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 September 30, 2004           Commission File No. 000-26363

                                IPIX 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 [ ]

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

21,529,831 shares of $0.001 par value common stock outstanding as of November 3,
2004.



                                       1
<PAGE>


                                IPIX CORPORATION
                                    FORM 10-Q
                    FOR THE QUARTER ENDED SEPTEMBER 30, 2004
                                      INDEX


  PART I -- FINANCIAL INFORMATION.........................................     3

     Item 1. Condensed Consolidated Financial Statements (unaudited)......     3

     Item 2. Management's Discussion and Analysis of Financial Condition
             and Results of Operations....................................    13

     Item 3. Quantitative and Qualitative Disclosures About Market Risk...    21

     Item 4. Controls and Procedures......................................    22

  PART II -- OTHER INFORMATION............................................    23

     Item 1. Legal Proceedings............................................    23

     Item 2. Changes In Securities And Use Of Proceeds....................    23

     Item 3. Defaults Upon Senior Securities..............................    24

     Item 4. Submission Of Matters To A Vote Of Security Holders..........    24

     Item 5. Other Information............................................    24

     Item 6. Exhibits And Reports On Form 8-K.............................    24

  Signatures..............................................................    25

  Exhibit Index...........................................................    26






                                       2
<PAGE>


PART I--FINANCIAL INFORMATION

Item 1.     Condensed Consolidated Financial Statements

                                IPIX CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<S>                                                                                                     <C>            <C>

                                                                                                        December 31,  September 30,
                                                                                                            2003          2004
                                                                                                      --------------  --------------
                                                                                                             (1)       (unaudited)
 (In thousands)

 ASSETS
 Cash and cash equivalents.........................................................................     $    10,241  $     18,064
 Restricted short term investments.................................................................           1,100           800
 Short term investments............................................................................             331           645
 Accounts receivable, net..........................................................................             261           824
 Inventory, net....................................................................................             398         1,311
 Prepaid expenses and other current assets.........................................................           1,523         1,527
                                                                                                        -----------  ------------
       Total current assets........................................................................          13,854        23,171
 Computer hardware, software and other, net........................................................           1,578           974
 Restricted cash and other long term assets........................................................             852           718
                                                                                                        -----------  ------------
       Total assets................................................................................     $    16,284  $     24,863
                                                                                                        ===========  ============

 LIABILITIES AND STOCKHOLDERS' EQUITY
 CURRENT LIABILITIES:
 Accounts payable..................................................................................     $       612  $      1,343
 Accrued liabilities...............................................................................           3,342         3,778
 Deferred revenue..................................................................................              76            92
 Current portion of obligations under capital leases...............................................             608           112
                                                                                                        -----------  ------------
       Total current liabilities...................................................................           4,638         5,325
 Other long term liabilities.......................................................................             181            --
                                                                                                        -----------  ------------
          Total liabilities........................................................................           4,819         5,325
                                                                                                        -----------  ------------

 STOCKHOLDERS' EQUITY:
 Preferred stock (Aggregate liquidation value: $23,716 in 2003 and $7,208 in 2004).................               1            --
 Common stock......................................................................................               9            21
 Class B common stock..............................................................................              --            --
 Additional paid-in capital........................................................................         515,186       533,281
 Accumulated deficit...............................................................................        (503,731)     (513,764)
                                                                                                        ------------ -------------
       Total stockholders' equity..................................................................          11,465        19,538
                                                                                                        -----------  ------------

       Total liabilities and stockholders' equity..................................................     $    16,284  $     24,863
                                                                                                        ===========  ============
</TABLE>


----------------------

(1) The December  31, 2003  balances  were  derived  from the audited  financial
statements.

See accompanying notes to the unaudited condensed consolidated financial
statements.


                                       3
<PAGE>

                                IPIX CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<S>                                                                         <C>             <C>             <C>            <C>

                                                                              Three months ended               Nine months ended
                                                                                 September 30,                   September 30,
                                                                         ----------------------------       ------------------------
                                                                              2003            2004             2003           2004
                                                                         --------------  --------------     -------------- ---------
                   (In thousands, except per share data)                          (unaudited)                      (unaudited)


    Revenue:
    Security.........................................................       $     146       $     724       $    237       $  1,130
    AdMission........................................................           5,811             276         17,471            810
    InfoMedia........................................................             666             741          1,858          1,824
                                                                            ---------       ---------       --------    -----------
       Total revenue.................................................           6,623           1,741         19,566          3,764
                                                                            ---------       ---------       --------    -----------

    Cost of revenue:
    Security.........................................................              75             525            161            814
    AdMission........................................................           1,876             570          5,426          1,808
    InfoMedia........................................................             400             302          1,025            896
                                                                            ---------       -----------     ----------  -----------
       Total cost of revenue.........................................           2,351           1,397          6,612          3,518
                                                                            ---------       ---------       --------       --------

       Gross profit..................................................           4,272             344         12,954            246
                                                                            ---------       ---------       --------       --------

    Operating expenses:
    Sales and marketing..............................................           1,899           1,625          5,704          4,620
    Research and development.........................................           1,198             952          3,626          2,874
    General and administrative.......................................           1,001           1,220          2,664          2,837
                                                                            ---------       ---------       --------       --------
       Total operating expenses......................................           4,098           3,797         11,994         10,331
                                                                            ---------       ---------       --------       --------

    Income (loss) from operations....................................             174          (3,453)           960        (10,085)
    Other............................................................             (20)             32           (103)            52
                                                                            ----------      ---------       ---------      --------

    Net income (loss)................................................             154          (3,421)           857        (10,033)
    Preferred stock dividends........................................            (454)           (133)        (1,345)          (757)
                                                                            ----------      ---------       --------       --------

    Net loss available to common stockholders........................       $    (300)      $  (3,554)      $   (488)      $(10,790)
                                                                            ==========      =========       =========      ========

    Loss per common share, basic and diluted ........................       $   (0.04)      $   (0.18)      $  (0.07)      $  (0.73)
    Weighted average common shares, basic and diluted................           7,613          19,625          7,147         14,807
</TABLE>


See accompanying notes to the unaudited condensed consolidated financial
statements.


                                       4
<PAGE>


                                IPIX CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<S>                                                                                                        <C>         <C>

                                                                                                              Nine months ended
                                                                                                                September 30,
                                                                                                              -----------------
                                                                                                               2003      2004
                                                                                                              ------    -------
                                                     (In thousands)                                              (unaudited)

Cash flows from operating activities:
Net income (loss).......................................................................................   $      857 $  (10,033)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation............................................................................................        2,725        749
Provision for doubtful accounts receivable..............................................................            8          3
Changes in operating assets and liabilities:
   Accounts receivable..................................................................................        1,264       (566)
   Inventory............................................................................................          (26)      (913)
   Prepaid expenses and other current assets............................................................       (1,099)        (4)
   Other long term assets...............................................................................           59        134
   Accounts payable.....................................................................................          547        731
   Accrued liabilities and other........................................................................         (144)        43
   Deferred revenue.....................................................................................        2,981         16
                                                                                                           ---------- ----------
      Net cash provided by (used in) operating activities...............................................        7,172     (9,840)
                                                                                                           ---------- -----------

Cash flows from investing activities:
Purchases of computer hardware, software and other......................................................         (883)      (145)
Maturity of short term investments......................................................................           --      1,431
Purchase of short term investments......................................................................           --     (1,445)
                                                                                                           ----------------------
      Net cash used in investing activities.............................................................         (883)      (159)
                                                                                                           ---------- ----------

Cash flows from financing activities:
Proceeds from issuance of common stock..................................................................        1,432      5,512
Proceeds from issuance of common stock (PIPE), net......................................................           --      4,898
Exercise of additional investment rights (AIR)..........................................................           --      5,394
Exercise of Series B Preferred Warrants.................................................................           --      2,988
Dividends paid in connection with Series B Preferred Stock conversions..................................          (14)      (452)
Repayments of capital lease obligations.................................................................       (1,894)      (518)
                                                                                                           ----------------------
      Net cash provided by (used in) financing activities...............................................         (476)    17,822
                                                                                                           ---------------------

Effect of exchange rate changes on cash.................................................................            3         --
                                                                                                           ---------- ----------

Net increase in cash and cash equivalents...............................................................        5,816      7,823
Cash and cash equivalents, beginning of period..........................................................        3,020     10,241
                                                                                                           ---------- ----------

Cash and cash equivalents, end of period................................................................   $    8,836 $   18,064
                                                                                                           ========== ==========
</TABLE>

See accompanying notes to the unaudited condensed consolidated financial
statements


                                       5
<PAGE>


         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

IPIX  Corporation,   formerly  Internet  Pictures  Corporation,  offers  mission
critical imaging where visual content is required for the protection of life and
property and eCommerce.  IPIX conducts its business through three business units
that share IPIX's patented  technology:  IPIX Security,  IPIX AdMission and IPIX
InfoMedia.  Our  solutions  create,  process and manage a rich  variety of media
including  still  images,  Full-360  degree  immersive  images and  video.  IPIX
Security is a supplier of Full-360  video  surveillance  technology for critical
government  and  commercial  security  applications  that  provide  complete and
continuous situational  awareness.  IPIX AdMission offers services that visually
enhance online auctions and real estate  listings.  IPIX InfoMedia  supports the
creation of Full-360 degree panoramic photography and movies content.

Our extensive  intellectual property covers patents for Full-360 imaging,  video
and surveillance applications and image management.

The accompanying  unaudited condensed  consolidated financial statements include
the accounts of IPIX 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 ceased  operations in our
Canadian  and  United  Kingdom  subsidiaries  and  we  are  in  the  process  of
liquidation of those subsidiaries.

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  accounting  principles  generally  accepted in the
United State of America 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, 2003.

The information furnished reflects all adjustments which management believes are
necessary for a fair presentation of our financial  position as of September 30,
2004 and the  results of our  operations  for the three and nine  month  periods
ended  September 30, 2003 and 2004 and our cash flows for the nine month periods
ended  September  30,  2003  and  2004.  All  such  adjustments  are of a normal
recurring nature. The results of operations for the three and nine month periods
ended September 30, 2003 and 2004 are not necessarily  indicative of the results
to be expected for the respective full years.

2. GOING CONCERN CONSIDERATIONS

The  accompanying  financial  statements  have been presented in accordance with
accounting principles generally accepted in the United States of America,  which
assume the  continuity  of the  Company as a going  concern.  During the quarter
ended  September 30, 2004 and in the prior fiscal  periods,  we experienced  and
continue to  experience,  certain going concern  issues related to cash flow and
profitability.

During 2003, we changed our relationship with our largest customer,  eBay, which
represented  87% of revenue for the year ended December 31, 2003.  eBay licensed
technology  from us that we had  previously  used to provide eBay with recurring
services. After 2003, we no longer provide any services to eBay. As a result, we
have a limited  operating  history as we are operating in 2004 and upon which an
evaluation  of our  business and  prospects  may be made.  In  addition,  we are
subject to generally  prevailing economic conditions and, as such, our operating
results in 2004 and beyond will be dependent upon our ability to provide quality
products  and  services,  the success of our  customers  and the  appropriations
processes of various commercial and governmental entities.

Management believes, however, that we have sufficient cash resources to meet our
funding  needs  through at least the next twelve  months.  We finished the third
quarter of 2004 with approximately $20.1 million in cash reserves (cash and cash
equivalents of $18.1 million, short term restricted investments of $0.8 million,
long term  restricted  cash of $0.6 million and short term  investments  of $0.6
million).  We have  three  business  units  all at  different  stages  in  their
development.  Management expects to continue to make significant  investments in
the development,  sale and marketing of new products for the security market and
in the image management business, which may consume some of our cash reserves.

                                       6
<PAGE>

3. CASH, CASH EQUIVALENTS AND RESTRICTED 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.

At September 30, 2004, we had a $1.4 million short term investment which matures
on June 19, 2005,  $0.8  million of which has been  provided as  collateral  for
certain capital lease  obligations  and,  accordingly,  classified as restricted
short term  investments.  We will renew the investment for successive short term
periods  until  the  capital  lease  obligation  restrictions  are  removed.  At
September  30, 2004,  we also had $0.6 million of cash  deposits  restricted  as
collateral  on a letter  of  credit  for  certain  co-location  facility  leases
expiring in 2006 and, accordingly, classified as long term restricted cash.

4. EQUITY

On April 5, 2004, we completed  the sale of 909,090  shares of our common stock,
resulting in net proceeds received of approximately $4.9 million, and additional
investment rights ("AIR") to purchase another 888,179 shares of our unregistered
common  stock  in a  private  offering  to  accredited  institutional  investors
("PIPE"). The shares of common stock were sold at $5.50 per share and the shares
of common stock  underlying the AIR are purchasable at $6.05 per share.  The AIR
was  exercisable  until September 28, 2004. As of September 30, 2004, all of the
AIR's had been  exercised:  799,361  shares of common stock in the third quarter
and 88,818  shares in the second  quarter.  Our proceeds  from the AIR exercises
were $5.4 million. The common stock sold in the PIPE and from the AIR's has been
registered  under the Securities Act of 1933, as amended,  and may be offered or
sold in the  United  States.  Our  Form  S-3  filed on May 5,  2004  provides  a
description of this transaction and copies of the executed documents.

During the three months ended March 31, 2004, we issued 442,144 shares of common
stock upon exercise of stock options.  Our total proceeds from the first quarter
option exercises were $0.6 million, $0.3 million of which was collected on April
1, 2004.  During the quarter ended June 30, 2004, we issued  1,511,680 shares of
common  stock upon  exercise  of stock  options.  Our  proceeds  from the second
quarter option  exercises were $4.2 million.  During the quarter ended September
30,  2004,  we issued  185,127  shares of common  stock upon  exercise  of stock
options. Our proceeds from the third quarter option exercises were $0.4 million.
During the quarter ended June 30, 2004, we sold 91,140 shares of common stock to
employees  under the IPIX Employee Stock  Purchase Plan  ("ESPP").  Our proceeds
from these ESPP purchases  were $0.1 million.  As of September 30, 2004, we have
collected $0.2 million for our employees' fourth quarter 2004 ESPP purchases.

