---

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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,
2006                                            
|           |                                                                                              
|           | or                                                                                           
|           |                                                                                              
|o          | TRANSITION REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE 
  SECURITIES EXCHANGE ACT OF 1934
|           |                                                                                              
|           | For the transition period from ______________ to ______________                              

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 |  | (I.R.S.
  Employer Identification No.)
|incorporation
  or organization)  |  |                                       

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 o

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check One): Large
accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). o Yes x No

As of November 6, 2006, 67,670,000 shares of $0.001 par value
  common stock were outstanding.

---

---



|                    |                                                                                                               |  |     
|------------------- | ------------------------------------------------------------------------------------------------------------- |  | ----
|TABLE OF
  CONTENTS
|                    |                                                                                                               |  | Page
|                    |                                                                                                               |  |     
|                    | PART I - FINANCIAL INFORMATION                                                                                |  |     
|                    |                                                                                                               |  |     
|Item 1.             | Consolidated
  Financial Statements                                                                           |  | 3   
|                    |                                                                                                               |  |     
|                    | Consolidated
  Balance Sheets  September 30, 2006 and December 31, 2005 (unaudited)                          |  | 3   
|                    | Consolidated Statements of
Operations  Three and
  nine months ended September 30, 2006 and 2005 (unaudited) |  | 4   
|                    | Consolidated Statements of Cash Flows  Nine months ended
  September 30, 2006 and 2005 (unaudited)           |  | 5   
|                    | Notes to
  Consolidated Financial Statements (unaudited)                                                      |  | 7   
|                    |                                                                                                               |  |     
|Item 2.             | Managements
  Discussion and Analysis of Financial Condition and Results of Operations                       |  | 22  
|                    |                                                                                                               |  |     
|Item 3.             | Quantitative
  and Qualitative Disclosures About Market Risk                                                  |  | 42  
|                    |                                                                                                               |  |     
|Item 4.             | Controls
  and Procedures                                                                                     |  | 42  
|                    |                                                                                                               |  |     
|                    | PART II  OTHER INFORMATION                                                                                   |  |     
|                    |                                                                                                               |  |     
|Item 1.             | Legal
  Proceedings                                                                                           |  | 43  
|Item 1A.            | Risk
  Factors                                                                                                |  | 43  
|Item 2.             | Unregistered
  Sales of Equity Securities and Use of Proceeds                                                 |  | 43  
|Item 3.             | Defaults
  Upon Senior Securities                                                                             |  | 43  
|Item 4.             | Submission
  of Matters to a Vote of Security Holders                                                         |  | 43  
|Item 5.             | Other
  Information                                                                                           |  | 43  
|Item 6.             | Exhibits                                                                                                      |  | 44  
|                    |                                                                                                               |  |     
|                    | Signatures                                                                                                    |  | 45  

2

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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, |  
|                                                                                                                                                                                                                     |  | 2006          |          | 2005         |  
|                                                                                                                                                                                                                     |  |               |          |              |  
|ASSETS                                                                                                                                                                                                               |  |               |          |              |   |          |  
|Current assets:                                                                                                                                                                                                      |  |               |          |              |   |          |  
|Cash and cash equivalents                                                                                                                                                                                            |  | $             | 1,927    |              | $ | 6,437    |  
|Marketable securities                                                                                                                                                                                                |  |               | 4,382    |              |   | 2,674    |  
|Accounts receivable, net of reserve of $425 and
$419, respectively                                                                                                                                                   |  |               | 2,572    |              |   | 4,342    |  
|Prepaid expenses and other current assets                                                                                                                                                                            |  |               | 504      |              |   | 510      |  
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  
|Total current assets                                                                                                                                                                                                 |  |               | 9,385    |              |   | 13,963   |  
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  
|Restricted cash                                                                                                                                                                                                      |  |               | 188      |              |   | 182      |  
|Property and equipment, net                                                                                                                                                                                          |  |               | 1,146    |              |   | 1,218    |  
|Goodwill, net                                                                                                                                                                                                        |  |               | 14,882   |              |   | 25,537   |  
|Intangible assets, net                                                                                                                                                                                               |  |               | 3,681    |              |   | 4,131    |  
|Other assets, net                                                                                                                                                                                                    |  |               | 92       |              |   | 105      |  
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  
|Total assets                                                                                                                                                                                                         |  | $             | 29,374   |              | $ | 45,136   |  
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  
|LIABILITIES
  AND STOCKHOLDERS EQUITY                                                                                                                                                                               |  |               |          |              |   |          |  
|Current liabilities:                                                                                                                                                                                                 |  |               |          |              |   |          |  
|Accounts payable                                                                                                                                                                                                     |  | $             | 2,257    |              | $ | 2,834    |  
|Accrued expenses                                                                                                                                                                                                     |  |               | 609      |              |   | 635      |  
|Deferred revenues                                                                                                                                                                                                    |  |               | 149      |              |   | 207      |  
|Current portion of notes payable                                                                                                                                                                                     |  |               | 389      |              |   | 814      |  
|Accrued incentive compensation                                                                                                                                                                                       |  |               | 545      |              |   | 545      |  
|Current liabilities related to discontinued
operations                                                                                                                                                               |  |               | 231      |              |   | 231      |  
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  
|Total current liabilities                                                                                                                                                                                            |  |               | 4,180    |              |   | 5,266    |  
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  
|Deferred rent                                                                                                                                                                                                        |  |               | 261      |              |   | 334      |  
|Warrants to purchase common
  stock                                                                                                                                                                                  |  |               | 1,133    |              |   | 982      |  
|Subordinated notes-related party                                                                                                                                                                                     |  |               | 2,357    |              |   | 2,090    |  
|Unicast notes                                                                                                                                                                                                        |  |               | 1,583    |              |   | 1,582    |  
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  
|Total liabilities                                                                                                                                                                                                    |  |               | 9,514    |              |   | 10,254   |  
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  
|Stockholders equity:                                                                                                                                                                                                |  |               |          |              |   |          |  
|Preferred stock, $.001 par value; 5,000 shares
authorized - no shares
  issued and outstanding on September 30, 2006 and December 31, 2005                                                                           |  |               |         |              |   |         |  
|Common stock, $.001 par value; 100,000 shares
authorized -
  67,830 shares issued and 67,670 shares outstanding at September 30, 2006, and
  64,849 shares issued and 64,689 shares outstanding at December 31, 2005 |  |               | 68       |              |   | 65       |  
|Paid-in capital                                                                                                                                                                                                      |  |               | 305,787  |              |   | 301,766  |  
|Treasury stock at cost; 160 at September 30, 2006
and December 31,
  2005                                                                                                                                            |  |               | (1,015   | )            |   | (1,015   | )
|Accumulated other comprehensive loss                                                                                                                                                                                 |  |               | (2       | )            |   | (63      | )
|Accumulated deficit                                                                                                                                                                                                  |  |               | (284,978 | )            |   | (265,871 | )
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  
|Total stockholders equity                                                                                                                                                                                           |  |               | 19,860   |              |   | 34,882   |  
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  
|Total liabilities and stockholders
equity                                                                                                                                                                           |  | $             | 29,374   |              | $ | 45,136   |  
|                                                                                                                                                                                                                     |  |               |          |              |   |          |  

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

3

---



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

(Unaudited)

|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|----------------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | ------ | - | ---- | ------- | - | - | ------ | -
|                                                                  |  | Three Months Ended |         | Nine Months Ended |  
|                                                                  |  | September 30,      |         | September 30,     |  
|                                                                  |  |                    |         |                   |  
|                                                                  |  | 2006               |         | 2005              |   | 2006   |   | 2005 |        
|                                                                  |  |                    |         |                   |   |        |   |      |        
|Revenues:                                                         |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Search                                                            |  | $                  | 1,460   |                   | $ | 2,498  |   | $    | 4,822   |   | $ | 7,071  |  
|Advertising systems                                               |  |                    | 961     |                   |   | 566    |   |      | 5,569   |   |   | 2,461  |  
|Services                                                          |  |                    | 786     |                   |   | 1,744  |   |      | 2,430   |   |   | 4,551  |  
|Related party services                                            |  |                    |        |                   |   | 154    |   |      |        |   |   | 903    |  
|Licenses                                                          |  |                    | 4       |                   |   | 124    |   |      | 82      |   |   | 506    |  
|Related party licenses                                            |  |                    |        |                   |   | 873    |   |      |        |   |   | 2,618  |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Total revenues                                                    |  |                    | 3,211   |                   |   | 5,959  |   |      | 12,903  |   |   | 18,110 |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Cost of revenues:                                                 |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Search                                                            |  |                    | 39      |                   |   | 39     |   |      | 113     |   |   | 134    |  
|Advertising systems                                               |  |                    | 399     |                   |   | 405    |   |      | 3,638   |   |   | 1,907  |  
|Services                                                          |  |                    | 455     |                   |   | 956    |   |      | 1,766   |   |   | 2,875  |  
|Licenses                                                          |  |                    |        |                   |   | 8      |   |      | 8       |   |   | 11     |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Total cost of revenues                                            |  |                    | 893     |                   |   | 1,408  |   |      | 5,525   |   |   | 4,927  |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Gross profit                                                      |  |                    | 2,318   |                   |   | 4,551  |   |      | 7,378   |   |   | 13,183 |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Operating expenses:                                               |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Sales and Marketing                                               |  |                    | 1,454   |                   |   | 1,325  |   |      | 4,481   |   |   | 3,828  |  
|Research and development                                          |  |                    | 982     |                   |   | 1,126  |   |      | 3,138   |   |   | 3,479  |  
|General and administrative                                        |  |                    | 2,102   |                   |   | 3,224  |   |      | 6,687   |   |   | 7,965  |  
|Depreciation                                                      |  |                    | 113     |                   |   | 158    |   |      | 337     |   |   | 496    |  
|Amortization of intangible assets                                 |  |                    | 222     |                   |   | 118    |   |      | 443     |   |   | 370    |  
|Restructuring charges                                             |  |                    |        |                   |   |       |   |      | 92      |   |   |       |  
|Impairment of goodwill                                            |  |                    | 10,655  |                   |   |       |   |      | 10,655  |   |   |       |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Total operating expenses                                          |  |                    | 15,528  |                   |   | 5,951  |   |      | 25,833  |   |   | 16,138 |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|                                                                 
|Loss from operations                                              |  |                    | (13,210 | )                 |   | (1,400 | ) |      | (18,455 | ) |   | (2,955 | )
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Other income (expense),
  net:                                    |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Interest and other income; net                                    |  |                    | 95      |                   |   | 30     |   |      | 264     |   |   | 86     |  
|Interest expense                                                  |  |                    | (213    | )                 |   | (288   | ) |      | (709    | ) |   | (943   | )
|Changes in fair values of warrants to purchase
common stock       |  |                    | 1,021   |                   |   | 207    |   |      | (151    | ) |   | 1,037  |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Total other income
  (expense)                                    |  |                    | 903     |                   |   | (51    | ) |      | (596    | ) |   | 180    |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Loss before provision for
  income taxes                          |  |                    | (12,307 | )                 |   | (1,451 | ) |      | (19,051 | ) |   | (2,775 | )
|Provision for income taxes                                        |  |                    | 30      |                   |   |       |   |      | 56      |   |   | 12     |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Net loss from continuing
  operations                             |  |                    | (12,337 | )                 |   | (1,451 | ) |      | (19,107 | ) |   | (2,787 | )
|Adjustment to net loss on
  disposal of discontinued operations   |  |                    |        |                   |   |       |   |      |        |   |   | 145    |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|                                                                 
|Net loss                                                          |  | $                  | (12,337 | )                 | $ | (1,451 | ) | $    | (19,107 | ) | $ | (2,642 | )
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Basic and diluted net loss
  per common share:                    |  | $                  | (0.18   | )                 | $ | (0.02  | ) | $    | (0.29   | ) | $ | (0.05  | )
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  
|Weighted average number of shares outstanding
 basic and diluted |  |                    | 67,361  |                   |   | 59,136 |   |      | 66,253  |   |   | 58,274 |  
|                                                                  |  |                    |         |                   |   |        |   |      |         |   |   |        |  

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

4

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

|                                                                              |  |                     |         |      |   |        |  
|----------------------------------------------------------------------------- |  | ------------------- | ------- | ---- | - | ------ | -
|                                                                              |  | Nine
  Months Ended |        
|                                                                              |  | September
  30,     |        
|                                                                              |  |                     |        
|                                                                              |  | 2006                |         | 2005 |  
|                                                                              |  |                     |         |      |  
|Cash flows from operating
  activities:                                       |  |                     |         |      |   |        |  
|Net loss                                                                      |  | $                   | (19,107 | )    | $ | (2,642 | )
|Adjustments to reconcile
  net loss to net cash used in operating activities: |  |                     |         |      |   |        |  
|Stock-based compensation charges                                              |  |                     | 1,616   |      |   | 1,743  |  
|Depreciation and amortization                                                 |  |                     | 942     |      |   | 1,183  |  
|Impairment of goodwill and intangibles                                        |  |                     | 10,655  |      |   |       |  
|Provision for bad debt                                                        |  |                     | 27      |      |   | 95     |  
|Changes in fair values of warrants to purchase
common stock                   |  |                     | 151     |      |   | (1,037 | )
|Amortization of debt discount and issuance
costs                              |  |                     | 533     |      |   | 805    |  
|Changes in operating assets and liabilities, net of
acquisitions:             |  |                     |         |      |   |        |  
|Accounts receivable                                                           |  |                     | 1,764   |      |   | 1,329  |  
|Prepaid expenses                                                              |  |                     | 6       |      |   | (165   | )
|Accounts payable                                                              |  |                     | (693    | )    |   | (2,028 | )
|Accrued expenses                                                              |  |                     | (99     | )    |   | (581   | )
|Deferred revenues                                                             |  |                     | (58     | )    |   | (123   | )
|Related party deferred revenues                                               |  |                     |        |      |   | (3,490 | )
|Other                                                                         |  |                     | 34      |      |   |       |  
|                                                                              |  |                     |         |      |   |        |  
|Net cash used in operating activities                                         |  |                     | (4,229  | )    |   | (4,911 | )
|                                                                              |  |                     |         |      |   |        |  
|Cash flows from investing
  activities:                                       |  |                     |         |      |   |        |  
|Proceeds from sales and maturities of marketable
securities                   |  |                     | 7,943   |      |   | 9,050  |  
|Purchases of marketable securities                                            |  |                     | (9,645  | )    |   | (8,232 | )
|(Increase)/decrease
        in restricted cash                                |  |                     | (6      | )    |   | 139    |  
|Purchases of property and equipment                                           |  |                     | (226    | )    |   | (341   | )
|Acquisition of Unicast, net of cash
acquired                                  |  |                     |        |      |   | (512   | )
|Purchases of patents and trademarks                                           |  |                     | (77     | )    |   | (48    | )
|                                                                              |  |                     |         |      |   |        |  
|Net cash (used in) provided by investing
activities                           |  |                     | (2,011  | )    |   | 56     |  
|                                                                              |  |                     |         |      |   |        |  
|Cash flows from financing
  activities:                                       |  |                     |         |      |   |        |  
|Repayment of Subordinated Notes                                               |  |                     | (450    | )    |   |       |  
|Repayment of Unicast Debt                                                     |  |                     | (227    | )    |   |       |  
|Payment of modification fee relating to debt
extension                        |  |                     |        |      |   | (61    | )
|Proceeds from issuance of common stock                                        |  |                     |        |      |   | 2,000  |  
|Proceeds from exercise of stock options                                       |  |                     | 2,407   |      |   | 488    |  
|                                                                              |  |                     |         |      |   |        |  
|Net cash provided by financing
activities                                     |  |                     | 1,730   |      |   | 2,427  |  
|                                                                              |  |                     |         |      |   |        |  
|Effect of exchange rates
  changes on cash                                    |  |                     |        |      |   | 3      |  
|                                                                              |  |                     |         |      |   |        |  
|Net decrease in cash and
  cash equivalents                                   |  |                     | (4,510  | )    |   | (2,425 | )
|Cash and cash equivalents
  at beginning of period                            |  |                     | 6,437   |      |   | 5,804  |  
|                                                                              |  |                     |         |      |   |        |  
|Cash and cash equivalents
  at end of period                                  |  | $                   | 1,927   |      | $ | 3,379  |  
|                                                                              |  |                     |         |      |   |        |  

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

5

---



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

|                                                                          |  |                     |     |      |  |        |  
|------------------------------------------------------------------------- |  | ------------------- | --- | ---- |  | ------ | -
|                                                                          |  | Nine
  Months Ended |    
|                                                                          |  | September
  30,     |    
|                                                                          |  |                     |    
|                                                                          |  | 2006                |     | 2005 | 
|                                                                          |  |                     |     |      | 
|                                                                          |  |                     |     |      |  |        |  
|Supplemental disclosure of
  cash flow activities:                        |  |                     |     |      |  |        |  
|Cash paid during the period for income
taxes                              |  |                     | 56  |      |  | 12     |  
|Cash paid during the period for interest                                  |  |                     | 178 |      |  | 183    |  
|Net assets acquired in
  Unicast acquisition:                             |  |                     |     |      |  |        |  
|Accounts receivable, net                                                  |  |                     |    |      |  | 2,056  |  
|Prepaids                                                                  |  |                     |    |      |  | 7      |  
|Other assets                                                              |  |                     |    |      |  | 22     |  
|Fixed assets                                                              |  |                     |    |      |  | 128    |  
|Goodwill and Intangible assets                                            |  |                     |    |      |  | 6,547  |  
|Accounts payable and accrued expenses                                     |  |                     |    |      |  | (3,578 | )
|Unicast Debt                                                              |  |                     |    |      |  | (1,702 | )
|Supplemental disclosure of non-cash investing and
financing
  activities: |  |                     |     |      |  |        |  
|Cost of Unicast acquisition                                               |  |                     |     |      |  |        |  
|Common stock                                                              |  |                     |    |      |  | (1     | )
|APIC                                                                      |  |                     |    |      |  | (2,967 | )
|Unrealized (losses) gains on marketable
securities                        |  |                     | 6   |      |  |       |  
|Purchase of property and equipment accrued and not
yet paid               |  |                     | 117 |      |  |       |  

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

6

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VIEWPOINT CORPORATIONNOTES 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 the
Companys Annual Report on Form 10-K for the year ended December 31, 2005. The
interim financial information is unaudited, but reflects all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results of Viewpoint Corporation (Viewpoint
or the Company) for the interim periods.

