UNITED STATES
                       SECURITIES 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 June 30, 2002 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             (I.R.S. Employer Identification No.)
incorporation or organization)

                              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 [X ] No [ ]

6,798,418  shares of $0.001 par value  common stock  outstanding  as of July 15,
2002

                                  Page 1 of 28




<PAGE>

<TABLE>
<CAPTION>
                          INTERNET PICTURES CORPORATION
                                    FORM 10-Q
                       FOR THE QUARTER ENDED JUNE 30, 2002
                                      INDEX

<S>                                                                                                         <C>
PART I--FINANCIAL INFORMATION................................................................................3

   Item 1.     Condensed Consolidated Financial Statements...................................................3

   Item 2.     Management's Discussion and Analysis of Financial Condition and  Results of Operations.......14

   Item 3.     Quantitative and Qualitative Disclosures About Market Risk...................................24

PART II -- OTHER INFORMATION................................................................................25

   Item 1.     Legal Proceedings............................................................................25

   Item 2.     Changes In Securities And Use Of Proceeds....................................................26

   Item 3.     Defaults Upon Senior Securities..............................................................26

   Item 4.     Submission Of Matters To A Vote Of Security Holders..........................................26

   Item 5.     Other Information........................................................................... 27

   Item 6.     Exhibits And Reports On Form 8-K.............................................................27

Signatures..................................................................................................27

Exhibit Index...............................................................................................28
</TABLE>


                                       2
<PAGE>


PART I--FINANCIAL INFORMATION

Item 1.      Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
                          INTERNET PICTURES CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS



                                                                                    December 31,    June 30,
                                                                                         2001         2002
                                                                                    -----------   ------------
                                                                                        (1)       (unaudited)
(In thousands, except share and per share amounts)
ASSETS
<S>                                                                                  <C>            <C>
Cash and cash equivalents.......................................................     $    11,103    $   4,659
Restricted cash ................................................................           2,298        2,513
Short term investments .........................................................              --        1,400
Accounts receivable, net .......................................................             921        1,555
Inventory, net .................................................................             219          104
Prepaid expenses and other current assets ......................................             881          864
                                                                                     -----------   -----------
       Total current assets ....................................................          15,422       11,095

Property and equipment, net ....................................................           4,614        6,200
Other long term assets .........................................................              --          165
Goodwill .......................................................................           3,042        3,042
                                                                                     -----------   -----------
       Total assets ............................................................     $    23,078    $  20,502
                                                                                     ===========   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable ...............................................................     $     1,500    $   1,211
Accrued liabilities ............................................................           7,557        6,783
Deferred revenue ...............................................................           1,592          490
Current portion of obligations under capital leases ............................           1,267        2,342
                                                                                     -----------   -----------
       Total current liabilities ...............................................          11,916       10,826
                                                                                     -----------   -----------

Obligations under capital leases, net of current portion .......................           1,277        1,841
                                                                                     -----------   -----------
Other long term liabilities.....................................................           1,115          595
                                                                                     -----------   -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value: .............................................               1           1
   Authorized:  5,001,100 at December 31, 2001 and June 30, 2002 (unaudited)
   Issued and outstanding: 1,115,080 at December 31, 2001 and
    June 30, 2002(unaudited)
Class B common stock, $0.0001 par value: .......................................              --           --
   Authorized:  742,154 at December 31, 2001 and June 30, 2002 (unaudited)
   Issued and outstanding:  179,480 at December 31, 2001 and
    June 30, 2002(unaudited)
Common stock, $0.001 par value: ................................................              66           66
   Authorized:  150,000,000 at December 31, 2001 and 50,000,000 at June 30, 2002
    (unaudited)
   Issued and outstanding:  6,568,337 at December 31, 2001 and
    6,618,938 at June 30, 2002 (unaudited)
Additional paid-in capital .....................................................         513,467      513,922
Note receivable from stockholder ...............................................            (179)          --
Unearned stock-based compensation ..............................................            (142)         (81)
Accumulated deficit ............................................................        (503,974)    (506,178)
Accumulated other comprehensive loss............................................            (469)        (490)
                                                                                     -----------   -----------
       Total stockholders' equity...............................................           8,770        7,240
                                                                                     -----------   -----------
       Total liabilities and stockholders' equity...............................     $    23,078   $   20,502
                                                                                     ===========   ===========
</TABLE>

(1)       The December 31, 2001 balances were derived from the audited financial
          statements.

See  accompanying  notes  to  the  unaudited  condensed  consolidated  financial
statements.

                                       3

<PAGE>


                          INTERNET PICTURES CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                               Three months ended     Six months ended
                                                                    June 30,               June 30,
                                                               ------------------     ----------------
In thousands, except per share data                              2001       2002        2001     2002
                                                               -------    -------     -------  -------
                                                                   (unaudited)           (unaudited)
Revenues:
<S>                                                             <C>        <C>         <C>      <C>
Transaction services.......................................     $3,761     $3,802      $5,652   $7,377
Immersive solutions........................................      2,046      1,959       4,763    3,178
Full service real estate tours.............................      2,157         --       7,071       --
                                                              --------    -------    --------  -------
Total revenues.............................................      7,964      5,761      17,486   10,555
                                                              --------    -------    --------  -------
Cost of revenues:
Transaction services.......................................      1,504      1,831       3,149    3,500
Immersive solutions........................................        915        355       1,666      811
Full service real estate tours.............................      1,018         --       3,456
--
                                                              --------    -------    --------  -------
Total cost of revenues.....................................      3,437      2,186       8,271    4,311
                                                              --------    -------    --------  -------

Gross profit...............................................      4,527      3,575       9,215    6,244
                                                              --------    -------    --------  -------
Operating expenses:
Sales and marketing........................................      5,848      2,153      16,284    4,193
Research and development...................................      1,766      1,230       4,526    2,511
General and administrative.................................      7,696        893      11,633    1,797
Goodwill amortization......................................        608         --       1,216       --
Restructuring and impairment...............................      7,193         --      10,193       --
Loss on disposal of assets.................................         --         --       1,769       --
                                                              --------    -------    --------  -------
Total operating expenses...................................     23,111      4,276      45,621    8,501
                                                              --------    -------    --------  -------

Loss from operations.......................................    (18,584)      (701)    (36,406)  (2,257)

Other income(expense):
Interest expense...........................................       (938)       (14)     (1,005)     (31)
Interest income............................................         61         25         174       80
Other......................................................       (154)        (1)       (387)       4
                                                              --------    -------    --------  -------
Loss before extraordinary gain.............................    (19,615)      (691)    (37,624)  (2,204)

Extraordinary gain.........................................         --         --         901       --
                                                              --------    -------    --------  -------
Net loss...................................................   $(19,615)   $  (691)   $(36,723) $(2,204)
                                                              ========    =======    ========  =======

Basic and diluted net loss per common share:
Loss before extraordinary gain.............................   $  (3.00)   $ (0.10)   $  (5.83) $ (0.32)
Extraordinary gain.........................................         --         --        0.14       --
                                                              --------    -------    --------  -------
Net loss per common share..................................   $  (3.00)   $ (0.10)   $  (5.69) $ (0.32)
                                                              ========    =======    ========  =======
</TABLE>



See  accompanying  notes  to  the  unaudited  condensed  consolidated  financial
statements.

                                       4


<PAGE>





                          INTERNET PICTURES CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                Six months ended
                                                                                    June 30,
                                                                              --------------------
                                                                                2001        2002
                                                                              --------    --------
In thousands                                                                      (unaudited)

Cash flows from operating activities:
<S>                                                                           <C>        <C>
Net loss..................................................................    $(36,723)  $(2,204)
Adjustments to reconcile net loss to net cash
  used in operating activities:
Depreciation and amortization.............................................       3,146     1,496
Provision for doubtful accounts receivable................................       1,827      (100)
Provision for inventory obsolescence......................................         201        --
Loss on disposal of assets................................................       1,769        --
Accretion of available-for-sale securities................................          (5)       --
Interest charge for amortization of discount on convertible debt..........         805        --
Non-cash compensation expense.............................................       6,161        91
Impairment loss...........................................................       1,122        --
Extraordinary gain........................................................        (901)       --
Changes in operating assets and liabilities:
   Accounts receivable....................................................         507      (534)
   Inventory..............................................................         499       114
   Prepaid expenses and other current assets..............................        (990)       18
   Other long term assets.................................................       1,019      (165)
   Accounts payable.......................................................        (210)     (289)
   Accrued expenses.......................................................       1,779    (1,199)
   Deferred revenue.......................................................        (545)   (1,102)
                                                                              --------   -------
      Net cash used in operating activities...............................     (20,539)   (3,874)
                                                                              --------   -------
Cash flows from investing activities:
Purchases of equipment and furniture......................................        (154)   (3,174)
Purchase of short term investments........................................          --    (1,400)
Proceeds from sale of assets..............................................       8,577        --
Maturities of securities available-for-sale...............................       6,000        --
                                                                              --------   -------
      Net cash provided by (used in) investing activities.................      14,423    (4,574)
                                                                              --------   -------
Cash flow from financing activities:
Proceeds from obligations under capital lease.............................          --     2,494
Repayments of capital lease obligation and notes payable..................        (849)     (763)
Net proceeds from convertible promissory note and warrants................       9,277        --
Proceeds from issuance of common stock....................................          25       115
Distribution to stockholders..............................................        (839)       --
Proceeds from notes receivable from stockholders..........................          --       179
                                                                              --------   -------
      Net cash provided by financing activities...........................       7,614     2,025
                                                                              --------   -------
Effect of exchange rate changes on cash...................................      (1,200)      (21)
                                                                              --------   -------
Net increase (decrease) in cash and cash equivalents......................         298    (6,444)
Cash and cash equivalents, beginning of period............................       5,322    11,103
                                                                              --------   -------
Cash and cash equivalents, end of period..................................    $  5,620   $ 4,659
                                                                              ========   =======
</TABLE>



No income tax payments were made in either period  presented.  Interest paid for
the six months ending June 30, 2001 and 2002 was $119 and $55, respectively.

