##### Table of Contents



UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

|                                         |  |                              
|---------------------------------------- |  | -----------------------------
|For the quarter ended September 30, 2001 |  | Commission File No. 000-26363

Internet Pictures Corporation(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-2213841                          
|                                                              
|                                                              
|                                                              
|                                                              
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

3160 Crow Canyon Road
San Ramon, California 94583(Address of principal executive offices, zip code)

Registrants telephone number, including area code: (925) 242-4002

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 such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (CHECKBOX) No (BOX)

6,699,201 shares of $0.001 par value common stock outstanding as of October 15,
2001

Page 1 of 26
Exhibit Index on Page 26



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TABLE OF CONTENTS



|                                  |                                                                                               |                                                                |  |  |  |  |  | 
|--------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART IFINANCIAL INFORMATION     
|                                  | Item 1. Consolidated Financial Statements                                                    
|                                  |                                                                                               | CONSOLIDATED BALANCE SHEETS                                   
|                                  |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                         
|                                  |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                         
|                                  |                                                                                               | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                  | Item 2. Managements Discussion and Analysis Of Financial Condition and Results Of Operations
|PART II  OTHER INFORMATION      
|                                  | Item 1. Legal Proceedings                                                                    
|                                  | Item 2. Changes In Securities And Use Of Proceeds                                            
|                                  | Item 3. Defaults Upon Senior Securities                                                      
|                                  | Item 4. Submission Of Matters To A Vote Of Security Holders                                  
|                                  | Item 5. Other Information                                                                    
|                                  | Item 6. Exhibits And Reports On Form 8-K                                                     
|SIGNATURES                       
|INDEX TO EXHIBITS FOR FORM 10-Q  
|VISUAL CONTENT SERVICES AGREEMENT
|PURCHASE AGREEMENT - LEASEBACK   
|MASTER LEASE AGREEMENT           



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##### Table of Contents



INTERNET PICTURES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX

|                             |         |  |                                                                                       |  |  |    |  |  | 
|---------------------------- | ------- |  | ------------------------------------------------------------------------------------- |  |  | -- |  |  | 
|PART IFINANCIAL INFORMATION |         |  | 3                                                                                     | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|                             | Item 1. |  | Consolidated Financial Statements                                                     |  |  | 3  | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|                             | Item 2. |  | Management's Discussion and Analysis Of Financial Condition and Results Of Operations |  |  | 14 | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|PART II  OTHER INFORMATION  |         |  | 22                                                                                    | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|                             | Item 1. |  | Legal Proceedings                                                                     |  |  | 22 | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|                             | Item 2. |  | Changes In Securities And Use Of Proceeds                                             |  |  | 22 | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|                             | Item 3. |  | Defaults Upon Senior Securities                                                       |  |  | 23 | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|                             | Item 4. |  | Submission Of Matters To A Vote Of Security Holders                                   |  |  | 23 | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|                             | Item 5. |  | Other Information                                                                     |  |  | 23 | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|                             | Item 6. |  | Exhibits And Reports On Form 8-K                                                      |  |  | 24 | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|Signatures                   |         |  | 25                                                                                    | 
|                            
|                            
|                            
|                            
|                             |         |  |                                                                                       |  |  |    |  | 
|                            
|                            
|                            
|                            
|Exhibit Index                |         |  | 26                                                                                    | 

2



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##### Table of Contents






PART IFINANCIAL INFORMATION




Item 1. Consolidated Financial Statements




INTERNET PICTURES CORPORATION
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |        | 
|-------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | --- | ------------ | ----------- | ------------- | - | -------- | ------ | 
|                                                                                                                                       |                                                                                                        |     | December 31, |             | September 30,
|                                                                                                                                       |                                                                                                        |     | 2000         |             | 2001         
|                                                                                                                                       |                                                                                                        |     |              |             |              
|(In thousands, except share and per share amounts)                                                                                     |                                                                                                        | (1) |              | (unaudited)
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|ASSETS                                                                                                                                 |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|CURRENT ASSETS:                                                                                                                        |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Cash and cash equivalents                                                                                                              |                                                                                                        | $   | 5,322        |             |               | $ | 15,320   |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Securities available-for-sale                                                                                                          |                                                                                                        |     | 5,713        |             |               |   |         |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Accounts receivable, net of allowance for doubtful accounts of
$4,617 at December 31, 2000 and $2,888 at September 30, 2001(unaudited) |                                                                                                        |     | 13,732       |             |               |   | 3,017    |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Inventory, net of reserve for obsolescence of $203 at December 31, 2000 and
$479 at September 30, 2001(unaudited)                      |                                                                                                        |     | 1,061        |             |               |   | 290      |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Prepaid expenses and other current assets                                                                                              |                                                                                                        |     | 6,790        |             |               |   | 2,248    |       
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                       | Total current assets                                                                                   |     |              | 32,618      |               |   |          | 20,875 | 
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|Property and equipment, net                                                                                                            |                                                                                                        |     | 20,965       |             |               |   | 6,645    |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Other assets                                                                                                                           |                                                                                                        |     | 1,555        |             |               |   |         |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Goodwill and other intangible assets                                                                                                   |                                                                                                        |     | 5,476        |             |               |   | 3,651    |       
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                       | Total assets                                                                                           |     | $            | 60,614      |               |   | $        | 31,171 | 
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                   |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|CURRENT LIABILITIES:                                                                                                                   |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Accounts payable                                                                                                                       |                                                                                                        | $   | 4,077        |             |               | $ | 4,224    |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Accrued liabilities                                                                                                                    |                                                                                                        |     | 16,682       |             |               |   | 11,584   |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Deferred revenue                                                                                                                       |                                                                                                        |     | 9,077        |             |               |   | 1,765    |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Current portion of promissory note and obligations under capital leases                                                                |                                                                                                        |     | 1,608        |             |               |   | 1,134    |       
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                       | Total current liabilities                                                                              |     |              | 31,444      |               |   |          | 18,707 | 
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|Promissory note and obligations under capital leases, net of current portion                                                           |                                                                                                        |     | 957          |             |               |   | 1,279    |       
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|Commitments and contingencies (Note 9)                                                                                                 |                                                                                                        |     |             |             |               |   |         |       
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|STOCKHOLDERS EQUITY:                                                                                                                  |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Preferred stock, $0.001 par value:                                                                                                     |                                                                                                        |     |             |             |               |   | 1        |       
|                                                                                                                                       | Authorized: 5,001,100 at December 31, 2000 and September 30, 2001(unaudited)                           |     |              |             |               |   |          |        | 
|                                                                                                                                       | Issued and outstanding: 0 at December 31, 2000 and 1,115,080 at September
30, 2001(unaudited)          |     |              |             |               |   |          |        | 
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Class B common stock, $0.0001 par value:                                                                                               |                                                                                                        |     |             |             |               |   |         |       
|                                                                                                                                       | Authorized: 7,421,536 at December 31, 2000 and September 30, 2001(unaudited)                           |     |              |             |               |   |          |        | 
|                                                                                                                                       | Issued and outstanding: 404,173 at December 31, 2000 and 117,656 at
September 30, 2001(unaudited)      |     |              |             |               |   |          |        | 
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Common stock, $0.001 par value:                                                                                                        |                                                                                                        |     | 6            |             |               |   | 7        |       
|                                                                                                                                       | Authorized: 150,000,000 at December 31, 2000 and September 30, 2001(unaudited)                         |     |              |             |               |   |          |        | 
|                                                                                                                                       | Issued and outstanding: 5,946,402 at December 31, 2000 and 6,581,545 at
September 30, 2001 (unaudited) |     |              |             |               |   |          |        | 
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Additional paid-in capital                                                                                                             |                                                                                                        |     | 484,151      |             |               |   | 513,842  |       
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Notes receivable from stockholders                                                                                                     |                                                                                                        |     | (2,349       | )           |               |   | (227     | )     
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Unearned stock-based compensation                                                                                                      |                                                                                                        |     | (3,361       | )           |               |   | (237     | )     
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Accumulated deficit                                                                                                                    |                                                                                                        |     | (450,296     | )           |               |   | (501,565 | )     
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|Accumulated other comprehensive income (loss)                                                                                          |                                                                                                        |     | 62           |             |               |   | (636     | )     
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                       | Total stockholders equity                                                                             |     |              | 28,213      |               |   |          | 11,185 | 
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       
|                                                                                                                                       | Total liabilities and stockholders equity                                                             |     | $            | 60,614      |               |   | $        | 31,171 | 
|                                                                                                                                       |                                                                                                        |     |              |             |               |   |          |       



|(1) |  | The December 31, 2000 balances were derived from the audited
financial
statements.
|--- |  | ----------------------------------------------------------------------------------

See accompanying notes to the unaudited condensed consolidated financial
statements.

