internet content publishers. On June 14, 2005, Viewpoint announced that it was discontinuing the
practice of charging customers a license fee for the use of the Viewpoint Media Player and related
technologies. The Viewpoint Media Player will no longer require a broadcast key to display content,
thereby giving all developers free access to the Viewpoint Distribution Network. By providing the
license for free, the Company plans to extend the Viewpoint Media Players reach into new channels
of distribution beyond the estimated 120 million computers it currently resides within. Viewpoint
believes that this strategy supports the advertising business - by potentially making the player
more pervasive  as well as providing strong backing to the search and photo management distribution
strategies.
Prior to 2004, licenses were generally 15 months in duration. Revenues were recognized upon the completion
of the sales and delivery process so long as all other revenue recognition criteria were satisfied.
The Company supplemented its license revenue by providing content development services to licensees.
The service revenues were recognized on a percentage of completion basis as computed by comparing
the incurred costs of the project to the total estimated project cost and applying this percentage
against the total contracted revenue.
25
During the first five months of 2005 the Company continued to recognize license sales upon delivery
so long as all other revenue recognition criteria are satisfied. Since January 2004, licenses had
generally been sold for a 12 month term. The Company also adopted a new licensing price structure
in 2004 whereby larger license sales, that are made less frequently, contain product upgrades when
and if available for a period of 12 months. These license sales are amortized over the license periods,
due to the significance of the post contract customer support which include when and if available
upgrades.
During October 2003, the Company entered into an amended license agreement with America Online, Inc.
(AOL) which provided for payments by AOL of $10.0 million which were received in the
fourth quarter of 2003. The agreement contains multiple elements consisting of a perpetual broadcast
license, a perpetual source code license, quarterly updates to the source code through December 2005,
and maintenance and consulting services. The Company will recognize revenue from this agreement ratably
as license and services revenue through December 2005 which represents the duration of the Companys
obligation for post-contract support of the source code element, including quarterly upgrades and
maintenance requirements. Approximately $0.9 million is recognized each quarter as related party
license revenue and $0.1 million as related party services revenue.
During 2004, the Company began to focus more resources on its Search and Advertising systems segments.
License revenue will stay relatively constant through the end of 2005, as twelve month licenses that
contained upgrades when and if available that were entered into prior to the change in license fee
structure in June 2005 are recognized. The Company believes that, consistent with the new business
model, license revenue will be minimal in 2006.
Search revenues were $2.4 million for the three months ended June 30, 2005 compared to the three months
ended June 30, 2004 in which the Company did not recognize search revenue. Search revenues are generated
when users of the Viewpoint Toolbar are provided search results from advertisers that they click
on to see. These advertisers then pay a fee to Yahoo!, who remits a percentage of the fee to Viewpoint.
The Company had installed 1.5 million Viewpoint Toolbars through June 30, 2004, 8.7 million through
December 31, 2004, 12.5 million through March 31, 2005 and 16.1 through June 30, 2005. Internet users
can uninstall the Viewpoint Toolbar, and through December 31, 2004, 3.3 million users who had accepted
the installation of the Toolbar had later uninstalled it during 2004. The total of uninstalled toolbars
had increased to 6.7 million by June 30, 2005.
Search revenues of $4.6 million for the six months ended June 30, 2005 compared to revenues of less
than $0.1 million for the six months ended June 30, 2004. The increase in revenues is associated
with the acceleration of our search business which began after June 30, 2004. The Company believes
that search revenues will continue to increase in 2005 if it is able to continue to increase the
number of Viewpoint Toolbars that are distributed and remain installed.
The Company recognized $1.2 million in advertising systems revenue during the three months ended June
30, 2005 compared to revenues of less than $0.1 million for the three months ended June 30, 2004.
This revenue was generated by delivering advertising impressions to websites in several different
formats including video and by selling website advertising inventory on behalf of website publishers.
A significant portion of this revenue came from clients who had used Unicast to deliver video advertising
prior to the January 3, 2005 merger with Viewpoint.
Ad systems revenues of $1.9 million for the six months ended June 30, 2005 compared to revenues of
less than $0.1 million for the six months ended June 30, 2004. The growth compared to the prior period
is the result of the Companys entry into the ad systems business late in the second quarter
of 2004 and the purchase of Unicast in January of 2005. Growth in this segment accelerated during
the second quarter and will continue to increase during 2005 if the Company is able to attract more
clients and websites to its various ad serving formats.
Service revenues of $1.6 million for the three months ended June 30, 2005 compare to $1.1 million for
the same period in 2004. The increase in revenues is due to increases in the number of clients with
projects in excess of $50,000 who were not related parties.
Services revenues of $ 2.8 million for the six months ended June 30, 2005 compared to revenues of $2.6
million for the six months ended June 30, 2004. The Companys revenues during 2004 included
$0.5 million from a service project that was completed in the third quarter of 2003 for which the
Company received a final payment and recognized revenue in February 2004. Excluding this item, the
adjusted increase in revenues is due to increases in the number of clients with projects in excess
of $50,000 who were not related parties. The Company believes that it will be able to increase revenues
in this segment if licensees continue to ask the Company for assistance in building
26
more content using the Viewpoint Platform to be used at their websites. The Company believes the elimination
of the license fee will further increase revenues in this area as companies will have even more of
an inclination to use the Viewpoint platform.
Related party service revenues of $0.4 million for the three months ended June 30, 2005 decreased by
approximately $0.3 million, or 48%, compared to the same period last year. Revenues included as related
party service revenues relate to contracts that were entered into with AOL prior to December 2003.
Related party service revenues of $0.7 million for the six months ended June 30, 2005 decreased by
approximately $0.9 million or 53% compared to the same period last year. We believe that revenue
in this segment will be significantly lower in 2005 since there is only one remaining agreement for
the Company to provide services to AOL that was executed in 2003.
License revenues of $0.2 million for the three months ended June 30, 2005 increased by approximately
$0.1 million or 58% for the three months ended June 30, 2005, compared to the same period last year.
License revenues for the second quarter of 2005 primarily represent four licenses the Company sold
during 2004, which provided upgrade rights, and are therefore being recognized ratably over 12 months,
and recognition of a $0.1 million renewal of a 2002 license that did not contain upgrades or maintenance,
and was therefore recognized entirely in the second quarter of 2005. License revenues for the second
quarter of 2004 were essentially generated from the sale of licenses without upgrade rights where
the Company recognized the total value of the contract in the second quarter.
License revenues of $0.4 million for the six months ended June 30, 2005, compared to $0.4 million for
the same period last year. Revenues in this segment will remain relatively constant in 2005, and
will be minimal in 2006 as the Company is offering the license for free beginning in June 2005.
Related party license revenues of $0.9 million and $1.7 million for the three and six month periods
ended June 30, 2005 respectively were consistent with the amount in the same period in 2004, as the
Company was working under the same contract. Revenues in this segment will remain relatively constant
in 2005 and be eliminated in 2006.
27
Cost of revenues
June 30,
    