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  between  the  Company  and  Image  dated  as of May 14,  2001,  Image
purchased  from us a $10 million  convertible  senior  secured note and received
Tranche A and Tranche B warrants with the right to purchase up to $20 million of
our Series B  Preferred  Stock.  Each share of the Series B  Preferred  Stock is
convertible  into  approximately  9.2 shares of common  stock and is entitled to
vote on matters  submitted to holders of common stock on an as-converted  basis.
On September 26, 2001, the Company,  Image and strategic investors completed the
Tranche B stage of the investment.  At that time, we issued  1,115,080 shares of
Series B Preferred Stock for total  consideration of $22.3 million,  represented
by the  conversion  of the $10 million note,  the  conversion of $0.3 million of
interest on the Note and $12 million in cash  through the  exercise of Tranche B
warrants. The remainder of the Tranche B warrants expired.

At  December  31,  2003,  there  were two  Tranche A warrants  ("Warrant  1" and
"Warrant 2")  outstanding.  As of September 30, 2004,  Warrant 1, which entitled
the holders to purchase  150,000  shares of Series B Preferred  Stock at $20 per
share, has been exercised in full. We issued 1,375,600 shares of common stock in
the third quarter of 2004 and received $3.0 million in cash from the exercise of
part of Warrant 1 and the conversion of the underlying Series B Preferred Stock.
During  the  second  quarter  of 2004,  600 shares of the rest of Warrant 1 were
converted  into 4,372  shares of common  stock.  We did not receive any proceeds
from the second  quarter  Warrant 1 exercise.  Warrant 2 entitles the holders 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.  During the
second quarter of 2004, 400 shares of Warrant 2 were converted into 2,914 shares
of common stock. We did not receive any proceeds from the second quarter Warrant
2 exercise.

                                       7
<PAGE>

5. INCOME (LOSS) PER COMMON SHARE

Basic income  (loss) per common share is computed by dividing net income  (loss)
available to common  stockholders  for the period by the weighted average number
of shares of common stock  outstanding.  Net income  (loss)  available to common
stockholders  is calculated as the net income (loss) less  cumulative  preferred
stock  dividends for the period.  If dilutive,  the  participation  right of the
preferred stock is reflected in the calculation of basic income (loss) per share
using the "if  converted"  method or the "two class  method," if more  dilutive.
Diluted income (loss) per common share is computed by dividing net income (loss)
for the  period by the  weighted  average  number  of  shares  of  common  stock
outstanding  plus, if dilutive,  potential common stock  outstanding  during the
period.

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

<TABLE>
<S>                                                                       <C>           <C>           <C>         <C>

                                                                              Three months ended         Nine months ended
                                                                                 September 30,             September 30,
                                                                         --------------------------   ---------------------
                      (In thousands, except per share)                        2003         2004         2003        2004
                                                                         ------------  ------------   ---------  ----------

(unaudited) (unaudited)
NUMERATOR:
Net income (loss)....................................................      $     154    $  (3,421)    $    857    $(10,033)
Preferred stock dividends............................................           (454)        (133)      (1,345)       (757)
                                                                           ---------    ---------     --------    --------

Net loss available to common stockholders............................      $    (300)   $  (3,554)    $   (488)   $(10,790)
                                                                           =========    =========     ========    ========

DENOMINATOR:
   Weighted average shares outstanding -- Basic and diluted...........         7,613       19,625        7,147      14,807
                                                                            =========    =========     ========    ========

LOSS PER COMMON SHARE, BASIC AND DILUTED.............................      $   (0.04)   $   (0.18)    $  (0.07)   $  (0.73)
                                                                           =========    =========     ========    ========
</TABLE>

The following table sets forth potential  common shares that are not included in
the  diluted  net loss per common  share  calculation  because to do so would be
antidilutive  for the three months ended September 30, 2003 and 2004 as a result
of the net loss available to common stockholders:
<TABLE>
<S>                                                           <C>              <C>

            (Shares in thousands)                                  Three months ended
                                                                      September 30,
                                                              --------------------------
                                                                   2003             2004
                                                              -------------    ---------

           Stock options..................................          1,573          1,685
           Convertible preferred stock....................         11,002          2,835
           Series B Warrants..............................            492            448
</TABLE>

Not included in the table above,  were the following  rights to purchase  common
stock where the average exercise price was greater than the average common share
price during the period and,  accordingly,  they were  excluded from diluted net
loss per common share for the three month periods  ended  September 30, 2003 and
2004:
<TABLE>
<S>                                                                           <C>            <C>

 (Shares in thousands)                                                             Three months ended
                                                                                      September 30,
                                                                              ------------------------
                                                                                   2003         2004
                                                                              -------------  ---------

Average share price of IPIX common stock...................................     $   3.39      $   8.50
Stock options:
   Average exercise price of options.......................................     $  55.68      $ 114.32
   Shares excluded.........................................................          316           112
Series B Warrants (exercise price $4.34)...................................          921            --
Common Warrants (average exercise price $165.33)...........................          137           137
</TABLE>

                                       8
<PAGE>

6. RESTRUCTURING AND OTHER

During the nine months ended  September 30, 2004,  $0.2 million of payments were
made against our  restructuring  accrual.  No additions were made to the accrual
during the nine months  ended  September  30, 2004.  At  September  30, 2004 the
remaining balance in the restructuring accrual was $0.2 million.

7. STOCK-BASED COMPENSATION -- FAIR VALUE DISCLOSURES

We comply with the disclosure provisions of Financial Accounting Standards Board
Statement of Financial  Accounting Standards No. 123 "Accounting for Stock-based
Compensation" ("FAS 123"). We have elected,  however, to continue accounting for
stock-based  compensation issued to employees using Accounting  Principles Board
("APB") Opinion No. 25,  "Accounting for Stock Issued to Employees"  ("APB 25").
Under APB 25,  compensation  expense is based on the difference,  if any, on the
date of grant, between the fair value of our stock and the exercise price of the
option.  Stock and other equity  instruments  issued to non-employees  have been
accounted  for in accordance  with FAS 123 and Emerging  Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods, or Services."

Pro forma information regarding our net income (loss) is required by FAS 123 and
FAS 148 "Accounting for Stock-Based  Compensation,  Transition and  Disclosure,"
and has been  determined  as if we had accounted for the stock options under the
fair value method of FAS 123.

The computations for pro forma basic and diluted loss per share follow:
<TABLE>
<S>                                                                         <C>           <C>           <C>          <C>

                                                                              Three months ended           Nine months ended
                                                                                 September 30,               September 30,
                                                                         --------------------------  -------------------------
               (In thousands, except per share data)                          2003          2004          2003           2004
                                                                         ------------- ------------  -------------  ----------
                                                                                  (unaudited)                 (unaudited)
                                                                         --------------------------  -------------------------

Net loss available to common stockholders............................       $    (300)    $  (3,554)    $   (488)    $ (10,790)
Less total stock-based employee compensation expense
    determined under fair value based methods for all awards.........            (347)         (505)      (1,213)       (1,786)
                                                                            ----------         -----      -------       -------
Adjusted net loss available to common stockholders...................       $    (647)    $  (4,059)    $ (1,701)      $ (12,576)
                                                                            ==========    ==========    =========      =========

Basic and diluted loss per common share:
   Net loss available to common stockholders before pro forma charges..     $   (0.04)      $ (0.18)   $   (0.07)      $ (0.73)
   Net effect of pro forma charges.....................................         (0.04)        (0.03)       (0.17)        (0.12)
                                                                          -----------   -----------   -----------   -----------
Adjusted net loss per common share available to common stockholders....     $   (0.08)      $ (0.21)   $   (0.24)      $ (0.85)
                                                                            ==========      ========   ==========      ========
</TABLE>

Grants  under  the  ESPP  have  a  look-back  feature  and  a 15%  discount  and
accordingly  under FAS 123 would have had compensation  expense  calculated as a
result. The fair value disclosure associated with the ESPP grants is included in
the fair value pro-forma information above.
We  calculated  the fair  value of each  award  on the date of grant  using  the
Black-Scholes  pricing  model.  The  following  assumptions  were  used for each
respective period:

                                                        Three Months Ended
                                                          September 30,
                                                          -------------

                                                     2003               2004
                                                     ----               ----
Risk-free interest rates.........................    4.2%               3.8%
Expected lives (in years)........................    4.0                3.5
Dividend yield...................................      0%                 0%
Expected volatility..............................     92%               179%

                                       9
<PAGE>

8. INVENTORY

Our  inventory  consists  primarily  of  finished  camera  products  and  camera
components. Our inventory is valued at the lower of cost, using the FIFO method,
or market.  The table below shows our  inventory mix as of December 31, 2003 and
September 30, 2004:


 (In thousands)                                   December 31,    September 30,
                                                      2003            2004
                                                      ----            ----
Components........................................$       --      $      620
Finished goods....................................       546             839
Inventory reserve.................................      (148)           (148)
                                                  -------------  ------------
Inventory, net....................................$      398      $    1,311
                                                  =============  ============

9. COMMITMENTS AND CONTINGENCIES

Commitments

The table below shows our contractual obligations as of September 30, 2004:
<TABLE>
<S>                                                                     <C>         <C>         <C>        <C>         <C>

(In thousands)                                                                             Payments Due by Period
                                                                        -----------------------------------------------------
                                                                                    Remainder
                                                                          Total      of 2004      2005       2006      2007
                                                                        --------  ------------  --------   -------- ---------
Capital leases......................................................    $   112     $    112    $    --     $   --     $  --
Operating leases....................................................      2,520          266       1,419       771        64
                                                                        --------     -------     -------     -----      ----
Total...............................................................    $ 2,632      $   378     $ 1,419    $ 771      $ 64
                                                                        =======      =======     ========    =====      ====
</TABLE>

At  September  30,  2004,  we had $0.6 million of cash  deposits  restricted  as
collateral  on a letter  of  credit  for  certain  co-location  facility  leases
expiring in 2006 and,  accordingly,  classified as long term restricted cash. In
addition,  as of  September  30,  2004,  we have  prepaid  $0.3  million  of our
obligations  to the  co-location  facility.  As of September  30, 2004,  we have
outstanding  purchase  orders  from our lens and camera  vendors  valued at $1.6
million for delivery mostly in the fourth quarter of 2004.

Contingencies

On November 15, 2002, a First  Amended  Consolidated  Complaint for violation of
federal securities laws was filed against  Homestore.com,  Inc. ("Homestore") by
the California Teachers' Retirement System ("CalSTRS"). The Complaint is a class
action  lawsuit filed on behalf of  stockholders  of Homestore  which flows from
alleged  misstatements  and  omissions  made by  Homestore  and the other  named
defendants,  which include us. The Complaint alleges that during 2001, Homestore
and  IPIX  entered  into   fraudulent   reciprocal   transactions   intended  to
artificially  bolster and maintain  Homestore's and our respective stock prices.
The Complaint  alleges that Homestore's  public statements with respect to these
transactions  are attributable to us and violate Sections 10(b) and 20(a) of the
Securities  Exchange Act of 1934. We joined with other co-defendants and filed a
joint motion to dismiss, alleging that the Complaint fails to state a claim upon
which relief may be granted,  among other things.  On March 7, 2003,  the United
States District Court for the District of Central  California granted our motion
to  dismiss,  with  prejudice.  On  April  7,  2004,  the  California  Teachers'
Retirement  System  filed a notice of appeal  with the  United  States  Court of
Appeals for the Ninth  Circuit  appealing  the  dismissal  of the First  Amended
Consolidated  Complaint for violation of federal  securities  laws filed against
Homestore.com, Inc, us and the other named defendants. On July 22, 2004, CalSTRS
and IPIX filed a Stipulation of Dismissal with the Court of Appeals  pursuant to
which the appeal was dismissed, with prejudice, against us.

In June 2003, we filed a lawsuit against Ford Oxaal and Minds-Eye-View,  Inc. in
the United States District Court for the Eastern District of Tennessee  alleging
patent  infringement  of  certain  patents  and  other  causes  of  action.  The
defendants in the lawsuit have filed counterclaims  against the Company in their
response to our action.  The litigation is in the pre-trial  motion stage at the
current time.

We are not currently a party to any other legal  proceedings the adverse outcome
of which,  individually  or in the  aggregate,  we believe could have a material
adverse effect on our business,  financial  condition,  results of operations or
cash flows.

                                       10

<PAGE>

Indemnification Provisions

During the ordinary  course of business,  in certain limited  circumstances,  we
include indemnification provisions within certain of our contracts.  Pursuant to
these  agreements,  we will indemnify,  hold harmless and agree to reimburse the
indemnified  party for losses  suffered or incurred  by the  indemnified  party,
generally  parties with which we have commercial  relations,  in connection with
certain  intellectual  property  infringement  claims  by any third  party  with
respect to our products and services. To date, we have not incurred any costs in
connection with such indemnification clauses.