The
  year end consolidated balance sheet data was derived from audited financial
  statements, but does not include all disclosures required by accounting principles
  generally accepted in the United States of America.

These
unaudited consolidated financial statements have been prepared in accordance
with the instructions to Rule 10-01 of Regulation S-X and, therefore, do not
include all of the information and footnotes normally provided in annual
financial statements. As a result, these unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with managements discussion and
analysis of financial condition and results of operations, contained in Viewpoints
Annual Report on Form 10-K for the year ended December 31, 2005. The results of
operations for the three and nine month periods ended September 30, 2006 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2006 or other future periods.

Certain
reclassifications have been made to the 2005 consolidated financial statements
to conform to the 2006 presentation (See Note 3).

Liquidity

The
Company had cash, cash equivalents and marketable securities of $6.3 million at
September 30, 2006. During the nine months ended September 30, 2006, net cash
used in operations amounted to $4.2 million. As of September 30, 2006, the
Company had an accumulated deficit of $285.0 million.

The
Company has incurred negative cash flows and net losses since inception. Based
on current operating levels combined with limited capital resources, financing
operations during 2007 will require that the Company improve operating results
through cost cutting measures, increases in revenues or both, and/or raise
sufficient additional equity or debt capital, including the avoidance of
violating existing debt covenants. If the Companys expected revenue targets
are not achieved, management would implement cost reduction measures including
work force reduction as well as reduction in overhead costs and capital
expenditures.

There
can be no assurance that the Company will achieve or sustain positive cash
flows from operations or profitability. The Company currently has no commitment
for additional financing and may experience difficulty in obtaining additional
financing on favorable terms, if at all. Any financing the Company obtains may
contain covenants that restrict the Companys freedom to operate the business or
may have rights, preferences or privileges senior to the Companys common stock
and may dilute the Companys current shareholders ownership interest in
Viewpoint.

Furthermore,
the stock price of the Company declined below $1.00 and has not closed above
$1.00 since October 13, 2006. If the Companys stock trades below a $1.00 for
30 consecutive days, NASDAQs listing rules provide for Viewpoint to be
notified that its common stock is being considered for de-listing. While the
Company has not been notified that its stock has been considered for
de-listing, it may receive such notification. While there are several different
remediation measures that the Company may take to prevent such de-listing, if
the Companys remediation measures are unsuccessful, it is possible that the
Companys stock could be de-listed in approximately one year after receiving
such notification from NASDAQ. If the Company is de-listed it will violate a
covenant within the subordinated note agreement which would accelerate the
maturity date of the $3.1 million of subordinated

7

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note currently
scheduled to mature on March 31, 2008. If the Company is unable to secure
adequate financing, including the avoidance of the acceleration of the maturity
date of the $3.1 million subordinated note, and/or can not achieve and sustain
positive cash flows from operations, it would raise substantial doubt about the
Companys ability to continue as a going concern through December 31, 2007.

Use of Estimates

The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant
estimates include fair value of stock compensation, revenue, receivables, liabilities,
warrants, goodwill, and intangible and fixed asset useful lives.

Stock-Based Compensation

The
Company has adopted the provisions of FAS No. 123R, Share-Based Payment which
replaced FAS 123, Accounting for Stock-Based Compensation and supersedes APB
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, as of
January 1, 2006. The provisions of FAS 123R require a company to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost is
recognized in the statement of operations over the period during which an
employee is required to provide service in exchange for the award. The
determination of the fair value of stock-based payment awards on the date of
grant using the Black-Scholes option pricing model is affected by the Companys
stock price as well as assumptions regarding a number of complex and subjective
variables. These variables include the Companys expected stock price volatility
over the term of the awards of 134%, actual and projected employee stock option
exercise behaviors resulting in an estimated term of 4.54 years, risk-free
interest rate of 4.67%, and expected dividends of zero. FAS 123R also amends
FASB Statement No. 95, Statement of Cash Flows, to require that excess tax
benefits, as defined, realized from the exercise of stock options be reported
as a financing cash inflow rather than as a reduction of taxes paid in cash
flow from operations. As the result of the uncertainty regarding the Companys
ability to utilize its deferred tax assets, the impact of wind fall tax
benefits on the accompanying financial statements was immaterial. A change in
volatility and term could significantly increase or decrease operating
expenses.

The
Company elected the modified-prospective method, under which prior periods are
not revised for comparative purposes. The valuation provisions of SFAS 123R
apply to new 2006 grants and to grants that were unvested as of the effective
date. Estimated compensation for grants that were outstanding as of the
effective date will be recognized over the remaining service period using the
compensation cost estimated for the FAS 123 pro forma disclosures.

The
adoption of FAS 123R had a material impact on our consolidated financial
position and results of operations. See Note 4 for further information
regarding our stock-based compensation assumptions and expenses, including pro
forma disclosures for prior periods as if we had recorded stock-based
compensation expense.

Net Loss Per Common Share

Basic
net loss per common share is computed using the weighted average number of
shares of outstanding and diluted net loss per common share is computed using
the weighted average number of shares of common and common equivalent shares
outstanding. Common equivalent shares related to stock options and warrants
totaling 7.2 million for the three and nine months ended September 30, 2006,
and 8.2 million and 8.6 million for the three and nine months ended September
30, 2005, respectively, are excluded from the computation of diluted net loss
per common share because their effect was anti-dilutive.

Common Stock Issuance

In
July 2005, the Company sold 1.3 million shares of common stock in a private
placement to a holder of the Companys subordinated debt for aggregate gross
proceeds of $2.0 million.

In
December 2005, the Company sold 5.1 million shares of common stock and warrants
in a private placement to several investors for $5.1 million. The warrants were
to purchase an additional 1.0 million shares of common stock at an exercise
price of $1.20 per share with a term of three years. In addition, as
compensation to the underwriter of this private placement the Company issued
warrants to purchase 0.2 million shares of common stock

8

---



at an exercise
price of $1.20 per share with a term of five years, and paid $0.3 million in
issuance costs. For financial reporting purposes, the terms and provisions of
the warrants require that the Company record the fair value of the warrant as a
liability at the time of issuance. At each balance sheet date subsequent to
issuance, the carrying value of warrants are adjusted to the then current fair
value using the Black-Scholes Method and any changes in fair value of the
warrant are included within operating results. During the three months ended
September 30, 2006, the fair value of the warrants decreased by $0.7 million
which is included as a gain on changes in the fair value of the warrants within
the statement of operations. During the nine months ended September 30, 2006,
the fair value of the warrants increased by $0.1 million, which is included as
an expense within the statement of operations.

Comprehensive Income

For
all periods presented, the difference between net loss and comprehensive net
loss was not material.

Recent Accounting Pronouncements

In
  February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
  Financial Instrumentsan amendment of FASB SFAS Nos. 133 and 140.
  This Statement amends FASB SFAS No. 133, Accounting for Derivative Instruments
  and Hedging Activities”, and No. 140, Accounting for Transfers and
  Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
  155 resolves issues addressed in Statement 133 Implementation Issue No. D1,
  Application of Statement 133 to Beneficial Interests in Securitized Financial
  Assets. SFAS 155 is effective for all financial instruments acquired or issued
  after the beginning of an entity's first fiscal year that begins after September
  15, 2006. We do not believe the adoption of SFAS No. 155 will materially impact
  our consolidated financial statements.

In
July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes 
an Interpretation of FASB Statement No. 109 (FIN 48), which
clarifies the accounting for uncertainty in tax positions. FIN 48 requires
that we recognize in our financial statements the impact of a tax position if
that position is more likely than not, of being sustained on audit, based on
the technical merits of the position. The provisions of FIN 48 are
effective as of January 1, 2007, with the cumulative effect, if any, of
the change in accounting principle recorded as an adjustment to opening
retained earnings. We do not believe the adoption of FIN 48 will materially
impact our consolidated financial statements.

In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements (SAB 108), which provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. We will be required to
adopt the provisions of SAB 108 in our annual financial statements for
fiscal year 2006. We do not believe that the adoption of SAB 108 will
materially impact our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (FAS 157). FAS 157 establishes a framework for
measuring fair value and expands disclosures about fair value measurements. The
changes to current practice resulting from the application of this Statement
relate to the definition of fair value, the methods used to measure fair value,
and the expanded disclosures about fair value measurements. We will be required
to adopt the provisions of FAS 157 beginning with our first quarter ending
March 31, 2008. We do not believe that the adoption of the provisions of
FAS 157 will materially impact our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans  an amendment
of FASB Statements No. 87, 88, 106, and 132(R), (FAS 158).
FAS 158 requires an employer to recognize the over-funded or under-funded
status of a defined benefit pension and other postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which
the changes occur through comprehensive income of a business entity. We will be
required to adopt the provisions of FAS 158 in our annual financial
statements for fiscal year 2006. We do not believe that the adoption of the
provisions of FAS 158 will materially impact our consolidated financial
statements.

2. Goodwill and Intangible Assets

Goodwill
is subject to impairment tests annually, or earlier if indicators of potential
impairment exist, using a fair-value-based approach. All other intangible
assets are amortized over their estimated useful lives and are assessed for
impairment under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.

At
September 30, 2006 the Company determined that, based on a decline in operating
performance during the third quarter of 2006 marked by a reduction of revenues
from the automotive sector and slower growth in revenues from the development
of other creative products and initiatives, the Services reporting unit had
experienced an impairment of its allocated goodwill. The Company then performed
the second step of the impairment test in accordance with SFAS No. 142 using a
discount rate of 16% and a revenue growth rate of 5%. Following the completion
of that step the Company recorded an impairment expense of $10.7 million.

9

---



At
December 31, 2005 the Company determined that, based upon a decline in
operating performance during the fourth quarter of 2005, the Services reporting
unit had experienced an impairment of its allocated goodwill. At that time, the
Company recorded an impairment expense of $7.8 million.

As
stated in Note 1, the Company has reclassified amortization expense amounts in
the 2005 financial statements to conform to the 2006 presentation. The 2005
reclassification consisted of the allocation of amortization from operating
expenses into cost of sales. For the three and nine month periods ended
September 30, 2006, amortization amounted to $0.1 million and $0.3 million,
respectively, of which less than $0.1 million was recorded in cost of sales for
the three months ended September 30, 2006, and $0.1 million was recorded in
cost of sales for the nine months ended September 30, 2006.

The
changes in the carrying amounts of goodwill by reporting unit, and intangible
assets during the three and nine months ended September 30, 2006 and 2005, by
aggregated segments are as follows (amounts in thousands):

|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|---------------------------------- |  | ---------- | ------ | ------------------------ | - | -------- |  | ----- | ------- | ---------------------- | - | ------- | - | - | ----- | -
|                                   |  | Goodwill   |        |                          |   |         
|                                   |  |            |        |                          |   |         
|                                   |  | Technology |        | Advertising
  
  Systems |   | Services |  | Total |         | Intangible
  
  Assets |  
|                                   |  |            |        |                          |   |          |  |       |         |                        |  
|Balance as of December 31,
  2005  |  | $          | 10,206 |                          | $ | 2,039    |  | $     | 13,292  |                        | $ | 25,537  |   | $ | 4,131 |  
|Additions during period            |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | 16    |  
|Impairment                         |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   |      |  
|Adjustments                        |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   |      |  
|Amortization                       |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | (138  | )
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|Balance as of March 31,
  2006     |  | $          | 10,206 |                          | $ | 2,039    |  | $     | 13,292  |                        | $ | 25,537  |   | $ | 4,009 |  
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|Additions during period            |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | 44    |  
|Impairment                         |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   |      |  
|Adjustments                        |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   |      |  
|Amortization                       |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | (138  | )
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|Balance as of June 30, 2006        |  | $          | 10,206 |                          | $ | 2,039    |  | $     | 13,292  |                        | $ | 25,537  |   | $ | 3,915 |  
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|Additions during period            |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | 16    |  
|Impairment                         |  |            |       |                          |   |         |  |       | (10,655 | )                      |   | (10,655 | ) |   |      |  
|Adjustments                        |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   |      |  
|Amortization                       |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | (250  | )
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|Balance as of September 30,
  2006 |  | $          | 10,206 |                          | $ | 2,039    |  | $     | 2,637   |                        | $ | 14,882  |   | $ | 3,681 |  
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|                                   |  | Goodwill   |        |                          |   |         
|                                   |  |            |        |                          |   |         
|                                   |  | Technology |        | Advertising
  
  Systems |   | Services |  | Total |         | Intangible
  
  Assets |  
|                                   |  |            |        |                          |   |          |  |       |         |                        |  
|Balance as of December 31,
  2004  |  | $          | 10,206 |                          | $ |         |  | $     | 21,070  |                        | $ | 31,276  |   | $ | 230   |  
|Additions during period            |  |            |       |                          |   | 2,101    |  |       |        |                        |   | 2,101   |   |   | 5,179 |  
|Amortization                       |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | (178  | )
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|Balance as of March 31,
  2005     |  | $          | 10,206 |                          | $ | 2,101    |  | $     | 21,070  |                        | $ | 33,377  |   | $ | 5,231 |  
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|Additions during period            |  |            |       |                          |   | 32       |  |       |        |                        |   | 32      |   |   | 2     |  
|Adjustments                        |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | (662  | )
|Amortization                       |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | (178  | )
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|Balance as of June 30, 2005        |  | $          | 10,206 |                          | $ | 2,133    |  | $     | 21,070  |                        | $ | 33,409  |   | $ | 4,393 |  
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|Additions during period            |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | 36    |  
|Amortization                       |  |            |       |                          |   |         |  |       |        |                        |   |        |   |   | (160  | )
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  
|Balance as of September 30,
  2005 |  | $          | 10,206 |                          | $ | 2,133    |  | $     | 21,070  |                        | $ | 33,409  |   | $ | 4,269 |  
|                                   |  |            |        |                          |   |          |  |       |         |                        |   |         |   |   |       |  

10

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As
of September 30, 2006 and December 31, 2005, the Companys intangible assets
and related accumulated amortization consisted of the following (in thousands):

|                                       |  |                      |       |                               |   |        |   |       |       |                               |   |       |  |   |      |   |   |       | 
|-------------------------------------- |  | -------------------- | ----- | ----------------------------- | - | ------ | - | ----- | ----- | ----------------------------- | - | ----- |  | - | ---- | - | - | ----- | 
|                                       |  | September
  30, 2006 |       | December
  31, 2005           |  
|                                       |  |                      |       |                               |  
|                                       |  | Gross                |       | Accumulated
  
  Amortization |   | Net    |   | Gross |       | Accumulated
  
  Amortization |   | Net   | 
|                                       |  |                      |       |                               |  
|Website Partner Relationships -Unicast |  | $                    | 3,772 |                               | $ | (685   | ) | $     | 3,087 |                               | $ | 3,772 |  | $ | (404 | ) | $ | 3,368 | 
|Acquired Technology - Unicast          |  |                      | 410   |                               |   | (271   | ) |       | 139   |                               |   | 410   |  |   | (187 | ) |   | 223   | 
|Patents and Trademarks - Unicast       |  |                      | 326   |                               |   | (126   | ) |       | 200   |                               |   | 326   |  |   | (80  | ) |   | 246   | 
|Patents and Trademarks                 |  |                      | 409   |                               |   | (154   | ) |       | 255   |                               |   | 332   |  |   | (38  | ) |   | 294   | 
|                                       |  |                      |       |                               |   |        |   |       |       |                               |   |       |  |   |      |   |   |       | 
|Total Intangible Assets                |  | $                    | 4,917 |                               | $ | (1,236 | ) | $     | 3,681 |                               | $ | 4,840 |  | $ | (709 | ) | $ | 4,131 | 
|                                       |  |                      |       |                               |   |        |   |       |       |                               |   |       |  |   |      |   |   |       | 

During
  the quarter ended September 30, 2006, the Company reduced the useful life of
  its patent technology from 17 years to 8 years. The change was made to better
  reflect the period in which the Company expected to benefit from the use of
  the patented technology. As a result of this change, patent amortization expense
  increased by $0.1 million for the three and nine month periods ended September
  30, 2006. The impact of this change in estimate on per share data was not material.