See  accompanying  notes  to  the  unaudited  condensed  consolidated  financial
statements.
                                       5
<PAGE>




NOTES TO  UNAUDITED  CONDENSED  CONSOLIDATED  FINANCIAL  STATEMENTS  (Dollars in
thousands)

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  consolidated  financial  statements  and  notes  thereto
included  in our  audited  financial  statements  as of and for the  year  ended
December 31, 2001. The  information  furnished  reflects all  adjustments  which
management  believes are  necessary  for a fair  presentation  of our  financial
position  as of June 30,  2002 and the  results of our  operations  and our cash
flows for the three and six month periods ended June 30, 2001 and 2002. All such
adjustments are of a normal recurring nature.  The results of operations for the
three and six month  periods  ended June 30,  2001 and 2002 are not  necessarily
indicative of the results to be expected for the respective full years.

2.  RECLASSIFICATIONS

Certain  amounts  reported  in the  previous  period have been  reclassified  to
conform to the current period presentation. The reclassifications did not affect
the previously  reported total revenue,  operating loss, net loss, total current
assets, total assets or stockholders' equity.

3.  CASH EQUIVALENTS, RESTRICTED CASH AND SHORT TERM INVESTMENTS

We consider all highly liquid debt instruments with a remaining maturity at date
of  purchase of three  months or less to be cash  equivalents.  Restricted  cash
consists  primarily of deposits related to certain accrued  expenses.  All other
liquid investments are classified as either short term or long term investments.
We determine the appropriate classification of investment securities at the time
of purchase and  reevaluate  such  designation as of each balance sheet date. At
June 30, 2002, we had $1,400 of investments  with a remaining  maturity of three
to twelve months and accordingly classified as short term investments.

4.  LOSS PER SHARE

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 for the  period  by the  weighted
average  number of shares of common  stock  outstanding  during

                                       6
<PAGE>

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.

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

In thousands, except per share data
<TABLE>
<CAPTION>

                                                                    Three months ended               Six months ended
                                                                          June 30,                        June 30,
                                                                    ------------------               ----------------
                                                                    2001          2002               2001        2002
                                                                    ----          ----               ----        ----
(unaudited)
NUMERATOR:
<S>                                                             <C>              <C>             <C>          <C>
Loss before extraordinary gain                                  $(19,615)        $(691)          $(37,624)    $(2,204)

DENOMINATOR:
Weighted average shares outstanding                                6,535         6,792              6,455       6,785

LOSS PER SHARE BEFORE EXTRAORDINARY GAIN:
Basic and diluted                                                 $(3.00)       $(0.10)            $(5.83)     $(0.32)
</TABLE>


In accordance with SFAS No. 142, the results for the prior year periods have not
been  restated.  A  reconciliation  of reported net loss and net loss per common
share as if SFAS No. 142 had been in effect for 2001 is presented as follows:

<TABLE>
<CAPTION>

                                                             Three months ended                 Six months ended
                                                                  June 30,                           June 30,
                                                             ------------------                 ----------------
In thousands, except per share                               2001          2002                 2001        2002
                                                             ----          ----                 ----        ----
(unaudited)
<S>                                                      <C>             <C>                <C>         <C>
Net loss before extraordinary gain                       $(19,615)       $ (691)            $(37,624)   $ (2,204)
   Extraordinary gain                                           -             -                  901           -
                                                        ---------       -------            ---------   ---------
Net loss                                                  (19,615)         (691)             (36,723)     (2,204)
   Goodwill amortization                                      608             -                1,216           -
                                                        ---------       -------            ---------   ---------
Adjusted net loss                                        $(19,007)       $ (691)            $(35,507)   $ (2,204)
                                                        =========       =======            =========   =========

Basic and diluted net loss per common share:
   Net loss before extraordinary gain                     $ (3.00)      $ (0.10)            $  (5.83)   $ ( 0.32)
                                                                -             -                 0.14           -
                                                        ---------       -------            ---------   ---------
Net loss                                                    (3.00)        (0.10)               (5.69)      (0.32)
   Goodwill amortization                                     0.10             -                 0.19           -
                                                        ---------       -------            ---------   ---------
Adjusted basic and diluted net loss per common share      $ (2.90)      $ (0.10)            $  (5.50)    $ (0.32)
                                                        =========       =======            =========   =========
</TABLE>

                                       7
<PAGE>

The following table sets forth common stock equivalents that are not included in
the  diluted  net loss per share  calculation  above  because  to do so would be
antidilutive for the three month period ended June 30, 2002:

In thousands, except per share data

                                      Shares            Range of Exercise Prices
                                      ------            ------------------------
Stock options                            336                  $1.42 - $2.02
Convertible preferred stock           10,267

5.   CAPITAL STOCK

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. 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.  Preferred
Stock  Effective  March 26, 2002,  each share of the Series B Preferred Stock is
convertible  into  approximately  9.2  shares  of the our  common  stock  and is
entitled  to  vote on  matters  submitted  to  holders  of  common  stock  on an
as-converted basis. At any time that the holders of the Series B Preferred Stock
hold more than 50% of our voting stock, a voluntary liquidation,  dissolution or
winding up of the Company must be approved by at least five of the seven members
of our board of directors.

6.  RESTRUCTURING AND IMPAIRMENT

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

During the second quarter of 2001, we recorded a restructuring  charge of $7,193
consisting  of expenses  associated  with a reduction  in our  workforce,  lease
obligations for vacated offices and a write down of abandoned  office  equipment
to its net realizable  value.  Additional  restructuring  accruals were recorded
during  2001.  As of June 30,  2002,  $1,690  remained  in  these  restructuring
accruals,  primarily  associated with abandoned lease  obligations and long term
severance agreements.

Included  in the  second  quarter  2001  restructuring  is $1,300  related  to a
severance  liability for our former Chief Executive Officer,  James M. Phillips.
At  June  30,  2002,  the  unpaid  liability  is  $500,  which  is to be paid in
installments  ending in  September  of 2003.  As further  consideration  for Mr.
Phillips'  separation  agreement,  we

                                       8
<PAGE>

forgave  a loan  from the  Company  to Mr.  Phillips  and the  related  interest
aggregating  $2,193,  which  is also  included  in the  second  quarter  of 2001
restructuring expense.

7.  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
in cash, of which $155 was paid  directly to a lessor for certain  capital lease
obligations,  $7,454 was deposited  into control  accounts for deferred  revenue
obligations  and  the  remainder,  $4,391,  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 $1,936.

We  recorded  an  extraordinary  gain of $901  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 2000
pooling of Interactive Pictures Corporation and bamboo.com.

The  $1,769  loss on the 2001  sale of the  remaining  residential  real  estate
related  assets  that were  unrelated  to the  pooling of  Interactive  Pictures
Corporation and bamboo.com was included in loss on the disposal of assets in the
accompanying statement of operations.

8.   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.


                                       9
<PAGE>


The following  presents,  for the periods indicated,  the charges that have been
included in the following captions:
<TABLE>
<CAPTION>
                                        Three months ended              Six months ended
                                              June 30,                       June 30,
                                       ------------------              ------------------
In thousands                             2001        2002                2001       2002
                                       -------     -------             -------    -------
                                                           (unaudited)
<S>                                    <C>         <C>                 <C>        <C>
Cost of revenues                       $   15      $    --             $  104     $   --
Sales and marketing                       641           38              1,358         91
Research and development                  251           --                539         --
General and administrative              1,912           --              2,035         --
                                       -------     -------             -------    -------
                                       $2,819      $    38             $4,037     $   91
                                       =======     =======             =======    =======
</TABLE>

9.  COMMITMENTS AND CONTINGENCIES

On October  28,  1998,  Minds-Eye-View,  Inc.  ("Minds-Eye")  and Mr. Ford Oxaal
("Oxaal") filed a lawsuit against us in the United States District Court for the
Northern District of New York. Minds-Eye alleged in its lawsuit that we breached
a duty of confidence to them, made  misrepresentations and misappropriated trade
secrets.  The court removed this action to arbitration  upon our motion,  and we
cross-claimed alleging various affirmative claims, including trade secret theft.
Minds-Eye and Oxaal filed a motion to dismiss the suit, and the court  dismissed
the lawsuit on May 19, 1999.  Although the lawsuit was  dismissed,  we proceeded
with the arbitration in Knoxville, Tennessee. The arbitration was stayed pending
resolution of the following lawsuit.

On May 20, 1999,  Oxaal filed a lawsuit  against us and certain of our customers
in the same court alleging that our technology infringes upon a patent claim for
360 degree  spherical  visual  technology held by him. Oxaal filed an additional
complaint  on  December  5, 2000 in the  United  States  District  Court for the
Northern  District of New York,  naming us as the sole defendant.  The complaint
states a single  claim for  relief,  alleging  infringement  of U.S.  Patent No.
6,157,385, which issued on December 5, 2000. This patent encompasses a method of
seamlessly combining at least two images into a spherical image.