10. SEGMENTS

We currently have three  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 revenues and 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>
<S>                                                                  <C>           <C>          <C>           <C>

                                                                        Three months ended          Nine months ended
                                                                           September 30,              September 30,
                                                                  --------------------------    ----------------------
           (In thousands)                                              2003          2004         2003          2004
                                                                  ------------- ------------    ---------    ---------

Revenue:
   Security....................................................      $    146      $    724     $    237      $  1,130
   AdMission...................................................         5,811           276       17,471           810
   InfoMedia...................................................           666           741        1,858         1,824
                                                                     --------      --------     --------      --------
Total..........................................................      $  6,623      $  1,741     $ 19,566      $  3,764
                                                                     ========      ========     ========      ========

Gross profit (loss):
   Security....................................................      $     71      $    199     $     76      $    316
   AdMission...................................................         3,935          (294)      12,045          (998)
   InfoMedia...................................................           266           439          833           928
                                                                     --------      --------     --------      --------
Total..........................................................      $  4,272      $    344     $ 12,954      $    246
                                                                     ========      ========     ========      ========
</TABLE>

11. CONCENTRATIONS OF CREDIT RISK

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

The following  table  summarizes  the revenue from customers in excess of 10% of
total revenues:
<TABLE>
<S>                                                                            <C>         <C>           <C>        <C>

                                                                               Three months ended        Nine months ended
                                                                                  September 30,            September 30,
                                                                               --------------------      -----------------
                                                                                2003         2004         2003       2004
                                                                               -------     --------      --------  -------

Homestore...............................................................          3%           7%          3%         10%
eBay....................................................................         84%          --%         85%         --%
UK Distributor..........................................................          2%          43%          1%         32%
</TABLE>

At September 30, 2004,  Homestore  represented 6% of accounts receivable and our
UK distributor represented 41% of accounts receivable.  There are no amounts due
from eBay as of September 30, 2004. At December 31, 2003, Homestore  represented
22% and our UK Distributor represented 3% of accounts receivable.  There were no
amounts due from eBay as of December 31, 2003.

On October 1, 2004, the license  agreement  dated January 12, 2001 (the "License
Agreement")  between us and Homestore  Virtual  Tours,  Inc.  ("Homestore")  was
terminated.  Under the License  Agreement,  Homestore had the exclusive right to
sell our virtual tour technology to the U.S.  residential real estate market and

                                       11
<PAGE>

was  required  to pay us a royalty  for each  virtual  tour sold.  A copy of the
license  agreement was filed as Exhibit  10.16 to our  quarterly  report on Form
10-K filed with the  Securities  and Exchange  Commission on April 2, 2001. As a
result of the  termination,  Homestore no longer has the exclusive right to sell
our virtual tour technology to the U.S.  residential real estate market,  and we
may sell, or license  another third party to sell,  our virtual tour  technology
into this market. We mutually  released each other from any further  obligations
under the License Agreement.

12. LIQUIDATION PREFERENCE AND PREFERRED STOCK DIVIDENDS

On September 26, 2001,  Image Investor  Portfolio,  a separate series of Memphis
Angels, LLC ("Image") and certain strategic  investors completed the purchase of
1,115,080  shares of the Series B  Preferred  Stock for total  consideration  of
$22.3 million.  Each share of the Series B Preferred  Stock is convertible  into
approximately  9.2 shares of our common stock and is entitled to vote on matters
submitted to holders of common stock on an as-converted basis. During the second
quarter of 2004,  613,483  shares of Series B Preferred  stock plus  accumulated
dividends were converted into 6,261,574 shares of common stock. During the third
quarter of 2004,  100,000 shares of Series B Preferred stock were converted into
920,749  shares of common  stock.  We did not  receive any  proceeds  from these
conversions,  but we paid $0.5 million for accumulated dividends associated with
the conversions.  As of September 30, 2004, 290,347 shares of Series B Preferred
Stock remain outstanding with a Liquidation  Preference,  defined below, of $7.2
million,  which  includes  $1.4  million in accrued  dividends in arrears on the
Series B Preferred Stock.

Holders  of Series B  Preferred  Stock,  in  preference  to holders of any other
series of  Preferred  Stock and in  preference  to the  holders of Common  Stock
(collectively,  "Junior  Securities"),  accrue  dividends  at the  rate of eight
percent (8%) of the price paid per annum on each  outstanding  share of Series B
Preferred  Stock ("Series B Dividends").  The Series B Dividends are cumulative,
accrue  daily and shall be  payable,  when and if  declared  by the Board,  upon
conversion or as an accretion to the Liquidation  Preference,  as defined below.
Accrued Series B Dividends may be paid in cash or common stock,  at the election
of the  Series B  Preferred  stockholder.  Holders of Series B  Preferred  Stock
participate on an as-if  converted basis in any common stock  dividends.  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.  Upon any liquidation event, before any distribution or payment shall
be made to the  holders  of any  Junior  Securities,  the  holders  of  Series B
Preferred  Stock  shall be  entitled to be paid out of the assets of the Company
legally  available  for  distribution,  or the  consideration  received  in such
Transaction,  an amount per share of Series B Preferred Stock equal to the price
paid plus all accrued and unpaid  Series B Dividends  for each share of Series B
Preferred Stock held by them (the "Liquidation  Preference").  If, upon any such
liquidation event, the assets of the Company are insufficient to make payment in
full to all holders of Series B Preferred Stock of the  Liquidation  Preference,
then such assets  shall be  distributed  among the holders of Series B Preferred
Stock at the time  outstanding,  ratably in  proportion  to the full  amounts to
which they would otherwise be respectively entitled.

13. RELATED PARTY TRANSACTIONS

Transactions with eBay, Inc.

In  September  2001,  eBay  acquired  Series B Preferred  Stock from us and as a
result  beneficially owned more than 10% of our common stock through April 2004.
Pursuant to an agreement dated April 19, 2000, as amended,  we provided to eBay,
Inc. image management  services to eBay's online auction Web sites.  Pursuant to
that  agreement,  we issued eBay a warrant to purchase  60,000  shares of common
stock at an exercise  price of $203.80 per share.  The warrant  expires on April
19, 2010. Under this agreement, as amended, we generated revenue of $5.6 million
and $16.6  million for the quarter and nine months  ended  September  30,  2003,
respectively.  As announced in June 2003, we amended the then current commercial
agreement with eBay to include a one-time $8.0 million license fee from eBay for
our technology and other services.  The license fee was recognized in the fourth
quarter of 2003 and we no longer provide any products or services to eBay.

Our visual  content  services  agreement  with eBay required us to pay marketing
fees to eBay of $16.0 million over a two-year period.  As of September 26, 2001,
we had paid $9.5 million of the $16.0  million  commitment  and agreed to extend
the additional $6.5 million of payments  through  September 2003. The commitment
has been paid in full.  In  accordance  with EITF 01-09,  during the quarter and
nine  months  ended   September  30,  2003,   $0.5  million  and  $1.5  million,
respectively,  of these fees was offset against revenue which amount represented
the excess over the fair value of the benefit received.

In 2001 and 2002, we sold to eBay, and eBay leased back to us, certain  computer
equipment  utilized  to  provide  image  management  services  to eBay and other
customers.  The purchase price for the equipment was approximately $5.3 million.
The  transactions  resulted in no gain or loss to us. In the nine  months  ended
September 30, 2003, we paid eBay $1.5 million pursuant to these lease schedules.
In the fourth quarter of 2003, we returned the underlying equipment,  with a net
carrying  amount of $0.9 million,  associated  with these lease  obligations and
eBay forgave the remaining  balances due of $1.1 million.

                                       12
<PAGE>

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 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

Our Business

Over the past few years,  we have  restructured  the  Company  around our higher
gross margin businesses. We are now organized into three market focused business
units: IPIX Security, IPIX AdMission and IPIX InfoMedia.

IPIX  Security:  Supplies  Full-360 video  surveillance  technology for critical
government and commercial security applications.  Patent protected technology is
used in digital video systems that provide  complete and continuous  situational
awareness.

IPIX AdMission:  Enables local advertisers with the means to create rich, visual
ads showcasing their businesses,  products and services.  The AdMission platform
is  implemented  on a large scale for  managing  media across the  Internet.  It
allows   advertisers   and  consumers  to   successfully   conclude   commercial
transactions by communicating the value of advertised goods and services through
accompanying media.

IPIX InfoMedia:  Provides for creation of Full-360 degree panoramic  photography
and movies  content.  Markets are  professional  photographers,  ad and creative
media agencies, web developers and visual documentation.

Products

CommandView(TM) - Multi-mega-pixel  network cameras, with fisheye lens, patented
Full-360 viewing  technology and camera management  software to provide a unique
award-winning  `see  everything'  video  surveillance and security camera system
that can see in all directions, simultaneously with no moving parts and no blind
spots.

AdMission(TM)  - A hosted media platform  enabling  local  advertisers to create
rich, visual ads showcasing their businesses,  products and services.  AdMission
enhanced ads are an upsell to print  classified  and display  ads.  They include
logos,  photos,  fast  facts,   printable  coupons  and  information  about  the
advertiser's  business,  products and  services.  Consumers  are rewarded with a
convenient  informative  presentation  that appears directly within their search
results. AdMission ads communicate product and service offerings effectively and
result in better-qualified leads to advertisers.

Interactive Studio(TM) - A single integrated solution for panorama photographers
that can automate a wide variety of tasks previously  requiring  separate tools.
Makes creating  multiple  Full-360 degree images as simple as a drag-and-drop of
fisheye  source images into the  application,  selecting the output file formats
desired and hitting the save  button.  Features  include  image  editors,  image
format converter tools and high dynamic range image compositors.

Target Markets

CommandView - Commercial  facilities such as banks and retail outlets.  Homeland
security infrastructure protection related to ports, harbors,  waterways,  dams,
conventional  and nuclear power stations,  utilities,  airports and mass transit
rail systems. In the military, perimeter force protection, unmanned vehicles and
special operations.

AdMission - Newspaper  classified  and display  advertising  (online and print);
yellow  page  directories   (online);   and  local  search  platforms  (online).

Interactive Studio - Visual documentation markets such as facilities management;
private and government  infrastructure  management and service departments;  and
vertical  market  data-warehouse  solutions  providers  such  as  insurance  and
mapping.

                                       13
<PAGE>

Business Models

IPIX  Security:  Sell camera  systems via  world-wide  network of  distributors.
Camera systems will retail from $1,000 to $25,000, depending upon configuration.
Traditional distributor discounts will apply (25 to 35%).

IPIX AdMission:  Partner with publishers and software  vendors of the publishing
industry. Recurring revenue share on premiums charged for visually enhanced ads.
Fixed infrastructure support costs, with very low marginal cost as volumes grow.

IPIX  InfoMedia:  Market  software  platform and  supporting  hardware  products
primarily over the internet.

Business Trends and Conditions

On March 31, 2004, our Security  business unit launched a new family of Full-360
degree   real-time  video  camera   systems.   Shipment  of  these  products  to
distributors  began in late June 2004.  These new camera systems are expected to
generate  revenues from their sale primarily to  distributors.  During the third
quarter  of 2004,  we  received  an order  for the  purchase  of $3  million  of
CommandView video surveillance cameras from our UK distributor.  We shipped $0.5
million of cameras from this order in the third  quarter of 2004 and expect that
the  remaining  cameras  from this  order  will ship over the next  three to six
months. We continue to develop additional products and features for the security
and surveillance market.

Substantially  all  of our  recurring  revenue  in the  past  was  derived  from
transaction fees generated by our AdMission  business unit. In particular,  eBay
represented  approximately 85% and 95% of total revenue for the quarter and nine
months ended September 30, 2003, respectively. We no longer provide any products
or  services  to eBay as of  November  1, 2003.  Since  April 1,  2004,  we have
continued to diversify and add additional  AdMission customers and have launched
two new products:  AdMission  Classifieds  and AdMission  Directories  which are
currently  targeted  at  newspaper  and yellow  page  publishers  for online and
in-print classified advertising and other business opportunities.

Our Full-360  degree  technology  used by the InfoMedia  business unit primarily
generates  revenues in two ways:  licenses of software  and the resale of camera
equipment.  In the past, we utilized "keys" to license our InfoMedia  technology
to capture and save a single  immersive  image.  With the launch of  Interactive
Studios  in the first  quarter  of 2004,  we now offer  time-based  seat or user
licenses which permit an unlimited number of immersive images to be captured and
saved  within a  specific  time  period,  usually a year.  We sell our  Full-360
products  primarily  into the real  estate,  travel and  hospitality  and visual
documentation  markets.  The cost of sales for our licenses is low in proportion
to the related  revenue.  The cost of sales for the sale of camera equipment has
generally been 50% to 75% of related revenues.

On October 1, 2004, the license  agreement  dated January 12, 2001 (the "License
Agreement")  between us and Homestore  Virtual  Tours,  Inc.  ("Homestore")  was
terminated.  Under the License  Agreement,  Homestore had the exclusive right to
sell our virtual tour technology to the U.S.  residential real estate market and
was  required  to pay us a royalty  for each  virtual  tour sold.  A copy of the
license  agreement was filed as Exhibit  10.16 to our  quarterly  report on Form
10-K filed with the  Securities  and Exchange  Commission on April 2, 2001. As a
result of the  termination,  Homestore no longer has the exclusive right to sell
our virtual tour technology to the U.S.  residential real estate market,  and we
may sell, or license  another third party to sell,  our virtual tour  technology
into this  market.  IPIX and  Homestore  mutually  released  each other from any
further obligations under the License Agreement.

InfoMedia will now market and sell its virtual tour  photography  solution,  the
IPIX Interactive  Studio,  directly to the U.S. real estate market and Homestore
will expand its hometour360  program to support in addition to us, a wider range
of imaging technologies.  As a result, real estate agents and photographers will
benefit  from a broader  choice of  panoramic  imaging  solutions  and  enhanced
marketing capabilities. The companies will continue to work together to grow the
adoption of virtual  tours in the U.S.  real estate  industry.  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 40%
to 60% of revenues.

MANAGEMENT CHANGE

On September 16, 2004,  Donald W.  Strickland  resigned as our President,  Chief
Executive Officer and as a Director. We entered into a separation agreement with
Mr.  Strickland,  which was filed on September 21, 2004 with the  Securities and
Exchange Commission as Exhibit 99.1 to a Form 8-K. Under this agreement, we will
pay Mr.  Strickland a severance  payment of $0.2 million,  which will be paid in
six monthly  installments.  Any stock  options  granted to Mr.  Strickland  will
continue to vest  through  March 31,  2005,  and such  options must be exercised
before June 30, 2005, at which time they will expire.  The employment  agreement
between us and Mr.  Strickland  dated July 1, 2001 was  terminated,  except that
certain   obligations   concerning    confidentiality,    non-solicitation   and
non-disparagement will survive termination.