Amortization
of intangible assets is estimated to be $0.6 million a year for the next five
years.

The
Company has also reclassified depreciation expense amounts in the 2005
financial statements to conform to the 2006 presentation. The 2005 reclassification
consisted of the allocation of depreciation from operating expenses into cost
of sales. For the three and nine month periods ended September 30, 2006,
depreciation expense amounted to $0.1 million and $0.4 million, respectively,
of which less than $0.1 million was recorded in cost of sales for the three
months ended September 30, 2006, and $0.1 million was recorded in cost of sales
for the nine months ended September 30, 2006.

11

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3. Long Term Debt

Convertible Notes

On
December 31, 2002, the Company completed a private placement of convertible
notes and warrants in which it issued to three institutional investors, 4.95%
convertible notes having an aggregate principal amount of $7.0 million, and
warrants to purchase 0.7 million shares of Company common stock. The warrants
expire on December 31, 2006, and were initially issued at an exercise price of
$2.26 per share. The number of warrants and the exercise price are subject to
adjustment if the Company sells or issues securities under a dilutive issuance
(as defined in the warrant to purchase common stock agreement) subject to
certain conditions. As of September 30, 2006, 0.8 million warrants were
outstanding related to this placement.

For
the three and nine month period ended September 30, 2006, the Company
recognized a gain related to the change in the valuation for the outstanding
warrants of $0.3 million and a loss of less than $0.1 million, respectively.
For the three and nine month period ended September 30, 2005, the Company
recognized a gain from the change in the fair value of the outstanding warrants
of $0.2 million and $1.0 million, respectively, resulting from a decrease in
the fair market value of the Companys common stock. The fair value of these
outstanding warrants amounted to $0.1 as of September 30, 2006 and December 31,
2005.

Subordinated Notes

On
March 26, 2003, Viewpoint Corporation entered into a Securities Purchase
Agreement with three accredited investors, pursuant to which it received $3.5
million in exchange for an aggregate of $3.5 million principal amount of 4.95%
subordinated notes and 3.6 million shares of Viewpoint common stock. Prior to
the amendment discussed below (see Amended Notes), the subordinated notes
were scheduled to mature on March 31, 2006. Interest on these notes is payable
quarterly in arrears in cash. The Company has the right at any time to redeem
all of the outstanding notes at par plus accrued and unpaid interest.

The
$3.5 million of proceeds was allocated to subordinated notes in the amount of
$1.7 million, common stock for the par value and additional paid in capital of
$1.8 million based on the market value of the Companys common stock on March
26, 2003. Debt issuance costs, which amounted to $0.2 million, were recorded as
other assets in the Companys consolidated balance sheet.

On
March 31, 2006, the Company redeemed notes with a principal amount of $0.4
million pursuant to the agreement. The maturity date for the remaining notes
with a principal amount of $3.1 million was extended in July, 2005. (see
Amended Notes).

Amended Notes

On
July 27, 2005, the Company and a holder of the subordinated debt amended the
4.95% subordinated note in the principal amount of $3.1 million (referred to
herein as the Holder) to extend the maturity date from March 31, 2006 to
March 31, 2008 in exchange for the payment by Viewpoint of $0.1 million to the
Holder of the subordinated note. As discussed in more detail below, the $0.1
million was accounted for as a reduction in the carrying value of the
subordinated debt.

The
Company accounted for the amended and restated note as a nontroubled debt
transaction in accordance with EITF Issue No. 96-19 Debtors Accounting for a
Modification or Exchange of Debt Instruments. Pursuant to EITF 96-19, the
Company is required to account for the modification as a debt extinguishment if
it is determined that the terms have changed substantially. Per EITF 96-19, an
indication of the existence of substantially different terms is whether the
cash flows have changed by more than 10%. In calculating the present value of
the cash flows, the Company used its current effective interest rate of 23%
(incremental borrowing rate) and determined that the cash flows changed by more
than 10% as a result of the extension of the maturity date on the note. Since
the terms of the old and new notes were determined to be substantially
different, the new debt instrument was recorded at fair value.

In
addition to the amendment of the note, the Company and the Holder entered into
a Stock Purchase Agreement, dated as of July 27, 2005, under which the Company
issued 1.3 million shares of Company common stock in a private placement to the
Holder at a purchase price of $1.55 per share resulting in aggregate gross
proceeds of $2.0 million. The closing price of the Companys common stock on
the date of the share purchase was $1.59.

Since
the Holder of the subordinated note owned 13% of Viewpoints outstanding common
stock and also had a position on the Companys Board of Directors, the Holder
of the note is considered a related party; therefore, the underlying amendment
of the note was accounted for as a capital transaction. The Company recognized
the difference between the carrying value of the subordinated note and the fair
value of the amended and restated

12

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substituted
note in the amount of $0.6 million offset by the modification fee paid of $0.1
million as an increase to the stockholders equity.

Unicast Notes

On
January 3, 2005, as disclosed in Note 2, Viewpoint purchased Unicast and, as a
result, assumed debt which included an unsecured note with a principal amount
of $1.0 million due in December 2011 at an interest rate of 5% per annum and a
collateralized note with a principal balance of $1.8 million which matures in
March 2011 and interest rate of 5% per annum. This note is collateralized by
the assets of Unicast. The debt was discounted to its fair value based upon the
prevailing interest rates at the date of the acquisition, the term of the debt,
the interest provisions of the debt and the credit risk associated with
repayment. Viewpoint will accrete the notes based upon the interest-method,
including interest payment requirements through maturity.

As
of January 3, 2005, the date of acquisition, the fair value of the
collateralized and non-collateralized notes amounted to $1.4 million and $0.3
million, respectively. The Company recorded interest expense on these notes of
$0.1 million and $0.3 million for the three and nine months ended September 30,
2006, respectively and $0.1 million and $0.3 million for the three and nine
months ended September 30, 2005, respectively. In March 2006, the Company began
making monthly payments as required by the agreement and this resulted in a
decrease of the aggregate carrying value of these notes to $2.0 million as of
September 30, 2006, of which $1.6 million is long-term.

The
Companys total carrying value by note at September 30, 2006 and December 31,
2005 is as follows (amounts in thousands):

|                                         |  |                |       |               |   |       | 
|---------------------------------------- |  | -------------- | ----- | ------------- | - | ----- | 
|                                         |  | September
  30 |       | December
  31 |  
|                                         |  |                |      
|                                         |  | 2006           |       | 2005          |  
|                                         |  |                |       |               |  
|                                        
|Subordinated
  notes                     |  | $              | 2,357 |               | $ | 2,505 | 
|Unicast
  notes                          |  |                | 1,972 |               |   | 1,981 | 
|                                         |  |                |       |               |   |       | 
|Total
  long-term debt                   |  |                | 4,329 |               |   | 4,486 | 
|                                         |  |                |       |               |   |       | 
|Less current
  portion                   |  |                | 389   |               |   | 814   | 
|                                         |  |                |       |               |   |       | 
|Long-term
  debt, net of current portion |  | $              | 3,940 |               | $ | 3,672 | 
|                                         |  |                |       |               |   |       | 

The
reconciliation of the carrying value to the face value of each note as of
September 30, 2006, is as follows (amounts in thousands):

|                                   |  |                         |       |                 |   |       |  |   |       | 
|---------------------------------- |  | ----------------------- | ----- | --------------- | - | ----- |  | - | ----- | 
|                                   |  | Subordinated
  
  Notes |       | Unicast
  Notes |   | Total | 
|                                   |  |                         |       |                 |   |       | 
|Book value of long-term debt       |  |                         | 2,357 |                 |   | 1,972 |  |   | 4,329 | 
|Discount on
  long-term debt       |  |                         | 693   |                 |   | 551   |  |   | 1,244 | 
|                                   |  |                         |       |                 |   |       |  |   |       | 
|Face value
  of the long-term debt |  | $                       | 3,050 |                 | $ | 2,523 |  | $ | 5,573 | 
|                                   |  |                         |       |                 |   |       |  |   |       | 

The
maturity schedule for the Companys debt subsequent to September 30, 2006 is as
follows (amounts in thousands):

|                      |  |   |       | 
|--------------------- |  | - | ----- | 
|Maturity              |  |   |       | 
|                      |  |   |       | 
|2006                  |  | $ | 65    | 
|2007                  |  |   | 350   | 
|2008                  |  |   | 3,400 | 
|2009                  |  |   | 350   | 
|2010 and
  thereafter |  |   | 1,408 | 
|                      |  |   |       | 
|                      |  | $ | 5,573 | 
|                      |  |   |       | 

The Subordinated Note contains a covenant which requires that
  the Companys common stock remain listed on a national stock exchange as
  defined. The Companys common stock declined below $1.00 and has not closed
  above $1.00 since October 13, 2006. While the Company has not been notified
  that its stock has been considered by NASDAQ for de-listing, it may receive
  such notification. If the Companys stock remains below a $1.00 for 30
  consecutive days NASDAQ listing rules provide for Viewpoint to be notified that
  its common stock has been considered for delisting. While there are several
  different remediation measures that the Company may take to prevent such de-listing,
  if the Companys remediation measures are unsuccessful it is possible that
  the Companys stock could be de-listed approximately one year after receiving
  such notification from

13

---



NASDAQ. If the
Company is de-listed, it will violate the loan covenant noted above which would
allow the Subordinated Note holders to demand repayment immediately of the $3.1
million outstanding note balance.

4. Stock-Based Compensation

Beginning
with the first quarter of 2006, the Company adopted FAS 123R. See Note 1 for a
description of the adoption of FAS 123R. The Company currently uses the
Black-Scholes Option Pricing Model to determine the fair value of stock
options. The determination of the fair value of stock-based payment awards on
the date of grant using an option-pricing model is affected by the Companys
stock price as well as assumptions regarding a number of complex and subjective
variables. These variables include the Companys expected stock price
volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rate and expected dividends.

Prior
to the adoption of FAS No. 123(R) the Company accounted for share-based awards
to employees and directors using the intrinsic value method in accordance with
APB No. 25 as allowed under FAS No. 123, Accounting
for Stock-Based Compensation. Under the intrinsic value method,
share-based compensation expense was recognized by the Company if the exercise
price of the grant was less than the fair market value of the underlying stock
at the date of grant.

Prior
to January 1, 2006, the Company disclosed compensation cost in accordance with
FAS No. 123. The provisions of FAS No. 123 required the Company to disclose the
assumptions used in calculating the fair value pro forma expense. Had
compensation expense for the plans been determined based on the fair value of
the options at the grant dates for awards under the plans consistent with FAS
No. 123, the Companys net loss for the three and nine months ended September
30, 2005 would have been as follows (amounts in thousands, except per share
data):

|                                                                                                                          |  |                                         |        |                                       |   |        |  
|------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | ------------------------------------- | - | ------ | -
|                                                                                                                          |  | Three
  Months
  Ended 
  September 30, |        | Nine
  Months
  Ended
  September 30, |  
|                                                                                                                          |  |                                         |        |                                       |  
|                                                                                                                          |  | 2005                                    |        | 2005                                  |  
|                                                                                                                          |  |                                         |        |                                       |  
|Net loss, as
        reported                                                                                             |  | $                                       | (1,451 | )                                     | $ | (2,642 | )
|Add: Stock-based
        employee compensation charges included in reported net loss                                      |  |                                         | 1,147  |                                       |   | 1,742  |  
|Deduct: Stock-based
        employee compensation charges determined under fair value based method
        for all awards |  |                                         | (2,550 | )                                     |   | (5,071 | )
|                                                                                                                          |  |                                         |        |                                       |   |        |  
|Pro forma net
        loss                                                                                                |  | $                                       | (2,854 | )                                     | $ | (5,971 | )
|                                                                                                                          |  |                                         |        |                                       |   |        |  
|Net loss per
        share:                                                                                               |  |                                         |        |                                       |   |        |  
|Basic and diluted as reported                                                                                             |  | $                                       | (0.02  | )                                     | $ | (0.05  | )
|                                                                                                                          |  |                                         |        |                                       |   |        |  
|Basic and diluted pro forma                                                                                               |  | $                                       | (0.05  | )                                     | $ | (0.10  | )
|                                                                                                                          |  |                                         |        |                                       |   |        |  

Pro
forma disclosures for the three and nine months ended September 30, 2006 are
not presented because the amounts are recognized in the unaudited Consolidated
Statement of Operations.

The
Company estimated the expected term of options granted in accordance with the
Staff Accounting Bulletin (SAB) 107. The Company estimated the volatility of
the Companys common stock by using the historical volatility of the Companys
common stock over the expected term. The Company based the risk-free interest
rate used in the option valuation model on U.S. Treasury zero-coupon issues
with remaining terms similar to the expected term on the options. The Company
does not anticipate paying cash dividends in the foreseeable future and
therefore uses an expected dividend yield of zero in the option valuation
model. The Company is required to estimate forfeitures at the time of grant and
revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. As a result of the uncertainty regarding the Companys ability
to utilize its deferred tax assets, the impact of wind fall tax benefits on
the accompanying financial statements was immaterial. All stock-based payment
awards are amortized on a straight-line basis over the requisite service
periods of the awards, which are the vesting periods.

14

---



To
  determine compensation expense under FAS No. 123(R) and FAS No. 123 for the
  three months and nine months ended September 30, 2006 and 2005, respectively,
  the Company uses the Black-Scholes Option-Pricing Model with the following weighted-average
  assumptions:

|                                          |  |                             |           |      |  |           |  
|----------------------------------------- |  | --------------------------- | --------- | ---- |  | --------- | -
|                                          |  | Three and Nine Months Ended |          
|                                          |  |                             |          
|                                          |  | September 30,               |          
|                                          |  |                             |          
|                                          |  | 2006                        |           | 2005 | 
|                                          |  |                             |           |      | 
|Risk-free interest rate                   |  |                             | 4.72-5.07 | %    |  | 3.73-4.04 | %
|Dividend yield                            |  |                             |          |      |  |          |  
|Volatility factor                         |  |                             | 1.34-1.35 |      |  | 1         |  
|Weighted average expected
  life in years |  |                             | 4.52-4.58 |      |  | 3.75      |  

In
September 2006 the Company issued retention options to certain employees within
the company, that vest after three years. The options were valued using the
same assumptions in the above table, but due to their three year cliff vesting, the
Company estimated a forfeiture rate against those options of 64% based on the
history of employees term.

The
Company will recognize the estimated compensation cost of performance awards,
net of estimated forfeitures, when it becomes probable that the performance
criteria will be met. The Company currently has outstanding performance awards
with a fair value of $0.3 million which will vest if certain operating
performance is achieved by December 31, 2006. As
of September 30, 2006, managements current estimate is that these awards will
not vest and accordingly no provision has been made in the accompanying
financial statements.

As of September 30, 2006, total unrecognized share-based
compensation cost related to unvested stock options was $4.5 million (excluding
performance based awards noted above), which is expected to be recognized over
a weighted average period of approximately 2.7 years. The Company has included
the following amounts for share-based compensation cost, in the accompanying
unaudited Consolidated Statement of Operations for the three and nine months ended
September 30, 2006 (amounts in thousands):

|                           |  |                      |     |                     |   |       | 
|-------------------------- |  | -------------------- | --- | ------------------- | - | ----- | 
|                           |  | Three Months
  Ended |     | Nine Months
  Ended |  
|                           |  |                      |    
|                           |  | 30-Sep-06            |     | 30-Sep-06           |  
|                           |  |                      |     |                     |  
|Cost of revenues:          |  |                      |     |                     |   |       | 
|Advertising systems        |  | $                    | 10  |                     | $ | 15    | 
|Services                   |  |                      | 25  |                     |   | 126   | 
|Operating expenses:        |  |                      |     |                     |   |       | 
|Sales and marketing        |  |                      | 104 |                     |   | 396   | 
|Research and development   |  |                      | 67  |                     |   | 261   | 
|General and administrative |  |                      | 247 |                     |   | 818   | 
|                           |  |                      |     |                     |   |       | 
|Total                      |  | $                    | 453 |                     | $ | 1,616 | 
|                           |  |                      |     |                     |   |       | 

Share-based
compensation expense recognized during the three and nine months ended September
30, 2006 included (1) compensation expense for awards granted prior to, but not
yet fully vested as of January 1, 2006, and (2) compensation expense for the
share-based payment awards granted subsequent to December 31, 2005, based on
the grant date fair values estimated in accordance with the provisions of SFAS
No. 123R.