On June  11,  2002,  we  reached  an out of  court  settlement  with  Oxaal  and
Minds-Eye.  As a  result  of the  settlement,  each  of  the  lawsuits  and  the
arbitration  proceeding  described above were dismissed and mutual releases have
been  executed.  Pursuant to the  settlement  agreement,  neither party admitted
liability or any wrong  doing.  We were granted a  non-exclusive  license  under
patents  and  pending  patents  conceived  by  Oxaal or in  which  Oxaal  has an
interest.  The license rights inure to the benefit of our customers with respect
to  their  purchases  from us and  also  inure to the  benefit  of our  business
partners with respect to their business  relations with us. We included the cost
of the license in property and equipment on the  accompanying  balance sheet. We
do not believe that the cost of the license in the current period or the future,
will have a material effect on our financial condition, results of operations or
cash flows.

                                       10
<PAGE>

During the quarter ending September 30, 2002, we expect to receive approximately
$1,400  in cash from a  previously  disclosed  favorable  jury  verdict  against
Infinite  Pictures  that found the  defendants  liable for  infringement  of our
patents  under the  doctrine of  equivalents  and awarding us $1,000 in damages,
plus interest and court costs.  We will record these proceeds as a one-time gain
in the quarter ending  September 30, 2002. The defendants  have filed for a writ
of certiorari  with the United States  Supreme Court in an effort to reverse the
lower  court's  findings  in our favor.  We believe the  defendants'  claims are
without  merit,  and we intend to vigorously  defend  against  these claims.  We
believe the ultimate  resolution  of the Supreme  Court  filings will not have a
material impact on our financial condition, results of operations or cash flows.

We are  subject to claims in the  ordinary  course of  business.  We believe the
ultimate  resolution  of these  matters  will not have a material  impact on our
financial condition, results of operations or cash flows.

Please  reference  Legal  Proceedings  in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 for disclosures  regarding a case undergoing
discovery.  If the plaintiffs in this case were to prevail in their action,  our
financial  condition,  results of operations  and cash flows could be materially
adversely affected.

10.  SEGMENTS

We  currently  have two  reportable  segments.  The  accounting  policies of the
segments  are  the  same as  those  of the  Company.  Management  evaluates  the
performance of the segments and allocates resources to them based on evaluations
of the segment's 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  the
performance or the allocation of resources to them.

Information about the reported segments is as follows:
<TABLE>
<CAPTION>
In thousands
                                                        Three months ended          Six months ended
                                                              June 30,                   June 30,
                                                        ------------------          ----------------
                                                         2001       2002             2001      2002
                                                        -------    -------          -------   ------
(unaudited)
Revenues:
<S>                                                     <C>        <C>              <C>      <C>
 Transaction services                                   $ 3,761    $ 3,802          $ 5,652  $ 7,377
 Immersive solutions                                      2,046      1,959            4,763    3,178
 Full service real estate                                 2,157         --            7,071       --
                                                        -------    -------          -------  -------
 Total                               .                  $ 7,964    $ 5,761          $17,486  $10,555
                                                        =======    =======          =======  =======

Cost of revenues:
 Transaction services                                   $ 1,504    $ 1,831          $ 3,149  $ 3,500
 Immersive solutions                                        915        355            1,666      811
 Full service real estate                                 1,018         --            3,456       --
                                                        -------    -------          -------  -------
 Total                                                  $ 3,437    $ 2,186          $ 8,271  $ 4,311
                                                        =======    =======          =======  =======
</TABLE>

In fiscal year 2001, we organized into two primary  business units:  Transaction
Services and Immersive Solutions.  In addition, as part of the sale of assets to
Homestore.com  during the first

                                       11
<PAGE>

quarter of 2001,  we no longer  directly  sell full service  virtual real estate
tours or iPIX keys to customers in the U.S.  residential real estate market.  We
have not generated  full service  virtual tour revenues  since the quarter ended
September 30, 2001 and we expect to generate  minimal  future  revenues from the
sale of full  service  virtual real estate  tours in the U.S.  residential  real
estate markets. Full service real estate is presented as a segment in 2001.

Immersive  solution  revenues include $489 and $487 from the sale of camera kits
for the  quarters  ended June 30, 2002 and June 30, 2001,  respectively,  with a
cost of $240 and $315.  Immersive  solution  revenues include $955 and $825 from
the sale of camera  kits for the six  months  ended  June 30,  2002 and June 30,
2001, respectively, with a cost of $583 and $565.

11.  EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

We adopted  Statement  of  Accounting  Standards  No. 142,  "Goodwill  and Other
Intangible  Assets"(FAS 142), effective January 1, 2002. Under FAS 142, goodwill
is no longer amortized, but reviewed for impairment annually, or more frequently
if certain indicators arise. Under the transitional  requirements,  we completed
an impairment test and no impairment loss resulted. See Note 4.

We also adopted FAS 144,  effective  January 1, 2002.  In August 2001,  the FASB
issued  FAS 144,  "Accounting  for the  Impairment  or  Disposal  of  Long-Lived
Assets." FAS 144 replaces FAS 121,  "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived  Assets to Be Disposed Of." The FASB issued FAS 144 to
establish a single accounting model,  based on the framework  established in FAS
121,  as FAS 121 did not  address  the  accounting  for a segment  of a business
accounted for as a discontinued  operation under APB 30,  "Reporting The Results
of  Operations  -- Reporting  The Effects of Disposal of a Segment of a Business
and Extraordinary  Unusual and Infrequently  Occurring Events and Transactions."
FAS 144 also resolves significant  implementation  issues related to FAS 121. We
determined  that the  adoption of FAS 144 did not have a material  impact on our
reported results of operations, financial position or cash flows.

In  February  2002,  the EITF  issued  Topic  Number  D-103,  "Income  Statement
Characterization   of  Reimbursements   Received  for   Out-of-Pocket   Expenses
Incurred," which is effective for financial  statements beginning after December
31,  2001.  Topic  Number  D-103  requires  that  reimbursements   received  for
out-of-pocket expenses incurred,  generally,  be characterized as revenue in the
statement of  operations.  We adopted  Topic  Number D-103 in the quarter  ended
March 31, 2002. The adoption of Topic Number D-103 had no material effect on our
reported results of operations, financial position or cash flows.

In June 2002,  the FASB issued SFAS No.  146,  "Accounting  for Exit or Disposal
Activities'"  ("SFAS 146"). SFAS 146 addresses  significant issues regarding the
recognition,  measurement,  and reporting of costs that are associated with exit
and disposal activities,  including restructuring  activities that are currently
accounted for under EITF No. 94-3,  "Liability  Recognition for Certain Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs Incurred in a  Restructuring)."  The scope of SFAS 146 also includes costs
related to  terminating a contract  that is not a capital lease and  termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit  arrangement that is not an ongoing benefit arrangement or
an  individual  deferred-compensation  contract.  SFAS 146 will be effective

                                       12
<PAGE>

for exit or disposal  activities  that are initiated after December 31, 2002 and
early application is encouraged. We will adopt SFAS 146 during the first quarter
ending March 31, 2003.  The  provisions of EITF No. 94-3 shall continue to apply
for an exit activity  initiated under an exit plan that met the criteria of EITF
No. 94-3 prior to the  adoption of SFAS 146.  The effect on adoption of SFAS 146
will change on a prospective basis the timing of when restructuring  charges are
recorded from a commitment date approach to when the liability is incurred.

12.    CONCENTRATIONS OF CREDIT RISK

Financial  instruments that potentially  subject us to a concentration of credit
risk consist of cash and cash  equivalents,  short term investments and accounts
receivable.  Cash and cash  equivalents and short term investments 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.

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

                          Three months ended           Six months ended
                            June 30, 2002               June 30, 2002
                            -------------               -----------------
Customer A                        23%                          22%
Customer B                        51%                          53%

During  the three  months  and six months  ended  June 30,  2001,  there were no
customers  which  represented  in excess of 10% of total  revenues.  At June 30,
2002,  Customer A holds a warrant for 16,134 shares of our common stock. At June
30, 2002,  Customer B represents  53% of accounts  receivable  and holds 100,000
shares of our Series B Preferred  Stock and a warrant  for 60,000  shares of our
common  stock.  All  amounts  due  from  Customer  B as of June 30,  2002,  were
collected  during  July  2002.  Our  principal  agreements  with  Customer A and
Customer B, expire on September 30, 2002 and  September 30, 2003,  respectively.
These  agreements are subject to extension,  amendment and  re-negotiation  from
time to time.

13. CONVERTIBLE PROMISSORY NOTE AND WARRANTS

On May 14,  2001,  we entered into a definitive  agreement  with Image  Investor
Portfolio,  a separate series of Memphis Angels, LLC ("Image") for an investment
by  Image  in the  Company.  Pursuant  to the  terms  of a  securities  purchase
agreement  with Image  dated as of May 14,  2001,  Image  purchased  our $10,000
convertible  senior secured note (the "Note") and received Tranche A and Tranche
B warrants to purchase up to $20,000 of our Series B Preferred Stock.