3



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##### Table of Contents






INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |        | 
|---------------------------------------- | ------------ | ----------- | ------------------ | ----------- | ----------------- | - | ------- | ----- | ---- | - | -------- | ------ |  | - | ------- | ------ | 
|                                         |              |             | Three months ended |             | Nine months ended
|                                         |              |             | September 30,      |             | September 30,    
|                                         |              |             |                    |             |                  
|                                         |              |             | 2000               |             | 2001              |   | 2000    |       | 2001
|                                         |              |             |                    |             |                   |   |         |       |     
|In thousands, except per share data      |              | (unaudited) |                    | (unaudited)
|                                         |              |             |                    |             |                  
|Revenues:                                |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|                                        
|                                        
|                                        
|                                        
|Products                                 |              | $           | 15,515             |             |                   | $ | 1,904   |       |      | $ | 37,280   |        |  | $ | 13,729  |       
|                                        
|                                        
|                                        
|                                        
|Services                                 |              |             | 1,703              |             |                   |   | 4,672   |       |      |   | 3,710    |        |  |   | 10,333  |       
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|                                         |              |             | 17,218             |             |                   |   | 6,576   |       |      |   | 40,990   |        |  |   | 24,062  |       
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|Cost of revenues:                        |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|                                        
|                                        
|                                        
|                                        
|Products                                 |              |             | 7,330              |             |                   |   | 1,114   |       |      |   | 19,450   |        |  |   | 6,616   |       
|                                        
|                                        
|                                        
|                                        
|Services                                 |              |             | 810                |             |                   |   | 1,286   |       |      |   | 1,474    |        |  |   | 3,951   |       
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|                                         |              |             | 8,140              |             |                   |   | 2,400   |       |      |   | 20,924   |        |  |   | 10,567  |       
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|                                         | Gross profit |             |                    | 9,078       |                   |   |         | 4,176 |      |   |          | 20,066 |  |   |         | 13,495 | 
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|Operating expenses:                      |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|                                        
|                                        
|                                        
|                                        
|Sales and marketing                      |              |             | 22,279             |             |                   |   | 2,834   |       |      |   | 60,778   |        |  |   | 17,760  |       
|                                        
|                                        
|                                        
|                                        
|Research and development                 |              |             | 3,649              |             |                   |   | 1,733   |       |      |   | 10,086   |        |  |   | 5,720   |       
|                                        
|                                        
|                                        
|                                        
|General and administrative               |              |             | 4,012              |             |                   |   | 1,896   |       |      |   | 15,071   |        |  |   | 8,280   |       
|                                        
|                                        
|                                        
|                                        
|Stock-based compensation                 |              |             | (1,811             | )           |                   |   | 409     |       |      |   | 5,769    |        |  |   | 4,446   |       
|                                        
|                                        
|                                        
|                                        
|Goodwill amortization                    |              |             | 19,330             |             |                   |   | 609     |       |      |   | 38,040   |        |  |   | 1,825   |       
|                                        
|                                        
|                                        
|                                        
|Restructuring and impairment             |              |             |                   |             |                   |   | 1,462   |       |      |   |         |        |  |   | 11,655  |       
|                                        
|                                        
|                                        
|                                        
|Bad debt expense                         |              |             | 197                |             |                   |   | 300     |       |      |   | 431      |        |  |   | 3,513   |       
|                                        
|                                        
|                                        
|                                        
|Loss (gain) on disposal of assets        |              |             |                   |             |                   |   | (114    | )     |      |   |         |        |  |   | 1,655   |       
|                                        
|                                        
|                                        
|                                        
|Merger expenses                          |              |             |                   |             |                   |   |        |       |      |   | 15,175   |        |  |   |        |       
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|Total operating expenses                 |              |             | 47,656             |             |                   |   | 9,129   |       |      |   | 145,350  |        |  |   | 54,854  |       
|                                        
|                                        
|                                        
|                                        
|Other income(expense):                   |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|                                        
|                                        
|                                        
|                                        
|Interest expense, net                    |              |             | (9                 | )           |                   |   | (9,637  | )     |      |   | (216     | )      |  |   | (10,642 | )     
|                                        
|                                        
|                                        
|                                        
|Other                                    |              |             | 875                |             |                   |   | 44      |       |      |   | 2,964    |        |  |   | (169    | )     
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|Loss before extraordinary items          |              |             | (37,712            | )           |                   |   | (14,546 | )     |      |   | (122,536 | )      |  |   | (52,170 | )     
|                                        
|                                        
|                                        
|                                        
|Extraordinary gain                       |              |             |                   |             |                   |   |        |       |      |   |         |        |  |   | 901     |       
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|Net loss                                 |              | $           | (37,712            | )           |                   | $ | (14,546 | )     |      | $ | (122,536 | )      |  | $ | (51,269 | )     
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|Basic and diluted loss per common share: |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|                                        
|                                        
|                                        
|                                        
|Loss before extraordinary items          |              | $           | (6.24              | )           |                   | $ | (2.19   | )     |      | $ | (22.38   | )      |  | $ | (8.11   | )     
|                                        
|                                        
|                                        
|                                        
|Extraordinary gain                       |              |             |                   |             |                   |   |        |       |      |   |         |        |  | $ | 0.14    |       
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       
|Net loss (Note 3)                        |              | $           | (6.24              | )           |                   | $ | (2.19   | )     |      | $ | (22.38   | )      |  | $ | (7.97   | )     
|                                         |              |             |                    |             |                   |   |         |       |      |   |          |        |  |   |         |       

See accompanying notes to the unaudited condensed consolidated financial
statements.

4



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##### Table of Contents






INTERNET PICTURES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                                 |                                           |             |                   |         |      |   |         |         |  
|-------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------- | ----------------- | ------- | ---- | - | ------- | ------- | -
|                                                                                                                                 |                                           |             | Nine months ended
|                                                                                                                                 |                                           |             | September 30,    
|                                                                                                                                 |                                           |             |                  
|                                                                                                                                 |                                           |             | 2000              |         | 2001
|                                                                                                                                 |                                           |             |                   |         |     
|In thousands                                                                                                                     |                                           | (unaudited)
|                                                                                                                                 |                                           |             |                   |         |     
|Cash flows from operating activities:                                                                                            |                                           |             |                   |         |      |   |         |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Net loss                                                                                                                         |                                           | $           | (122,536          | )       |      | $ | (51,269 | )      
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Adjustments to reconcile net loss to net cash used in operating
activities:                                                      |                                           |             |                   |         |      |   |         |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Depreciation and amortization                                                                                                    |                                           |             | 41,210            |         |      |   | 4,082   |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Provision for doubtful accounts receivable                                                                                       |                                           |             | 1,158             |         |      |   | (1,729  | )      
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Loss on disposal of assets                                                                                                       |                                           |             |                  |         |      |   | 1,655   |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Non-cash interest expense related to amortization of discount attributable
to beneficial conversion feature of debt and warrants |                                           |             |                  |         |      |   | 10,000  |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Non-cash compensation expense and restructuring charges                                                                          |                                           |             | 5,769             |         |      |   | 6,639   |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Impairment loss                                                                                                                  |                                           |             |                  |         |      |   | 1,122   |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Extraordinary gain                                                                                                               |                                           |             |                  |         |      |   | (901    | )      
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Changes in operating assets and liabilities:                                                                                     |                                           |             |                   |         |      |   |         |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                 | Accounts receivable                       |             |                   | (12,677 | )    |   |         | 5,600   |  
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                 | Inventory                                 |             |                   | 365     |      |   |         | 771     |  
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                 | Prepaid expenses and other current assets |             |                   | (308    | )    |   |         | 1,830   |  
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                 | Other assets                              |             |                   | 504     |      |   |         | 1,199   |  
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                 | Accounts payable                          |             |                   | (3,278  | )    |   |         | 27      |  
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                 | Accrued expenses                          |             |                   | 6,891   |      |   |         | (2,520  | )
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                 | Deferred revenue                          |             |                   | 2,012   |      |   |         | 331     |  
|                                                                                                                                 |                                           |             |                   |         |      |   |         |        
|                                                                                                                                 | Net cash used in operating activities     |             |                   | (80,890 | )    |   |         | (23,163 | )
|                                                                                                                                 |                                           |             |                   |         |      |   |         |        
|Cash flows from investing activities:                                                                                            |                                           |             |                   |         |      |   |         |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Purchases of furniture and equipment                                                                                             |                                           |             | (11,389           | )       |      |   | (631    | )      
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Proceeds from sale of assets                                                                                                     |                                           |             |                  |         |      |   | 11,165  |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Purchases of securities available-for-sale                                                                                       |                                           |             | (44,522           | )       |      |   |        |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Maturities of securities available-for-sale                                                                                      |                                           |             | 69,058            |         |      |   | 6,000   |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Acquisitions, net of cash acquired                                                                                               |                                           |             | (8,290            | )       |      |   |        |        
|                                                                                                                                 |                                           |             |                   |         |      |   |         |        
|                                                                                                                                 | Net cash provided by investing activities |             |                   | 4,857   |      |   |         | 16,534  |  
|                                                                                                                                 |                                           |             |                   |         |      |   |         |        
|Cash flow from financing activities:                                                                                             |                                           |             |                   |         |      |   |         |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Repayments of capital lease obligation and notes payable                                                                         |                                           |             | (10,364           | )       |      |   | (2,552  | )      
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Proceeds from issuance of common stock                                                                                           |                                           |             | 69,590            |         |      |   |        |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Net proceeds from preferred stock, convertible promissory
note and warrants                                                      |                                           |             |                  |         |      |   | 20,974  |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Proceeds from exercise of stock options                                                                                          |                                           |             | 1,759             |         |      |   | 25      |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Distribution to stockholders                                                                                                     |                                           |             |                  |         |      |   | (839    | )      
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Notes payable to stockholders                                                                                                    |                                           |             | (1,986            | )       |      |   |        |        
|                                                                                                                                 |                                           |             |                   |         |      |   |         |        
|                                                                                                                                 | Net cash provided by financing activities |             |                   | 58,999  |      |   |         | 17,608  |  
|                                                                                                                                 |                                           |             |                   |         |      |   |         |        
|Effect of exchange rate changes on cash                                                                                          |                                           |             | 75                |         |      |   | (981    | )      
|                                                                                                                                 |                                           |             |                   |         |      |   |         |        
|Net increase (decrease) in cash and cash equivalents                                                                             |                                           |             | (16,959           | )       |      |   | 9,998   |        
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Cash and cash equivalents, beginning of period                                                                                   |                                           |             | 18,627            |         |      |   | 5,322   |        
|                                                                                                                                 |                                           |             |                   |         |      |   |         |        
|Cash and cash equivalents, end of period                                                                                         |                                           | $           | 1,668             |         |      | $ | 15,320  |        
|                                                                                                                                 |                                           |             |                   |         |      |   |         |        

