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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

|           |                                                                                         |                                                  
|---------- | --------------------------------------------------------------------------------------- | -------------------------------------------------
|(Mark One) |                                                                                        
|[X]        | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|           |                                                                                         | For the quarterly period ended September 30, 2003

or

|                                |                                                                                          |                                 
|------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------
|[  ]                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|                                |                                                                                          | For the transition period fromto
|Commission file number: 0-27168



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VIEWPOINT CORPORATION

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-4102687                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

498 Seventh Avenue, Suite 1810, New York, NY 10018
(Address of principal executive offices and zip code)

(212) 201-0800
(Registrants telephone number, including area code)



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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 [X] No [  ]

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

As of November 11, 2003, 49,123,007 shares of $0.001 par value common stock
were outstanding.



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TABLE OF CONTENTS



|                                |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I   FINANCIAL INFORMATION
|                                | Item 1. Consolidated Financial Statements                                                    
|                                |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                | Item 4. Controls and Procedures                                                              
|PART II - OTHER INFORMATION    
|                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                     
|EMPLOYMENT AGREEMENT: AMATO    
|EMPLOYMENT AGREEMENT: MITCHELL 
|EMPLOYMENT AGREEMENT: RICE     
|302 CERTIFICATION              
|302 CERTIFICATION              
|906 CERTIFICATION              



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##### Table of Contents



TABLE OF CONTENTS

|        |  |                                                                                       |                                |                                                                                                             |    |  |    |      |  | 
|------- |  | ------------------------------------------------------------------------------------- | ------------------------------ | ----------------------------------------------------------------------------------------------------------- | -- |  | -- | ---- |  | 
|        |  |                                                                                       |                                |                                                                                                             |    |  |    | Page
|        |  |                                                                                       |                                |                                                                                                             |    |  |    |     
|        |  |                                                                                       | PART I  FINANCIAL INFORMATION |                                                                                                             |    |  |   
|Item 1. |  | Consolidated Financial Statements (unaudited)                                         |                                |                                                                                                             |    | 
|        |  |                                                                                       |                                | Consolidated Balance Sheets  September 30, 2003
and December 31, 2002 (unaudited)                          |    |  | 3  |     
|        |  |                                                                                       |                                | Consolidated Statements of Operations  Three and nine months
ended September 30, 2003 and 2002 (unaudited) |    |  | 4  |     
|        |  |                                                                                       |                                | Consolidated Statements of Cash Flows  Nine months ended
September 30, 2003 and 2002 (unaudited)           |    |  | 5  |     
|        |  |                                                                                       |                                | Notes to Consolidated Financial Statements (unaudited)                                                      |    |  | 7  |     
|Item 2. |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                |                                                                                                             | 17 | 
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |                                |                                                                                                             | 35 | 
|Item 4. |  | Controls and Procedures                                                               |                                |                                                                                                             | 35 | 
|        |  |                                                                                       | PART II  OTHER INFORMATION    |                                                                                                             |    |  |   
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |                                |                                                                                                             | 37 | 
|        |  |                                                                                       |                                | Signatures                                                                                                  |    |  | 38 |     

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##### Table of Contents






PART I   FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements




VIEWPOINT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)

|                                                                                                                                                                                                               |                                                        |                                            |          |               |        |              |          |        |        | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------ | -------- | ------------- | ------ | ------------ | -------- | ------ | ------ | 
|                                                                                                                                                                                                               |                                                        |                                            |          | September 30, |        | December 31,
|                                                                                                                                                                                                               |                                                        |                                            |          | 2003          |        | 2002        
|                                                                                                                                                                                                               |                                                        |                                            |          |               |        |             
|ASSETS                                                                                                                                                                                                         |                                                        |                                            |          |               |        |              |          |       
|Current assets:                                                                                                                                                                                                |                                                        |                                            |          |               |        |              |          |       
|                                                                                                                                                                                                               | Cash and cash equivalents                              |                                            | $        | 746           |        |              | $        | 10,678 |       
|                                                                                                                                                                                                               | Marketable securities                                  |                                            |          | 1,017         |        |              |          | 890    |       
|                                                                                                                                                                                                               | Accounts receivable, net                               |                                            |          | 1,218         |        |              |          | 2,925  |       
|                                                                                                                                                                                                               | Related party accounts receivable, net                 |                                            |          | 286           |        |              |          | 838    |       
|                                                                                                                                                                                                               | Notes receivable, net                                  |                                            |          |              |        |              |          | 750    |       
|                                                                                                                                                                                                               | Prepaid expenses and other current assets              |                                            |          | 633           |        |              |          | 599    |       
|                                                                                                                                                                                                               |                                                        |                                            |          |               |        |              |          |        |       
|                                                                                                                                                                                                               |                                                        | Total current assets                       |          |               | 3,900  |              |          |        | 16,680 | 
|Restricted cash                                                                                                                                                                                                |                                                        |                                            | 455      |               |        |              | 987      |       
|Property and equipment, net                                                                                                                                                                                    |                                                        |                                            | 2,111    |               |        |              | 3,591    |       
|Goodwill, net                                                                                                                                                                                                  |                                                        |                                            | 31,276   |               |        |              | 31,276   |       
|Intangible assets, net                                                                                                                                                                                         |                                                        |                                            | 187      |               |        |              | 165      |       
|Other assets                                                                                                                                                                                                   |                                                        |                                            | 294      |               |        |              | 653      |       
|                                                                                                                                                                                                               |                                                        |                                            |          |               |        |              |          |        |       
|                                                                                                                                                                                                               |                                                        | Total assets                               |          | $             | 38,223 |              |          | $      | 53,352 | 
|                                                                                                                                                                                                               |                                                        |                                            |          |               |        |              |          |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                           |                                                        |                                            |          |               |        |              |          |       
|Current liabilities:                                                                                                                                                                                           |                                                        |                                            |          |               |        |              |          |       
|                                                                                                                                                                                                               | Accounts payable                                       |                                            | $        | 1,994         |        |              | $        | 2,962  |       
|                                                                                                                                                                                                               | Accrued expenses                                       |                                            |          | 1,520         |        |              |          | 759    |       
|                                                                                                                                                                                                               | Due to related parties, net                            |                                            |          | 2,928         |        |              |          | 2,920  |       
|                                                                                                                                                                                                               | Deferred revenues                                      |                                            |          | 379           |        |              |          | 334    |       
|                                                                                                                                                                                                               | Related party deferred revenues                        |                                            |          | 687           |        |              |          | 249    |       
|                                                                                                                                                                                                               | Accrued incentive compensation                         |                                            |          | 545           |        |              |          | 545    |       
|                                                                                                                                                                                                               | Current liabilities related to discontinued operations |                                            |          | 231           |        |              |          | 231    |       
|                                                                                                                                                                                                               |                                                        |                                            |          |               |        |              |          |        |       
|                                                                                                                                                                                                               |                                                        | Total current liabilities                  |          |               | 8,284  |              |          |        | 8,000  | 
|Convertible notes                                                                                                                                                                                              |                                                        |                                            | 3,001    |               |        |              | 6,712    |       
|Warrants to purchase common stock                                                                                                                                                                              |                                                        |                                            | 130      |               |        |              | 288      |       
|Subordinated notes                                                                                                                                                                                             |                                                        |                                            | 1,685    |               |        |              |         |       
|Commitments and contingencies (Note 7)                                                                                                                                                                         |                                                        |                                            |          |               |        |              |          |       
|Stockholders equity:                                                                                                                                                                                          |                                                        |                                            |          |               |        |              |          |       
|Preferred stock, $.001 par value; 5,000 shares authorized  no shares
issued and outstanding at September 30, 2003 and December 31, 2002                                                                       |                                                        |                                            |         |               |        |              |         |       
|Common stock, $.001 par value; 75,000 shares authorized 
46,158 shares issued and 45,998 shares outstanding at
September 30, 2003 and 41,179 shares issued and 41,019 shares
outstanding at December 31, 2002 |                                                        |                                            | 46       |               |        |              | 41       |       
|Paid-in capital                                                                                                                                                                                                |                                                        |                                            | 269,119  |               |        |              | 267,569  |       
|Deferred compensation                                                                                                                                                                                          |                                                        |                                            | (586     | )             |        |              | (4,130   | )     
|Treasury stock at cost; 160 shares at September 30, 2003 and
December 31, 2002                                                                                                                                 |                                                        |                                            | (1,015   | )             |        |              | (1,015   | )     
|Accumulated other comprehensive loss                                                                                                                                                                           |                                                        |                                            | (56      | )             |        |              | (36      | )     
|Accumulated deficit                                                                                                                                                                                            |                                                        |                                            | (242,385 | )             |        |              | (224,077 | )     
|                                                                                                                                                                                                               |                                                        |                                            |          |               |        |              |          |        |       
|                                                                                                                                                                                                               |                                                        | Total stockholders equity                 |          |               | 25,123 |              |          |        | 38,352 | 
|                                                                                                                                                                                                               |                                                        |                                            |          |               |        |              |          |        |       
|                                                                                                                                                                                                               |                                                        | Total liabilities and stockholders equity |          | $             | 38,223 |              |          | $      | 53,352 | 
|                                                                                                                                                                                                               |                                                        |                                            |          |               |        |              |          |        |       

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

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VIEWPOINT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|----------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------ | ----- | ----------------- | - | ------ | ----- | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                  |                                                                                                                                                                                                                                                                         |   | Three Months Ended |       | Nine Months Ended
|                                                                  |                                                                                                                                                                                                                                                                         |   | September 30,      |       | September 30,    
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                  
|                                                                  |                                                                                                                                                                                                                                                                         |   | 2003               |       | 2002              |   | 2003   |       | 2002
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |     
|Revenues:                                                         |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |       
|                                                                  | Licenses                                                                                                                                                                                                                                                                |   | $                  | 317   |                   |   | $      | 1,633 |      |   | $       | 2,166  |   |   | $       | 4,129  |  
|                                                                  | Related party licenses                                                                                                                                                                                                                                                  |   |                    |      |                   |   |        | 2,024 |      |   |         | 1,060  |   |   |         | 6,929  |  
|                                                                  | Services                                                                                                                                                                                                                                                                |   |                    | 1,508 |                   |   |        | 605   |      |   |         | 3,705  |   |   |         | 2,673  |  
|                                                                  | Related party services                                                                                                                                                                                                                                                  |   |                    | 693   |                   |   |        | 1,064 |      |   |         | 4,086  |   |   |         | 1,757  |  
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Total revenues                                                    |                                                                                                                                                                                                                                                                         |   | 2,518              |       |                   |   | 5,326  |       |      |   | 11,017  |        |   |   | 15,488  |       
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Cost of revenues:                                                 |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |       
|                                                                  | Licenses                                                                                                                                                                                                                                                                |   |                    | 21    |                   |   |        | 6     |      |   |         | 96     |   |   |         | 251    |  
|                                                                  | Services                                                                                                                                                                                                                                                                |   |                    | 1,419 |                   |   |        | 1,125 |      |   |         | 4,967  |   |   |         | 2,947  |  
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Total cost of revenues                                            |                                                                                                                                                                                                                                                                         |   | 1,440              |       |                   |   | 1,131  |       |      |   | 5,063   |        |   |   | 3,198   |       
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Gross profit                                                      |                                                                                                                                                                                                                                                                         |   | 1,078              |       |                   |   | 4,195  |       |      |   | 5,954   |        |   |   | 12,290  |       
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Operating expenses:                                               |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |       
|                                                                  | Sales and marketing (including non-cash stock-based
compensation
charges totaling $88 and $552 for the three months ended
September 30, 2003 and 2002, respectively, and $467 and $1,992
for the nine months ended September 30, 2003 and 2002,
respectively)           |   |                    | 1,637 |                   |   |        | 4,068 |      |   |         | 7,625  |   |   |         | 11,234 |  
|                                                                  | Research and development (including non-cash stock-based
compensation charges totaling $138 and $366 for the three
months
ended September 30, 2003 and 2002, respectively, and $803 and
$1,071 for the nine months ended September 30, 2003 and 2002,
respectively)     |   |                    | 1,201 |                   |   |        | 1,439 |      |   |         | 4,125  |   |   |         | 4,619  |  
|                                                                  | General and administrative (including non-cash stock-based
compensation charges totaling $294 and $282 for the three
months
ended September 30, 2003 and 2002, respectively, and $1,118
and
$1,110 for the nine months ended September 30, 2003 and 2002,
respectively) |   |                    | 3,133 |                   |   |        | 2,247 |      |   |         | 8,058  |   |   |         | 6,846  |  
|                                                                  | Depreciation                                                                                                                                                                                                                                                            |   |                    | 383   |                   |   |        | 493   |      |   |         | 1,305  |   |   |         | 1,463  |  
|                                                                  | Amortization of intangible assets                                                                                                                                                                                                                                       |   |                    | 1     |                   |   |        | 1     |      |   |         | 9      |   |   |         | 664    |  
|                                                                  | Restructuring and impairment charges                                                                                                                                                                                                                                    |   |                    | 674   |                   |   |        |      |      |   |         | 1,885  |   |   |         |       |  
|                                                                  | Impairment of goodwill and other intangible assets                                                                                                                                                                                                                      |   |                    |      |                   |   |        |      |      |   |         |       |   |   |         | 6,275  |  
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Total operating expenses                                          |                                                                                                                                                                                                                                                                         |   | 7,029              |       |                   |   | 8,248  |       |      |   | 23,007  |        |   |   | 31,101  |       
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Loss from operations                                              |                                                                                                                                                                                                                                                                         |   | (5,951             | )     |                   |   | (4,053 | )     |      |   | (17,053 | )      |   |   | (18,811 | )     
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Other income (expense):                                           |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |       
|                                                                  | Interest and other income, net                                                                                                                                                                                                                                          |   |                    | 8     |                   |   |        | 44    |      |   |         | 42     |   |   |         | 133    |  
|                                                                  | Interest expense                                                                                                                                                                                                                                                        |   |                    | (257  | )                 |   |        |      |      |   |         | (743   | ) |   |         |       |  
|                                                                  | Changes in fair values of warrants to purchase common
stock and conversion options of convertible notes                                                                                                                                                                 |   |                    | 667   |                   |   |        |      |      |   |         | 1,010  |   |   |         |       |  
|                                                                  | Loss on early extinguishment of debt                                                                                                                                                                                                                                    |   |                    |      |                   |   |        |      |      |   |         | (1,682 | ) |   |         |       |  
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Total other income (expense)                                      |                                                                                                                                                                                                                                                                         |   | 418                |       |                   |   | 44     |       |      |   | (1,373  | )      |   |   | 133     |       
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Loss before provision for income taxes                            |                                                                                                                                                                                                                                                                         |   | (5,533             | )     |                   |   | (4,009 | )     |      |   | (18,426 | )      |   |   | (18,678 | )     
|Provision for income taxes                                        |                                                                                                                                                                                                                                                                         |   | 26                 |       |                   |   |       |       |      |   | 39      |        |   |   |        |       
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Net loss from continuing operations                               |                                                                                                                                                                                                                                                                         |   | (5,559             | )     |                   |   | (4,009 | )     |      |   | (18,465 | )      |   |   | (18,678 | )     
|Adjustment to net loss on disposal of discontinued
operations     |                                                                                                                                                                                                                                                                         |   | 41                 |       |                   |   | 9      |       |      |   | 157     |        |   |   | 102     |       
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Net loss                                                          |                                                                                                                                                                                                                                                                         | $ | (5,518             | )     |                   | $ | (4,000 | )     |      | $ | (18,308 | )      |   | $ | (18,576 | )     
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Basic and diluted net loss per common share:                      |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |       
|                                                                  | Net loss per common share from continuing operations                                                                                                                                                                                                                    |   | $                  | (0.12 | )                 |   | $      | (0.10 | )    |   | $       | (0.41  | ) |   | $       | (0.46  | )
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Net loss per common share                                         |                                                                                                                                                                                                                                                                         | $ | (0.12              | )     |                   | $ | (0.10  | )     |      | $ | (0.41   | )      |   | $ | (0.46   | )     
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  
|Weighted average number of shares outstanding  basic
and diluted |                                                                                                                                                                                                                                                                         |   | 45,987             |       |                   |   | 40,987 |       |      |   | 44,463  |        |   |   | 40,677  |       
|                                                                  |                                                                                                                                                                                                                                                                         |   |                    |       |                   |   |        |       |      |   |         |        |   |   |         |        |  

