UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from            to

Commission file number 00-26363

IPIX CORPORATION

(Exact name of registrant as specified in its charter)

3160 Crow Canyon Road, San Ramon, California 94583

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

_________________

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

Yes o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003 was $31,427,076 (based on the last sale price of $4.25).

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of March 10, 2004 was 8,986,923. On August 22, 2001 our stockholders approved a ten-for-one reverse stock split. All share and per share data is presented to give effect to the retroactive application of the reverse stock split.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Stockholders’ Meeting to be held on or about May 4, 2004, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Part III of this report on Form 10-K. Such Proxy Statement, except for the portions thereof which are specifically incorporated herein by reference, shall not be deemed “filed” for purposes of this report on Form 10-K.

Table of Contents

PART I

Item 1. Business.

SOURCE OF CERTAIN STATISTICAL AND OTHER INFORMATION

This annual report on Form 10-K includes certain statistical and other data with respect to us, our products and services and industries, derived from public available reports and other publications referenced in this annual report. These organizations generally use methodology and conventions that they deem appropriate to measure companies within the relevant industry segment and to measure industry size. These organizations generally indicate that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy of completeness of such information. While we believe this information to be reliable, we have not independently verified such data.

OVERVIEW

IPIX Corporation, formally Internet Pictures Corporation, is a leading provider of technology solutions enabling public and private enterprises to use visual data efficiently. We combine our experience, people, technology, processes and partnerships to deliver an extensive range of visual data solutions worldwide. Our services and technologies provide our customers with the opportunity to increase revenues, improve customer satisfaction and enhance security for the protection of life and property. Our patented immersive imaging technology is used to provide an unparalleled view of the world. Government and commercial enterprises and others around the world are finding new ways to use our products for video security, situational awareness, visual documentation and on-line marketing. Our Rimfire technology is used by publishers to dramatically improve the effectiveness of directional advertising in both traditional publishing such as yellow pages and newspaper classifieds ads. It is also used by on-line publishers such as real-estate and automobile resale aggregators.

Substantially all of our recurring revenue has been derived from transaction fees generated by our Rimfire service. In 2003, we received 87% of our total revenue from eBay pursuant to a visual content services agreement. We amended our agreement with eBay in June 2003 and received a one-time license fee of $8.0 million for our Rimfire technology and other services. We no longer provide any products or services to eBay as of November 1, 2003, and we will not receive any further revenue from eBay pursuant to these agreements.

In 2003, our organization moved from being technology focused (Immersive Video Solutions, Transaction Services and Immersive Still Solutions) to being market focused in order to better serve the needs of our customers. We are now organized into three business units: IPIX Security, IPIX Ad Technologies and IPIX InfoMedia, respectively.

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IPIX Security provides security and surveillance products and services for commercial and governmental customers.

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IPIX Ad Technologies focuses on the sale of complete solutions to customers who rely on visual data to create effective directional advertising such as publishers of newspaper classifieds, yellow page directories, on-line auctions, real estate and autos classifieds.

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IPIX InfoMedia focuses on the sale of immersive still technology licenses for the on-line real estate, travel and hospitality and visual documentation markets.

Each of our business units is discussed below in detail.

IPIX SECURITY

Prior to the terrorist attacks of September 11, 2001, the size of the global security market was estimated by the J.P. Freeman 2000 Report on Security Industry to be over $100 billion in sales annually across all segments of the security industry. Within the security market, the U.S. accounts for approximately 44% of the global market, of which video surveillance is the fastest growing market segment.

We believe IPIX Security is well positioned to address the video surveillance segment of the security industry. We offer new and innovative digital cameras that are highly attractive to end-users because our cameras are simple to operate, reduce the number of conventional cameras that are required to provide adequate coverage thereby reducing installation labor and material costs.

THE SECURITY SOLUTION

IPIX Security, using our core immersive technology, brings to market an innovative development in security and surveillance imaging that provides an expansive view of live and archival video from a single camera. By using a single fisheye lens, we are able to capture a Full-360 degree field of view from a video camera, then de-warp the fisheye video image using patented technology and compensate for distortion errors that are inherent in fisheye images and present the image in a manner that looks like a traditional image and can be easily understood by the viewer. The resulting image can be viewed in any direction, up-down, left-right and horizon to horizon. The viewer can easily navigate the image by moving a cursor inside the image or using our navigation controls.

We have developed a new generation and category of high resolution digital video cameras that use our patented technology for use by security professionals in commercial and government security applications.

Our core immersive technology has been successfully productized into a new category of digital, high resolution, network camera systems that provide continuous situational awareness by being able to:

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see in all directions simultaneously with no blind spots;

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provide alarms based on motion detection that is built into the camera;

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allow viewers to roam within live or recorded video using pan-tilt-zoom with no moving parts;

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provide recording and playback capability; and

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scale easily.