The warrants were issued in conjunction  with the convertible  promissory  note,
and  accordingly,  based on 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
convertible  promissory  note,  $10,000,  were allocated to the warrants and the
beneficial  conversion  feature based on a calculation  using the  Black-Scholes
model.  During the second quarter of 2001, we recorded $805 as interest  expense
related to the accretion of the  convertible  promissory  note to its face value
over the fifteen month period of the

                                       13
<PAGE>

Note.  During the third  quarter of 2001,  the  $10,000  Note and the  Tranche B
warrants were converted to preferred stock and accordingly we recorded $9,195 as
interest expense related to the accretion of the convertible  promissory note to
its face value.

At June 30,  2002,  there are two Tranche A warrants  ("Warrant  1" and "Warrant
2"),  issued to Paradigm  Capital  Partners and Memphis  Angels,  LLC, which are
outstanding.  Warrant 1 entitles the holder to 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  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.

14.  PURCHASE AGREEMENT-LEASEBACK

On May 31, 2002, we sold certain  assets  totaling  $2,494 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 $94 in  years  one and two and $21 in year  three.  The  lease  is
accounted for as a capital lease in accordance with SFAS No. 13, "Accounting for
Leases."

Item 2.   Management's  Discussion  and  Analysis  of  Financial  Condition  and
          Results of Operations

The  following  discussion  is  intended  to  assist  in the  understanding  and
assessment  of  significant  changes  and  trends  related  to  our  results  of
operations  and  our  financial   condition   together  with  our   consolidated
subsidiaries.  This discussion and analysis  should be read in conjunction  with
the consolidated  financial  statements and notes thereto included in our Annual
Report filed on Form 10-K.  Historical results and percentage  relationships set
forth in the statement of operations,  including trends which might appear,  are
not necessarily indicative of future operations.

OVERVIEW

In 2001, we restructured the Company around our higher gross margin  businesses.
The result is that we are focused on two  businesses:  (1) providing  outsourced
imaging services to facilitate online  transactions in the auction,  classifieds
and real estate markets and (2) providing  immersive  imaging  solutions for the
real estate,  security and observation  and visual  documentation  markets.  Our
products  and  services   include  the  capture,   processing,   management  and
distribution  of images and related  data.  Revenues  from online  auctions  and
classifieds are primarily  transaction  based. Our transaction  services involve
designing,  building and managing an image management  infrastructure as well as
leasing  spaces  from  state-of-the-art  co-location  facilities  with access to
telecommunications bandwidth. Since these services are capital intensive, a high
percentage  of the costs  associated  with  transaction  services  are fixed and
accordingly  the margins from  transaction  services are highly  dependent  upon
asset utilization.



Our immersive  technology  primarily generates revenues in two ways: licenses of
software  and re-sale of camera  equipment.  We utilize iPIX keys to license our
still immersive technology to capture and save a single immersive image. We also
offer  time-based  seat or user  licenses  which

                                       14
<PAGE>

permit an unlimited number of immersive images to be captured and saved within a
specific time period, usually a year. Our video immersive technology,  which may
be  off-line  or online,  may be  purchased  on a  per-unit  basis or a per-year
license.  We sell our immersive  products and services  primarily  into the real
estate,  security and observation and visual documentation  markets. The cost of
sales for our  licenses  is very  low.  The cost of sales for the sale of camera
equipment can be 50% to 75% of related revenues.

We also  provide  professional  services  to  customers  that  request  specific
customizations   or  integrations  of  our  products  and  services.   Providing
professional services is labor intensive, and our cost of sales for professional
service tends to be 50% to 60% of revenues.

Our real estate  business has changed over the past few years. In 2000, our real
estate focused revenues were generated from four primary  sources:  full service
virtual tours;  image management  services;  camera kits and immersive keys; and
professional  services.  We offered full service  virtual tours through  January
2001. A full service tour  includes  the  capture,  processing,  management  and
distribution  of real estate  images and related data for one price.  As part of
the sale of assets to a  subsidiary  of  Homestore.com  in January  2001,  we no
longer  directly  sell  full  service  virtual  tours to  customers  in the U.S.
residential real estate market.

Throughout  2001,  our real estate  focused  revenues were  generated from three
primary sources: image management services;  camera kits and immersive keys; and
other services. Our image management products and services were used in the real
estate  industry  primarily  to  associate  online  still  images with  for-sale
listings.  This  service is  offered  to  customers  under  license  agreements,
transaction  based  agreements  and  revenue  share  agreements  for real estate
properties around the world. Through January 12, 2002, we provided Homestore.com
with  processing,  hosting and  distribution  services and received  transaction
fees.

CRITICAL ACCOUNTING POLICIES

Financial  Reporting  Release  No.  60  issued by the  Securities  and  Exchange
Commission  ("SEC"),  requires all  registrants to discuss  critical  accounting
policies or methods used in the  preparation  of the financial  statements.  The
notes to the  consolidated  financial  statements  included in our Annual Report
filed on Form 10-K include a summary of the significant  accounting policies and
methods  used  in the  preparation  of our  consolidated  financial  statements.
Further, we have made a number of estimates and assumptions that affect reported
amounts of assets,  liabilities,  revenues and  expenses and actual  results may
differ from those  estimates.  Those areas that require the  greatest  degree of
management  judgment  include  adequacy of the allowance for doubtful  accounts,
reserves  for  obsolete  inventory,  valuations  of  intangible  assets  and the
estimated  costs  for  excess  facilities  related  to  lease  terminations  and
non-cancelable  lease  costs  utilized  in  satisfaction  of  outstanding  lease
obligations.

We believe that full consideration has been given to all relevant  circumstances
that we may be  subject  to, and our  financial  statements  accurately  reflect
management's best estimate of the results of operations,  financial position and
cash flows for the periods presented.
We believe the following represent our critical accounting policies:

Revenue Recognition

We  recognize   revenue  in  accordance   with  SOP  97-2,   "Software   Revenue
Recognition," and SAB

                                       15
<PAGE>

No. 101, "Revenue Recognition in Financial Statements."

Transaction  hosting  revenues are  recognized  as  transactions  are  performed
provided there was persuasive evidence of an arrangement,  the fee was fixed and
determinable and collection of the resulting receivable was probable.

Initial license fees are recognized when a contract exists, the fee is fixed and
determinable, software delivery has occurred and collection of the receivable is
deemed probable. If there are continuing obligations,  then we recognize revenue
ratably over the life of the contract.

Product  revenue is recognized  upon shipment or delivery  provided there are no
uncertainties  surrounding product acceptance or significant vendor obligations,
the fees are fixed and determinable and collection is considered probable.

Royalties  derived from desktop imaging products are recognized as revenues upon
receipt of the royalty sell-through reports from customers,  which are generally
in the  quarter  following  the quarter in which the sale by the  customer  took
place.

Revenues  from  the  sale of our  virtual  tour  products  are  recognized  upon
distribution to the Website designated by the customer.

Revenues  generated  from  professional  services are  recognized as the related
services are  performed.  When such  professional  services  are  combined  with
on-going transaction services or are deemed to be essential to the functionality
of the  delivered  software  product,  revenue  from the entire  arrangement  is
recognized  while the  transaction  services are  performed,  on a percentage of
completion  method or not until the contract is completed in accordance with SOP
81-1,   "Accounting   for   Performance   of   Construction-Type   and   Certain
Production-Type  Contracts,"  and  ARB  No.  45,  "Long-Term   Construction-Type
Contracts."

Allowances for Doubtful Accounts

Significant  management  judgments  and  estimates  must  be  made  and  used in
connection with  establishing the doubtful account  allowances in any accounting
period.  Management specifically analyzes accounts receivable and historical bad
debts, customer  concentrations,  customer  credit-worthiness,  current economic
trends and changes in our customer payment terms when evaluating the adequacy of
the allowance for doubtful  accounts.  Material  differences could result in the
amount and timing of expense  recorded if management  had different  judgment or
utilized different estimates.





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.

                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                         Three months ended          Six months ended
                                                               June 30,                   June 30,
                                                         ------------------          ----------------
                                                          2001        2002            2001      2002
                                                         ------      ------          ------    ------
                                                                          (unaudited)
Revenues:
<S>                                                        <C>        <C>              <C>       <C>
 Transaction services                                      47.2%      66.0%            32.3%     69.9%
 Immersive solutions                                       25.7       34.0             27.2      30.1
 Full service real estate tours                            27.1         --             40.4        --
                                                         ------     ------           ------    ------
Total revenues                                            100.0      100.0            100.0     100.0
                                                         ------     ------           ------    ------
Cost of revenues:
 Transaction services                                      18.9       31.8             18.0      30.1
 Immersive solutions                                       11.5        6.2              9.5       7.7
 Full service real estate tours                            12.8         --             19.8        --
                                                         ------     ------           ------    ------
Total cost of revenues                                     43.2       37.9             47.3      40.8
                                                         ------     ------           ------    ------
Gross profit                                               56.8       62.1             52.7      59.2
                                                         ------     ------           ------    ------
Operating expenses:
Sales and marketing                                        73.4       37.4             93.1      39.7
Research and development                                   22.2       21.4             25.9      23.8
General and administrative                                 96.6       15.5             66.5      17.0
Goodwill amortization                                       7.6         --              7.0        --
Restructuring and impairment                               90.3         --             58.3        --
Loss on disposal of assets                                   --         --             10.1        --
                                                         ------     ------           ------    ------
Total operating expenses                                  290.1       74.3            260.9      80.5
                                                         ------     ------           ------    ------
Loss from operations                                     (233.3)     (12.2)          (208.2)    (21.4)
Other income(expense), net                                (12.9)       0.2             (7.0)      0.5
                                                         ------     ------           ------    ------
Loss before extraordinary gain                           (246.2)     (12.0)          (215.2)    (20.9)
Extraordinary gain                                           --         --             (5.2)       --
                                                         ------     ------           ------    ------
Net loss                                                 (246.2)%    (12.0)%         (210.0)%   (20.9)%
                                                         ======     ======           ======    ======
</TABLE>


                                       17
<PAGE>


Quarter Ended June 30, 2002 Compared to the Quarter Ended June 30, 2001

Revenues. Total revenues decreased to $5.8 million in the quarter ended June 30,
2002,  compared to $8.0  million in quarter  ended June 30,  2001, a decrease of
$2.2 million or 28%.  This decrease was due to the  elimination  of full service
virtual tour revenues, which were $2.2 million during the quarter ended June 30,
2001 and zero during the quarter ended June 20, 2002.

