##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

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

|                                    |  |                              
|----------------------------------- |  | -----------------------------
|For the quarter ended June 30, 2003 |  | Commission File No. 000-26363

Internet Pictures Corporation

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [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]

7,557,241 shares of $0.001 par value common stock outstanding as of July 31,
2003.

1



---

TABLE OF CONTENTS



|                                            |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART IFINANCIAL INFORMATION               
|                                            | Item 1. Condensed Consolidated Financial Statements                                          
|                                            | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                            | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                            | Item 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION                
|                                            | Item 1. Legal Proceedings                                                                    
|                                            | Item 2. Changes In Securities And Use Of Proceeds                                            
|                                            | Item 3. Defaults Upon Senior Securities                                                      
|                                            | Item 4. Submission Of Matters To A Vote Of Security Holders                                  
|                                            | Item 5. Other Information                                                                    
|                                            | Item 6. Exhibits And Reports On Form 8-K                                                     
|SIGNATURES                                 
|INDEX TO EXHIBITS FOR FORM 10-Q            
|EX-31.1 SECTION 302 CEO CERTIFICATION      
|EX-31.2 SECTION 302 CFO CERTIFICATION      
|EX-32 SECTION 906 CEO AND CFO CERTIFICATION



---



##### Table of Contents



INTERNET PICTURES CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
INDEX

|                             |                                                                                               |  |    |    | 
|---------------------------- | --------------------------------------------------------------------------------------------- |  | -- | -- | 
|PART IFINANCIAL INFORMATION |                                                                                               |  | 3  |   
|                             | Item 1. Condensed Consolidated Financial Statements                                           |  |    | 4  | 
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  |    | 17 | 
|                             | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  |    | 30 | 
|                             | Item 4. Controls and Procedures                                                               |  |    | 30 | 
|PART II  OTHER INFORMATION  |                                                                                               |  | 31 |   
|                             | Item 1. Legal Proceedings                                                                     |  |    | 31 | 
|                             | Item 2. Changes In Securities And Use Of Proceeds                                             |  |    | 31 | 
|                             | Item 3. Defaults Upon Senior Securities                                                       |  |    | 31 | 
|                             | Item 4. Submission Of Matters To A Vote Of Security Holders                                   |  |    | 32 | 
|                             | Item 5. Other Information                                                                     |  |    | 32 | 
|                             | Item 6. Exhibits And Reports On Form 8-K                                                      |  |    | 32 | 
|Signatures                   |                                                                                               |  | 33 |   
|Exhibit Index                |                                                                                               |  | 34 |   

2



---



##### Table of Contents






PART IFINANCIAL INFORMATION

Recalculation of Earnings Per Share

This Form 10-Q of Internet
Pictures Corporation (iPIX, we, us, our, or
the Company) reflects the Form 10-K/A filed August 14, 2003 to reflect the
recalculation of our earnings (loss) per common share for the year ended
December 31, 2002 and for each of the quarterly periods in the
year then ended and reflects the Form 10-Q/A filed August 14, 2003
for the quarter March 31, 2003.
Other than as expressly stated herein, the information prior to April 1, 2003
in this Form 10-Q does not reflect any subsequent information or events other
than the recalculation detailed below. The only changes to our previously filed
Form 10-Q for the quarter ended March 31, 2002 relate to the recalculations
discussed below.

The Company has revised its unaudited financial statements for
the three and six months ended June 30, 2002
and the three months ended March 31, 2003 to reflect the impact of the
cumulative dividend and participation rights of the Companys convertible
preferred stock on the calculation of earnings (loss) per common share for
those periods. The
cumulative dividend, whether or not declared, has been reflected as a reduction
in net income (loss) to calculate net income (loss) available to common
shareholders. In addition, the participation right of the preferred stock has
been considered in the calculation of basic earnings (loss) per common share,
if dilutive, using the if converted method or the two class method, if more
dilutive. The revision of earnings (loss) per common share for the periods
indicated above had no effect on reported revenues, gross profit, net income
(loss) or cash balances in any of the periods. The effect of the restatement
of earnings (loss) per common share is as follows:

|                                  |  |                |       |               |  |                |       |   |  |   |       |  
|--------------------------------- |  | -------------- | ----- | ------------- |  | -------------- | ----- | - |  | - | ----- | -
|                                  |  | Three months   |       | Six months    |  | Three months  
|                                  |  | ended          |       | ended         |  | ended         
|                                  |  | June 30, 20002 |       | June 30, 2002 |  | March 31, 2003
|                                  |  |                |       |               |  |               
|Earnings (loss) per common share: |  |                |       |               |  |                |       |   |  |   |       |  
|Basic  as reported               |  | $              | (0.10 | )             |  | $              | (0.32 | ) |  | $ | 0.05  |  
|Basic  restated                  |  | $              | (0.17 | )             |  | $              | (0.46 | ) |  | $ | (0.01 | )
|Diluted  as reported             |  | $              | (0.10 | )             |  | $              | (0.32 | ) |  | $ | 0.02  |  
|Diluted  restated                |  | $              | (0.17 | )             |  | $              | (0.46 | ) |  | $ | (0.01 | )



---



##### Table of Contents






Item 1. Condensed Consolidated Financial Statements

INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                |                                            |                   |          |              |        |             |          |        |        | 
|------------------------------------------------------------------------------- | ------------------------------------------ | ----------------- | -------- | ------------ | ------ | ----------- | -------- | ------ | ------ | 
|                                                                                |                                            |                   |          | December 31, |        | June 30,   
|                                                                                |                                            |                   |          | 2002         |        | 2003       
|                                                                                |                                            |                   |          |              |        |            
|                                                                                |                                            |                   |          | (1)          |        | (unaudited)
|(In thousands)                                                                  |                                            |                   |          |              |        |             |          |       
|ASSETS                                                                          |                                            |                   |          |              |        |             |          |       
|Cash and cash equivalents                                                       |                                            | $                 | 3,020    |              |        | $           | 8,680    |       
|Restricted cash and short term investments                                      |                                            |                   | 2,972    |              |        |             | 1,400    |       
|Accounts receivable, net                                                        |                                            |                   | 3,535    |              |        |             | 2,046    |       
|Inventory, net                                                                  |                                            |                   | 181      |              |        |             | 180      |       
|Prepaid expenses and other current assets                                       |                                            |                   | 984      |              |        |             | 1,850    |       
|                                                                                |                                            |                   |          |              |        |             |          |       
|                                                                                | Total current assets                       |                   |          | 10,692       |        |             |          | 14,156 |       
|Computer hardware, software and other, net                                      |                                            |                   | 4,631    |              |        |             | 3,571    |       
|Other long term assets                                                          |                                            |                   | 70       |              |        |             | 20       |       
|Goodwill                                                                        |                                            |                   | 3,042    |              |        |             | 3,042    |       
|                                                                                |                                            |                   |          |              |        |             |          |       
|                                                                                | Total assets                               |                   | $        | 18,435       |        |             | $        | 20,789 |       
|                                                                                |                                            |                   |          |              |        |             |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                            |                                            |                   |          |              |        |             |          |       
|CURRENT LIABILITIES:                                                            |                                            |                   |          |              |        |             |          |       
|Accounts payable                                                                |                                            | $                 | 360      |              |        | $           | 891      |       
|Accrued liabilities                                                             |                                            |                   | 5,426    |              |        |             | 4,075    |       
|Deferred revenue                                                                |                                            |                   | 85       |              |        |             | 3,078    |       
|Current portion of obligations under capital leases                             |                                            |                   | 2,403    |              |        |             | 2,322    |       
|                                                                                |                                            |                   |          |              |        |             |          |       
|                                                                                | Total current liabilities                  |                   |          | 8,274        |        |             |          | 10,366 |       
|Obligations under capital leases, net of current portion                        |                                            |                   | 1,459    |              |        |             | 224      |       
|Other long term liabilities                                                     |                                            |                   | 310      |              |        |             | 76       |       
|                                                                                |                                            |                   |          |              |        |             |          |       
|                                                                                |                                            | Total liabilities |          |              | 10,043 |             |          |        | 10,666 | 
|                                                                                |                                            |                   |          |              |        |             |          |       
|STOCKHOLDERS EQUITY:                                                           |                                            |                   |          |              |        |             |          |       
|Preferred stock (Aggregate liquidation value:
$24,560 in 2002, $25,353 in 2003) |                                            |                   | 1        |              |        |             | 1        |       
|Common stock                                                                    |                                            |                   | 65       |              |        |             | 66       |       
|Class B common stock                                                            |                                            |                   |         |              |        |             |         |       
|Additional paid-in capital                                                      |                                            |                   | 513,937  |              |        |             | 514,961  |       
|Accumulated deficit                                                             |                                            |                   | (505,117 | )            |        |             | (504,414 | )     
|Accumulated other comprehensive loss                                            |                                            |                   | (494     | )            |        |             | (491     | )     
|                                                                                |                                            |                   |          |              |        |             |          |       
|                                                                                | Total stockholders equity                 |                   |          | 8,392        |        |             |          | 10,123 |       
|                                                                                |                                            |                   |          |              |        |             |          |       
|                                                                                | Total liabilities and stockholders equity |                   | $        | 18,435       |        |             | $        | 20,789 |       
|                                                                                |                                            |                   |          |              |        |             |          |       



---

|(1) |  | The December 31, 2002 balances were derived from the audited financial statements.
|--- |  | ----------------------------------------------------------------------------------

See accompanying notes to the unaudited condensed consolidated financial statements.

