UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

                          Commission File No. 000-26363

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

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

                             12120 Sunset Hills Road
                                    Suite 410
                             Reston, Virginia 20190
               (Address of principal executive offices, zip code)

       Registrant's telephone number, including area code: (703) 674-4100

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 [X] No [ ]

The number of shares  outstanding of the registrant's  Common Stock,  $0.001 par
value per share, as of May 1, 2005 was 22,299,368.




                                       1
<PAGE>

                                IPIX CORPORATION
                                    FORM 10-Q
                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
                                      INDEX
<TABLE>
<S>                                                                                                                            <C>
  PART I -- FINANCIAL INFORMATION...........................................................................................    3

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

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

     Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................................    19

     Item 4. Controls and Procedures.......................................................................................    19

  PART II -- OTHER INFORMATION..............................................................................................   21

     Item 1. Legal Proceedings.............................................................................................    21

     Item 6. Exhibits......................................................................................................    21

  Signatures...............................................................................................................    22

  Exhibit Index............................................................................................................    23
</TABLE>






                                       2
<PAGE>

PART I--FINANCIAL INFORMATION

Item 1.     Condensed Consolidated Financial Statements

                                IPIX CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<S>                                                                                                   <C>            <C>
                                                                                                         March 31,   December 31,
                                                                                                           2005          2004
                                                                                                      -------------  ------------
                                                                                                        (unaudited)       (1)
 (in thousands, except share amounts)

                                                ASSETS
 Cash and cash equivalents.........................................................................   $      8,896     $    12,784
 Restricted cash and short term investments........................................................          1,180             550
 Short term investments............................................................................            895             895
 Accounts receivable, net..........................................................................            293             414
 Inventory, net....................................................................................          2,401           2,334
 Prepaid expenses and other current assets.........................................................          1,678           1,512
 Assets held for sale for discontinued operations..................................................             --             321
                                                                                                      -------------     ----------
       Total current assets........................................................................         15,343          18,810
 Computer hardware, software and other, net........................................................            912             716
 Restricted cash and other long term assets........................................................             88             718
                                                                                                      ------------     -----------
       Total assets................................................................................   $     16,343     $    20,244
                                                                                                      ============     ===========

                                     LIABILITIES AND STOCKHOLDERS' EQUITY
 CURRENT LIABILITIES:
 Accounts payable..................................................................................   $        696     $     1,043
 Accrued liabilities...............................................................................          3,818           3,376
 Deferred revenue..................................................................................            137              84
 Liabilities held for sale for discontinued operations.............................................             --             164
 Current portion of obligations under capital leases...............................................             --             220
                                                                                                      -------------     -----------
       Total current liabilities...................................................................          4,651           4,887
 Other long term liabilities.......................................................................            109             142
                                                                                                      ------------     -----------
          Total liabilities........................................................................          4,760           5,029
                                                                                                      ------------     -----------

 STOCKHOLDERS' EQUITY:
 Preferred stock , $0.001 par value, 5,001,100 authorized, 290,347 shares issued and outstanding...             --              --
 (Aggregate liquidation value: $7,440 and $7,325)
 Common stock, $0.001 par value, 50,000,000 authorized, 22,239,154 and 21,539,058 shares issued
 and outstanding ..................................................................................             22              22
 Additional paid-in capital........................................................................        535,908         533,659
 Accumulated deficit...............................................................................       (524,347)       (518,466)
                                                                                                      -------------    ------------
       Total stockholders' equity..................................................................         11,583          15,215
                                                                                                      -------------    ------------

       Total liabilities and stockholders' equity..................................................   $     16,343     $    20,244
                                                                                                      ============     ===========
</TABLE>

(1)  The December 31, 2004 balances were derived from the audited consolidated
     financial statements.

See accompanying notes to the unaudited condensed consolidated financial
statements.

                                       3
<PAGE>


                                IPIX CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<S>                                                                      <C>               <C>
                                                                               Three months ended
                                                                                   March 31,
                                                                         -------------------------------
                                                                              2005              2004
                                                                         --------------    --------------
                   (in thousands, except per share data)
    Revenue:
    Hardware.........................................................       $     317         $     213
    Licenses and other...............................................             351               263
                                                                            ---------         ---------
       Total revenue.................................................             668               476
                                                                            ---------         ---------

    Cost of revenue:
    Hardware.........................................................             170               145
    Licenses and other...............................................             196               152
                                                                         ------------      ------------
       Total cost of revenue.........................................             366               297
                                                                            ---------         ---------

       Gross profit..................................................             302               179
                                                                            ---------         ---------

    Operating expenses:
    Sales and marketing..............................................           1,715               847
    Research and development.........................................             666               446
    General and administrative.......................................           2,294               693
    Loss on impairment of investment                                              253                --
                                                                         ---------------    ------------
       Total operating expenses......................................            4928             1,986
                                                                            ---------         ---------

    Loss from operations.............................................          (4,626)           (1,807)
    Other............................................................             105                 4
                                                                            ---------         ---------

    Loss from continuing operations..................................          (4,521)           (1,803)
    Loss from discontinued operations, net of taxes..................          (1,360)           (1,407)
                                                                            ---------         ----------

    Net loss.........................................................          (5,881)           (3,210)
    Preferred stock dividends........................................            (115)             (400)
                                                                            ---------         ----------
    Net loss available to common stockholders........................       $  (5,996)        $  (3,610)
                                                                            =========         ==========

    Basic and diluted loss per share:
       Continuing operations ........................................       $   (0.21)        $   (0.25)
       Discontinued operations ......................................           (0.06)            (0.16)
                                                                            ----------        ----------
    Net loss per common share to common stockholders - basic and diluted    $   (0.27)        $   (0.41)

    Weighted average common shares, basic and diluted................          21,938             8,901
</TABLE>


See  accompanying  notes  to  the  unaudited  condensed consolidated financial
statements.

                                       4
<PAGE>


                                IPIX CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<S>                                                                                                             <C>        <C>
                                                                                                                Three months ended
                                                                                                                     March 31,
                                                                                                                ------------------
                                                                                                                  2005      2004
                                                                                                                --------   -------
                                                     (In thousands)

Cash flows from operating activities:
Net (loss)...................................................................................................   $ (5,881)$   (3,210)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
Depreciation.................................................................................................        121        289
Change in inventory reserve..................................................................................         32         --
Stock based compensation expense.............................................................................        794         --
Changes in operating assets and liabilities:
   Accounts receivable.......................................................................................        121       (103)
   Inventory.................................................................................................        (99)      (203)
   Prepaid expenses and other current assets.................................................................       (166)       118
   Other long term assets....................................................................................        321        134
   Accounts payable..........................................................................................       (347)      (210)
   Accrued liabilities and other.............................................................................        157       (174)
   Deferred revenue..........................................................................................         53         (7)
                                                                                                                ---------  ---------
      Net cash (used in) operating activities................................................................     (4,894)    (3,366)
                                                                                                                ---------  ---------

Cash flows from investing activities:
Purchases of computer hardware, software and other...........................................................       (317)       (38)
                                                                                                                ---------- ---------
      Net cash (used in) investing activities................................................................       (317)       (38)
                                                                                                                ---------- ---------

Cash flows from financing activities:
Proceeds from issuance of common stock.......................................................................      1,543        362
Repayments of capital lease obligations......................................................................       (220)      (218)
                                                                                                                ---------- ---------
      Net cash provided by financing activities..............................................................      1,323        144
                                                                                                                ---------- ---------

Net decrease in cash and cash equivalents....................................................................     (3,888)    (3,260)
Cash and cash equivalents, beginning of period...............................................................     12,784     10,241
                                                                                                                ---------- ---------

Cash and cash equivalents, end of period.....................................................................   $  8,896 $    6,981
                                                                                                                ========== =========
</TABLE>

See accompanying notes to the unaudited condensed consolidated financial
statements

                                       5
<PAGE>


         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. THE COMPANY

IPIX Corporation ("IPIX" or "Company"),  formally Internet Pictures Corporation,
provides  mission-critical  imaging  solutions for commerce,  communication  and
security applications. The Company's solutions create, process and manage a rich
variety of media  including  still images,  360-degree  by 360-degree  immersive
images and video.  During  2004,  the  Company  focused on  realigning  its core
competencies  with its strategic  business goals.  The InfoMedia  business unit,
formerly  responsible  for the  development,  marketing  and sales of  immersive
photography products,  was integrated with the security business unit. The still
photography  product  teams  now work  closely  with  the  video  product  teams
leveraging  mature  development  processes  and  expertise;  and the  sales  and
marketing of each product line is conducted as a coordinated  effort. In markets
where  customers  benefit from combined  products (video and stills) in a single
offering,  this new structure allows IPIX to do so seamlessly.  In addition,  in
February  2005 we sold the AdMission  business  unit,  which  developed and sold
products  to  the  online  advertising  market.  In  accordance  with  Financial
Accounting  Standards Board ("FASB") Statement of Financial  Accounting Standard
("FAS")  No.144,  "Accounting  for the  Impairment  or  Disposal  of  Long-Lived
Assets"("FAS 144"), the assets and liabilities related to the AdMission business
unit were  classified as held for sale at December 31, 2004,  and the operations
of this business unit were considered discontinued operations (see Note 3).