Stock Option Plans

1995 Stock Plan

The
Companys 1995 Stock Plan (the 1995 Plan) provides for the grant to employees
(including officers and employee directors) of incentive stock options and for
the grant to employees (including officers and employee

15

---



directors),
non-employee directors and consultants of nonstatutory stock options and stock
purchase rights. As of September 30, 2006, options to purchase an aggregate of
3.5 million shares of common stock were outstanding under the 1995 Plan, with
vesting provisions ranging up to four years. Options granted under the 1995
Plan are exercisable for a period of up to ten years. The ability to issue
options out of this plan expired in 2005, however, options currently
outstanding will remain outstanding until exercised, forfeited, or expire.

1995 Director Option
Plan

The
Companys 1995 Director Option Plan (the Director Plan) provides for an
automatic grant of options to purchase shares of common stock to each
non-employee director of the Company. Options granted under the 1995 Director
Plan vest over one and a half to four and a half years and are exercisable for
a period of ten years. As of September 30, 2006, 0.1million options were
outstanding under the 1995 Director Plan. The ability to issue options out of
this plan expired in 2005, however, options currently outstanding will remain
outstanding until exercised, forfeited, or expire.

1996 Nonstatutory
Stock Option Plan

The
Companys 1996 Nonstatutory Stock Option Plan (the 1996 Nonstatutory Plan)
provides for the grant to employees (including officers and employee directors)
and consultants of nonstatutory stock options and stock purchase rights. As of
September 30, 2006, options to purchase an aggregate of 1.3 million shares of
common stock were outstanding under the 1996 Nonstatutory Plan, with vesting
provisions ranging up to four years. Options granted under the 1996
Nonstatutory Plan are exercisable for a period of up to ten years. At September
30, 2006, an aggregate of 0.2 million shares of common stock were reserved for
future issuance under the 1996 Nonstatutory Plan. The ability to issue options
out of this plan expire in October 2006, however, options currently outstanding
will remain outstanding until exercised, forfeited, or expire.

The 1995 Plan,
the Director Plan, and the 1996 Nonstatutory Plan are collectively referred to
as Option Plans.

2006 Equity
Incentive Plan

The
Companys 2006 Equity Incentive Plan (the 2006 Plan) provides for the grant
to employees (including officers and employee directors) of incentive stock
options and for the grant to employees (including officers and employee
directors), non-employee directors and consultants of nonstatutory stock
options, stock appreciation rights, restricted stock, restricted stock units
and other stock awards. The 2006 Plan was adopted by the stockholders of the
Company at the 2006 annual meeting of stockholders on June 21, 2006. As of
September 30, 2006, an aggregate of 1.1 million shares were outstanding under
the 2006 Plan and an aggregate of 3.4 million shares of common stock were
reserved for future issuance under the 2006 Plan.

Options Issued
Outside the Option Plans

For
the nine months ended September 30, 2006, the Company issued 0.3 million,
non-qualified stock options outside the Option Plans in connection with the
hiring of certain personnel. All options were issued with exercise prices equal
to the fair value of the Companys common stock on the grant date, which was
the employees first date of employment. The terms and conditions of these
grants are similar to the terms and conditions of options granted under the
1996 Nonstatutory Plan. There are 3.9 million shares outstanding outside the
Option Plans.

16

---



Summary of All Outstanding Options

Activity and
pricing information regarding all options to purchase shares of common stock
are summarized as follows, (in thousands, except per share data):

|                                             |  |                                   |        |                      |                       |                                       |   |   |      | 
|-------------------------------------------- |  | --------------------------------- | ------ | -------------------- | --------------------- | ------------------------------------- | - | - | ---- | 
|                                             |  |                                   |        |                      | Options
  Outstanding |                                      
|                                             |  |                                   |        |                      |                       |                                      
|                                             |  | Options
  Available
  for
  Grant |        | Number
  of
  Shares |                       | Weighted
  Average
  Exercise
  Price |  
|                                             |  |                                   |       
|Options outstanding at December 31, 2005     |  |                                   | 363    |                      |                       | 12,566                                |   | $ | 1.79 | 
|Granted  exercise price equal to
fair value |  |                                   | (1,532 | )                    |                       | 1,532                                 |   |   | 1.49 | 
|Granted  non-plan
options                   |  |                                   |       |                      |                       | 250                                   |   |   | 1.53 | 
|Plan approved at June 30, 2006               |  |                                   | 4,500  |                      |                       |                                      |   |   |     | 
|Exercised                                    |  |                                   |        |                      |                       | (2,981                                | ) |   | 0.81 | 
|Cancelled                                    |  |                                   | 393    |                      |                       | (393                                  | ) |   | 4.47 | 
|Cancelled  expired plan                     |  |                                   |       |                      |                       | (811                                  | ) |   | 2.30 | 
|Cancelled  non-plan
options                 |  |                                   |       |                      |                       | (249                                  | ) |   | 3.15 | 
|                                             |  |                                   |        |                      |                       |                                       |   |   |      | 
|Options outstanding at September 30, 2006    |  |                                   | 3,724  |                      |                       | 9,914                                 |   | $ | 1.85 | 
|                                             |  |                                   |        |                      |                       |                                       |   |   |      | 

During
the three and nine months ended September 30, 2006, the total intrinsic value
of options exercised to purchase common stock was $0.4 million and $1.9
million, and the weighted average fair value of options to purchase common
stock that were granted was $1.61 and $1.50 per share, respectively.

During
the three and nine months ended September 30, 2006, financing cash generated
from share-based compensation arrangements amounted to $0.5 million and $2.4
million for the purchase of shares upon exercise of options. The Company issues
new shares upon exercise of options to purchase common stock.

Additional
information regarding options outstanding for all plans as of September 30,
2006, is as follows (in thousands except per share data):

17

---



|                                            |  |                                           |       |             |                                          |       |                               |        |      |                                           |   |                               |  |   |      | 
|------------------------------------------- |  | ----------------------------------------- | ----- | ----------- | ---------------------------------------- | ----- | ----------------------------- | ------ | ---- | ----------------------------------------- | - | ----------------------------- |  | - | ---- | 
|                                            |  | Outstanding                               |       | Exercisable |                                         
|                                            |  |                                           |       |             |                                         
|                                            |  |                                           |       |             | Average                                  |       | Weighted
  Average
  Exercise |        |      |                                           |   | Weighted
  Average
  Exercise | 
|Exercise Price Range                        |  | Shares                                    |       | Life        |                                          | Price |                               | Shares |      | Price                                     |  
|$0.46  $0.82                               |  |                                           | 2,307 |             |                                          | 6.98  |                               | $      | 0.76 |                                           |   | 2,302                         |  | $ | 0.76 | 
|$0.87  $1.32                               |  |                                           | 2,105 |             |                                          | 5.41  |                               |        | 1.09 |                                           |   | 1,280                         |  |   | 1.02 | 
|$1.34  $1.62                               |  |                                           | 2,946 |             |                                          | 8.15  |                               |        | 1.48 |                                           |   | 660                           |  |   | 1.41 | 
|$1.63  $5.03                               |  |                                           | 2,052 |             |                                          | 5.58  |                               |        | 3.35 |                                           |   | 1,700                         |  |   | 3.61 | 
|$5.09  $12.88                              |  |                                           | 504   |             |                                          | 1.81  |                               |        | 6.07 |                                           |   | 504                           |  |   | 6.07 | 
|                                            |  |                                           |       |             |                                          |       |                               |        |      |                                           |   |                               |  |   |      | 
|Total                                       |  |                                           | 9,914 |             |                                          | 6.44  |                               | $      | 1.85 |                                           |   | 6,446                         |  | $ | 2.04 | 
|                                            |  |                                           |       |             |                                          |       |                               |        |      |                                           |   |                               |  |   |      | 
|                                            |  |                                           |       |             |                                          |       |                               |        |      |                                           |   |                               |  |   |      | 
|                                            |  | Intrinsic
  Value
  Options
  Outstanding |       |             |                                          |       |                               |        |      | Intrinsic
  Value
  Options
  Exercisable |   |                               |  |  
|                                            |  |                                           |       |             |                                          |       |                               |        |      |                                           |   |                               |  |  
|Aggregate intrinsic value (in thousands)    |  | $                                         | 1,269 |             |                                          |       |                               |        |      |                                           | $ | 1,223                         |  |   |      | 
|                                            |  |                                           |       |             |                                          |       |                               |        |      |                                           |   |                               |  |   |      | 
|                                            |  |                                           |       |             | Outstanding
        Average
        Life |       |                               |        |      | Exercisable
  Average
  Life              |   |                               |  |  
|                                            |  |                                           |       |             |                                          |       |                               |        |      |                                           |   |                               |  |  
|Weighted average remaining contractual life |  |                                           |       |             |                                          | 6.44  |                               |        |      |                                           |   | 6.14                          |  |   |      | 

The
aggregate intrinsic value in the table above is based on the Companys closing
stock price of $1.18 per share as of September 30, 2006, which amount would
have been received by the optionees had all options been exercised on that
date. The total fair value of options to purchase common stock that vested
during the three and nine months ended September 30, 2006 was $0.5 million, and
$1.6 million, respectively.

18

---



5. Restructuring Charges

In
March of 2006, the Company implemented a restructuring plan designed to
streamline the services business. Under this plan the Company eliminated 10
positions in the services group and relocated the management of the group from
its New York office to its existing Los Angeles office. The Company incurred a
restructuring charge of $0.1 million related to severance arrangements which
has been recorded separately on the statement of operations. This restructuring
plan was completed by June 30, 2006 and all payments have been made.

6. Commitments and Contingencies

Commitments

The
Company leases its primary office space in New York City pursuant to various
lease agreements with terms through February of 2010. The Company also leases
office space in Los Angeles, California, with a lease term through December of
2009.

The Company leased a vehicle for a former executive of
 the Company during
2005. The lease was terminated in the first quarter of 2006. Rent expense for
office space, equipment, and the executives vehicle totaled approximately $0.2
million, and $0.7 million, and $0.3 million and $0.8 for the three and nine
months ended September 30, 2006 and 2005, respectively.

Future minimum lease
payments under non-cancelable operating leases for each year subsequent to
September 30, 2006 are as follows (amounts in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2006 |  | $ | 253   | 
|2007 |  |   | 1,014 | 
|2008 |  |   | 855   | 
|2009 |  |   | 799   | 
|2010 |  |   | 90    | 
|     |  |   |       | 
|     |  | $ | 3,011 | 
|     |  |   |       | 

Legal Proceedings

The
Company is engaged in certain legal actions arising in the ordinary course of
business. The Company believes it has adequate legal defenses in legal actions
in which it is the defendant and believes that the ultimate outcome of such
actions will not have a material adverse effect on the Companys consolidated
financial position, results of operations, or cash flows.

19

---



7. Segment Information and Enterprise-Wide
Disclosures

As
discussed in more detail in Notes 1 and 2 in the Companys 2005 Form 10-K, the
Company has four revenue streams which are analyzed under three segments
consisting of the technology-based segment, which includes two revenue streams
licensing and search, the services segment, and the advertising systems
segment. In determining reportable segments, management considered the nature
of the business activity whose operations are regularly reviewed by the
Companys chief operating decision maker and for which there is discrete
financial information. Licensing revenue and search revenue are aggregated
within the Technology-based segment as both revenue streams give customers the
same access to the Viewpoint Media Player and the distributed network and have
similar economic characteristics. Upon the acquisition of Unicast in 2005 it
was determined that Unicast goodwill solely benefited Advertising Systems, and
accordingly all of the acquired goodwill was allocated to that reporting unit.

The
Company does not allocate or analyze operating expenses by segment. There are
no inter-segment sales.

Revenues
in the Technology segment are generated based upon providing customers access
to the Companys distributed network of Viewpoint Media Players. Advertising
systems revenue is generated by charging customers to host advertising
campaigns based on CPM impressions. The Services segment provides creative and
support services to customers who generally have purchased or received licenses
to use the Viewpoint software platform. The accounting policies for the
segments are the same as the consolidated accounting policies disclosed in the
Companys 2005 Form 10-K.

20

---



|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|--------------------------------- |  | ------------------------------------ | ----- | ----------------------------------- | - | ----- | - | ---- | ------ | - | - | ------ | -
|                                  |  | Three
  Months Ended
  September 30, |       | Nine
  Months Ended
  September 30, |  
|                                  |  |                                      |       |                                     |  
|                                  |  | 2006                                 |       | 2005                                |   | 2006  |   | 2005 |       
|                                  |  |                                      |       |                                     |   |       |   |      |       
|Revenues:                         |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Technology                        |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Licenses                          |  | $                                    | 4     |                                     | $ | 124   |   | $    | 82     |   | $ | 506    |  
|Related party licenses            |  |                                      |      |                                     |   | 873   |   |      |       |   |   | 2,618  |  
|Search                            |  |                                      | 1,460 |                                     |   | 2,498 |   |      | 4,822  |   |   | 7,071  |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Total technology revenue          |  |                                      | 1,464 |                                     |   | 3,495 |   |      | 4,904  |   |   | 10,195 |  
|Advertising systems               |  |                                      | 961   |                                     |   | 566   |   |      | 5,569  |   |   | 2,461  |  
|Services:                         |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Services                          |  |                                      | 786   |                                     |   | 1,744 |   |      | 2,430  |   |   | 4,551  |  
|Related party services            |  |                                      |      |                                     |   | 154   |   |      |       |   |   | 903    |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Total revenues                    |  |                                      | 3,211 |                                     |   | 5,959 |   |      | 12,903 |   |   | 18,110 |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Cost of Revenues:                 |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Technology                        |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Licenses                          |  | $                                    |      |                                     | $ | 8     |   | $    | 8      |   | $ | 11     |  
|Search                            |  |                                      | 39    |                                     |   | 39    |   |      | 113    |   |   | 134    |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Total technology cost of revenues |  |                                      | 39    |                                     |   | 47    |   |      | 121    |   |   | 145    |  
|Advertising systems               |  |                                      | 399   |                                     |   | 405   |   |      | 3,638  |   |   | 1,907  |  
|Services                          |  |                                      | 455   |                                     |   | 956   |   |      | 1,766  |   |   | 2,875  |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Total cost of revenues            |  |                                      | 893   |                                     |   | 1,408 |   |      | 5,525  |   |   | 4,927  |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Gross profit                      |  | $                                    | 2,318 |                                     | $ | 4,551 |   | $    | 7,378  |   | $ | 13,183 |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Technology                        |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Licenses                          |  | $                                    | 4     |                                     | $ | 989   |   | $    | 74     |   | $ | 3,113  |  
|Search                            |  |                                      | 1,421 |                                     |   | 2,459 |   |      | 4,709  |   |   | 6,937  |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Total technology gross profit     |  |                                      | 1,425 |                                     |   | 3,448 |   |      | 4,783  |   |   | 10,050 |  
|Advertising systems               |  |                                      | 562   |                                     |   | 161   |   |      | 1,931  |   |   | 554    |  
|Services                          |  |                                      | 331   |                                     |   | 942   |   |      | 664    |   |   | 2,579  |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Total gross profit                |  | $                                    | 2,318 |                                     | $ | 4,551 |   | $    | 7,378  |   | $ | 13,183 |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Gross profit margin               |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Technology                        |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Licenses                          |  |                                      | 100   | %                                   |   | 99    | % |      | 90     | % |   | 100    | %
|Search                            |  |                                      | 97    |                                     |   | 98    |   |      | 98     |   |   | 98     |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Total technology gross profit     |  |                                      | 97    |                                     |   | 99    |   |      | 98     |   |   | 99     |  
|Advertising systems               |  |                                      | 58    |                                     |   | 28    |   |      | 35     |   |   | 23     |  
|Services                          |  |                                      | 42    |                                     |   | 50    |   |      | 27     |   |   | 47     |  
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  
|Total gross profit margin         |  |                                      | 72    | %                                   |   | 76    | % |      | 57     | % |   | 73     | %
|                                  |  |                                      |       |                                     |   |       |   |      |        |   |   |        |  

|                    |  |                      |        |                     |   |        | 
|------------------- |  | -------------------- | ------ | ------------------- | - | ------ | 
|                    |  |                      |        |                     |  
|                    |  | September 30,
  2006 |        | December 31,
  2005 |  
|                    |  |                      |        |                     |  
|Total assets:       |  |                      |        |                     |   |        | 
|Technology          |  | $                    | 12,333 |                     | $ | 13,369 | 
|Advertising systems |  |                      | 7,421  |                     |   | 8,086  | 
|Services            |  |                      | 3,311  |                     |   | 14,388 | 
|Corporate (*)       |  |                      | 6,309  |                     |   | 9,293  | 
|                    |  |                      |        |                     |   |        | 
|Total assets        |  | $                    | 29,374 |                     | $ | 45,136 | 
|                    |  |                      |        |                     |   |        | 

* Corporate assets consists
solely of cash, cash equivalents, marketable securities and restricted cash as
the Company does not allocate such amounts to the individual reporting units.