    %2005
    
    2004
    
    Change(dollars in thousands)Three months ended:Search
    $
    49
    
    $
    
    
    
    N/APercentage of Search Revenues
    
    2
    %
    
    N/ASix months ended:Search
    $
    95
    
    $
    
    
    
    N/APercentage of Search Revenues
    
    2
    %
    
    
    %Three months ended:Advertising Systems
    $
    847
    
    $
    6
    
    
    14,017
    %Percentage of Advertising Systems Revenues
    
    73
    %
    
    16
    %Six months ended:Advertising Systems
    $
    1,365
    
    $
    6
    
    
    22,650
    %Percentage of Advertising Systems Revenues
    
    72
    %
    
    16
    %Three months ended:Services
    $
    1,026
    
    $
    792
    
    
    30
    %Percentage of Services Revenues
    
    53
    %
    
    45
    %Six months ended:Services
    $
    1,836
    
    $
    1,543
    
    
    19
    %Percentage of Services Revenues
    
    52
    %
    
    37
    %Three months ended:Licenses
    $
    1
    
    $
    3
    
    
    (67
    )%Percentage of Licenses Revenues
    
    0
    %
    
    0
    %Six months ended:Licenses
    $
    3
    
    $
    4
    
    
    (25
    )%Percentage of Licenses Revenues
    
    0
    %
    
    0
    %The Company incurs cost of revenues related to Search revenue for the hosting services associated with
providing search results. Bandwidth costs utilized in providing results has been minimal. The Company
believes that as Search revenue increases, the hosting services associated with this revenue will
increase although we do not anticipate an increase in the costs as a percentage of revenues.
Cost of revenues from advertising systems was $0.8 million and $1.4 million for the three and six month
periods ended June 30, 2005 respectively. These costs consist of the web-hosting and employee fees
associated with serving advertising content, costs for media space at websites when we package the
media space with delivery, and costs of developing certain advertisements in contracts that include
a combined price for developing creative material and delivering that material. The Company is continually
evaluating pricing for hosting services in order to reduce the delivery expenses to the greatest
extent practicable. During the third quarter of 2004, the Company separated creative development
from delivery contracts which will separate the creative development revenues and costs into services
revenues and costs. The Company believes that as advertising system revenue increases, expenses for
bandwidth will increase. However, the Company believes that costs as a percentage of revenue will
decrease since it will receive improved pricing efficiencies for hosting and delivery services. It
does not anticipate bundling the costs of media frequency or developing creative advertising with
contracts for delivery of such advertising impressions.
Cost of revenues for services consists primarily of salaries, consulting fees and overhead for those
who provide fee-based content creation and engineering professional services. Cost of revenues for
services of $1.0 and $1.8 million for the three and six months ended June 30, 2005, respectively,
increased by $0.2 million or 30% for the three month period and $0.3 million or 19% for the six month
period compared to the same periods last year. The increase in cost of revenues for services is attributable
to the increase in service revenues adjusted for the payment of $0.5 million in the second quarter
of 2004 that related to work performed in 2003. The Company believes that the costs for services
as a percentage of revenue will remain fairly constant in 2005.
28
Sales and marketing
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:Sales and Marketing
    $
    1,228
    