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

The  accompanying  unaudited,  condensed and consolidated  financial  statements
include the  accounts of IPIX  Corporation  and its  wholly-owned  subsidiaries,
Interactive  Pictures  Corporation 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.

The accompanying  unaudited,  condensed and consolidated financial statements of
IPIX Corporation, a Delaware corporation,  have been prepared in accordance with
accounting  principles generally accepted in the United States of America ("U.S.
GAAP") for interim financial  information and instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, these statements do not include all of the
information  and  footnotes   required  by  U.S.  GAAP  for  complete  financial
statements.  In  the  opinion  of the  Company's  management,  these  unaudited,
condensed and  consolidated  financial  statements  reflect all adjustments of a
normal,  recurring nature necessary to present fairly the financial  position of
the Company and its  subsidiaries  at March 31, 2005 and December 31, 2004,  the
results of  operations  for the three  months  ended March 31, 2005 and 2004 and
cash  flows for the three  months  ended  March 31,  2005 and 2004.  Results  of
operations  for the  three  months  ended  March  31,  2005 are not  necessarily
indicative  of results of  operations  expected  for the full fiscal year ending
December 31,  2005.  Please refer to the  Company's  2004 Annual  Report on Form
10-K,  as  amended  on Form  10-K/A,  for the  complete  consolidated  financial
statements for the period ended December 31, 2004.

2. GOING CONCERN CONSIDERATIONS

The  accompanying  condensed and  consolidated  financial  statements  have been
presented in  accordance  with U.S.  GAAP,  which assume the  continuity  of the
Company as a going concern.  During the three months ended March 31, 2005 and in
the prior fiscal years,  the Company  experienced,  and continues to experience,
certain  issues  related to cash flow and  profitability.  These  factors  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The  Company  believes  that it can  generate  sufficient  cash flow to fund its
operations  through the launch and sale of new  products in 2005.  In  addition,
management  will monitor the Company's cash position  carefully and evaluate its
future  operating  cash  requirements  with  respect to its  strategy,  business
objectives and performance. Management will focus on operating costs in relation
to revenue  generated  and its strategic  initiatives  for growing the immersive
imaging  solutions  business.  In line with this focus the Company completed the
sale of the  AdMission  business  unit to  AdMission  Corporation  in the  first
quarter of 2005 (See Note 3).

In addition,  the Company's operating results in 2005 will be dependent upon the
its ability to provide quality  products and services and is subject to the risk
of an  unfavorable  lower  demand  for its  products  and  services.  Management
believes,  however,  that the Company has  sufficient  cash reserves to meet its
funding  needs for 2005.  The Company  finished  the first  quarter of 2005 with
approximately  $10,971  thousand in cash reserves (cash and cash  equivalents of
$8,896 thousand,  short-term restricted investments of $550 thousand, short-term
restricted  cash of $630 thousand and short-term  investments of $895 thousand).

                                       6
<PAGE>

Management  expects to continue to make significant  investments in the sale and
marketing of new products, which may consume available cash reserves.  Depending
upon  the  Company's  ability  to  sell  its new  products,  the  timeliness  of
collection of accounts  receivable and other potential working capital needs, as
well as the  timing  and rate of  revenue  growth  and  management's  ability to
control costs,  the Company may require  additional  equity or debt financing to
meet  future  working  capital or  capital  expenditure  needs.  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 the Company.  If the
Company  is  not  able  to  raise  additional  funds,  it  may  be  required  to
significantly  curtail its operations  which would have an adverse effect on its
financial  position,   results  of  operations  and  cash  flow.  The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

3. DISCONTINUED OPERATIONS

On February 11, 2005,  the Company and AdMission  Corporation,  a privately held
Delaware  corporation  ("AdMission")  closed  the  transactions  under the asset
purchase  agreement  dated  January  11, 2005  between  the parties  (the "Asset
Purchase  Agreement").  Pursuant to the terms of the Asset  Purchase  Agreement,
IPIX sold to AdMission  certain of its assets  (including  certain patent rights
and other  intellectual  property) and contracts  relating to its IPIX AdMission
business unit (the "AdMission  Business").  In consideration  for the sale, IPIX
received  1,035,000  shares  of the  Series  A  Convertible  Preferred  Stock of
AdMission  and a warrant  to  purchase  200,000  shares of the  Common  Stock of
AdMission.  Additionally,  AdMission assumed certain liabilities associated with
the  AdMission  business  unit.  In  accordance  with FAS 144,  the  assets  and
liabilities  related to the AdMission  business were classified as held for sale
at December 31, 2004, and the  operations of this business unit were  considered
discontinued  operations for each quarter and for each full year presented.  The
preferred  stock and warrant were  recorded as an asset  investment in AdMission
and subsequently written-down to zero. This write-down was based on Management's
assessment of market value of the  investment  related to the carrying  value of
the asset which was based upon  AdMission's  first  quarter  loss until the sale
date and the  marketability  of the private  company's stock. The sale of assets
and liabilities to AdMission consists of fixed assets of $253 thousand,  prepaid
items of $62  thousand  and  deferred  revenue of $62  thousand.  The  operating
results of AdMission for 2005 were also reclassified to discontinued operations.
During the first quarter of 2005,  the Company  incurred  non-cash  compensation
expenses of $794  thousand  associated  with the  acceleration  of stock options
related to the sale of the AdMission business unit.

In connection with the Asset Purchase Agreement, IPIX and AdMission entered into
a Patent  Purchase,  License and Repurchase  Agreement  dated as of February 11,
2005 which provides for the transfer to AdMission of certain patents relating to
the  AdMission  Business,  the license of those  patents back to IPIX for use by
IPIX in the conduct of its security  sector  business and certain  other limited
uses, and repurchase right by IPIX in the event of certain  triggering events by
AdMission.  The  patent  agreement  remains in effect  until all of the  patents
transferred by the agreement expire.

IPIX and  AdMission  also  entered into an IPIX  Trademark/Service  Mark License
Agreement  which provides  AdMission  with an eighteen (18) month  royalty-free,
nonexclusive  license to use certain IPIX marks and certain other trademarks and
business brands in connection with the conduct of the AdMission Business.

Other than the  obligation to provide  AdMission  with a license of certain IPIX
marks and certain  other  trademarks  and business  brands  pursuant to the IPIX
Trademark/Service  Mark  License  Agreement,   the  Company  has  no  continuing
obligations to AdMission.

Revenues, operating expenses and loss from discontinued operations for the three
months ended March 31, 2005 and 2004 are as follows:

    (in thousands)                                  Three Months Ended March 31,
                                                    ----------------------------
                                                        2005           2004
                                                    ------------     -----------
                                                            (unaudited)

    Revenue....................................           $159           $246
    Cost of Revenue............................            220            678
    Gross profit...............................            (61)          (432)

    Operating expenses:
     Sales and marketing.......................            908            495
     Research and development..................            391            480
     Total operating expenses..................          1,299            975
    Loss from discontinued operations..........         (1,360)        (1,407)
                                                    ============     ===========

                                       7
<PAGE>

4. CASH, CASH EQUIVALENTS AND RESTRICTED SHORT TERM INVESTMENTS

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

At March 31, 2005, we had a $1,445 thousand short term investment  which matures
on June 19, 2005,  $550 thousand of which has been  provided as  collateral  for
certain capital lease  obligations  and,  accordingly,  classified as restricted
short term  investments.  We will renew the investment for successive short term
periods until the capital lease obligation  restrictions  are removed.  At March
31, 2005, we also had $630 thousand of cash deposits restricted as collateral on
a letter of credit for certain co-location facility leases expiring in 2006 and,
accordingly, classified as short term restricted cash.