21

---



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 2006 and our Annual Report on Form 10-K for 2005. When used in
this report, the words will, expects, anticipates, intends, plans,
believes, seeks, targets, estimates, and similar expressions are
generally intended to identify forward-looking statements. You should not place
undue reliance on these forward-looking statements, which speak only as of the
date of this Quarterly Report on Form 10-Q. We undertake no obligation to
publicly release any revisions to the forwardlooking statements or reflect
events or circumstances after the date of this document.

Overview

Viewpoint
Corporation (Viewpoint or the Company) is an internet marketing technology
company that focuses on using its technical capabilities to help marketers
effectively promote their products online. Viewpoint provides a full suite of
digital products, services and consulting for internet marketers. Viewpoint
employs its visualization technology to drive powerful customer-facing
marketing tools that enable marketers to showcase complex products as
advertising or content at websites, and allows for user interaction. Since 2003
the Company has extended the historical imaging capabilities of its proprietary
graphics technology to develop a search business that provides internet
consumers a flexible graphical searching experience and an advertising delivery
system that specializes in deploying video and rich media advertising. The
company supplements its revenues in these product segments by using its
in-house services team to build sophisticated content that is used by customers
in each product segment. Finally, the Company previously licensed its platform
to internet publishers enabling them to deploy graphical sophisticated content
at their websites. However, in September 2005, the Company began offering free
use of its platform to facilitate growth in its search and advertising systems
segments.

On
March 17, 2004, Viewpoint entered the internet search business by launching a
toolbar search product (the Viewpoint Toolbar). The Viewpoint Toolbar
attaches to the Internet Explorer browser, enabling web surfers to conduct
internet searches without leaving the web page they are viewing. When a user
enters a term or phrase in the search field of the Viewpoint Toolbar, search
results appear not only as text links listed on a search results page but also
as thumbnail icons of the web pages themselves in a tray that descends from
the Viewpoint Toolbar. Additionally, if a user visits certain internet search
engine sites the Viewpoint Toolbar will simultaneously receive a users search
request and provide the user comparative thumbnail search results in the
Viewpoint Toolbar search results tray.

The
Company executed a search advertising agreement in 2004, and amended it in
2006, with Yahoo!. The agreement provides that Yahoo! is the exclusive provider
of search results for the Viewpoint Toolbar through March 2008. Yahoo! pays a
variable fee per month for the access to the Companys distribution and the
exclusive right to display search results to the Viewpoint Toolbar. This
variable fee is based on users clicks on sponsored advertisements included in
the search results provided by Yahoo! through the Viewpoint Toolbar. The
Viewpoint Toolbars search results are provided by Yahoo!, who collects a fee
from the advertiser and remits a percentage of the fee to Viewpoint. Revenue
generated is a function of the number of Viewpoint Toolbars performing
searches, the number of searches that are sponsored by advertisers, the number
of advertisements that are clicked on by Viewpoint Toolbar searchers, the rate
advertisers pay for those advertisements, and the percentage retained by Yahoo!
for providing the results. The agreement also provides the Company the ability
to create, distribute and market private label toolbars for third parties.

In
July 2005, the Company launched version 3.0 of the Viewpoint Toolbar which
includes the capability to manage digital photograph files on the users
computer and provides the ability to share the photographs at a website or get
printed copies of the photographs for a fee. During October 2005, the Company released
version 3.5 of the Viewpoint Toolbar and re-named it the Fotomat Toolbar. The
Company has licensed the trademark and internet url Fotomat.com for its
exclusive use in connection with the internet website for photograph and
printing services and

22

---



computer software for
organization, editing, managing, sharing, and processing images and related
data through the end of December 2006. Its new Fotomat Toolbar provides
enhanced photograph editing capabilities and an efficient method of creating
albums of photographs, which the Company believes enhances the utility of the
toolbars for users, while simultaneously allowing users to use the Toolbar to
search the internet.

Prior
to launching the Search product the Company principally leveraged its
distributed base of VMPs by licensing access to use the Viewpoint Platform for
display of content on a website. Viewpoint initiated internet activities with
the release of a beta version of the Viewpoint Media Player in 1999.
Simultaneously, Viewpoint released a suite of free content authoring tools
specifically designed to enable customers who published digital content on
their websites to create material that can be read or played back by the
VMP. With the VMP residing on the web consumers computer and interpreting
instructions delivered by its customers web sites, web sites can transmit
relatively small files that can yield rich media on the end users computer.
In this way, website owners can deploy digital content representing
three-dimensional views of their products, include pre-set animations, and
provide high-resolution two-dimensional views, video, audio, text, and other
media types. For example, the Company has licensing customers who are auto
manufacturers that deploy from their websites 3D representations of their
vehicles which viewers can interact with by opening doors, zooming in on
features, configuring accessories, or swapping colors. Its licensees helped
facilitate the growth of its distributed base of VMPs that the Company used to
launch its Search Toolbar business.

In
addition, Viewpoint also offers an online advertising campaign management and
deployment product. In July 2005, the Company redesigned this product,
incorporating the Viewpoint Creative Innovator product with Unicasts UCP ad
delivery system into one system. This system, known as the Unicast Ad
Platform (UAP), permits publishers, advertisers, and their agencies to
manage the process of deploying online advertising campaigns. The Company
charges customers on a cost per thousand (CPM) impression basis, and
recognizes revenue when the impressions are served, so long as all other
revenue recognition criteria are satisfied. The Company also provides another
advertising services product whereby the Company purchases media space from
web-site publishers and resells that space to advertisers. The Company acts as
a principal party in the transaction by assuming the title to the media space
purchased. In addition, the Company assumes risks of collection, and therefore
recognizes the entire amount billed to the customer as revenue and the cost of
the media space as cost of sales.

The
Company provides fee-based professional services for creating content and
implementing visualization systems. Clients include both content-related
licensees and advertisers who use UAP as well as internal services provided to
its marketing team. Its professional services group uses the Viewpoint
platform, as well as a spectrum of tools and other technologies to create enhanced
rich media solutions for a clients particular purpose, whether over the web,
intranet systems or offline media and applications. The Company provides the
support its clients need to implement the rich media content, to fully utilize
the enhanced software, or to maximize the branding potential of the advertising
opportunity. Clients supported during 2005 and 2006 include America Online,
Toyota Motor Services, General Electric and Honda.

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, 2006, had an
accumulated deficit of $285 million. Viewpoints prospects must be considered
in light of the risks and difficulties frequently encountered by early stage
technology companies. There can be no assurance that Viewpoint will achieve or
sustain profitability.

23

---



RESULTS OF OPERATIONS

The
following table sets forth for the three and nine months ended September 30,
2006 and 2005, the Companys consolidated statements of operations expressed as
a percentage of total revenues for the periods indicated:

|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---- | ------------------------------ |  | ---- | -- | ---- | ---- | -- |  | --- | --
|                                                                                                          |  | Three Months EndedSeptember 30, |      | Nine Months EndedSeptember 30, | 
|                                                                                                          |  |                                 |      |                                |  |      |    |      |     
|                                                                                                          |  | 2006                            |      | 2005                           |  | 2006 |    | 2005 |     
|                                                                                                          |  |                                 |      |                                |  |      |    |      |     
|Statements
  of Operations Data                                                                           |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Revenues:                                                                                                 |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Search                                                                                                    |  |                                 | 46   | %                              |  | 42   | %  |      | 37   | %  |  | 39  | % 
|Advertising Systems                                                                                       |  |                                 | 30   |                                |  | 9    |    |      | 43   |    |  | 14  |   
|Services                                                                                                  |  |                                 | 24   |                                |  | 29   |    |      | 19   |    |  | 25  |   
|Related party services                                                                                    |  |                                 |     |                                |  | 3    |    |      |     |    |  | 5   |   
|Licenses                                                                                                  |  |                                 |     |                                |  | 2    |    |      | 1    |    |  | 3   |   
|Related party licenses                                                                                    |  |                                 |     |                                |  | 15   |    |      |     |    |  | 14  |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Total revenues                                                                                            |  |                                 | 100  |                                |  | 100  |    |      | 100  |    |  | 100 |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Cost of revenues:                                                                                         |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Search                                                                                                    |  |                                 | 1    |                                |  | 1    |    |      | 1    |    |  | 1   |   
|Advertising Systems                                                                                       |  |                                 | 13   |                                |  | 7    |    |      | 28   |    |  | 10  |   
|Services                                                                                                  |  |                                 | 14   |                                |  | 16   |    |      | 14   |    |  | 16  |   
|Licenses                                                                                                  |  |                                 |     |                                |  |     |    |      |     |    |  |    |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Total cost of revenues                                                                                    |  |                                 | 28   |                                |  | 24   |    |      | 43   |    |  | 27  |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Gross profit                                                                                              |  |                                 | 72   |                                |  | 76   |    |      | 57   |    |  | 73  |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Operating expenses:                                                                                       |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Sales and Marketing                                                                                       |  |                                 | 45   |                                |  | 22   |    |      | 34   |    |  | 21  |   
|Research and development                                                                                  |  |                                 | 31   |                                |  | 19   |    |      | 24   |    |  | 19  |   
|General and administrative                                                                                |  |                                 | 65   |                                |  | 54   |    |      | 52   |    |  | 44  |   
|Depreciation                                                                                              |  |                                 | 4    |                                |  | 3    |    |      | 3    |    |  | 3   |   
|Amortization of intangible assets                                                                         |  |                                 | 7    |                                |  | 2    |    |      | 3    |    |  | 2   |   
|Restructuring charges                                                                                     |  |                                 |     |                                |  |     |    |      | 1    |    |  |    |   
|Impairment of goodwill                                                                                    |  |                                 | 332  |                                |  |     |    |      | 83   |    |  |    |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Total operating expenses                                                                                  |  |                                 | 484  |                                |  | 100  |    |      | 200  |    |  | 89  |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Loss from operations                                                                                      |  |                                 | (412 | )                              |  | (23  | )  |      | (143 | )  |  | (17 | ) 
|                                                                                                         
|Other income (expense):                                                                                   |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Interest and other income, net                                                                            |  |                                 | 3    |                                |  | 1    |    |      | 2    |    |  |    |   
|Interest expense                                                                                          |  |                                 | (7   | )                              |  | (5   | )  |      | (5   | )  |  | (5  | ) 
|Changes in fair values of warrants to purchase common stock and
  conversion feature of convertible notes |  |                                 | 32   |                                |  | 3    |    |      | (1   | )  |  | 6   |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Total Other income (expense)                                                                              |  |                                 | 28   |                                |  | (1   | )  |      | (4   | )  |  | 1   |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Loss before provision for income taxes                                                                    |  |                                 | (384 | )                              |  | (24  | )  |      | (147 | )  |  | (16 | ) 
|Provision for income taxes                                                                                |  |                                 | 1    |                                |  |     |    |      |     |    |  |    |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Net loss from continuing operations                                                                       |  |                                 | (385 | )                              |  | (24  | )  |      | (147 | )  |  | (16 | ) 
|Adjustment to net loss on disposal of discontinued
operations                                             |  |                                 |     |                                |  |     |    |      |     |    |  | 1   |   
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   
|Net loss                                                                                                  |  |                                 | (385 | )%                             |  | (24  | )% |      | (147 | )% |  | (15 | )%
|                                                                                                          |  |                                 |      |                                |  |      |    |      |      |    |  |     |   

24

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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 principles generally accepted in the United
States of America. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. The Company bases its estimates on
historical experience and on various other assumptions that the Company
believes 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 critical accounting policies and estimates refer
to the Companys 2005 Form 10-K and Stock-Based Compensation discussed below.

Stock-Based Compensation

The
Company has adopted the provisions of FAS No. 123R (FAS 123R), Share-Based
Payment which replaced Statement of Financial Accounting Standards No. 123
(FAS 123), Accounting for Stock-Based Compensation and supersedes APB
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, as of January
1, 2006. The provisions of FAS 123R require a company to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost is recognized in the
statement of operations over the period during which an employee is required to
provide service in exchange for the award. The determination of the fair value
of stock-based payment awards on the date of grant using an option-pricing
model is affected by the Companys stock price as well as assumptions regarding
a number of complex and subjective variables. These variables include the
Companys expected stock price volatility over the terms of the awards of 134%,
actual and projected employee stock option exercise behaviors resulting in an
estimated term of 4.54 years, risk-free interest rate of 4.67%, and expected
dividends of zero. As the result of the uncertainty regarding the Companys
ability to utilize its deferred tax assets, the impact of wind fall tax
benefits on the accompanying financial statements was immaterial. A change in
volatility and term could significantly increase or decrease operating
expenses.

The
Company elected the modified-prospective method, under which prior periods are
not revised for comparative purposes. The valuation provisions of SFAS 123R
apply to new grants and to grants that were outstanding as of the effective
date and are subsequently modified. Estimated compensation for grants that were
outstanding as of the effective date will be recognized over the remaining
service period using the compensation cost estimated for the SFAS 123 pro forma
disclosures.

The
adoption of SFAS 123R had a material impact on our consolidated financial
position and results of operations.

Financial Results

Viewpoint reported total
revenue of $3.2 million for the third quarter 2006 compared to $6.0 million for
the third quarter 2005. Operating loss for the third quarter of 2006 was $13.2
million compared to $1.4 million in the third quarter of 2005. The increase in
operating loss compared to the third quarter 2005 resulted principally from a
$10.7 million impairment charge the Company took for its Services segment in
the third quarter when it concluded that revenue growth in this unit would take
longer to develop. Additionally revenue declined $1.0 million due to the
expiration of a license and services revenue arrangement with AOL in December
2005 from a contract executed in 2003. Additionally, the Company experienced a
42% or $1.0 million decline in revenue in its search business. Viewpoints ad
systems business, however experienced growth of 70% in the third quarter of
2006 as compared with the third quarter in 2005. The Company recorded $0.5
million of stock-based compensation expense in the third quarter of 2006
associated with the adoption of Statement of Financial Accounting Standards
(SFAS) No. 123R Share-Based Payment on January 1, 2006 which also led to an
increase in operating loss. This compared to a stock based compensation charge
of $1.1 million recorded in the third quarter of 2005 associated with the
departure of an executives from the Company and a corresponding extension of
their stock option exercise period. Net loss for the third quarter 2006 was
$12.3 million, or a loss of $0.18 per share, compared to a net loss of $1.5
million, or a loss of $0.02 per share, in the third quarter of 2005. The net
loss in the third quarter of 2006 included a non-cash gain of $1.0 million to
recognize the impact of the Companys decreased stock price on its outstanding
warrants. The net loss in the third quarter of 2005 included a non-cash gain of
$0.2 million to recognize the impact of the Companys increased stock price on
its outstanding warrants.

25

---



Viewpoint
reported total revenue of $12.9 million for the first nine months of 2006
compared to $18.1 million for the same period in 2005. Operating loss for the
first nine months of 2006 was $18.5 million compared to $3.0 million in the
same period of 2005. This increase in operating loss resulted principally from
the services impairment charge of $10.7 million and lower revenues associated
with the expiration of a license and services revenue arrangement with AOL in
December 2005 of a contract executed in 2003. The Company experienced a 32%
decline in revenue in its search business which contributed to an increase in
the operating loss on a comparative basis; however its ad systems business
experienced growth of 126% in revenues during the comparative period. The
Companys services revenue declined 47.0% in the first nine months of 2006
compared to the same period in 2005. During March 2006, when the Company noted
it was experiencing a decline in this business it announced a restructuring of
this group. This restructuring streamlined the business by terminating 29% of
the services employees and relocating the principal services office from New
York to Los Angeles. During the first nine months of 2006, the Company also
recorded $1.6 million of stock-based compensation expense associated with the
adoption of Statement of Financial Accounting Standards (SFAS) No. 123R
Share-Based Payment on January 1, 2006. This compared to a stock based
compensation expense of $1.7 million in the same period in 2005. Net loss for
the first nine months of 2006 was $19.1 million, or a loss of $0.29 per share
including a non-cash charge of $0.2 million to recognize the impact of the
Companys increased stock price of its outstanding warrants. Net loss for the
first nine months of 2005 was $2.6 million, or a loss of $0.05 per share,
including a non-cash gain of $1.0 million to recognize the impact of the
Companys decreased stock price on outstanding warrants.

Viewpoints
cash, cash equivalents, and marketable securities as of September 30, 2006 were
$6.3 million. This compares to cash, cash equivalents, and marketable
securities of $9.1 million at December 31, 2005. The decrease in cash, cash
equivalents, and marketable securities can be principally attributed to the
loss from operations during the nine month period offset by proceeds from the
exercise of stock options granted to current and former employees.