4



---



##### Table of Contents



INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |        | 
|---------------------------------------------------- | ------------------------ | ---------- | ------------------ | ----- | ---------------- | - | ---------- | ----- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                     |                          |            | Three months ended |       | Six months ended
|                                                     |                          |            | June 30,           |       | June 30,        
|                                                     |                          |            |                    |       |                 
|                                                     |                          |            | 2002               |       | 2003             |   | 2002       |       | 2003
|                                                     |                          |            |                    |       |                  |   |            |       |     
|                                                     |                          |            | (unaudited)        |       | (unaudited)     
|(In thousands, except per share data)                |                          | (restated) |                    |       |                  |   | (restated) |       |      |  
|Revenue:                                             |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|Transaction services                                 |                          | $          | 3,802              |       |                  | $ | 6,058      |       |      | $ | 7,377  |        |  | $ | 11,660 |       
|Immersive still solutions                            |                          |            | 1,959              |       |                  |   | 408        |       |      |   | 3,178  |        |  |   | 1,192  |       
|Immersive video solutions                            |                          |            |                   |       |                  |   | 86         |       |      |   |       |        |  |   | 91     |       
|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|                                                     | Total revenue            |            |                    | 5,761 |                  |   |            | 6,552 |      |   |        | 10,555 |  |   |        | 12,943 | 
|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|Cost of revenue:                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|Transaction services                                 |                          |            | 1,831              |       |                  |   | 1,768      |       |      |   | 3,500  |        |  |   | 3,550  |       
|Immersive still solutions                            |                          |            | 355                |       |                  |   | 287        |       |      |   | 811    |        |  |   | 625    |       
|Immersive video solutions                            |                          |            |                   |       |                  |   | 82         |       |      |   |       |        |  |   | 86     |       
|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|                                                     | Total cost of revenue    |            |                    | 2,186 |                  |   |            | 2,137 |      |   |        | 4,311  |  |   |        | 4,261  | 
|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|                                                     | Gross profit             |            |                    | 3,575 |                  |   |            | 4,415 |      |   |        | 6,244  |  |   |        | 8,682  | 
|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|Operating expenses:                                  |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|Sales and marketing                                  |                          |            | 2,153              |       |                  |   | 2,044      |       |      |   | 4,193  |        |  |   | 3,805  |       
|Research and development                             |                          |            | 1,230              |       |                  |   | 1,168      |       |      |   | 2,511  |        |  |   | 2,428  |       
|General and administrative                           |                          |            | 893                |       |                  |   | 834        |       |      |   | 1,797  |        |  |   | 1,663  |       
|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|                                                     | Total operating expenses |            |                    | 4,276 |                  |   |            | 4,046 |      |   |        | 8,501  |  |   |        | 7,896  | 
|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|Income (loss) from operations                        |                          |            | (701               | )     |                  |   | 369        |       |      |   | (2,257 | )      |  |   | 786    |       
|Other                                                |                          |            | 10                 |       |                  |   | (34        | )     |      |   | 53     |        |  |   | (83    | )     
|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|Net income (loss)                                    |                          | $          | (691               | )     |                  | $ | 335        |       |      | $ | (2,204 | )      |  | $ | 703    |       
|Preferred
stock dividends (restated)                 |                          |            | (445               | )     |                  |   | (453       | )     |      |   | (885   | )      |  |   | (891   | )     
|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|Net
loss available to common stockholders (restated) |                          | $          | (1,136             | )     |                  | $ | (118       | )     |      | $ | (3,089 | )      |  | $ | (188   | )     
|                                                     |                          |            |                    |       |                  |   |            |       |      |   |        |        |  |   |        |       
|Loss
per common share, basic and diluted (restated)  |                          | $          | (0.17              | )     |                  | $ | (0.02      | )     |      | $ | (0.46  | )      |  | $ | (0.03  | )     
|Weighted average common shares, basic and diluted    |                          |            | 6,792              |       |                  |   | 7,004      |       |      |   | 6,785  |        |  |   | 6,910  |       

See accompanying notes to the unaudited condensed consolidated financial statements.

5



---



##### Table of Contents



INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |        |       |      |       | 
|-------------------------------------------------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ------ | ---------------- | ------ | ------ | ----- | ---- | ----- | 
|                                                                                                   |                                           |                                                     |                                                     |        | Six months ended
|                                                                                                   |                                           |                                                     |                                                     |        | June 30,        
|                                                                                                   |                                           |                                                     |                                                     |        |                 
|                                                                                                   |                                           |                                                     |                                                     |        | 2002             |        | 2003  
|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |       
|(In thousands)                                                                                     |                                           | (unaudited)                                        
|Cash flows from operating activities:                                                              |                                           |                                                     |                                                     |        |                  |        |        |      
|Net income (loss)                                                                                  |                                           | $                                                   | (2,204                                              | )      |                  | $      | 703    |      
|Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |                                           |                                                     |                                                     |        |                  |        |        |      
|Depreciation                                                                                       |                                           |                                                     | 1,496                                               |        |                  |        | 1,868  |      
|Provision for doubtful accounts receivable                                                         |                                           |                                                     | (100                                                | )      |                  |        | 28     |      
|Non-cash compensation expense                                                                      |                                           |                                                     | 91                                                  |        |                  |        |       |      
|Changes in operating assets and liabilities:                                                       |                                           |                                                     |                                                     |        |                  |        |        |      
|                                                                                                   | Accounts receivable                       |                                                     |                                                     | (534   | )                |        |        | 1,461 |     
|                                                                                                   | Inventory                                 |                                                     |                                                     | 114    |                  |        |        | 1     |     
|                                                                                                   | Prepaid expenses and other current assets |                                                     |                                                     | 18     |                  |        |        | (866  | )   
|                                                                                                   | Other long term assets                    |                                                     |                                                     | (165   | )                |        |        | 50    |     
|                                                                                                   | Accounts payable                          |                                                     |                                                     | (289   | )                |        |        | 531   |     
|                                                                                                   | Accrued expenses                          |                                                     |                                                     | (1,199 | )                |        |        | (24   | )   
|                                                                                                   | Deferred revenue                          |                                                     |                                                     | (1,102 | )                |        |        | 2,993 |     
|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |        |      
|                                                                                                   |                                           |                                                     | Net cash provided by (used in) operating activities |        |                  | (3,874 | )      |       |      | 6,745 | 
|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |        |      
|Cash flow from investing activities:                                                               |                                           |                                                     |                                                     |        |                  |        |        |      
|Purchases of computer hardware, software and other                                                 |                                           |                                                     | (680                                                | )      |                  |        | (808   | )    
|Purchase of short term investments                                                                 |                                           |                                                     | (1,400                                              | )      |                  |        |       |      
|Purchases of equipment under capital lease                                                         |                                           |                                                     | (2,494                                              | )      |                  |        |       |      
|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |        |      
|                                                                                                   |                                           | Net cash used in investing activities               |                                                     |        | (4,574           | )      |        |       | (808 | )    
|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |        |      
|Cash flows from financing activities:                                                              |                                           |                                                     |                                                     |        |                  |        |        |      
|Proceeds from issuance of common stock                                                             |                                           |                                                     | 115                                                 |        |                  |        | 1,036  |      
|Proceeds from obligations under capital lease                                                      |                                           |                                                     | 2,494                                               |        |                  |        |       |      
|Repayments of capital lease obligations                                                            |                                           |                                                     | (763                                                | )      |                  |        | (1,316 | )    
|Proceeds from notes receivable from stockholders                                                   |                                           |                                                     | 179                                                 |        |                  |        |       |      
|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |        |      
|                                                                                                   |                                           | Net cash provided by (used in) financing activities |                                                     |        | 2,025            |        |        |       | (280 | )    
|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |        |      
|Effect of exchange rate changes on cash                                                            |                                           |                                                     | (21                                                 | )      |                  |        | 3      |      
|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |        |      
|Net increase (decrease) in cash and cash equivalents                                               |                                           |                                                     | (6,444                                              | )      |                  |        | 5,660  |      
|Cash and cash equivalents, beginning of period                                                     |                                           |                                                     | 11,103                                              |        |                  |        | 3,020  |      
|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |        |      
|Cash and cash equivalents, end of period                                                           |                                           | $                                                   | 4,659                                               |        |                  | $      | 8,680  |      
|                                                                                                   |                                           |                                                     |                                                     |        |                  |        |        |      

See accompanying notes to the unaudited condensed consolidated financial statements

6



---



##### Table of Contents



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements include
the accounts of Internet Pictures Corporation and its wholly-owned
subsidiaries, Interactive Pictures Corporation, Interactive Pictures UK
Limited, Internet Pictures (Canada), Inc. and PW Technology, Inc. The
consolidation of these entities will collectively be referred to as the Company
or iPIX. All significant intercompany balances and transactions have been
eliminated.

We have prepared these financial statements, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. The unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in our audited financial statements as of and for the year
ended December 31, 2002.

The information furnished reflects all adjustments which management believes
are necessary for a fair presentation of our financial position as of June 30,
2003 and the results of our operations for the three and six month periods
ended June 30, 2002 and 2003 and our cash flows for the six month periods ended
June 30, 2002 and 2003. All such adjustments are of a normal recurring nature.
The results of operations for the three and six month periods ended June 30,
2002 and 2003 are not necessarily indicative of the results to be expected for
the respective full years.

2.     AGREEMENT WITH eBAY

On June 27, 2003, we signed an amended license agreement with eBay. The
following is a summary of the provisions of Amendment No. 3 to the Visual
Content Services Agreement between iPIX and eBay. Amendment No. 3 should be
read together with the Visual Content Services Agreement dated April 19, 2000,
Amendment No. 1 and Amendment No. 2 to the Visual Content Services Agreement,
all of which were filed as Exhibits to our Form 10-Q filed on October 31, 2001.
A copy of Amendment No. 3 is filed as an exhibit to our Form 8-K filed on June
27, 2003.

Our Visual Content Services Agreement with eBay remains unchanged through the
contract period, which will expire by its terms on September 30, 2003. Under
the terms of Amendment No. 3, eBay will pay us $8.0 million and other
consideration based on certain service and licensing options granted to eBay
for a perpetual, non-exclusive license to the our Rimfire Imaging technology.
eBay paid us $3.0 million in the quarter ended June 30, 2003 upon the execution
of Amendment No. 3, as required. The $3.0 million is included in deferred
revenue at June 30, 2003 because certain obligations associated with the
license and services agreed to in the amendment had not been delivered at that
date. Remaining amounts due under Amendment No. 3 are payable on future dates
in conjunction with certain delivery obligations.