5. EQUITY

During the three months ended March 31, 2005, we issued 700,096 shares of common
stock upon exercise of employee stock options. Our total proceeds from the first
quarter  exercises  of theses  options  were $1,455  thousand.  During the three
months  ended March 31,  2004,  we issued  442,144  shares of common  stock upon
exercise of stock options. Our total proceeds from the first quarter 2004 option
exercises were $641 thousand, $279 thousand of which was collected in the second
quarter of 2004. As of March 31, 2005,  we have  collected $88 thousand from our
employees' second quarter 2005 Employee Stock Purchase Plan ("ESPP") purchases.

6. NET LOSS PER COMMON SHARE

Basic income  (loss) per common share is computed by dividing net income  (loss)
available to common  stockholders  for the period by the weighted average number
of shares of common stock  outstanding.  Net income  (loss)  available to common
stockholders  is calculated as the net income (loss) less  cumulative  preferred
stock  dividends for the period.  If dilutive,  the  participation  right of the
preferred stock is reflected in the calculation of basic income (loss) per share
using the "if  converted"  method or the "two class  method," if more  dilutive.
Warrant and stock options could  potentially  dilute basic loss per share in the
future  but were not  included  in the  computation  of  diluted  loss per share
because to do so would have been  antidilutive  for the three months ended March
31, 2005 and 2004. For all periods presented herein,  the Company's diluted loss
per share is equal to its basic loss per share  because  the effects of exercise
were anti-dilutive given the losses the Company incurred during such periods.

The following  table sets forth the  computation  of basic and dilutive loss per
common share for the periods indicated:
<TABLE>
<S>                                                                        <C>          <C>
                                                                            Three months ended
                                                                                 March 31,
                                                                         -------------------------
                      (In thousands, except per share)                        2005         2004
                                                                         -------------  ----------
                                                                                  (unaudited)
Numerator:
Loss from continuing operations......................................      $  (4,521)   $  (1,803)
Loss from discontinued operations, net of tax........................         (1,360)      (1,407)
                                                                           ---------    ---------
Net income (loss)....................................................         (5,881)      (3,210)
Preferred stock dividends............................................           (115)        (400)
                                                                           ---------    ----------

Net loss available to common stockholders............................      $  (5,996)   $  (3,610)
                                                                           =========    ==========

Denominator:
   Weighted average shares outstanding -- Basic and diluted...........        21,938        8,901
                                                                            =========   ==========

Loss per Common Share, Continuing Operations.........................       $  (0.21)   $   (0.25)
Loss per Common Share, Discontinued Operations.......................          (0.06)       (0.16)
                                                                            ---------   ----------
Loss per Common Share, Basic and Diluted.............................       $  (0.27)   $   (0.41)
                                                                            =========   ==========
</TABLE>

The  following  table sets forth  potential  common  stock  shares  that are not
included in the diluted net loss per common share  calculation  because to do so
would be  antidilutive  for the three  months ended March 31, 2005 and 2004 as a
result of the net loss available to common stockholders:

                                       8
<PAGE>


 (Shares in thousands)                                   Three months ended
                                                              March 31,
                                                         ------------------
                                                          2005        2004
                                                         -------    --------
                                                             (unaudited)
 Stock options...................................         1,419         888
 Convertible preferred stock.....................         2,954      10,970
 Series B Warrants...............................           -           195

Not included in the table above,  were the following  rights to purchase  common
stock where the average exercise price was greater than the average common share
price during the period and,  accordingly,  they were  excluded from diluted net
loss per common share for the three month periods ended March 31, 2005 and 2004:
<TABLE>
<S>                                                                             <C>           <C>

(Shares in thousands)                                                              Three months ended
                                                                                        March 31,
                                                                                   2005        2004
                                                                                ----------  ----------
                                                                                      (unaudited)
Average share price of IPIX common stock...................................     $   3.70      $   2.55
Stock options:
Shares excluded (average exercise price of options $15.59 in 2005
and $18.78 in 2004)........................................................        1,180           887
Series B Warrants (exercise price $4.34)...................................          917           921
Common Warrants (average exercise price $147.41 in 2005 and $165.33 in                32           137
2004)......................................................................
</TABLE>

7. RESTRUCTURING AND OTHER

During the three months ended March 31, 2005, payments of $15 thousand were made
against  our lease  restructuring  accrual  which  was  established  by  various
restructuring actions from 2000 to 2004. At March 31, 2005 the remaining balance
in the lease restructuring accrual was $242 thousand.

In  subsequent  quarters of 2005, we anticipate  incurring  additional  costs of
approximately  $1,700  thousand in connection  with the closing of our San Ramon
office.  These costs include  approximately $1,200 thousand in lease termination
costs and $500 thousand in asset disposal cost.


8. STOCK-BASED COMPENSATION -- FAIR VALUE DISCLOSURES

In December 2002 the Financial  Accounting  Standards Board issued  Statement of
Financial  Accounting  Standards  ("FAS") No. 148,  "Accounting  for Stock Based
Compensation-Transition   and   Disclosure,"   an  amendment  to  FAS  No.  123,
"Accounting  for  Stock-Based  Compensation."  FAS No. 148 amends the disclosure
provisions  to require  prominent  disclosure  about the effects on reported net
income of an entity's  accounting  policy  decisions with respect to stock-based
compensation.  Stock options are  accounted  for using the  intrinsic  method in
accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued
to  Employees,"  as  interpreted,  whereby if options  are priced at fair market
value or above at the date of grant, no compensation expense is recognized.  The
pro forma information is as follows:
<TABLE>
<S>                                                                      <C>               <C>
                                                                           Three months ended March
                                                                                     31,
                                                                         -----------------------------
                       (in thousands, except per share data)                 2005             2004
                                                                         -------------     -----------
                                                                                 (unaudited)
 Net loss, as reported                                                     $(5,996)          $(3,610)
 Stock-based employee compensation under the intrinsic
 method included in net loss as reported is $794 in 2005 and $0 in 2004
 Stock-based employee compensation under fair value
 method of FAS No. 123                                                        (701)             (287)
                                                                         -------------     -----------
 Net loss pro forma                                                        $(6,697)          $(3,897)
 Net loss per share basic and diluted - as reported                        $ (0.27)          $ (0.41)
 Net loss per share basic and diluted - pro forma                          $ (0.31)          $ (0.44)
</TABLE>

                                       9
<PAGE>

Grants  under  the  ESPP  have  a  look-back  feature  and  a 15%  discount  and
accordingly  under FAS 123 would have had compensation  expense  calculated as a
result. The fair value disclosure associated with the ESPP grants is included in
the fair value pro-forma information above.

We  calculated  the fair  value of each  award  on the date of grant  using  the
Black-Scholes  pricing  model.  The  following  assumptions  were  used for each
respective period:

                                                       Three Months Ended
                                                           March 31,
                                                           ---------
                                                     2005             2004
                                                     ----             ----
                                                           (unaudited)
Risk-free interest rates......................       5.0%             4.0%
Expected lives (in years).....................       4.0              4.0
Dividend yield................................         0%               0%
Expected volatility...........................       154%             141%


9. INVENTORY

Our  inventory  consists  primarily  of  finished  camera  products  and  camera
components.  Our inventory is valued at the lower of cost, or market,  using the
FIFO method.  The table below shows our  inventory  mix as of March 31, 2005 and
December 31, 2004:


 (In thousands)                                     March 31,   December 31,
                                                      2005           2004
                                                      ----           ----
                                                  (unaudited)
Components..................................      $    1,507    $    1,628
Finished goods..............................           1,209         1,052
Inventory reserve...........................            (315)         (346)
                                                  ------------- -----------
Inventory, net..............................      $    2,401    $    2,334
                                                  ==========    ==========


10. COMMITMENTS AND CONTINGENCIES

Commitments

The table below shows our total  contractual  obligations  as of March 31, 2005,
updated for the lease entered into on April 18, 2005:
<TABLE>
<S>                                                                     <C>         <C>         <C>        <C>         <C>

(In thousands)                                                                             Payments Due by Period
                                                                        --------------------------------------------------------
                                                                                    Less than                          After 5
                                                                          Total      a year     1-3 years  4-5 years    years
                                                                        --------    ---------   ---------  ---------   --------
Operating leases....................................................    $  3,883     $ 1,104     $  2,038    $ 657      $ 83
</TABLE>

At  March  31,  2005,  we had  $630  thousand  of cash  deposits  restricted  as
collateral  on a letter  of  credit  for  certain  co-location  facility  leases
expiring in 2006 and, accordingly, classified as short term restricted cash.