    $
    945
    
    
    30
    %Percentage of total revenues
    
    19
    %
    
    34
    %Six months ended:Sales and Marketing
    $
    2,503
    
    $
    1,996
    
    
    25
    %Percentage of total revenues
    
    21
    %
    
    31
    %Sales and marketing expenses include salaries and benefits, sales commissions, non-cash stock-based
compensation charges, consulting fees, and travel and entertainment expenses for our sales and marketing
personnel. Sales and marketing expenses also include the cost of programs aimed at increasing revenue,
such as advertising, trade shows, and public relations.
Sales and marketing expenses of $1.2 million for the three months ended June 30, 2005 increased by
$0.3 million or 30% compared to the same period last year. The increase was principally due to an
increase in personnel costs in sales and marketing associated with the Unicast acquisition. Personnel
costs including commissions increased by $0.3 million, in addition to ad serving marketing costs
increasing by $0.1 million. This was offset by a decrease in Search marketing costs of $0.2 million
which coincided with the launch of the toolbar in the first quarter of 2004.
Sales and marketing expenses of $2.5 million for the six months ended June 30, 2005 increased by $0.5
million or 25% compared to the same period last year. The increase was principally due to an increase
in personnel costs in sales and marketing associated with the Unicast acquisition. Personnel costs
including commissions increased by $0.6 million, in addition to ad serving marketing costs which
increased by $0.1 million. This was offset by a decrease in Search marketing costs of $0.2 million
which was launched in the first quarter of 2004.
Research and development
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:Research and development
    $
    1,147
    
    $
    860
    
    
    33
    %Percentage of total revenues
    
    18
    %
    
    31
    %Six months ended:Research and development
    $
    2,353
    
    $
    1,773
    
    
    33
    %Percentage of total revenues
    
    19
    %
    
    28
    %Research and development expenses consist primarily of salaries and benefits for software developers,
contracted development efforts, and non-cash stock-based compensation charges related to the Companys
product development efforts. The Company expenses as incurred research and development costs necessary
to establish the technological feasibility of its internally developed software products and technologies.
To date, the establishment of technological feasibility of the Companys products and general
release has substantially coincided. As a result, the Company has not capitalized any software development
costs since costs qualifying for such capitalization have not been significant. Additionally, the
Company capitalizes costs of software, consulting services, hardware and payroll-related costs incurred
to purchase or develop internal-use software, if technological feasibility has been established,
it is probable that the project will be completed and the software will be used as intended. The
Company expenses costs incurred during preliminary project assessment, research and development,
re-engineering, training and application maintenance.
Beginning in 2004, the Company expanded its research and development efforts beyond changes in the
overall quality of the Viewpoint Media Player to efforts to build the Viewpoint Toolbar for searching.
During 2005, efforts in this area have focused on the development of a more flexible frame for the
Toolbar which would facilitate adding different software tools to its capabilities and the development
of a photosharing capability which was released on June 29, 2005. In addition, during 2005 efforts
have been focused on building an ad delivery system that combines the capabilities of Unicasts
and Viewpoints products.
29
Research and development expenses increased by $0.3 million, or 33%, for the three months ended June
30, 2005 compared to the same period last year. The most significant change resulted from salaries
which increased by $0.3 million associated with employees added as a result of the Unicast acquisition.
Salaries and fringe benefits represent 95% of the costs in this department.
Research
  and development expenses increased by $0.6 million, or 33%, for the six months
  ended June 30, 2005 compared to the same period last year. The most significant
  change resulted from salaries which increased by $0.6 million associated with
  employees added as a result of the Unicast acquisition.
General and administrative
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:General and Administsrative
    $
    2,654
    
    $
    1,845
    
    
    44
    %Percentage of total revenues
    
    40
    %
    
    66
    %Six months ended:General and Administsrative
    $
    4,741
    
    $
    3,727
    
    
    27
    %Percentage of total revenues
    
    39
    %
    
    58
    %General and administrative expenses primarily consist of corporate overhead of the Company, which includes
salaries and benefits related to finance, human resources, MIS, legal, and executive personnel along
with other administrative costs such as facilities costs, legal, accounting and investor relations
fees, insurance expense, and bad debt expense.
General and administrative expenses increased by $0.8 million, or 44%, for the three months ended June
30, 2005 compared to the same period last year. Non-cash stock based compensation increased by $0.5
million related to a charge taken on extending the options of a former executive at June 30, 2005.
Salary and fringe benefit costs increased by $0.2 million due primarily to accruals for a severance
payment and reclassifications of certain employees to this department.
General and administrative expenses increased by $1.0 million, or 27%, for the six months ended June
30, 2005 compared to the same period last year. Salary and fringe benefit costs increased by $0.4
million due primarily to new employees associated with the Unicast acquisition. In addition, non-cash
stock-based compensation increased by $0.4 million related to a charge taken on a modification of
options granted to a former executive at June 30, 2005.
Depreciation expense
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:Depreciation
    $
    220
    
    $
    205
    
    
    7
    %Percentage of total revenues
    
    3
    %
    
    7
    %Six months ended:Depreciation
    $
    453
    
    $
    424
    
    
    7
    %Percentage of total revenues
    
    4
    %
    
    7
    %Depreciation
  expense increased by less than $0.1 million for the three and six month periods
  ended June 30, 2005.
Amortization of intangible assets
30
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:Amortization of intangible assets
    $
    179
    
    $
    1
    
    
    17,800
    %Percentage of total revenues
    
    3
    %
    
    
    %Six months ended:Amortization of intangible assets
    $
    357
    
    $
    4
    
    
    8,825
    %Percentage of total revenues
    
    3
    %
    
    
    %Amortization of intangible assets relates to the amortization of patents, trademarks and other intangible
assets acquired in the Unicast acquisition. Intangible assets, excluding Goodwill, included trademarks,
acquired technology and website partner relationships. Viewpoint will be amortizing these values
over the useful lives which range from 3 to 10 years.
Interest and other income, net
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:Interest and other income, net
    $
    32
    