7



---



##### Table of Contents



In addition, eBay has the option to extend the Rimfire Imaging services under
the Visual Services Content Agreement after September 30, 2003 for up to four
additional months for a minimum monthly payment of $0.45 million, plus
additional consideration based on the monthly volume of image submissions. We
may also transfer to eBay, at eBays option, a Rimfire Imaging environment
developed by us specifically for eBay in exchange for payment of $2.0 million.
eBay has also agreed to terminate certain leases under which we leased computer
equipment from eBay. In addition, we have given eBay an option to purchase
computer equipment and other assets, which relate to the eBay Rimfire Imaging
service. We have also agreed to work with eBay and some of our third party
service providers to efficiently transition appropriate services to eBay
allowing us to continue to focus on our base of existing and new customers.

On June 27, 2003, our agreement with eBay was amended. eBay is the largest
customer of the technology represented by our goodwill. Due to Amendment No. 3
of our agreement with eBay, we preformed an impairment analysis of goodwill at
June 30, 2003 and no impairment existed. However, at the end of the amended
agreement with eBay we may incur a significant impairment of our goodwill.

We believe that transaction fees from eBay will continue to increase as a
percentage of our total revenue through September 30, 2003 as more eBay
customers utilize our services on the eBay auction Web site. Although eBay has
an option to request us to extend our services and provide additional
assistance in transferring operating and program management responsibilities to
them after September 30, 2003, we can not give any assurance that such an
option will be exercised. As a result, we may not provide any services to eBay
after September 30, 2003, which would have a material effect on our business,
financial position, results of operations or cash flows.

In addition, if we experience significant changes in the terms of our
relationships with other current or prospective customers, delays in payments
from customers or the subsequent loss of another major customer, it may have a
material adverse effect on our business, financial position, results of
operations or cash flows.

3.     CASH EQUIVALENTS, RESTRICTED CASH AND SHORT TERM INVESTMENTS

We consider all highly liquid debt instruments with a remaining maturity at
date of purchase of three months or less to be cash equivalents.

At June 30, 2003, we had a $1.4 million short term investment which matures on
June 19, 2004 and has been provided as collateral for certain capital lease
obligations and, accordingly, classified as restricted cash and short term
investments. We will renew the investment for successive short term periods
until the capital lease obligation restrictions are removed. At December 31,
2002, restricted cash also included $1.4 million related to accrued customer
deposits which were paid in full during the quarter ended March 31, 2003.

8



---



##### Table of Contents



4.     EQUITY

During the six months ended June 30, 2003, we issued 533,429 shares of common
stock upon exercise of stock options, 12,767 shares under our employee stock
purchase program and 35,455 shares upon the conversion of Series B Preferred
Stock. The total proceeds from the option exercises and employee stock
purchases were $1.0 million. We do not receive any proceeds upon the
conversion of Series B Preferred Stock.

5.     INCOME (LOSS) PER COMMON SHARE

Recalculation of Income (loss) per Common Share

The Company has revised its unaudited
financial statements for the three and six months ended June 30, 2002
and the three months ended March 31, 2003 to reflect the impact of the
cumulative dividend and participation rights of the Companys convertible
preferred stock on the calculation of earnings (loss) per common
share for those periods. The
cumulative dividend, whether or not declared, has been reflected as a reduction
in net income (loss) to calculate net income (loss) available to common
shareholders. In addition, the participation right of the preferred stock has
been considered in the calculation of basic earnings (loss) per common share,
if dilutive, using the if converted method or the two class method, if more
dilutive. The revision of earnings (loss) per common share for the periods
indicated above had no effect on reported revenues, gross profit, net income
(loss) or cash balances in any of the periods. The effect of the restatement
of earnings (loss) per common share is as follows:

|                                  |  |                    |       |                    |  |                     |       |   |  |   |       |  
|--------------------------------- |  | ------------------ | ----- | ------------------ |  | ------------------- | ----- | - |  | - | ----- | -
|                                  |  | Three
months       |       | Six months         |  | Three months       
|                                  |  | endedJune
30, 2002 |       | endedJune 30, 2002 |  | endedMarch 31, 2003
|                                  |  |                    |       |                    |  |                    
|Earnings (loss) per common
share: |  |                    |       |                    |  |                     |       |   |  |   |       |  
|Basic  as reported               |  | $                  | (0.10 | )                  |  | $                   | (0.32 | ) |  | $ | 0.05  |  
|Basic  restated                  |  | $                  | (0.17 | )                  |  | $                   | (0.46 | ) |  | $ | (0.01 | )
|Diluted  as reported             |  | $                  | (0.10 | )                  |  | $                   | (0.32 | ) |  | $ | 0.02  |  
|Diluted  restated                |  | $                  | (0.17 | )                  |  | $                   | (0.46 | ) |  | $ | (0.01 | )

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.

9



---



##### Table of Contents



The following table sets forth the computation of basic and dilutive loss per
common share for the periods indicated (restated for 2002):

|                                          |                                                         |      |                    |       |                  |      |       |       |  |   |        |       |  |   |       |       | 
|----------------------------------------- | ------------------------------------------------------- | ---- | ------------------ | ----- | ---------------- | ---- | ----- | ----- |  | - | ------ | ----- |  | - | ----- | ----- | 
|                                          |                                                         |      | Three months ended |       | Six months ended
|                                          |                                                         |      | June 30,           |       | June 30,        
|                                          |                                                         |      |                    |       |                 
|(In thousands, except per share)          |                                                         | 2002 |                    | 2003  |                  | 2002 |       | 2003 
|                                          |                                                         |      |                    |       |                  |      |       |      
|                                          |                                                         |      | (unaudited)        |       | (unaudited)     
|                                          |                                                         |      |                    |       |                 
|NUMERATOR:                                |                                                         |      |                    |       |                  |      |       |       |  |   |        |       |  |   |       |      
|Net income (loss)                         |                                                         | $    | (691               | )     |                  | $    | 335   |       |  | $ | (2,204 | )     |  | $ | 703   |      
|Preferred
stock dividends                 |                                                         |      | (445               | )     |                  |      | (453  | )     |  |   | (885   | )     |  |   | (891  | )    
|                                          |                                                         |      |                    |       |                  |      |       |       |  |   |        |       |  |   |       |      
|Net loss available to common stockholders |                                                         | $    | (1,136             | )     |                  | $    | (118  | )     |  | $ | (3,089 | )     |  | $ | (188  | )    
|                                          |                                                         |      |                    |       |                  |      |       |       |  |   |        |       |  |   |       |      
|DENOMINATOR:                              |                                                         |      |                    |       |                  |      |       |       |  |   |        |       |  |   |       |      
|                                          | Weighted average shares outstanding 
Basic and diluted |      |                    | 6,792 |                  |      |       | 7,004 |  |   |        | 6,785 |  |   |       | 6,910 | 
|                                          |                                                         |      |                    |       |                  |      |       |       |  |   |        |       |  |   |       |      
|LOSS PER COMMON SHARE, BASIC AND DILUTED  |                                                         | $    | (0.17              | )     |                  | $    | (0.02 | )     |  | $ | (0.46  | )     |  | $ | (0.03 | )    
|                                          |                                                         |      |                    |       |                  |      |       |       |  |   |        |       |  |   |       |      

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 and six month periods ended June 30, 2002 and 2003:

|                            |  |        |        |        |  |        |        |        |  |  |        |  |  |  |        | 
|--------------------------- |  | ------ | ------ | ------ |  | ------ | ------ | ------ |  |  | ------ |  |  |  | ------ | 
|(Shares in thousands)       |  | 2002   |        | 2003  
|                            |  |        |        |       
|                            |  | Three  |        | Six    |  | Three  |        | Six   
|                            |  | Months |        | Months |  | Months |        | Months
|                            |  |        |        |        |  |        |        |       
|Stock options               |  |        | 336    |        |  |        | 541    |        |  |  | 1,248  |  |  |  | 644    | 
|Convertible preferred stock |  |        | 10,867 |        |  |        | 10,867 |        |  |  | 12,893 |  |  |  | 12,983 | 
|Warrants                    |  |        |       |        |  |        | 1,381  |        |  |  | 337    |  |  |  | 171    | 

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 and accordingly excluded from diluted net earnings per common share
for the three and six month periods ended June 30, 2002 and 2003:

|                                                 |                                   |                |       |                |      |   |      |       |      |   |      |       |  |   |      |       | 
|------------------------------------------------ | --------------------------------- | -------------- | ----- | -------------- | ---- | - | ---- | ----- | ---- | - | ---- | ----- |  | - | ---- | ----- | 
|(Shares in thousands)                            |                                   | Three Months   |       | Six Months    
|                                                 |                                   | Ended June 30, |       | Ended June 30,
|                                                 |                                   |                |       |                |     
|                                                 |                                   |                | 2002  |                | 2003 |   | 2002 |       | 2003
|                                                 |                                   |                |       |                |      |   |      |       |     
|Average share price of common stock              |                                   | $              | 2.03  |                |      | $ | 2.76 |       |      | $ | 2.27 |       |  | $ | 1.91 |      
|Stock options:                                   |                                   |                |       |                |      |   |      |       |      |   |      |       |  |   |      |      
|                                                 | Average exercise price of options |                | $     | 16.47          |      |   | $    | 21.68 |      |   | $    | 25.44 |  |   | $    | 12.61 | 
|                                                 | Shares excluded                   |                |       | 2,407          |      |   |      | 929   |      |   |      | 1,490 |  |   |      | 1,671 | 
|Series B Warrants (exercise price
$2.17)         |                                   |                | 1,381 |                |      |   |     |       |      |   |     |       |  |   |     |      
|Series B Warrants (exercise price
$4.34)         |                                   |                | 921   |                |      |   |     |       |      |   | 921  |       |  |   |     |      
|Common Warrants (average exercise
price $165.33) |                                   |                | 170   |                |      |   | 137  |       |      |   | 170  |       |  |   | 137  |      

10



---



##### Table of Contents



6. RESTRUCTURING AND OTHER

During the six months ended June 30, 2003, the following payments were made
against the restructuring accrual:

|                          |                   |      |              |      |            |      |             |      |          |   |     |     |            |   |     |     | 
|------------------------- | ----------------- | ---- | ------------ | ---- | ---------- | ---- | ----------- | ---- | -------- | - | --- | --- | ---------- | - | --- | --- | 
|                          |                   |      | Balance at   |      |            |      |             |      |          |   |     |     | Balance at
|                          |                   |      | December 31, |      | Expense in |      | Payments in |      | June 30,
|(In thousands)            |                   | 2002 |              | 2003 |            | 2003 |             | 2003
|                          |                   |      |              |      |            |      |             |     
|Restructuring provisions: |                   |      |              |      |            |      |             |      |          |   |     |     |            |   |     |    
|                          | Severance         |      | $            | 500  |            |      | $           |     |          |   | $   | 400 |            |   | $   | 100 | 
|                          | Lease obligations |      |              | 549  |            |      |             |     |          |   |     | 167 |            |   |     | 382 | 
|                          |                   |      |              |      |            |      |             |      |          |   |     |     |            |   |     |    
|Total                     |                   | $    | 1,049        |      |            | $    |            |      |          | $ | 567 |     |            | $ | 482 |    
|                          |                   |      |              |      |            |      |             |      |          |   |     |     |            |   |     |    

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, and have been valued using the Black-Scholes model.