26

---



Revenues

|                       |  |                                |        |      |   |        |  |  |      |   
|---------------------- |  | ------------------------------ | ------ | ---- | - | ------ |  |  | ---- | --
|                       |  | Months
  Ended
  September 30, |        | %    |  
|                       |  |                                |       
|                       |  | 2006                           |        | 2005 |   | Change | 
|                       |  |                                |       
|                       |  | (dollars
  in thousands)       |        |      |   |       
|Three months ended:    |  |                                |        |      |   |        |  |  |      |   
|Search                 |  | $                              | 1,460  |      | $ | 2,498  |  |  | (42  | ) 
|Advertising Systems    |  |                                | 961    |      |   | 566    |  |  | 70   |   
|Services               |  |                                | 786    |      |   | 1,744  |  |  | (55  | ) 
|Related party services |  |                                |       |      |   | 154    |  |  | (100 | ) 
|Licenses               |  |                                | 4      |      |   | 124    |  |  | (97  | ) 
|Related party licenses |  |                                |       |      |   | 873    |  |  | (100 | ) 
|                       |  |                                |        |      |   |        |  |  |      |   
|Total revenues         |  | $                              | 3,211  |      | $ | 5,959  |  |  | (46  | )%
|                       |  |                                |        |      |   |        |  |  |      |   
|                       |  |                                |        |      |   |        |  |  |      |   
|Nine months ended:     |  |                                |        |      |   |        |  |  |      |   
|Search                 |  | $                              | 4,822  |      | $ | 7,071  |  |  | (32  | )%
|Advertising Systems    |  |                                | 5,569  |      |   | 2,461  |  |  | 126  |   
|Services               |  |                                | 2,430  |      |   | 4,551  |  |  | (47  | ) 
|Related party services |  |                                |       |      |   | 903    |  |  | (100 | ) 
|Licenses               |  |                                | 82     |      |   | 506    |  |  | (84  | ) 
|Related party licenses |  |                                |       |      |   | 2,618  |  |  | (100 | ) 
|                       |  |                                |        |      |   |        |  |  |      |   
|Total revenues         |  | $                              | 12,903 |      | $ | 18,110 |  |  | (29  | )%
|                       |  |                                |        |      |   |        |  |  |      |   

On
March 17, 2004 Viewpoint entered the internet search business by launching the
Viewpoint Toolbar on a test basis. In April 2004, the Company ended the test
phase and began delivering the Viewpoint Toolbar Version 1.0. Search revenue is
generated when a customer uses the Viewpoint Toolbar to search the internet,
and clicks on a sponsored advertisement included in the search results. The
Viewpoint Toolbars search results are provided by Yahoo!, who collects a fee
from the advertiser and remits a percentage of the fee to Viewpoint. Revenue
generated is a function of the number of Viewpoint Toolbars performing
searches, the number of searches that are sponsored by advertisers, the number
of advertisements that are clicked on by Viewpoint Toolbar searchers, the rate
advertisers pay for those advertisements, and the percentage retained by Yahoo!
for providing the results.

Additionally,
Viewpoint offers an online advertising campaign management and deployment
product. In July 2005, the Company deployed a new product, incorporating the
Viewpoint Creative Innovator product and Unicasts UCP ad delivery system into
one system. This system, known as the Unicast Ad Platform (UAP), permits
publishers, advertisers, and their agencies to manage the process of deploying
online advertising campaigns. The Company charges customers on a cost per
thousand (CPM) impression basis, and recognizes revenue when the impressions
are served, so long as all other revenue recognition criteria are satisfied.
The Company also provides another advertising services product whereby the
Company purchases media space from web-site publishers and resells that space
to advertisers. The Company acts as a principal party in the transaction,
assumes the title to the media space purchased, and assumes the risks of
collection and therefore recognizes the entire amount billed to the customer as
revenue, and the cost of the media space as cost of sales.

Viewpoint
has a creative services group that builds content in the Viewpoint format for
customers. Viewpoint charges customers fees for these services based on the
estimated time and materials to complete a creative project for the customer
including an acceptable profit margin. Revenue is recognized on a
percentage-of-completion basis if all other revenue recognition criteria are
satisfied. During 2005 and 2006, the Company continued its strategy of
concentrating on executing larger creative projects

The
Company also generated revenues by selling licenses to the Viewpoint graphical
platform principally to internet content publishers. On June 14, 2005,
Viewpoint announced that for all non-special-purpose-licenses, it was
discontinuing the practice of charging customers a license fee for the use of
the Viewpoint Media Player and related technologies. The Viewpoint Media Player
will no longer require a broadcast key to display content, thereby giving all
developers a free license to the Viewpoint Distribution Network. However,
Viewpoint will still charge for certain licenses requiring customization. By
providing the standard license for free, the Company plans to extend the
Viewpoint Media Players reach into new channels of distribution beyond the
estimated 120 million computers it

27

---



currently
resides within. Viewpoint believes that this strategy supports the advertising
businessby potentially making the player more pervasiveas well as providing
stronger distribution for the search business.

During
October 2003, the Company entered into an amended license agreement with
America Online, Inc. (AOL) which provided for payments by AOL of $10.0
million which were received in the fourth quarter of 2003. The agreement
contains multiple elements consisting of a perpetual broadcast license, a
perpetual source code license, quarterly updates to the source code through
December 2005, and maintenance and consulting services. The Company recognized
revenue from this agreement ratably as license and services revenue through
December 2005 which represents the duration of the Companys obligation for
post-contract support of the source code element, including quarterly upgrades
and maintenance requirements. Approximately $0.9 million was recognized each
quarter from October 2003 to December 2005 as related party license revenue and
$0.2 million as related party services revenue. There will be no future revenue
earned subsequent to December 31, 2005 related to this License.

Search
  revenues for the three months ended September 30, 2006 amounted to $1.5 million,
  compared to $2.5 million in the three months ended September 30, 2005. Revenues
  for the nine months ended September 30, 2006 were $4.8 million compared to $7.1
  million for the comparable period in 2005. The Company had installed 19 million
  through September 2005, and 25.3 million through September 2006. Internet users
  can uninstall the Viewpoint Toolbar, and through September, 2005, 8.4 million
  users who had accepted the installation of the Toolbar had later uninstalled
  it, and 12.7 million had uninstalled through September, 2006. The total of cumulative
  toolbars installed, net of those uninstalled was 10.6 million at September,
  2005 and 12.6 million at September 2006. Though the number of toolbars is increasing,
  the Company is seeing a decrease in usage of bars, and a resulting decrease
  in search revenue. This decrease in revenue may continue unless the Company
  obtains new distribution partners for its toolbar, enhancements to its toolbar
  delivered to consumers are found to be beneficial or the revenue paid by advertisers
  to Yahoo! increases.

The
Company recognized $1.0 million in advertising systems revenue during the three
months ended September 30, 2006 compared to $0.6 million for the same period in
2005. This revenue was generated by delivering advertising impressions to
websites in several different formats including video and the purchase of media
space from publishers on behalf of advertisers. The revenue increase is
attributable to the Company continuing to expand its customer base and types of
advertising formats delivered to them.

Ad
systems revenues of $5.6 million for the nine months ended September 30, 2006
increased compared with revenues of $2.5 million for the nine months ended
September 30, 2005. Growth in this segment accelerated during the last six
months and is expected to continue during the remainder of 2006 as the Company
is able to attract more clients and websites to its various ad serving formats.

Services
revenues amounted to $0.8 million for the three months ended September 30, 2006
as compared to $1.7 million for the same period in 2005. The Company experienced
a decline in its number of clients during the quarter. During March 2006, in
recognition of a decline in revenues for this group, the Company announced a
restructuring which resulted in a reduction of its workforce and the relocation
of its principal operational headquarters for this business to its Los Angeles
office. The Company recognized an additional impairment of goodwill for this
segment during this quarter due to a reduction of revenues from the automotive
sector and slower growth in revenues from the development of other creative
products and initiatives.

28

---



Services
revenues amounted to $2.4 million for the nine months ended September 30, 2006
as compared to revenues of $5.5 million for the nine months ended September 30,
2005. This segments revenues were down significantly in the first quarter of
2006 compared to the same period the prior year which led to the March 2006
restructuring. Additional decreases in subsequent quarters led to an impairment
expense for this segment which was recorded in September 2006. The Company
believes that it can increase revenues prospectively in this segment if
customers continue to seek the Companys assistance in building more content
using the Viewpoint Platform to be used at their websites, develop advertising
formats, and more client contracts for private label toolbars.

There
were no related party services or license revenues for the three months ended
September 30, 2006, as the October 2003 AOL contract expired on December 31,
2005.

License
revenues amounted to less than $0.1 million in the nine months ended September
30, 2006, which represents a decrease of approximately $0.4 million, as
compared to the same period last year. License revenues for the first quarter
of 2005 represent four licenses the Company sold during 2004, which provided
upgrade rights, and were therefore being recognized ratably over 12 months. The
Company essentially eliminated the sale of all but special-purposes licenses in
September 2005 and believes that revenues in this segment will continue to
decrease in 2006.

29

---



Cost of revenues

|                                           |  |                        |       |      |   |        |   |      |    | 
|------------------------------------------ |  | ---------------------- | ----- | ---- | - | ------ | - | ---- | -- | 
|                                           |  | September 30,          |       | %    |  
|                                           |  |                        |      
|                                           |  | 2006                   |       | 2005 |   | Change |  
|                                           |  |                        |      
|                                           |  | (dollars in thousands) |       |      |  
|Three months ended:                        |  |                        |       |      |   |        |   |      |   
|Search                                     |  | $                      | 39    |      | $ | 39     |   |     | %  | 
|Percentage of Search Revenues              |  |                        | 3     | %    |   | 2      | % |      |    | 
|Nine months ended:                         |  |                        |       |      |   |        |   |      |    | 
|Search                                     |  | $                      | 113   |      | $ | 134    |   | (16  | )% | 
|Percentage of Search Revenues              |  |                        | 2     | %    |   | 2      | % |      |    | 
|                                           |  |                        |       |      |   |        |   |      |    | 
|Three months ended:                        |  |                        |       |      |   |        |   |      |    | 
|Advertising Systems                        |  | $                      | 399   |      | $ | 405    |   | (1   | )% | 
|Percentage of Advertising Systems
Revenues |  |                        | 42    | %    |   | 72     | % |      |    | 
|Nine months ended:                         |  |                        |       |      |   |        |   |      |    | 
|Advertising Systems                        |  | $                      | 3,638 |      | $ | 1,907  |   | 91   | %  | 
|Percentage of Advertising Systems
Revenues |  |                        | 65    | %    |   | 77     | % |      |    | 
|                                           |  |                        |       |      |   |        |   |      |    | 
|Three months ended:                        |  |                        |       |      |   |        |   |      |    | 
|Services                                   |  | $                      | 455   |      | $ | 956    |   | (52  | )% | 
|Percentage of Services Revenues            |  |                        | 58    | %    |   | 50     | % |      |    | 
|Nine months ended:                         |  |                        |       |      |   |        |   |      |    | 
|Services                                   |  | $                      | 1,766 |      | $ | 2,875  |   | (39  | )% | 
|Percentage of Services Revenues            |  |                        | 73    | %    |   | 53     | % |      |    | 
|                                           |  |                        |       |      |   |        |   |      |    | 
|Three months ended:                        |  |                        |       |      |   |        |   |      |    | 
|Licenses                                   |  | $                      |      |      | $ | 8      |   | (100 | )% | 
|Percentage of Licenses Revenues            |  |                        |      | %    |   | 1      | % |      |    | 
|Nine months ended:                         |  |                        |       |      |   |        |   |      |    | 
|Licenses                                   |  | $                      | 8     |      | $ | 11     |   | (27  | )% | 
|Percentage of Licenses Revenues            |  |                        | 10    | %    |   |       | % |      |    | 

The
Company incurs cost of revenues related to search revenue for the hosting
services associated with providing search results. Bandwidth costs utilized in
providing results has been minimal. The Company believes that as search revenue
increases, the hosting services associated with this revenue will increase.
Additionally, as the Company is able to obtain private label distribution
agreements there may be costs associated with that distribution. This may lead
to an increase in the costs as a percentage of revenues.

Cost
of revenues from advertising systems were $0.4 million and $3.6 million for the
three and nine month periods, respectively, ended September 30, 2006 compared
to $0.4 million and $1.9 million for the same periods last year. These costs
consist of the web-hosting and employee fees associated with serving
advertising content, costs for media space at websites, and costs of developing
certain advertisements in contracts that include a combined price for
developing creative material and delivering that material. Cost of media space
at websites increased by $0.0 million and $2.0 million in the three and nine
month periods, respectively, in 2006, compared with the same periods last year.
This increase was due to more contracts which required the Company to both
purchase media and deliver ads for the advertiser.

Cost
of revenues for services consists primarily of salaries, consulting fees and
overhead for those who provide fee-based content creation and engineering
professional services. Cost of revenues for services of $0.5 million and $1.8
million for the three and nine month periods, respectively, ended September 30,
2006 decreased by $0.5 and $1.1 million, respectively, compared to the same
periods last year. The decreases in cost of revenues for services is
attributable to the decrease in service revenues compared to the prior year.
Additionally, due to the decline in revenues the Company initiated a
restructuring which reduced the cost of revenues in the second quarter of 2006
as compared to the first quarter of 2006. The Company believes that the costs
for services as a percentage of revenue will improve during the remainder of
2006.

30

---



Sales and marketing

|                             |  |                          |       |      |   |       |            |  |     | 
|---------------------------- |  | ------------------------ | ----- | ---- | - | ----- | ---------- |  | --- | 
|                             |  | September
  30,          |       |      |   |      
|                             |  | 2006                     |       | 2005 |   |       | %
  Change | 
|                             |  |                          |       |      |  
|                             |  | (dollars
  in thousands) |       |      |   |      
|Three months ended:          |  |                          |       |      |   |       |            |  |     | 
|Sales and Marketing          |  | $                        | 1,454 |      | $ | 1,325 |            |  | 10% | 
|Percentage of total revenues |  |                          | 45    | %    |   | 22    | %          |  |     | 
|Nine months ended:           |  |                          |       |      |   |       |            |  |     | 
|Sales and Marketing          |  | $                        | 4,481 |      | $ | 3,828 |            |  | 17% | 
|Percentage of total revenues |  |                          | 34    | %    |   | 21    | %          |  |     | 

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

Sales
and marketing expenses of $1.5 million for the three months ended September 30,
2006 increased by $0.1 million compared to the same period last year. The
increase was principally due to recording $0.1 million in stock-based
compensation in 2006 due to the adoption of FAS 123R.

Sales
and marketing expenses of $4.5 million for the nine months ended September 30,
2006 increased by $0.7 million compared to the same period last year. The
increase was principally due to recording $0.4 million in stock-based
compensation in 2006 due to the adoption of FAS 123R. Personnel costs including
commissions increased by $0.2 million and search marketing costs increased by
$0.1 million. These increases were offset by a decrease in consulting expenses
of $0.1 million.

31

---



Research and development

|                             |  |                          |       |      |   |       |            |  |       | 
|---------------------------- |  | ------------------------ | ----- | ---- | - | ----- | ---------- |  | ----- | 
|                             |  | September
  30,          |       |      |   |      
|                             |  | 2006                     |       | 2005 |   |       | %
  Change | 
|                             |  |                          |       |      |  
|                             |  | (dollars
  in thousands) |       |      |   |      
|Three months ended:          |  |                          |       |      |   |       |            |  |       | 
|Research and development     |  | $                        | 982   |      | $ | 1,126 |            |  | (13)% | 
|Percentage of total revenues |  |                          | 31    | %    |   | 19    | %          |  |       | 
|Nine months ended:           |  |                          |       |      |   |       |            |  |       | 
|Research and development     |  | $                        | 3,138 |      | $ | 3,479 |            |  | (10)% | 
|Percentage of total revenues |  |                          | 24    | %    |   | 19    | %          |  |       | 

Research
and development expenses consist primarily of salaries and benefits for
software developers, contracted development efforts, and stock-based
compensation charges related to the Companys product development efforts. The
Company expenses as incurred research and development costs necessary to
establish the technological feasibility of its internally developed software
products and technologies. To date, the establishment of technological
feasibility of the Companys products and general release has substantially
coincided. As a result, the Company has not capitalized any software
development costs since costs qualifying for such capitalization have not been
significant. Additionally, the Company capitalizes costs of software,
consulting services, hardware and payroll-related costs incurred to purchase or
develop internal-use software, if technological feasibility has been
established, it is probable that the project will be completed and the software
will be used as intended. The Company expenses costs incurred during
preliminary project assessment, research and development, re-engineering,
training and application maintenance.