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 U.S. residential real estate market.  Instead,  through January 12, 2002,
we provided  Homstore.com certain processing,  hosting and distribution services
and received  transaction  fees and royalties.  Throughout 2001, other than full
service  virtual  tours,  our real estate  focused  revenues were generated from
three primary  sources:  image  management  services;  camera kits and immersive
keys; and other services.

For the quarter  ended June 30, 2001,  revenues  included  $5.8 million from the
sale of our  technology  products and services and $2.2 million  related to full
service virtual real estate tours. We did not generate full service virtual tour
revenues after September 30, 2001 and expect to generate minimal future revenues
from the sale of full service virtual real estate tours in the U.S.  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 $2.2 million in the quarter ended June 30, 2002,  compared
to $3.4  million in the quarter  ended June 30, 2001, a decrease of $1.2 million
or 36%. Cost of revenues as a percentage of total  revenues  decreased to 38% in
the quarter  ended June 30, 2002 from 43% in the  quarter  ended June 30,  2001.
$1.0  million of the  decrease  was the result of our exit from the full service
virtual  tour real estate  business and $0.5 million of the decrease was related
to a change in the product mix of immersive  services,  software  and  hardware,
offset  partially  by an  increase  of $0.3  million  in the  cost of  providing
transaction services.

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 $2.2 million in the quarter ended June 30, 2002,
compared to $5.8 million in the quarter  ended June 30, 2001, a decrease of $3.6
million or 63%.  $2.6 million of this decrease was due primarily to our decision
to sell more of our products and services  through third parties and become less
reliant  upon a worldwide  direct  sales force.  As a result,  we  significantly
decreased our sales force and eliminated our field operations personnel. We also
eliminated $0.4 million of costs relating to sponsorship  fees,  advertising and
branding  expenses.  In  addition,  stock-based  expenses  recorded to sales and
marketing  expense,  decreased  from $0.6 million in the quarter  ended June 30,
2001, to $38 thousand in the quarter ended June 30, 2002.


                                       18
<PAGE>


Research and Development. Research and development expenses consist primarily of
personnel   costs   related  to  building  and   enhancing   our  digital  media
infrastructure  and  immersive  imaging  technology.  Research  and  development
expenses decreased to $1.2 million in the quarter ended June 30, 2002,  compared
to $1.8  million in the quarter  ended June 30, 2001, a decrease of $0.6 million
or 30%. 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
virtual tour real estate business.

General  and  Administrative.   General  and  administrative   expenses  consist
primarily of salaries  and related  benefits for  administrative  and  executive
staff, fees for outside professional services, bad debt expenses and other costs
associated  with being a public  company.  General and  administrative  expenses
decreased to $0.9 million in the quarter  ended June 30, 2002,  compared to $7.7
million in the quarter  ended June 30,  2001, a decrease of $6.8 million or 88%.
This decrease was due primarily to decreased bad debt expense ($3.1 million),  a
decrease in personnel and related costs ($1.1 million),  reduced fees related to
professional  services ($0.6 million) and our exit from the full service virtual
tour real estate  business ($0.1  million).  In addition,  stock-based  expenses
recorded to general and administrative  expense,  decreased from $1.9 million in
the quarter ended June 30, 2001, to zero in the quarter ended June 30, 2002.

Goodwill Amortization.  Goodwill amortization in 2001 was the result of goodwill
associated with corporate acquisitions during 2000. Amortization of goodwill was
$0.6  million in the  quarter  ended  June 30,  2001.  We adopted  FAS 142 as of
January 1, 2002 and as a result we no longer amortize goodwill.

Restructuring and Impairment. There were no restructuring and impairment charges
in the quarter  ended June 30,  2002,  compared  to $7.2  million in the quarter
ended June 30,  2001.  Restructuring  charges  were  primarily  associated  with
reductions of our workforce, outstanding obligations under non-productive leases
resulting from the  consolidation of certain offices and write-offs of abandoned
computers, office furniture and equipment. Included in the restructuring is $1.3
million  related  to a  severance  liability  with our  former  Chief  Executive
Officer,  James M.  Phillips.  At June 30,  2002 the  unpaid  liability  is $0.5
million,  which is to be paid in  installments  ending in September of 2003.  As
further consideration for Mr. Phillips' separation agreement, in 2001 we forgave
a loan from the Company to Mr.  Phillips  and the related  interest  aggregating
$2.2 million.

Interest  Expense.  Interest  expense was $14 thousand in the quarter ended June
30, 2002, compared to interest expense of $0.9 million in the quarter ended June
30, 2001.  This decrease is primarily  related to the 2001  non-cash  expense of
$0.8 million  related to the accretion of the promissory note issued to Image to
its face value and the weighted  average  amount of debt in each period.  During
May 2001, we borrowed $10 million which was repaid in full in September  2001 as
part of our sale of preferred stock.

Interest Income.  Interest income consists  primarily of interest earned on cash
and investments.  Interest income decreased to $25 thousand in the quarter ended
June 30, 2002,  compared to $61 thousand in the quarter ended June 30, 2001. The
decrease is primarily due to lower average cash and investment balances.

                                       19
<PAGE>

Other Income  (Expense).  Other expense  decreased to $1 thousand in the quarter
ended June 30,  2002,  compared to $154  thousand in the quarter  ended June 30,
2001.  The loss in the quarter  ended June 30, 2001 is primarily due to realized
losses on investments sold during the quarter.

Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001

Revenues. Total revenues decreased to $10.6 million in the six months ended June
30,  2002,  compared to $17.5  million in the six months  ended June 30, 2001, a
decrease of $6.9  million or 40%.  This  decrease  was due to a decrease of $7.1
million in sales of full service  virtual  tours.  For the six months ended June
30, 2001,  revenues of $17.5 million included $10.4 million from the sale of our
technology  products  and  services  and $7.1  million  related to full  service
virtual  real estate  tours.  We did not  generate  full  service  virtual  tour
revenues after September 30, 2001 and expect to generate minimal future revenues
from the sale of full service virtual real estate tours in the U.S.  residential
markets.  Transaction services revenues increased 30% or $1.7 million during the
first half of 2002 relative to the first half of 2001 and represent 70% of total
revenues  for the six  months  ended  June 30,  2002,  primarily  as a result of
increased  services related to on-line auctions.  Immersive  solutions  revenues
decreased  33% or $1.6  million  during the first half of 2002  relative  to the
first half of 2001,  primarily as a result of a decreased focus on certain lower
operating margin sales opportunities.

Cost of Revenues.  Cost of revenues  decreased to $4.3 million in the first half
of 2002,  compared to $8.3 million in the first half of 2001, a decrease of $4.0
million or 48%. Cost of revenues as a percentage of total revenues  decreased to
41% in the six months  ended June 30, 2002 from 47% in the six months ended June
30, 2001.  $3.5 million of the decrease was the result of our exit from the full
service  virtual tour real estate  business and $0.8 million of the decrease was
related to a change in the product mix of immersive software and hardware sales,
offset  partially  by an  increase  of $0.3  million  in the  cost of  providing
transaction services.

Sales and Marketing.  Sales and marketing  expenses decreased to $4.2 million in
the six months ended June 30, 2002,  compared to $16.3 million in the six months
ended June 30, 2001, a decrease of $12.1  million,  or 74%. $8.8 million of this
decrease  was due  primarily  to our  decision to sell more of our  products and
services  through third parties and become less reliant upon a worldwide  direct
sales  force.  As a result,  we  significantly  decreased  our  sales  force and
eliminated our field  operations  personnel.  We also eliminated $2.0 million of
costs  relating to  sponsorship  fees,  advertising  and branding  expenses.  In
addition,   stock-based  expenses  recorded  to  sales  and  marketing  expense,
decreased  from $1.4  million in the six  months  ended  June 30,  2001,  to $91
thousand in the six months ended June 30, 2002.

Research and Development.  Research and development  expenses  decreased to $2.5
million in the first half of 2002, compared to $4.5 million in the first half of
2001, a decrease of $2.0  million,  or 45%.  This  decrease was due primarily to
decreased personnel and related costs as a result of our reduction in work force
and the exit of the full service real estate business.