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 (restated for 2002):

|                                                    |                                                                        |      |                    |        |                  |      |      |      |   |   |        |        |   |   |        |      |  
|--------------------------------------------------- | ---------------------------------------------------------------------- | ---- | ------------------ | ------ | ---------------- | ---- | ---- | ---- | - | - | ------ | ------ | - | - | ------ | ---- | -
|                                                    |                                                                        |      | Three months ended |        | Six months ended
|                                                    |                                                                        |      | June 30,           |        | June 30,        
|                                                    |                                                                        |      |                    |        |                 
|(In thousands, except per share data)               |                                                                        | 2002 |                    | 2003   |                  | 2002 |      | 2003
|                                                    |                                                                        |      |                    |        |                  |      |      |     
|                                                    |                                                                        |      | (unaudited)        |        | (unaudited)     
|                                                    |                                                                        |      |                    |        |                 
|Net loss available for common stockholders          |                                                                        | $    | (1,136             | )      |                  | $    | (118 | )    |   | $ | (3,089 | )      |   | $ | (188   | )   
|                                                    | Add: employee stock compensation expense
included in reported net loss |      |                    | 38     |                  |      |      |     |   |   |        | 91     |   |   |        |     |  
|                                                    | Less: FAS 123 pro forma charges                                        |      |                    | (3,521 | )                |      |      | (431 | ) |   |        | (6,613 | ) |   |        | (867 | )
|                                                    |                                                                        |      |                    |        |                  |      |      |      |   |   |        |        |   |   |        |     
|Adjusted net loss available for common
stockholders |                                                                        | $    | (4,619             | )      |                  | $    | (549 | )    |   | $ | (9,611 | )      |   | $ | (1,055 | )   
|                                                    |                                                                        |      |                    |        |                  |      |      |      |   |   |        |        |   |   |        |     

11



---



##### Table of Contents



|                                         |                                        |   |                    |       |                  |   |            |       |      |   |       |       |   |   |       |       |  
|---------------------------------------- | -------------------------------------- | - | ------------------ | ----- | ---------------- | - | ---------- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                                         |                                        |   | Three months ended |       | Six months ended
|                                         |                                        |   | June 30,           |       | June 30,        
|                                         |                                        |   |                    |       |                 
|                                         |                                        |   | 2002               |       | 2003             |   | 2002       |       | 2003
|                                         |                                        |   |                    |       |                  |   |            |       |     
|                                         |                                        |   | (restated)         |       |                  |   | (restated) |       |     
|Basic and diluted loss per common share: |                                        |   |                    |       |                  |   |            |       |      |   |       |       |   |   |       |      
|                                         | Loss available for common stockholders |   | $                  | (0.17 | )                |   | $          | (0.02 | )    |   | $     | (0.46 | ) |   | $     | (0.03 | )
|                                         | Net effect of pro forma charges        |   |                    | (0.51 | )                |   |            | (0.06 | )    |   |       | (0.96 | ) |   |       | (0.12 | )
|                                         |                                        |   |                    |       |                  |   |            |       |      |   |       |       |   |   |       |      
|Adjusted loss per common share           |                                        | $ | (0.68              | )     |                  | $ | (0.08      | )     |      | $ | (1.42 | )     |   | $ | (0.15 | )    
|                                         |                                        |   |                    |       |                  |   |            |       |      |   |       |       |   |   |       |      

Grants under the Employee Stock Purchase Plan (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.

8. COMMITMENTS AND CONTINGENCIES

Commitments

The table below shows our contractual obligations as of June 30, 2003:

|                 |  |                        |       |         |  |           |       |        |  |            |       |  |  |   |     |  |  |   |    | 
|---------------- |  | ---------------------- | ----- | ------- |  | --------- | ----- | ------ |  | ---------- | ----- |  |  | - | --- |  |  | - | -- | 
|(In thousands)   |  | Payments Due by Period
|                 |  |                       
|                 |  |                        |       |         |  | Remainder |       | 2004 & |  | 2006 &     |       |  |  |  
|                 |  | Total                  |       | of 2003 |  | 2005      |       | 2007   |  | After 2007
|                 |  |                        |       |         |  |           |       |        |  |           
|Capital leases   |  | $                      | 2,546 |         |  | $         | 1,938 |        |  | $          | 608   |  |  | $ |    |  |  | $ |   | 
|Operating leases |  |                        | 6,796 |         |  |           | 1,697 |        |  |            | 4,264 |  |  |   | 771 |  |  |   | 64 | 
|                 |  |                        |       |         |  |           |       |        |  |            |       |  |  |   |     |  |  |   |    | 
|Total            |  | $                      | 9,342 |         |  | $         | 3,635 |        |  | $          | 4,872 |  |  | $ | 771 |  |  | $ | 64 | 
|                 |  |                        |       |         |  |           |       |        |  |            |       |  |  |   |     |  |  |   |    | 

Contingencies

See Item 3, Legal Proceedings, in our annual report on Form 10-K for discussion
of litigation that has been dismissed against us but is subject to appeal. We
are not currently a party to any 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.

9. 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.

12



---



##### Table of Contents



Information about the reported segments is as follows:

|                 |                           |      |                             |       |                           |      |       |       |  |   |        |       |  |   |        |        | 
|---------------- | ------------------------- | ---- | --------------------------- | ----- | ------------------------- | ---- | ----- | ----- |  | - | ------ | ----- |  | - | ------ | ------ | 
|                 |                           |      | Three months ended June 30, |       | Six months ended June 30,
|                 |                           |      |                             |       |                          
|(In thousands)   |                           | 2002 |                             | 2003  |                           | 2002 |       | 2003 
|                 |                           |      |                             |       |                           |      |       |      
|Revenue:         |                           |      |                             |       |                           |      |       |       |  |   |        |       |  |   |        |       
|                 | Transaction services      |      | $                           | 3,802 |                           |      | $     | 6,058 |  |   | $      | 7,377 |  |   | $      | 11,660 | 
|                 | Immersive still solutions |      |                             | 1,959 |                           |      |       | 408   |  |   |        | 3,178 |  |   |        | 1,192  | 
|                 | Immersive video solutions |      |                             |      |                           |      |       | 86    |  |   |        |      |  |   |        | 91     | 
|                 |                           |      |                             |       |                           |      |       |       |  |   |        |       |  |   |        |       
|Total            |                           | $    | 5,761                       |       |                           | $    | 6,552 |       |  | $ | 10,555 |       |  | $ | 12,943 |       
|                 |                           |      |                             |       |                           |      |       |       |  |   |        |       |  |   |        |       
|Cost of revenue: |                           |      |                             |       |                           |      |       |       |  |   |        |       |  |   |        |       
|                 | Transaction services      |      | $                           | 1,831 |                           |      | $     | 1,768 |  |   | $      | 3,500 |  |   | $      | 3,550  | 
|                 | Immersive still solutions |      |                             | 355   |                           |      |       | 287   |  |   |        | 811   |  |   |        | 625    | 
|                 | Immersive video solutions |      |                             |      |                           |      |       | 82    |  |   |        |      |  |   |        | 86     | 
|                 |                           |      |                             |       |                           |      |       |       |  |   |        |       |  |   |        |       
|Total            |                           | $    | 2,186                       |       |                           | $    | 2,137 |       |  | $ | 4,311  |       |  | $ | 4,261  |       
|                 |                           |      |                             |       |                           |      |       |       |  |   |        |       |  |   |        |       

10. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 were applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, while the disclosure requirements
were applicable in 2002. The adoption of FIN 45 did not have a material impact
on our results of operation or financial condition and did not result in any
additional liabilities as of June 30, 2003 associated with guarantees covered
by this interpretation. In addition to guarantees, we have entered into
agreements indemnifying certain parties with respect to our potential
infringement of other partys intellectual property. Due to the nature of the
indemnifications, our maximum exposure under these agreements cannot be
estimated. We have not recorded any amounts for FIN 45 indemnities because
they are not probable, immaterial or not estimable at this time.

As permitted under Delaware law, we have agreements whereby our officers and
directors are indemnified for certain events or occurrences while the officer
or director is, or was, serving at our request in such capacity. The term of
the indemnification period is for the officers or directors term in such
capacity. The maximum potential amount of future payments we could be required
to make under these indemnification agreements is unlimited; however, we have a
director and officer insurance policy that limits our exposure and enables us
to recover a portion of any future amounts paid. As a result of our insurance
policy coverage, we believe the estimated fair value of these indemnification
agreements is minimal. Our director and officer indemnification agreements
were grandfathered under the provisions of FIN 45 as they were in effect prior
to December 31, 2002. We have not recorded any amounts for these indemnities
because they are not probable or estimable at this time.

13



---



##### Table of Contents



In November 2002, the EITF reached consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF 00-21 will apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. We do not believe that the
adoption of this standard will have a material effect on our financial position
or results of operations.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We do not believe that
the adoption of this standard will have a material effect on our financial
position or results of operations.