No income tax payments were made in either period presented. Interest paid for
the nine months ending September 30, 2000 and 2001 was $206 and $229,
respectively.

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##### Table of Contents






NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements include
the accounts of Internet Pictures Corporation and its wholly-owned
subsidiaries, Interactive Pictures Corporation, Interactive Pictures UK
Limited, Internet Pictures (Canada), Inc. and PW Technology, Inc. The
consolidation of these entities will collectively be referred to as the Company
or iPIX. All significant intercompany balances and transactions have been
eliminated. We have prepared these financial statements, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. The unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in our audited financial statements as of and for the
period ended December 31, 2000. The information furnished reflects all
adjustments which management believes are necessary for a fair presentation of
our financial position as of September 30, 2001 and the results of our
operations and our cash flows for the nine month periods ended September 30,
2000 and 2001. All such adjustments are of a normal recurring nature.

2. RESULTS OF OPERATIONS

The results of operations for the three month periods and the nine month
periods ended September 30, 2000 and 2001 are not necessarily indicative of the
results to be expected for the respective full years.

3. LOSS PER SHARE

LOSS PER SHARE BEFORE EXTRAORDINARY ITEM. We compute net loss per share in
accordance with SFAS No.128, Earnings Per Share. Under the provisions of SFAS
No. 128, basic and diluted net loss per share is computed by dividing the net
loss applicable to common stockholders for the period by the weighted average
number of shares of common stock outstanding during the period. The calculation
of diluted net loss per share excludes potential common shares if the effect is
antidilutive. Potential common shares are composed of incremental shares of
common stock issuable upon the conversion or exercise of potentially dilutive
convertible preferred stock, stock options and warrants.

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##### Table of Contents



The following table sets forth the computation of basic and dilutive net loss
per share for the periods indicated:

|                                                          |  |                    |         |                   |  |      |         |      |  |   |          |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                                          |  | THREE MONTHS ENDED |         | NINE MONTHS ENDED
|                                                          |  | SEPTEMBER 30,      |         | SEPTEMBER 30,    
|                                                          |  |                    |         |                  
|                                                          |  | 2000               |         | 2001              |  | 2000 |         | 2001
|                                                          |  |                    |         |                   |  |      |         |     
|In thousands, except per share data                       |  | (unaudited)        |         | (unaudited)      
|                                                          |  |                    |         |                   |  |      |         |     
|NUMERATOR:                                                |  |                    |         |                   |  |      |         |      |  |   |          |   |  |   |         |  
|                                                         
|                                                         
|                                                         
|                                                         
|Loss before extraordinary item applicable to common stock |  | $                  | (37,712 | )                 |  | $    | (14,546 | )    |  | $ | (122,536 | ) |  | $ | (52,170 | )
|                                                         
|                                                         
|                                                         
|                                                         
|DENOMINATOR:                                              |  |                    |         |                   |  |      |         |      |  |   |          |   |  |   |         |  
|                                                         
|                                                         
|                                                         
|                                                         
|Weighted average shares outstanding                       |  |                    | 6,040   |                   |  |      | 6,641   |      |  |   | 5,475    |   |  |   | 6,430   |  
|                                                         
|                                                         
|                                                         
|                                                         
|LOSS PER SHARE BEFORE EXTRAORDINARY ITEM:                 |  |                    |         |                   |  |      |         |      |  |   |          |   |  |   |         |  
|                                                         
|                                                         
|                                                         
|                                                         
|Basic and diluted                                         |  | $                  | (6.24   | )                 |  | $    | (2.19   | )    |  | $ | (22.38   | ) |  | $ | (8.11   | )

The following table sets forth potential common stock excluded from the
calculation of earnings per share as of September 30, 2001:

|                            |  |                |       |                                     |  |              
|--------------------------- |  | -------------- | ----- | ----------------------------------- |  | -------------
|                            |  | Shares         |       | Range of Exercise/Conversion Prices
|                            |  |                |       |                                    
|                            |  | (in thousands) |       |                                    
|                            |  |                |       |                                    
|Stock options               |  |                | 3,260 |                                     |  | $1.42-$338.13
|                           
|                           
|                           
|                           
|Convertible preferred stock |  |                | 8,921 |                                     |  | $2.50        
|                           
|                           
|                           
|                           
|Warrants                    |  |                | 2,169 |                                     |  | $2.50-$203.80

4. REVERSE STOCK SPLIT

On August 22, 2001 our shareholders approved a one-for-ten reverse stock split
of all of our outstanding $0.001 par value common stock and our $0.0001 par
value Class B common stock. The reduction of shares was subject to an increase
to eliminate fractional interests resulting from the reverse stock split. No
fractional shares of common stock were issued in connection with the reverse
stock split, and cash was issued in lieu of any fractional shares. The reverse
stock split was effective as of the close of market on August 22, 2001, and our
common stock began trading on a reverse split basis on August 23, 2001. All
share and per share data is presented to give effect to the retroactive
application of the reverse stock split.

5. RESTRUCTURING AND IMPAIRMENT

During the first quarter of 2001, we recorded a restructuring charge of
$1,878,000 consisting of expenses associated with a reduction in our workforce,
lease obligations for vacated offices and a write down of abandoned office
equipment of $1,122,000 to its net realizable value.

During the second quarter of 2001, we recorded a restructuring charge of
$7,193,000 as a result of continued efforts to align our business strategy
toward higher margin business.

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##### Table of Contents



The costs primarily consist of severance payments, termination benefits
associated with a reduction in our work force, facility closure costs and other
contractual obligations.

Included in the second quarter restructuring is $1,300,000 related to a
severance liability for our former chief executive officer, James M. Phillips.
At September 30, 2001 the unpaid liability is $900,000, which is to be paid in
installments ending in September of 2003. As further consideration for Mr.
Phillips separation agreement, we forgave a note receivable from Mr. Phillips
and the related interest aggregating $2,193,000.

Included in the third quarter restructuring is $1,462,000 related to the write
off of the unamortized portion of our directors and officers insurance
policy. We were required to obtain a new policy due to the change in control
of the company related to the closing of Tranche B of our announced capital
raising transaction.