On February 3, 2005, we entered into a lease  agreement with Oak Ridge Technical
Center  Partners  - One,  L.P.  ("Landlord").  The Lease is for a period of five
years  beginning May 1, 2005. The base rent is  approximately  $313 thousand per
year and will increase by approximately $5 thousand each year beginning in April
2006.  In addition to the base rent,  we are required to pay certain taxes and a
pro rata share of operating  expenses.  We are also responsible for the costs of
certain  tenant  improvements  associated  with  the new  facility,  but will be
entitled to  reimbursement  for certain costs from the Landlord.  The Lease also
provides for three 36 month renewal  options at 95% of the then  prevailing fair
market rents.

On April 18, 2005, we entered into a sublease  agreement with Thomas Group, Inc.
with respect to our new corporate headquarters in Reston, Virginia. The sublease
is for a period  of 31  months  beginning  April  15,  2005.  The  base  rent is
approximately  $298 thousand per year and will increase by  approximately  three

                                       10
<PAGE>

(3%) percent each year beginning April 1, 2006. In addition to the base rent, we
are  responsible  for any  increases  in operating  expenses and property  taxes
billed to the landlord and paid by Thomas Group. We are also responsible for the
costs of tenant  improvements.  All terms and  conditions  of the  master  lease
between  Thomas  Group  and REC  Partners,  L.P.  dated  February  15,  2000 are
incorporated into and made part of the sublease.

Contingencies

On June 15,  2003,  we filed an action  against Mr. Ford Oxaal and his  company,
Minds-Eye-View,  (together, "Oxaal") in the United States District Court for the
Eastern District of Tennessee.  In the complaint,  we asserted claims for patent
infringement,  false designation of origin, false description or representation,
unfair or deceptive acts and tortious  interference  in connection  with Oxaal's
competing  software  product  marketed under the name "Click Away." On August 8,
2003,  Oxaal  filed its answer  asserting  counterclaims  for  non-infringement,
invalidity,  unenforceability,  breach of contract,  patent  misuse,  Lanham Act
violations and tortious interference.  We denied all of Oxaal's allegations. The
case was stayed pending settlement negotiations, which have since terminated. In
response,  on March 15,  2005,  we filed a motion to vacate the stay so that our
lawsuit can proceed in due course.

On March 4, 2005,  Grandeye Ltd. filed a complaint in the United States District
Court for the Eastern  District of Virginia against us alleging that Grandeye is
not infringing our patents, that our patents are invalid and are not owned by us
and  that  we  engaged  in  false  advertising,  unfair  competition,   tortious
interference and antitrust violations.  The Company denied these allegations and
filed  counterclaims  alleging Grandeye is infringing the Company's patents.  On
March 24, 2005, we filed a motion to move the case to the United States District
Court for the Eastern District of Tennessee.

We intend to vigorously defend each of the above referenced lawsuits. Because of
the inherent uncertainties related to this type of litigation,  we are unable to
predict the ultimate  outcome of these cases, or the likelihood or amount of our
potential liability,  if any, of these cases.  However, if we are not successful
in  defending  or  settling  these  matters,  these  cases could have a material
adverse effect on our business,  financial  condition,  results of operations or
cash flows.

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

Indemnification Provisions

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

11. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In  December  2004,  the FASB issued FAS No. 123 (R),  "Share-Based  Payment" to
replace FAS No. 123,  "Accounting for Stock-Based  Compensation" and APB Opinion
No. 25,  "Accounting  for Stock Issued to Employees."  FAS No. 123 (R) requires,
among other things, that all share-based payments to employees, including grants
of stock  options,  be  measured  based  on  their  grant-date  fair  value  and
recognized  as expense in the  financial  statements  effective  for  interim or
annual periods  beginning after June 15, 2005.  Unless  observable market prices
exist,   the   grant-date   fair  value  is  estimated   using  an   appropriate
option-pricing  model as determined  by  management.  Management  must also make
certain assumptions about employee exercise habits,  forfeiture rates and select
an appropriate  amortization  methodology for recognizing  compensation expense.
The Statement requires a modified prospective method of adoption.  Companies may
also elect to restate their previously  issued  financial  statements to provide
consistency across all periods presented under a modified  retrospective method.
Management  believes the adoption of FAS No. 123(R) will have a material  impact
on the Company's  consolidated  results of operations and earnings per share but
has not yet  determined  the method of adoption  that will be applied or whether
adoption  will  result  in  expense  amounts  materially  different  from  those
currently provided under the pro forma disclosures (See Note 8).

In April 2005, the Securities and Exchange Commission  announced the adoption of
a new rule that amends the effective date of FAS No.  123(R).The  effective date
of the new  standard  under  these  new  rules  for our  consolidated  financial
statements  is  January  1,  2006.  Adoption  of  this  statement  will  have  a
significant  impact on our  consolidated  results of operations and earnings per
share as we will be  required  to  expense  the fair  value of our stock  option
grants and stock  purchases  under our employee  stock purchase plan rather than
disclose the impact on our consolidated  net income within our footnotes,  as is
our current practice.

                                       11
<PAGE>

12. SEGMENTS.

In 2004,  the  Company  focused on  realigning  our core  competencies  with our
strategic  business  goals.  In 2005,  the  InfoMedia  business  unit,  formerly
responsible for the  development,  marketing and sales of immersive  photography
products,  was integrated  with the security  business unit.  Still  photography
product teams now work closely with the video product  teams  leveraging  mature
development processes and expertise; and the sales and marketing of both product
lines is conducted as a coordinated  effort.  In markets where customers benefit
from  combined  products  (video  and  stills)  in a single  offering,  this new
structure  allows IPIX to do so  seamlessly.  In addition,  in February 2005, we
sold the  AdMission  business  unit,  which  developed  and sold products to the
online advertising market.  (See Note 3) As such, the Company's  management does
not  evaluate  the  performance  of any segment of the  business  but rather the
business as a whole, therefore, there are no separate segments to report.

13. 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  in  certain
instances require partial or full payment prior to shipment,  however, we do not
require collateral from our customers.

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

                                                       Three months ended
                                                            March 31,
                                                       ------------------
                                                       2005         2004
                                                       ----       -------

Homestore.........................................      -%          16%
General Dynamics..................................      -%          20%
Evolve............................................     10%           -%

At  March  31 2005,  our  Australian  distributor  represented  22% of  accounts
receivable.   Substantially   all  amounts  due  from  Evolve,   our  Australian
distributor, as of March 31, 2005, were collected during April 2005. At December
31, 2004,  Homestore and our UK Distributor  represented 21% and 11% of accounts
receivable, respectively.

On October 1, 2004, the license  agreement  dated January 12, 2001 (the "License
Agreement") between the Company and Homestore Virtual Tours, Inc.  ("Homestore")
was terminated.  Under the License Agreement,  Homestore had the exclusive right
to sell our virtual tour technology to the U.S.  residential  real estate market
and was required to pay us a royalty for each virtual tour sold.  As a result of
the termination, Homestore no longer has the exclusive right to sell our virtual
tour  technology to the U.S.  residential  real estate  market,  and we may sell
directly,  or license  another third party to sell, our virtual tour  technology
into this market. We mutually  released each other from any further  obligations
under the License Agreement.