                                       14
<PAGE>

Effective  September 16, 2004, the Board  appointed Ms. Clara M. Conti President
and Chief  Executive  Officer of the Company.  Ms. Conti was also elected to the
Board of  Directors  as a Class II  director  and  will  serve on the  Executive
Committee of the Board. Ms. Conti will receive a base salary of $0.3 million per
annum  and  will be  entitled  to such  bonus  as the  Board  of  Directors  may
determine.  In addition,  we issued to Ms.  Conti an option to purchase  500,000
shares of our common stock at an exercise price of $8.28 per share.  On November
15,  2004,  we  entered  into  an  employment  agreement  with  Ms.  Conti  (the
"Agreement"),  effective  September  16, 2004,  which  contains the terms of Ms.
Conti's  employment.  The  Agreement  provides  that Ms. Conti will serve as our
president  and chief  executive  officer  until such time as either the Board of
Directors or Ms. Conti  terminates the  Agreement.  We may terminate Ms. Conti's
Agreement with or without cause;  however, if we terminate the agreement without
cause,  or if Ms. Conti resigns for good reason,  she is entitled to a severance
payment of $0.23 million which will be paid in ten monthly installments.  In the
event Ms. Conti is terminated without cause or resigns for good cause within two
(2) years of a change of  control,  Ms.  Conti is  entitled  to payment of $0.23
million within ten (10) days of such termination or resignation, and all options
issued to Ms. Conti will vest and be fully exercisable.

Prior to joining us, Ms.  Conti was  President  and Chief  Executive  Officer of
ObjectVideo,  a object tracking  software security  business,  Vice President of
eBusiness  Solutions for DynCorp,  an  information  technology  and  outsourcing
company,  and  President  and  Chief  Executive  Officer  of  Aurora  Enterprise
Solutions,  a business to business internet security products and services firm,
all  headquartered  in  Reston,  Virginia.  Ms.  Conti is  based  out of our new
Northern Virginia office.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The  preparation  of these  financial  statements  requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues  and  expenses,   and  related  disclosure  of  contingent  assets  and
liabilities.  On an on-going basis,  we evaluate our estimates,  including those
related to revenue recognition,  uncollectible  receivables and other long-lived
assets and contingencies.  We base our estimates on historical experience and on
various  other  assumptions  that  are  believed  to  be  reasonable  under  the
circumstances,  the results of which form the basis for making  judgments  about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these  estimates  under different
assumptions or conditions. We believe the following critical accounting policies
affect our more  significant  judgments and estimates used in the preparation of
our  consolidated   financial   statements:   revenue   recognition;   valuation
allowances,   specifically  the  allowance  for  doubtful  accounts;  and  other
long-lived assets; and significant  accruals. 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.

Management has discussed the development and selection of the following critical
accounting  policies,  estimates and assumptions with the Audit Committee of our
Board of Directors and the Audit  Committee has reviewed these  disclosures.  We
believe the following represent our critical accounting policies:

Revenue Recognition

We recognize revenue in accordance with SOP 97-2, "Software Revenue Recognition"
and Staff  Accounting  Bulletin  No.  104,  "Revenue  Recognition  in  Financial
Statements."  We derive  revenue from  product  sales and services we provide to
customers.  Product  revenue  includes  InfoMedia  hardware and  licenses,  IPIX
Security hardware and licenses,  as well as AdMission  license revenue.  Service
revenues are primarily from  transactions  where a seller uses IPIX AdMission to
enhance their on-line offering.

Product  revenue is recognized  upon shipment or delivery  provided there are no
uncertainties   surrounding  product  acceptance,   persuasive  evidence  of  an
arrangement exists,  there are no significant vendor  obligations,  the fees are
fixed or determinable and collection is reasonably assured. Initial license fees
are  recognized  when a  contract  exists,  the fee is  fixed  or  determinable,
software  delivery has occurred and  collection of the  receivable is reasonably
assured. If there are continuing  obligations,  then license fees are recognized
ratably  over  the  life  of  the  contract.   Revenue  from  product  sales  to
distributors  is  generally   recognized   upon  shipment   ("sell-in")  if  the
distributor relationship does not create substantial uncertainty regarding fixed
or determinable fees and  collectibility.  If at the outset of an arrangement we
determine  the  arrangement  fee is not,  or is  presumed  to not be,  fixed and
determinable,  revenue is deferred and subsequently recognized as amounts become
due and payable.

Transaction   hosting  revenues  are  recognized  ratably  as  transactions  are
performed provided there was persuasive evidence of an arrangement,  the fee was
fixed or determinable and collection of the resulting  receivable was reasonably
assured.  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."  Reimbursements  received for  out-of-pocket  expenses  incurred are
characterized as revenue in the statement of operations.

                                       15
<PAGE>

Where  multiple  elements  exist  in an  arrangement,  the  arrangement  fee  is
allocated to the different elements based upon verifiable  objective evidence of
the fair value of the elements,  as governed under EITF 00-21, which is codified
in  SEC  Staff   Accounting   Bulletin  No.  104  "SAB  104."  Multiple  element
arrangements  primarily  involve an arrangement with  professional  services and
transaction  hosting.  Revenue is recognized  as each element is earned,  namely
upon completion of the services, provided that the fair value of the undelivered
element(s) has been  determined,  the delivered  element has stand-alone  value,
there is no right of return on  delivered  element(s),  and we are in control of
delivery of the undelivered element(s).

Royalties derived from desktop imaging products were 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.

Payments  received in advance  are  initially  recorded as deferred  revenue and
recognized as obligations are fulfilled.

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.

Goodwill

During the fourth  quarter of 2003,  certain  events,  including  the end of the
agreement  with eBay,  led us to perform an impairment  review of goodwill.  The
eBay  agreement  ended in November 2003 and was the primary source of cash flows
for the technology associated with goodwill in the AdMission business unit. This
review  indicated  that  goodwill was being  carried at amounts in excess of the
fair value based on  estimated  discounted  future  cash flows of the  AdMission
business unit. As a result,  an impairment charge was recorded to expense in the
year ended December 31, 2003. No balance remains in goodwill.

Significant Accruals, including Restructuring Charges and Sales Tax

We recorded  restructuring  charges associated with vacated facilities.  The key
assumptions  associated  with  these  charges  include  the timing and amount of
sub-lease  income.  In addition,  in  establishing  and  providing for sales tax
accruals,  we make  judgments  based on the actual tax laws and guidance.  While
management  believes  that  its  judgments  and  interpretations  regarding  tax
liabilities are appropriate,  significant  differences in actual  experience may
materially affect our future financial results.

RESTRUCTURING ACTIONS

During the years ended  December 31, 2000 thru  December  31, 2003,  the Company
executed several  restructuring actions and recorded related charges during each
of those  fiscal  years.  During the three and nine months ended  September  30,
2004, $0.0 million and $0.2 million, respectively, of payments were made against
the  Company's  restructuring  accrual.  No  additions  were made to the accrual
during the three or nine months ended September 30, 2004. At September 30, 2004,
the remaining balance in the restructuring accrual was $0.2 million.

                                       16
<PAGE>

RESULTS OF OPERATIONS

Financial  results  from  prior  periods  are not useful in  comparison  to 2004
results because of the previously  announced amendment of our service agreements
with eBay to a one-time  2003  license  fee and since we launched  the  security
business  products in the second quarter of 2004. The following  table presents,
for the periods indicated,  the percent relationship to total revenues of select
items in our statements of operations.
<TABLE>
<S>                                                                        <C>            <C>          <C>          <C>
                                                                            Three months ended         Nine months ended
                                                                               September 30,             September 30,
                                                                            2003           2004         2003         2004
                                                                           -------        -------      -------      ------
Revenue:
      Security..........................................................      2.2%          41.6%         1.2%       30.0%
      AdMission.........................................................     87.7           15.8         89.3        21.5
      InfoMedia.........................................................     10.1           42.6          9.5        48.5
                                                                           -------        -------      ------      ------
   Total revenue........................................................    100.0          100.0        100.0       100.0
                                                                           ------         ------       ------      ------
Cost of revenue:
      Security..........................................................      1.1           30.2          0.8        21.6
      AdMission.........................................................     28.3           32.7         27.7        48.0
      InfoMedia.........................................................      6.1           17.3          5.3        23.8
                                                                           -------        ------       ------      ------
   Total cost of revenue................................................     35.5           80.2         33.8        93.4
                                                                           ------         ------       ------      ------
   Gross profit.........................................................     64.5           19.8         66.2         6.6
                                                                           ------         ------       ------      ------
Operating expenses:
      Sales and marketing...............................................     28.7           93.3         29.2       122.7
      Research and development..........................................     18.1           54.7         18.5        76.4
      General and administrative........................................     15.1           70.0         13.6        75.4
                                                                           ------         ------       ------      ------
   Total operating expenses.............................................     61.9          218.0         61.3       274.5
                                                                           ------         ------       ------      ------
Income (loss) from operations...........................................      2.6         (198.2)         4.9      (267.9)
Other...................................................................     (0.3)           1.8         (0.5)        1.4
                                                                           -------        ------       -------     ------
Net income (loss).......................................................      2.3%        (196.4)%        4.4.%    (266.5)%
                                                                           ======         =======      ========    ========
</TABLE>

Quarter Ended September 30, 2003 Compared to the Quarter Ended September 30,
2004
<TABLE>
<S>                                                                               <C>       <C>       <C>          <C>
                                                                                   Three months ended
                                                                                      September 30,
                                                                                  -------------------
                                                                                                                   Percent
                             (Dollars in thousands)                                  2003      2004   Difference   Change
                                                                                  --------- --------  ----------  ---------

Revenue:
      Security.................................................................   $     146 $    724  $     578     396%
      AdMission................................................................       5,811      276     (5,535)    (95)
      InfoMedia................................................................         666      741         75      11
                                                                                  --------- --------  ---------    -----
   Total revenue...............................................................       6,623    1,741     (4,882)    (74)
                                                                                  --------- --------  ----------   -----
Cost of revenue:
      Security.................................................................          75      525        450     600
      AdMission................................................................       1,876      570     (1,306)    (70)
      InfoMedia................................................................         400      302        (98)     25
                                                                                  --------- --------  ----------   -----
   Total cost of revenue.......................................................       2,351    1,397       (954)    (41)
                                                                                  --------- --------  ---------    -----
   Gross profit................................................................       4,272      344     (3,928)    (92)
                                                                                  --------- --------  ----------   -----
Operating expenses:
      Sales and marketing......................................................       1,899    1,625       (274)    (14)
      Research and development.................................................       1,198      952       (246)    (21)
      General and administrative...............................................       1,001    1,220        219      22
                                                                                  --------- --------  ---------    -----
   Total operating expenses....................................................       4,098    3,797       (301)     (7)
                                                                                  --------- --------  ---------    -----
Income (loss) from operations..................................................         174   (3,453)    (3,627) (2,084)
Other..........................................................................         (20)      32         52    (260)
                                                                                  ---------- -------  ----------  ------

Net income (loss)..............................................................   $     154 $ (3,421) $  (3,575) (2,321)%
                                                                                  ========= ========= ========== ========
</TABLE>
                                       17
<PAGE>

Revenue.
      Security:  On March 31, 2004, the Security  business unit launched its new
         family of Full-360 degree security cameras.  Prior to this launch,  the
         Security  business unit had primarily been  developing the products and
         testing them in field beta trials.  The first  finished  products  were
         shipped  during late June,  2004.  Revenues in 2003 were primarily from
         the sale of beta units.
      AdMission:  Decreased  in the quarter  ended  September  30, 2004 over the
         quarter  ended  September  30, 2003 due to decreased  volumes of images
         processed, primarily related to the change in relationship with eBay as
         of November 2003.
      InfoMedia:  Increased  in the quarter  ended  September  30, 2004 over the
         quarter ended  September 30, 2003 primarily due to the increased  sales
         of the new  software  platform  launched in the first  quarter of 2004,
         offset by lower camera kit sales.

Cost of Revenue.
      Security:  Cost of revenues consists of the costs to purchase and assemble
         the  components  of the video  cameras sold during the  quarter.  Gross
         margins were 27% in the quarter ended September 30, 2004, down from 49%
         in the same  period  in 2003.  Cost of  revenues  includes  the cost of
         promotional  cameras,  which are sold at reduced margins.  In addition,
         the 2004 sales  volumes  were not yet  sufficient  to achieve  targeted
         margins of 40 to 50% in the Security business unit.
      AdMission: Cost of revenue consists of our direct expenses associated with
         the processing,  hosting and distribution of digital content.  With the
         reduced  volumes of images to process  during the third quarter of 2004
         relative to the third  quarter of 2003,  the  AdMission  business  unit
         decreased  depreciation  expense by reducing  the capital  committed to
         image processing ($0.6 million),  lowered its purchase of bandwidth and
         managed care services  from third party  co-location  facilities  ($0.4
         million)  and  reduced  the  number of  personnel  and  other  expenses
         incurred in the management of the network ($0.3 million).  Gross profit
         in the  third  quarter  of 2004 was  negative  because  of fixed  costs
         associated with the running and management of the network.
      InfoMedia:  Cost of revenues  consists of the costs of the digital  camera
         and related components included in an InfoMedia kit. Cost of revenue in
         the third quarter of 2004 was lower than in 2003 primarily due to fewer
         kit sales.  Cost of revenue as a percent of revenue  decreased from 60%
         in the  third  quarter  of 2003  to 41% in the  third  quarter  of 2004
         primarily  because of the increase in software license sales due to the
         launch of its new  software  platform in the first  quarter of 2004 and
         fewer kit sales, which have lower margins than software sales.

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 in the quarter ended  September 30, 2004 over the
quarter ended September 30, 2003, primarily due to the changed relationship with
eBay ($0.6  million)  and a reduction  of corporate  marketing  ($0.2  million),
offset by an increase in sales and marketing activities in our Security business
unit ($0.5 million).