    $
    27
    
    
    19
    %Percentage of total revenues
    
    0
    %
    
    1
    %Six months ended:Interest and other income, net
    $
    56
    
    $
    46
    
    
    22
    %Percentage of total revenues
    
    0
    %
    
    1
    %Interest and other income, net, primarily consists of interest and investment income on cash, cash
equivalents and marketable securities. As a result, interest and other income, net, fluctuates with
changes in the Companys cash, cash equivalents and marketable securities balances and market
interest rates.
Interest expense
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:Interest expense
    $
    (339
    )
    $
    (236
    )
    
    44
    %Percentage of total revenues
    
    (5
    )%
    
    (8
    )%Six months ended:Interest expense
    $
    (655
    )
    $
    (486
    )
    
    35
    %Percentage of total revenues
    
    (5
    )%
    
    (8
    )%Interest expense consists of interest paid and accrued, and amortization of debt discount and debt
issue costs on the Companys outstanding convertible, subordinated notes and the debt assumed
from Unicast following the acquisition on January 3, 2005. The increase is the result of interest
expense recorded on the Unicast debt.
Loss on conversion of debt
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:Loss on conversion of debt
    $
    
    
    $
    (212
    )
    
    (100
    )%Percentage of total revenues
    
    
    %
    
    (8
    )%Six months ended:Loss on conversion of debt
    $
    
    
    $
    (810
    )
    
    (100
    )%Percentage of total revenues
    
    
    %
    
    (13
    )%31
On March 17, 2004, one of the institutional investors holding the convertible notes converted $0.9
million of outstanding notes for shares of the Companys common stock. The Company recorded
a loss of $1.4 million related to the change in the fair value of the conversion feature at the time
of the conversion. In addition, on the same day as the conversion, the Company sold 1.5 million shares
of common stock in a private placement to the institutional investor, for $3.7 million or $2.45 per
share. The Company recorded a loss on conversion of debt in the amount of $0.6 million, which represented
the write-off of unamortized debt issuance costs of $0.1 million and the difference between the carrying
value of the convertible notes and the fair value of the common stock issued based upon the closing
price of the Companys stock on the day of the sale in the amount of $0.5 million.
During the period beginning on April 15, 2004 and May 20, 2004  a period which covered 25 consecutive
trading days  the dollar volume-weighted average price of the Companys common stock exceeded
150% of the conversion price applicable to the outstanding convertible notes and the Company determined
to exercise its right to convert the outstanding notes into shares of Company common stock. Accordingly,
on May 20, 2004, the Company informed the institutional investors holding the outstanding convertible
notes that it would exercise its right to convert that debt. On June 18, 2004, the Company completed
the conversion of the remaining outstanding convertible notes of $1.8 million and the related outstanding
interest into 1.7 million shares of Viewpoint common stock. In addition, the Company recorded a loss
on conversion which represented the difference between the fair value of the common stock issued
in exchange for the notes and the carrying value of the convertible notes on the date of conversion.
This change was primarily comprised of the write-off of unamortized loan discount and debt issuance costs.
Changes in fair value of warrants to purchase common stock and conversion options of convertible notes
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:Changes in fair value of warrants to             
      purchase common stock and conversion    
      options of convertible notes
    $
    648
    
    $
    3,050
    
    
    (79
    )%Percentage of total revenues
    
    10
    %
    
    109
    %Six months ended:Changes in fair value of warrants to 
      purchase common stock and conversion      
      options of convertible notes
    $
    830
    
    $
    (3,553
    )
    
    (123
    )%Percentage of total revenues
    
    7
    %
    
    (56
    )%On March 25, 2003, the Company entered into Redemption, Amendment and Exchange Agreements with the

three institutional investors with whom it had completed the private placement of convertible notes

and warrants on December 31, 2002, extinguishing the original convertible notes. In conjunction
with
the extinguishment, the Company paid $3.3 million, issued new convertible notes in the principal

amount of $2.7 million and issued $1.4 million shares of its common stock with a market value of

$0.7 million.
The Company bi-furcated the fair value of the conversion options from the new convertible notes since
the conversion options were determined to not be clearly and closely related to the debt host. In
addition, since the effective registration of the securities underlying the conversion options is
an event outside of the control of the Company, the Company recorded the fair value of the conversion
options as long-term liabilities, as it was assumed that the Company would be required to net-cash
settle the underlying securities.
The Company recorded income or loss based on the decrease or increase, respectively, in the fair values

of the new conversion options and original warrants in the Companys consolidated statements

of operations. The amortization of discount on the new convertible notes and debt issue costs were

accounted for using the effective interest method.
In March 2004, one of the institutional investors holding the convertible notes converted $0.9 million
of outstanding notes with Company common stock.
For the three months ended June 30, 2005, the Company recorded income based on the change in the fair
value of the original warrants of $0.6 million. The Company recorded income for the three months
ended June 30,
32
2004 based on the decrease in fair values of the conversion options of its convertible notes of $2.3
million and warrants of $0.7 million.
For the six months ended June 30, 2005, the Company recorded income based on the change in the fair
value of the original warrants of $0.8 million. For the six months ended June 30, 2004, the Company
recorded a loss based on the increase in fair values of the conversion options of its convertible
notes of $3.0 million and warrants of $0.6 million.
Provision for income taxes
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:Provision for income taxes
    $
    9
    