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

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##### Table of Contents






VIEWPOINT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |       |        |      |        |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------------------------------------------- | --------------------------------------------------- | ------ | ----------------- | ------- | ----- | ------ | ---- | ------ | -
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        | Nine Months Ended
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        | September 30,    
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        |                  
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        | 2003              |         | 2002 
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      
|Cash flows from operating activities:                                       |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      
|Net loss                                                                    |                                                                                                         | $                                                                                                | (18,308                                      | )                                                   |        | $                 | (18,576 | )    
|Adjustments to reconcile net loss to net cash used
in operating activities: |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      
|                                                                            | Adjustment to net loss on disposal of discontinued operations                                           |                                                                                                  |                                              |                                                    |        |                   |         | (102  | )     
|                                                                            | Non-cash stock-based compensation charges                                                               |                                                                                                  |                                              | 2,388                                               |        |                   |         | 4,173 |       
|                                                                            | Restructuring and impairment charges                                                                    |                                                                                                  |                                              | 1,885                                               |        |                   |         |      |       
|                                                                            | Depreciation and amortization                                                                           |                                                                                                  |                                              | 1,314                                               |        |                   |         | 2,127 |       
|                                                                            | Provision for bad
debt                                                                                  |                                                                                                  |                                              | 745                                                 |        |                   |         | 570   |       
|                                                                            | Impairment of goodwill and other intangible assets                                                      |                                                                                                  |                                              |                                                    |        |                   |         | 6,275 |       
|                                                                            | Loss on write-off of notes receivable                                                                   |                                                                                                  |                                              | 750                                                 |        |                   |         |      |       
|                                                                            | Loss on sale or disposal of equipment                                                                   |                                                                                                  |                                              | 226                                                 |        |                   |         | 45    |       
|                                                                            | Accrued interest income                                                                                 |                                                                                                  |                                              |                                                    |        |                   |         | (17   | )     
|                                                                            | Changes in fair values of warrants to purchase common stock
and conversion options of convertible notes |                                                                                                  |                                              | (1,010                                              | )      |                   |         |      |       
|                                                                            | Loss on early extinguishment of debt                                                                    |                                                                                                  |                                              | 1,682                                               |        |                   |         |      |       
|                                                                            | Amortization of debt discount and issuance costs                                                        |                                                                                                  |                                              | 320                                                 |        |                   |         |      |       
|                                                                            | Changes in operating assets and liabilities:                                                            |                                                                                                  |                                              |                                                     |        |                   |         |       |       
|                                                                            |                                                                                                         |                                                                                                  | Accounts receivable                          |                                                     |        | 962               |         |       |        | (731 | )     
|                                                                            |                                                                                                         |                                                                                                  | Related party accounts receivable            |                                                     |        | 552               |         |       |        | 960  |       
|                                                                            |                                                                                                         |                                                                                                  | Prepaid expenses and other assets            |                                                     |        | (339              | )       |       |        | 312  |       
|                                                                            |                                                                                                         |                                                                                                  | Accounts payable                             |                                                     |        | (215              | )       |       |        | 264  |       
|                                                                            |                                                                                                         |                                                                                                  | Accrued expenses                             |                                                     |        | (763              | )       |       |        | (37  | )     
|                                                                            |                                                                                                         |                                                                                                  | Due to related parties, net                  |                                                     |        | 8                 |         |       |        | (72  | )     
|                                                                            |                                                                                                         |                                                                                                  | Deferred revenues                            |                                                     |        | 45                |         |       |        | (434 | )     
|                                                                            |                                                                                                         |                                                                                                  | Related party deferred revenues              |                                                     |        | 438               |         |       |        | 187  |       
|                                                                            |                                                                                                         |                                                                                                  | Net cash provided by discontinued operations |                                                     |        |                  |         |       |        | 128  |       
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      
|                                                                            |                                                                                                         |                                                                                                  |                                              | Net cash used in operating activities               |        |                   | (9,320  | )     |        |      | (4,928 | )
|Cash flows from investing activities:                                       |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      
|                                                                            |                                                                                                         | Proceeds from sales and maturities of marketable securities                                      |                                              |                                                     | 1,525  |                   |         |       | 8,725  |     
|                                                                            |                                                                                                         | Purchases of marketable securities                                                               |                                              |                                                     | (1,652 | )                 |         |       | (3,507 | )   
|                                                                            |                                                                                                         | Net (increase) decrease in restricted cash                                                       |                                              |                                                     | 499    |                   |         |       | (2     | )   
|                                                                            |                                                                                                         | Purchases of property and equipment                                                              |                                              |                                                     | (419   | )                 |         |       | (712   | )   
|                                                                            |                                                                                                         | Proceeds from sale of property and equipment                                                     |                                              |                                                     | 7      |                   |         |       |       |     
|                                                                            |                                                                                                         | Purchases of patents and trademarks                                                              |                                              |                                                     | (31    | )                 |         |       | (47    | )   
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      
|                                                                            |                                                                                                         |                                                                                                  |                                              | Net cash provided by (used in) investing activities |        |                   | (71     | )     |        |      | 4,457  |  
|Cash flows from financing activities:                                       |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      
|                                                                            |                                                                                                         | Payment of issuance costs on convertible notes                                                   |                                              |                                                     | (576   | )                 |         |       |       |     
|                                                                            |                                                                                                         | Proceeds from issuance of subordinated notes and common
stock net of issuance costs paid of $189 |                                              |                                                     | 3,311  |                   |         |       |       |     
|                                                                            |                                                                                                         | Repayment of convertible notes                                                                   |                                              |                                                     | (3,300 | )                 |         |       |       |     
|                                                                            |                                                                                                         | Restricted cash used to pay interest on convertible notes                                        |                                              |                                                     | 33     |                   |         |       |       |     
|                                                                            |                                                                                                         | Proceeds from exercise of stock options                                                          |                                              |                                                     | 11     |                   |         |       | 1,370  |     
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      
|                                                                            |                                                                                                         |                                                                                                  |                                              | Net cash provided by (used in) financing activities |        |                   | (521    | )     |        |      | 1,370  |  
|Effect of exchange rate changes on cash and cash equivalents                |                                                                                                         |                                                                                                  | (20                                          | )                                                   |        |                   | (6      | )    
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      
|Net increase (decrease) in cash and cash equivalents                        |                                                                                                         |                                                                                                  | (9,932                                       | )                                                   |        |                   | 893     |      
|Cash and cash equivalents at beginning of period                            |                                                                                                         |                                                                                                  | 10,678                                       |                                                     |        |                   | 8,054   |      
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      
|Cash and cash equivalents at end of period                                  |                                                                                                         | $                                                                                                | 746                                          |                                                     |        | $                 | 8,947   |      
|                                                                            |                                                                                                         |                                                                                                  |                                              |                                                     |        |                   |         |      

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

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VIEWPOINT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

|                                                 |                                                                                        |  |                   |       |      |  |   |       | 
|------------------------------------------------ | -------------------------------------------------------------------------------------- |  | ----------------- | ----- | ---- |  | - | ----- | 
|                                                 |                                                                                        |  | Nine Months Ended
|                                                 |                                                                                        |  | September 30,    
|                                                 |                                                                                        |  | 2003              |       | 2002
|                                                 |                                                                                        |  |                   |       |     
|Supplemental disclosure of cash flow activities: |                                                                                        |  |                   |       |      |  |   |      
|                                                 | Cash paid during the period for income taxes                                           |  | $                 | 79    |      |  | $ | 151   | 
|                                                 | Cash paid during the period for interest                                               |  |                   | 161   |      |  |   |      | 
|                                                 | Supplemental disclosure of non-cash investing
and financing activities:                |  |                   |       |      |  |   |       | 
|                                                 | Unrealized gains on marketable securities                                              |  | $                 |      |      |  | $ | 27    | 
|                                                 | Issuance costs on convertible notes and subordinated notes
accrued and not yet paid    |  |                   | 12    |      |  |   |      | 
|                                                 | Issuance of 1,351,351 shares of common stock as partial
repayment of convertible notes |  |                   | 1,000 |      |  |   |      | 
|                                                 | Consideration not yet issued in connection with the
acquisition of Viewpoint Digital   |  |                   |      |      |  |   | 2,928 | 

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

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 our Annual Report on Form 10-K/A for the year ended December 31,
2002. The interim financial information is unaudited, but reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of Viewpoint Corporations (Viewpoint or the Company)
financial position and operating results 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/A for the year ended
December 31, 2002. The results of operations for the three and nine months
ended September 30, 2003 are not necessarily indicative of the results to be
expected for the year ending December 31, 2003 or other future periods.

Certain reclassifications have been made to the 2002 consolidated
financial statements to conform to the 2003 presentation.

Liquidity

The Company had cash, cash equivalents and marketable securities of
$1,763,000 at September 30, 2003. During the nine months ended September 30,
2003 net cash used in operations amounted to $9,320,000. Viewpoint has had
significant quarterly and annual operating losses since its inception, and as
of September 30, 2003, had an accumulated deficit of $242,385,000. There can
be no assurance that Viewpoint will achieve or sustain cash flows from
operations or profitability.

The Company believes that its current cash, cash equivalents, and
marketable securities balances, cash obtained through a private equity
financing and $10,000,000 in cash to be paid by AOL in the fourth quarter will
be sufficient to meet its operating cash flow needs and anticipated capital
expenditure requirements through at least the next twelve months.

In October 2003, the Company entered into an amended license agreement
with AOL which provides for payments by AOL of $10,000,000, all due in the
fourth quarter of 2003. The agreement contains multiple elements consisting of
a perpetual broadcast license, a perpetual source code license to certain
source code, quarterly updates to the source code through December 2005, and
maintenance and consulting services.

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

Holders of the Companys convertible notes (see Note 3 for specific terms
and conditions) which were issued on March 25, 2003, may redeem
notes in an amount up to 20% of the $2,500,000 received by the Company in the
November 12, 2003 private placement. To exercise this right, the noteholders
must notify the Company within 10 days of the Companys public announcement of
the closing of the private placement. Additionally, the Companys convertible
notes contain provisions that permit the holders to redeem notes on or after
June 30, 2004 if the Companys common stock trades below the conversion price
for 25 consecutive trading days, subject to the terms and conditions of the
notes described in Footnote 3.

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has contingency plans for the fourth quarter of 2003 and 2004
if expected revenue targets are not achieved. These plans include further
workforce reductions as well as reductions in overhead and capital
expenditures. The Company may seek additional funds when necessary through
public or private equity financing or from other sources to fund our operations
and pursue our growth.

We currently have no commitment for additional financing, and we may experience
difficulty in obtaining additional financing on favorable terms, if at all.
Any financing we obtain may contain covenants that restrict our freedom to
operate our business or may have rights, preferences or privileges senior to
our common stock and may dilute our current shareholders ownership interest in
Viewpoint.

Revenue Recognition

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

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

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

Fee-based professional services for customized software development are
performed on a fixed-fee or time-and-materials basis under separate service
arrangements. Revenues for fixed-fee arrangements are recognized over the
pattern of performance in accordance with the provisions of SAB No. 101. The
pattern of performance for service arrangements is measured principally by the
percentage of costs incurred and accrued to date for each contract, which
principally consist of direct labor costs, cost of outsourcing, and overhead,
to the estimated total cost for each contract at completion. Revenues from
customer support services are recognized ratably over the term of the contract.
Revenues from training services are recognized as services are performed.

Fees from licenses sold together with fee-based professional services are
generally recognized upon delivery of the software, provided that the payment
of the license fees are not dependent upon the performance of the services, and
the services are not essential to the functionality of the licensed software.
If the services are essential to the functionality of the software, or payment
of the license fees are dependent upon the performance of the services, both
the software license and service fees are recognized in accordance with SOP
81-1 Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. The percentage of competition method is used for
those arrangements in which reasonably dependable estimates are available.

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, we use renewal rates to determine the price when
sold separately. The Company

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

accounts for multiple element arrangements which involve only fee-based
professional services in accordance with EITF 00-21.

Standard terms for license arrangements require payment within 90 days of
the contract date, which typically coincides with delivery. Standard terms for
service arrangements, which are typically billed and collected on an
installment basis, require final payment within 90 days of completion of the
services. Probability of collection is based upon the assessment of the
customers financial condition through the review of their current financial
statements and/or credit reports. For follow-on sales to existing customers,
prior payment history is also used to evaluate probability of collection. Our
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.

The Company periodically enters into nonmonetary arrangements whereby the
Companys licenses or services are exchanged for services of its customers.
Nonmonetary revenues are recognized at the estimated fair value of the services
received. Generally, nonmonetary revenues equal nonmonetary expenses, however,
due to timing, nonmonetary accounts receivable and accounts payable may result.

Notes Receivable

During 2000, the Company loaned $1,500,000 to a former officer of the
Company. The loan was non-interest bearing, and was
collateralized by 200,000 shares of restricted Company stock, as well as
options to purchase 790,000 shares of Company stock. The loan, which was
originally due on May 1, 2004, became due 30 days after the officer ceased to
be an employee of the Company, which occurred on January 5, 2001. At that
date, the Company recorded a reserve against the loan in the amount of
$750,000. The Company had commercial litigation to pursue recovery, however,
notification of a court judgment in favor of the former officer was received
in September 2003. As a result of this unfavorable outcome, a loss of $750,000
was charged to operations to write off the remaining balance of the note.

Stock-Based Compensation

The Company accounts for stock option grants in accordance with Accounting
Principals Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, Financial Accounting Standards Board (FASB) issued Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25 (FIN 44), and complies with the
disclosure provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148
Accounting for Stock-Based CompensationTransition and Disclosure. Under APB
Opinion No. 25, compensation expense is recognized over the vesting period
based on the difference, if any, at the date of grant between the fair value of
the Companys stock and the exercise price. The Company accounts for stock
issued to non-employees in accordance with SFAS No. 123 and Emerging Issues
Task Force (EITF) Issue No. 96-18 Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, as amended by SFAS No. 148, and has been determined
as if the Company has accounted for its employee stock option grants under the
fair value method of SFAS No. 123. The fair value of options issued to
employees was estimated at the date of grant using the Black-Scholes
option-pricing model. For purposes of pro forma disclosures, the estimated
fair value of the Companys employee options is amortized to expense over the
options vesting period. If the Company elected to record stock-based
compensation charges in accordance with SFAS 123, the pro forma non-cash
stock-based employee compensation charges, net loss and net loss per common
share would approximate the following (in thousands, except per share amounts):

|                                                                                                                                               |                               |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | - | ------------------ | ----- | ----------------- | - | ------ | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                               |                               |   | Three Months Ended |       | Nine Months Ended
|                                                                                                                                               |                               |   | September 30,      |       | September 30,    
|                                                                                                                                               |                               |   |                    |       |                  
|                                                                                                                                               |                               |   | 2003               |       | 2002              |   | 2003   |       | 2002
|                                                                                                                                               |                               |   |                    |       |                   |   |        |       |     
|Net loss, as reported                                                                                                                          |                               | $ | (5,518             | )     |                   | $ | (4,000 | )     |      | $ | (18,308 | )     |   | $ | (18,576 | )    
|Add: Non-cash stock-based employee
compensation charges included in reported
net loss, net of related tax effects                              |                               |   | 520                |       |                   |   | 1,184  |       |      |   | 2,388   |       |   |   | 3,899   |      
|Deduct: Non-cash stock-based employee
compensation charges determined under
fair value based method for all awards, net of
related tax effects |                               |   | (1,196             | )     |                   |   | (2,460 | )     |      |   | (4,990  | )     |   |   | (8,312  | )    
|                                                                                                                                               |                               |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      
|Pro forma net loss                                                                                                                             |                               | $ | (6,194             | )     |                   | $ | (5,276 | )     |      | $ | (20,910 | )     |   | $ | (22,989 | )    
|                                                                                                                                               |                               |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      
|Net loss per share:                                                                                                                            |                               |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      
|                                                                                                                                               | Basic and diluted as reported |   | $                  | (0.12 | )                 |   | $      | (0.10 | )    |   | $       | (0.41 | ) |   | $       | (0.46 | )
|                                                                                                                                               |                               |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      
|                                                                                                                                               | Basic and diluted pro forma   |   | $                  | (0.13 | )                 |   | $      | (0.13 | )    |   | $       | (0.47 | ) |   | $       | (0.57 | )
|                                                                                                                                               |                               |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      

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 the future.