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  in the quarter  ended  September  30, 2004 over the quarter
ended  September  30,  2003,  due to the  changed  relationship  with eBay ($0.4
million),  offset by an increase in research and  development for our new family
of Full-360 degree security cameras ($0.2 million).

General  and  Administrative.   General  and  administrative   expenses  consist
primarily of salaries  and related  benefits for  administrative  and  executive
staff,  fees for outside  professional  services and other costs associated with
being a public company.  General and  administrative  expenses  increased in the
quarter  ended  September  30, 2004 over the quarter  ended  September  30, 2003
primarily  as a result of  additional  expenses  incurred  in  association  with
compliance  with public  company  regulations,  including  Sarbanes-Oxley  ($0.2
million).  During the  quarter  ended  September  30,  2004,  severance  for Mr.
Strickland,  our former CEO, of $0.2 million was offset by lower  year-over-year
professional  fees ($0.1 million) for legal and auditing  services and severance
paid in the third  quarter  of 2003 for our former VP of Human  Resources  ($0.1
million).

                                       18
<PAGE>

Nine Months Ended September 30, 2003 Compared to the Nine Months Ended
September 30, 2004
<TABLE>
<S>                                                                             <C>      <C>         <C>           <C>
                                                                                  Nine months ended
                                                                                    September 30,
                                                                                -------------------
                                                                                                                   Percent
                            (Dollars in thousands)                                 2003     2004     Difference    Change
                                                                                -------- ---------   ----------   ---------
Revenue:
      Security................................................................. $    237 $   1,130   $     893      377%
      AdMission................................................................   17,471       810     (16,661)     (95)
      InfoMedia................................................................    1,858     1,824         (34)      (2)
                                                                                -------- ---------   ----------    -----
   Total revenue...............................................................   19,566     3,764     (15,802)     (81)
                                                                                -------- ---------   ----------    -----
Cost of revenue:
      Security.................................................................      161       814         653      406
      AdMission................................................................    5,426     1,808      (3,618)     (67)
      InfoMedia................................................................    1,025       896        (129)     (13)
                                                                                -------- ---------   ----------    -----
   Total cost of revenue.......................................................    6,612     3,518      (3,094)     (47)
                                                                                -------- ---------   ---------     -----
   Gross profit................................................................   12,954       246     (12,708)     (98)
                                                                                -------- ---------   ----------    -----
Operating expenses:
      Sales and marketing......................................................    5,704     4,620      (1,084)     (19)
      Research and development.................................................    3,626     2,874        (752)     (21)
      General and administrative...............................................    2,664     2,837         173        6
                                                                                -------- ---------   ---------     -----
   Total operating expenses....................................................   11,994    10,331      (1,663)     (14)
                                                                                -------- ---------   ---------     -----
Income (loss) from operations..................................................      960   (10,085)    (11,045)  (1,151)
Other..........................................................................     (103)       52         155      150
                                                                                --------- ---------  ---------     -----

Net income (loss).............................................................. $    857 $ (10,033)  $ (10,890)  (1,271)%
                                                                                ======== ==========  ==========  ========
</TABLE>
Revenue.
      Security:  On March 31, 2004, the Security  business unit launched its new
         family of Full-360 degree security cameras.  Prior to this launch,  the
         Security  business unit had primarily been  developing the products and
         testing them in field beta trials.  The first  finished  products  were
         shipped  during late June,  2004.  Revenues in 2003 were primarily from
         the sale of beta units.
      AdMission:  Decreased in the nine months ended September 30, 2004 over the
         nine months ended September 30, 2003 due to decreased volumes of images
         processed, primarily related to the change in relationship with eBay as
         of November 2003.
      InfoMedia: During the first nine months of 2003, InfoMedia recognized $0.3
         million in  royalties  while in the first nine months of 2004 the group
         recognized  $0.1  million  of  royalty  revenues.   In  February  2004,
         InfoMedia launched  Interactive  Studios to eventually replace the sale
         of one-use keys, which generated  royalty income in 2003. This decrease
         in revenues in 2004 was offset by sales of the new products launched in
         the first quarter of 2004.
Cost of Revenue.
      Security:  Cost of revenues consists of the costs to purchase and assemble
         the  components of the video  cameras sold during the period.  In 2003,
         the business unit recognized virtually no revenues or cost of revenues.
         Gross  margins  were 28% in the nine months ended  September  30, 2004,
         down from 32% in the same period in 2003. Cost of revenues includes the
         cost of beta units and promotional  cameras,  which are sold at reduced
         margins. In addition, the 2004 sales volumes were not yet sufficient to
         achieve targeted margins of 40 to 50% in the Security business unit.
      AdMission: Cost of revenue consists of our direct expenses associated with
         the processing,  hosting and distribution of digital content.  With the
         reduced  volumes of images to process  during the first nine  months of
         2004 relative to the first nine months of 2003, the AdMission  business
         unit decreased  depreciation  expense by reducing the capital committed
         to image processing  ($1.9 million),  lowered its purchase of bandwidth
         and managed care services from third party co-location facilities ($1.0
         million)  and  reduced  the  number of  personnel  and  other  expenses
         incurred in the management of the network ($0.7 million).  Gross profit
         in the first nine  months of 2004 was  negative  because of fixed costs
         associated with the running and management of the network.
      InfoMedia:  Cost of revenues  consists of the costs of the digital  camera
         and related  components  included in an InfoMedia  kit. Cost of revenue
         declined in the first nine months of 2004  relative to 2003,  primarily
         due to fewer kit sales and change in product mix between  hardware  and
         software. Cost of revenue as a percent of revenue decreased from 55% in
         the first nine  months of 2003 to 49% in the first nine  months of 2004
         primarily  because  of the  change in product  mix to  relatively  more
         software sales, which have virtually no cost of revenues.

                                       19
<PAGE>

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 in the nine months ended  September 30, 2004 over
the  nine  months  ended  September  30,  2003,  primarily  due to  the  changed
relationship  with eBay ($1.8  million) and a reduction  of corporate  marketing
($0.4 million),  offset by an increase in sales and marketing  activities in our
Security business unit ($1.0 million) and in InfoMedia ($0.1 million).

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  in the nine months ended  September  30, 2004 over the nine
months ended  September 30, 2003, due to the result of the changed  relationship
with eBay ($1.3 million),  offset by an increase in research and development for
our new family of Full-360 degree security cameras ($0.5 million).

General  and  Administrative.   General  and  administrative   expenses  consist
primarily of salaries  and related  benefits for  administrative  and  executive
staff,  fees for outside  professional  services and other costs associated with
being a public  company.  General and  administrative  expenses  increased  $0.2
million in the nine months ended  September  30, 2004 over the nine months ended
September 30, 2003,  due to the increased  costs of being a public company ($0.5
million), partially offset by a decrease in personnel costs ($0.2 million) and a
decrease in outside professional services ($0.1 million).

CONTRACTUAL OBLIGATIONS

The table below shows our contractual obligations as of September 30, 2004:
<TABLE>
<S>                                                                     <C>       <C>           <C>        <C>         <C>
(In thousands)                                                                             Payments Due by Period
                                                                        ------------------------------------------------------
                                                                                    Remainder
                                                                          Total      of 2004      2005       2006        2007
                                                                        --------  ------------  --------   --------    -------
Capital leases......................................................    $    112     $    112    $     --    $   --    $   --
Operating leases....................................................       2,520          266       1,419       771        64
                                                                        --------     --------    --------    ------    -------
Total...............................................................    $  2,632     $    378    $  1,419    $  771    $   64
                                                                        ========     ========    ========    ======    =======
</TABLE>
At  September  30,  2004,  we had $0.6 million of cash  deposits  restricted  as
collateral  on a letter  of  credit  for  certain  co-location  facility  leases
expiring in 2006 and,  accordingly,  classified as long term restricted cash. In
addition,  as of  September  30,  2004,  we have  prepaid  $0.3  million  of our
obligations  to the  co-location  facility.  As of September  30, 2004,  we have
outstanding  purchase  orders  from our lens and camera  vendors  valued at $1.6
million for delivery mostly in the fourth quarter of 2004.

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 September 30,
2004, we had $20.1 million of cash,  restricted cash and short term investments,
of which  $1.4  million  was  restricted  and  $0.6  million  was in short  term
investments.
                       Summary Consolidated Cash Flow Data
<TABLE>
<S>                                                                     <C>           <C>           <C>          <C>

                                                                          Three months ended           Nine months ended
                                                                             September 30,               September 30,
                                                                     --------------------------     ----------------------
                         (In thousands)                                   2003          2004          2003         2004
                                                                     -------------    ---------     ---------    ---------

Net cash provided by (used in) operating activities...............      $     417     $  (3,135)    $  7,172     $ (9,840)
Net cash used in investing activities.............................            (75)          (70)        (883)        (159)
Net cash provided by (used in) financing activities...............           (185)        7,816         (476)      17,822
Effect of exchange rate changes on cash...........................             (1)           --            3           --
                                                                        ----------    ---------     --------     --------
Net increase in cash and cash equivalents.........................            156         4,611        5,816        7,823
Cash and cash equivalents, beginning of period....................          8,680        13,453        3,020       10,241
                                                                        ---------     ---------     --------     --------

Cash and cash equivalents, end of period..........................      $   8,836     $  18,064     $  8,836     $ 18,064
                                                                        =========     =========     ========     ========
</TABLE>
                                       20
<PAGE>

Cash flows from  operating  activities in the third quarter of 2004,  reflects a
net loss of $3.4  million,  compared to net income of $0.2  million in the third
quarter of 2003.  Our net income for the three months ended  September  30, 2003
included $0.9 million of non-cash depreciation charges, whereas the three months
ended September 30, 2004 included $0.2 million of such charges. During the third
quarter of 2003, we invested $0.6 million in working  capital.  During the third
quarter of 2004, our working capital declined by $0.1 million.

Net cash used in investing  activities in the third quarter of 2004 and 2003 was
primarily related to the acquisition of computer software and hardware.

Net cash  provided  by  financing  activities  in the third  quarter of 2004 was
primarily  related to $4.9  million of net  proceeds  from AIR  exercises,  $0.4
million  of  proceeds  from the  exercise  of stock  options,  $0.2  million  of
collections under our ESSP, $3.0 million of proceeds from the exercise of Series
B Preferred  warrants,  net of $0.2  million of payments  made on capital  lease
obligations  and $0.5 million in dividends  paid  relating to the  conversion of
Series B Preferred  Stock.  Net cash used in financing  activities  in the third
quarter of 2003 related to $0.4  million of proceeds  from the exercise of stock
options,  net of $0.6  million of payments  on capital  lease  obligations.  The
capital  lease  payments in 2003 were larger than in 2004  because in the fourth
quarter of 2003, we returned equipment under lease from eBay in exchange for the
retirement of the remaining obligations under the leases.

Cash flows from operating  activities in the first nine months of 2004, reflects
net loss of $10.0  million,  compared to a net income of $0.9  million the first
nine months of 2003. Our net income for the nine months ended September 30, 2003
included $2.7 million of non-cash depreciation charges,  whereas the nine months
ended September 30, 2004 included $0.7 million of such charges.  During the nine
months of 2003, the Company had positive net cash flows from working  capital of
$3.6  million,  primarily  as a result of $3.0  million  for the  collection  of
deferred revenue in the second quarter of 2003.  During the first nine months of
2004, we invested $0.5 million in additional working capital.

Net cash used in investing  activities in the first nine months of 2004 and 2003
was primarily related to the acquisition of computer software and hardware.

Net cash  provided by financing  activities in the first nine months of 2004 was
primarily  related to $4.9 million of net proceeds from the private placement of
common stock in April 2004,  $5.4 million of proceeds  from AIR  exercise,  $5.2
million of proceeds from the exercise of stock options, $3.0 million of proceeds
from the exercise of Series B Preferred warrants,  $0.3 million of proceeds from
the sale of common  stock to  employees  under our ESPP,  net of $0.5 million of
payments made on capital lease  obligations  and $0.5 million in dividends  paid
relating  to the  conversion  of  Series B  Preferred  Stock.  Net cash  used in
financing activities in the first nine months of 2003 related to $1.4 million of
proceeds  from the exercise of stock  options,  net of $1.9 million  payments on
capital lease  obligations.  The capital lease payments in 2003 were larger than
in 2004 because in the fourth quarter of 2003, we returned equipment under lease
from eBay in exchange for the retirement of the remaining  obligations under the
leases.

During the quarter ended September 30, 2004 and in prior fiscal periods, we have
experienced certain going concern issues related to cash flow and profitability.
During  the first  nine  months of 2004,  we have  generated  approximately  $19
million in cash from the sale of common stock. In addition,  management believes
that it will  improve  future  operating  cash  flows  through  the  sale of new
products launched in the first nine months of 2004.

During 2003, we changed our relationship with out largest customer,  eBay, which
represented  87% of revenue for the year ended December 31, 2003.  eBay licensed
technology  from us that had  previously  been used by us to  provide  eBay with
recurring services.  After 2003, we no longer provide any services to eBay. As a
result,  we have a limited  operating  history  as we will  operate  in 2004 and
beyond and upon which an  evaluation  of our business and prospects may be made.
In addition,  we are subject to generally prevailing economic conditions and, as
such, our future operating results will be dependent upon our ability to provide
quality   products  and   services,   the  success  of  our  customers  and  the
appropriations processes of various commercial and governmental entities.

Management believes, however, that we have sufficient cash resources to meet our
funding  needs  through at least the next twelve  months.  We finished the third
quarter of 2004 with approximately $20.1 million in cash reserves (cash and cash
equivalents of $18.1 million, short term restricted investments of $0.8 million,
long term  restricted  cash of $0.6 million and short term  investments  of $0.6
million).  We have  three  business  units  all at  different  stages  in  their
development.  Management expects to continue to make significant  investments in
the development,  sale and marketing of new products for the security market and
in the image management business, which may consume some of our cash reserves.