In May 2003, the FASB issued FAS No. 150, Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity (FAS 150).
FAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. FAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. For nonpublic entities, mandatorily redeemable financial
instruments are subject to the provisions of FAS 150 for the first fiscal
period beginning after December 15, 2003. It is to be implemented by reporting
the cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of FAS 150 and still existing at
the beginning of the interim period of adoption. Restatement is not permitted.
We will adopt FAS 150 in the quarter ending September 30, 2003 and the adoption
of FAS 150 will not have a material impact on our financial statements.

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.

14



---



##### Table of Contents



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

|          |  |                    |    |                  |  |      |    |      |  |  |    |   |  |  |    |  
|--------- |  | ------------------ | -- | ---------------- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | -
|          |  | Three months ended |    | Six months ended
|          |  | June 30,           |    | June 30,        
|          |  |                    |    |                 
|          |  | 2002               |    | 2003             |  | 2002 |    | 2003
|          |  |                    |    |                  |  |      |    |     
|Homestore |  |                    | 23 | %                |  |      | 3  | %    |  |  | 22 | % |  |  | 3  | %
|eBay      |  |                    | 51 | %                |  |      | 87 | %    |  |  | 53 | % |  |  | 85 | %

At June 30, 2003, Homestore and eBay represented 3% and 84% of accounts
receivable, respectively. All amounts due from Homestore and eBay as of June
30, 2003, were collected during July 2003. At December 31, 2002, Homestore and
eBay represented 0% and 83% of accounts receivable, respectively.

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. 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.

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 by 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.

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.

15



---



##### Table of Contents



As of June 30, 2003, the
Liquidation Preference was $25.4 million, which
includes the $3.1 million in accrued dividends in arrears on the Series B
Preferred Stock which have not been declared to be paid.

In June 2003, certain investors converted Series B Preferred Stock into 35,455
shares of common stock in accordance with the conversion terms of the Series B
Preferred Stock. In conjunction with the conversion we paid them $11 thousand
in dividends accrued through the date of conversion as required under the
conversion terms of the Series B Preferred Stock.

13. RELATED PARTY TRANSACTIONS

During 2001, our CEO at that time, Mr. James M. Phillips resigned as our
chairman and chief executive officer. Pursuant to a separation agreement, Mr.
Phillips received a severance payment in the amount of $1.3 million, in the
following increments: (i) $0.2 million was paid on May 25, 2001; (ii) $0.2
million was paid on September 1, 2001; (iii) $0.2 million was paid on January
1, 2002; (iv) $0.2 million was paid on June 1, 2002; (v) $0.2 million was paid
on January 2, 2003; (vi) $0.2 million was paid on June 2, 2003 and (vii) $0.1
million will be paid on or before September 1, 2003.

IPIX International

In the third quarter of 2002, we entered into license, distribution and
trademark agreements with Soroof International, a Saudi Arabia-based
corporation (Soroof). Under the agreements, Soroof is the exclusive
distributor for iPIX immersive still products, including the iPIX GPS Mapping
System, outside of North America and Asia through its newly established entity,
iPIX International (iPIX-I). The agreement, effective July 1, 2002, expires
December 31, 2007, unless renewed. iPIX-I has an exclusive license to develop
integrated solutions for markets including real estate, travel and tourism and
other markets in which online marketing is critical. We will also provide
certain hosting services during the term of the agreements. Soroof has
committed to certain minimum quarterly royalties during the term of the
agreement. Should these minimum royalties not be met, we have the right to
terminate our agreements with Soroof.

We have a minority equity interest in iPIX-I, however, we do not have the
ability to exercise significant influence over iPIX-I operations. We account
for our investment in iPIX-I on the cost basis. We did not make any capital
contributions to iPIX-I and we have no commitments to fund iPIX-I. We do have
the right, however, but not the obligation, to purchase iPIX-I from Soroof
after December 31, 2005 for consideration as defined in the agreements. During
the three months ended June 30, 2003, we held discussions with Soroof relating
to the terms of these agreements. These discussions are continuing. We did
not recognize any revenue from iPIX-I in the three months ended June 30, 2003.
During the six months ended June 30, 2003, we recognized $0.2 million of
revenue under these agreements.

16



---



##### Table of Contents



Transactions with eBay, Inc.

Pursuant to an agreement dated April 19, 2000, as amended, we provide to eBay,
Inc., which currently beneficially owns more than 10% of our common stock (5%
fully diluted), 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, we generated revenues of $5.6 million
and $11.1 million for the six months ended June 30, 2002 and 2003,
respectively. We generated revenues of $3.0 million and $5.7 million for the
three months ended June 30, 2002 and 2003, respectively. Under this agreement,
we were required 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 we agreed to extend the additional $6.5 million of payments
through September 2003. As of June 30, 2003, we have $1.0 million of the
commitment remaining. In accordance with EITF 01-09 Accounting for
consideration given by a vendor to a customer (including a reseller of the
vendors products), $1.0 million of these fees were offset against revenue
which represented the excess over the fair value of the benefit received during
the six months ended June 30, 2003.

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 iPIX. Pursuant to lease
schedules covering this equipment, we would have paid eBay annual lease
payments of approximately $0.9 million, $0.8 million and $0.1 million in the
duration of 2003, 2004 and 2005, respectively. In the six months ended June 30,
2003, we paid eBay $1.0 million pursuant to these lease schedules. As part of
the third amendment to our agreement with eBay, eBay agreed to exchange the
equipment underlying these leases as final payment after we satisfactorily
perform certain transition services, which is expected to occur either in the
fourth quarter of 2003 or in the first quarter of 2004.




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

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

17



---



##### Table of Contents



OVERVIEW

We are focused on three businesses providing:



| | (1) |  | outsourced imaging services to facilitate online transactions
in the auction, classifieds and real estate markets (Transaction
Services);
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | immersive imaging solutions for the real estate, travel and
visual documentation markets (Immersive still solutions); and                
|
| | (3) |  | 180-degree and 360-degree video surveillance for the security
and observation markets (Immersive video solutions).                       

Our Transaction Services products and services include the capture,
processing, management and distribution of images and related data. Revenues
from online auctions and classifieds are primarily transaction based. Our
transaction services involve designing, building and managing an image
management infrastructure as well as leasing spaces from state-of-the-art
co-location facilities with access to telecommunications bandwidth. Since these
services are capital intensive, a high percentage of the costs associated with
transaction services are fixed and accordingly the margins from transaction
services are highly dependent upon asset utilization. Substantially all of our
recurring revenue is derived from transaction fees generated by our Rimfire
service. In particular, eBay and Homestore are our largest Rimfire customers.
eBay represented approximately 85% of our total revenue and approximately 95%
of Rimfire services revenue for the six months ended June 30, 2003 and 87% of
total revenue and 94% of Rimfire service revenue for the second quarter of
2003. Homestore represented approximately 22% of total revenue and 17% of
Rimfire service revenue for the first six months of 2002, but less than 10% of
total revenue and Rimfire service revenue for the first three months and first
six months of 2003.

On June 27, 2003, we signed an amended license agreement with eBay. Our Visual
Content Services Agreement with eBay remains unchanged through the contract
period, which will expire on September 30, 2003. Under the terms of Amendment
No. 3, eBay will pay us $8.0 million and other consideration based on certain
service and licensing options granted to eBay for a perpetual, non-exclusive
restricted use license to our Rimfire Imaging technology.

In addition, eBay has the option to extend the Rimfire Imaging services after
September 30, 2003 for up to four additional months for a minimum monthly
payment of $0.45 million, plus additional consideration based on the monthly
volume of image submissions. We may also transfer to eBay, at eBays future
option, a Rimfire Imaging environment developed by us specifically for eBay in
exchange for a payment of $2.0 million. eBay has also agreed to terminate
certain leases under which we leased computer equipment from eBay. In
addition, we have given eBay an option to purchase computer equipment and other
assets, which relate to the eBay Rimfire Imaging service. We have also agreed
to work with eBay and some of our third party service providers to efficiently
transition appropriate services to eBay allowing us to continue to focus on our
base of existing and new customers.

18



---



##### Table of Contents



We believe that transaction fees from eBay will continue to increase as a
percentage of our total revenue through September 30, 2003 as more eBay
customers utilize our services on the eBay auction Web site. Although eBay has
an option to request us to extend our services and provide additional
assistance in transferring operating and program management responsibilities to
them after September 30, 2003, we can not give any assurance that such an
option will be exercised. As a result, we may not provide any services to eBay
after September 30, 2003, which may have a material adverse effect on our
business, financial position, results of operations or cash flows.

We continue to diversify and add additional Transaction Services customers and
are currently targeting image management for publications, online and off line
classified advertising and other business opportunities. If we fail to add
significant customers in this segment of our business, our results of
operations could be adversely affected.

Our immersive technology primarily generates revenues in two ways: licenses of
software and re-sale of camera equipment. We utilize iPIX keys to license our
immersive still technology to capture and save a single immersive image. We
also 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. Our immersive video technology, which may be off-line or
online, may be purchased on a per-unit basis or a per-year license. We sell our
immersive products and services primarily into the real estate, security and
observation and visual documentation markets. The cost of sales for our
licenses is 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. We
continue to develop our immersive imaging business for the security and
observation market.

In the third quarter of 2002, we entered into license, distribution and
trademark agreements with Soroof International, a Saudi Arabia-based
corporation (Soroof). Under the agreements, Soroof is the exclusive
distributor for iPIX immersive still products, including the iPIX GPS Mapping
System, outside of North America and Asia through its newly established entity,
iPIX International (iPIX-I). iPIX-I represented approximately 0% of
Immersive revenue for the second quarter of 2003 and 19% of Immersive revenue
for the six months ended June 30, 2003. Homestore represented approximately
16% of Immersive revenue for the second quarter of 2003 and 21% of Immersive
revenue for the six months ended June 30, 2003.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release 60 issued by the Securities and Exchange Commission
(SEC) requires all registrants to discuss critical accounting policies or
methods used in the preparation of the financial statements. The notes to the
consolidated financial statements included in our Annual Report filed on Form
10-K include a summary of the significant accounting policies and methods used
in the preparation of our consolidated financial statements. Further, we have
made a number of estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses and actual results may differ from
those estimates. Those areas that require the greatest degree of management
judgment include revenue recognition, adequacy of the allowance for doubtful
accounts, goodwill and significant accruals.