6. DISPOSAL OF ASSETS

A subsidiary of Homestore.com purchased certain assets from us pursuant to the
terms of an acquisition agreement dated January 12, 2001. Under the terms of
the acquisition agreement, the subsidiary of Homestore.com purchased certain
computers, furniture, fixtures and equipment and certain sales contracts with
residential real estate brokers and agents. We used these assets in our
operations providing virtual tours of residential real estate properties. As
part of the acquisition, Homestore.coms subsidiary hired certain sales force
and customer service personnel. The purchase price for these assets was
$12,000,000 in cash, of which $155,000 was paid directly to a lessor for
certain capital lease obligations, $7,454,000 was deposited into control
accounts for deferred revenue obligations and the remainder, $4,391,000, was
paid to us. We also granted Homestore.coms subsidiary an exclusive domestic
license of certain of our virtual tour technology for the residential real
estate market.

In accordance with the January 12, 2001 purchase transaction, we agreed to
negotiate one remaining residential real estate contract with RETT f/k/a
National Reality Trust. Homestore.coms subsidiary, RETT and we settled on
March 3, 2001 the remaining obligation of the contract for which we received
$1,935,500.

We recorded an extraordinary gain of $901,000 from the cash received from the
January 12, 2001 agreement, resulting in the disposal of assets used to provide
tours of residential real estate properties that were related to the pooling of
Interactive Pictures Corporation and bamboo.com.

The remaining residential real estate related assets that were unrelated to the
pooling of Interactive Pictures Corporation and bamboo.com were recorded as a
loss on the disposal of assets of $1,655,000.

8



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##### Table of Contents



7. STOCK-BASED COMPENSATION

Stock-based compensation expense consists of the amortization of deferred
compensation related to stock options granted to employees and others prior to
our initial public offering with an exercise price below the deemed fair market
value of our common stock on the date of grant, to the amortization of the fair
value of warrants and options issued to non-employees and to the amortization
of the fair value of restricted stock granted to employees. The related
compensation is amortized over the vesting period of the options or stock
grants. Expenses related to the warrants are amortized over the term of the
agreements to which they relate. The following presents, for the periods
indicated, the charges that have been excluded from the following captions:

|                           |  |                    |        |                   |  |      |     |      |  |   |       |  |  |   |       | 
|-------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                           |  | Three months ended |        | Nine months ended
|                           |  | September 30,      |        | September 30,    
|                           |  |                    |        |                  
|                           |  | 2000               |        | 2001              |  | 2000 |     | 2001
|                           |  |                    |        |                   |  |      |     |     
|In thousands               |  | (unaudited)        |        | (unaudited)      
|                           |  |                    |        |                   |  |      |     |     
|Cost of revenues           |  | $                  | 5      |                   |  | $    | (9  | )    |  | $ | 90    |  |  | $ | 95    | 
|                          
|                          
|                          
|                          
|Sales and marketing        |  |                    | (1,920 | )                 |  |      | 194 |      |  |   | 4,317 |  |  |   | 1,552 | 
|                          
|                          
|                          
|                          
|Research and development   |  |                    | 59     |                   |  |      | 110 |      |  |   | 964   |  |  |   | 650   | 
|                          
|                          
|                          
|                          
|General and administrative |  |                    | 45     |                   |  |      | 114 |      |  |   | 398   |  |  |   | 2,149 | 
|                           |  |                    |        |                   |  |      |     |      |  |   |       |  |  |   |       | 
|                           |  | $                  | (1,811 | )                 |  | $    | 409 |      |  | $ | 5,769 |  |  | $ | 4,446 | 
|                           |  |                    |        |                   |  |      |     |      |  |   |       |  |  |   |       | 

8. DISTRIBUTION TO STOCKHOLDERS

On May 10, 2001, we issued one hundred ninety thousand (190,000) shares of
common stock to six of our stockholders (the Stockholders) in exchange for
the termination of certain obligations arising under (i) the merger agreement
between the Company and TBI Imaging, Inc. and (ii) the merger agreement between
the Company and Opticom Corporation, each dated March 16, 2000. Concurrent
with the above transaction, we distributed all of the outstanding shares of
Imaging Services Corporation, a wholly-owned subsidiary, and certain related
assets to the Stockholders. As a result of the transaction, we recorded a
distribution to stockholders of $2,979,000, which resulted in a reduction of
additional paid in capital.

9. COMMITMENTS AND CONTINGENCIES

Please reference Legal Proceedings in our Annual Report on Form 10K for the
fiscal year ended December 31, 2000 and our Quarterly Report on Form 10Q for
the quarter ended June 30, 2001 for additional disclosures.

We are subject to claims in the ordinary course of business. Management
believes the ultimate resolution of these matters will have no material impact
our financial condition, results of operations or cash flows.

9



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##### Table of Contents



If the plaintiffs in any of these cases were to prevail in their action, our
financial condition, results of operations and cash flows could be materially
adversely affected

10. SEGMENTS

We have two reportable segments: 1) products and 2) services. The accounting
policies of the segments are the same as those of the Company. We evaluate the
performance of our segments and allocate resources to them based solely on
evaluation of gross profit. There are no inter-segment revenues. We do not make
allocations of corporate costs to the individual segments and do not identify
separate assets of the segments in making decisions regarding performance or
allocation of resources to them.

Information about reported segments is as follows:

|                  |       |             |                    |             |                   |   |       |       |      |   |        |        |  |   |        |        | 
|----------------- | ----- | ----------- | ------------------ | ----------- | ----------------- | - | ----- | ----- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                  |       |             | Three months ended |             | Nine months ended
|                  |       |             | September 30,      |             | September 30,    
|                  |       |             |                    |             |                  
|                  |       |             | 2000               |             | 2001              |   | 2000  |       | 2001
|                  |       |             |                    |             |                   |   |       |       |     
|In thousands      |       | (unaudited) |                    | (unaudited)
|                  |       |             |                    |             |                  
|Revenues:         |       |             |                    |             |                   |   |       |       |      |   |        |        |  |   |        |       
|                 
|                 
|                 
|                 
|Products          |       | $           | 15,515             |             |                   | $ | 1,904 |       |      | $ | 37,280 |        |  | $ | 13,729 |       
|                 
|                 
|                 
|                 
|Services          |       |             | 1,703              |             |                   |   | 4,672 |       |      |   | 3,710  |        |  |   | 10,333 |       
|                  |       |             |                    |             |                   |   |       |       |      |   |        |        |  |   |        |       
|                  | Total |             | $                  | 17,218      |                   |   | $     | 6,576 |      |   | $      | 40,990 |  |   | $      | 24,062 | 
|                  |       |             |                    |             |                   |   |       |       |      |   |        |        |  |   |        |       
|Cost of revenues: |       |             |                    |             |                   |   |       |       |      |   |        |        |  |   |        |       
|                 
|                 
|                 
|                 
|Products          |       | $           | 7,330              |             |                   | $ | 1,114 |       |      | $ | 19,450 |        |  | $ | 6,616  |       
|                 
|                 
|                 
|                 
|Services          |       |             | 810                |             |                   |   | 1,286 |       |      |   | 1,474  |        |  |   | 3,951  |       
|                  |       |             |                    |             |                   |   |       |       |      |   |        |        |  |   |        |       
|                  | Total |             | $                  | 8,140       |                   |   | $     | 2,400 |      |   | $      | 20,924 |  |   | $      | 10,567 | 
|                  |       |             |                    |             |                   |   |       |       |      |   |        |        |  |   |        |       

Long-lived asset information by geographic area is as follows:

|                   |  |              |        |               |  |   |       | 
|------------------ |  | ------------ | ------ | ------------- |  | - | ----- | 
|                   |  | December 31, |        | September 30,
|                   |  | 2000         |        | 2001         
|                   |  |              |        |              
|In thousands       |  | (unaudited) 
|                   |  |              |        |              
|LONG-LIVED ASSETS: |  |              |        |               |  |   |       | 
|                  
|                  
|                  
|                  
|Foreign            |  | $            | 3,285  |               |  | $ | 53    | 
|                  
|                  
|                  
|                  
|United States      |  |              | 17,680 |               |  |   | 6,592 | 
|                   |  |              |        |               |  |   |       | 
|                   |  | $            | 20,965 |               |  | $ | 6,645 | 
|                   |  |              |        |               |  |   |       | 

10



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##### Table of Contents



11. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued Statement No. 141 (FAS 141), Business
Combinations, and Statement No. 142 (FAS 142), Goodwill and Other Intangible
Assets. FAS 141 supercedes APB 16, Business Combinations and primarily
addresses the accounting for the cost of an acquired business (i.e., the
purchase price allocation), including any subsequent adjustments to its cost.