                                       21
<PAGE>

Management's  focus is to manage our cash  requirements and focus our operations
on revenue  generation and controlled  spending.  Our long term strategy remains
unchanged.  We will  continue  to invest in  research  and  development  for our
Security and image management  products and in the expansion of our distribution
channels  for  security  and the  offline  publications  and  online  classified
advertising businesses.

INFLATION

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2004, we had $20.1 million of cash, cash equivalents,  short
term and long term  restricted  cash and short term  investments.  Our  interest
income is sensitive to changes in the general  level of United  States  interest
rates,  particularly  since the  majority of our  investments  are in short term
instruments.  Due to the nature of our short term investments, we concluded that
we do not have material market risk exposure.


Item 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.  Under the supervision and
with the participation of our management,  including our chief executive officer
and chief financial  officer,  we have evaluated the effectiveness of the design
and operation of our disclosure  controls and procedures (as defined in Exchange
Act  Rule  13a-14(c))  as of the end of the  period  covered  by this  quarterly
report.  Based  on that  evaluation,  the  chief  executive  officer  and  chief
financial officer have concluded that our disclosure controls and procedures are
effective to ensure that  material  information  relating to the Company and our
consolidated  subsidiaries is made known to such officers by others within these
entities,  particularly  during the period for which this  quarterly  report was
prepared, in order to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls. There have not been any significant changes in
our  internal  controls or in other  factors  during the period  covered by this
quarterly report that materially affected or are reasonably likely to materially
affect our internal controls over financial reporting.

CAUTIONARY STATEMENT REGARDING 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.

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.

Although we believe that the  expectations  and  assumptions  reflected in these
statements are reasonable in view of the information currently available,  there
can be no  assurance  that these  expectations  will prove to be correct.  These
forward-looking   statements  involve  a  number  of  risks  and  uncertainties,
including those set forth below and in our 2003 Annual Report on Form 10-K filed
with the  Securities  and  Exchange  Commission  on March 31, 2004 under Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  under  the  caption  "Risk  Factors."  Actual  results  may  differ
materially  from the results  discussed in the  forward-looking  statements.  In
addition to the specific factors  discussed in our 2003 Form 10-K, the following
are among the  important  factors  that  could  cause  actual  results to differ
materially from the forward-looking statements:

  -        our loss of existing, or an inability to attract new customers,
  -        changes in the demand for our products and services,
  -        our rate of revenue growth,

                                       22
<PAGE>


  -        the burdens and costs of defending against potential infringement
           claims,
  -        our ability to attract and retain personnel,
  -        our ability to control or affect reductions in costs,
  -        our ability to design, manufacture and deliver high quality products
           in a timely fashion,
  -        uncertainty regarding our ability to continue as a going concern,
  -        our third-party supplier's ability to deliver high quality components
           to us in a timely fashion,
  -        technological changes,
  -        general economic, financial or market changes or developments,
  -        the conversion of our Series B Preferred Stock into common stock,
  -        actions taken by government agencies,
  -        the ultimate impact of the Sarbanes-Oxley Act of 2002 and any future
           changes in accounting regulations or practices in general with
           respect to public companies or our operations specifically,
-          the enactment of new accounting standards, or interpretations of
           existing accounting standards, by the Financial Accounting Standards
           Board (FASB), or the SEC that could impact the way we record
           revenues, assets and liabilities, which in turn could affect our
           reported results of operations and
-          the enactment of new auditing standards, or interpretations of
           auditing standards, by the Public Company Accounting Oversight Board
           (PCAOB) which could adversely affect our ability to comply with the
           requirements of Section 404 of the Sarbanes-Oxley Act of 2002
           (SOX 404).


PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

See Item 3, Legal  Proceedings  in our Annual  Report on Form 10-K.  On April 7,
2004, the California  Teachers'  Retirement System ("CalSTRS") filed a notice of
appeal with the United States Court of Appeals for the Ninth  Circuit  appealing
the  dismissal of the First  Amended  Consolidated  Complaint  for  violation of
federal securities laws filed against Homestore.com, Inc, us and the other named
defendants.  On July 22, 2004, CalSTRS and IPIX filed a Stipulation of Dismissal
with the Court of  Appeals  pursuant  to which the appeal  was  dismissed,  with
prejudice, against us.

Item 2. Changes In Securities And Use Of Proceeds

On April 5, 2004, we completed  the sale of 909,090  shares of our common stock,
resulting in net proceeds received of approximately $4.9 million, and additional
investment rights ("AIR") to purchase another 888,180 shares of our unregistered
common  stock  in a  private  offering  to  accredited  institutional  investors
("PIPE"). The shares of common stock were sold at $5.50 per share and the shares
of common stock  underlying the AIR are purchasable at $6.05 per share.  The AIR
was  exercisable  until September 28, 2004. As of September 30, 2004, all of the
AIR's had been  exercised:  799,361  shares of common stock in the third quarter
and 88,818  shares in the second  quarter.  Our proceeds  from the AIR exercises
were $5.4 million. The common stock sold in the PIPE and from the AIR's has been
registered  under the Securities Act of 1933, as amended,  and may be offered or
sold in the  United  States.  Our  Form  S-3  filed on May 5,  2004  provides  a
description of this transaction and copies of the executed documents.

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  between  the  Company  and  Image  dated  as of May 14,  2001,  Image
purchased  from us a $10 million  convertible  senior  secured note and received
Tranche A and Tranche B warrants with the right to purchase up to $20 million of
our Series B  Preferred  Stock.  Each share of the Series B  Preferred  Stock is
convertible  into  approximately  9.2 shares of common  stock and is entitled to
vote on matters  submitted to holders of common stock on an as-converted  basis.
On September 26, 2001, the Company,  Image and strategic investors completed the
Tranche B stage of the investment.  At this time, we issued  1,115,080 shares of
Series B Preferred Stock for total  consideration of $22.3 million,  represented
by the  conversion  of the $10 million note,  the  conversion of $0.3 million of
interest on the Note and $12 million in cash  through the  exercise of Tranche B
warrants. The remainder of the Tranche B warrants expired.

At  December  31,  2003,  there  were two  Tranche A warrants  ("Warrant  1" and
"Warrant  2"),  outstanding.  Warrant 1, which  entitled the holders to purchase
150,000 shares of Series B Preferred Stock at $20 per share,  has been exercised
in full. We issued 1,375,600 shares of common stock in the third quarter of 2004
and received $3.0 million in cash from the exercise of part of Warrant 1 and the
conversion of the underlying Series B Preferred Stock. During the second quarter
of 2004, 600 shares of the rest of Warrant 1 were converted into 4,372 shares of

                                       23
<PAGE>

common stock.  We did not receive any proceeds from the second quarter Warrant 1
exercise.  Warrant 2 entitles the holders 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.  During the second quarter of 2004, 400 shares
of  Warrant 2 were  converted  into  2,914  shares of common  stock.  We did not
receive any proceeds from the second quarter Warrant 2 exercise.

Item 3. Defaults Upon Senior Securities

    None.

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

     None.

Item 5. Other Information

    None.

Item 6. Exhibits And Reports On Form 8-K

(a)  Exhibits

Exhibit      Exhibit Description
Number       -------------------
-------

 10.1        Employment Agreement between the Company and Clara Conti, effective
             September 16, 2004

 31.1        Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 31.2        Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 32          Section 1350 Certification of Chief Executive Officer and Chief
             Financial Officer


(b)  Reports On Form 8-K


     We filed the following Current Reports on Form 8-K during the quarter
     ended September 30, 2004:
<TABLE>
<S>    <C>                     <C>

         Date Filed                      Event Reported
         ----------                      --------------

       July 19, 2004.........  Items 7 and 12.  Earnings release regarding financial results for the quarter ended June 30, 2004.

       September 21,           Items 1 and 5.  Announcing resignation of Mr. Strickland as President, CEO and director and the
       2004..................  appointment of Ms. Conti as President, CEO and director.
</TABLE>


                                       24
<PAGE>


                                IPIX 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: November 5, 2004              IPIX CORPORATION
                                      (Registrant)


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





                                       25
<PAGE>

                                IPIX CORPORATION
                         INDEX TO EXHIBITS FOR FORM 10-Q
                      FOR QUARTER ENDED SEPTEMBER 30, 2004


EXHIBIT NO.                        EXHIBIT DESCRIPTION
-----------                        -------------------

10.1           Employment Agreement between the Company and Clara Conti,
               effective September 16, 2004

31.1           Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2           Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32             Section 1350 Certification of Chief Executive Officer and Chief
               Financial Officer




                                       26

<PAGE>

                                                                    Exhibit 10.1


                              EMPLOYMENT AGREEMENT

     This  Employment  Agreement  is  made  and  entered  into  effective  as of
September  16,  2004 by and between  IPIX  Corporation,  a Delaware  corporation
having an office at 3160 Crow Canyon, Fourth Floor, San Ramon, California 94583,
and the individual named in Exhibit A ("Executive").

     WHEREAS, the Company wishes to employ Executive with the title in Exhibit A
and upon the terms and conditions  hereinafter set forth, and Executive  desires
to serve in such capacities upon the terms and conditions hereinafter set forth.

     NOW THEREFORE, in consideration of the premises and of the mutual covenants
and conditions contained herein, and other good and valuable consideration,  the
receipt  and  sufficiency  of which are hereby  acknowledged,  the  Company  and
Executive hereby agree as follows:

     1. Term.  Executive's employment under this Agreement shall commence on the
Effective  Date set forth in Exhibit A and shall  continue  indefinitely  as set
forth herein until termination of Executive's  employment as provided in Section
6 hereof. If Executive's  employment is terminated pursuant to Section 6 hereof,
the Term of Employment  shall expire as of the  Termination  Date (as defined in
Section 6 hereof).

     2. Duties and  Activities.  During the Term of  Employment,  Executive will
faithfully  perform  those  duties and  responsibilities  commensurate  with the
position set forth in Exhibit A. Executive  shall  participate  and perform such
other  responsibilities and duties as may be reasonably determined in the future
by the  Company's  Board of  Directors  (the  "Board").  Executive  will  devote
Executive's  entire business time,  attention and energy and use best efforts to
advance the business and welfare of the Company in  furtherance  of the policies
established  by the Board.  Executive  shall not engage in any other  employment
activities  for any direct of indirect  remuneration,  except that Executive may
continue to devote  reasonable  time to the management of personal  investments,
participation in community and charitable affairs, and the activities as further
set forth in Exhibit B hereto,  so long as such activities do not interfere with
Executive's performance of her duties under this Agreement.  Executive may serve
on the board of directors of other  for-profit  companies with the prior consent
of the Board.

     3. Former Employers.  Executive  represents and warrants that employment by
the Company will not conflict with and will not be  constrained  by any prior or
current employment,  consulting or other relationship.  Executive represents and
warrants that Executive does not possess confidential information arising out of
any such employment, consulting or other relationship, which in Executive's best
judgment,  would be utilized  in  connection  with  employment  by the  Company.
Executive has documented in Exhibit C any prior inventions claimed by Executive.

<PAGE>

     4. Compensation.

     4.1 Base Salary.  In  consideration  for  Executive's  services  under this
     Agreement,  Executive  will be paid a salary at an annual rate set forth in
     Exhibit A, or at such other annual  salary rate as  determined by the Board
     or its  Compensation  Committee,  but in any  event at  least  equal to the
     salary rate in effect immediately preceding any change thereto. Executive's
     annual salary rate in effect from time to time is referred to herein as the
     "Base  Salary".   Executive's   Base  Salary  shall  be  paid  in  periodic
     installments  at such times as salaries are generally  paid to other senior
     executives of the Company.

     4.2 Bonus  Compensation.  Executive  shall be  eligible  to  receive  Bonus
     Compensation  as may be determined  from time to time by the Board based on
     such  objectives  and  performance  goals as the Board may determine in its
     discretion.  The Company and Executive  acknowledge that Bonus Compensation
     is anticipated  to be based on Executive  attaining  certain  Management by
     Objective targets in substantially the form and in the manner as previously
     provided to Executive.  Executive's compensation by payments of Base Salary
     and Bonus  Compensation shall not be deemed exclusive and shall not prevent
     Executive from  participating in any other incentive  compensation,  profit
     sharing or benefit  plan made  available  by the Company to its  executives
     generally. The Base Salary payments hereunder shall not in any way limit or
     reduce  any  other  obligation  of the  Company  hereunder,  and  no  other
     compensation, benefit or payment hereunder shall in any way limit or reduce
     the obligation of the Company to pay Executive's Base Salary.

     4.3 Stock Option  Grant.  The Company shall grant to Executive an incentive
     stock option (the  "Option"),  (to the extent  permitted by the  applicable
     provisions  of Section 422 of the  Internal  Revenue  Code) to purchase the
     number of shares of the common stock of the Company as set forth in Exhibit
     A. Executive shall be entitled to option shares in an amount and consistent
     with option shares being granted to the  Company's  other senior  executive
     officers,  which  option  shares will be issued  pursuant to the  Company's
     employee stock option plans, subject to approval by the Board of Directors,
     and shall include the following terms:

     (1) The option shares will vest as set forth in Exhibit A.

     (2) The  exercise  price for the option shall be as set forth in Exhibit A,
     as appropriately adjusted for stock splits, stock dividends,  and the like.

     (3) The option  shall be  exercisable  upon vesting or within 90 days after
     termination  of  Executive's  employment  with the Company,  which shall be
     deemed to have  occurred  after all  Continuation  Payments,  as defined in
     Section 7, have been made by the Company to Executive.

                                        2
<PAGE>

     (4)  Issuance  of the option  shall be in  accordance  with all  applicable
     securities  laws and the other terms and conditions of the Company's  Stock
     Option Plan and form of the Stock Option Agreement.

     (5) The Option will have a term of ten years.