    $
    25
    
    
    (64
    )%Percentage of total revenues
    
    
    %
    
    1
    %Six months ended:Provision for income taxes
    $
    12
    
    $
    35
    
    
    (66
    )%Percentage of total revenues
    
    
    %
    
    1
    %Provision for income taxes consists primarily of certain minimum state and local income taxes.
33
Adjustment to net loss on disposal of discontinued operations
June 30,2005
    
    2004
    
    % Change(dollars in thousands)Three months ended:Adjustment to net loss on disposalof discontinued operations, net of tax
    $
    
    
    $
    20
    
    
    (100
    )%Percentage of total revenues
    
    
    %
    
    1
    %Six months ended:Adjustment to net loss on disposalof discontinued operations, net of tax
    $
    145
    
    $
    39
    
    
    272
    %Percentage of total revenues
    
    1
    %
    
    1
    %In December 1999, the Board of Directors of the Company approved a plan to focus exclusively on its
interactive media technologies and digital content creation services and to correspondingly divest
itself of its prepackaged software graphics business. Accordingly, these operations are reflected
as discontinued operations for all periods presented in the accompanying consolidated statements
of operations.
The decrease in the adjustment to net loss on disposal of discontinued operations for the three months
ended June 30, 2005 was less then $0.1 million. The increase in the adjustment to net loss on disposal
of discontinued operations for the six months ended June 30, 2005, represents a settlement of a lawsuit
in the Companys favor related to discontinued operations.
The adjustment to net loss on disposal of discontinued operations for the three and six months ended
June 30, 2004 represents royalty payments received for certain prepackaged software.
Factors That May Affect Future Results of Operations
We believe that in the future our results of operations could be affected by various factors including:

We have a history of losses and expect to incur losses in the future, which may cause our share price
to decline.
We may have to obtain financing on less favorable terms, which could dilute current stockholders
ownership interests in the Company.
Our business is difficult to evaluate because we have a limited operating history and have only relatively
recently launched our search toolbar and creative innovator products.
Our competitors in the search business include much larger companies such as Google, Microsoft, Yahoo!
and others that have significantly greater resources than we do to build a business.
Our efforts to distribute our graphically enhanced search toolbar may experience setbacks limiting
or reducing our search revenue.
The success of our graphically enhanced search operations depends on users satisfaction with
search results supplied by Yahoo!.
We may be unable to successfully replace our search results vendor when our distribution contract with
Yahoo! expires in March 2006.
Our software products may be wrongly labeled as spyware or adware which might lead to its uninstallation
causing a decrease in our revenues.
Our business may not grow if the internet advertising market does not continue to develop or if we
are unable to successfully implement our business model.
Our failure to successfully compete may hinder our growth.
Our revenues will be subject to seasonal fluctuations.34

We may enter into business combinations and strategic alliances which could be difficult to integrate
and may disrupt our business.
We may need to develop new products or other untested methods of increasing sales with our existing
products or distribution network to generate sales and if we are unsuccessful the growth of our business
may cease or decline.
We will need to keep pace with rapid technological change in the internet search and advertising industries.
Our ad campaign management and deployment solution may not be successful and may cause business disruption.
We might experience significant defects in our products.
Our technical systems are vulnerable to interruption and damage.
Our stock price is volatile, which could subject us to class action litigation.
Our charter documents could make it more difficult for an unsolicited third party to acquire us.
The market for digital visualization solutions is characterized by rapidly changing technology, and
if we do not respond in a timely manner, our products and technologies may not succeed in the marketplace.
We may be unable to protect our intellectual property rights.
We may be liable for infringing the intellectual property rights of others.
Regulatory and legal uncertainties could harm our business.
Internet security poses risks to our entire business.Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting

Standards (SFAS) No. 123 (revised 2004) (SFAS 123R), Share-Based
Payment,
which requires companies to expense the fair value of employee stock options and
other forms of stock-based
compensation for interim periods that begin after June 15, 2005. This
requirement represents a significant
change because stock option awards have not been recognized
as compensation expense in the Companys
historical consolidated financial statements under
Accounting Principles Board Opinion No. 25 (APB
25), Accounting for Stock Issued
to Employees. SFAS 123R requires the cost of an
award, based upon fair value on the date
of grant, to be recognized over the period during which
an employee is required to provide service
in exchange for the award (usually the vesting period).
The fair value of the award on the date
of grant will be estimated using option pricing models. In
April 2005, the Securities and Exchange
Commission (the SEC) delayed the effective date
of SFAS 123R for public companies until
the first annual period, rather than the first interim period,
that begins after June 15, 2005.
The Company will adopt SFAS 123R on January 1, 2006 and recognize
compensation expense prospectively
for non-vested stock options outstanding at December 31, 2005
and for all future stock option grants.
The effect of the adoption of SFAS No. 123(R) is expected
to be comparable to the effect disclosed
on a pro forma basis resulting from the application of the
current fair-value recognition provisions
of SFAS No. 123, as shown in Note 1.
In
  March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
  Asset Retirement Obligations (FIN 47), which clarifies that the
  term conditional asset retirement, as used in SFAS No. 143, Accounting
  for Asset Retirement Obligations, refers to a legal obligation to perform an
  asset retirement activity in which the timing and/or method of settlement are
  conditional on a future event that may or may not be within the control of the
  entity. FIN 47 requires that a liability be recognized for the fair value of
  a conditional asset retirement obligation when incurred, if the fair value of
  the liability can be reasonably estimated. Uncertainty about the timing and
  method of settlement of a conditional asset retirement obligation would be factored
  into the measurement of the liability when sufficient information exists. FIN
  47 is effective no later than the end of fiscal years ending after December
  15, 2005. Management believes that the future adoption of FIN 47 will not have
  a material impact on the Companys financial statements.
35
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections - a replacement