The most significant changes made by FAS 141 involve the requirement to use the
purchase method of accounting for all business combinations, thereby
eliminating use of the pooling-of-interests method along with the establishment
of new criteria for determining whether intangible assets acquired in a
business combinations should be recognized separately from goodwill. FAS 141
is effective for all business combinations (as defined in the statement)
initiated after September 30, 2001 and for all business combinations accounted
for by the purchase method that are completed after September 30, 2001 (that
is, the date of the acquisition is July 1, 2001 or later). We do not expect
adoption of FAS 141 to have a material impact on our reported results of
operations, financial position or cash flows.

FAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition (i.e., the post-acquisition accounting). FAS
142 supercedes APB 17, Intangible Assets. Under FAS 142, goodwill and
indefinite lived intangible assets will no longer be amortized and will be
tested for impairment at least annually at a reporting unit level.
Additionally, the amortization period of intangible assets with finite lives is
no longer limited to forty years. FAS 142 is effective for fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized in an entitys statement of financial position at that date,
regardless of when those assets were initially recognized. Early application
is permitted for entities with fiscal years beginning after March 15, 2001
provided that the first interim period financial statements have not been
issued previously. We do not expect adoption of FAS 142 to have a material
impact on our financial position or cash flows. However, since the goodwill
will no longer be amortized, it may have a material impact on our reported
results of operations.

12. CONVERTIBLE PROMISSORY NOTE AND WARRANTS

On May 14, 2001, we executed definitive agreements with Image Investor
Portfolio, a separate series of Memphis Angels, LLC for an investment by it
into the Company. The agreement (the Purchase Agreement) called for the
investment to occur in two tranches. Tranche A consisted of a $10.0 million
convertible promissory note (the Note) that we issued to Image Investor
Portfolio.

We also issued three warrants (Warrant 1, Warrant 2 and Warrant 3) to Image
Investor Portfolio. Warrant 1 entitles the holder to subscribe for and purchase
150,000 shares of Series B Preferred Stock at $20 per share and is exercisable
at any time before the expiration date of May 14, 2006. Warrant 2 entitles the
holder to subscribe for and

11



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##### Table of Contents



purchase 100,000 shares of Series B Preferred Stock at $40 per share and is
exercisable at any time before the expiration date of May 14, 2006. Warrant 3
entitles the holder to subscribe for and purchase 1,000,000 shares of Series B
Preferred Stock at $20 per share and is exercisable at any time before the
expiration date of August 29, 2002.

On September 26, 2001, we completed the transactions contemplated under Tranche
B of the investment. At the close of the transaction, we issued 1,115,080
shares of our Series B Preferred Stock represented by the conversion of the
$10.0 million Note, the conversion of $0.3 million of interest on the Note and
$12.025 million in cash through the exercise of Warrant 3. The remainder of
Warrant 3 expired. Proceeds of the investment will be used for sales and
marketing efforts, research and development and general working capital
purposes.

The $22.30 million of Series B Preferred Stock is convertible into our common
stock at a price of $2.50 per share. The conversion price may be adjusted at
the sixth month anniversary of the closing of Tranche B based on the preceding
twenty-day average trading price of our common stock, but not below a price of
$2.00 per share or above a price of $2.50 per share.

In accordance with APB 14, Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants and EITF 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features, the entire proceeds from the second
quarter 2001 convertible promissory note, $10,000,000, were allocated to the
warrants and the beneficial conversion feature of the Note based on a
calculation using the Black-Scholes model. During the third quarter of 2001,
we recorded $9,195,000 as interest expense related to the accretion of the Note
to its face value as a result of the close of Tranche B and the subsequent
conversion of the Note to our Series B Preferred Stock. Of the $9,195,000 of
interest expense recorded in the third quarter, $7,192,000 was recorded upon
conversion of the Note to Series B Preferred Stock.

On September 26, 2001, we filed an Amended Certificate of Designation of Series
B Preferred Stock, which amended certain provisions that required mezzanine
presentation of our Series B Preferred Stock, the beneficial conversion feature
of the Note and the warrants. As a result, Warrant 1, Warrant 2, the
beneficial conversion feature of the Note and the outstanding Series B
Preferred Stock are reflected in the shareholders equity section of the
accompanying financial statements.

13. CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents and accounts receivable.
Cash and cash equivalents are deposited with high quality financial
institutions. Our accounts receivable are derived from revenue earned from
clients located in the U.S. and abroad. We perform ongoing credit evaluations
of our clients financial condition and we do not require collateral from our
clients.

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The following table summarizes the revenue from customers in excess of 10% of
total revenues:

|           |  |                    |    |                    |  |  |    |  
|---------- |  | ------------------ | -- | ------------------ |  |  | -- | -
|           |  | Three months ended |    | Nine months ended 
|           |  | September 30, 2001 |    | September 30, 2001
|           |  |                    |    |                   
|Customer A |  |                    | 46 | %                  |  |  | 29 | %
|          
|          
|          
|          
|Customer B |  |                    | 27 | %                  |  |  | 17 | %

At September 30, 2001 Customer B represents 15% of accounts receivable and
holds 100,000 shares of our Series B Preferred Stock and a warrant for 60,000
shares. All amounts due from Customer B as of September 30, 2001, were
collected in full during October 2001.

14. PURCHASE AGREEMENT-LEASEBACK

On September 26, 2001, we sold certain assets totaling $2,474,000 to a
stockholder and agreed to leaseback those assets over a three-year period from
that stockholder. The net book value and the fair value of the assets equaled
the sale price, resulting in no gain or loss on the sale of the assets. The
monthly lease payments are approximately $97,000 in years one and two and
approximately $21,000 in year three. The lease is accounted for as a capital
lease in accordance with SFAS No. 13, Accounting for Leases. In order to sell
the assets to the stockholder, we paid off the remaining payments under an
existing capital lease of the assets from a third party during the third
quarter.

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Item 2. Managements Discussion and Analysis Of Financial Condition and Results Of Operations

OVERVIEW

Internet Pictures Corporation (iPIX) provides mission critical imaging software
and services solutions to facilitate commerce, communication and entertainment.
The Companys solutions include the capture, processing, management and
distribution of images and related data. iPIX solutions create and manage a
rich variety of media including still images, 360° by 360° immersive images,
video, animation, text and audio. The Companys clients are those who rely
heavily on images to support their business and/or are generating revenue with
images. iPIX clients span a broad array of industries including real estate,
auctions and classifieds, travel, government, security and observation,
automotive, sports and entertainment. These clients include market leaders such
as eBay, CNN, Discovery and Homestore.com.

The Companys solutions are centered on its two technologies: iPIX Immersive
Imaging; and iPIX Rimfire Imaging.

iPIX Immersive Imaging

iPIX provides the leading immersive 360-degree images for real estate,
e-commerce, security and observation, travel and hospitality, and
entertainment. iPIX immersive images offer viewers the opportunity to navigate
a spherical scene (still or video) on their own terms, looking in any
direction, and zooming in and out as they choose. This interactive imaging
experience offers the most complete field of view to communicate the most
information, increases buyer confidence and adds a new dimension to imaging.

iPIX Rimfire Imaging

Rimfire is an open imaging platform that allows business-to-business and
business-to-consumer sites to quickly and easily capture, manage and distribute
media from site viewers to live Web pages. With Rimfire, end-users can easily
publish still photos and other rich media to the Web with simple drag-and-drop
image submission. Rimfire also offers enhanced features for automatic
generation of slide shows from multiple photos, NetCards using submitted images
and built-in size, crop and rotate tools. For example, with Rimfire, eBay is
able to allow their users to instantly add photos directly to their listings
from the Sell Your Item form online. The photos are automatically sized,
formatted and delivered to the eBay Web site to the standards pre-set by eBay.

Utilizing our Rimfire infrastructure products and services, we provide
end-to-end solutions to customers who request digital media content to be
hosted and distributed to the Internet. Revenues associated with the hosting
services are recognized ratably over the hosting and distribution term. We also
generate revenues from our sale of digital media content as well as iPIX keys
and iPIX kits. Sales of immersive images, iPIX kits and iPIX keys are
recognized upon delivery to the customer. We calculate a provision for returns
based on historical experience and make appropriate reserves at the time
revenues are recognized. To date, returns have been insignificant.