General and  Administrative.  General and  administrative  expenses decreased to
$1.8 million in the six months ended June 30, 2002, compared to $11.6 million in
the six months  ended June 30,

                                       20
<PAGE>

2001, a decrease of $9.8  million or 85%.  This  decrease  was due  primarily to
decreased bad debt expense ($3.2  million),  a decrease in personnel and related
costs ($2.8 million), reduced fees paid for professional services ($1.4 million)
and our exit from the full  service  virtual  tour real  estate  business  ($0.4
million).   In   addition,   stock-based   expenses   recorded  to  general  and
administrative expense, decreased from $2.0 million in the six months ended June
30, 2001, to zero in the six months ended June 30, 2002.

Goodwill Amortization.  Goodwill amortization in 2001 was the result of goodwill
associated with corporate acquisitions during 2000. Amortization of goodwill was
$1.2  million in the six months  ended June 30,  2001.  We adopted FAS 142 as of
January 1, 2002 and as a result we no longer amortize goodwill.

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

Loss on Disposal of Assets.  The loss during the first six months of 2001 on the
disposal of assets of $1.8 million is primarily 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.  During  the first half of 2001,  we  recorded a
restructuring  charge of $9.1 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 of $1.1 million to its 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 June 30, 2002 the
unpaid liability is $0.5 million,  which is to be paid in installments ending in
September  of  2003.  As  further  consideration  for Mr.  Phillips'  separation
agreement,  in 2001 we forgave a loan from the Company to Mr.  Phillips  and the
related interest aggregating $2.2 million.

Interest  Expense.  Interest expense decreased to $31 thousand in the six months
ended June 30,  2002,  compared to $1.0 million in the six months ended June 30,
2001. In the first half of 2001, we recorded a non-cash interest expense of $0.8
million related to the accretion of the promissory note to its face value.

Interest Income.  Interest income consists  primarily of interest earned on cash
and  investments.  Interest  income  decreased to $80 thousand in the six months
ended June 30, 2002,  compared to $174 thousand in the six months ended June 30,
2001. The decrease is primarily due to a lower cash and investment balances.

Other Income (Expense).  Other income increased to $4 thousand in the six months
ended June 30,  2002,  compared  to other  expense of $387  thousand  in the six
months  ended June 30, 2001.  The expense in the quarter  ended June 30, 2001 is
primarily due to realized losses on investments sold during the period.

                                       21
<PAGE>

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 option exercises.  At June 30, 2002,
we had $8.6 million of cash, restricted cash and short term investments.
<TABLE>
<CAPTION>

                                                                   Summary Consolidated Statement of Cash Flows
                                                                   Three months ended         Six months ended
                                                                        June 30,                  June 30,
                                                                   ------------------        ------------------
                                                                     2001       2002           2001       2002
                                                                   -------    -------        -------    -------
In thousands                                                                      (unaudited)

<S>                                                                <C>        <C>           <C>        <C>
Net cash used in operating activities.........................     $(9,123)   $  (754)      $(20,539)  $(3,874)
Net cash provided by (used in)investing activities............          32     (4,052)        14,423    (4,574)
Net cash provided by financing activities.....................       8,013      2,037          7,614     2,025
Effect of exchange rate changes on cash.......................         (20)        28         (1,200)      (21)
                                                                   -------    -------       --------   -------
Net increase (decrease) in cash and cash equivalents..........      (1,098)    (2,741)           298    (6,444)
Cash and cash equivalents, beginning of period................       6,718      7,400          5,322    11,103
                                                                   -------    -------       --------   -------
Cash and cash equivalents, end of period......................     $ 5,620    $ 4,659       $  5,620   $ 4,659
                                                                   =======    =======       ========   =======
</TABLE>


Net cash used in operating  activities was $3.9 million for the six months ended
June 30, 2002 and $20.5 million for the six months ended June 30, 2001. Net cash
used for operating  activities in each of these periods is primarily a result of
net  losses.  Our net  loss for the six  months  ended  June  30,  2002 and 2001
included  non-cash charges for $1.5 million and $3.1 million,  respectively,  of
depreciation and  amortization and $0.1 million and $6.2 million,  respectively,
of  non-cash  stock  based and other  compensation.  Our net  losses for the six
months  ended June 30,  2002 and 2001 also  included  non-cash  amortization  of
deferred revenues of $1.1 million and $0.5 million,  respectively.  Net of these
non-cash amounts,  our net losses reduced cash by $1.7 million in the six months
ended June 30, 2002, an  improvement  from $27.9 million in cash used in the six
months ended June 30, 2001.

Also included in net cash used in operating  activities for the six months ended
June 30, 2002, were the following:

-         an increase in  receivables  due  primarily to  increased  services to
          on-line auction clients ($0.6 million);
-         a decrease  in  accounts  payable  primarily  related to  payments  of
          year-end accruals from 2001 ($0.3 million); and
-         a decrease  in accrued  expenses  primarily  related  to  payments  of
          restructuring  accruals  from 2001 and  payments of prior  obligations
          under extended terms ($1.2 million).





Net cash used in operating  activities  was $0.8  million for the quarter  ended
June 30,  2002.  Net cash  used  for  operating  activities  in the  quarter  is
primarily  a result  of the $0.7  million  in net  losses.  Our net loss for the
quarter  ended June 30,  2002  included  non-cash  charges  for $0.8  million of
depreciation partially offset by non-cash deferred revenues of $0.5 million. Net
of these  non-cash  amounts,  our net losses reduced cash by $0.5 million in the
quarter ended June 30, 2002, a sequential  improvement from $1.3 million used in
the quarter ended March 31, 2002.

Net cash provided by (used in) investment  activities was ($4.6) million for the
six months  ended June 30, 2002 and $14.4  million for the six months ended June
30, 2001. Net cash provided by

                                       22
<PAGE>

(used in) investing  activities in the first half of 2002 was primarily  related
to the  acquisition of computer  software and hardware and the purchase of short
term investments. On July 24, 2002, we received $1.4 million in cash from a sale
lease-back  transaction of assets  acquired in the first half of 2002. We do not
currently expect any significant  acquisitions of computer hardware and software
throughout the remainder of 2002.

Net cash  provided by financing  activities  was $2.0 million for the six months
ended June 30, 2002 and $7.6 million for the six months ended June 30, 2001. The
cash  provided by financing  activities  in the first half of 2002 was primarily
related  to  capital  lease  obligations.  The net cash  provided  by  financing
activities for the first half of 2001 was due primarily to the proceeds from the
convertible  note, which was converted into preferred stock in the quarter ended
September 30, 2001.

Management  believes we have sufficient cash resources to meet our funding needs
for at least the next twelve months. We finished the quarter ended June 30, 2002
with  $8.6  million  in  cash,  restricted  cash  and  short  term  investments.
Management's  focus in 2002 is to reduce  our cash  requirements  to  manageable
levels  and focus our  operations  on  profitability.  Our  operating  expenses,
however,  are  primarily  based  on  anticipated  revenue  levels.  Since a high
percentage  of those  expenses  are  relatively  fixed,  a delay in revenue from
licenses or transactions could cause significant variations in operating results
from quarter to quarter, and we may continue to sustain losses as a result.

Our long term strategy  remains  unchanged.  We will continue to make  necessary
capital  investments as well as investments in research and  development for all
segments and will invest in the expansion of the online  auction and  classified
businesses and in the development of new security and  observation  products and
services during this economic downturn.

RECENT ACCOUNTING PRONOUNCEMENTS

We adopted  Statement  of  Accounting  Standards  No. 142,  "Goodwill  and Other
Intangible  Assets"(FAS 142), effective January 1, 2002. Under FAS 142, goodwill
is no longer amortized, but reviewed for impairment annually, or more frequently
if certain indicators arise. Under the transitional  requirements,  we completed
an impairment test and no impairment loss resulted.


                                       23
<PAGE>


We also adopted FAS 144,  effective  January 1, 2002.  In August 2001,  the FASB
issued  FAS 144,  "Accounting  for the  Impairment  or  Disposal  of  Long-Lived
Assets." FAS 144 replaces FAS 121,  "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived  Assets to Be Disposed Of." The FASB issued FAS 144 to
establish a single accounting model,  based on the framework  established in FAS
121,  as FAS 121 did not  address  the  accounting  for a segment  of a business
accounted for as a discontinued  operation under APB 30,  "Reporting The Results
of  Operations  -- Reporting  The Effects of Disposal of a Segment of a Business
and Extraordinary  Unusual and Infrequently  Occurring Events and Transactions."
FAS 144 also resolves significant  implementation  issues related to FAS 121. We
determined  that the  adoption of FAS 144 did not have a material  impact on our
reported results of operations, financial position or cash flows.

In  February  2002,  the EITF  issued  Topic  Number  D-103,  "Income  Statement
Characterization   of  Reimbursements   Received  for   Out-of-Pocket   Expenses
Incurred," which is effective for financial  statements beginning after December
31,  2001.  Topic  Number  D-103  requires  that  reimbursements   received  for
out-of-pocket expenses incurred,  generally,  be characterized as revenue in the
statement of  operations.  We adopted  Topic  Number D-103 in the quarter  ended
March 31, 2002. The adoption of Topic Number D-103 had no material effect on our
reported results of operations, financial position or cash flows.