of APB Opinion No. 20 and SFAS No. 3. This statement provides guidance on the accounting
for
and reporting of accounting changes and error corrections. It requires, unless impracticable,
retrospective
application for reporting a change in accounting principle, unless the newly adopted
accounting principle
specifies otherwise, and reporting of a correction of an error. The provisions
of this statement
are effective for accounting changes and corrections of errors made in fiscal
years beginning after
December 15, 2005. The adoption of this statement is not expected to materially
impact the Companys
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities totaled $4.6 million at June 30, 2005, down from
$8.7 million at December 31, 2004.
June 30,2005
    
    2004(dollars in millions)Cash used in operating activities
    $
    (3.7
    )
    $
    (4.7
    )Cash provided by (used in) investing activities
    
    1.0
    
    
    (6.7
    )Cash provided by financing activities
    
    0.4
    
    
    3.9Operating activities
In the six months ended June 30, 2005, cash used in operating activities was $3.7 million, a decrease of $1.0 million compared to the six months ended June 30, 2004. The decrease is primarily due to the Companys improved operating performance, and the payment received of 1.9 million from Unicast receivables related to balances that existed prior to the acquisition.  This was offset by the payment of Unicast liabilities of $2.6 million related to balances prior to the acquisition.  The decrease in the net loss number was due to a charge for the six months ended June 30, 2004 related to the change in fair value of warrants to purchase common stock and conversion feature of convertible debt and loss on conversion of debt of $4.4 million. The convertible notes associated with this charge were converted into equity during 2004, and therefore the expense related to the conversion option did
not occur in 2005.

Investing activities
In the six months ended June 30, 2005, cash provided by investing activities was $1.0 million, primarily
due to the net proceeds from sales and maturities of marketable securities. Capital expenditures
were $0.3 million.
In the six months ended June 30, 2004, cash used in investing activities was $6.7 million, primarily
due to net purchases of marketable securities of $6.5 million. Capital expenditures were $ 0.2 million.
Financing activities
In the six months ended June 30, 2005, net cash provided by financing activities was $0.4 million,
resulting solely from the exercise of stock options.
In the six months ended June 30, 2004, net cash provided by financing activities was $3.9 million.
This primarily resulted from the issuance of 1.5 million shares of common stock to an institutional
investor on March 16, 2004 for $3.7 million.
As of June 30, 2005, the Company had cash commitments totaling approximately $12.5 million through
2011, related to long-term convertible notes, and future minimum lease payments for office space,
and equipment.
36
Payments Due By Period(dollars in thousands)Total
    
    1 Year or
      Less
    
    2-3 Years
    
    4-5 Years
    
    More than 5
      YearsLong-Term Debt Obligations
    
    3,500
    
    
    450
    
    
    3,050
    
    
    
    
    
    Operating Lease Obligations
    
    4,412
    
    
    939
    
    
    1,965
    
    
    1,508
    
    
    Interest Payments on Long-TermDebt Obligations
    
    532
    
    
    166
    
    
    295
    
    
    66
    
    
    5Employee Agreement
    
    165
    
    
    165
    
    
    
    
    
    
    
    
    Unicast Debt Obligations
    
    3,155
    
    
    389
    
    
    778
    
    
    648
    
    
    1,340Purchase Obligations
    
    719
    
    
    719
    
    
    
    
    
    
    
    
    Total
    
    12,483
    
    
    2,828
    
    
    6,088
    
    
    2,222
    
    
    1,345Unicast Acquisition
On December 1, 2004, Viewpoint Corporation entered into an agreement to acquire all of the outstanding

capital stock of Unicast Communications Corp. (Unicast). The transaction closed on
  January
  3, 2005, and Viewpoint assumed ownership of Unicast as a wholly owned subsidiary at that
  date. The
  aggregate purchase price for the acquisition was $3.5 million.
Under
  the terms of the agreement, Viewpoint issued an aggregate of 1.1 million shares
  of Viewpoint common stock, with a fair value of $3.0 million to the selling
  stockholders of Unicast and paid $0.4 million in cash and acquisition costs
  of $0.1 million. Viewpoint also assumed negative net working capital from Unicast
  of $1.2 million. Based upon the working capital calculation during the period
  following the acquisition Viewpoint has no additional obligation to issue shares
  or pay cash to the selling stockholders of Unicast.
Additionally,
  long-term debt issued by Unicast (Unicast notes) remains outstanding
  at the Unicast subsidiary level following the closing. This debt is comprised
  primarily of two notes. Unicast issued an unsecured promissory note dated February
  27, 2004 in the principal amount of $1.0 million. This promissory note bears
  interest at 5% per annum, compounding annually, and matures in February 2011.
  No payments of principal or interest are due until the maturity date. In addition,
  Unicast issued an amended and restated secured promissory note dated February
  27, 2004 in the principal amount of $2.0 million. This promissory note bears
  interest of 5% per annum and is collateralized by substantially all of the Unicast
  subsidiarys assets. Concurrently with the closing of the Unicast acquisition,
  Viewpoint made a payment of $0.3 million to the secured note holder which was
  applied towards reducing the amount outstanding under the promissory note. Viewpoint
  will become an additional obligor under the promissory note and Viewpoints
  assets will become additional collateral to secure the obligations if certain
  contingencies occur, such as Viewpoints failure to operate the Unicast
  ad-serving business through the Unicast subsidiary or the ad-serving business
  fails to achieve certain revenue targets. No payments under the secured promissory
  note are due until March 2006. All unpaid principal and interest is payable
  in 60 equal monthly installments from March 2006 through March 2011 amounting
  to $2.2 million.
Viewpoint recorded all working capital assets and liabilities at their fair market value on the date