On April 14, 2003, the Company granted 2,300,000 nonstatutory stock
options to acquire Company common stock, to certain executives of the Company
at an exercise price equal to the fair market value of the Companys common
stock on the date of grant. Twenty-five percent of the options vest on the
first anniversary of the date of grant and the remaining options vest at the
rate of 1/36th per month thereafter. On July 1, 2003, the Company modified the
terms to accelerate the vesting of a grant to one executive. In accordance
with FIN 44, no compensation charge has been recorded through September 30,
2003 since the Company believes that this executive will not derive any benefit
from the acceleration. If the executives employment ends during the original
vesting period (prior to modification) then the modification to accelerate
vesting would be determined to be beneficial to the executive and a non-cash
compensation charge of up to $360,000 would be charged to operations.

In
November 2003, the Company will modify the terms of five stock option
grants to certain employees and officers to reduce the vesting period
from four years to two years. The Company will
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 1,125,000 options modified. The weighted average grant price for
these options is $0.76. Such charge would be recorded if the executives are
expected to derive a benefit from the acceleration. If any executive ceased
employment during the original vesting period then the
modification to accelerate would be determined to be beneficial.

Basic and Diluted Net Loss Per Common Share

Basic net loss per common share is computed using the weighted average
number of common shares outstanding and diluted net loss per common share is
computed using the weighted average number of common shares and common
equivalent shares outstanding. Common equivalent shares related to stock
options and warrants totaling 5,175,000 and 4,491,000 for the three months
ended September 30, 2003 and 2002, respectively, and 5,175,000 and 7,540,000
for the nine months ending September 30, 2003 and 2002, respectively, are
excluded from the computation of diluted net loss per common share because
their effect was antidilutive.

Derivatives

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46 Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51 (FIN 46). FIN 46 provides a new framework for
identifying VIEs and determining when a company should include the assets,
liabilities, noncontrolling interests and results of activities of a VIE in its
consolidated financial statements. FIN 46 was effective immediately for VIEs
created after January 31, 2003. In October 2003, the FASB directed the FASB
staff to issue FASB Staff Position No. FIN 46-6 (FSP FIN 46-6). FSP FIN 46-6
defers the effective date of FIN 46 for interests held by public entities in
VIEs or potential VIEs dating from before February 1, 2003. The consolidation
requirements of FIN 46 for these interests are now scheduled to be effective on
December 31, 2003. The consolidation requirements of FIN 46 remain applicable
to VIEs created after January 31, 2003 and to VIEs in which an enterprise
obtains an interest after that date. The adoption of FIN 46 is not expected to
have a material effect on the Companys financial statements.

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

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

In November 2002, the Emerging Issues Task Force (EITF) issued EITF
00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which
addresses revenue recognition accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. EITF 00-21 does
not apply to deliverables in arrangements to the extent the accounting for such
deliverables is within the scope of other existing higher-level authoritative
literature including SOP 97-2. EITF 00-21 is effective for revenue
arrangements entered into beginning on July 1, 2003. The adoption of EITF
00-21 did not have an impact on our financial statements.

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Goodwill and Intangible Assets

Effective January 1, 2002, the Company completed the adoption of SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting. As
required by SFAS No. 142, the Company discontinued amortizing the remaining
balances of goodwill as of January 1, 2002. All remaining and future acquired
goodwill will be subject to impairment tests annually, or earlier if indicators
of potential impairment exist, using a fair-value-based approach. When
evaluating goodwill for potential impairment, the Company first compares the
fair value of the reporting unit, based on market values of the reporting unit
or on the present value of estimated future cash flows, with its carrying
amount. If the estimated fair value of the reporting unit is less than its
carrying amount, an impairment loss calculation is prepared. The impairment
loss calculation compares the implied fair value of the reporting unit goodwill
with the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. All other
intangible assets will continue to be amortized over their estimated useful
lives and assessed for impairment under SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.

In conjunction with the implementation of SFAS No. 142, the Company
completed a goodwill impairment review as of January 1, 2002 and found no
impairment on that date. The fair value of the Viewpoint Digital reporting
unit was determined to exceed its carrying value using the expected present
value of future cash flows, a discount rate of 15% and a terminal value based
on a multiple of EBITDA. The fair value of the Company was determined to
exceed its carrying value by comparison to its market capitalization on that
date, less the fair value of the Viewpoint Digital reporting unit.

The Company recorded $2,928,000 of additional goodwill during the first
quarter of 2002 in connection with a contingent promissory note due Computer
Associates on April 30, 2002 for the acquisition of Viewpoint Digital. As of
March 31, 2002, due to the persistence of unfavorable economic conditions along
with lower-than-expected revenues generated to date and reduced estimates of
future performance of the Viewpoint Digital reporting unit, the Company
performed an additional impairment analysis on the goodwill and other
intangible asset balances recorded upon the acquisition of Viewpoint Digital.
In accordance with the provisions of SFAS No. 142 and SFAS No. 144, the Company
recorded impairment charges totaling $6,275,000 for the three months ended
March 31, 2002. The fair value of the Viewpoint Digital reporting unit was
estimated using the expected present value of future cash flows. The
assumptions supporting the cash flows, including the discount rate of 20%, were
determined using the Companys best estimates as of the date the impairment was
recorded.

In accordance with the provisions of SFAS No. 142, the Company completed a
goodwill impairment review as of January 1, 2003 and found no impairment on
that date. The fair value of the Company was determined to exceed its
carrying value by comparison to its market capitalization on that date.

During the three months ended March 31, 2003, the market value of the
Companys equity securities declined below the Companys carrying value
indicating the existence of a potential goodwill impairment. In accordance
with SFAS No. 142, the Company performed the first step of the goodwill
impairment test as of March 31, 2003. The fair value of the Company was
determined to exceed its carrying value using a market-based approach with
selected multiples ranging from 1.5 to 2.0 times revenues and 1.8 to 2.5 times
gross profit. In accordance with SFAS No. 142, the second step of the
impairment test was unnecessary, and no goodwill impairment charges were
recorded. Subsequent to March 31, 2003, the market value of the Company
recovered and did not decline below the Companys carrying value, therefore, no
impairment existed through September 30, 2003.

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The changes in the carrying amounts of goodwill and intangible assets
during the nine months ended September 30, 2003, are as follows (in thousands):

|                                 |                                       |   |          |   |                   |   |       |    |   |   |        |    |  
|-------------------------------- | ------------------------------------- | - | -------- | - | ----------------- | - | ----- | -- | - | - | ------ | -- | -
|                                 |                                       |   | Goodwill |   | Intangible Assets |   | Total
|                                 |                                       |   |          |   |                   |   |      
|Balance as of January 1, 2003    |                                       | $ | 31,276   |   |                   | $ | 165   |    |   | $ | 31,441 |   
|                                 | Additions during period               |   |          |  |                   |   |       | 11 |   |   |        | 11 |  
|                                 | Amortization                          |   |          |  |                   |   |       | (1 | ) |   |        | (1 | )
|                                 |                                       |   |          |   |                   |   |       |    |   |   |        |   
|Balance as of March 31, 2003     |                                       |   | 31,276   |   |                   |   | 175   |    |   |   | 31,451 |   
|                                 | Additions & adjustments during period |   |          |  |                   |   |       | (8 | ) |   |        | (8 | )
|                                 | Amortization                          |   |          |  |                   |   |       | (7 | ) |   |        | (7 | )
|                                 |                                       |   |          |   |                   |   |       |    |   |   |        |   
|Balance as of June 30, 2003      |                                       |   | 31,276   |   |                   |   | 160   |    |   |   | 31,436 |   
|                                 | Additions during period               |   |          |  |                   |   |       | 28 |   |   |        | 28 |  
|                                 | Amortization                          |   |          |  |                   |   |       | (1 | ) |   |        | (1 | )
|                                 |                                       |   |          |   |                   |   |       |    |   |   |        |   
|Balance as of September 30, 2003 |                                       | $ | 31,276   |   |                   | $ | 187   |    |   | $ | 31,463 |   
|                                 |                                       |   |          |   |                   |   |       |    |   |   |        |   

The changes in the carrying amounts of goodwill and intangible assets for
the nine months ended September 30, 2002, are as follows (in thousands):

|                                 |                         |   |          |        |                   |   |       |        |   |   |        |        |  
|-------------------------------- | ----------------------- | - | -------- | ------ | ----------------- | - | ----- | ------ | - | - | ------ | ------ | -
|                                 |                         |   | Goodwill |        | Intangible Assets |   | Total
|                                 |                         |   |          |        |                   |   |      
|Balance as of January 1, 2002    |                         | $ | 33,042   |        |                   | $ | 2,361 |        |   | $ | 35,403 |       
|                                 | Additions during period |   |          | 2,928  |                   |   |       | 24     |   |   |        | 2,952  |  
|                                 | Impairment losses       |   |          | (4,694 | )                 |   |       | (1,581 | ) |   |        | (6,275 | )
|                                 | Amortization            |   |          |       |                   |   |       | (661   | ) |   |        | (661   | )
|                                 |                         |   |          |        |                   |   |       |        |   |   |        |       
|Balance as of March 31, 2002     |                         |   | 31,276   |        |                   |   | 143   |        |   |   | 31,419 |       
|                                 | Additions during period |   |          |       |                   |   |       | 3      |   |   |        | 3      |  
|                                 | Amortization            |   |          |       |                   |   |       | (2     | ) |   |        | (2     | )
|                                 |                         |   |          |        |                   |   |       |        |   |   |        |       
|Balance as of June 30, 2002      |                         |   | 31,276   |        |                   |   | 144   |        |   |   | 31,420 |       
|                                 | Additions during period |   |          |       |                   |   |       | 20     |   |   |        | 20     |  
|                                 | Amortization            |   |          |       |                   |   |       | (1     | ) |   |        | (1     | )
|                                 |                         |   |          |        |                   |   |       |        |   |   |        |       
|Balance as of September 30, 2002 |                         | $ | 31,276   |        |                   | $ | 163   |        |   | $ | 31,439 |       
|                                 |                         |   |          |        |                   |   |       |        |   |   |        |       

As of September 30, 2003 and December 31, 2002, the Companys intangible
assets and related accumulated amortization consisted of the following (in
thousands):

|                        |  |                    |     |                   |  |             |     |       |  |              |     |     |  |   |     |             |  |   |    |   |  |   |     | 
|----------------------- |  | ------------------ | --- | ----------------- |  | ----------- | --- | ----- |  | ------------ | --- | --- |  | - | --- | ----------- |  | - | -- | - |  | - | --- | 
|                        |  | September 30, 2003 |     | December 31, 2002
|                        |  |                    |     |                  
|                        |  |                    |     |                   |  | Accumulated |     |       |  |              |     |     |  |   |     | Accumulated |  |   |    |  
|                        |  | Gross              |     | Amortization      |  | Net         |     | Gross |  | Amortization |     | Net
|                        |  |                    |     |                   |  |             |     |       |  |              |     |    
|Patents and Trademarks  |  | $                  | 199 |                   |  | $           | (12 | )     |  | $            | 187 |     |  | $ | 168 |             |  | $ | (3 | ) |  | $ | 165 | 
|                        |  |                    |     |                   |  |             |     |       |  |              |     |     |  |   |     |             |  |   |    |   |  |   |     | 
|Total Intangible Assets |  | $                  | 199 |                   |  | $           | (12 | )     |  | $            | 187 |     |  | $ | 168 |             |  | $ | (3 | ) |  | $ | 165 | 
|                        |  |                    |     |                   |  |             |     |       |  |              |     |     |  |   |     |             |  |   |    |   |  |   |     | 

Amortization of patents and trademarks is estimated to be $3,000 a year
for the next five years.

3. Long Term Debt

On December 31, 2002, the Company completed a private placement of
convertible notes and warrants in which it issued to three institutional
investors, 4.95% convertible notes having an aggregate principal amount of
$7,000,000, and warrants to purchase 726,330 shares of Company common stock.
Interest on the convertible notes was payable quarterly in arrears in cash or,
at the option of the Company, in shares of Company common stock, provided the
Company satisfied certain financial and other conditions. The convertible
notes were to mature on December 31, 2007, unless earlier converted into shares
of Company common stock at a price of $2.26 per share. The warrants expire on
December 31, 2006, and are exercisable at a price of $2.26 per share.

The Company was required to provide registration rights under the
Securities Act of 1933 for shares of Company common stock covering (i) the
conversion of $7,000,000 in principal, (ii) 726,330 warrants, and (iii) any
potential payment of interest in the form of common stock.

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The convertible notes defined several events of default, including but not
limited to: (i) failure of the Companys registration statement to be declared
effective by the Securities and Exchange Commission (SEC), (ii) delisting
from The NASDAQ National Market or other national exchange, (iii) change in
control, (iv) event of conversion default such as lack of authorized capital,
(v) event of bankruptcy, (vi) failure to pay principal and interest on the
convertible notes when payments become due, (vii) judgments against the Company
in excess of $1,000,000 and (viii) material breach of any representation,
warranty, covenant or other term. Upon an event of default, the convertible
notes would immediately become due and payable, after a grace period to cure
the default lapsed.

Pursuant to SFAS No. 133 Accounting for Derivative Instruments and
Hedging Activities, the Company bifurcated the fair value of the conversion
options from the convertible notes since the conversion options were determined
to not be clearly and closely related to the debt host. In addition, since the
effective registration of the securities underlying the conversion options and
warrants was an event outside of the control of the Company, pursuant to EITF
Issue No. 00-19, the Company recorded the fair value of conversion options and
warrants as long-term liabilities, as it was assumed that the Company will be
required to net-cash settle the underlying securities. The fair values of the
convertible notes, conversion options, and warrants of $5,535,000, $1,177,000,
and $288,000, respectively, were determined by the Company using the following
assumptions: a 20% discount on the Companys common stock price at December 31,
2002, a credit spread of 20% over LIBOR rates at December 31, 2002, and an
annualized stock volatility of 46%. The aggregate value of the convertible
notes and conversion options of $6,712,000, and the warrants of $288,000 are
recorded as long-term liabilities in the Companys consolidated balance sheets
at December 31, 2002. Debt issuance costs, which amounted to $668,000, were
recorded as other assets in the Companys consolidated balance sheets, in
accordance with APB Opinion No. 21 Interest on Receivables and Payables. The
amortization of discount on the convertible notes and debt issue costs totaling
$72,000 were accounted for in accordance with the provisions of APB Opinion No.
21, which requires amortization of the discount and debt issue costs using the
interest method.

