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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

Internet Pictures Corporation

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

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

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

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

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PART I—FINANCIAL INFORMATION

Recalculation of Earnings Per Share

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

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

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Item 1. Condensed Consolidated Financial Statements

INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to the unaudited condensed consolidated financial statements.

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INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to the unaudited condensed consolidated financial statements.

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INTERNET PICTURES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to the unaudited condensed consolidated financial statements

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

2.     AGREEMENT WITH eBAY

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

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

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

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

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

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

3.     CASH EQUIVALENTS, RESTRICTED CASH AND SHORT TERM INVESTMENTS

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

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

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4.     EQUITY

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

5.     INCOME (LOSS) PER COMMON SHARE

Recalculation of Income (loss) per Common Share

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

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

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