of the acquisition. Liabilities assumed included an obligation to make certain payments on behalf

of the selling stockholders in the maximum amount of $0.4 million, payable in equal bi-monthly
installments
over the one-year period following the closing.
Viewpoint assessed the values of assets other than working capital assets purchased in the acquisition.

Tangible equipment value was determined based on fair market value at the date of acquisition.
The
remaining useful life of this equipment was predominantly determined to be one year. Intangible
values
acquired included trademarks, acquired technology, website partner relationships and goodwill.
Acquired
technology was determined to have a life of three years while the other intangible values
were determined
to have a life of 5-10 years. Unicast had no in-process research and development.
Goodwill was determined based upon the residual value based upon fair value of the common stock issued,
the cash paid less the liabilities assumed less the identifiable asset values. Values assigned to
goodwill and other acquired assets and liabilities are preliminary and are subject to adjustment
based upon finalizing the fair values of acquired assets and liabilities. During the quarter ended
June 30, 2005, the Company changed its initial estimate of
37
the fair value of the acquired website relationships and certain liabilities the affect of which increased
goodwill by less then $0.1 million from the amounts recorded at March 31, 2005. Consideration paid
for the acquisition amounted to $3.5 million, made up of cash consideration of $0.4 million, acquisition
costs of $0.1 million and the issuance of 1.1 million shares of common stock valued at $3.0 million.
Convertible Notes
On December 31, 2002, the Company completed a private placement of convertible notes and warrants in
which it issued to three institutional investors, 4.95% convertible notes having an aggregate principal
amount of $7.0 million, and warrants to purchase 0.7 million shares of Company common stock. The
warrants expire on December 31, 2006, and are exercisable at a price of $2.26 per share.
On March 25, 2003, the Company entered into Redemption, Amendment and Exchange Agreements with the
three institutional investors with whom it had completed the private placement of convertible notes
and warrants on December 31, 2002. The Company recorded a loss for the quarter ended June 30, 2003,
on the early extinguishment of the original convertible notes in the amount of $1.7 million of which
$0.7 related to the write-off of deferred loan costs. In conjunction with the extinguishment, the
Company paid $3.3 million, issued new convertible notes in the principal amount of $2.7 million and
issued $1.4 million shares of its common stock with a market value of $0.7 million. The difference
between (i) the carrying value of the outstanding convertible notes exchanged and (ii) cash paid
and the fair value of the common stock and new convertible notes issued, amounted to $1.0 million
and was included in the loss on early extinguishment of debt.
During 2004 all of the outstanding convertible notes were converted to common stock. As of June 30,
2005, warrants to purchase 0.7 million shares remain outstanding.
Subordinated NotesOn March 26, 2003, Viewpoint Corporation entered into a Securities Purchase Agreement with three other
accredited investors, pursuant to which it received $3.5 million in exchange for an aggregate of
$3.5 million principal amount of 4.95% subordinated notes and 3.6 million shares of Viewpoint common
stock. The subordinated notes are scheduled to mature on March 31, 2006. Interest on these notes
is payable quarterly in arrears in cash. The Company has the right at any time to redeem up to all
of the outstanding notes at par plus accrued and unpaid interest.
On July 23, 2005 a holder of subordinated notes in the principal amount of $3.0 million agreed to extend
the maturity date of those notes to March 31, 2008. The Company paid a fee of less than $1.0 million
to secure this agreement. Simultaneously the Company sold this holder approximately 1.4 million shares
of common stock for $2.0 million.
Amended and Restated Notes
On July 27, 2005, the Company and a holder of the subordinated debt amended the 4.95% subordinated

note in the principal amount of $3.1 million to extend the maturity date from March 31, 2006 to
March
31, 2008 in exchange for the payment by Viewpoint of $0.1 million to the holder of the subordinated