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

On March 25, 2003, the Company entered into Redemption, Amendment and
Exchange Agreements with the three institutional investors with whom it had
completed the private placement of convertible notes and warrants on December
31, 2002. Pursuant to these agreements, the notice of default was withdrawn
and Viewpoint redeemed an aggregate of $3,300,000 principal amount of the
outstanding convertible notes, exchanged an aggregate of $1,000,000 principal
amount of the outstanding convertible notes for shares of Viewpoint common
stock at $0.74 per share, and exchanged the remaining $2,700,000 principal
amount of outstanding convertible notes for $2,700,000 principal amount of new
convertible notes. The convertible notes were issued in three tranches of
$900,000 each and are scheduled to mature December 31, 2007. The warrants to
purchase 726,330 shares of Company common stock, which were issued to these
investors on December 31, 2002, remain outstanding.

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

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

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Interest on the new convertible notes is payable quarterly in arrears in
cash or, at the option of the Company, in shares of Company common stock,
provided the Company satisfies certain financial and other conditions. If
interest is paid in shares of Company common stock, the number of shares to be
issued shall be calculated by dividing the interest payable by 95% of the
arithmetic average of the dollar volume-weighted average price of Company
common stock on each of the five consecutive trading days immediately preceding
the interest payment date. The new convertible notes mature on December 31,
2007, unless earlier converted into shares of Company common stock. Each
tranche of the new convertible notes were initially convertible into Company
common stock at a price of $2.26 per share. However, pursuant to the
Redemption, Amendment and Exchange Agreements, the conversion price of the
first, second, and third tranche became adjustable on the basis of the
arithmetic average of the dollar volume-weighted average price of Company
common stock for the ten trading days following May 16, 2003, August 16, 2003,
and November 16, 2003, respectively, in each case subject to a minimum
conversion price of $1.00 and a maximum conversion price of $2.26. The
conversion price of the first $900,000 tranche of notes is $1.10. The
conversion price of the second $900,000 tranche of notes is $1.00.

At the
noteholders option, up to 20% of the net proceeds from any new
capital raises by the Company may be used to redeem outstanding notes
at par plus accrued interest. On November 12, 2003, the Company
sold 3,125,000 shares of common stock in a private placement to
Federal Partners, L.P., an affiliate of The Clarke Estates, Inc. for
$2,500,000, or $0.80 per share. To exercise their right to redeem
their notes in an amount up to 20% of the $2,500,000 received by the
Company, the noteholders must notify the Company within 10 days
of the Companys public announcement of the closing of the
private placement. The Company publicly announced the closing of the
private placement on November 13, 2003 by way of a filing on SEC
Form 8-K.

Each tranche of the notes is redeemable by the investors at any time on or
after June 30, 2004 in cash at par plus accrued and unpaid interest if the
dollar volume-weighted average price of Company common stock is less than the
conversion price applicable to the notes for any 25 consecutive trading days.
Each tranche of the notes is redeemable by the investors at any time after
December 31, 2005, in cash at 83% of par plus accrued and unpaid interest if
the dollar volume-weighted average price of Company common stock is less than
the conversion price applicable to the notes for any 25 consecutive trading
days following December 31, 2005. If the investors redeem their convertible
notes, up to 20% of the amount to be redeemed may, at the Companys option, be
paid in shares of Company common stock, and said payment would be at 95% of the
dollar volume-weighted average price of Company common stock for the 20
consecutive trading days immediately preceding payment.

The Company has the right at any time to redeem up to all of the
outstanding notes at par plus accrued and unpaid interest. Concurrently with
any such redemption, the Company is required to deliver to the investors
warrants, with an exercise price of $1.00 and a term equal to the remaining
term of the notes being redeemed, to subscribe for a number of shares of common
stock equal to 100% of the principal amount being redeemed divided by the
conversion price of the notes then in effect.

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

The investors may require the Company to sell to the investors an
additional 4.95% convertible notes having an aggregate principal amount of up
to $2,800,000, and warrants to purchase up to 290,533 shares of Company common
stock prior to January 14, 2004.

The Company had the right to sell additional 4.95% convertible notes
having an aggregate principal amount of up to $7,000,000 and warrants to
purchase up to 726,330 shares of Company common stock prior to June 30, 2003,
if the dollar volume-weighted average price of Company common stock exceeded
$3.25 on each of not less than 15 trading days in any 20 consecutive
trading-day period. This right expired unexercised on June 30, 2003.

The Company was required to file a registration statement by April 14,
2003, covering the resale of the shares of common stock issued to the investors
in exchange for the $1,000,000 principal of convertible notes, the shares of
common stock issuable to the investors upon the conversion of the notes, the
shares of common stock underlying the warrants issued and to be issued, and any
shares of common stock that may be issued as payment of interest on the

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

notes. The Company was required to pay cash penalties if the registration
statement was not declared effective by June 30, 2003. The registration
statement was declared effective July 14, 2003, and the Company was required to
pay penalties of $183,000, of which $127,000 was charged to interest expense in
the second quarter of 2003 and $56,000 was charged to interest expense in the
third quarter of 2003.

Under the terms of the amended agreements, certain covenants and events of
default were restructured as follows: the requirement to have its registration
statement declared effective by the SEC and the requirement to remain listed on
The NASDAQ National Market or other national exchange, were waived through
March 2004, unless the Company receives a going concern or qualified opinion
from its auditors. If such a report is received from the Companys auditors
through March 2004, the original events of default remain effective.

Pursuant to SFAS No. 133, the Company bifurcated the fair value of the
conversion options from the new convertible notes since the conversion options
were determined to not be clearly and closely related to the debt host. In
addition, since the effective registration of the securities underlying the
conversion options is an event outside of the control of the Company, pursuant
to EITF Issue No. 00-19, the Company recorded the fair value of the conversion
options as long-term liabilities, as it is assumed that the Company will be
required to net-cash settle the underlying securities. The fair values of the
new convertible notes and conversion options of $2,361,000 and $339,000,
respectively, were determined by the Company using the following assumptions:
the Companys Common stock price at March 25, 2003, a credit spread of 30% over
LIBOR rates at March 25, 2003, and an annualized stock volatility of 65%. The
value of the new convertible notes and conversion options of $2,392,000 and
$609,000, respectively are recorded as long-term liabilities in the Companys
consolidated balance sheets at September 30, 2003. Debt issuance costs, which
amounted to $75,000, were recorded as other assets in the Companys
consolidated balance sheets, in accordance with APB Opinion No. 21.

Based on the provisions of SFAS No. 133 and EITF Issue No. 00-19, the
Company recorded income based on the changes in the fair values of the new
conversion options and original warrants of $61,000 and $241,000, respectively,
in the Companys consolidated statements of operations for the three months
ended March 31, 2003, and a loss based on the changes in the fair values of the
new conversion options and original warrants of $886,000 and $195,000,
respectively, in the Companys consolidated statements of operations for the
three months ended June 30, 2003. For the three months ended September 30,
2003, the Company recorded income based on the changes in the fair values of
the new conversion options and original warrants of $555,000 and $112,000,
respectively. The amortization of discount on the new convertible notes and
debt issue costs totaling $37,000 were accounted for using the interest method,
in accordance with the provisions of APB Opinion No. 21.

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

Interest on these notes is payable quarterly in arrears in cash. The
notes contain certain events of default, including, but not limited to: (i)
failure to pay principal and interest on the notes when payments become due,
(ii) judgments against the Company in excess of $1,000,000, (iii) event of
bankruptcy, and (iv) material breach of representations, covenants or other
terms. Upon an event of default, the notes will become immediately due and
payable.

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

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

The $3,500,000 of proceeds was allocated to subordinated notes, common
stock, and additional paid in capital based on the market value of the
Companys common stock on March 26, 2003. In accordance with the provisions of
APB Opinion No. 21, the Company recorded a debt discount of $2,024,000. Debt
issuance costs, which amounted to $194,000, were recorded as other assets in
the Companys consolidated balance sheets in accordance

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

with APB Opinion No. 21. The amortization of the discount on the
subordinated notes and debt issue costs totaling $211,000 were accounted for
using the interest method, in accordance with the provisions of APB Opinion No.
21.

4. Related Party Transactions

During the three and nine months ended September 30, 2003, the Company
recorded revenues totaling $693,000 and $5,146,000, respectively, related to
agreements with America Online, Inc. (AOL). As of September 30, 2003, the
Company has $286,000 in accounts receivable and $687,000 in deferred revenues
relating to transactions entered into with AOL and Computer Associates, Inc.
(Computer Associates), both of whom have representatives on the Companys
Board of Directors. During the three and nine months ended September 30, 2002,
the Company recorded revenues totaling $3,088,000 and $8,686,000, respectively,
related to agreements, including reseller arrangements, with AOL and Computer
Associates. At December 31, 2002 the Company had $838,000 in accounts
receivable and $500,000 in deferred revenues relating to transactions entered
into with AOL and Computer Associates.

5. Restructuring and Impairment Charges

In fiscal 2003, the Company implemented two restructuring plans. The
first plan, implemented in February 2003, reduced operating expenses by closing
the Companys Utah office and related to the termination of 28 employees in
that office who were primarily engaged in sales and marketing activities. In
accordance with SFAS No. 146 Accounting for Costs Associated with Exit or
Disposal Activities, the Company recorded restructuring charges of $1,211,000.
The restructuring charges represent the fair value of remaining lease
commitments reduced by estimated sublease rentals, employee severance and
termination benefits, the write-off of the net book value of certain fixed
assets used in the Utah office, and other miscellaneous charges. In September
2003, the Company re-evaluated market conditions surrounding its efforts to
sub-lease the Utah office space and adjusted the restructuring charge by
$211,000 related to the reduction of estimated sublease rentals as of September
30, 2003. The Company believes that it may be necessary to adjust our estimate
of sublease income in the future as our ability to sublease the property in
Utah is contingent upon real estate and other market conditions in Utah.

The restructuring reserve activity for the first plan for the three and
nine months ended September 30, 2003 was as follows (in thousands):

|                                     |                  |   |             |     |          |   |             |      |         |   |               |      |               |   |    |     |   |   |       |      |  
|------------------------------------ | ---------------- | - | ----------- | --- | -------- | - | ----------- | ---- | ------- | - | ------------- | ---- | ------------- | - | -- | --- | - | - | ----- | ---- | -
|                                     |                  |   |             |     |          |   | Employee    |      |         |   |               |      |               |   |    |     |   |   |      
|                                     |                  |   |             |     |          |   | Severance   |      |         |   |               |      |               |   |    |     |   |   |      
|                                     |                  |   |             |     |          |   | and         |      |         |   |               |      |               |   |    |     |   |   |      
|                                     |                  |   |             |     |          |   | Termination |      | Asset   |   | Miscellaneous |      | Restructuring
|                                     |                  |   | Lease Costs |     | Benefits |   | Write-offs  |      | Charges |   | Accrual      
|                                     |                  |   |             |     |          |   |             |      |         |   |              
|Restructuring and impairment
charges |                  | $ | 459         |     |          | $ | 367         |      |         | $ | 361           |      |               | $ | 24 |     |   | $ | 1,211 |     
|                                     | Cash paid        |   |             | (36 | )        |   |             | (350 | )       |   |               |     |               |   |    | (24 | ) |   |       | (410 | )
|                                     | Non-cash charges |   |             |    |          |   |             |     |         |   |               | (361 | )             |   |    |    |   |   |       | (361 | )
|                                     |                  |   |             |     |          |   |             |      |         |   |               |      |               |   |    |     |   |   |       |     
|Balance at March 31, 2003            |                  |   | 423         |     |          |   | 17          |      |         |   |              |      |               |   |   |     |   |   | 440   |     
|                                     | Cash paid        |   |             | (53 | )        |   |             | (17  | )       |   |               |     |               |   |    |    |   |   |       | (70  | )
|                                     |                  |   |             |     |          |   |             |      |         |   |               |      |               |   |    |     |   |   |       |     
|Balance as of June 30, 2003          |                  |   | 370         |     |          |   |            |      |         |   |              |      |               |   |   |     |   |   | 370   |     
|Restructuring charge                 |                  |   | 211         |     |          |   |            |      |         |   |              |      |               |   |   |     |   |   | 211   |     
|                                     | Cash paid        |   |             | (56 | )        |   |             |     |         |   |               |     |               |   |    |    |   |   |       | (56  | )
|                                     |                  |   |             |     |          |   |             |      |         |   |               |      |               |   |    |     |   |   |       |     
|Balance as of September 30, 2003     |                  | $ | 525         |     |          | $ |            |      |         | $ |              |      |               | $ |   |     |   | $ | 525   |     
|                                     |                  |   |             |     |          |   |             |      |         |   |               |      |               |   |    |     |   |   |       |     

The second plan was implemented in September 2003, and was designed to
streamline the business. Under the plan the Company eliminated 24 sales and
marketing, research and development, and general and administrative positions.
The Company incurred a restructuring charge of $463,000 related to one-time
severance arrangements. The charge is recorded on our income statement as a
restructuring and impairment charge. The second restructuring plan was
completed by September 30, 2003.

The restructuring activity for the second restructuring plan is as follows
(in thousands):

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                 |           |   |               |      |               |   |     |      |  
|-------------------------------- | --------- | - | ------------- | ---- | ------------- | - | --- | ---- | -
|                                 |           |   | Employee      |      |               |   |    
|                                 |           |   | Severance and |      |               |   |    
|                                 |           |   | Termination   |      | Restructuring
|                                 |           |   | Benefits      |      | Accrual      
|                                 |           |   |               |      |              
|Restructuring charges            |           | $ | 463           |      |               | $ | 463 |     
|                                 | Cash paid |   |               | (256 | )             |   |     | (256 | )
|                                 |           |   |               |      |               |   |     |     
|Balance as of September 30, 2003 |           | $ | 207           |      |               | $ | 207 |     
|                                 |           |   |               |      |               |   |     |     

6. Comprehensive Loss

Total comprehensive loss for the three and nine months ended September 30,
2003 and 2002 consisted of the following (in thousands):

|                                                |  |               |        |               |  |      |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | ------------- | ------ | ------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                |  | Three Months  |        | Nine Months  
|                                                |  | Ended         |        | Ended        
|                                                |  | September 30, |        | September 30,
|                                                |  |               |        |              
|                                                |  | 2003          |        | 2002          |  | 2003 |        | 2002
|                                                |  |               |        |               |  |      |        |     
|Net loss                                        |  | $             | (5,518 | )             |  | $    | (4,000 | )    |  | $ | (18,308 | ) |  | $ | (18,576 | )
|Foreign currency translation adjustment         |  |               | (6     | )             |  |      | 7      |      |  |   | (14     | ) |  |   | (1      | )
|Unrealized gain (loss) on marketable securities |  |               |       |               |  |      | 107    |      |  |   |        |   |  |   | 60      |  
|                                                |  |               |        |               |  |      |        |      |  |   |         |   |  |   |         |  
|Comprehensive loss                              |  | $             | (5,524 | )             |  | $    | (3,886 | )    |  | $ | (18,322 | ) |  | $ | (18,517 | )
|                                                |  |               |        |               |  |      |        |      |  |   |         |   |  |   |         |  

7. Commitments and Contingencies

On May 5, 2003, the Company entered into termination protection agreements
with certain executives of the Company. The agreements provide benefits
following a change in control by the Company, and the termination of the
executives employment within 12 to 24 months following the change in control
that occurs on or prior to December 31, 2006. The benefits include severance
payments ranging from 2 to 2.99 times the executives annual compensation and
full vesting of all outstanding stock options granted to these executives.

These benefits replace the existing termination benefits in change of
control agreements which provided for one times the executives annual
compensation and full vesting of stock options that the executives were
entitled to in the event of a change in control prior to the execution of the
termination protection agreements.

On November 6, 2003, a former officer of the Company filed a claim against
the Company in New York State Supreme Court alleging that the Company breached
an employment agreement between the officer and Viewpoint. The suit claims
$1,050,000 in damages. The Company believes it did not breach the employment
agreement and that it has strong defenses against the officers claims. In
responding to the claims, the Company intends to assert its claims against the
former officer in the amount of $425,000, plus attorneys fees.