In June 2002,  the FASB issued SFAS No.  146,  "Accounting  for Exit or Disposal
Activities'"  ("SFAS 146"). SFAS 146 addresses  significant issues regarding the
recognition,  measurement,  and reporting of costs that are associated with exit
and disposal activities,  including restructuring  activities that are currently
accounted for under EITF No. 94-3,  "Liability  Recognition for Certain Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs Incurred in a  Restructuring)."  The scope of SFAS 146 also includes costs
related to  terminating a contract  that is not a capital lease and  termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit  arrangement that is not an ongoing benefit arrangement or
an  individual  deferred-compensation  contract.  SFAS 146 will be effective for
exit or disposal activities that are initiated after December 31, 2002 and early
application  is  encouraged.  We will adopt  SFAS 146  during the first  quarter
ending March 31, 2003.  The  provisions of EITF No. 94-3 shall continue to apply
for an exit activity  initiated under an exit plan that met the criteria of EITF
No. 94-3 prior to the  adoption of SFAS 146.  The effect on adoption of SFAS 146
will change on a prospective basis the timing of when restructuring  charges are
recorded from a commitment date approach to when the liability is incurred.

INFLATION

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

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk sensitive  instruments do not subject us to material market risk
exposures.


                                       24

<PAGE>


                           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  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 annual report on Form 10-K filed with the SEC on March 29, 2002.

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

On October  28,  1998,  Minds-Eye-View,  Inc.  ("Minds-Eye")  and Mr. Ford Oxaal
("Oxaal") filed a lawsuit against us in the United States District Court for the
Northern District of New York. Minds-Eye alleged in its lawsuit that we breached
a duty of confidence to them, made  misrepresentations and misappropriated trade
secrets.  The court removed this action to arbitration  upon our motion,  and we
cross-claimed alleging various affirmative claims, including trade secret theft.
Minds-Eye and Oxaal filed a motion to dismiss the suit, and the court  dismissed
the lawsuit on May 19, 1999.  Although the lawsuit was  dismissed,  we proceeded
with the arbitration in Knoxville, Tennessee. The arbitration was stayed pending
resolution of the following lawsuit.

On May 20, 1999,  Oxaal filed a lawsuit  against us and certain of our customers
in the same court alleging that our technology infringes upon a patent claim for
360 degree  spherical  visual  technology held by him. Oxaal filed an additional
complaint  on  December  5, 2000 in the  United  States  District  Court for the
Northern  District of New York,  naming us as the sole defendant.  The complaint
states a single  claim for  relief,  alleging  infringement  of U.S.  Patent No.
6,157,385, which issued on December 5, 2000. This patent encompasses a method of
seamlessly combining at least two images into a spherical image.

On June  11,  2002,  we  reached  an out of  court  settlement  with  Oxaal  and
Minds-Eye.  As a  result  of the  settlement,  each  of  the  lawsuits  and  the
arbitration  proceeding  described above were dismissed and mutual releases have
been  executed.  Pursuant to the  settlement  agreement,  neither party admitted
liability or any wrong  doing.  We were granted a  non-exclusive  license  under
patents  and  pending  patents  conceived  by  Oxaal or in  which  Oxaal  has an
interest.  The license rights inure to the benefit of our customers with respect
to  their  purchases  from us and  also  inure to the  benefit  of our  business
partners with respect to their business  relations with us. We included the cost
of the license in property and equipment on the  accompanying  balance sheet. We
do not believe that the cost of the license in the current period or the future,
will have a material effect on our financial condition, results of operations or
cash flows.

During the quarter ending September 30, 2002, we expect to receive approximately
$1,400  in cash from a  previously  disclosed  favorable  jury  verdict  against
Infinite  Pictures  that found the

                                       25
<PAGE>

defendants  liable  for  infringement  of our  patents  under  the  doctrine  of
equivalents and awarding us $1,000 in damages, plus interest and court costs. We
will record these  proceeds as a one-time gain in the quarter  ending  September
30, 2002.  The  defendants  have filed for a writ of certiorari  with the United
States  Supreme Court in an effort to reverse the lower court's  findings in our
favor.  We believe the  defendants'  claims are without merit,  and we intend to
vigorously  defend against these claims.  We believe the ultimate  resolution of
the  Supreme  Court  filings  will not have a material  impact on our  financial
condition, results of operations or cash flows.

We are  subject to claims in the  ordinary  course of  business.  We believe the
ultimate  resolution  of these  matters  will not have a material  impact on our
financial condition, results of operations or cash flows.

Please  reference  Legal  Proceedings  in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 for disclosures  regarding a case undergoing
discovery.  If the plaintiffs in this case 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

                  None.

Item 3.       Defaults Upon Senior Securities

                  None.

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

On May 30, 2002 we held the annual meeting of our  stockholders to vote upon the
following  proposals.  First, the  stockholders  voted to elect two directors to
serve until the 2005 annual  meeting of  stockholders.  Our common  stockholders
elected  Michael D.  Easterly to the Board of  Directors  by a vote of 5,120,983
for, 0 against,  and 66,893 abstentions and broker non-votes.  Thomas M. Garrott
was elected to the Board of Directors by our Series B Preferred  stockholders by
a  vote  of  10,163,523,  as-converted  common  shares  for,  0  against  and  0
abstentions and broker non-votes.

Laban P. Jackson,  Andrew P. Seamons and Donald W. Strickland  continue to serve
as members of the board of  directors  until  their  terms  expire at the annual
meeting of stockholders in 2004. Gregory S. Daily and David M. Wilds continue to
serve as members  of the board of  directors  until  their  terms  expire at the
annual meeting of stockholders in 2003.

Second,  the  stockholders  approved  and adopted the  amendment to the restated
certificate of incorporation to reduce the number of shares of common stock that
iPIX is  authorized  to  issue  from  150  million  to 50  million  by a vote of
15,301,858  as-converted common shares for, 42,299 against and 7,254 abstentions
and broker non-votes.

Finally,  the stockholders  ratified the 2001 Equity Incentive Plan by a vote of
11,549,296   as-converted   common  shares  for,   336,756  against  and  25,426
abstentions and broker non-votes.

                                       26
<PAGE>

Item 5.        Other Information

                  None.

Item 6.        Exhibits And Reports On Form 8-K

                  a)  Exhibits

                    Exhibit 10.1 Purchase Agreement No. 3 between the Company
                                 and eBay Inc. dated May 31, 2002

                    Exhibit 99.1 Certification  pursuant to 18 U.S.C.  Section
                                 1350,  as adopted  pursuant  to Section 906 of
                                 the Sarbanes-Oxley Act of 2002

                    Exhibit 99.2 Certification  pursuant to 18 U.S.C.  Section
                                 1350,  as adopted  pursuant  to Section 906 of
                                 the Sarbanes-Oxley Act of 2002

                  b)  Reports On Form 8-K

                     None.

                          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: August 13, 2002               INTERNET PICTURES CORPORATION
                                            (Registrant)


                                        /s/ Paul Farmer
                                            ---------------------------
                                            Paul Farmer
                                            Authorized Officer
                                            Chief Financial Officer and
                                            Chief Accounting Officer

                                       27
<PAGE>


                          INTERNET PICTURES CORPORATION

                         INDEX TO EXHIBITS FOR FORM 10-Q

                         FOR QUARTER ENDED JUNE 30, 2002



                    EXHIBIT NO.            EXHIBIT DESCRIPTION

                    Exhibit 10.1 Purchase  Agreement No. 3 between the Company
                                 and eBay Inc. dated May 31, 2002

                    Exhibit 99.1 Certification  pursuant to 18 U.S.C.  Section
                                 1350,  as adopted  pursuant  to Section 906 of
                                 the Sarbanes-Oxley Act of 2002

                    Exhibit 99.2 Certification  pursuant to 18 U.S.C.  Section
                                 1350,  as adopted  pursuant  to Section 906 of
                                 the Sarbanes-Oxley Act of 2002



                                       28
<PAGE>
EXHIBIT 10.1

                      PURCHASE AGREEMENT No. 3 - Leaseback


         THIS  AGREEMENT  dated  as of May  31,  2002  by and  between  INTERNET
PICTURES  CORPORATION,  a Delaware  corporation,  having its principal  place of
business at 1009 Commerce Park Drive, Oak Ridge,  Tennessee  37830,  hereinafter
called SELLER and EBAY INC. a Delaware  corporation,  having its principal place
of business at 2145 Hamilton Avenue, San Jose,  California,  95125,  hereinafter
called BUYER.

         All  capitalized  terms used in this Agreement  shall have the meanings
ascribed  to them in the Visual  Content  Services  Agreement,  effective  as of
September 7, 2001,  Amendment No. 1 to the Visual  Content  Services  Agreement,
effective  January 1, 2001, and Amendment No. 2 to the Visual  Content  Services
Agreement,  effective  as of the date  hereof,  in each case by and  between the
SELLER and BUYER (collectively, the "VCSA Agreement").

         WITNESSETH,  that in  consideration  of the mutual  undertaking  herein
contained, the parties agree as follows:

1.       SALE.

         SELLER  agrees to sell and BUYER  agrees to  purchase  from  SELLER the
equipment  listed on Schedule A-1 attached hereto and  incorporated by reference
herein   together  with  all  additions,   attachments,   parts  or  accessories
incorporated  or attached  therein or associated  therewith  (referred to as the
"Equipment") in accordance with the terms and conditions specified herein.