19



---



##### Table of Contents



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

Revenue Recognition

We recognize revenue in accordance with SOP 97-2, Software Revenue
Recognition, and SAB 101, Revenue Recognition in Financial Statements.
Transaction revenues are recognized 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.
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 we recognize
license revenue ratably over the life of the contract. As there are
significant continuing undelivered obligations at June 30, 2003 under the
Amendment No. 3 to the Visual Content Services Agreement with eBay, we have
deferred all license revenue under the amendment at June 30, 2003.

Product revenue is recognized upon shipment or delivery provided there are no
uncertainties surrounding product acceptance or significant vendor obligations,
persuasive evidence of an arrangement exists, the fees are fixed or
determinable and collection is reasonably assured.

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

Revenues 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 45, Long-Term Construction-Type
Contracts.

Allowances for Doubtful Accounts

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

20



---



##### Table of Contents



Goodwill

Under United States generally accepted accounting principles, we evaluate
goodwill for impairment on an annual basis and on an interim basis if events or
changes in circumstances between annual impairment tests indicate that the
asset might be impaired. In assessing the recoverability of our goodwill, we
must make assumptions regarding estimated future cash flows and other factors
to determine the fair value of the goodwill. These estimates include forecasted
revenues and operating expenses, which are inherently difficult to predict. If
these estimates or their related assumptions change in the future, we may be
required to record impairment charges for these assets. We believe that the
accounting estimate related to goodwill is a critical accounting estimate
because (1) it requires Company management to make assumptions about fair
values and (2) the impact of recognizing an impairment could be material to our
financial position, as well as our results of operations. Managements
assumptions about fair values require significant judgment because broad
economic factors, industry factors and technology considerations can result in
variable and volatile fair values. On June 27, 2003, our agreement with eBay
was amended. eBay is the largest customer of the technology represented by our
goodwill. Due to Amendment No. 3 of our agreement with eBay, we preformed an
impairment analysis of goodwill at June 30, 2003 and no impairment existed.
However, at the end of the amended agreement with eBay we may incur a
significant impairment of our 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 six months ending June 30, 2003, the following payments were made
against our restructuring accrual:

|                          |                   |      |              |      |            |      |             |      |          |   |     |     |            |   |     |     | 
|------------------------- | ----------------- | ---- | ------------ | ---- | ---------- | ---- | ----------- | ---- | -------- | - | --- | --- | ---------- | - | --- | --- | 
|                          |                   |      | Balance at   |      |            |      |             |      |          |   |     |     | Balance at
|                          |                   |      | December 31, |      | Expense in |      | Payments in |      | June 30,
|(In thousands)            |                   | 2002 |              | 2003 |            | 2003 |             | 2003
|                          |                   |      |              |      |            |      |             |     
|Restructuring provisions: |                   |      |              |      |            |      |             |      |          |   |     |     |            |   |     |    
|                          | Severance         |      | $            | 500  |            |      | $           |     |          |   | $   | 400 |            |   | $   | 100 | 
|                          | Lease obligations |      |              | 549  |            |      |             |     |          |   |     | 167 |            |   |     | 382 | 
|                          |                   |      |              |      |            |      |             |      |          |   |     |     |            |   |     |    
|Total                     |                   | $    | 1,049        |      |            | $    |            |      |          | $ | 567 |     |            | $ | 482 |    
|                          |                   |      |              |      |            |      |             |      |          |   |     |     |            |   |     |    

21



---



##### Table of Contents



RESULTS OF OPERATIONS

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

|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |   |  |       |      |  
|----------------------------- |  |  | ------------------------ | -------------------------- |  | ------------------ | ---- | ---------------- |  | ----- | ----- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                              |  |  |                          |                            |  | Three months ended |      | Six months ended
|                              |  |  |                          |                            |  | June 30,           |      | June 30,        
|                              |  |  |                          |                            |  | 2002               |      | 2003             |  | 2002  |       | 2003
|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |     
|Revenue:                      |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|                              |  |  |                          | Transaction services       |  |                    | 66.0 | %                |  |       | 92.5  | %    |  |       | 69.9 | % |  |       | 90.1 | %
|                              |  |  |                          | Immersive still solutions  |  |                    | 34.0 |                  |  |       | 6.2   |      |  |       | 30.1 |   |  |       | 9.2  |  
|                              |  |  |                          | Immersive video solutions  |  |                    |     |                  |  |       | 1.3   |      |  |       |     |   |  |       | 0.7  |  
|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|                              |  |  | Total revenue            |                            |  | 100.0              |      |                  |  | 100.0 |       |      |  | 100.0 |      |   |  | 100.0 |     
|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|Cost of revenue:              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|                              |  |  |                          | Transaction services       |  |                    | 31.8 |                  |  |       | 27.0  |      |  |       | 33.1 |   |  |       | 27.4 |  
|                              |  |  |                          | Immersive still solutions  |  |                    | 6.1  |                  |  |       | 4.4   |      |  |       | 7.7  |   |  |       | 4.8  |  
|                              |  |  |                          | Immersive video solutions  |  |                    |     |                  |  |       | 1.2   |      |  |       |     |   |  |       | 0.7  |  
|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|                              |  |  | Total cost of revenue    |                            |  | 37.9               |      |                  |  | 32.6  |       |      |  | 40.8  |      |   |  | 32.9  |     
|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|                              |  |  | Gross profit             |                            |  | 62.1               |      |                  |  | 67.4  |       |      |  | 59.2  |      |   |  | 67.1  |     
|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|Operating expenses:           |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|                              |  |  |                          | Sales and marketing        |  |                    | 37.4 |                  |  |       | 31.2  |      |  |       | 39.8 |   |  |       | 29.4 |  
|                              |  |  |                          | Research and development   |  |                    | 21.4 |                  |  |       | 17.9  |      |  |       | 23.8 |   |  |       | 18.8 |  
|                              |  |  |                          | General and administrative |  |                    | 15.5 |                  |  |       | 12.7  |      |  |       | 17.0 |   |  |       | 12.8 |  
|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|                              |  |  | Total operating expenses |                            |  | 74.3               |      |                  |  | 61.8  |       |      |  | 80.6  |      |   |  | 61.0  |     
|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|Income (loss) from operations |  |  | (12.2                    | )                          |  |                    | 5.6  |                  |  |       | (21.4 | )    |  |       | 6.1  |  
|Other                         |  |  | 0.2                      |                            |  |                    | (0.5 | )                |  |       | 0.5   |      |  |       | (0.6 | )
|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  
|Net income (loss)             |  |  | (12.0                    | )%                         |  |                    | 5.1  | %                |  |       | (20.9 | )%   |  |       | 5.5  | %
|                              |  |  |                          |                            |  |                    |      |                  |  |       |       |      |  |       |      |  

22



---



##### Table of Contents



Quarter Ended June 30, 2002 Compared to the Quarter Ended June 30, 2003

|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |         |     |  
|----------------------------- | ------------------------ | -------------------------- | ---- | ------------------ | ----- | ---------- | --- | ------ | ----- | - | ----- | ---- | ------ | - | ---- | ------- | --- | -
|                              |                          |                            |      | Three months ended |       |            |     |        |       |   |       |     
|                              |                          |                            |      | June 30,           |       |            |     |        |       |   |       |     
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |     
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      | Percent
|(Dollars in thousands)        |                          | 2002                       |      | 2003               |       | Difference |     | Change
|                              |                          |                            |      |                    |       |            |     |       
|Revenue:                      |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|                              |                          | Transaction services       |      | $                  | 3,802 |            |     | $      | 6,058 |   |       | $    | 2,256  |   |      |         | 59  | %
|                              |                          | Immersive still solutions  |      |                    | 1,959 |            |     |        | 408   |   |       |      | (1,551 | ) |      |         | (79 | )
|                              |                          | Immersive video solutions  |      |                    |      |            |     |        | 86    |   |       |      | 86     |   |      |         | 100 |  
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|                              | Total revenue            |                            |      | 5,761              |       |            |     | 6,552  |       |   |       | 791  |        |   |      | 14      |    
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|Cost of revenue:              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|                              |                          | Transaction services       |      |                    | 1,831 |            |     |        | 1,768 |   |       |      | (63    | ) |      |         | (3  | )
|                              |                          | Immersive still solutions  |      |                    | 355   |            |     |        | 287   |   |       |      | (68    | ) |      |         | (19 | )
|                              |                          | Immersive video solutions  |      |                    |      |            |     |        | 82    |   |       |      | 82     |   |      |         | 100 |  
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|                              | Total cost of revenue    |                            |      | 2,186              |       |            |     | 2,137  |       |   |       | (49  | )      |   |      | (2      | )  
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|                              | Gross profit             |                            |      | 3,575              |       |            |     | 4,415  |       |   |       | 840  |        |   |      | 23      |    
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|Operating expenses:           |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|                              |                          | Sales and marketing        |      |                    | 2,153 |            |     |        | 2,044 |   |       |      | (109   | ) |      |         | (5  | )
|                              |                          | Research and development   |      |                    | 1,230 |            |     |        | 1,168 |   |       |      | (62    | ) |      |         | (5  | )
|                              |                          | General and administrative |      |                    | 893   |            |     |        | 834   |   |       |      | (59    | ) |      |         | (7  | )
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|                              | Total operating expenses |                            |      | 4,276              |       |            |     | 4,046  |       |   |       | (230 | )      |   |      | (5      | )  
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|Income (loss) from operations |                          |                            | (701 | )                  |       |            | 369 |        |       |   | 1,070 |      |        |   | (153 | )      
|Other                         |                          |                            | 10   |                    |       |            | (34 | )      |       |   | (44   | )    |        |   | (440 | )      
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        
|Net Income (loss)             |                          | $                          | (691 | )                  |       | $          | 335 |        |       | $ | 1,026 |      |        |   | (148 | )%     
|                              |                          |                            |      |                    |       |            |     |        |       |   |       |      |        |   |      |        

Revenue.Total revenue increased in the quarter ended June 30, 2003 over the
quarter ended June 30, 2002 due to increased volumes of images processed by
Rimfire ($2.3 million), primarily related to on-line auctions, partially offset
by lower sales volumes of primarily immersive keys and kits ($1.6 million).
During 2002, we reduced our sales and marketing efforts related to the sale of
immersive kits and keys, which resulted in lower revenues in order to increase
operating margins related to these products. A portion of this decrease is
attributable to our sale of our international immersive imaging operations to
iPIX-I in 2002.