8. Subsequent Events

In October 2003, the Company entered into an amended license agreement
with AOL which provides for payments by AOL of $10,000,000, all due 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, through December 31, 2005, which represents the duration of the
Companys obligation for post-contract customer support including quarterly
upgrades and maintenance requirements.

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

In November 2003, the Company approved a grant of 2,375,000 non-statutory
stock options to acquire Company common stock to certain employees 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 provisions of the Companys
stock option plans. The options will vest over a period of up to two years.
Additionally, the Company plans to reduce the vesting period of

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VIEWPOINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1,125,000 previously issued stock options by approximately 2 years. These options carry a
weighted average grant price of $0.76. If the fair market value the day of the
reduction exceeds the price on the original date of grant, the Company would incur an expense if the
applicable employee terminates employment prior to the conclusion of the
original vesting period.

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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 2003 and our Annual Report on Form 10-K/A for 2002. When used
in this report, the words expects, anticipates, intends, plans,
believes, seeks, targets, estimates, and similar expressions are
generally intended to identify forward-looking statements. You should not
place undue reliance on 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) provides interactive
media technologies and digital content creation services for website marketing,
online advertising, and embedded applications. Our graphics operating system
has been licensed by Fortune 500 companies and others for use in online,
offline and embedded applications serving a wide variety of needs, including:
interactive marketing campaigns, rich media advertising and product
presentations, and business process visualizations.

Until December 1999, the Company (which was then known as MetaCreations)
was primarily engaged in the development, marketing, and sales of prepackaged
software graphics products. Its principal products were computer graphics
painting tools, photo editing software, and 3D graphics software. With its
acquisition of Real Time Geometry Corporation in December 1996, the Company
became involved, on a limited basis, in the development of technologies
designed to make practical the efficient display and deployment of interactive
media on the Internet. In June 1999, the Company increased its commitment to
the development of interactive Internet technologies and formed Viewpoint
(formerly Metastream Corporation) to increase the pace of development of an
Internet-based product and a business model to exploit these technologies.

In December 1999, the Board of Directors of the Company approved a plan to
focus exclusively on the Internet technologies of Viewpoint and to
correspondingly divest the Company of all its prepackaged software business.
Since then, our primary goal has been to establish the Viewpoint Media Player
as the standard platform for the display of interactive media content,
particularly on the Internet.

The Companys primary initiatives include:



| |  |  | Licensing technology for website marketing and e-commerce visualization solutions;                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Licensing technology for Internet advertising purposes;                                                                                               
|
| |  |  | Providing a full range of fee-based digital content creation and
software engineering services for implementing visualization solutions
for marketing;
|
| |  |  | Forging technological alliances with leading interactive agencies,
Web content providers, major portals, ISPs, tool companies and computer
OEMs; and  
|
| |  |  | Maximizing market penetration of the Viewpoint Media Player.                                                                                          

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Viewpoint believes that its success will depend largely on its ability to
improve and enhance its interactive media technologies and the distribution of
those technologies. Accordingly, Viewpoint has invested and intends to
continue to invest in research and development and sales and marketing.
Revenues from continuing operations primarily have been from the sale of
technology licenses and fee-based professional services, including digital
content creation services and engineering services to enhance and create new
enterprise software applications.

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 September
30, 2003, had an accumulated deficit of $242,385,000. Viewpoints prospects
must be considered in light of the risks and difficulties frequently
encountered by early stage technology companies. There can be no assurance
that Viewpoint will achieve or sustain profitability.

RESULTS OF OPERATIONS

The following table sets forth for the three and nine months ended
September 30, 2003 and 2002, the Companys consolidated statements of
operations expressed as a percentage of total revenues for the periods
indicated:

|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  | ------------- | --- | ------------- |  | ---- | -- | ---- |  | ---- | --- | - |  | ---- | -- | -
|                                                              |                                                                                                         |  | Three Months  |     | Nine Months  
|                                                              |                                                                                                         |  | Ended         |     | Ended        
|                                                              |                                                                                                         |  | September 30, |     | September 30,
|                                                              |                                                                                                         |  |               |     |              
|                                                              |                                                                                                         |  | 2003          |     | 2002          |  | 2003 |    | 2002
|                                                              |                                                                                                         |  |               |     |               |  |      |    |     
|Statements of Operations Data                                 |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |   
|Revenues:                                                     |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |   
|                                                              | Licenses                                                                                                |  |               | 13  | %             |  |      | 31 | %    |  |      | 20  | % |  |      | 27 | %
|                                                              | Related party licenses                                                                                  |  |               |    |               |  |      | 38 |      |  |      | 9   |   |  |      | 45 |  
|                                                              | Services                                                                                                |  |               | 60  |               |  |      | 11 |      |  |      | 34  |   |  |      | 17 |  
|                                                              | Related party services                                                                                  |  |               | 27  |               |  |      | 20 |      |  |      | 37  |   |  |      | 11 |  
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Total revenues                                                |                                                                                                         |  | 100           |     |               |  | 100  |    |      |  | 100  |     |   |  | 100  |   
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Cost of revenues:                                             |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |   
|                                                              | Licenses                                                                                                |  |               | 1   |               |  |      |   |      |  |      | 1   |   |  |      | 2  |  
|                                                              | Services                                                                                                |  |               | 56  |               |  |      | 21 |      |  |      | 45  |   |  |      | 19 |  
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Total cost of revenues                                        |                                                                                                         |  | 57            |     |               |  | 21   |    |      |  | 46   |     |   |  | 21   |   
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Gross profit                                                  |                                                                                                         |  | 43            |     |               |  | 79   |    |      |  | 54   |     |   |  | 79   |   
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Operating expenses:                                           |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |   
|                                                              | Sales and marketing (including non-cash stock-based
compensation charges)                               |  |               | 65  |               |  |      | 77 |      |  |      | 69  |   |  |      | 73 |  
|                                                              | Research and development (including non-cash stock-based
compensation charges)                          |  |               | 48  |               |  |      | 27 |      |  |      | 37  |   |  |      | 30 |  
|                                                              | General and administrative (including non-cash stock-based
compensation charges)                        |  |               | 124 |               |  |      | 42 |      |  |      | 73  |   |  |      | 44 |  
|                                                              | Depreciation                                                                                            |  |               | 15  |               |  |      | 9  |      |  |      | 12  |   |  |      | 9  |  
|                                                              | Amortization of intangible assets                                                                       |  |               |    |               |  |      |   |      |  |      |    |   |  |      | 4  |  
|                                                              | Restructuring and impairment charges related to office closure                                          |  |               | 27  |               |  |      |   |      |  |      | 17  |   |  |      |   |  
|                                                              | Impairment of goodwill and other intangible assets                                                      |  |               |    |               |  |      |   |      |  |      |    |   |  |      | 41 |  
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Total operating expenses                                      |                                                                                                         |  | 279           |     |               |  | 155  |    |      |  | 208  |     |   |  | 201  |   
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Loss from operations                                          |                                                                                                         |  | (236          | )   |               |  | (76  | )  |      |  | (154 | )   |   |  | (122 | ) 
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Other income (expense):                                       |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |   
|                                                              | Interest and other income, net                                                                          |  |               |    |               |  |      | 1  |      |  |      |    |   |  |      | 1  |  
|                                                              | Interest expense                                                                                        |  |               | (10 | )             |  |      |   |      |  |      | (7  | ) |  |      |   |  
|                                                              | Changes in fair values of warrants to purchase common stock
and conversion options of convertible notes |  |               | 26  |               |  |      |   |      |  |      | 9   |   |  |      |   |  
|                                                              | Loss on early extinguishment of debt                                                                    |  |               |    |               |  |      |   |      |  |      | (15 | ) |  |      |   |  
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Total other income (expenses)                                 |                                                                                                         |  | 16            |     |               |  | 1    |    |      |  | (13  | )   |   |  | 1    |   
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Loss before provision for income taxes                        |                                                                                                         |  | (220          | )   |               |  | (75  | )  |      |  | (167 | )   |   |  | (121 | ) 
|Provision for income taxes                                    |                                                                                                         |  | 1             |     |               |  |     |    |      |  |     |     |   |  |     |   
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Net loss from continuing operations                           |                                                                                                         |  | (221          | )   |               |  | (75  | )  |      |  | (167 | )   |   |  | (121 | ) 
|Adjustment to net loss on disposal of discontinued operations |                                                                                                         |  | 2             |     |               |  |     |    |      |  | 1    |     |   |  | 1    |   
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |    |  
|Net loss                                                      |                                                                                                         |  | (219          | )%  |               |  | (75  | )% |      |  | (166 | )%  |   |  | (120 | )%
|                                                              |                                                                                                         |  |               |     |               |  |      |    |      |  |      |     |   |  |      |   

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Critical Accounting Policies And Estimates

Viewpoints discussion and analysis of its financial condition and results
of operations are based upon its consolidated financial statements, which have
been prepared in accordance with accounting principals 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. On an on-going basis, the Company
evaluates its critical accounting policies and estimates, including those
related to revenue recognition and goodwill and other intangible assets. 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 our 2002 Annual Report on Form
10-K/A.

We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements:

Revenue Recognition

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

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

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

Fee-based professional services for customized software development are
performed on a fixed-fee or time-and-materials basis under separate service
arrangements. Revenues for fixed-fee arrangements are recognized over the
pattern of performance in accordance with the provisions of SAB No. 101. The
pattern of performance for service arrangements is measured principally by the
percentage of costs incurred and accrued to date for each contract, which
principally consist of direct labor costs, cost of outsourcing, and overhead,
to the estimated total cost for each contract at completion. Revenues from
customer support services are recognized ratably over the term of the contract.
Revenues from training services are recognized as services are performed.

Fees from licenses sold together with fee-based professional services are
generally recognized upon delivery of the software, provided that the payment
of the license fees are not dependent upon the performance of the services, and
the services are not essential to the functionality of the licensed software.
If the services are essential to the functionality of the software, or payment
of the license fees are dependent upon the performance of the services,

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both the software license and service fees are recognized in accordance
with SOP 81-1 Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. The percentage of competition method is used for
those arrangements in which reasonably dependable estimates are available.

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, we use 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.

Standard terms for license arrangements require payment within 90 days of
the contract date, which typically coincides with delivery. Standard terms for
service arrangements, which are typically billed and collected on an
installment basis, require final payment within 90 days of completion of the
services. Probability of collection is based upon the assessment of the
customers financial condition through the review of their current financial
statements and/or credit reports. For follow-on sales to existing customers,
prior payment history is also used to evaluate probability of collection. Our
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.

The Company periodically enters into nonmonetary arrangements whereby the
Companys licenses or services are exchanged for services of its customers.
Nonmonetary revenues are recognized at the estimated fair value of the services
received. Generally, nonmonetary revenues equal nonmonetary expenses, however,
due to timing, nonmonetary accounts receivable and accounts payable may result.

The Company loaned $1,500,000 to a former officer of the Company during
2000. The loan became due and was in default. The Company had commercial
litigation to pursue recovery, however, notification of a court judgement in
favor of the former officer was received in September 2003. As a result of
this unfavorable outcome, a loss of $750,000 was charged to operations to write
off the remaining balance of the note.

Goodwill and Intangible Assets

Effective January 1, 2002, the Company completed the adoption of SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting. As
required by SFAS No. 142, the Company discontinued amortizing the remaining
balances of goodwill as of January 1, 2002. All remaining and future acquired
goodwill will be subject to impairment tests annually, or earlier if indicators
of potential impairment exist, using a fair-value-based approach. When
evaluating goodwill for potential impairment, the Company first compares the
fair value of the reporting unit, based on market values of the reporting unit
or on the present value of estimated future cash flows, with its carrying
amount. If the estimated fair value of the reporting unit is less than its
carrying amount, an impairment loss calculation is prepared. The impairment
loss calculation compares the implied fair value of the reporting unit goodwill
with the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. All other
intangible assets will continue to be amortized over their estimated useful
lives and assessed for impairment under SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.

Derivatives

The Company accounts for the fair values of the 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

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Settled in, a Companys Own Stock, which requires the Company to
bifurcate and separately account for its embedded derivatives contained in the
Companys convertible notes. The Company is required to carry these embedded
derivatives on its balance sheet at fair value and the unrealized changes in
the value of these embedded derivatives are reflected in net income as changes
in fair values of warrants to purchase common stock and conversion options of
convertible notes.

Revenues

|                    |                        |                |        |                        |       |               |        |        |       |  |     |      |     |   
|------------------- | ---------------------- | -------------- | ------ | ---------------------- | ----- | ------------- | ------ | ------ | ----- |  | --- | ---- | --- | --
|                    |                        |                |        | September 30,          |       | September 30, |        | %     
|                    |                        |                |        | 2003                   |       | 2002          |        | Change
|                    |                        |                |        |                        |       |               |        |       
|                    |                        |                |        | (dollars in thousands) |       |               |        |       
|Three months ended: |                        |                |        |                        |       |               |        |        |       |  |     |     
|                    | Licenses               |                | $      | 317                    |       |               | $      | 1,633  |       |  |     | (81  | )% 
|                    | Related party licenses |                |        |                       |       |               |        | 2,024  |       |  |     | (100 | )% 
|                    | Services               |                |        | 1,508                  |       |               |        | 605    |       |  |     | 149  | %  
|                    | Related party services |                |        | 693                    |       |               |        | 1,064  |       |  |     | (35  | )% 
|                    |                        |                |        |                        |       |               |        |        |       |  |     |     
|                    |                        | Total revenues |        | $                      | 2,518 |               |        | $      | 5,326 |  |     |      | (53 | )%
|Nine months ended:  |                        |                |        |                        |       |               |        |        |       |  |     |     
|                    | Licenses               |                | $      | 2,166                  |       |               | $      | 4,129  |       |  |     | (48  | )% 
|                    | Related party licenses |                |        | 1,060                  |       |               |        | 6,929  |       |  |     | (85  | )% 
|                    | Services               |                |        | 3,705                  |       |               |        | 2,673  |       |  |     | 39   | %  
|                    | Related party services |                |        | 4,086                  |       |               |        | 1,757  |       |  |     | 133  | %  
|                    |                        |                |        |                        |       |               |        |        |       |  |     |     
|Total               |                        | $              | 11,017 |                        |       | $             | 15,488 |        |       |  | (29 | )%  

During 2003, the Company began to migrate its sales efforts toward larger
customers. The customers the Company is currently targeting are contracting
limited use of our software to understand its capabilities before they will
commit to larger and longer license purchases. These limited use projects are
generally for services as we develop content for the customers to use with our
software. As we have begun migrating our sales efforts towards these larger
customers with a longer license sales cycle, we are generally experiencing what
we believe to be a short-term decline in the mix of license revenues relative
to total revenues. We believe that this mix will change in the future as the
customers who are currently using our software in these limited use projects
purchase larger and longer use licenses, which will help increase the mix of
license revenues relative to total revenues. Additionally we believe we may
need to reduce our license pricing at the entry level of the market to
successfully broaden our potential customer base. If we are not able to
increase the number of sales we make at the entry level, or sell larger and
longer licenses to our larger customers we may not be able to reverse our
decline in License revenues.

License revenues decreased $1,316,000 or 81%, for the three months ended
September 30, 2003, compared to the same period last year. This decrease is
the result of a change in the mix of our business during the period from
primarily license based to service based and an overall decline in the
licensing of our technology to VARs. During the three months ended September
30, 2003, the Company only sold a few small project licenses and one
international VAR sale. As a result, during the three months ended September
30, 2003, the number of pure license arrangements entered into as well as the
average size of license arrangements decreased substantially when compared to
the same period last year. During the three months ended September 30, 2002
the company entered into several VAR arrangements, as well as a substantial
enterprise sale that is not yet up for renewal.