Beginning
in 2004, the Company expanded its research and development efforts beyond
changes in the overall quality of the Viewpoint Media Player to efforts to
build the Viewpoint Toolbar for searching. During 2005, efforts in this area focused
on the development of a more flexible frame for the Toolbar which would
facilitate adding different software tools to its capabilities and the
development of a photo sharing capability. In addition, during 2004 the Company
expanded its efforts to build its advertising system product by expanding the
creative assembly capability of its product. During 2005, efforts were focused
on building an ad delivery system that combined the capabilities of Unicasts
and Viewpoints products. During 2006, the Company has been working on a new
type of toolbar which can be easily branded for a customer. Additionally, the
Company has been developing a personalization tool that can be used in the
toolbar or ad systems business and a new reporting module that will more
effectively determine returns on types of advertising formats for its ad
systems platform. Furthermore, the Company has been developing a new method for
the delivery of advertisements into video games.

Research
and development expenses decreased by $0.1 million and $0.3 million for the
three and nine months ended September 30, 2006 compared to the same periods
last year. These changes resulted from a decrease in salaries due to fewer
employees in this group during the past year.

32

---



General and
administrative

|                             |  |                          |       |      |   |       |            |  |       | 
|---------------------------- |  | ------------------------ | ----- | ---- | - | ----- | ---------- |  | ----- | 
|                             |  | September
  30,          |       |      |   |      
|                             |  | 2006                     |       | 2005 |   |       | %
  Change | 
|                             |  |                          |       |      |  
|                             |  | (dollars
  in thousands) |       |      |   |      
|Three months ended:          |  |                          |       |      |   |       |            |  |       | 
|General and Administsrative  |  | $                        | 2,102 |      | $ | 3,224 |            |  | (35)% | 
|Percentage of total revenues |  |                          | 65    | %    |   | 54    | %          |  |       | 
|Nine months ended:           |  |                          |       |      |   |       |            |  |       | 
|General and Administsrative  |  | $                        | 6,687 |      | $ | 7,965 |            |  | (16)% | 
|Percentage of total revenues |  |                          | 52    | %    |   | 44    | %          |  |       | 

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

General
and administrative expenses decreased by $1.1 million for the three months
ended September 30, 2006 compared to the same period last year. The Company
recorded $0.2 million in stock-based compensation for the three months ended
September 30, 2006 due to the adoption of FAS 123R. During the same period in
2005 the Company recorded a stock based compensation expense of $1.1 million
associated with a charge taken on extending the options of a former executive
at September 30, 2005. Salary and fringe benefit costs decreased by $0.2 million
in the three months ended September 30, 2006 due primarily to an overall
reduction of employees in this department during the year.

General
  and administrative expenses decreased by $1.3 million, for the nine months ended
  September 30, 2006 compared to the same period last year. Stock based compensation
  charges decreased $0.9 million for the period due to the extension of options
  to the former executive noted above. Corporate costs including accounting fees increased
  by $0.2 million in the nine months ended September 30, 2006 as compared to the
  same period in the prior year. Salary and fringe benefit costs decreased by
  $0.6 million due primarily to a decrease of employees in this area during 2006.

33

---



Depreciation expense

|                             |  |                          |     |      |   |     |            |  |       | 
|---------------------------- |  | ------------------------ | --- | ---- | - | --- | ---------- |  | ----- | 
|                             |  | September
  30,          |     |      |   |    
|                             |  | 2006                     |     | 2005 |   |     | %
  Change | 
|                             |  |                          |     |      |  
|                             |  | (dollars
  in thousands) |     |      |   |    
|Three months ended:          |  |                          |     |      |   |     |            |  |       | 
|Depreciation                 |  | $                        | 113 |      | $ | 158 |            |  | (28)% | 
|Percentage of total revenues |  |                          | 4   | %    |   | 3   | %          |  |       | 
|Nine months ended:           |  |                          |     |      |   |     |            |  |       | 
|Depreciation                 |  | $                        | 337 |      | $ | 496 |            |  | (32)% | 
|Percentage of total revenues |  |                          | 3   | %    |   | 3   | %          |  |       | 

Depreciation
expense relating to operating expenses decreased by less than $0.1 million and
$0.2 million for the three and nine month periods ended September 30, 2006, as
compared with the same period last year primarily due to the Unicast assets
acquired on January 3, 2005. Most of the assets acquired were depreciated over
a one year life. Certain depreciation amounts were reclassed to the cost of
revenue for the three and nine months ended September 30, 2005 to conform to
the 2006 presentation. Refer to the consolidated financial statements for
further information regarding the reclassification.

Amortization of
intangible assets

|                                  |  |                          |     |      |   |     |            |  |     | 
|--------------------------------- |  | ------------------------ | --- | ---- | - | --- | ---------- |  | --- | 
|                                  |  | September
  30,          |     |      |   |    
|                                  |  | 2006                     |     | 2005 |   |     | %
  Change | 
|                                  |  |                          |     |      |  
|                                  |  | (dollars
  in thousands) |     |      |   |    
|Three months ended:               |  |                          |     |      |   |     |            |  |     | 
|Amortization of intangible assets |  | $                        | 222 |      | $ | 118 |            |  | 88% | 
|Percentage of total revenues      |  |                          | 7   | %    |   | 2   | %          |  |     | 
|Nine months ended:                |  |                          |     |      |   |     |            |  |     | 
|Amortization of intangible assets |  | $                        | 443 |      | $ | 370 |            |  | 20% | 
|Percentage of total revenues      |  |                          | 3   | %    |   | 2   | %          |  |     | 

Amortization
of intangible assets relates to the amortization of patents, trademarks and
other intangible assets acquired in the Unicast acquisition. Intangible assets,
excluding Goodwill, determined to have been acquired included trademarks, and
website partner relationships. Viewpoint will be amortizing these intangible
assets over an effective 7.5 year life principally due to the longer life
estimated for the more valuable website partner relationships. Certain
amortization amounts were reclassed to cost of revenue for the three and nine
months ended September 30, 2005 to conform to the 2006 presentation. Refer to
the consolidated financial statements for further information regarding the
reclassification.

Impairment Charge

|                                                   |  |                          |        |      |   |   |            |  |      | 
|-------------------------------------------------- |  | ------------------------ | ------ | ---- | - | - | ---------- |  | ---- | 
|                                                   |  | September
  30,          |        |      |   |  
|                                                   |  | 2006                     |        | 2005 |   |   | %
  Change | 
|                                                   |  |                          |        |      |  
|                                                   |  | (dollars
  in thousands) |        |      |   |  
|Three months ended:                                |  |                          |        |      |   |   |            |  |      | 
|Impairment of goodwill and other intangible assets |  | $                        | 10,655 |      | $ |  |            |  | N/A% | 
|Percentage of total revenues                       |  |                          | 332    | %    |   |  | %          |  |      | 
|Nine months ended:                                 |  |                          |        |      |   |   |            |  |      | 
|Impairment of goodwill and other intangible assets |  | $                        | 10,655 |      | $ |  |            |  | N/A% | 
|Percentage of total revenues                       |  |                          | 83     | %    |   |  | %          |  |      | 

At
September 30, 2006 the Company determined that, based on a decline in operating
performance during the third quarter of 2006 marked by a reduction of revenues
from the automotive sector and slower growth in revenues from the development
of other creative products and initiatives, the Services reporting unit had

34

---



experienced an
impairment of its allocated goodwill. The Company then performed the second
step of the impairment test in accordance with SFAS No. 142 using a discount
rate of 16% and a revenue growth rate of 5%. Following the completion of that
step the Company recorded an impairment expense of $10.7 million.

Restructuring
charges

|                             |  |                          |    |      |   |   |            |  |      | 
|---------------------------- |  | ------------------------ | -- | ---- | - | - | ---------- |  | ---- | 
|                             |  | September
  30,          |    |      |   |  
|                             |  | 2006                     |    | 2005 |   |   | %
  Change | 
|                             |  |                          |    |      |  
|                             |  | (dollars
  in thousands) |    |      |   |  
|Three months ended:          |  |                          |    |      |   |   |            |  |      | 
|Restructuring charges        |  | $                        |   |      | $ |  |            |  | N/A% | 
|Percentage of total revenues |  |                          |   | %    |   |  | %          |  |      | 
|Nine months ended:           |  |                          |    |      |   |   |            |  |      | 
|Restructuring charges        |  | $                        | 92 |      | $ |  |            |  | N/A% | 
|Percentage of total revenues |  |                          | 1  | %    |   |  | %          |  |      | 

The
Company implemented a restructuring plan in March 2006 designed to streamline
the services business. Under this plan the Company eliminated 10 positions in
the services group and relocated the management of the group from its New York
office to its existing Los Angeles office. The Company incurred a restructuring
charge of $0.1 million related to severance arrangements which has been recorded
separately on the income statement. This restructuring plan was completed by
March 31, 2006 and the severance was paid in the second quarter of 2006.

Interest and other
income, net

|                               |  |                          |     |      |   |    |            |  |      | 
|------------------------------ |  | ------------------------ | --- | ---- | - | -- | ---------- |  | ---- | 
|                               |  | September
  30,          |     |      |   |   
|                               |  | 2006                     |     | 2005 |   |    | %
  Change | 
|                               |  |                          |     |      |  
|                               |  | (dollars
  in thousands) |     |      |   |   
|Three months ended:            |  |                          |     |      |   |    |            |  |      | 
|Interest and other income, net |  | $                        | 95  |      | $ | 30 |            |  | 217% | 
|Percentage of total revenues   |  |                          | 3   | %    |   | 1  | %          |  |      | 
|Nine months ended:             |  |                          |     |      |   |    |            |  |      | 
|Interest and other income, net |  | $                        | 264 |      | $ | 86 |            |  | 207% | 
|Percentage of total revenues   |  |                          | 2   | %    |   |   | %          |  |      | 

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, increased 217% and 207% for the three and nine months
ended September 30, 2006, respectively, compared to the same period last year
due to an increase in average cash, cash equivalents, and marketable securities
balances as well as an increase in market interest rates.

Interest expense

|                             |  |                          |      |      |   |      |          |  |       | 
|---------------------------- |  | ------------------------ | ---- | ---- | - | ---- | -------- |  | ----- | 
|                             |  | September
  30,          |      |      |  
|                             |  | 2006                     |      | 2005 |   |      | % Change | 
|                             |  |                          |      |      |  
|                             |  | (dollars
  in thousands) |      |      |   |     
|Three months ended:          |  |                          |      |      |   |      |          |  |       | 
|Interest expense             |  | $                        | (213 | )    | $ | (288 | )        |  | (26)% | 
|Percentage of total revenues |  |                          | (7   | )%   |   | (5   | )%       |  |       | 
|Nine months ended:           |  |                          |      |      |   |      |          |  |       | 
|Interest expense             |  | $                        | (709 | )    | $ | (943 | )        |  | (25)% | 
|Percentage of total revenues |  |                          | (5   | )%   |   | (5   | )%       |  |       | 

Interest
expense consists of interest paid and accrued, and amortization of debt
discount and debt issue costs on the Companys outstanding subordinated notes
and the debt assumed based upon the Unicast acquisition on January 3, 2005. The
decrease is primarily the result of an extension of the maturity period of a
note from March

35

---



2006 to March
2008, resulting in lower monthly interest expense for that note based on the
effective rate of interest, as well as a reduction of $0.4 million of debt in
March 2006.

Changes in fair
value of warrants to purchase common stock

|                                                                                                         |  |                          |       |      |   |            |   |  |      |   
|-------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----- | ---- | - | ---------- | - |  | ---- | --
|                                                                                                         |  | September
  30,          |       |      |  
|                                                                                                         |  | 2006                     |       | 2005 |   | %
  Change
|                                                                                                         |  |                          |       |     
|                                                                                                         |  | (dollars
  in thousands) |       |      |  
|Three months ended:                                                                                      |  |                          |       |      |   |            |   |  |      |   
|Changes in fair value of warrants to purchase
common stock and
  conversion options of convertible notes |  | $                        | 1,021 |      | $ | 207        |   |  | 393  | % 
|Percentage of total revenues                                                                             |  |                          | 32    | %    |   | 3          | % |  |      |   
|Nine months ended:                                                                                       |  |                          |       |      |   |            |   |  |      |   
|Changes in fair value of warrants to purchase
common stock and
  conversion options of convertible notes |  | $                        | (151  | )    | $ | 1,037      |   |  | (115 | )%
|Percentage of total revenues                                                                             |  |                          | (1    | )%   |   | 6          | % |  |      |   

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 records gains and losses based upon changes in the
Companys common stock value and the number of common stock equivalents that
the associated financial instruments may be settled in.

For
the three and nine month periods ended September 30, 2006, the Company recorded
a gain of $1.0 million and an expense of $0.2 million, respectively, based on
the change in the fair value of warrants. For the three and nine months ended
September 30, 2005, the Company recorded income of $0.2 million and $1.0
million, respectively, in the Companys consolidated statements of operations
based on the change in the fair values of warrants.

Provision for income
taxes

|                             |  |                          |    |      |   |            |   |  |     |  
|---------------------------- |  | ------------------------ | -- | ---- | - | ---------- | - |  | --- | -
|                             |  | September
  30,          |    |      |  
|                             |  | 2006                     |    | 2005 |   | %
  Change
|                             |  |                          |    |     
|                             |  | (dollars
  in thousands) |    |      |  
|Three months ended:          |  |                          |    |      |   |            |   |  |     |  
|Provision for income taxes   |  | $                        | 30 |      | $ |           |   |  | N/A | %
|Percentage of total revenues |  |                          | 1  | %    |   |           | % |  |     |  
|Nine months ended:           |  |                          |    |      |   |            |   |  |     |  
|Provision for income taxes   |  | $                        | 56 |      | $ | 12         |   |  | 367 | %
|Percentage of total revenues |  |                          |   | %    |   |           | % |  |     |  

Provision
for income taxes consists primarily of certain minimum state and city income
taxes.

36

---



Adjustment to net
loss on disposal of discontinued operations

|                                                                            |  |                          |   |      |   |            |   |  |      |   
|--------------------------------------------------------------------------- |  | ------------------------ | - | ---- | - | ---------- | - |  | ---- | --
|                                                                            |  | September
  30,          |   |      |  
|                                                                            |  | 2006                     |   | 2005 |   | %
  Change
|                                                                            |  |                          |   |     
|                                                                            |  | (dollars
  in thousands) |   |      |  
|Three months ended:                                                         |  |                          |   |      |   |            |   |  |      |   
|Adjustment to net loss on disposal of discontinued
operations, net of
  tax |  | $                        |  |      | $ |           |   |  | N/A  | % 
|Percentage of total revenues                                                |  |                          |  | %    |   |           | % |  |      |   
|Nine months ended:                                                          |  |                          |   |      |   |            |   |  |      |   
|Adjustment to net loss on disposal of discontinued
operations, net of
  tax |  | $                        |  |      | $ | 145        |   |  | (100 | )%
|Percentage of total revenues                                                |  |                          |  | %    |   | 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.

There
were no adjustments to net loss on disposal of discontinued operations for the
three and nine month periods ended September 30, 2006. The adjustment to net
loss on disposal of discontinued operations for the nine month ended September
30, 2005 represents a settlement of a lawsuit in the Companys favor related to
discontinued operations.