2.       PURCHASE PRICE.

         BUYER shall  purchase the  Equipment  for an amount  equivalent  to Two
Million, Four Hundred Ninety-four Thousand, One Hundred Twenty-Eight Dollars and
Twenty  Cents  ($2,494,128.20).  SELLER  shall  provide  BUYER  with  all of the
purchase  documentation  associated with SELLER's purchase of the Equipment from
the  vendor(s)  (the  "Equipment  Vendor(s)"),  including but not limited to the
purchase documentation, invoices, and bill of sale provided to SELLER. If SELLER
has not yet paid the  Equipment  Vendor(s)  from whom SELLER is  purchasing  the
Equipment,  BUYER  shall  pay said  Purchase  Price  directly  to the  Equipment
Vendor(s), unless otherwise agreed.

3.       DELIVERY.

         SELLER shall  deliver and BUYER shall accept  delivery of the Equipment
on the Closing Date at a location designated by BUYER prior to or on the Closing
Date.  Irrespective of any other provision hereof, SELLER shall bear all risk of
damage  from fire,  the  elements  or  otherwise  until the full  payment of the
purchase price is paid.

4.       CLOSING DATE.

         The Closing shall take place on May 31, 2002.

5.       LEASEBACK.

         This  Agreement is contingent  upon SELLER  leasing the Equipment  from
BUYER pursuant to Lease Schedule No. 3 to the Master Lease Agreement dated as of
the date hereof between SELLER, as Lessee,  and BUYER, as Lessor  (collectively,
the "Lease").

         SELLER  represents  and warrants to BUYER that the  Equipment  has been
installed, tested, inspected and accepted by SELLER from the Equipment Vendor(s)
and that the Equipment is in good working order.


6.       MAINTENANCE/WARRANTIES.

         (a) SELLER  warrants  that  either  (i) the  Equipment  is under  "new"
equipment  warranty  from  the  manufacturer  or (ii)  the  Equipment  has  been
continuously  under  a  maintenance  contract  and  will  be  eligible  for  the
manufacturer's maintenance agreement as of the Closing Date and all Equipment is
at current manufacturer release, revision and/or engineering change levels.

         (b) SELLER  shall and hereby  does  assign to BUYER the  benefit of all
rights  applicable to the Equipment in connection  with  warranties,  servicing,
training,  patent and copyright indemnities and the like, including the right to
use and possess licensed products  associated with the Equipment provided by the
manufacturer or Equipment Vendor(s).


7.       SELLER REPRESENTATIONS.

(a) SELLER is a corporation duly existing and in good standing under the laws of
the state of its incorporation and qualified and licensed to do business in, and
is in good  standing  in, any state in which the conduct of its  business or its
ownership of property requires that it be so qualified.

(b) SELLER is duly  authorized to execute,  deliver and perform its  obligations
under this Agreement and all corporate  actions required on its part for the due
execution,  delivery and performance of the transaction contemplated herein have
been duly and effectively taken.

(c) SELLER's execution,  delivery, and performance of its obligations under this
Agreement  are not in conflict  with nor  constitute  a breach of any  provision
contained in SELLER's  Certificate  of  Incorporation  or Bylaws,  nor will they
constitute an event of default under any agreement to which SELLER is a party or
by which SELLER is bound.

(d) Each item of  Equipment  is owned by SELLER  free and clear of any liens and
encumbrances  of any  kind  or  description.  Upon  purchase  of  the  Equipment
hereunder, BUYER will acquire good and marketable title in and to the Equipment.
Each item of Equipment (i) is currently  located in the State of California  and
(ii) has at all times been located in the State of  California  during  SELLER's
ownership of the Equipment.  The Equipment purchased hereunder is intended to be
used solely to provide the  Services.  The SELLER has paid in full the Equipment
Vendor(s)  from whom SELLER  purchased  the  Equipment.  At the time of SELLER's
purchase  of the  Equipment,  SELLER  paid in full all  California  sales or use
taxes, as applicable, associated with the Equipment.

         (e) Each item of Equipment is in good  condition  and repair  (ordinary
wear and tear excepted) and is adequate and appropriate for the uses to which it
is currently being put by SELLER.

All  representations  and warranties  herein shall survive the execution of this
Agreement and the purchase of the Equipment.


8.       TITLE.

         Title shall pass from SELLER to BUYER on the date BUYER tenders payment
of the purchase  price.  SELLER shall  provide  BUYER with a Bill of Sale in the
form of Schedule B attached  hereto and  incorporated  by reference  herein upon
payment of the full Purchase Price to evidence passage of title to the Equipment
from SELLER to BUYER free and clear of all claims, liens and encumbrances.

9.       TAXES AND TAX BENEFITS.

         SELLER  hereby  indemnifies  and holds BUYER  harmless for any sales or
other tax arising from the transaction  between the Equipment Vendor and SELLER.
BUYER hereby agrees that with respect to Equipment,  SELLER shall be entitled to
all the tax  benefits  that are  afforded  to an owner of  equipment  under  the
Internal Revenue Code of 1986 (the "Code").


10.      NOTICES.

         Any  notice  provided  for  herein  shall  be in  writing  and  sent by
registered or certified mail, postage prepaid,  addressed to the party for which
it is intended at the address set forth in the first paragraph of this Agreement
or to such other  address as either  party  shall from time to time  indicate in
writing,  and said notice shall be effective upon receipt or three days from the
date of mailing, whichever occurs first.

11.      COVENANTS.

(a)            Upon request by BUYER, SELLER shall assist BUYER in obtaining all
               licenses  necessary or useful to operate the Services  (including
               but not limited to executing any consents  and/or  assignments to
               transfer  and/or  effectuate  such  license(s)  to  BUYER  for no
               additional incremental fees.

(b)            BUYER covenants that it shall pay any applicable California sales
               taxes arising from the sale of the Equipment to BUYER pursuant to
               this Agreement.

12.      MISCELLANEOUS.

         (a) This  constitutes  the entire  Agreement  between  SELLER and BUYER
solely  with  respect  to  the  purchase  and  sale  of  the  Equipment  and  no
representation or statement not contained herein shall be binding upon SELLER or
BUYER as a warranty or otherwise, unless in writing and executed by the party to
be bound thereby.

         (b) This  Agreement  shall be binding  upon and inure to the benefit of
the parties hereto and their respective successors and assigns.

         (c) This  Agreement  shall be governed by and  construed in  accordance
with the laws of the State of California, including all matters of construction,
validity, performance and enforcement. Any disputes arising under this Agreement
may be brought in the state courts and the federal  courts  located in San Jose,
California,  and the parties  hereby  consent to the personal  jurisdiction  and
venue of these courts.

         (d) This  Agreement is subject to acceptance by BUYER at its offices in
San Jose, California, and shall only become effective on the date thereof.

         (e) This  Agreement may be executed in multiple  counterparts,  each of
which shall be deemed to be an original and of equal force and effect.

         (f) SELLER agrees to and shall  indemnify and hold BUYER  harmless from
and against all claims,  liens,  costs, loss, expenses or damages arising out of
the  breach by  SELLER of its  obligations  or out of any  misrepresentation  by
SELLER, hereunder.

         (g)  THE  PARTIES  HERETO  EACH  HEREBY  WAIVE  TO THE  FULLEST  EXTENT
PERMITTED  BY LAW ANY  RIGHT  TO A TRIAL  BY JURY IN ANY  ACTION  OR  PROCEEDING
ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT.

                                   [Remainder of page intentionally left blank.]


<PAGE>


         IN WITNESS  WHEREOF,  the  parties  have caused  this  Agreement  to be
executed and do each hereby warrant and represent that its respective  signatory
whose signature appears below has been and is on the date of this Agreement duly
authorized  by all necessary and  appropriate  corporate  action to execute this
Agreement.

INTERNET PICTURES CORPORATION                                 EBAY INC.,
as Seller                                                     as Buyer



By:      /s/ Paul Farmer                              By:      /s/Thomas Keevan
   ----------------------------                          -----------------------

Title:   Chief Financial Officer                      Title:   Vice President
      --------------------------                            --------------------

Date:    May 31, 2002                                 Date:    May 31, 2002
     ---------------------------                           ---------------------





<PAGE>
EXHIBIT 99.1
                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly  Report of Internet  Pictures  Corporation
(the  "Company")  on Form 10-Q for the period ending June 30, 2002 as filed with
the Securities  and Exchange  Commission on the date hereof (the  "Report"),  I,
Donald Strickland,  Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the  Sarbanes-Oxley Act of
2002, that:

          (1) The Report fully complies with the  requirements  of section 13(a)
          or  15(d)  of  the  Securities  Exchange  Act of  1934;  and  (2)  The
          information  contained in the Report fairly presents,  in all material
          respects,  the  financial  condition  and results of  operation of the
          Company.

  /s/ Donald Strickland
  ---------------------
  Donald Strickland
  Chief Executive Officer
  August 13, 2002


<PAGE>
EXHIBIT 99.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly  Report of Internet  Pictures  Corporation
(the  "Company")  on Form 10-Q for the period ending June 30, 2002 as filed with
the Securities  and Exchange  Commission on the date hereof (the  "Report"),  I,
Paul Farmer,  Chief Financial  Officer of the Company,  certify,  pursuant to 18
U.S.C.  ss. 1350, as adopted  pursuant to ss. 906 of the  Sarbanes-Oxley  Act of
2002, that:

          (1) The Report fully complies with the  requirements  of section 13(a)
          or  15(d)  of  the  Securities  Exchange  Act of  1934;  and  (2)  The
          information  contained in the Report fairly presents,  in all material
          respects,  the  financial  condition  and results of  operation of the
          Company.

  /s/ Paul Farmer
  ---------------
  Paul Farmer
  Chief Financial Officer
  August 13, 2002