License revenues decreased $1,963,000, or 48% for the nine months ended
September 30, 2003 compared to the same period last year. The decrease is
primarily the result of a decrease in VAR arrangements in 2003 compared to 2002
which accounted for $1,360,000 of the decrease. The remainder of the decrease
is due to our success at selling a larger enterprise license in 2002 that we
have not successfully duplicated in 2003 due to a reduction in the salesforce
and our customers inclination to purchase smaller project licenses in 2003
instead of larger and longer enterprise licenses. We do not anticipate
entering into significant VAR arrangements in the immediate future.

Related party license revenues decreased approximately $2,024,000, or
100%, and $5,869,000, or 85%, for the three and nine months ended September 30,
2003, respectively, compared to the same periods last year. The decrease in
related party license revenues stems from the Companys main contract with
America Online, Inc. (AOL), which was executed and amended in 2002 under
which the Company had recognized license revenues

24



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when payments were due. This contract with AOL resulted in $5,825,000 of
license revenue during the nine months ended September 30, 2002 as compared to
$1,000,000 in the nine months ended September 30, 2003.

Service revenues increased approximately $903,000, or 149%, for the three
months ended September 30, 2003 compared to the same period last year. The
increase in service revenue compared to 2002 is largely attributable to project
work performed for several larger clients, and the receipt of cash from certain
clients who were considered credit risks in prior periods for which revenue was
not previously recognized.

Service revenues increased approximately $1,032,000, or 39%, for the nine
months ended September 30, 2003, compared to the same period last year. The
increase is primarily attributable to our efforts to target larger customers
for smaller limited use license contracts and content development services that
will be followed by our efforts to sell larger licenses to these customers.
While we have had a slight decrease in the total number of customers we bill
for services, revenue from our average customer is 43% greater for the nine
month period in 2003 compared to 2002.

Related party service revenues decreased approximately $371,000, or 35%,
but increased $2,329,000 or 133%, for the three and nine months ended September
30, 2003, respectively, compared to the same periods last year. These changes
were generally due to AOLs expanded use of the Companys engineering and
creative services resources during 2003 to make fuller use of the license
rights AOL has for Viewpoint technology. The reduction of services revenues in
the three month period ended September 30, 2003 was affected by the timing of
completion for certain AOL projects.

Cost of revenues

|                    |          |                                 |   |                        |    |               |   |        |    |   |  |     |    | 
|------------------- | -------- | ------------------------------- | - | ---------------------- | -- | ------------- | - | ------ | -- | - |  | --- | -- | 
|                    |          |                                 |   | September 30,          |    | September 30, |   | %     
|                    |          |                                 |   | 2003                   |    | 2002          |   | Change
|                    |          |                                 |   |                        |    |               |   |       
|                    |          |                                 |   | (dollars in thousands) |    |               |   |       
|Three months ended: |          |                                 |   |                        |    |               |   |        |    |   |  |    
|                    | Licenses |                                 | $ | 21                     |    |               | $ | 6      |    |   |  | 250 | % 
|                    |          | Percentage of license revenues  |   |                        | 7  | %             |   |        |   | % |  |     |    | 
|Nine months ended:  |          |                                 |   |                        |    |               |   |        |    |   |  |    
|                    | Licenses |                                 | $ | 96                     |    |               | $ | 251    |    |   |  | (62 | )%
|                    |          | Percentage of license revenues  |   |                        | 3  | %             |   |        | 2  | % |  |     |    | 
|Three months ended: |          |                                 |   |                        |    |               |   |        |    |   |  |    
|                    | Services |                                 | $ | 1,419                  |    |               | $ | 1,125  |    |   |  | 26  | % 
|                    |          | Percentage of service revenues  |   |                        | 65 | %             |   |        | 67 | % |  |     |    | 
|Nine months ended:  |          |                                 |   |                        |    |               |   |        |    |   |  |    
|                    | Services |                                 | $ | 4,967                  |    |               | $ | 2,947  |    |   |  | 69  | % 
|                    |          | Percentage of services revenues |   |                        | 64 | %             |   |        | 67 | % |  |     |    | 

Cost of revenues consists primarily of salaries, consulting fees and
overhead for those who provide fee-based content creation and engineering
professional services. The increase in cost of revenues is directly
attributable to an increase in service revenues. Services expenses as a
percentage of services revenue decreased slightly for the three and nine month
periods ended September 30, 2003 as the company relied more heavily in 2003 on
outside labor to complete its projects and received more favorable pricing in
its agreements with customers. The reduction in cost of revenues attributable
to licenses was due to the reduction in sales made to VARs during 2003.

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Sales and marketing (including non-cash stock-based compensation charges
totaling $88 and $552 for the three months ended September 30, 2003 and 2002,
respectively and $467 and $1,992 for the nine months ended September 30, 2003
and 2002, respectively)

|                    |                              |  |                        |       |               |  |        |        |   |  |  |     |   
|------------------- | ---------------------------- |  | ---------------------- | ----- | ------------- |  | ------ | ------ | - |  |  | --- | --
|                    |                              |  | September 30,          |       | September 30, |  | %     
|                    |                              |  | 2003                   |       | 2002          |  | Change
|                    |                              |  |                        |       |               |  |       
|                    |                              |  | (dollars in thousands) |       |               |  |       
|Three months ended: |                              |  |                        |       |               |  |        |        |   |  |  |    
|                    | Sales and marketing          |  | $                      | 1,637 |               |  | $      | 4,068  |   |  |  | (60 | )%
|                    | Percentage of total revenues |  |                        | 65    | %             |  |        | 77     | % |  |  |     |   
|Nine months ended:  |                              |  |                        |       |               |  |        |        |   |  |  |    
|                    | Sales and marketing          |  | $                      | 7,625 |               |  | $      | 11,234 |   |  |  | (32 | )%
|                    | Percentage of total revenues |  |                        | 69    | %             |  |        | 73     | % |  |  |     |   

Sales and marketing expenses include salaries and benefits, sales
commissions, non-cash stock-based compensation charges, consulting fees, and
travel and entertainment expenses for our sales and marketing personnel. Sales
and marketing expenses also include the cost of programs aimed at increasing
revenue, such as advertising, trade shows, and public relations.

Sales and marketing expenses decreased by $2,431,000, or 60%, for the
three months ended September 30, 2003 compared to the same period last year
primarily due to a decrease in salaries, commissions and benefits of $1,259,000
and non-cash stock-based compensation charges of $463,000. Salaries and
benefits decreased due to the office closure in Utah and other reductions in
2003. Non-cash stock-based compensation charges decreased due to headcount
reductions in marketing and creative service personnel who had received option
grants in the past where the exercise price was lower than the market value of
the Companys common stock on the date of grant. The Company expects non-cash
stock-based compensation expense charges to continue to decrease in subsequent
periods. However, since the remaining unamortized deferred compensation as of
September 30, 2003 amounted to $586,000 and significant compensation cost is
not expected to be recorded on future grants of stock options, the Company does
not expect those decreases to be as significant as in previous quarters.
Currently, the Company issues stock options to new personnel with an exercise
price equal to the market value of the common stock on the date of grant. Other
decreases in Sales and marketing included $251,000 in lower marketing
expenditures due to the Company narrowing its focus on marketing efforts to
certain industries in 2003.

Sales and marketing expenses decreased by $3,609,000, or 32%, for the nine
months ended September 30, 2003 compared to the same period last year due,
primarily due to decreases in non-cash stock-based compensation charges of
$1,525,000 and salaries, commissions and benefits of $1,891,000. This was
partially offset by an increase in consulting fees of $381,000. Non-cash
stock-based compensation charges decreased due to headcount reductions in
marketing and creative service personnel who had received option grants in the
past where the exercise price was lower than the market value of the Companys
common stock on the date of grant. Salaries and benefits decreased due to the
office closure in Utah and other headcount reductions in the first and third
quarters of 2003. Consulting expenses increased due to training related costs
associated with the Companys plan to outsource certain content creation
services to international partners, which the Company expects will increase its
fee-based professional service margins over time.

Research and development (including non-cash stock-based compensation charges
totaling $138 and $366 for the three months ended September 30, 2003 and 2002,
respectively and $803 and $1,071 for the nine months ended September 30, 2003
and 2002, respectively)

|                    |                              |  |                        |       |               |  |        |       |   |  |  |     |   
|------------------- | ---------------------------- |  | ---------------------- | ----- | ------------- |  | ------ | ----- | - |  |  | --- | --
|                    |                              |  | September 30,          |       | September 30, |  | %     
|                    |                              |  | 2003                   |       | 2002          |  | Change
|                    |                              |  |                        |       |               |  |       
|                    |                              |  | (dollars in thousands) |       |               |  |       
|Three months ended: |                              |  |                        |       |               |  |        |       |   |  |  |    
|                    | Research and development     |  | $                      | 1,201 |               |  | $      | 1,439 |   |  |  | (17 | )%
|                    | Percentage of total revenues |  |                        | 48    | %             |  |        | 27    | % |  |  |     |   
|Nine months ended:  |                              |  |                        |       |               |  |        |       |   |  |  |    
|                    | Research and development     |  | $                      | 4,125 |               |  | $      | 4,619 |   |  |  | (11 | )%
|                    | Percentage of total revenues |  |                        | 37    | %             |  |        | 30    | % |  |  |     |   

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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, when technological feasibility has been
established, it is probable that the project will be completed and the software
will be used as intended. The Company expenses costs incurred during
preliminary project assessment, research and development, re-engineering,
training and application maintenance.

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

Research and development expenses decreased by $238,000, or 17%, and
$494,000, or 11%, for the three and nine months ended September 30, 2003,
respectively, compared to the same periods last year. The decrease is
primarily attributable to a decrease in non-cash stock-based compensation for
three and nine months ended September 30, 2003, of $228,000 and $268,000,
respectively. The Company expects non-cash stock-based compensation expense
charges to continue to decrease in subsequent periods. However, since the
remaining unamortized deferred compensation as of September 30, 2003 amounted
to $586,000 and significant compensation cost is not expected to be recorded on
future grants of stock options, the Company does not expect those decreases to
be as significant as in previous quarters. Salaries and benefits also
decreased for three and nine months ended September 30, 2003 by $33,000 and
$188,000, respectively, primarily due to specific engineering salaries and
benefits which were charged to cost of revenues as compared to research and
development, as a result of revenue generating customer-specific development
work.

General and administrative (including non-cash stock-based compensation charges
totaling $294 and $282 for the three months ended September 30, 2003 and 2002,
respectively and $1,118 and $1,110 for the nine months ended September 30, 2003
and 2002, respectively)

|                    |                              |  |                        |       |               |  |        |       |   |  |  |    |  
|------------------- | ---------------------------- |  | ---------------------- | ----- | ------------- |  | ------ | ----- | - |  |  | -- | -
|                    |                              |  | September 30,          |       | September 30, |  | %     
|                    |                              |  | 2003                   |       | 2002          |  | Change
|                    |                              |  |                        |       |               |  |       
|                    |                              |  | (dollars in thousands) |       |               |  |       
|Three months ended: |                              |  |                        |       |               |  |        |       |   |  |  |   
|                    | General and administrative   |  | $                      | 3,133 |               |  | $      | 2,247 |   |  |  | 39 | %
|                    | Percentage of total revenues |  |                        | 124   | %             |  |        | 42    | % |  |  |    |  
|Nine months ended:  |                              |  |                        |       |               |  |        |       |   |  |  |   
|                    | General and administrative   |  | $                      | 8,058 |               |  | $      | 6,846 |   |  |  | 18 | %
|                    | Percentage of total revenues |  |                        | 73    | %             |  |        | 44    | % |  |  |    |  

General and administrative expenses primarily consist of corporate
overhead of the Company, which includes salaries and benefits related to
finance, human resources, legal, and executive personnel along with other
administrative costs such as facilities costs, legal, accounting and investor
relations fees, insurance expense, and bad debt expense.

General and administrative expenses increased by $886,000, or 39%, for the
three months ended September 30,

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2003 compared to the same period last year principally due to our
recognition of a charge for an unfavorable legal decision. The Company had
previously estimated it would receive a favorable decision, and had anticipated
the receipt of $750,000 as a result of the conclusion of the case. Based upon
the decision in the case, the Company has recorded a loss of $750,000 on the
write-off of the remaining unreserved notes receivable which increased general
and administrative expense this quarter. The Company wrote off $226,000 of
internally developed software that had been previously capitalized as it
re-evaluated its estimate of the softwares utility and concluded that the
write-off of the remaining balance was appropriate. The Company had increases
in accounting and printing costs of $111,000 due to the filing of stock
registration rights associated with its convertible debt facility and other
filings. Finally, the Company had increases in expenses of $123,000 associated
with hiring new management. These increases were principally offset by a
decrease in bad debt expense of $431,000 attributable to a large reserve that
was established in 2002 for certain specific receivables.

General and administrative expenses increased by $1,212,000, or 18%, for
the nine months ended September 30, 2003 compared to the same period last year,
due to a loss on the write-off of a note receivable in the amount of $750,000,
associated legal costs, a software asset write-off of $226,000, bad debt
expense of $175,000, and accounting and printing costs of $131,000. These costs
were partially offset by a decrease in facilities and office expenses of
$151,000. The decrease in facilities and office expenses is attributable to the
Companys overall cost reduction strategy including the closure of the
Companys Utah office during the three months ended March 31, 2003.

Depreciation

|                    |                              |  |                        |       |               |  |        |       |   |  |  |     |   
|------------------- | ---------------------------- |  | ---------------------- | ----- | ------------- |  | ------ | ----- | - |  |  | --- | --
|                    |                              |  | September 30,          |       | September 30, |  | %     
|                    |                              |  | 2003                   |       | 2002          |  | Change
|                    |                              |  |                        |       |               |  |       
|                    |                              |  | (dollars in thousands) |       |               |  |       
|Three months ended: |                              |  |                        |       |               |  |        |       |   |  |  |    
|                    | Depreciation                 |  | $                      | 383   |               |  | $      | 493   |   |  |  | (22 | )%
|                    | Percentage of total revenues |  |                        | 15    | %             |  |        | 9     | % |  |  |     |   
|Nine months ended:  |                              |  |                        |       |               |  |        |       |   |  |  |    
|                    | Depreciation                 |  | $                      | 1,305 |               |  | $      | 1,463 |   |  |  | (11 | )%
|                    | Percentage of total revenues |  |                        | 12    | %             |  |        | 9     | % |  |  |     |   

Depreciation expense decreased $110,000, or 22%, and $158,000, or 11%, for
the three and nine months ended September 30, 2003, respectively, compared to
the same periods last year, due to a decrease in the average property and
equipment balances during the respective periods.

Amortization of intangible assets

|                    |                                   |  |                        |   |               |  |        |     |   |  |  |     |   
|------------------- | --------------------------------- |  | ---------------------- | - | ------------- |  | ------ | --- | - |  |  | --- | --
|                    |                                   |  | September 30,          |   | September 30, |  | %     
|                    |                                   |  | 2003                   |   | 2002          |  | Change
|                    |                                   |  |                        |   |               |  |       
|                    |                                   |  | (dollars in thousands) |   |               |  |       
|Three months ended: |                                   |  |                        |   |               |  |        |     |   |  |  |    
|                    | Amortization of intangible assets |  | $                      | 1 |               |  | $      | 1   |   |  |  | 0   | % 
|                    | Percentage of total revenues      |  |                        |  | %             |  |        |    | % |  |  |     |   
|Nine months ended:  |                                   |  |                        |   |               |  |        |     |   |  |  |    
|                    | Amortization of intangible assets |  | $                      | 9 |               |  | $      | 664 |   |  |  | (99 | )%
|                    | Percentage of total revenues      |  |                        |  | %             |  |        | 4   | % |  |  |     |   

Amortization of intangible assets for the three and nine months ended
September 30, 2003, relates to the amortization of the Companys patents and
trademarks. Amortization of intangible assets decreased $655,000 for the nine
months ended September 30, 2003 compared to the same period last year as all
intangible assets acquired in the Viewpoint Digital transaction were either
fully amortized or written off in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets during the three months ended March 31, 2002.