23



---



##### Table of Contents



Cost of Revenue.Cost of revenue consists of our direct expenses associated
with the processing, hosting and distribution of digital content and the costs
of the digital camera and related components included in an iPIX kit. Cost of
revenue remained at substantially the same dollar level, but as a percentage of
total revenues decreased to 33% in the quarter ended June 30, 2003 from 38% in
the quarter ended June 30, 2002. Cost of revenue as a percent of revenue
declined in 2003 primarily due to operational efficiencies and economies of
scale associated with the processing of transactions.

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 June 30, 2003 over the
quarter ended June 30, 2002, due to our decision to shift resources from
international sales personnel costs in 2002 to more domestic sales personnel in
2003.

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 were essentially at the same dollar levels in the quarter ended June
30, 2003 and the quarter ended June 30, 2002.

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 were essentially at
the same dollar levels in the quarter ended June 30, 2003 and the quarter ended
June 30, 2002.

24



---



##### Table of Contents



Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2003

|                              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |    |    |     |  
|----------------------------- | -------------------------- | ------------------------ | ------------------------- | ----- | ---------------- | ---------- | --- | ------ | ------ | ------ | ------- | ---- | ----- | ------ | ---- | -- | -- | --- | -
|                              |                            |                          |                           |       | Six months ended |            |     |        |        |        |         |      |      
|                              |                            |                          |                           |       | June 30,         |            |     |        |        |        |         |      |      
|                              |                            |                          |                           |       |                  |            |     |        |        |        | Percent
|(Dollars in thousands)        |                            | 2002                     |                           | 2003  |                  | Difference |     | Change
|                              |                            |                          |                           |       |                  |            |     |       
|Revenue:                      |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|                              |                            |                          | Transaction services      |       | $                | 7,377      |     |        | $      | 11,660 |         |      | $     | 4,283  |      |    |    | 58  | %
|                              |                            |                          | Immersive still solutions |       |                  | 3,178      |     |        |        | 1,192  |         |      |       | (1,986 | )    |    |    | (63 | )
|                              |                            |                          | Immersive video solutions |       |                  |           |     |        |        | 91     |         |      |       | 91     |      |    |    | 100 |  
|                              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|                              |                            | Total revenue            |                           |       | 10,555           |            |     |        | 12,943 |        |         |      | 2,388 |        |      |    | 23 |    
|                              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|Cost of revenue:              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|                              |                            |                          | Transaction services      |       |                  | 3,500      |     |        |        | 3,550  |         |      |       | 50     |      |    |    | 1   |  
|                              |                            |                          | Immersive still solutions |       |                  | 811        |     |        |        | 625    |         |      |       | (186   | )    |    |    | (23 | )
|                              |                            |                          | Immersive video solutions |       |                  |           |     |        |        | 86     |         |      |       | 86     |      |    |    | 100 |  
|                              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|                              |                            | Total cost of revenue    |                           |       | 4,311            |            |     |        | 4,261  |        |         |      | (50   | )      |      |    | (1 | )  
|                              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|                              |                            | Gross profit             |                           |       | 6,244            |            |     |        | 8,682  |        |         |      | 2,438 |        |      |    | 39 |    
|                              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|Operating expenses:           |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|                              | Sales and marketing        |                          |                           | 4,193 |                  |            |     | 3,805  |        |        |         | (388 | )     |        |      | (9 | ) 
|                              | Research and development   |                          |                           | 2,511 |                  |            |     | 2,428  |        |        |         | (83  | )     |        |      | (3 | ) 
|                              | General and administrative |                          |                           | 1,797 |                  |            |     | 1,663  |        |        |         | (134 | )     |        |      | (7 | ) 
|                              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|                              |                            | Total operating expenses |                           |       | 8,501            |            |     |        | 7,896  |        |         |      | (605  | )      |      |    | (7 | )  
|                              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|Income (loss) from operations |                            |                          | (2,257                    | )     |                  |            | 786 |        |        |        | 3,043   |      |       |        | (135 | ) 
|Other                         |                            |                          | 53                        |       |                  |            | (83 | )      |        |        | (136    | )    |       |        | (257 | ) 
|                              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   
|Net Income (loss)             |                            | $                        | (2,204                    | )     |                  | $          | 703 |        |        | $      | 2,907   |      |       |        | (132 | )%
|                              |                            |                          |                           |       |                  |            |     |        |        |        |         |      |       |        |      |   

Revenue.Total revenue increased in the six months ended June 30, 2003 over the
six months ended June 30, 2002 due to increased volumes of images processed by
Rimfire ($4.3 million), primarily related to on-line auctions, partially offset
by lower sales volumes of primarily immersive keys and kits ($2.0 million).
During 2002, we reduced our sales and marketing efforts related to the sale of
immersive kits and keys, which resulted in lower revenues in order to increase
operating margins related to these products. A portion of this decrease is
attributable to our sale of our international immersive imaging operations to
iPIX-I in 2002.

25



---



##### Table of Contents



Cost of Revenue.Cost of revenue consists of our direct expenses associated
with the processing, hosting and distribution of digital content and the costs
of the digital camera and related components included in an iPIX kit. Cost of
revenue remained at substantially the same dollar level, but as a percentage of
total revenues decreased to 33% in the six months ended June 30, 2003 from 41%
in the six months ended June 30, 2002. Cost of revenue as a percent of
revenue declined in 2003 primarily due to operational efficiencies and
economies of scale associated with the processing of transactions.

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 six months ended June 30, 2003 over the six
months ended June 30, 2002, primarily due to our decision to shift resources
from international sales personnel costs in 2002 to more domestic sales
personnel in 2003.

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 were essentially at the same dollar levels in the six months ended
June 30, 2003 and the six months ended June 30, 2002.

General and Administrative.General and administrative expenses consist
primarily of salaries and related benefits for administrative and executive
staff, fees for outside professional services, bad debt expenses and other
costs associated with being a public company. General and administrative
expenses were essentially at the same dollar levels in the six months ended
June 30, 2003 and the six months ended June 30, 2002. In the six months ended
June 30, 2002, $0.1 million was collected from previously reserved receivables
and recognized as a reduction in general and administrative expenses, this was
offset in the same quarter of 2003 primarily by a $0.2 million decrease in
personnel and related costs.

26



---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations through our registered public
offerings, the private placements of capital stock, a convertible debenture, a
convertible promissory note and warrant and option exercises. At June 30,
2003, we had $10.1 million of cash, restricted cash and short term investments,
of which $1.4 million was restricted.

Summary Consolidated Cash Flow Data

|                                                     |  |                    |        |                  |  |      |       |      |  |   |        |   |  |   |       |  
|---------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                     |  | Three months ended |        | Six months ended
|                                                     |  | June 30,           |        | June 30,        
|                                                     |  |                    |        |                 
|(In thousands)                                       |  | 2002               |        | 2003             |  | 2002 |       | 2003
|                                                     |  |                    |        |                  |  |      |       |     
|Net cash provided by (used in) operating activities  |  | $                  | (754   | )                |  | $    | 3,636 |      |  | $ | (3,874 | ) |  | $ | 6,745 |  
|Net cash used in investing activities                |  |                    | (4,052 | )                |  |      | (90   | )    |  |   | (4,574 | ) |  |   | (808  | )
|Net cash provided by (used in) financing activities  |  |                    | 2,037  |                  |  |      | 406   |      |  |   | 2,025  |   |  |   | (280  | )
|Effect of exchange rate changes on cash              |  |                    | 28     |                  |  |      | (1    | )    |  |   | (21    | ) |  |   | 3     |  
|                                                     |  |                    |        |                  |  |      |       |      |  |   |        |   |  |   |       |  
|Net increase (decrease) in cash and cash
equivalents |  |                    | (2,741 | )                |  |      | 3,951 |      |  |   | (6,444 | ) |  |   | 5,660 |  
|Cash and cash equivalents, beginning of period       |  |                    | 7,400  |                  |  |      | 4,729 |      |  |   | 11,103 |   |  |   | 3,020 |  
|                                                     |  |                    |        |                  |  |      |       |      |  |   |        |   |  |   |       |  
|Cash and cash equivalents, end of period             |  | $                  | 4,659  |                  |  | $    | 8,680 |      |  | $ | 4,659  |   |  | $ | 8,680 |  
|                                                     |  |                    |        |                  |  |      |       |      |  |   |        |   |  |   |       |  

Cash flows from operating activities in the second quarter of 2003, reflects
net income of $0.3 million, compared to a net loss of $0.7 million the second
quarter of 2002. Our net loss for the three months ended June 30, 2002
included non-cash amortization of deferred revenues of $0.5 million, whereas
the three months ended June 30, 2003 included no material amortization of
deferred revenues, but does include $3.0 million for the collection of deferred
revenue during the quarter.

Net cash used in investing activities in the second quarter of 2003 and 2002
was primarily related to the acquisition of computer software and hardware and
the purchase of short-term investments of $1.4 million in the second quarter of
2002. We do not currently expect any significant acquisitions of computer
hardware and software throughout the remainder of 2003.

Net cash provided by financing activities in the second quarter of 2003 was
primarily related to $1.0 million of proceeds from the exercise of stock
options, net of $0.6 million of payments made on capital lease obligations.
Net cash provided by financing activities in the second quarter of 2002 was
primarily related to proceeds from new capital lease obligations.

Cash flows from operating activities in the first half of 2003, reflects net
income of $0.7 million, compared to a net loss of $2.2 million the first half
of 2002. Our net loss for the six months ended June 30, 2002 included non-cash
amortization of deferred revenues of $1.1 million, whereas the six months ended
June 30, 2003 included no material amortization of deferred revenues, but does
include $3.0 million of deferred revenue recorded in June 2003. During the
first six months of 2002, receivables increased $0.5 million, while in the same
period of 2003, receivables decreased $1.5 million. The decrease in 2003 was
primarily related to the timing of collections in early 2003.