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 business
  is difficult to evaluate because we have a limited operating history and have
  only relatively recently launched our search toolbar and UAP products.                            
| |   |                                                                                                                                                                                                  
| |  | If our stock
  price were to remain below $1.00 we may receive notice of de-listing from
  NASDAQ which might reduce the value of our Company.                                                   
| |   |                                                                                                                                                                                                  
| |  | If our
  common stock were to be de-listed from NASDAQ we would be in default of certain
  loan covenants which could require the accelerated payment of our $3.1
  million subordinated loan.   
| |   |                                                                                                                                                                                                  
| |  | Our
  competitors in the search business include much larger companies such as
  Google, Microsoft, Yahoo! and others that have significantly greater
  resources than we do to build a business.
| |   |                                                                                                                                                                                                  
| |  | Our efforts
  to distribute our graphically enhanced search toolbar may experience setbacks
  limiting or reducing our search revenue.                                                           
| |   |                                                                                                                                                                                                  
| |  | The success
  of our graphically enhanced search operations depends on users satisfaction
  with search results supplied by Yahoo!.                                                             
| |   |                                                                                                                                                                                                  
| |  | We may be
  unable to successfully replace our search results vendor when our
  distribution contract with Yahoo! expires in March 2008.                                                         
| |   |                                                                                                                                                                                                  
| |  | Our software
  products may be improperly labeled as spyware or adware which might lead to
  its uninstallation causing a decrease in our revenues.                                              
| |   |                                                                                                                                                                                                  
| |  | Our business
  may not grow if the internet advertising market does not continue to develop
  or if we are unable to successfully implement our business model.                                  
| |   |                                                                                                                                                                                                  
| |  | Our failure
  to successfully compete may hinder our growth.                                                                                                                                     

37

---



| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our revenues
  will be subject to seasonal fluctuations.                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                         
| |  | We may enter
  into business combinations and strategic alliances which could be difficult
  to integrate and may disrupt our business.                                                                                                 
| |   |                                                                                                                                                                                                                                         
| |  | We may need
  to develop new products or other untested methods of increasing sales with
  our existing products or distribution network to generate sales and if we are
  unsuccessful the growth of our business may cease or decline.
| |   |                                                                                                                                                                                                                                         
| |  | We will need
  to keep pace with rapid technological change in the internet search and
  advertising industries.                                                                                                                        
| |   |                                                                                                                                                                                                                                         
| |  | Our ad
  campaign management and deployment solution may not be successful and may
  cause business disruption.                                                                                                                         
| |   |                                                                                                                                                                                                                                         
| |  | We might
  experience significant defects in our products.                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                         
| |  | Our
  technical systems are vulnerable to interruption and damage.                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                         
| |  | Our
  management team has only recently started working together.                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                         
| |  | We may have
  to obtain financing on less favorable terms, which could dilute current
  stockholders ownership interests in the company.                                                                                               
| |   |                                                                                                                                                                                                                                         
| |  | Our stock
  price is volatile, which could subject us to class action litigation.                                                                                                                                                       
| |   |                                                                                                                                                                                                                                         
| |  | Our charter
  documents could make it more difficult for an unsolicited third party to
  acquire us.                                                                                                                                    
| |   |                                                                                                                                                                                                                                         
| |  | The market
  for digital visualization solutions is characterized by rapidly changing
  technology, and if we do not respond in a timely manner, our products and
  technologies may not succeed in the marketplace.                    
| |   |                                                                                                                                                                                                                                         
| |  | We may be
  unable to protect our intellectual property rights.                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                         
| |  | We may be
  liable for infringing the intellectual property rights of others.                                                                                                                                                           
| |   |                                                                                                                                                                                                                                         
| |  | Regulatory
  and legal uncertainties could harm our business.                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                         
| |  | Changes in
  regulations or user concerns regarding privacy and protection of user data
  could adversely affect our business.                                                                                                          
| |   |                                                                                                                                                                                                                                         
| |  | Internet
  security poses risks to our entire business.                                                                                                                                                                                 

38

---



Recent Accounting Pronouncements

In
  February 2006, the FASB issued SFAS No. 155, Accounting for Certain
  Hybrid Financial Instrumentsan amendment of FASB SFAS Nos. 133 and 140.
  This Statement amends FASB SFAS No. 133, Accounting for Derivative
  Instruments and Hedging Activities, and No. 140, Accounting
  for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
  SFAS 155 resolves issues addressed in Statement 133 Implementation Issue No.
  D1, Application of Statement 133 to Beneficial Interests in Securitized Financial
  Assets. SFAS 155 is effective for all financial instruments acquired or issued
  after the beginning of an entitys first fiscal year that begins after
  September 15, 2006. We do not believe the adoption of SFAS No. 155 will
  materially impact our consolidated financial statements.

In
  July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
  No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation
  of FASB Statement No. 109 (FIN 48), which clarifies the accounting for
  uncertainty in tax positions. FIN 48 requires that we recognize in our financial
  statements the impact of a tax position if that position is more likely than
  not, of being sustained on audit, based on the technical merits of the position.
  The provisions of FIN 48 are effective as of January 1, 2007, with the cumulative
  effect, if any, of the change in accounting principle recorded as an adjustment
  to opening retained earnings. We do not believe the adoption of FIN 48 will
  materially impact our consolidated financial statements.

In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements (SAB 108),
which provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. We will be required to adopt the provisions of SAB
108 in our annual financial statements for fiscal year 2006. We do not believe that
the adoption of SAB 108 will materially impact our consolidated financial
statements.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (FAS
157). FAS 157 establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to current practice
resulting from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded
disclosures about fair value measurements. We will be required to adopt the
provisions of FAS 157 beginning with our first quarter ending March 31, 2008.
We do not believe that the adoption of the provisions of FAS 157 will
materially impact our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB
Statements No. 87, 88, 106, and 132(R), (FAS 158). FAS 158 requires an
employer to recognize the over-funded or under-funded status of a defined
benefit pension and other postretirement plan (other than a multiemployer plan)
as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income of a business entity. We will be required to adopt
the provisions of FAS 158 in our annual financial statements for fiscal year
2006. We do not believe that the adoption of the provisions of FAS 158 will materially
impact our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and
Capital Resources

Cash,
cash equivalents, and marketable securities totaled $6.3 million at September
30, 2006, down from $9.1 million at December 31, 2005.

|                                                  |  |                                     |      |      |   |      |  
|------------------------------------------------- |  | ----------------------------------- | ---- | ---- | - | ---- | -
|                                                  |  | Nine
  Months Ended
  September 30, |     
|                                                  |  | 2006                                |      | 2005 |  
|                                                  |  |                                     |     
|                                                  |  | (dollars
  in millions)             |     
|Cash used in operating
  activities               |  | $                                   | (4.2 | )    | $ | (4.9 | )
|Cash provided by (used in)
  investing activities |  | $                                   | (2.0 | )    | $ | 0.1  |  
|Cash provided by financing
  activities           |  | $                                   | 1.7  |      | $ | 2.4  |  

39

---



Operating activities

In
the nine months ended September 30, 2006, cash used in operating activities was
$4.2 million, a decrease of $0.7 million compared to the nine months ended
September 30, 2005. The use of cash was mainly due to a net loss of $19.1
million, adjusted for the goodwill impairment charge of $10.7 million and
non-cash stock-based compensation charges of $1.6 million, as well as a
decrease in accounts payable and accrued expenses of $0.8 million, offset by a
decrease in accounts receivable of $1.8 million, a change in the fair value of
warrants of $0.2 million, depreciation and amortization expenses of $0.9
million and amortization of debt related costs of $0.5 million.

Investing activities

In
the nine months ended September 30, 2006, cash used in investing activities was
$2.0 million, primarily as a result of net purchases of marketable securities
of $1.7 million and purchase of property and equipment of $0.2 million.

In the
nine months ended September 30, 2005, cash provided by investing activities was
$0.1 million, primarily due to net sale of marketable securities of $0.8
million offset by the cash used in the acquisition of Unicast of $0.5 million
and capital expenditures of $0.3 million.

Financing activities

In
the nine months ended September 30, 2006, net cash provided by financing
activities was $1.7 million, resulting from the exercise of stock options of
$2.4 million which was offset by cash used for the repayment of debt totaling
$0.7 million.

In
the nine months ended September 30, 2005, net cash provided by financing
activities was $2.4 million, resulting from the issuance of common stock in
connection with the company extending the maturity of a subordinated note
payable. In addition, stock option exercises amounted to $0.5 million.

As
of September 30, 2006, the Company had cash commitments totaling approximately
$10.0 million through 2011, related mainly to long-term notes and future
minimum lease payments for office space, and equipment.

|                                                  |  |                          |       |                    |   |             |  |             |       |                       |   |       |  |   |   | 
|------------------------------------------------- |  | ------------------------ | ----- | ------------------ | - | ----------- |  | ----------- | ----- | --------------------- | - | ----- |  | - | - | 
|                                                  |  | Payments
  Due By Period |      
|                                                  |  |                          |      
|                                                  |  | (dollars
  in thousands) |      
|                                                  |  | Total                    |       | 1 Year
  or
  Less |   | 2-3
  Years |  | 4-5
  Years |       | More
  than
  5 Years |  
|                                                  |  |                          |       |                    |   |             |  |             |       |                       |  
|Long-Term Debt Obligations                        |  | $                        | 3,050 |                    | $ |            |  | $           | 3,050 |                       | $ |      |  | $ |  | 
|Operating Lease Obligations                       |  |                          | 3,011 |                    |   | 253         |  |             | 1,869 |                       |   | 889   |  |   |  | 
|Interest Payments on
  Long-Term Debt Obligations |  |                          | 487   |                    |   | 59          |  |             | 314   |                       |   | 114   |  |   |  | 
|Unicast Debt Obligations                          |  |                          | 3,058 |                    |   | 97          |  |             | 778   |                       |   | 2,183 |  |   |  | 
|Purchase Obligations                              |  |                          | 381   |                    |   | 381         |  |             |      |                       |   |      |  |   |  | 
|                                                  |  |                          |       |                    |   |             |  |             |       |                       |   |       |  |   |   | 
|Total                                             |  | $                        | 9,987 |                    | $ | 790         |  | $           | 6,011 |                       | $ | 3,186 |  | $ |  | 
|                                                  |  |                          |       |                    |   |             |  |             |       |                       |   |       |  |   |   | 

Convertible
Notes

On
December 31, 2002, the Company completed a private placement of convertible
notes and warrants in which it issued to three institutional investors, 4.95%
convertible notes having an aggregate principal amount of $7.0 million, and
warrants to purchase 0.7 million shares of Company common stock. The
convertible notes were converted to Viewpoint common stock in 2004. The
warrants expire on December 31, 2006, and were initially issued at an exercise
price of $2.26 per share. The number of warrants and the exercise price are
subject to adjustment if the Company sells or issues securities under a
dilutive issuance (as defined in the warrant to purchase common stock
agreement) subject to certain conditions. In 2003 and 2004, all of the
convertible notes were converted into common stock or redeemed for cash,
therefore, no convertible notes remained outstanding as of

40

---



September 30,
2006 and December 31, 2005. As of September 30, 2006, 0.8 million warrants were
outstanding related to this placement.

Subordinated
Notes

On
March 26, 2003, Viewpoint Corporation entered into a Securities Purchase
Agreement with three other accredited investors, pursuant to which it received
$3.5 million in exchange for an aggregate of $3.5 million principal amount of
4.95% subordinated notes and 3.6 million shares of Viewpoint common stock. The
subordinated notes were scheduled to mature on March 31, 2006. Interest on
these notes is payable quarterly in arrears in cash. The Company has the right
at any time to redeem up to all of the outstanding notes at par plus accrued
and unpaid interest.

On March 31, 2006, the Company redeemed notes with a
principal amount of $450,000 pursuant to the agreement. The maturity date was
extended to March 31, 2008 for the remaining notes with a principal amount of
$3.1 million and these notes remain outstanding as of September 30, 2006.

The Subordinated Note contains a covenant which requires that the Companys common stock remain listed on a national stock exchange as defined.  The Companys common stock declined below $1.00 and has not closed above $1.00 since October 13, 2006.  While the company has not been notified that its stock has been considered by NASDAQ for de-listing, it may receive such notification.  If the Companys stock remains below a $1.00 for 30 consecutive days NASDAQ listing rules provide for Viewpoint to be notified that its common stock has been considered for delisting.
While there are several different remediation measures that the Company may take to prevent such de-listing, if the Companys remediation measures are unsuccessful it is possible that the Companys stock could be de-listed approximately one year after receiving such notification from NASDAQ.  If the Company is de-listed, it will violate the loan covenant noted above which would allow the Subordinated Note holders to demand repayment immediately of the $3.1 million outstanding note balance.

Other
Transactions

In
March of 2006, the Company implemented a restructuring plan designed to
streamline the services business. Under this plan the Company eliminated 10
positions in the services group and relocated the management of the group from
its New York office to its existing Los Angeles office. The Company incurred a
restructuring charge of $0.1 million related to severance arrangements which
has been recorded separately on the statement of operations. As of September 30,
2006, all severance obligations have been paid in full.

Liquidity

The
Company had cash, cash equivalents and marketable securities of $6.3 million at
September 30, 2006. During the nine months ended September 30, 2006, net cash
used in operations amounted to $4.2 million. As of September 30, 2006, the
Company had an accumulated deficit of $285.0 million.

The
Company has incurred negative cash flows and net losses since inception. Based
on current operating levels combined with limited capital resources, financing
operations during 2007 will require that the Company improve operating results
through cost cutting measures, increases in revenues or both, and/or raise
sufficient additional equity or debt capital, including the avoidance of
violating existing debt covenants. If the Companys expected revenue targets
are not achieved, management would implement cost reduction measures including
work force reduction as well as reduction in overhead costs and capital
expenditures.

There
can be no assurance that the Company will achieve or sustain positive cash
flows from operations or profitability. The Company currently has no commitment
for additional financing and may experience difficulty in obtaining additional
financing on favorable terms, if at all. Any financing the Company obtains may
contain covenants that restrict the Companys freedom to operate the business
or may have rights, preferences or privileges senior to the Companys common
stock and may dilute the Companys current shareholders ownership interest in
Viewpoint.

Furthermore,
the stock price of the Company declined below $1.00 and has not closed above
$1.00 since October 13, 2006. If the Companys stock trades below a $1.00 for
30 consecutive days, NASDAQs listing rules provide for Viewpoint to be
notified that its common stock is being considered for de-listing. While the
Company has not been notified that its stock has been considered for
de-listing, it may receive such notification. While there are several different
remediation measures that the Company may take to prevent such de-listing, if
the Companys remediation measures are unsuccessful, it is possible that the
Companys stock could be de-listed in approximately one year after receiving
such notification from NASDAQ. If the Company is de-listed it will violate a
covenant within the subordinated note agreement which would accelerate the
maturity date of the $3.1 million of subordinated note currently scheduled to
mature on March 31, 2008. If the Company is unable to secure adequate
financing, including the avoidance of the acceleration of the maturity date of
the $3.1 million subordinated note, and/or can not achieve and sustain positive
cash flows from operations, it would raise substantial doubt about the
Companys ability to continue as a going concern through December 31, 2007.

41

---



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.

42

---



PART II -
OTHER INFORMATION

Item 1. Legal Proceedings

The
Company is engaged in certain legal actions arising in the ordinary course of
business. The Company believes it has adequate legal defenses in legal actions
in which it is the defendant and believes that the ultimate outcome of such
actions will not have a material adverse effect on the Companys consolidated
financial position, results of operations, or cash flows.

Item 1A. Risk Factors

We
have previously disclosed the risk factors in Part I Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2005, which was filed with
the Securities and Exchange Commission on March 20, 2006. A summary of these
risk factors and certain additional risk factors is provided in Item 2 of Part
1.

The Company has incurred negative cash flows and net losses since inception. Based on current operating levels combined with limited capital resources, financing operations during 2007 will require that the Company improve operating results through cost cutting measures, increases in revenues or both, and/or raise sufficient additional equity or debt capital, including the avoidance of violating existing debt covenants. If the Company’s expected revenue targets are not achieved, management would implement cost reduction measures including work force reduction as well as reduction in overhead costs and capital expenditures.

There
  can be no assurance that the Company will achieve or sustain positive cash flows
  from operations or profitability. The Company currently has no commitment for
  additional financing and may experience difficulty in obtaining additional financing
  on favorable terms, if at all. Any financing the Company obtains may contain
  covenants that restrict the Company’s freedom to operate the business
  or may have rights, preferences or privileges senior to the Company’s common
  stock and may dilute the Company’s current shareholders’ ownership interest
  in Viewpoint.

Furthermore, the stock price of the Company declined below $1.00 and has not closed above $1.00 since October 13, 2006. If the Company’s stock trades below a $1.00 for 30 consecutive days, NASDAQ’s listing rules provide for Viewpoint to be notified that its common stock is being considered for de-listing. While the Company has not been notified that its stock has been considered for de-listing, it may receive such notification. While there are several different remediation measures that the Company may take to prevent such de-listing, if the Company’s remediation measures are unsuccessful, it is possible that the Company’s stock could be de-listed in approximately one year after receiving such notification from NASDAQ. If the Company is de-listed it will violate a covenant within the subordinated note agreement which would accelerate the maturity date of the $3.1 million of subordinated note currently scheduled to mature on March 31, 2008. If the Company is unable to secure adequate financing, including the avoidance of the acceleration of the maturity date of the $3.1 million subordinated note, and/or can not achieve and sustain positive cash flows from operations, it would raise substantial doubt about the Company’s ability to continue as a going concern through December 31, 2007.

Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of
Security Holders

None.

Item 5. Other Information

None.

43

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Item 6. Exhibits

(a) Exhibits

|               |  |                                                                                                                            
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Title                                                                                                              
|               |  |                                                                                                                            
|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.

44

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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 9, 2006 | By:                     | /s/ PATRICK
  VOGT                     
|                          |                         |                                        
|                          |                         | Patrick Vogt                           
|                          |                         | President
  and Chief Executive Officer
|                          |                         |                                        
|Dated:
  November 9, 2006 | By:                     | /s/ WILLIAM
  H. MITCHELL              
|                          |                         |                                        
|                          |                         | William H.
  Mitchell                  
|                          |                         | Chief
  Financial Officer              
|                          |                         |                                        
|Dated:
  November 9, 2006 | By:                     | /s/
  CHRISTOPHER C. DUIGNAN           
|                          |                         |                                        
|                          |                         | Christopher
  C. Duignan               
|                          |                         | Chief
  Accounting Officer             

45

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