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Restructuring and impairment charges

|                    |                                      |  |                        |       |               |  |        |   |   |  |  |     | 
|------------------- | ------------------------------------ |  | ---------------------- | ----- | ------------- |  | ------ | - | - |  |  | --- | 
|                    |                                      |  | September 30,          |       | September 30, |  | %     
|                    |                                      |  | 2003                   |       | 2002          |  | Change
|                    |                                      |  |                        |       |               |  |       
|                    |                                      |  | (dollars in thousands) |       |               |  |       
|Three months ended: |                                      |  |                        |       |               |  |        |   |   |  |  |    
|                    | Restructuring and impairment charges |  | $                      | 674   |               |  | $      |  |   |  |  | N/A | 
|                    | Percentage of total revenues         |  |                        | 27    | %             |  |        |  | % |  |  |     | 
|Nine months ended:  |                                      |  |                        |       |               |  |        |   |   |  |  |    
|                    | Restructuring and impairment charges |  | $                      | 1,885 |               |  | $      |  |   |  |  | N/A | 
|                    | Percentage of total revenues         |  |                        | 17    | %             |  |        |  | % |  |  |     | 

In fiscal 2003, the Company implemented two restructuring plans. The
first plan, implemented in February 2003, reduced operating expenses by closing
the Companys Utah office and related to the termination of 28 employees in
that office who were primarily engaged in sales and marketing activities. In
accordance with SFAS No. 146 Accounting for Costs Associated with Exit or
Disposal Activities, the Company recorded restructuring charges of $1,211,000.
The restructuring charges represent the fair value of remaining lease
commitments reduced by estimated sublease rentals, employee severance and
termination benefits, the write-off of the net book value of certain fixed
assets used in the Utah office, and other miscellaneous charges. In September
2003, the Company re-evaluated market conditions surrounding its efforts to
sub-lease the Utah office space and adjusted the restructuring charge by
$211,000 related to the reduction of estimated sublease rentals as of September
30, 2003.

The second plan was implemented in September 2003, and was designed to
streamline the business. Under the plan the Company eliminated 24 sales and
marketing, research and development, and general and administrative positions.
The Company incurred a restructuring charge of $463,000 related to one-time
severance arrangements. The second restructuring plan was completed by
September 30, 2003.

Impairment of goodwill and other intangible assets

|                    |                                                    |  |                        |   |               |  |        |       |   |  |  |      |   
|------------------- | -------------------------------------------------- |  | ---------------------- | - | ------------- |  | ------ | ----- | - |  |  | ---- | --
|                    |                                                    |  | September 30,          |   | September 30, |  | %     
|                    |                                                    |  | 2003                   |   | 2002          |  | Change
|                    |                                                    |  |                        |   |               |  |       
|                    |                                                    |  | (dollars in thousands) |   |               |  |       
|Three months ended: |                                                    |  |                        |   |               |  |        |       |   |  |  |     
|                    | Impairment of goodwill and other intangible assets |  | $                      |  |               |  | $      |      |   |  |  | N/A  |   
|                    | Percentage of total revenues                       |  |                        |  | %             |  |        |      | % |  |  |      |   
|Nine months ended:  |                                                    |  |                        |   |               |  |        |       |   |  |  |     
|                    | Impairment of goodwill and other intangible assets |  | $                      |  |               |  | $      | 6,275 |   |  |  | (100 | )%
|                    | Percentage of total revenues                       |  |                        |  | %             |  |        | 41    | % |  |  |      |   

In conjunction with the implementation of SFAS No. 142 Goodwill and Other
Intangible Assets, the Company completed a goodwill impairment review as of
January 1, 2002 and found no impairment on that date. As of March 31, 2002,
due to the persistence of unfavorable economic conditions along with
lower-than-expected revenues generated to date and reduced estimates of future
performance of the Viewpoint Digital assets, the Company performed an
additional impairment analysis on the goodwill and other intangible asset
balances recorded upon the acquisition of Viewpoint Digital. In accordance
with the provisions of SFAS No. 142 and SFAS No. 144, the Company recorded
impairment charges totaling $6,275,000 during the three months ended March 31,
2002. The fair value of the Viewpoint Digital assets was estimated using the
expected present value of future cash flows. The assumptions supporting the
cash flows, including a discount rate of 20%, were determined using the
Companys best estimates as of the date the impairment was recorded.

In accordance with the provisions of SFAS No. 142, the Company completed a
goodwill impairment review as of January 1, 2003 and found no impairment on
that date. The fair value of the Company was determined to exceed its carrying
value by comparison to the market capitalization on that date.

During the nine months ended September 30, 2003, the market value of the
Companys equity securities declined below the Companys carrying value
indicating the existence of a potential goodwill impairment. In accordance
with SFAS No. 142, the Company performed the first step of the goodwill
impairment test as of March 31, 2003.

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The fair value of the Company was determined to exceed its carrying value using a market-based approach with selected multiples ranging from 1.5 to 2.0 times revenues and 1.8 to 2.5 times gross profit. In accordance with SFAS No. 142, the second step of the impairment test was unnecessary, and no goodwill impairment charges were recorded.

Interest and other income, net

|                    |                                |  |                        |    |               |  |        |     |   |  |  |     |   
|------------------- | ------------------------------ |  | ---------------------- | -- | ------------- |  | ------ | --- | - |  |  | --- | --
|                    |                                |  | September 30,          |    | September 30, |  | %     
|                    |                                |  | 2003                   |    | 2002          |  | Change
|                    |                                |  |                        |    |               |  |       
|                    |                                |  | (dollars in thousands) |    |               |  |       
|Three months ended: |                                |  |                        |    |               |  |        |     |   |  |  |    
|                    | Interest and other income, net |  | $                      | 8  |               |  | $      | 44  |   |  |  | (82 | )%
|                    | Percentage of total revenues   |  |                        |   | %             |  |        | 1   | % |  |  |     |   
|Nine months ended:  |                                |  |                        |    |               |  |        |     |   |  |  |    
|                    | Interest and other income, net |  | $                      | 42 |               |  | $      | 133 |   |  |  | (68 | )%
|                    | Percentage of total revenues   |  |                        |   | %             |  |        | 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 and other income, net, decreased $36,000, or 82%, and $91,000, or
68%, for the three and nine months ended September 30, 2003, respectively,
compared to the same period last year due to a decrease in average cash, cash
equivalents, and marketable securities balances as well as a decline in market
interest rates.

Interest expense

|                    |                              |  |                        |      |               |  |        |   |   |  |  |     | 
|------------------- | ---------------------------- |  | ---------------------- | ---- | ------------- |  | ------ | - | - |  |  | --- | 
|                    |                              |  | September 30,          |      | September 30, |  | %     
|                    |                              |  | 2003                   |      | 2002          |  | Change
|                    |                              |  |                        |      |               |  |       
|                    |                              |  | (dollars in thousands) |      |               |  |       
|Three months ended: |                              |  |                        |      |               |  |        |   |   |  |  |    
|                    | Interest expense             |  | $                      | (257 | )             |  | $      |  |   |  |  | N/A | 
|                    | Percentage of total revenues |  |                        | (10  | )%            |  |        |  | % |  |  |     | 
|Nine months ended:  |                              |  |                        |      |               |  |        |   |   |  |  |    
|                    | Interest expense             |  | $                      | (743 | )             |  | $      |  |   |  |  | N/A | 
|                    | Percentage of total revenues |  |                        | (7   | )%            |  |        |  | % |  |  |     | 

Interest expense consists of interest paid and accrued, and amortization
of debt discount and debt issue costs on the Companys outstanding convertible
and subordinated notes. The notes were executed and funded during the first
quarter of 2003.

Loss on early extinguishment of debt

|                    |                                      |  |                        |        |               |  |        |   |   |  |  |     | 
|------------------- | ------------------------------------ |  | ---------------------- | ------ | ------------- |  | ------ | - | - |  |  | --- | 
|                    |                                      |  | September 30,          |        | September 30, |  | %     
|                    |                                      |  | 2003                   |        | 2002          |  | Change
|                    |                                      |  |                        |        |               |  |       
|                    |                                      |  | (dollars in thousands) |        |               |  |       
|Three months ended: |                                      |  |                        |        |               |  |        |   |   |  |  |    
|                    | Loss on early extinguishment of debt |  | $                      |       |               |  | $      |  |   |  |  | N/A | 
|                    | Percentage of total revenues         |  |                        |       | %             |  |        |  | % |  |  |     | 
|Nine months ended:  |                                      |  |                        |        |               |  |        |   |   |  |  |    
|                    | Loss on early extinguishment of debt |  | $                      | (1,682 | )             |  | $      |  |   |  |  | N/A | 
|                    | Percentage of total revenues         |  |                        | (15    | )%            |  |        |  | % |  |  |     | 

On December 31, 2002, the Company completed a private placement of
convertible notes and warrants in which it issued to three institutional
investors, 4.95% convertible notes having an aggregate principal amount of
$7,000,000, and warrants to purchase 726,330 shares of Company common stock.
Interest on the convertible notes was payable quarterly in arrears in cash or,
at the option of the Company, in shares of Company common stock, provided the
Company satisfied certain financial and other conditions. The convertible
notes were to mature on December 31, 2007, unless earlier converted into shares
of Company common stock at a price of $2.26 per share. The warrants expire on
December 31, 2006, and are exercisable at a price of $2.26 per share.

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

On March 25, 2003, the Company entered into Redemption, Amendment and
Exchange Agreements with the three institutional investors with whom it had
completed the private placement of convertible notes and warrants on December
31, 2002. Pursuant to these agreements, the notice of default was withdrawn
and Viewpoint redeemed an aggregate of $3,300,000 principal amount of the
outstanding convertible notes, exchanged an aggregate of $1,000,000 principal
amount of the outstanding convertible notes for shares of Viewpoint common
stock at $0.74 per share, and exchanged the remaining $2,700,000 principal
amount of outstanding convertible notes for $2,700,000 principal amount of new
convertible notes. The convertible notes were issued in three tranches of
$900,000 each. The notes are scheduled to mature December 31, 2007. The
warrants to purchase 726,330 shares of Company common stock, which were issued
to these investors on December 31, 2002, remain outstanding.

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

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

Changes in fair value of warrants to purchase common stock and conversion
options of convertible notes

|                    |                                                                                                        |  |                        |       |               |  |        |   |   |  |  |     | 
|------------------- | ------------------------------------------------------------------------------------------------------ |  | ---------------------- | ----- | ------------- |  | ------ | - | - |  |  | --- | 
|                    |                                                                                                        |  | September 30,          |       | September 30, |  | %     
|                    |                                                                                                        |  | 2003                   |       | 2002          |  | Change
|                    |                                                                                                        |  |                        |       |               |  |       
|                    |                                                                                                        |  | (dollars in thousands) |       |               |  |       
|Three months ended: |                                                                                                        |  |                        |       |               |  |        |   |   |  |  |    
|                    | Changes in fair value of
warrants to purchase common
stock and conversion
options of convertible
notes |  | $                      | 667   |               |  | $      |  |   |  |  | N/A | 
|                    | Percentage of total revenues                                                                           |  |                        | 26    | %             |  |        |  | % |  |  |     | 
|Nine months ended:  |                                                                                                        |  |                        |       |               |  |        |   |   |  |  |    
|                    | Changes in fair value of
warrants to purchase common
stock and conversion
options of convertible
notes |  | $                      | 1,010 |               |  | $      |  |   |  |  | N/A | 
|                    | Percentage of total revenues                                                                           |  |                        | 9     | %             |  |        |  | % |  |  |     | 

Based on the provisions of SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, and EITF Issue No. 00-19 Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock, the Company recorded a gain for the three months ended
September 30, 2003 based on the decrease in fair values of the conversion
options of its convertible notes of $555,000 and warrants of $112,000. For the
nine months ended September 30, 2003, the Company recorded income based on the
decrease in fair values of the conversion options of its convertible notes of
$852,000 and warrants of $158,000.

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Provision for income taxes

|                    |                              |                            |   |                        |    |               |   |        |   |  |  |     |     | 
|------------------- | ---------------------------- | -------------------------- | - | ---------------------- | -- | ------------- | - | ------ | - |  |  | --- | --- | 
|                    |                              |                            |   | September 30,          |    | September 30, |   | %     
|                    |                              |                            |   | 2003                   |    | 2002          |   | Change
|                    |                              |                            |   |                        |    |               |   |       
|                    |                              |                            |   | (dollars in thousands) |    |               |   |       
|Three months ended: |                              |                            |   |                        |    |               |   |        |   |  |  |    
|                    | Provision for income taxes   |                            | $ | 26                     |    |               | $ |       |   |  |  | N/A |    
|                    | Percentage of total revenues |                            |   | 1                      | %  |               |   |       | % |  |  |     |    
|Nine months ended:  |                              |                            |   |                        |    |               |   |        |   |  |  |    
|                    |                              | Provision for income taxes |   | $                      | 39 |               |   | $      |  |  |  |     | N/A | 
|                    | Percentage of total revenues |                            |   |                       | %  |               |   |       | % |  |  |     |    

Provision for income taxes consists primarily of certain minimum state
income taxes as well as foreign tax withholdings.

Adjustment to net loss on disposal of discontinued operations

|                    |                                                               |  |                        |     |               |  |        |     |   |  |  |     |  
|------------------- | ------------------------------------------------------------- |  | ---------------------- | --- | ------------- |  | ------ | --- | - |  |  | --- | -
|                    |                                                               |  | September 30,          |     | September 30, |  | %     
|                    |                                                               |  | 2003                   |     | 2002          |  | Change
|                    |                                                               |  |                        |     |               |  |       
|                    |                                                               |  | (dollars in thousands) |     |               |  |       
|Three months ended: |                                                               |  |                        |     |               |  |        |     |   |  |  |    
|                    | Adjustment to net loss on disposal of discontinued operations |  | $                      | 41  |               |  | $      | 9   |   |  |  | 356 | %
|                    | Percentage of total revenues                                  |  |                        | 2   | %             |  |        |    | % |  |  |     |  
|Nine months ended:  |                                                               |  |                        |     |               |  |        |     |   |  |  |    
|                    | Adjustment to net loss on disposal of discontinued operations |  | $                      | 157 |               |  | $      | 102 |   |  |  | 54  | %
|                    | 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 adjustment to net loss on disposal of discontinued operations for the
three and nine months ended September 30, 2003, 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;                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our future revenues may be unpredictable and may cause our
quarterly results to fall below market expectations;                           
|
| |  |  | We may have to obtain financing on less than favorable terms, which
could dilute current stockholders ownership interests in the Company;
|
| |  |  | We have limited cash resources which could affect our ability to
fund operations;                                                         
|
| |  |  | Provisions of our Convertible debt may require us to redeem part or
all of the $2.7 million outstanding debt as early as June 2004;       
|
| |  |  | Our stock price is volatile, which could subject us to class action
litigation;                                                           
|
| |  |  | Negative publicity resulting from announcements of new products or
initiatives may cause our share price to decline;                      

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| |  |  | We may be delisted from NASDAQ, which would adversely impact our
stock price and the ability of our stockholders to purchase and sell
our shares in an orderly manner;                                                                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We may
need to develop new products or other untested methods of increasing
sales with our existing products or distribution network to generate
sufficient sales that will be necessary for future growth and if we
are unsuccessful the growth of our business may cease or decline.
|
| |  |  | We may effect a reverse stock split and if we do so, our stock
price may decline after the reverse stock split;                                                                                                                                                                       
|
| |  |  | If the Internet does not become a more widespread commerce medium,
demand for our products and technologies may decline significantly;                                                                                                                                                
|
| |  |  | Our market 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;                                                                                                            
|
| |  |  | Security risks could limit the growth of e-commerce which would
adversely impact our ability to increase sales of graphics technology;                                                                                                                                                
|
| |  |  | We may be unable to protect our intellectual property rights;                                                                                                                                                                                                                         
|
| |  |  | We may be liable for infringing the intellectual property rights of others;                                                                                                                                                                                                           
|
| |  |  | We may need to enter into business combinations and strategic
alliances, which could be difficult to integrate and may disrupt our
business;                                                                                                                                          
|
| |  |  | The loss of key engineering or management employees, including our
former Chief Technology Officer who left the Company on September 30,
2003, could harm our business;                                                                                                               
|
| |  |  | If we fail to establish, maintain, or expand our strategic
relationships for the integration of our technology with the services
and products of third parties, the growth of our business may cease or
decline;                                                                      
|
| |  |  | AOL accounted for 51% of our revenues for the year ended December
31, 2002, and 47% of our revenues for the nine months ended September
30, 2003, but may not generate similar amounts of revenue in subsequent
periods or years;                                                     
|
| |  |  | Our charter documents could make it more difficult for an
unsolicited third party to acquire us.                                                                                                                                                                                      

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46 Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51 (FIN 46). FIN 46 provides a new framework for
identifying VIEs and determining when a company should include the assets,
liabilities, noncontrolling interests and results of activities of a VIE in its
consolidated financial statements. FIN 46 was effective immediately for VIEs
created after January 31, 2003. In October 2003, the FASB directed the FASB
staff to issue FASB Staff Position No. FIN 46-6 (FSP FIN 46-6). FSP FIN 46-6
defers the effective date of FIN 46 for interests held by public entities in
VIEs or potential VIEs dating from before February 1, 2003. The consolidation
requirements of FIN 46 for these interests are now scheduled to be effective on
December 31, 2003. The consolidation requirements of FIN 46 remain applicable
to VIEs created after January 31, 2003 and to VIEs in which an enterprise
obtains an interest after that date. The adoption of FIN 46 is not expected to
have a material effect on the Companys financial statements.