     (6) In the event of a Change of Control (as defined in the  Company's  2001
     Equity  Incentive  Plan),  all unvested  options will vest and become fully
     exercisable.  In the event of the death of the Executive;  or the Permanent
     Disability of Executive (as defined in Section 6.1 (b) hereof),  vesting of
     options will continue for the 90 day period thereafter. In the event of the
     termination  of  Executive  without  Cause (as  defined in Section  6.1 (c)
     hereof) or  termination by Executive for Good Reason (as defined in Section
     6.1(e),  then vesting of options  will  continue in  accordance  with their
     terms over the ten (10) month severance period.

     5. Benefits.

     5.1 Participation. Executive shall be entitled to participate in all fringe
     benefit  programs  maintained  by the  Company  and made  available  to its
     executive  officers  from time to time.  The  Company  shall  maintain  for
     Executive disability, health, vision, dental and prescription drug coverage
     comparable to that provided to executives of the Company.  Executive  shall
     be entitled to four (4) weeks of paid  vacation  per year,  which  vacation
     time shall accrue in accordance with the Company's policies.

     5.2  Expenses.  The  Company  will  pay or  reimburse  Executive  for  such
     reasonable  travel,  entertainment or other business  expenses  incurred on
     behalf of the Company in connection  with the  performance  of  Executive's
     duties  hereunder  but only to the extent  that such  expenses  were either
     specifically  authorized  by the  Company or incurred  in  accordance  with
     policies  established  by the  Company for  executives  and  provided  that
     Executive  shall  furnish the Company with such  evidence  relating to such
     expenses  as the  Company  may  reasonably  require  to  substantiate  such
     expenses for tax purposes.

     6. Termination of Employment.

     6.1  Circumstances of Termination.  Notwithstanding  the terms set forth in
Section  1  hereof,  Executive's  employment  shall  terminate  under any of the
following  circumstances  and the date of such an occurrence,  unless  otherwise
provided below, shall be Executive's "Termination Date":

          (a) Death. Immediately, in the event of Executive's death.

                                       3
<PAGE>

          (b) Permanent  Disability.  At the option of the Company, if Executive
     becomes  physically  or  mentally  incapacitated  or  disabled  so that (i)
     Executive  is unable to  perform  for the  Company  substantially  the same
     services as Executive  performed  prior to  incurring  such  incapacity  or
     disability or to devote a substantial portion of Executive's  business time
     or use Executive's  best efforts to advance the business and welfare of the
     Company or otherwise to perform  Executive's  duties under this  Agreement,
     (ii) such condition exists for an aggregate of six (6) months in any twelve
     (12)  month  consecutive  calendar  months,  and (iii) such  incapacity  or
     disability is incapable of reasonable  accommodations under applicable law,
     including but not limited to the Americans with  Disabilities  Act of 1990,
     as amended  (a  "Permanent  Disability"),  the  Company,  at its option and
     expense,  is  entitled  to  retain a  physician  reasonably  acceptable  to
     Executive to confirm the existence of such  incapacity or  disability,  and
     the  determination  of such  physician  is  binding  upon the  Company  and
     Executive.

          (c) Cause. At the option of the Company, if Executive:

          (i) has been convicted of a felony; or

          (ii) has  embezzled or  misappropriated  Company  funds or property or
          that of the Company's customers, suppliers or affiliates; or

          (iii) has violated any material term of this Employment Agreement; or

          (iv) has  demonstrated  gross  negligence  or  willful  misconduct  in
          connection with the performance of Executive's duties hereunder;

     provided,  however,  that with respect to subsections (iii) and (iv) above,
     the Company's right to terminate  Executive shall be conditioned on (A) the
     Company  giving  Executive  written  notice  specifically  referring to the
     pertinent subsection above and describing the specific circumstances and/or
     actions  purportedly  giving rise to the  occurrence of such item;  and (B)
     failure by Executive, within ten (10) days after receipt of any such notice
     to  cease  the  actions  and/or  reinstate  or  rectify  the  circumstances
     described in such notice to the reasonable  satisfaction of the Board. With
     respect to these  subsections,  the  Company  shall have the right to place
     Executive   on   administrative   leave   pending   investigation   of  the
     circumstance(s)  or action(s)  purportedly giving rise to the occurrence of
     such items.

          (d)  Without  Cause.  At the option of the Company at any time for any
     reason  other  than  those  referred  to  above  or for no  reason  at all,
     whereupon the Company  shall be obligated to make those  payments set forth
     in Section 7 hereof but if, and only if, Executive executes a mutual, valid
     and comprehensive release of any and all claims that the Executive may have
     against the Company in a form provided by the Company.

                                       4
<PAGE>

          (e) Resignation for Good Reason.

               (i) Executive, at Executive option, may resign for "Good Reason":

                    (1) because the Company has unreasonably reduced the role or
                    responsibilities of Executive;

                    (2)  because  the  Company  causes  Executive  to  report to
                    someone   other  than  the  Board  without  the  consent  of
                    Executive;

                    (3) because the Company has reduced  Executive's Base Salary
                    from the level in effect  immediately  prior to such change,
                    with  the   exception   of  a   company-wide   reduction  of
                    compensation due to economic  considerations,  provided that
                    the foregoing shall not limit or derogate from the Company's
                    obligations set forth in Section 4 above;

                    (4) because the Company has breached  any  material  term of
                    this Agreement  other than as noted in  subsections  (1) and
                    (2) above; or

                    (5) after the Company has relocated its principal  executive
                    offices to Tyson's Corner,  Virginia,  the Company relocates
                    its principal  executive  offices to a location more than 50
                    miles from such location.

     In the event that Executive  terminates this Agreement for Good Reason, the
     Company shall become  obligated to make those payments set forth in Section
     7 hereof.

     6.2 Notice of Termination.  Any intent to terminate employment by Executive
pursuant  to Section  6.1(e)  shall be  communicated  by  written  notice to the
Company  setting forth in detail the specific  actions deemed to constitute Good
Reason.  If the Company does not respond  within ten (10) days from such notice,
the resignation shall be deemed effective.  The Company may, within the ten (10)
day period,  correct such condition giving rise to Executive's notice or dispute
Executive's claims by giving written notice of such dispute.

     6.3 At-Will Employment.  Notwithstanding the Company's obligation described
in Sections 6 and 7,  Executive's  employment with the Company will be on an "at
will"  basis,  meaning  that  either  Executive  or the  Company  may  terminate
Executive's employment at any time for any reason or no reason.

                                       5
<PAGE>

     6.4 Resignation. Upon termination of employment,  Executive shall be deemed
to have  resigned  from the Board of Directors of the Company if Executive was a
director.

     6.5  Cooperation.  After notice of termination and the 60 days  thereafter,
Executive  shall  cooperate  with the Company,  as  reasonably  requested by the
Company,  to effect a transition of Executive's  responsibilities  and to ensure
that the Company is aware of all matters being handled by Executive.

     7. Payments Upon Termination of Employment.

     7.1  Payments.  In addition to any rights  Executive may have under Section
4.3 on the Termination Date:

          (a) If the Company terminates  Executive's  employment for Cause or if
     Executive  voluntarily  terminates  employment  without  Good  Reason,  the
     Company's obligation to compensate Executive shall in all respects cease as
     of the  Termination  Date,  except that the Company  shall pay to Executive
     within 30 days the Base Salary accrued under Section 4.1, a pro-rata amount
     of any Bonus or other  compensation  earned under Section 4.3, the value of
     accrued vacation time pursuant to Section 5.1 hereof,  and the reimbursable
     expenses   incurred  under  Section  5.2  of  this  Agreement  up  to  such
     Termination Date (the "Accrued Obligations").

          (b) If  Executive's  employment  is  terminated  due to the  death  of
     Executive,  the Company's  obligation to compensate  Executive shall in all
     respects cease as of the Termination  Date,  except that within thirty (30)
     days after the Termination  Date, the Company shall pay Executive's  estate
     or legal representative the Accrued Obligations.

          (c)  If  Executive's  employment  is  terminated  upon  the  Permanent
     Disability of Executive,  the Company's  obligation to compensate Executive
     with  respect to Base Salary (as in effect on the  Termination  Date) shall
     continue  for up to six (6)  months  or until  Executive  is  eligible  for
     long-term  disability  payments  from  the  Company's  insurance  provider,
     whichever  is sooner.  In addition,  the Company  shall pay  Executive  any
     Accrued Obligations within 30 days of termination; and

          (d) If Executive's employment is terminated by the Company pursuant to
     Section  6.1(d),  or by Executive  pursuant to Section 6.1(e) the Company's
     obligation to compensate Executive shall in all respects cease, except that
     within  thirty (30) days after the  Termination  Date the Company shall pay
     Executive  the  Accrued  Obligations  and during  the period  ending on the
     expiration of the tenth month  following the  Termination  Date the Company
     shall pay to Executive each month  one-twelfth  (1/12th) of the annual Base

                                       6
<PAGE>

     Salary of Executive in effect at the  Termination  Date (the  "Continuation
     Payments").  The  Company  shall be excused  from the  obligations  of this
     Section 7.1(d) if Executive  breaches  Executive's  obligations  under this
     Agreement or the Confidentiality Agreement.

     Notwithstanding the foregoing,  in the event such termination occurs within
     two (2) years of a Change of Control of the Company, the full amount of the
     Continuation  Payments  will be paid in a lump sum  within ten (10) days of
     the termination.

     7.2 Medical Benefits.If Executive's employment is terminated by the Company
pursuant  to Section  6.1(d) or by  Executive  pursuant to Section  6.1(e),  the
Company shall  reimburse the  Executive  for the amount of  Executive's  premium
payments for group health coverage, if any, elected by the Executive pursuant to
the  Consolidated  Omnibus  Budget   Reconciliation  Act  of  1985,  as  amended
("COBRA"); provided, however, that the Executive shall be solely responsible for
all matters relating to Executive's  continuation of coverage pursuant to COBRA,
including  (without  limitation)  Executive's  election  of  such  coverage  and
Executive's timely payment of premiums; provided further , that upon the earlier
to occur of (C) the time that the  Executive no longer  constitutes  a Qualified
Beneficiary  (as such term is  defined in Section  4980B(g)(1)  of the  Internal
Revenue Code of 1986, as amended) and (D) the date ten (10) months following the
Executive's  termination,  the Company's  obligations to reimburse the Executive
under this subsection (ii) shall cease.

     7.3 Effect on this  Agreement.  Any  termination of Executive's  employment
under this  Agreement  shall not affect the  continuing  operation and effect of
this Section and Section 8 hereof, which shall continue in full force and effect
with  respect to the Company and  Executive,  and their  heirs,  successors  and
assigns.

     Nothing  in  Section  6 hereof  shall be deemed to  operate  as a  release,
settlement  or discharge of any  liability of Executive to the Company or others
from any action or omission by Executive enumerated in Section 6.1 (c) hereof as
a possible basis for termination of Executive's employment for Cause.

     7.4 No Duty to Mitigate.  Subject to the provisions of the  Confidentiality
Agreement  and Section 8 of this  Agreement,  Executive  shall be free to accept
such  employment  and engage in such business as Executive may desire  following
the  termination  of  employment  hereunder,  and no  compensation  received  by
Executive  therefrom shall reduce or affect any payments  required to be made by
the Company  hereunder except to the extent expressly  provided herein or in the
benefit plans of the Company.

     7.5 Parachute  Payment.  In the event that the  termination  of Executive's
employment is for one of the reasons set forth in Section 6.1 (d) or Section 6.1
(e) and the  aggregate of all payments or benefits made or provided to Executive
under  Section 7 and under all other  plans and  programs  of the  Company  (the

                                       7
<PAGE>

"Aggregate  Payment") is determined to constitute a Parachute  Payment,  as such
term is defined in Section  280G(b)(2) of the Internal Revenue Code, the Company
shall pay to Executive, prior to the time any excise tax imposed by Section 4999
of the  Internal  Revenue  Code  ("Excise  Tax") is payable with respect to such
Aggregate  Payment,  an  additional  amount which,  after the  imposition of all
income and excise  taxes  thereon,  is equal to the Excise Tax on the  Aggregate
Payment.

     8. Post-Employment Activities.

     8.1 Conditional Nature of Severance  Payments;  Non-Competition.  Executive
acknowledges  that the nature of the Company's  business is such that during the
term  of  employment  and  for  twelve  (12)  months  following  termination  of
Executive's employment with the Company (the "Noncompete Period"):

          8.1.1 if  Executive  were to  become  employed  by,  or  substantially
          involved in, the business of a Competitor,  it would be very difficult
          for the Executive  not to rely on or use the  Company's  trade secrets
          and confidential information. A "Competitor" is defined as any person,
          entity or division,  whether now  existing or  hereafter  established,
          which directly competes with the products and services of the Company.
          To avoid the inevitable  disclosure of the Company's trade secrets and
          confidential  information,  Executive agrees and acknowledges that the
          Executive's right to receive the severance payments and other benefits
          set forth in  Section 7 (to the  extent  the  Executive  is  otherwise
          entitled to such payments) shall be conditioned upon (a) the Executive
          not  directly or  indirectly  engaging  in  (whether  as an  employee,
          consultant,  proprietor,  partner, director or otherwise),  nor having
          any ownership  interest  directly or indirectly in more than 1% in, or
          participating in the financing, operation, management or control of, a
          Competitor;  provided,  however;  that  Executive may be employed by a
          division of a Competitor  so long as such  division does not engage in
          activities that directly compete with the products and services of the
          Company  and  Executive  is  otherwise  in  compliance  with all other
          provisions of this Section 8, and (b) Executive continuing to observe,
          and  not be in  breach  of,  the  provisions  of  the  Confidentiality
          Agreement  and  Invention   Assignment  Agreement  (the  "Confidential
          Agreement") entered into by Executive and the Company. Upon any breach
          of  this  Section  or the  Confidentiality  Agreement,  all  severance
          payments pursuant to Section 7 shall immediately cease.

                                       8
<PAGE>

          The  obligations  under  the  Confidential   Agreement  shall  survive
          termination of this Agreement for any reason.