note. In addition, the Company and the holder entered into a Stock Purchase Agreement, dated as
of
July 27, 2005, under which the Company issued 1.3 million shares of Company common stock in
a private
placement to the holder at a purchase price of $1.55 per share (resulting in aggregate
gross proceeds
of $2.0 million). The securities offered and sold in the private placement have
not been registered
under the Securities Act of 1933, as amended and were sold in reliance upon
the exemption from securities
registration afforded by Regulation D. In connection with the private
placement, the Company entered
into a Registration Rights Agreement with the holder pursuant to
which the Company is required to
file a registration statement with the SEC covering the shares
within 45 days of the closing of the
private placement.
Other Transactions
In October 2003, the Company entered into an amended license agreement with AOL which provided for
payments by AOL of $10.0 million. The agreement contains multiple elements consisting of a perpetual
broadcast license, a perpetual source code license, quarterly updates to the source code through
December 2005, and maintenance and consulting services. The Company will recognize revenue from this
agreement ratably, through
38
December 31, 2005, which represents the duration of the Companys obligation for post-contract
customer support including quarterly upgrades and maintenance requirements.
The Company implemented a restructuring plan in September 2003, which was designed to streamline the
business. Under the plan the Company eliminated 24 sales and marketing, research and development,
and general and administrative positions. The Company incurred a restructuring charge of $0.5 million
related to severance arrangements. The charge was recorded on the income statement as a restructuring
and impairment charge. This restructuring plan was completed by September 30, 2003. In November 2003,
however, the Company increased the restructuring charge by $0.1 million in settlement of an action
brought by one of the terminated employees. In January 2004 the Company recorded a non-cash adjustment
of less then $0.1 million to the restructuring accrual to reflect payments that were less than originally
contemplated under the plan. This restructuring plan was completed by June 30, 2004.
The Company had cash, cash equivalents and marketable securities of $4.6 million at June 30, 2005.
During the quarter ended June 30, 2005, net cash used in operations amounted to $0.4 million. As
of June 30, 2005, the Company had an accumulated deficit of $256.5 million. There can be no assurance
that Viewpoint will achieve or sustain positive cash flows from operations or profitability.
The Company believes that its current cash, cash equivalents, and marketable securities balances and
cash provided by expected future operations are sufficient to meet its operating cash flow needs
and anticipated capital expenditure requirements through the next twelve months. This includes the
payment of $0.5 million in subordinated notes due in March 2006.
The Company has contingency plans for 2005 if expected revenue targets are not achieved. These plans

include further workforce reductions as well as reductions in overhead and capital expenditures.

The Company may seek additional funds when necessary through public or private equity financing
or
from other sources to fund operations and pursue growth, although there are no assurances that
the
Company can obtain such financing with reasonable terms.
Other then the shares sold on July 27, 2005, the Company has no commitment for additional financing
and may experience difficulty in obtaining additional financing on favorable terms, if at all. Any
financing the Company obtains may contain covenants that restrict the Companys freedom to operate
the business or may have rights, preferences or privileges senior to the Companys common stock
and may dilute the Companys current shareholders ownership interest in Viewpoint. If
the Company is unable to achieve profitable operations and/or raise additional capital, future operations
will need to be scaled back further or discontinued.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to concentration of credit risk and interest rate risk related to cash, cash
equivalents and marketable securities. Credit risk is managed by limiting the amount of securities
placed with any one issuer, investing in high-quality marketable securities and securities of the
U.S. government and limiting the average maturity of the overall portfolio. The majority of the Companys
portfolio, which is classified as available-for-sale, is comprised of fixed income securities that
are subject to the risk of market interest rate fluctuations, and all of the Companys securities
are subject to risks associated with the ability of the issuers to perform their obligations under
the instruments. The Company may suffer losses in principal if forced to sell securities, which have
declined in market value due to changes in interest rates.
Item 4. Controls and Procedures
As required by Rule 13a-15(b), Viewpoint management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation as of the end of the period covered by this report, of
the effectiveness of the Companys disclosure controls and procedures as defined in Exchange
Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective as of the end
of the period covered by this report. As required by Rule 13a-15(d), Viewpoint management, including
the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Companys
internal control over financial reporting to determine whether any changes occurred during the quarter
covered by this report, including changes created by the Unicast Acquisition, that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting. Based on that evaluation, there has been no such change during the quarter covered
by this report.
39
PART II - OTHER INFORMATION
Item 4.            Submission of Matters to
a Vote of Security holders
The Annual Meeting of Stockholders of Viewpoint Corporation was held on June 22, 2005. A proposal to
elect eight (8) members of the Board of Directors to serve for a one-year term expiring at the annual
meeting of stockholders in 2006 was approved by the stockholders with the nominees receiving the
following votes:
For
    
    WithheldJerry Amato
    
    45,542,179
    
    350,252Thomas Bennett
    
    45,220,203
    
    672,228James Crabbe
    
    45,561,966
    
    330,465Stephen Duff
    
    45,562,889
    
    329,542Samuel Jones
    
    45,527,397
    
    365,034Dennis Raney
    
    45,563,563
    
    328,868Robert Rice
    
    44,647,075
    
    1,245,356Patrick Vogt
    
    45,561,468
    
    330,963Stockholders ratified the appointment of PricewaterhouseCoopers LLP as independent public accountants
of the Company for the 2005 fiscal year. This proposal received 45,773,590 votes in favor and 90,249
against, with 28,592 abstaining. Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number
    
    Exhibit Title10.1
    
    Consulting Agreement of Brian ODonoghue31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(b) Reports on Form 8-K
The Company filed a report on Form 8-K on May 5, 2005, to furnish its press release concerning its
results of operations for the quarterly period ending on March 31, 2005.
On June 10, 2005, the Company filed a report on Form 8-K announcing the resignation of its Senior Vice
President of Corporate Development and General Counsel of the Company and the hiring of a Vice
President and General Counsel of the Company.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VIEWPOINT CORPORATIONDated: August 9, 2005
    By:
    /s/ JAY S. AMATOJay S. Amato
      President and Chief Executive OfficerDated: August 9, 2005
    By:
    /s/ WILLIAM H. MITCHELLWilliam H. Mitchell
      Chief Financial OfficerDated: August 9, 2005
    By:
    /s/ CHRISTOPHER C. DUIGNANChristopher C. Duignan
      Chief Accounting Officer41