27



---



##### Table of Contents



Net cash used in investing activities in the first half of 2003 and 2002 was
primarily related to the acquisition of computer software and hardware and the
purchase of short-term investments of $1.4 million in the first half of 2002.

Net cash used in financing activities in the first half of 2003 was primarily
related to $1.3 million of payments made on capital lease obligations, net of
$1.0 million of proceeds from the exercise of stock options. Net cash provided
by financing activities in the first half of 2002 was primarily related to
proceeds from new capital lease obligations.

The table below shows our contractual obligations as of June 30, 2003:

|                 |  |                        |       |         |  |           |       |        |  |            |       |  |  |   |     |  |  |   |    | 
|---------------- |  | ---------------------- | ----- | ------- |  | --------- | ----- | ------ |  | ---------- | ----- |  |  | - | --- |  |  | - | -- | 
|(In thousands)   |  | Payments Due by Period
|                 |  |                       
|                 |  |                        |       |         |  | Remainder |       | 2004 & |  | 2006 &     |       |  |  |  
|                 |  | Total                  |       | of 2003 |  | 2005      |       | 2007   |  | After 2007
|                 |  |                        |       |         |  |           |       |        |  |           
|Capital leases   |  | $                      | 2,546 |         |  | $         | 1,938 |        |  | $          | 608   |  |  | $ |    |  |  | $ |   | 
|Operating leases |  |                        | 6,796 |         |  |           | 1,697 |        |  |            | 4,264 |  |  |   | 771 |  |  |   | 64 | 
|                 |  |                        |       |         |  |           |       |        |  |            |       |  |  |   |     |  |  |   |    | 
|Total            |  | $                      | 9,342 |         |  | $         | 3,635 |        |  | $          | 4,872 |  |  | $ | 771 |  |  | $ | 64 | 
|                 |  |                        |       |         |  |           |       |        |  |            |       |  |  |   |     |  |  |   |    | 

On June 27, 2003, we signed an amended license agreement with eBay. The Visual
Content Services Agreement between iPIX and eBay remains unchanged through the
contract period, which will expire on September 30, 2003. Under the terms of
Amendment No. 3, eBay will pay us $8.0 million and other consideration based on
certain service and licensing options granted to eBay for a perpetual,
non-exclusive restricted use license to the Rimfire Imaging technology. In
addition, eBay has the option to extend the Rimfire Imaging services after
September 30, 2003 for up to four additional months for a minimum monthly
payment of $0.45 million, plus additional consideration based on the monthly
volume of image submissions. We may also transfer to eBay, at eBays option,
a Rimfire Imaging environment developed by us specifically for eBay in exchange
for a payment of $2.0 million. eBay and iPIX have also agreed to terminate
certain leases under which we leased computer equipment from eBay. In
addition, we have given eBay an option to purchase other assets, both of which
relate to the eBay Rimfire Imaging service. We have also agreed to work with
eBay and some of our third party service providers to efficiently transition
appropriate services to eBay allowing us to continue to focus on our base of
existing and new customers.

We finished the second quarter of 2003 with approximately $10.1 million in
cash, cash equivalents, restricted cash and short-term investments of which
$1.4 million was restricted cash and short-term investments. Our use, or
generation, of cash will be largely influenced by revenues from our major
customers. Depending upon the options elected by eBay under our amended
agreement and negotiations with other customers, the timeliness of collection
of our accounts receivable, our rate of growth and our ability to control or
affect reductions in costs, we are not expecting to, but may require additional
equity or debt financing to meet future working capital or capital expenditure
needs for the next 12 months. There can be no assurance that such additional
financing will be available or if available, that such financing can be
obtained on terms satisfactory to us.

28



---



##### Table of Contents



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 Rimfire
and our immersive video products and will invest in the expansion of the
offline publications and online classified advertising businesses and in the
development of new security and observation products and services.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 were applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, while the disclosure requirements
were applicable in 2002. The adoption of FIN 45 did not have a material impact
on our results of operation or financial condition and did not result in any
additional liabilities as of June 30, 2003 associated with guarantees covered
by this interpretation. In addition to guarantees, we have entered into
agreements indemnifying certain parties with respect to our potential
infringement of other partys intellectual property. Due to the nature of the
indemnifications, our maximum exposure under these agreements cannot be
estimated. We have not recorded any amounts for FIN 45 indemnities because
they are not probable, immaterial or not estimable at this time.

As permitted under Delaware law, we have agreements whereby our officers and
directors are indemnified for certain events or occurrences while the officer
or director is, or was, serving at our request in such capacity. The term of
the indemnification period is for the officers or directors term in such
capacity. The maximum potential amount of future payments we could be required
to make under these indemnification agreements is unlimited; however, we have a
director and officer insurance policy that limits our exposure and enables us
to recover a portion of any future amounts paid. As a result of our insurance
policy coverage, we believe the estimated fair value of these indemnification
agreements is minimal. Our director and officer indemnification agreements
were grandfathered under the provisions of FIN 45 as they were in effect prior
to December 31, 2002. We have not recorded any amounts for these indemnities
because they are not probable or estimable at this time.

In November 2002, the EITF reached consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF 00-21 will apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. We do not believe that the
adoption of this standard will have a material effect on our financial position
or results of operations.

29



---



##### Table of Contents



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We do not believe that
the adoption of this standard will have a material effect on our financial
position or results of operations.

In May 2003, the FASB issued FAS No. 150, Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity (FAS 150).
FAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. FAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. For nonpublic entities, mandatorily redeemable financial
instruments are subject to the provisions of FAS 150 for the first fiscal
period beginning after December 15, 2003. It is to be implemented by reporting
the cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of FAS 150 and still existing at
the beginning of the interim period of adoption. Restatement is not permitted.
We will adopt FAS 150 in the quarter ending September 30, 2003 and the adoption
of FAS 150 will not have a material impact on our financial statements.

INFLATION

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




Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2003, we had $10.1 million of cash, cash equivalents, 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. Our chief executive
officer and chief financial officer 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 date covered by this quarterly report.
Based on that evaluation, the chief executive officer and chief financial
officer have concluded as of the date covered by this quarterly report that our
disclosure controls and procedures are effective to ensure that material
information relating to the Company and our

30



---



##### Table of Contents



consolidated subsidiaries is made
known to such officers by others within these entities, particularly during the
period 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 that could significantly affect
these controls during the period covered by this report.

FORWARD-LOOKING STATEMENTS

This quarterly report contains statements about future events and expectations
which are characterized as forward-looking statements. Forward-looking
statements are based on our managements beliefs, assumptions and expectations
of our future economic performance, taking into account the information
currently available to them. These statements are not statements of historical
fact. Forward-looking statements involve risks and uncertainties that may
cause our actual results, performance or financial condition to be materially
different from the expectations of future results, performance or financial
condition we express or imply in any forward-looking statements. Factors that
could contribute to these differences include those discussed in Risk Factors
of our annual report on Form 10-K filed with the SEC on March 31, 2003.

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







PART II  OTHER INFORMATION

Item 1. Legal Proceedings

See Item 3, Legal Proceedings, in our annual report on Form 10-K for discussion
of litigation that has been dismissed against us but is subject to appeal.

We are not currently a party to any 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.




Item 2. Changes In Securities And Use Of Proceeds

None.




Item 3. Defaults Upon Senior Securities

None.

31



---



##### Table of Contents






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

On May 6, 2003, we held the annual meeting of our stockholders to vote upon the
election of two members to our board of directors.. At the meeting, our Series
B Preferred stockholders voted to elect two directors to serve until the 2006
annual meeting of stockholders. Greg Daily was elected to the Board of
Directors by our Series B Preferred stockholders by a vote of 9,235,236,
as-converted common shares for, 0 against and 0 abstentions and broker
non-votes. David Wilds was elected to the Board of Directors by our Series B
Preferred stockholders by a vote of 9,235,236, as-converted common shares for,
0 against and 0 abstentions and broker non-votes

Laban P. Jackson, Andrew P. Seamons and Donald W. Strickland continue to serve
as members of the board of directors until their terms expire at the annual
meeting of stockholders in 2004. Thomas Garrott and Michael Easterly continue
to serve as members of the board of directors until their terms expire at the
annual meeting of stockholders in 2005.




Item 5. Other Information

None.




Item 6. Exhibits And Reports On Form 8-K

| |  |    |                     |                                                                                                                    
| |  | -- | ------------------- | -------------------------------------------------------------------------------------------------------------------
| |  | a) | Exhibits            |                                                                                                                    
| |  |    |                     |                                                                                                                    
| |  |    | Exhibit 31.1        | Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002                                            
| |  |    |                     |                                                                                                                    
| |  |    | Exhibit 31.2        | Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002                                            
| |  |    |                     |                                                                                                                    
| |  |    | Exhibit 32          | Certification pursuant 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
| |  |    |                     |                                                                                                                    
| |  | b) | Reports On Form 8-K |                                                                                                                    

A Form 8-K was filed on June 27, 2003, under Item 5, relating to the Companys
Amendment No. 3 to the Visual Content Services Agreement with eBay Inc.

A form 8-K was filed on August 14, 2003,
under Item 12, relating to the
Companys press release setting for the Companys second quarter 2003 financial
results.

32



---



##### Table of Contents






INTERNET PICTURES CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                      |  |                                                                                                   
|--------------------- |  | --------------------------------------------------------------------------------------------------
|DATE: August 14, 2003 |  | INTERNET PICTURES CORPORATION
(Registrant)                                                        
|                     
|                      |  | /s/ Paul FarmerPaul Farmer
Authorized Officer
Chief Financial Officer and
Chief Accounting Officer

33



---



##### Table of Contents






INTERNET PICTURES CORPORATION
INDEX TO EXHIBITS FOR FORM 10-Q

FOR QUARTER ENDED JUNE 30, 2003

|             |  |                                                                                                                    
|------------ |  | -------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO.  |  | EXHIBIT DESCRIPTION                                                                                                
|             |  |                                                                                                                    
|Exhibit 31.1 |  | Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002                                            
|             |  |                                                                                                                    
|Exhibit 31.2 |  | Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002                                            
|             |  |                                                                                                                    
|Exhibit 32   |  | Certification pursuant 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002

34