14. 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
$22,302 thousand. 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. As of March 31,
2005,  290,347  shares of Series B Preferred  Stock  remain  outstanding  with a
liquidation preference, defined below, of $7,440 thousand, which includes $1,633
thousand in accrued dividends in arrears on the Series B Preferred Stock.

Holders  of Series B  Preferred  Stock,  in  preference  to holders of any other
series of  Preferred  Stock and in  preference  to the  holders of Common  Stock
(collectively,  "Junior  Securities"),  accrue  dividends  at the  rate of eight
percent (8%) of the price paid per annum on each  outstanding  share of Series B
Preferred  Stock ("Series B Dividends").  The Series B Dividends are cumulative,
accrue  daily and shall be  payable,  when and if  declared  by the Board,  upon

                                       12
<PAGE>

conversion or as an accretion to the liquidation  preference,  as defined below.
Accrued Series B Dividends may be paid in cash or common stock,  at the election
of the  Series B  Preferred  stockholder.  Holders of Series B  Preferred  Stock
participate on an as-if  converted basis in any common stock  dividends.  At any
time that the holders of the Series B Preferred  Stock hold more than 50% of our
voting stock, a voluntary liquidation,  dissolution or winding up of the Company
must be  approved  by at  least  five  of the  seven  members  of our  board  of
directors.  Upon any liquidation event, before any distribution or payment shall
be made to the  holders  of any  Junior  Securities,  the  holders  of  Series B
Preferred  Stock  shall be  entitled to be paid out of the assets of the Company
legally  available  for  distribution,  or the  consideration  received  in such
transaction,  an amount per share of Series B Preferred Stock equal to the price
paid plus all accrued and unpaid  Series B Dividends  for each share of Series B
Preferred Stock held by them (the "liquidation  preference").  If, upon any such
liquidation event, the assets of the Company are insufficient to make payment in
full to all holders of Series B Preferred Stock of the  liquidation  preference,
then such assets  shall be  distributed  among the holders of Series B Preferred
Stock at the time  outstanding,  ratably in  proportion  to the full  amounts to
which they would otherwise be respectively entitled.



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

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

Overview

Our Business

During the last quarter of 2004, we undertook a fundamental restructuring of the
Company to position  ourselves as the leader in immersive  imaging  technologies
for  visual  intelligence  applications.  We develop  immersive  video and still
photography products for major markets in surveillance, visual documentation and
forensic analysis.  This restructuring included the merging of the InfoMedia and
the Security  business units and a change in our sales structure which broadened
our emphasis on both direct sales,  indirect sales and channel development.  The
new structure  also enables us to develop  product  offerings  that include both
video and still products for customers in the same market.  IPIX has aligned its
product  lines  with  our  core   competencies  in  immersive  video  and  still
technology.  The  restructuring  was  completed  with the sale of the  AdMission
business unit in February of 2005.  In  accordance  with FAS 144, the assets and
liabilities  related to the AdMission  business unit were classified as held for
sale at  December  31,  2004,  and the  operations  of this  business  unit were
considered discontinued operations for all periods presented.

Immersive Video Products:  Formerly the Security business unit,  provides a full
360-degree  immersive  video  capability for government and commercial  security
markets.  Patent  protected  technology  is used in digital  video  systems that
provide  complete  and  continuous  situational  awareness.  These  products are
currently  being  marketed to government  agencies and  commercial  accounts for
security applications, visual documentation and surveillance.

Immersive  Still  Photography  Products:  Formerly the InfoMedia  business unit,
provides  for  creation  of  Full-360  degree  panoramic  photography  and movie
content.  Markets  for these  products  are  government  agencies,  professional
photographers,  ad and creative media  agencies,  web developers and creators of
visual documentation.

Products

CommandView:  Multi-mega-pixel  network  cameras,  with fisheye  lens,  patented
Full-360 viewing  technology and camera management  software to provide a unique
award-winning  `see  everything'  video  surveillance and security camera system
that can see in all directions, simultaneously with no moving parts and no blind
spots.  Features  include  low light  performance;  remote,  secure  monitoring;
digital pan-tilt-zoom; and weather reliability.

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

                                       13
<PAGE>

Target Markets

CommandView:  For  Commercial  facilities  such as  banks  and  retail  outlets.
Government agencies with responsibility for security  infrastructure  protection
related to ports,  harbors,  waterways,  dams,  conventional  and nuclear  power
stations,  utilities,  airports  and  mass  transit  rail  systems.  Also in the
military, perimeter force protection,  unmanned vehicles and special operations.

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

Business Models

Immersive video:  Camera systems marketed to end users both directly and through
distributors  in the U.S. and via  world-wide  network of  distributors.  Camera
systems  will  retail  from $1,000 to  $25,000,  depending  upon  configuration.

Immersive still:  Software platform and supporting  hardware products  primarily
marketed over the internet to the real estate,  travel,  hospitality  and visual
documentation industries.

Business Trends and Conditions

On March  31,  2004,  the  Company  launched  a new  family of  Full-360  degree
real-time video camera systems. Shipment of these products to distributors began
in late June 2004. These new camera systems generate revenues from sales to both
end-users and resellers.  In April 2005, at the ISC West trade show, the Company
announced  its newest  product the  CommandView(TM)  Day/Night  Dome camera that
combines   Full-360   degree   views  in   low-light,   no-light   and  infrared
lighting-assisted  environments.  The Company  continues  to develop  additional
products and features for the security and surveillance  market. Also at the ISC
West trade show,  we  announced  an OEM  agreement  with  ObjectVideo  to market
software  for  intelligent  video  surveillance.  In April 2005,  we announced a
partnership  with  VistaScape  to integrate  their  SiteIQ(TM)  tm  surveillance
software with our CommandView(TM)  cameras. These products will be available for
shipment in the third quarter of 2005.

Our full-360 degree technology used by the immersive still photography  products
primarily  generates revenues in two ways:  licenses of software and the sale of
camera  equipment.  In the past, we utilized "keys" to license our technology to
capture  and  save a  single  immersive  image.  With  the  launch  of the  IPIX
Interactive  Studio,  we now offer time-based seat or user licenses which permit
an  unlimited  number of  immersive  images to be  captured  and saved  within a
specific time period, usually a year.

In response to our change in sales  structure  the Company  hired 11  additional
sales  staff  focused  on  direct  and  channel  sales  both  in  the  U.S.  and
internationally  to market immersive video products.  The Company  currently has
approximately fifty resellers in the U.S. and five distributors internationally.
In addition, the still sales had 336 new accounts in the first quarter of 2005.

Our immersive still photography  products business unit will now market and sell
our virtual tour photography solution, the IPIX Interactive Studio,  directly to
the U.S. real estate market and will expand its hometour360 program to support a
wider range of imaging  technologies.  As a result,  we believe that real estate
agents and photographers will benefit from a broader choice of panoramic imaging
solutions  and enhanced  marketing  capabilities.  We also provide  professional
services to customers that request  specific  customizations  or integrations of
our products and services.

CRITICAL ACCOUNTING POLICIES

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

We  believe  the  following  critical   accounting   policies  affect  our  more
significant  judgments and estimates used in the preparation of our consolidated
financial statements:  revenue recognition;  valuation allowances,  specifically

                                       14
<PAGE>

the  allowance  for  doubtful  accounts  and  inventory  reserves;  valuation of
goodwill and other long-lived assets; and significant  accruals. We believe that
full  consideration has been given to all relevant  circumstances that we may be
subject to, and our financial  statements  accurately reflect  management's best
estimate of the results of operations, financial position and cash flows for the
periods presented.

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

Revenue Recognition

We recognize revenue in accordance with SOP 97-2, "Software Revenue Recognition"
and SEC Staff Accounting Bulletin No. 104 ("SAB 104"),  "Revenue  Recognition in
Financial  Statements."  We derive  revenue from  product  sales and services we
provide  to  customers.  Product  revenue  includes  Immersive  still  and video
hardware and licenses  (formerly  InfoMedia and Security).  Service revenues are
primarily from transactions where a seller uses our image management products to
enhance their on-line offering.