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RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the percent
relationship to total revenues of select items in our statements of operations.

|                                |  |                    |      |                   |  |      |      |      |  |  |      |    |  |  |      |   
|------------------------------- |  | ------------------ | ---- | ----------------- |  | ---- | ---- | ---- |  |  | ---- | -- |  |  | ---- | --
|                                |  | Three months ended |      | Nine months ended
|                                |  | September 30,      |      | September 30,    
|                                |  |                    |      |                  
|                                |  | 2000               |      | 2001              |  | 2000 |      | 2001
|                                |  |                    |      |                   |  |      |      |     
|                                |  | (unaudited)        |      | (unaudited)      
|                                |  |                    |      |                  
|Revenues                        |  |                    | 100  | %                 |  |      | 100  | %    |  |  | 100  | %  |  |  | 100  | % 
|                                |  |                    |      |                  
|Cost of revenues                |  |                    | 47   | %                 |  |      | 36   | %    |  |  | 51   | %  |  |  | 44   | % 
|                                |  |                    |      |                   |  |      |      |      |  |  |      |    |  |  |      |   
|Gross profit                    |  |                    | 53   | %                 |  |      | 64   | %    |  |  | 49   | %  |  |  | 56   | % 
|                                |  |                    |      |                   |  |      |      |      |  |  |      |    |  |  |      |   
|Operating expenses:             |  |                    |      |                   |  |      |      |      |  |  |      |    |  |  |      |   
|                               
|                               
|                               
|                               
|Sales and marketing             |  |                    | 130  | %                 |  |      | 43   | %    |  |  | 148  | %  |  |  | 74   | % 
|                               
|                               
|                               
|                               
|Research and development        |  |                    | 21   | %                 |  |      | 26   | %    |  |  | 25   | %  |  |  | 24   | % 
|                               
|                               
|                               
|                               
|General and administrative      |  |                    | 25   | %                 |  |      | 29   | %    |  |  | 38   | %  |  |  | 34   | % 
|                               
|                               
|                               
|                               
|Stock-based compensation        |  |                    | (11  | )%                |  |      | 6    | %    |  |  | 14   | %  |  |  | 18   | % 
|                               
|                               
|                               
|                               
|Goodwill amortization           |  |                    | 112  | %                 |  |      | 9    | %    |  |  | 93   | %  |  |  | 8    | % 
|                               
|                               
|                               
|                               
|Restructuring and impairment    |  |                    | 0    | %                 |  |      | 22   | %    |  |  | 0    | %  |  |  | 48   | % 
|                               
|                               
|                               
|                               
|Bad debt expense                |  |                    | 0    | %                 |  |      | 5    | %    |  |  | 0    | %  |  |  | 15   | % 
|                               
|                               
|                               
|                               
|Loss on disposal of assets      |  |                    | 0    | %                 |  |      | (1   | )%   |  |  | 0    | %  |  |  | 7    | % 
|                               
|                               
|                               
|                               
|Merger expenses                 |  |                    | 0    | %                 |  |      | 0    | %    |  |  | 37   | %  |  |  | 0    | % 
|                                |  |                    |      |                   |  |      |      |      |  |  |      |    |  |  |      |   
|Total operating expenses        |  |                    | 277  | %                 |  |      | 139  | %    |  |  | 355  | %  |  |  | 228  | % 
|                                |  |                    |      |                  
|Loss from operations            |  |                    | (224 | )%                |  |      | (75  | )%   |  |  | (306 | )% |  |  | (172 | )%
|                                |  |                    |      |                  
|Other
income (expense), net     |  |                    | 5    | %                 |  |      | (146 | )%   |  |  | 7    | %  |  |  | (45  | )%
|                                |  |                    |      |                   |  |      |      |      |  |  |      |    |  |  |      |   
|Loss before extraordinary items |  |                    | (219 | )%                |  |      | (221 | )%   |  |  | (299 | )% |  |  | (217 | )%
|                                |  |                    |      |                  
|Extraordinary gain              |  |                    | 0    | %                 |  |      | 0    | %    |  |  | 0    | %  |  |  | 4    | % 
|                                |  |                    |      |                   |  |      |      |      |  |  |      |    |  |  |      |   
|Net loss                        |  |                    | (219 | )%                |  |      | (221 | )%   |  |  | (299 | )% |  |  | (213 | )%
|                                |  |                    |      |                   |  |      |      |      |  |  |      |    |  |  |      |   

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Quarter Ended September 30, 2001 Compared to the Quarter Ended September 30, 2000

Revenues. Total revenues decreased to $6.6 million in the third quarter of
2001, compared to $17.2 million in the third quarter of 2000, a decrease of
$10.6 million or 62%. This decrease was due primarily to a decrease of $11.4
million in sales of full service virtual tours off-set by an increase of $0.8
million in non-real estate related revenues. As part of the sale of assets to
Homestore.com during the first quarter of 2001, we no longer directly sell full
service virtual tours or iPIX keys to customers in the residential real estate
market. Instead, we have an agreement with Homestore.com whereby we provide
certain processing, hosting and distribution services for Homestore.com and
receive transaction fees and royalties. The third quarter 2001 revenues of
$6.6 million included $6.1 million from the sale of our technology products and
services and $0.5 million related to full service virtual real estate tours. We
do not expect to generate significant future revenues from the sale of virtual
real estate tours in the US residential markets.

Cost of Revenues. Cost of revenues consists of our direct expenses associated
with the processing, hosting and distribution of digital content and the costs
of the digital camera and related components included in an iPIX kit. Cost of
revenues decreased to $2.4 million in the third quarter of 2001, compared to
$8.1 million in the third quarter of 2000, a decrease of $5.7 million or 71%.
Cost of revenues as a percentage of total revenues decreased to 36% in the
third quarter of 2001 from 47% in the third quarter of 2000. This decrease was
the result of a lower volume of virtual tour deliveries and the increase in
higher margin Rimfire based revenue.

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries for marketing, sales, and business development personnel. Sales and
marketing expenses also include commissions and related benefits for sales
personnel and consultants, traditional advertising and promotional expenses.
Sales and marketing expenses decreased to $2.8 million in the third quarter of
2001, compared to $22.3 million in the third quarter of 2000, a decrease of
$19.5 million or 87%. This decrease is due primarily to our decision to sell
more of our products and services through various third parties, such as
equipment manufacturers, and become less reliant upon a worldwide direct sales
force. As a result, we had a significant reduction in our sales force and
eliminated our field operations personnel. In addition, we eliminated costs
relating to technology access and sponsorship fees and decreased advertising
and branding expenses.

Research and Development. Research and development expenses consist primarily
of personnel costs. Research and development expenses decreased to $1.7
million in the third quarter of 2001, compared to $3.6 million in the third
quarter of 2000, a decrease of $1.9 million or 53%. This decrease was due
primarily to decreased personnel and related costs as a result of our reduction
in work force and our exit from the full service real estate business.

General and Administrative. General and administrative expenses consist
primarily of salaries and related benefits for administrative and executive
staff and fees for

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professional services. General and administrative expenses decreased to $1.9
million in the third quarter of 2001, compared to $4.0 million in the third
quarter of 2000, a decrease of $2.1 million or 53%. This decrease was due
primarily to a decrease in personnel and related costs and fees related to
professional services.

Stock-based Compensation. Stock-based compensation expense consists of the
amortization of deferred compensation related to stock options granted to
employees and others prior to our initial public offering with an exercise
price below the deemed fair market value of our common stock on the date of
grant. In addition, it also includes the amortization of the fair value of
warrants and options issued to non-employees and restricted stock granted to
employees. The related compensation is amortized over the vesting period of the
options or stock grants. Expenses related to the warrants are amortized over
the term of the agreements to which they relate. Stock-based compensation
expense increased to $0.4 million in the third quarter of 2001, compared to
$(1.8) million in the third quarter of 2000, an increase of $2.2 million or
123%. The credit in the third quarter of 2000 was primarily related to the
reduction in our stock price during that quarter.

Goodwill Amortization. The amortization consists of goodwill associated with
the acquisitions during the second quarter of 2000. Amortization of goodwill
was $0.6 million in the third quarter 2001, compared to $19.3 million in the
third quarter of 2000, a decrease of $18.7 million or 97%. The decrease is
related to the impairment charge taken in the fourth quarter of 2000 of $176.8
million.

Restructuring and Impairment Charges.Included in the third quarter
restructuring is $1,462,000 related to the write off of the unamortized
portion of our directors and officers insurance policy. We were required to
obtain a new policy due to the change in control related to the closing of
Tranche B.

Bad Debt Expense. Bad debt expense was $0.3 million in the third quarter of
2001, compared to $0.2 million in the third quarter of 2000, an increase of
$0.1 million.

Other Income (Expense). Other income (expense) consists primarily of interest
earned on cash and investments, interest paid on capital leases, interest
accrued for the convertible promissory note and the accretion of the promissory
note towards its face value. Other income (expense) decreased to $(9.6) million
in the third quarter of 2001, compared to $(0.0) million in the third quarter
of 2000. This decrease was due primarily to interest expense related to the
accretion of the promissory note and decreased earnings on our cash investments
related to a lower cash balance. In the third quarter of 2001, we recorded
non-cash interest expense of $9.2 million related to the accretion of the
promissory note to its face value.