33



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

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

In November 2002, the Emerging Issues Task Force (EITF) issued EITF
00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which
addresses revenue recognition accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. EITF 00-21 does
not apply to deliverables in arrangements to the extent the accounting for such
deliverables is within the scope of other existing higher-level authoritative
literature including SOP 97-2. EITF 00-21 is effective for revenue
arrangements entered into beginning on July 1, 2003. The adoption of EITF
00-21 did not have an impact on our financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents, and marketable securities totaled $1,763,000 at
September 30, 2003, down from $11,568,000 at December 31, 2002.

Net cash used in operating activities of the Company totaled $9,320,000
and $4,928,000 for the nine months ended September 30, 2003 and 2002,
respectively. Net cash used in operating activities for the nine months ended
September 30, 2003 primarily resulted from a $18,308,000 net loss, partially
offset by $2,388,000 in non-cash stock-based compensation charges, $1,885,000
in restructuring and impairment charges, $1,682,000 of a loss on early
extinguishment of debt, a $1,514,000 decrease in accounts receivable,
$1,314,000 in depreciation and amortization, a $750,000 write-off of a Note
Receivable and a $745,000 provision for bad debt. Net cash used in operating
activities for the nine months ended September 30, 2002 primarily resulted from
a $18,576,000 net loss, partially offset by $6,275,000 of impairment of
goodwill and other intangible assets, $4,173,000 in non-cash stock-based
compensation charges and $2,127,000 in depreciation and amortization.

Net cash used in investing activities totaled $71,000 for the nine months
ended September 30, 2003, compared to net cash provided by investing activities
of $4,457,000 for the nine months ended September 30, 2002. Net cash used in
investing activities for the nine months ended September 30, 2003 primarily
resulted from $419,000 for the purchase of property and equipment and a net
$127,000 net purchases of marketable securities, which was partially offset by
a $499,000 net decrease in restricted cash. Net cash provided by investing
activities for the nine months ended September 30, 2002 primarily resulted from
$5,218,000 in net proceeds from sales and maturities of marketable securities,
partially offset by $712,000 for the purchase of property and equipment.

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Net cash used in financing activities totaled $521,000 for the nine months
ended September 30, 2003, compared to net cash provided by financing activities
of $1,370,000 for the nine months ended September 30, 2002. Net cash used in
financing activities for the nine months ended September 30, 2003 resulted from
$3,300,000 used for the repayment of convertible notes and $576,000 used for
the payment of debt issue costs, which was partially offset by $3,311,000 in
proceeds from the issuance of subordinated notes and common stock, net of
issuance costs. Net cash provided by financing activities for the nine months
ended September 30, 2002 resulted from proceeds received from the exercise of
stock options by the Companys employees.

On December 31, 2002, the Company completed a private placement of
convertible notes and warrants in which it issued to three institutional
investors 4.95% convertible notes having an aggregate principal amount of
$7,000,000, and warrants to purchase 726,330 shares of Company common stock.
Interest on the convertible notes was payable quarterly in arrears in cash or,
at the option of the Company, in shares of Company common stock, provided the
Company satisfied certain financial and other conditions. The convertible
notes were to mature on December 31, 2007, unless earlier converted into shares
of Company common stock at a price of $2.26 per share. The warrants expire on
December 31, 2006, and are exercisable at a price of $2.26 per share.

The Company was required to provide registration rights under the
Securities Act of 1933 for shares of Company common stock covering (i) the
conversion of $7,000,000 in principal, (ii) 726,330 warrants, and (iii) any
potential payment of interest in the form of common stock.

The convertible notes defined several events of default, including but not
limited to: (i) failure of the Companys registration statement to be declared
effective by the Securities and Exchange Commission (SEC), (ii) delisting
from The NASDAQ National Market or other national exchange, (iii) change in
control, (iv) event of conversion default such as lack of authorized capital,
(v) event of bankruptcy, (vi) failure to pay principal and interest on the
convertible notes when payments become due, (vii) judgments against the Company
in excess of $1,000,000 and (viii) material breach of any representation,
warranty, covenant or other term. Upon an event of default, the convertible
notes would become immediately due and payable, after a grace period to cure
the default lapsed.

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

On March 25, 2003, the Company entered into Redemption, Amendment and
Exchange Agreements with the three institutional investors with whom it had
completed the private placement of convertible notes and warrants on December
31, 2002. Pursuant to these agreements, the notice of default was withdrawn
and Viewpoint redeemed an aggregate of $3,300,000 principal amount of the
outstanding convertible notes, exchanged an aggregate of $1,000,000 principal
amount of the outstanding convertible notes for shares of Viewpoint common
stock at $0.74 per share, and exchanged the remaining $2,700,000 principal
amount of outstanding convertible notes for $2,700,000 principal amount of new
convertible notes. The convertible notes were issued in three tranches of
$900,000 each and are scheduled to mature on December 31, 2007. The warrants
to purchase 726,330 shares of Company common stock, which were issued to these
investors on December 31, 2002, remain outstanding.

Interest on the new convertible notes is payable quarterly in arrears in
cash or, at the option of the Company, in shares of Company common stock,
provided the Company satisfies certain financial and other conditions. If
interest is paid in shares of Company common stock, the number of shares to be
issued shall be calculated by dividing the interest payable by 95% of the
arithmetic average of the dollar volume-weighted average price of Company
common stock on each of the five consecutive trading days immediately preceding
the interest payment date. The new convertible notes mature on December 31,
2007, unless earlier converted into shares of Company common stock. Each
tranche of the new convertible notes were initially convertible into Company
common stock at a price of $2.26 per share. However, pursuant to the
Redemption, Amendment and Exchange Agreements, the conversion price of the
first, second, and third tranche became adjustable on the basis of the
arithmetic average of the dollar volume-weighted average price of Company
common stock for the ten trading days following May 16, 2003,

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August 16, 2003, and November 16, 2003, respectively, in each case subject
to a minimum conversion price of $1.00 and a maximum conversion price of $2.26.
The conversion price of the first $900,000 tranche of notes is $1.10. The
conversion price of the second $900,000 tranche of notes is $1.00.

At the
noteholders option, up to 20% of the net proceeds from any new
capital raises by the Company may be used to redeem outstanding notes
at par plus accrued interest. On November 12, 2003, the Company
sold 3,125,000 shares of common stock in a private placement to
Federal Partners, L.P., an affiliate of The Clarke Estates, Inc. for
$2,500,000, or $0.80 per share. To exercise their right to redeem
their notes in an amount up to 20% of the $2,500,000 received
by the Company, the noteholders must notify the Company within
10 days of the Companys public announcement of the closing
of the private placement. The Company publicly announced the closing
of the private placement on November 13, 2003 by way of a filing
on SEC Form 8-K.

Each tranche of the notes is redeemable by the investors at any time on or
after June 30, 2004 in cash at par plus accrued and unpaid interest if the
dollar volume-weighted average price of Company common stock is less than the
conversion price applicable to the notes for any 25 consecutive trading days.
Each tranche of the notes is redeemable by the investors at any time after
December 31, 2005, in cash at 83% of par plus accrued and unpaid interest if
the dollar volume-weighted average price of Company common stock is less than
the conversion price applicable to the notes for any 25 consecutive trading
days following December 31, 2005. If the investors redeem their convertible
notes, up to 20% of the amount to be redeemed may, at the Companys option, be
paid in shares of Company common stock, and said payment would be at 95% of the
dollar volume-weighted average price of Company common stock for the 20
consecutive trading days immediately preceding payment.

The Company has the right at any time to redeem up to all of the
outstanding notes at par plus accrued and unpaid interest. Concurrently with
any such redemption, the Company is required to deliver to the investors
warrants, with an exercise price of $1.00 and a term equal to the remaining
term of the notes being redeemed, to subscribe for a number of shares of common
stock equal to 100% of the principal amount being redeemed divided by the
conversion price of the notes then in effect.

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

The investors may require the Company to sell to the investors an
additional 4.95% convertible notes having an aggregate principal amount of up
to $2,800,000, and warrants to purchase up to 290,533 shares of Company common
stock prior to January 14, 2004.

The Company had the right to sell additional 4.95% convertible notes
having an aggregate principal amount of up to $7,000,000 and warrants to
purchase up to 726,330 shares of Company common stock prior to June 30, 2003,
if the dollar volume-weighted average price of Company common stock exceeded
$3.25 on each of not less than 15 trading days in any 20 consecutive
trading-day period. This right expired unexercised on June 30, 2003.

The Company was required to file a registration statement by April 14,
2003, covering the resale of the shares of common stock issued to the investors
in exchange for the $1,000,000 principal of convertible notes, the shares of
common stock issuable to the investors upon the conversion of the notes, the
shares of common stock underlying the warrants issued and to be issued, and any
shares of common stock that may be issued as payment of interest on the notes.
The Company was required to pay cash penalties if the registration statement
was not declared effective by June 30, 2003. The registration statement was
declared effective July 14, 2003, and the Company was required to pay penalties
of $182,000, of which $127,000 was accrued as interest expense in the second
quarter of 2003 and $55,000 was accrued as interest expense in the third
quarter of 2003.

Under the terms of the amended agreements, certain covenants and events of
default were restructured as follows: the requirement to have its registration
statement declared effective by the SEC and the requirement to remain listed on
The NASDAQ National Market or other national exchange, were waived through
March 2004, unless the Company receives a going concern or qualified opinion
from its auditors. If such a report is received from the Companys auditors
through March 2004, the original events of default remain effective.

On March 26, 2003, Viewpoint Corporation entered into a Securities
Purchase Agreement with three other accredited investors, pursuant to which it
received $3,500,000 in exchange for an aggregate of $3,500,000 principal

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amount of 4.95% subordinated notes and 3,614,756 shares of Viewpoint
common stock. The notes are scheduled to mature on March 31, 2006.

Interest on these notes is payable quarterly in arrears in cash. The
notes contain certain events of default, including, but not limited to: (i)
failure to pay principal and interest on the notes when payments become due,
(ii) judgments against the Company in excess of $1,000,000, (iii) event of
bankruptcy, and (iv) material breach of representations, covenants or other
terms. Upon an event of default, the notes will become immediately due and
payable.

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

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

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

The second plan was implemented in September 2003, and was designed to
streamline the business. Under the plan the Company eliminated 24 research and
development, sales and marketing, and general and administrative positions.
The Company incurred a restructuring charge of $463,000 related to severance.
The charge is recorded on our income statement as a restructuring and
impairment charge. The second restructuring plan was completed by September
30, 2003.

The Company has contingency plans for 2004 if expected revenue targets are
not achieved. These plans include further workforce reductions as well as
reductions in overhead and capital expenditures.

The Company believes that its current cash, cash equivalents, and
marketable securities balances and cash provided by future operations, if any,
are sufficient to meet its operating cash flow needs and anticipated capital
expenditure requirements through at least the next twelve months. The Company
may seek additional funds before that time through public or private equity
financing or from other sources to fund our operations and pursue our growth
strategy. We have no commitment for additional financing, and we may
experience difficulty in obtaining additional financing on favorable terms, if
at all. Any financing we obtain may contain covenants that restrict our
freedom to operate our business or may have rights, preferences or privileges
senior to our common stock and may dilute our current shareholders ownership
interest in Viewpoint.

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Subsequent Events

In October 2003, the Company entered into an amended license agreement
with AOL which provides for payments by AOL of $10,000,000, all due 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, through December 31, 2005, which represents the duration of the
Companys obligation for post-contract customer support including quarterly
upgrades and maintenance requirements.

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

In November 2003, the Company approved a grant of 2,375,000 non-statutory
stock options to acquire Company common stock to certain employees of the
Company at an exercise price equal to the fair market value of the Companys
common stock on the final date of grant, under the provisions of the Companys
stock option plans. The options will vest over a period of up to two years.
Additionally, the Company plans to reduce the vesting period of 1,125,000 stock
options by approximately 2 years. These options carry a weighted average grant
price of $0.76. If the fair market value the day of the reduction
exceeds the price on the original grant date the Company would incur an expense if the applicable employee
terminates employment prior to the conclusion of the original vesting period.

On November 6, 2003, a former officer of the Company filed a claim against
the Company in New York State Supreme Court alleging that the Company breached
an employment agreement between the officer and Viewpoint. The suit claims
$1,050,000 in damages. The Company believes it did not breach the employment
agreement and that it has strong defenses against the officers claims. In
responding to the claims, the Company intends to assert its claims against the
former officer in the amount of $425,000, plus attorneys fees.




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 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.

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PART II - OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

|               |  |                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Title                                                                                                          
|               |  |                                                                                                                        
|10.1           |  | Employment Agreement between Viewpoint Corporation and Jay
S. Amato, dated August 7 2003                               
|               |  |                                                                                                                        
|10.2           |  | Employment Agreement between Viewpoint Corporation and
William H. Mitchell, dated July 18, 2003                        
|               |  |                                                                                                                        
|10.3           |  | Employment Amendment Agreement between Viewpoint
Corporation and Robert E. Rice, dated July 1, 2003                    
|               |  |                                                                                                                        
|31.1           |  | 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 August 6, 2003 to furnish its press release
concerning its results of operation for the quarterly period ending
on June 30, 2003.

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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 CORPORATION
|                         |  |                       |  |                                                   
|Dated: November 14, 2003 |  | By:                   |  | /s/ JAY S. AMATO                                  
|                         |  |                       |  |                                                   
|                         |  |                       |  | Jay S. Amato
President and Chief Executive Officer
|                         |  |                       |  |                                                   
|Dated: November 14, 2003 |  | By:                   |  | /s/ WILLIAM H. MITCHELL                           
|                         |  |                       |  |                                                   
|                         |  |                       |  | William H. Mitchell
Chief Financial Officer       

40