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

Transaction  hosting revenue is recognized ratably as transactions are performed
provided there was persuasive  evidence of an arrangement,  the fee was fixed or
determinable and collection of the resulting  receivable was reasonably assured.
Revenue  generated  from  professional  services  is  recognized  as the related
services are  performed.  When such  professional  services  are  combined  with
on-going transaction services or are deemed to be essential to the functionality
of the  delivered  software  product,  revenue  from the entire  arrangement  is
recognized  while the  transaction  services are  performed,  on a percentage of
completion  method or not until the contract is completed in accordance with SOP
81-1,   "Accounting   for   Performance   of   Construction-Type   and   Certain
Production-Type  Contracts,"  and  ARB  No.  45,  "Long-Term   Construction-Type
Contracts."  Reimbursements  received for  out-of-pocket  expenses  incurred are
characterized as revenue in the statement of operations.

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

Allowances for Doubtful Accounts

Significant  management  judgments  and  estimates  must  be  made  and  used in
connection  with  establishing  the  allowance  for  doubtful  accounts  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 as the latter
related to different reporting periods.

Reserve for Inventory Obsolescence

Significant  management  estimates  must be made  and used in  conjunction  with
establishing the inventory  obsolescence  reserve in any accounting period. This
may  occur  as  a  result  of   technological   advances,   out  of   production
sub-assemblies,  radical  changes  in market  demand  or  change  of  suppliers.
Management periodically reviews the inventory aging, turnover, sales forecast as
well as input from vendors in determining the appropriate amount of the reserve.

Significant Accruals, including Restructuring Charges and Sales Tax

                                       15
<PAGE>

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

RESTRUCTURING ACTIONS

During the years ended  December 31, 2000 thru  December  31, 2004,  the Company
executed several restructuring actions and recorded related lease charges during
each of those fiscal years.  At December 31, 2004, the remaining  balance in the
lease  restructuring  accrual was $257  thousand.  During the three months ended
March 31, 2005,  $15 thousand of payments were made against the Company's  lease
restructuring  accrual.  At March 31, 2005,  the remaining  balance in the lease
restructuring  accrual was $242 thousand.  No additions were made to the accrual
during the quarter  ended March 31,  2005.  The  Company  anticipates  incurring
additional costs of approximately $1,700 thousand in connection with the closing
of its San Ramon,  California  office.  The costs include  approximately  $1,200
thousand in lease termination costs and $500 thousand in asset disposal costs.

RESULTS OF OPERATIONS
<TABLE>
<S>                                                                              <C>        <C>       <C>          <C>
                           THREE MONTHS ENDED MARCH 31, 2005 and MARCH 31, 2004
                                                (UNAUDITED)

                                                                                  Three months ended
                                                                                       March 31,
                                                                                  ------------------
                                                                                                                   Percent
                             (Dollars in thousands)                                  2005      2004*  Difference   Change
                                                                                  --------- --------  ----------   --------

Revenue:
      Hardware.................................................................   $     317 $    213  $     104      49%
      Licenses and other.......................................................         351      263         88      33
                                                                                  --------- --------  ---------    ----
   Total revenue...............................................................         668      476        192      40
                                                                                  --------- --------  ---------    ----

Cost of revenue:
      Hardware.................................................................         170      145         25      17
      Licenses and other.......................................................         196      152         44      29
                                                                                  --------- -------- ----------  ------
   Total cost of revenue.......................................................         366      297         69      23
                                                                                  --------- --------  ---------    ----
   Gross profit................................................................         302      179        123      69
                                                                                  --------- --------  ---------    ----

Operating expenses:
      Sales and marketing......................................................       1,715      847        868     102
      Research and development.................................................         666      446        220      49
      General and administrative...............................................       2,294      693      1,601     231
                                                                                  --------- --------  ---------    ----
   Total operating expenses....................................................       4,675    1,986      2,689     135
                                                                                  --------- --------  ---------    ----
Loss from operations...........................................................      (4,373)  (1,807)    (2,566)    142
Loss on sale of assets.........................................................        (253)      --       (253)   (100)
Other..........................................................................         105        4        101   2,500
                                                                                  --------- --------  ---------   ------
Loss from continuing operations................................................      (4,521)  (1,803)    (2,718)    151
Loss from discontinued operations..............................................      (1,360)  (1,407)        47      (3)
                                                                                  ------------------- ---------   -------
Net loss.......................................................................   $  (5,881)$ (3,210) $  (2,671)     83%
                                                                                  =================== ========== ========
     * As adjusted for discontinued operations
</TABLE>


REVENUE.  The Company  derives its revenue  from  product  sales of its full-360
degree  technology  sold as licenses of software  and  hardware  sales of camera
equipment.  Total  revenue  for the three  months  ended March 31, 2005 was $668
thousand,  an increase of $192  thousand,  or 40%  compared to the three  months
ended  March 31,  2004.  This  increase  was  primarily  due to a $104  thousand
increase in hardware  sales of the Company's  Immersive  Video product line. The
Company  launched a new family of Full-360 degree security cameras at the end of
the first quarter in 2004 with field beta trials.  The first  finished  products
were shipped at the end of the second quarter of 2004. License and other revenue
increased  $88  thousand,  or 33%, to $351  thousand  for the three months ended
March 31, 2005.  This increase is primarily  attributed to increased  sales of a

                                       16

new still technology  software  platform  launched in the first quarter of 2004.
The revenue from  immersive  video  products may grow faster in future  quarters
than from its immersive still products due to  opportunities in the market place
and advances in digital technology.

COST OF REVENUE.  The Company's  cost of revenue  consists of cost of components
and cost of  assembly  for video and  immersive  cameras,  internally  developed
software,  licensed  software,  fulfillment  and  shipping  costs,  customer and
technical support,  internet hosting fees,  professional service fees and direct
labor.  Hardware  cost of revenue  increased  17%  compared to a 49% increase in
hardware revenue resulting in a hardware gross margin for the three months ended
March 31, 2005 of 46%  compared to 32% for the same period in 2004.  The Company
historically  experienced and expects to experience  margin  fluctuations in the
future based on the mix of units of high-margin versus low-margin products. Cost
of license and other revenue  increased 29% which is relatively  consistent with
the 33%  increase in license and other  revenue.  Gross  margins for license and
other  revenue for the  periods  ended March 31, 2005 and 2004 were 44% and 42%,
respectively.

SALES AND MARKETING.  Sales and marketing expenses  increased $868 thousand,  or
102%,  during the quarter  ended March 31,  2005  compared to the quarter  ended
March 31, 2004, primarily due to the expenditures focused on our immersive video
product line. The increase  included  employee salary,  benefits and recruitment
expenses related to the increase in our sales force of $212 thousand; recruiting
and  relocating  of new sales  personnel  of $165  thousand;  increase in public
relations,  marketing  and trade  show  activities  of $203  thousand;  web site
development of $70 thousand;  and an increase in travel and associated  expenses
of $95 thousand.  The Company  anticipates  continued hiring of sales personnel,
increased marketing,  public relations and participation in trade show events in
future quarters.

RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
personnel  costs and facility  expenses  related to building and  enhancing  our
digital media  infrastructure  and immersive  imaging  technology.  Research and
development  expenses increased $220 thousand,  or 49%, during the quarter ended
March 31, 2005 compared to the quarter ended March 31, 2004, primarily due to an
increase in head count of engineering personnel.  In addition, the Company spent
$72 thousand for  consultants  and an external  engineering  firm mainly for the
development of the Company's new product line of Day/Night Dome camera lens. The
Company  expects to increase  spending in areas of research and  development  by
increasing  head count  and/or  contractors  in the  effort to procure  research
grants from government agencies.