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Nine months Ended September 30, 2001 Compared to the Nine months Ended September 30, 2000

Revenues. Total revenues decreased to $24.1 million in the nine months ended
September 30, 2001, compared to $41.0 million in the nine months ended
September 30, 2000, a decrease of $16.9 million or 41%. This decrease was due
primarily to a decrease of $18.7 million in sales of full service virtual tours
off-set by an increase of $1.8 million in non-real estate related revenues. For
the nine months ended September 30, 2001, revenues of $24.1 million included
$16.5 million from the sale of our technology products and services and $7.6
million related to full service virtual real estate tours. We do not expect to
generate significant future revenues from the sale of virtual real estate tours
in the US residential markets. Instead, we have an agreement with
Homestore.com whereby we provide certain processing, hosting and distribution
services for Homestore.com and receive transaction fees and royalties.

Cost of Revenues. Cost of revenues decreased to $10.6 million in the nine
months ended September 30, 2001, compared to $20.9 million in the nine months
ended September 30, 2000, a decrease of $10.3 million or 49%. Cost of revenues
as a percentage of total revenues decreased to 44% in the first nine months of
2001 from 51% in the first nine months of 2000. This decrease was the result
of a lower volume of virtual tour deliveries and the increase in higher margin
Rimfire based revenues.

Sales and Marketing. Sales and marketing expenses decreased to $17.8 million in
the nine months ended September 30, 2001, compared to $60.8 million in the nine
months ended September 30, 2000, a decrease of $43.0 million or 71%. This
decrease is due primarily to our decision to sell more of our products and
services through various third parties, such as equipment manufacturers, and
become less reliant upon a worldwide direct sales force. As a result, we had a
significant reduction in our sales force and eliminated field operations
personnel. In addition, we eliminated costs relating to technology access and
sponsorship fees and decreased advertising and branding expenses.

Research and Development. Research and development expenses decreased to $5.7
million in the nine months ended September 30, 2001, compared to $10.1 million
in the nine months ended September 30, 2000, a decrease of $4.4 million or 43%.
This decrease was due primarily to decreased personnel and related costs as a
result of our reduction in work force and our exit from the full service real
estate business.

General and Administrative Expenses. General and administrative expenses
decreased to $8.3 million in the nine months ended September 30, 2001, compared
to $15.1 million in the nine months ended September 30, 2000, a decrease of
$6.8 million or 45%. This decrease was due primarily to a decrease in
personnel and related costs and fees for professional services.

Stock-based Compensation. Stock-based compensation expense decreased from $4.4
million in the nine months ended September 30, 2001, compared to $5.8 million
in the

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nine months ended September 30, 2000, a decrease of $1.3 million or 23%. The
decrease was due primarily to the decrease in our stock price.

Goodwill Amortization. Amortization of intangible assets was $1.8 million in
the nine months ended September 30, 2001, compared to $38.0 million in the nine
months ended September 30, 2000, a decrease of $36.2 million or 95%. The
decrease is related to the impairment charge taken in the fourth quarter of
2000 of $176.8 million.

Merger Expenses. Merger expenses consist of costs incurred as a result of the
merger of Interactive Pictures and bamboo.com that occurred on January 19,
2000.
Merger expenses in the nine months ended September 30, 2000 were $15.2 million.

Extraordinary Gain. The extraordinary gain during the first nine months of 2001
of $0.9 million results from the sale of assets used to provide residential
real estate virtual tours that were related to the pooling of Interactive
Pictures Corporation and bamboo.com. The sale transaction took place within a
year of the 2000 pooling transaction and accordingly, the gain from the sale is
considered to be extraordinary.

Loss on Disposal of Assets. The $1.7 million loss during the first nine months
of 2001 on the disposal of assets is the result of the sale of assets used to
provide residential real estate virtual tours that consisted of the remaining
residential real estate assets that were unrelated to the 2000 pooling of
Interactive Pictures Corporation and bamboo.com.

Restructuring and Impairment Charges. During the nine months ended September
30, 2001, we recorded a restructuring charge of $11.7 million consisting of
expenses associated with a reduction in our workforce, lease obligations for
vacated office and other contractual obligations. In addition to the
restructuring, we wrote down abandoned office equipment and other assets of
$1.1 million to their net realizable value.

Included in the restructuring is $1.3 million related to a severance liability
with our former chief executive officer, James M. Phillips. At September 30,
2001 the unpaid liability is $0.9 million, which is to be paid in installments
ending in September of 2003. As further consideration for Mr. Phillips
separation agreement, we forgave a note receivable from Mr. Phillips and the
related interest aggregating $2.2 million.

Bad Debt Expense. Bad debt expense was $3.5 million in the nine months ended
September 30, 2001, compared to $0.4 million in the first half of 2000. The
increase in bad debt expense was the result of non-payment by customers, now in
financial difficulty, and our belief that certain former customers will not pay
all of their obligations.

Other Income (Expense). Other income (expense) decreased to $(10.8) million in
the nine months ended September 30, 2001, compared to $2.7 million in the nine
months ended September 30, 2000, a decrease of $13.6 million. This decrease was
due primarily to interest expense related to the accretion of the promissory
note and decreased earnings on our cash investments related to a lower cash
balance. In the nine months ended

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September 30, 2001, we recorded non-cash interest expense of $10.0 million
related to the accretion of the promissory note to its face value.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations through our registered public
offerings, the private placements of capital stock, a convertible debenture, a
convertible promissory note and warrant and options exercises. At September 30,
2001, we had $15.3 million of cash and cash equivalents.

On May 14, 2001, we executed definitive agreements with Paradigm Capital
Partners and Memphis Angels, LLC for an investment by the parties into the
Company. The agreement called for the investment to occur in two tranches.
Tranche A consisted of $10.0 million in convertible notes and warrants. On
September 26, 2001, we completed the Tranche B transactions of the investment.
At the close of the Tranche B transaction, we issued 1,115,080 shares of our
Series B Preferred Stock represented by the conversion of the $10.0 million
Note, the conversion of $276,615 of interest on the Note and $12.025 million in
cash through the exercise of Tranche B warrants.

Net cash used in operating activities was $23.2 million for the nine months
ended September 30, 2001 and $80.9 million for the nine months ended September
30, 2000. Net cash used for operating activities in each of these periods is
primarily a result of net losses offset by changes in net operating assets.
Our net loss for the nine month periods ended September 30, 2001 and 2000
included $4.1 million and $41.2 million, respectively, for non-cash
depreciation and amortization.

Net cash provided by investment activities was $16.5 million for the nine
months ended September 30, 2001 and $4.9 million for the nine months ended
September 30, 2000. Net cash provided by investing activities was related to
the net purchases and maturities of short-term investments, the acquisition of
computer software and hardware and other equipment and the proceeds from the
sale of assets.

Net cash provided by financing activities was $17.6 million for the nine months
ended September 30, 2001 and $59.0 million for the nine months ended September
30, 2000. The net cash provided by financing activities for these periods was
due primarily to the sale of shares of our common and preferred stock, the
exercise of stock options and the issuance of a convertible promissory note,
off-set by the repayment of capital lease obligations and other notes payable.

Although we have no material commitments for capital expenditures, we
anticipate that the rate of capital expenditures and other expenses consistent
with our operations, personnel and marketing activities will be a material use
of our cash resources for the foreseeable future. We may also use our cash
resources to acquire or license technology, products or businesses related to
our current business. We believe that the issuance of our third quarter 2001
preferred stock, our second quarter 2001 convertible promissory note and
warrants, together with existing cash and cash equivalents, will be sufficient
to

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meet our anticipated cash needs for working capital and capital expenditures
for at least the next twelve months.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FAB issued Statement No. 141 (FAS 141), Business
Combinations, and Statement No. 142 (FAS142), Goodwill and Other Intangible
Assets. FAS 141 supercedes APB 16, Business Combinations and primarily
addresses the accounting for the cost of an acquired business (i.e., the
purchase price allocation), including any subsequent adjustments to its cost.

The most significant changes made by FAS 141 involve the requirement to use the
purchase method of accounting for all business combinations, thereby
eliminating use of the pooling-of-interests method along with the establishment
of new criteria for determining whether intangible assets acquired in a
business combinations should be recognized separately from goodwill. FAS 141
is effective for all business combinations (as defined in the statement)
initiated after September 30, 2001 and for all business combinations accounted
for by the purchase method that are completed after September 30, 2001 (that
is, the date of the acquisition is July 1, 2001 or later). We do not expect
adoption of FAS 141 to have a material impact on our reported results of
operations, financial position or cash flows.

FAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition (i.e., the post-acquisition accounting). FAS
142 supercedes APB 17, Intangible Assets. Under FAS 142, goodwill and
indefinite lived intangible assets will no longer be amortized and will be
tested for impairment at least annually at a reporting unit level.
Additionally, the amortization period of intangible assets with finite lives is
no longer limited to forty years. FAS 142 is effective for fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized in an entitys statement of financial position at that date,
regardless of when those assets were initially recognized. Early application
is permitted for entities with fiscal years beginning after March 15, 2001
provided that the first interim period financial statements have not been
issued previously. We do not expect adoption of FAS 142 to have a material
impact on our financial position or cash flows. However, since the goodwill
will no longer be amortized, it may have a material impact on our reported
results of operations.

INFLATION

Inflation has not had a significant impact on our operations to date.

FORWARD-LOOKING STATEMENTS

This quarterly report contains statements about future events and expectations
which are characterized as forward-looking statements. Forward-looking
statements are based on our managements beliefs, assumptions and expectations
of our future economic

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performance, taking into account the information currently available to them.
These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express
or imply in any forward-looking statements. Factors that could contribute to
these differences include those discussed in Risk Factors of our registration
statement on Form S-3 filed with the SEC on October 16, 2001.

The words believe, may, will, should, anticipate, estimate,
expect, intends, objective or similar words or the negatives of these
words are intended to identify forward-looking statements. We qualify any
forward-looking statements entirely by these cautionary factors.




PART II  OTHER INFORMATION




Item 1. Legal Proceedings

Please reference Legal Proceedings in our Annual Report on Form 10K for the
fiscal year ended December 31, 2000 and our Quarterly Report on Form 10Q for
the quarter ended June 30, 2001 for additional disclosures.

We are subject to claims in the ordinary course of business. Management
believes the ultimate resolution of these matters will have no material impact
our financial condition, results of operations or cash flows.

If the plaintiffs in any of these cases were to prevail in their action, our
financial condition, results of operations and cash flows could be materially
adversely affected.




Item 2. Changes In Securities And Use Of Proceeds

On May 14, 2001, we executed definitive agreements with Image Investor
Portfolio, a separate series of Memphis Angels, LLC for an investment by it
into the Company. The agreement called for the investment to occur in two
tranches (the Purchase Agreement). Tranche A consisted of a $10.0 million
convertible promissory note (the Note) that we issued to Image Investor
Portfolio.

On September 26, 2001, we completed the Tranche B transactions of the
investment. At the close of the transaction, we issued 1,115,080 shares of our
Series B Preferred Stock represented by the conversion of the $10.0 million
Note, the conversion of $0.3 million of interest on the Note and $12.025
million in cash through the exercise of Tranche B warrants. The remainder of
the Tranche B warrants expired. The Series B Preferred Stock was issued to
Image Investor Portfolio and certain other accredited investors. Proceeds of
the investment will be used for sales and marketing efforts, research and
development and general working capital purposes.

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The $22.3 million of Series B Preferred Stock is convertible into our common
stock at a price of $2.50 per share. The conversion price may be adjusted at
the sixth month anniversary of the closing of Tranche B based on the preceding
twenty-day average trading price of the Companys common stock, but not below a
price of $2.00 per share or above a price of $2.50 per share.

Pursuant to the terms of an Amended Certificate of Designation of Series B
Preferred Stock, filed with the Secretary of State of the State of Delaware on
September 26, 2001, the 2001 Series B Preferred Stock bears dividends at an
annual rate of 8% of the original issue price payable quarterly in cash or as
an increase to the Series B Preferred Stock liquidation preference. In
addition to significant matters requiring a class vote, Series B Preferred
Stock is entitled to vote on matters submitted to holders of common stock on an
as-converted basis and, so long as at least 25% of the shares of the Series B
Preferred Stock issued in connection with the Tranche A and Tranche B closings
is outstanding, is entitled to elect four (4) members of the Board of Directors
of the Company. These modifications to the Series B Preferred Stock made
pursuant to the Amended Certificate of Designation limit the rights of the
current holders of our common stock. For example, the common stock holders
will be entitled to elect only three (3) directors, and the Company is required
to obtain the separate approval of Series B Preferred holders in order to
consummate certain transactions.

The Company relied on the exemption from registration provided in Section 4(2)
and Rule 506 of the Securities Act when effecting the private placement of the
Note and the Series B Preferred Stock. All of the securities were purchased by
ten (10) accredited investors, and no general advertising or solicitation was
used.




Item 3. Defaults Upon Senior Securities

None.




Item 4. Submission Of Matters To A Vote Of Security Holders

On August 22, 2001 we held the annual meeting of our stockholders to vote upon
the following proposals. First, the stockholders voted to elect three
directors to serve until the 2004 annual meeting of stockholders. Donald W.
Strickland was elected to the Board of Directors by a vote of 43,582,347 for, 0
against, and 5,751,128 abstentions and broker nonvotes. William J. Razzouk was
elected to the Board of Directors by a vote of 43,613,690 for, 0 against and
5,719,785 abstentions and broker nonvotes. Laban P. Jackson, Jr. was elected
to the Board of Directors by a vote of 45,161,107 for, 0 against and 4,172,368
abstentions and broker nonvotes. Thomas M. Garrott and Michael Easterly
continue serving as directors until the annual meeting of stockholders in the
year 2002 (Class III directors). Frank A. McGrew, IV and Andrew P. Seamons
continue serving as directors until the annual meeting of stockholders in the
year 2003 (Class I directors). Frank A. McGrew resigned from the Board of
Directors on September 26, 2001 and was replaced by David M. Wilds. Andrew
Seamons resigned from the Board of Directors on October 17, 2001 and was
replaced by Gregory S. Dailey.

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Second, the stockholders approved and adopted the amendment to the restated
certificate of incorporation to effect a ten-for-one stock combination, or
reverse stock split, with respect to all of our outstanding common stock by a
vote of 46,676,356 for, 2,505,588 against and 151,531 abstentions and broker
nonvotes.

Third, the stockholders ratified the Securities Purchase Agreement between the
Company and Image Investor Portfolio and the transactions contemplated
thereunder by a vote of 25,067,224 for, 3,654,592 against and 388,197
abstentions and broker nonvotes.

Finally, the stockholders voted to ratify the selection of
PricewaterhouseCoopers LLP as our independent auditors by a vote of 48,835,569
for, 289,481 against and 208,424 abstentions and broker nonvotes.




Item 5. Other Information

None.




Item 6. Exhibits And Reports On Form 8-K

a.     Exhibits

|             |  |                                                                                                      
|------------ |  | -----------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | Visual Content Services Agreement between the Company and eBay Inc., dated April 19, 2000, as amended
|            
|            
|            
|            
|Exhibit 10.2 |  | Purchase Agreement between the Company and eBay Inc. dated September 26, 2001                        
|            
|            
|            
|            
|Exhibit 10.3 |  | Master Lease Agreement between the Company and eBay Inc. dated September 26, 2001                    

b.     Reports on Form 8-K



| |                            
| | ---------------------------
| | (1) October 3, 2001; Item 5

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INTERNET PICTURES CORPORATION




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.

|                       |  |                                                                                                    
|---------------------- |  | ---------------------------------------------------------------------------------------------------
|DATE: October 31, 2001 |  | INTERNET PICTURES CORPORATION
(Registrant)                                                         
|                      
|                       |  |                                                                                                    
|                      
|                       |  | /s/ Paul Farmer
Paul Farmer
Authorized Officer
Chief Financial Officer and
Chief Accounting Officer

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INTERNET PICTURES CORPORATION

INDEX TO EXHIBITS FOR FORM 10-Q

FOR QUARTER ENDED SEPTEMBER 30, 2001

|             |  |                                                                                                      
|------------ |  | -----------------------------------------------------------------------------------------------------
|EXHIBIT NO.  |  | EXHIBIT DESCRIPTION                                                                                  
|             |  |                                                                                                      
|             |  |                                                                                                      
|Exhibit 10.1 |  | Visual Content Services Agreement between the Company and eBay Inc., dated April 19, 2000, as amended
|            
|            
|            
|            
|             |  |                                                                                                      
|            
|            
|            
|            
|Exhibit 10.2 |  | Purchase Agreement between the Company and eBay Inc. dated September 26, 2001                        
|            
|            
|            
|            
|             |  |                                                                                                      
|            
|            
|            
|            
|Exhibit 10.3 |  | Master Lease Agreement between the Company and eBay Inc. dated September 26, 2001                    

26