          8.1.2  Executive  shall not,  without the prior written consent of the
          Company, directly or indirectly, (i) solicit, request, cause or induce
          any person who is at the time, or 12 months prior thereto had been, an
          employee of or a  consultant  of the Company to leave the employ of or
          terminate such person's  relationship with the Company or (ii) attempt
          to interfere  with any business  agreement  or  relationship  existing
          between the Company and/or its affiliates with a third party.

          8.1.3  Executive  shall not disparage  the business  reputation of the
          Company (or its management  team) or take any actions that are harmful
          to the  Company's  goodwill  with its  customers,  content  providers,
          bandwidth  or  other  network   infrastructure   providers,   vendors,
          employees,  the media or the public.  Executive  recognizes  that such
          actions  would cause  irreparable  harm for which there is no adequate
          remedy at law and that the Company may seek in state or federal court,
          and is entitled to a temporary  restraining  order and to  preliminary
          and permanent  injunctive relief in state or federal court to stop any
          such conduct or statements for any breach or threatened breach of this
          Section 8 during the term of employment  and for a period of two years
          thereafter. The Company shall not disparage the business reputation of
          Executive.

          8.1.4 The  Company  spends  considerable  amounts  of time,  money and
          effort  in  developing  and  maintaining  good  will in its  industry.
          Executive  agrees the covenants  contained  within this Section 8: (i)
          are  reasonable and necessary in all respects to protect the goodwill,
          trade secrets,  confidential  information,  and business  interests of
          Company; (ii) are not oppressive to Executive; and (iii) do not impose
          any greater  restraint on Executive  than is  reasonably  necessary to
          protect the goodwill,  trade  secrets,  confidential  information  and
          legitimate business interests of Company.

          8.1.5  Executive  acknowledges  and agrees that  promises  made by the
          Company  in  this  Agreement  such  as  (i)  the  establishment  of an
          employment  relationship and (ii) the commitment to provide  severance

                                       9
<PAGE>

          compensation in the event of the termination of Executive's employment
          for reasons other than Cause (subject to certain  requirements  on the
          part  of  Executive),   constitute  one  form  of  consideration   for
          Executive's agreement to and compliance with the restrictive covenants
          in this Agreement.  Executive  acknowledges  and agrees that Company's
          agreement to provide  Executive with access to Company's  confidential
          and  proprietary  information  is a  separate  form  of  consideration
          supporting  the  restrictive  covenants in this  Agreement.  Executive
          acknowledges and agrees that the Company's agreement to permit the use
          of the Company's goodwill with the Company's customers,  investors and
          content  providers is a separate form of consideration  supporting the
          restrictive  covenants in this Agreement.  Executive  acknowledges and
          agrees that the  Company's  commitment  to  providing  Executive  with
          unique  skill   development   and  training  is  a  separate  form  of
          consideration supporting the restrictive covenants in this Agreement.

     8.2  Exclusions.  No  provision  of this  Agreement  shall be  construed to
     preclude  Executive  from  performing  the same services  which the Company
     hereby retains Executive to perform for any person or entity which is not a
     Competitor of the Company upon the expiration or termination of Executive's
     employment (or any post-employment  consultation) so long as Executive does
     not thereby violate any term of the Confidentiality Agreement.

     9. Remedies.  Executive's  obligations under the Confidentiality  Agreement
under Section 8 of this Agreement shall survive the expiration or termination of
Executive's  employment (whether through  Executive's  resignation or otherwise)
with the Company.  Executive acknowledges that a remedy at law for any breach or
threatened  breach  by  Executive  of  the  provisions  of  the  Confidentiality
Agreement or Section 8 would be inadequate  and Executive  therefore  agree that
the Company  shall be entitled to  injunctive  relief in any court of  competent
jurisdiction  in the case of any such  breach or  threatened  breach.  Executive
acknowledges  that  this  Section  does not limit  the  Company's  right to seek
monetary damages for breach of this Agreement.

     10. Miscellaneous.

          10.1 Notice. All notices, requests,  consents and other communications
     hereunder shall be in writing,  shall be addressed to the receiving party's
     address set forth below or to such other  address as a party may  designate
     by notice  hereunder,  and shall be either (i) delivered by hand, (ii) made
     by telecopy, (iii) send by overnight courier, or (iv) sent by registered or
     certified mail, return receipt required, postage prepaid.

                                       10
<PAGE>

              If to the Company:        IPIX Corporation
                                        3160 Crow Canyon Road
                                        Fourth Floor
                                        San Ramon, CA 94583

              If to Executive:          Home address of Executive as
                                        maintained in the Company's
                                        personnel records.


          10.2  Modification and No Waiver of Breach.  No waiver or modification
     of this  Agreement  shall be binding  unless it is in writing signed by the
     parties hereto.  No waiver by a party of a breach hereof by the other party
     shall be deemed to  constitute  a waiver of a future  breach,  whether of a
     similar or dissimilar nature, except to the extent specifically provided in
     any written waiver under this Section.

          10.3. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
     AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TENNESSEE.  ALL
     QUESTIONS  RELATING TO THE  VALIDITY  AND  PERFORMANCE  HEREOF AND REMEDIES
     HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAW.

          10.4.  Counterparts.  This  Agreement  may be  executed in one or more
     counterparts,  each of which shall be deemed an original,  but all of which
     taken together shall constitute one and the same agreement.

          10.5 Captions. The captions used herein are for ease of reference only
     and shall not define or limit the provisions hereof.

          10.6  Assistance  in  Litigation.  Executive  shall,  during and after
     termination of employment, upon reasonable notice, furnish such information
     and proper  assistance to the Company as may  reasonably be required by the
     Company  in  connection  with  any  litigation  in  which  it or any of its
     subsidiaries  or affiliates is, or may become a party;  provided,  however,
     that such assistance  following  termination shall be furnished at mutually
     agreeable times and for mutually agreeable compensation.

          10.7 Entire Agreement.This  Agreement,  any written agreement referred
     to herein and the Exhibits hereto  constitute the entire agreement  between
     the parties hereto relating to the matters  encompassed herby and supersede
     any prior or contemporaneous written or oral agreements.

                                       11
<PAGE>

     10.8 Successors.

     (a) Any successor to the Company (whether direct or indirect and whether by
     purchase, lease, merger, consolidation, liquidation or otherwise) to all or
     substantially  all of the  Company's  business  and assets shall assume the
     obligations  under  this  Agreement  and agree  expressly  to  perform  the
     obligations  under this Agreement in the same manner and to the same extent
     as the Company would be required to perform such obligations in the absence
     of a succession.  For all purposes under the Agreement,  the term "Company"
     shall include successor to the Company's  business and assets that executes
     and delivers the assumption  agreement  described in this subsection (a) or
     which becomes bound by the terms of this Agreement by operation of law.

     (b) The terms of this Agreement and all rights of Executive hereunder shall
     insure to the benefit or, and be enforceable  by,  Executive's  personal or
     legal  representatives,   executors,  administrators,   successors,  heirs,
     devisees and legatees.


     IN  WITNESS  HEREOF,  this  Agreement  has  been  duly  executed  as of the
Effective date written in Exhibit A.


                                        IPIX CORPORATION


                                        By:   /s/ David M. Wilds
                                           --------------------------------

                                        Name:    David M. Wilds
                                             ------------------------------

                                        Title:   Chairman
                                              -----------------------------



                                            /s/ Clara Conti
                                        -----------------------------------
                                        Executive


                                       12
<PAGE>

                                    EXHIBIT A

Effective Date of Employment Agreement:  September 16, 2004

Name:  Clara M. Conti

Title:  President and Chief Executive Officer

Direct Supervisor:  Board of Directors

Annual Base Salary:  $275,000

Options:
         Number:  500,000
         Exercise Price:  $8.28 per share
         Vesting start date:  September 16, 2004
         Vesting  terms:  (1) Options to purchase  142,857  shares shall vest on
September  16, 2005;  (2) options to purchase  11,905  shares shall vest monthly
thereafter (beginning on October 16, 2005) for the next twenty nine (29) months;
and (3) options to purchase 11,898 shares on March 16, 2008.

Other (state "None" if no other items should be noted):  NONE



                                           IPIX CORPORATION


                                           By:  /s/ David M. Wilds
                                              -------------------------------

                                           Name:  David M. Wilds
                                                 ----------------------------

                                           Title:   Chairman
                                                  ---------------------------



                                             /s/ Clara Conti
                                           ----------------------------------
                                           Executive


                                       13
<PAGE>

                                    EXHIBIT B

                                 OTHER POSITIONS

                        Women's Center (Vienna, Virginia)



















                                       14
<PAGE>

                                    EXHIBIT C

                                PRIOR INVENTIONS

                                     [NONE]

















                                       15

<PAGE>

                                                                    Exhibit 31.1

        Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

I, Clara Conti, the President and Chief Executive Officer of IPIX Corporation,
certify that:


1.    I have reviewed this quarterly report on Form 10-Q of IPIX Corporation;

2.    Based on my knowledge,  this quarterly  report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the  circumstances  under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

3.    Based on my  knowledge,  the  financial  statements,  and other  financial
      information  included  in this  quarterly  report,  fairly  present in all
      material respects the financial condition,  results of operations and cash
      flows of the  registrant  as of, and for,  the periods  presented  in this
      quarterly report;

4.    The  registrant's  other  certifying  officers and I are  responsible  for
      establishing  and  maintaining  disclosure  controls  and  procedures  (as
      defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) for the registrant
      and have:

      a)   Designed  such  disclosure  controls and  procedures,  or caused such
           disclosure   controls  and   procedures  to  be  designed  under  our
           supervision,  to ensure  that  material  information  relating to the
           registrant, including its consolidated subsidiaries, is made known to
           us by others within those entities, particularly during the period in
           which this report is being prepared;

      b)   Evaluated the effectiveness of the registrant's  disclosure  controls
           and procedures and presented in this report our conclusions about the
           effectiveness  of the disclosure  controls and procedures,  as of the
           end of the period  covered by this report  based on such  evaluation;
           and

      c)   Disclosed  in this  report  any change in the  registrant's  internal
           control  over   financial   reporting   that   occurred   during  the
           registrant's  most recent  fiscal  quarter (the  registrant's  fourth
           fiscal  quarter in the case of an annual  report) that has materially
           affected,   or  is  reasonably  likely  to  materially   affect,  the
           registrant's internal control over financial reporting; and

5.    The registrant's other certifying officers and I have disclosed,  based on
      our most recent  evaluation of internal control over financial  reporting,
      to the registrant's auditors and the audit committee of registrant's board
      of directors (or persons performing the equivalent function):

      a)   All significant deficiencies and material weaknesses in the design or
           operation of internal  control  over  financial  reporting  which are
           reasonably  likely to adversely  affect the  registrant's  ability to
           record, process, summarize and report financial information; and

      b)   Any fraud, whether or not material, that involves management or other
           employees who have a significant  role in the  registrant's  internal
           control over financial reporting.

Date: November 5, 2004


/s/ Clara Conti
------------------------------
Clara Conti
President and Chief Executive Officer


<PAGE>

                                                                    Exhibit 31.2

        Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer


I, Paul Farmer, Chief Financial Officer of IPIX Corporation, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of IPIX Corporation;

2.    Based on my knowledge,  this quarterly  report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the  circumstances  under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

3.    Based on my  knowledge,  the  financial  statements,  and other  financial
      information  included  in this  quarterly  report,  fairly  present in all
      material respects the financial condition,  results of operations and cash
      flows of the  registrant  as of, and for,  the periods  presented  in this
      quarterly report;

4.    The  registrant's  other  certifying  officers and I are  responsible  for
      establishing  and  maintaining  disclosure  controls  and  procedures  (as
      defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) for the registrant
      and have:

      a)   Designed  such  disclosure  controls and  procedures,  or caused such
           disclosure   controls  and   procedures  to  be  designed  under  our
           supervision,  to ensure  that  material  information  relating to the
           registrant, including its consolidated subsidiaries, is made known to
           us by others within those entities, particularly during the period in
           which this report is being prepared;

      b)   Evaluated the effectiveness of the registrant's  disclosure  controls
           and procedures and presented in this report our conclusions about the
           effectiveness  of the disclosure  controls and procedures,  as of the
           end of the period  covered by this report  based on such  evaluation;
           and

      c)   Disclosed  in this  report  any change in the  registrant's  internal
           control  over   financial   reporting   that   occurred   during  the
           registrant's  most recent  fiscal  quarter (the  registrant's  fourth
           fiscal  quarter in the case of an annual  report) that has materially
           affected,   or  is  reasonably  likely  to  materially   affect,  the
           registrant's internal control over financial reporting; and

5.    The registrant's other certifying officers and I have disclosed,  based on
      our most recent  evaluation of internal control over financial  reporting,
      to the registrant's auditors and the audit committee of registrant's board
      of directors (or persons performing the equivalent function):

      a)   All significant deficiencies and material weaknesses in the design or
           operation of internal  control  over  financial  reporting  which are
           reasonably  likely to adversely  affect the  registrant's  ability to
           record, process, summarize and report financial information; and

      b)   Any fraud, whether or not material, that involves management or other
           employees who have a significant  role in the  registrant's  internal
           control over financial reporting.


Date: November 5, 2004


/s/ Paul Farmer
--------------------------
Paul Farmer
Chief Financial Officer


<PAGE>


                           Section 1350 Certifications
                                   Exhibit 32

     In  connection  with  the  Quarterly  Report  of IPIX  Corporation  and its
wholly-owned  subsidiaries  (collectively,  the  "Company") on Form 10-Q for the
period  ending  September  30, 2004 as filed with the  Securities  and  Exchange
Commission on the date hereof (the  "Report"),  we, Clara Conti and Paul Farmer,
the Chief Executive Officer and Chief Financial  Officer,  respectively,  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 operations of the
Company.




/s/ Clara Conti
--------------------------
Clara Conti
Chief Executive Officer
November 5, 2004



/s/ Paul Farmer
--------------------------
Paul Farmer
Chief Financial Officer
November 5, 2004


A signed  original of this  written  statement  required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.