GENERAL  AND  ADMINISTRATIVE.   General  and  administrative   expenses  consist
primarily of salaries  and related  benefits for  administrative  and  executive
staff,  fees for  outside  professional  services,  insurance  and  other  costs
associated  with being a public  company.  General and  administrative  expenses
increased  $1,601  thousand  during the quarter ended March 31, 2005 compared to
the quarter ended March 31, 2004 as a result of: salaries, benefits, bonuses and
severance  paid to  employees  of $455  thousand,  which was incurred due to the
relocation of our corporate headquarters, for which there was no such expense in
2004;  an increase in expenses of $407  thousand  incurred in  association  with
compliance with public company regulations, including Sarbanes-Oxley compliance;
an increase in professional  fees to lawyers and public  accounting firm of $413
thousand due to additional  audit  requirements  for the Company's  discontinued
operations and  additional  legal counsel  initiated by the Company's  executive
management for contract review, patent litigation and executive  agreements;  an
increase in employee  related  expenses  due to an increase in headcount of $210
thousand,  and an increase in our director and officer's  insurance premiums due
to  increased  coverage  of $167  thousand.  The  Company  has hired  additional
administrative  and  executive  staff in the  second  quarter of 2005 due to the
relocation of the Company's  headquarters to Reston,  Virginia. The Company will
concentrate  on  strengthening  documentation  and testing of controls  internal
controls which may incur additional  expenses in future quarters but the Company
does not  anticipate  incurring  costs  equal to those  incurred  in the  fourth
quarter of 2004 and first quarter of 2005.

LOSS ON SALE OF ASSETS.  Loss on sale of assets for the three months ended March
31, 2005 was $253 thousand. This amount was due to a write down to zero net book
value of the  investment  which  was  acquired  as a  result  of the sale of the
AdMission business unit in the first quarter of 2005 (see Note 3).

OTHER  INCOME.  Other  income for the three months ended March 31, 2005 was $105
thousand  compared to $4 thousand for the same period in 2004.  This increase is
primarily due to the sale of one of our discontinued web domain names during the
three months ended March 31, 2005 for which there is no such amount in 2004.

LOSS FROM DISCONTINUED  OPERATIONS.  Loss from discontinued operations of $1,360
thousand and $1,407 thousand, respectively, for the three months ended March 31,
2005 and 2004 was due to the discontinued  operations of the Company's AdMission
business unit which was  discontinued  in the fourth quarter of 2004 and sold in
the first  quarter  of 2005.  The prior  period  results  were  reclassified  to
properly classify the business unit as discontinued operations.

NET LOSS. As a result of the factors described above, the net loss for the three
months ended March 31, 2005 was $5,881 thousand,  an increase of $2,671 thousand
or 83%, compared to the three months ended March 31, 2004.

                                       17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Since inception,  we have financed our operations  through our registered public
offerings,  the private placements of capital stock, a convertible  debenture, a
convertible promissory note and warrant and option exercises. At March 31, 2005,
we had $10,971 thousand of cash, restricted cash and short term investments,  of
which $1,180 thousand was restricted.

                    Summary Consolidated Cash Flow Data

                                                           Three months ended
                                                                March 31,
                                                           ------------------
                  (In thousands)                             2005       2004
                                                           --------  --------
                                                               (unaudited)
Net cash provided by (used in) operating activities.....  $ (4,894)  $ (3,366)
Net cash provided by (used in) investing activities.....      (317)       (38)
Net cash provided by (used in) financing activities.....     1,323        144
                                                          ---------  ---------
Net decrease in cash and cash equivalents...............    (3,888)    (3,260)
Cash and cash equivalents, beginning of period..........    12,784     10,241
                                                          ---------  ---------

Cash and cash equivalents, end of period................  $  8,896   $  6,981
                                                          =========  =========

Cash flows from  operating  activities in the first quarter of 2005,  reflects a
net loss of $5,881  thousand,  compared  to net loss of $3,210  thousand  in the
first quarter of 2004.  During the first quarter of 2005,  the Company  incurred
non-cash compensation expenses of $794 thousand associated with the acceleration
of stock options related to the sale of the Admissions business unit.

Net cash used in investing  activities in the first quarter of 2005 and 2004 was
primarily  related to the  acquisition  of  computer  software  and  hardware to
support the increase in staffing and to complete the build-out of a new computer
and communication center in Oak Ridge, Tennessee.

Net cash  provided  by  financing  activities  in the first  quarter of 2005 was
primarily  related to $1,543  thousand  of proceeds  from the  exercise of stock
options, net of $220 thousand of payments made on capital lease obligations. Net
cash provided by financing activities in the first quarter of 2004 was primarily
related to $362 thousand of proceeds from the exercise of stock options,  net of
$218 thousand of payments made on capital lease obligations.

During the quarter  ended March 31, 2005 and in prior  fiscal  periods,  we have
experienced certain going concern issues related to cash flow and profitability.
In addition,  the Company's operating results in 2005 will be dependent upon the
its ability to provide quality  products and services and is subject to the risk
of an  unfavorable  change in demand for its products and  services.  Management
believes,  however,  that we have  sufficient cash resources to meet our funding
needs through at least the next twelve months.  We finished the first quarter of
2005  with  approximately  $10,971  thousand  in cash  reserves  (cash  and cash
equivalents  of  $8,896  thousand,  short-term  restricted  investments  of $550
thousand, short-term restricted cash of $630 thousand and short-term investments
of  $895  thousand).   Management   expects  to  continue  to  make  significant
investments in the  development,  sale and marketing of new products,  which may
consume  much of our cash  reserves.  Management's  focus is to manage  our cash
requirements  and focus our  operations  on revenue  generation  and  controlled
spending.  Management  may need to raise debt or equity  financing to fund these
operations.

CONTRACTUAL OBLIGATIONS

The table below shows our total  contractual  obligations  as of March 31, 2005,
updated for the lease entered into on April 18, 2005:
<TABLE>
<S>                                                                     <C>         <C>         <C>        <C>         <C>
(In thousands)                                                                             Payments Due by Period
                                                                        -------------------------------------------------------
                                                                                    Less than                          After 5
                                                                          Total      a year     1-3 years  4-5 years    years
                                                                        --------    ---------   ---------  ---------   -------
Operating leases....................................................    $  3,883     $ 1,104     $  2,038    $ 657      $ 83
</TABLE>

                                       18
<PAGE>

At  March  31,  2005,  we had  $630  thousand  of cash  deposits  restricted  as
collateral  on a letter  of  credit  for  certain  co-location  facility  leases
expiring  in  February  of 2006  and,  accordingly,  classified  as  short  term
restricted cash.

On February 3, 2005, we entered into a lease  agreement with Oak Ridge Technical
Center  Partners  - One,  L.P.  ("Landlord").  The Lease is for a period of five
years  beginning May 1, 2005. The base rent is  approximately  $313 thousand per
year and will increase by approximately $5 thousand each year beginning in April
2006.  In addition to the base rent,  we are required to pay certain taxes and a
pro rata share of operating  expenses.  We are also responsible for the costs of
certain  tenant  improvements  associated  with  the new  facility,  but will be
entitled to  reimbursement  for certain costs from the Landlord.  The Lease also
provides for three 36 month renewal  options at 95% of the then  prevailing fair
market rents.

On April 18, 2005, we entered into a sublease  agreement with Thomas Group, Inc.
with respect to our new corporate headquarters in Reston, Virginia. The sublease
is for a period  of 31  months  beginning  April  15,  2005.  The  base  rent is
approximately  $298 thousand per year and will increase by  approximately  three
(3%) percent each year beginning April 1, 2006. In addition to the base rent, we
are  responsible  for any  increases  in operating  expenses and property  taxes
billed to the landlord and paid by Thomas Group. We are also responsible for the
costs of tenant  improvement.  All  terms and  conditions  of the  master  lease
between  Thomas  Group  and REC  Partners,  L.P.  dated  February  15,  2000 are
incorporated into and made part of the sublease.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of March 31, 2005, we had $10,971 thousand of cash, cash  equivalents,  short
term and long term  restricted  cash and short term  investments.  Our  interest
income is sensitive to changes in the general  level of United  States  interest
rates,  particularly  since the  majority of our  investments  are in short term
instruments.  Due to the nature of our short term investments, we concluded that
we do not have material market risk exposure.


Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. The Company's management, with
the  participation of the Company's chief executive  officer and chief financial
officer,  have  evaluated the  effectiveness  of the design and operation of the
Company's  disclosure  controls and  procedures (as defined in Exchange Act Rule
13a-14(c)) as of the end of the period covered by this quarterly  report on Form
10-Q. Based on that evaluation,  the chief executive officer and chief financial
officer have  concluded  that the Company's  disclosure  controls and procedures
were not effective due to material  weaknesses in the Company's internal control
over financial  reporting which were set forth in Management's  Annual Report on
Internal  Control Over  Financial  Reporting  included in the  Company's  Annual
Report on Form  10-K/A for the fiscal year ended  December  31,  2004.  Material
weaknesses were identified in the following areas:

1. Period-end  close process
2. Purchases and accounts  payable
3. Inventory
4. Revenue and receivables
5. Information technology

Changes  in  Internal   Control  over  Financial   Reporting  and   Management's
Remediation Initiatives. The discussion below describes the material planned and
actual changes to the Company's internal control over financial reporting during
the fourth quarter of 2004 and  subsequent to December 31, 2004 that  materially
affected,  or are reasonably likely to materially affect, the Company's internal
control over financial reporting.  As described in Management's Annual Report on
Internal  Control over  Financial  Reporting,  the Company  identified  material
weaknesses in the Company's  internal  control over financial  reporting and, as
described  below,  the  Company  has  made,  and plans to make,  changes  to its
internal control over financial reporting.

In response to the matters  discussed in Management's  Annual Report on Internal
Control Over  Financial  Reporting,  the Company plans to continue to review and
make  necessary  changes  to the  overall  design  of its  control  environment,
including the roles and  responsibilities  of each  functional  group within the
organization  and  reporting  structure,  as well as policies and  procedures to
improve the overall  internal control over financial  reporting.  In particular,
the Company has  implemented,  and plans to implement  during 2005, the specific
measures  described  below to  remediate  the material  weaknesses  described in
Management's  Annual Report on Internal  Control Over Financial  Reporting.  The
Company  plans to continue to review and make  changes to its  internal  control
environment  as it deems  appropriate  or necessary  to  remediate  the material
weaknesses described herein.

                                       19
<PAGE>

     Period-End  Close  Process.-  To address  these  material  weaknesses,  the
Company  appointed a new chief  financial  officer,  a  vice-president  of human
resources, a controller and an assistant controller in April, 2005. In addition,
the Company  added  additional  accounting  staff at the  corporate  level.  The
Company plans to schedule training for accounting staff to heighten awareness of
generally accepted accounting principles and to adopt more rigorous policies and
procedures  regarding the review and approval  process for complex  calculations
and unusual transactions.

The Company plans to implement a periodic report  checklist,  which will require
the  signature  of the  Controller.  The Company  will  assign to the  assistant
controller responsibility for referencing the financial statements to supporting
documentation   and  verifying  the  mathematical   accuracy  of  the  financial
statements  prior to the filing of any  periodic  report.  The Company  plans to
adopt  documentation  and testing of controls to require the appropriate  review
and approval of journal entries.  Additionally,  the chief financial officer and
controller will be required to review all related party transactions and to note
such review on the periodic report checklist.

As part  of the  reorganization  of the  Company's  business,  the  Company  has
eliminated, in 2005, the positions of business unit general manager. The Company
plans to utilize the  operational  expertise of chief executive  officer,  chief
financial officer,  and controller to identify expenses and liabilities in order
to  ensure  that the  Company's  expenses  are  appropriately  reflected  in the
financial statements.

     Purchases  and Accounts  Payable -- With regard to the  Company's  internal
controls related to wire transfers, the Company plans to document and test these
controls  during the second fiscal quarter of 2005. The Company plans to conduct
testing of controls  requiring that authorized check signers  adequately  review
supporting  documentation  during the check signing process and require evidence
of such process be maintained  for future  review.  Controls to require  monthly
review of  accruals  for  accounts  payable are  planned to be  implemented  and
tested. Additionally,  the Company plans to implement controls requiring that an
approved  vendor  list be  maintained  and  reviewed  periodically  by the chief
financial officer or controller.  The Company plans to document and test written
policies and procedures related to purchases and accounts payable.

     Inventory  - Through  December  2004,  the  Company  remediated  identified
inventory-related control deficiencies by implementing documentation to evidence
controls relating to the approval of inventory purchases, the proper receipt and
accounting of inventory  receipts,  the reconciliation of accounting records and
inventory counts and the proper costing and valuation of inventory.  The Company
plans to test these controls in order to obtain sufficient  evidence about their
operating  effectiveness.  The Company will continue to evaluate  these controls
and may in the future implement additional measures based on the results of such
testing.

     Receivables and Revenue - The Company remediated identified receivables and
revenue related control  deficiencies by implementing  documentation of controls
relating to the matters  described  in  Management's  Annual  Report on Internal
Control Over Financial Reporting - Receivables and Revenue. The Company plans to
test these controls in order to obtain sufficient evidence about their operating
effectiveness.  The Company will continue to evaluate  these controls and may in
the future implement additional measures based on the results of such testing.

     Information Technology - To remediate the identified information technology
related  control  deficiencies,  the Company  plans to  implement a security and
backup  recovery  plan  which  will  address  each of the  control  deficiencies
described above in Management's Annual Report on Internal Control Over Financial
Reporting - Information Technology.  The Company will continue to evaluate these
controls and may in the future implement additional measures based on results of
such testing.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly  report contains  statements about future events and expectations
which  are   characterized  as   forward-looking   statements.   Forward-looking
statements are based on our management's  beliefs,  assumptions and expectations
of  our  future  economic  performance,  taking  into  account  the  information
currently  available to them.  These statements are not statements of historical
fact.  Forward-looking statements involve risks and uncertainties that may cause
our  actual  results,  performance  or  financial  condition  to  be  materially
different  from the  expectations  of future  results,  performance or financial
condition we express or imply in any forward-looking statements.

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

                                       20
<PAGE>

Although we believe that the  expectations  and  assumptions  reflected in these
statements are reasonable in view of the information currently available,  there
can be no  assurance  that these  expectations  will prove to be correct.  These
forward-looking   statements  involve  a  number  of  risks  and  uncertainties,
including those set forth below and in our 2004 Annual Report on Form 10-K filed
with the  Securities  and  Exchange  Commission  on March 31, 2005 under Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  under  the  caption  "Risk  Factors."  Actual  results  may  differ
materially  from the results  discussed in the  forward-looking  statements.  In
addition to the specific factors  discussed in our 2004 Form 10-K, the following
are among the  important  factors  that  could  cause  actual  results to differ
materially from the forward-looking statements:

- changes in the demand for our products and services,
- our third-party supplier's ability to deliver high quality components to us in
  a timely  fashion,
- our ability to control or effect  reductions  in costs,
- uncertainty  regarding our ability to continue as a going concern,
- our ability to raise  capital and fund our  operations,
- our ability to attract and retain highly qualified personnel,
- our ability to design, manufacture and deliver high quality products in a
  timely fashion,
- the burdens and costs of defending against potential infringement claims,

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

See Item 3, Legal Proceedings in our 2004 Annual Report on Form 10-K.

Item 6. Exhibits

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

 10.1       Sublease between the Company and Thomas Group, Inc. dated April 18,
            2005
 10.2       Lease Agreement between Rec Partners, L.P. and Thomas Group, Inc.
            dated February 15, 2000
 31.1       Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 31.2       Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 32         Section 1350 Certification of Chief Executive Officer and Chief
            Financial Officer


                                       21
<PAGE>

                                IPIX CORPORATION
                                   SIGNATURES

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


DATE: May 10, 2005            IPIX CORPORATION
                                (Registrant)


                                 /s/ Charles A. Crew
                                -------------------------
                                Charles A. Crew
                                Authorized Officer
                                Chief Financial Officer and
                                Chief Accounting Officer










                                       22
<PAGE>

                                IPIX CORPORATION
                         INDEX TO EXHIBITS FOR FORM 10-Q
                        FOR QUARTER ENDED MARCH 31, 2005


 EXHIBIT NO.                     EXHIBIT DESCRIPTION
 -----------                     -------------------
    10.1         Sublease between the Company and Thomas Group, Inc. dated
                 April 18, 2005
    10.2         Lease Agreement between Rec Partners, L.P. and Thomas Group,
                 Inc. dated February 15, 2000
    31.1         Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
                 Officer
    31.2         Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
                 Officer
    32           Section 1350 Certification of Chief Executive Officer and Chief
                 Financial Officer











                                       23