IPIX Security will launch its new product portfolio of Full-360 digital cameras on March 31, 2004 at ISC EXPO West in Las Vegas. The new product portfolio consists of three camera product lines with various configurations within each product line. The product lines include: CommandView, CommandView360 and InSight camera systems. The core camera electronics and fisheye lens optics have been designed to be used across the entire product line to enable economies of scale to be reached quickly in manufacturing. The camera systems will be offered in ceiling, wall and pole mount configurations with several mounting options available for each configuration.

IPIX CommandView

The CommandView camera consists of a two mega-pixel sensor, a digital signal processor (DSP) module and a power distribution and communication module. CommandView utilizes our fisheye lens that has been optimized for the image sensor in the camera subassembly, and bundles one licensed copy of the Milestone Security Management System Software with the our viewing software to provide a high value, highly attractive video surveillance product offering to the security market. CommandView comes in two configurations: wall-mount or ceiling-mount.

A typical high-speed dome camera relies upon a mechanical pan-tilt-zoom table to steer it to where it needs to be pointed and to monitor the area of concern. Control of where such a camera is pointed can be performed either by using presets that are tied to specific alarm points or manually by an operator who controls where the camera is pointed. One person could cause a diversion by tripping an alarm that causes a typical camera to rotate in that direction to ‘see’ what is causing the alarm, while a second person commits an actual ‘crime’ or incident in the blind spot of the mechanical camera.

For the first time, IPIX Security offers the security professional a camera system that cannot be defeated by co-conspirators that cause a diversion in one direction while the real threat or incident occurs in the opposite direction. The uses and applications of CommandView are virtually limitless because unlike the cameras it replaces, CommandView provides complete and continuous situational awareness. It cannot be fooled into looking in one

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direction and not another. CommandView sees everything at the same time and monitors everything in its area of concern with no blind spots.

IPIX CommandView360

CommandView360 further leverages our investment made into video camera and lens technologies. It uses the CommandView camera subassembly, our same fisheye lens and our same patented viewing software. CommandView360 utilizes two camera subassemblies mounted back-to-back and one fisheye lens on each camera to provide Full-360 degree coverage of the area of concern. Full-360 means it is monitoring in both the horizontal and vertical dimensions at the same time. This innovative camera system allows the user to view live and recorded video at user definable frame rates and compression settings to conserve bandwidth requirements.

The dual-lens, fixed spherical optical system integrates an optional off-the-shelf third party mechanical pan-tilt-zoom camera that has an optical zoom capability for long range target identification and tracking. Operation of the CommandView360 with the mechanical pan-tilt-zoom camera is simple and efficient and allows the operator to get on target quicker by using the ‘Assisted Cue and Zoom’ feature of the CommandView360. Targets of interest are seen through the spherical view of the CommandView360 and the operator simply ‘mouse-clicks’ on a target of interest in the viewer screen.

The CommandView360 software performs a mathematical calculation and sends the coordinates of the pixel that the operator ‘mouse-clicked’ on to the mechanical pan-tilt-zoom camera as positioning commands. The mechanical pan-tilt-zoom camera moves to the correct position to ‘capture’ the target and the operator then zooms in for close-up monitoring. Without the ‘Assisted Cue and Zoom’ feature offered by CommandView360, an operator using just a mechanical pan-tilt-zoom camera would have a very difficult time finding a target that could be anywhere in three-dimensional space either above, below, to the right, to the left or behind the current direction that a typical camera could be pointing.

Designed to provide the highest level of reliable operation for continuous situational awareness, the CommandView360 is rugged in construction and small in size making it ideal for fixed, outdoor installations where it is desirable to protect critical infrastructure and key assets such as ports, harbors, waterways, dams, power stations, airports and national icons against threats that could come from any direction on land, sea or air. Early prototype versions of the CommandView360 were first used in the fourth quarter of 2003 as part of our Beta Test and Evaluation Program. Participants in this program include TVA, Oak Ridge National Laboratories, Los Alamos National laboratory, Cumberland Gap Tunnel, Tennessee State Capitol, Boeing, Digital Force Technology, Cisco, Electronics Warfare Associates and SAIC.

IPIX InSight

We also have a family of surveillance cameras that take advantage of the high resolution and video frame rates in the CommandView platform. InSight is our entry level digital camera system using the camera subassembly that forms the foundation of our entire product portfolio.

The two mega-pixel InSight camera:

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can be fitted with a standard 1/2 inch CS mount commercial-off-the-shelf lens that provides a field-of-view in accordance with the user’s requirements;

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is capable of generating high quality, high resolution images at full motion frame rates that range from 15 frames per second to 48 frames per second, depending upon compression settings and number of users on the network;

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can automatically send streaming video over the network in one of three video streaming protocols; HTTP, RTP and RTSP and

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is offered in two configurations: ceiling-mount and wall-mount.

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In the ceiling-mount configuration, the user may select a fixed or a directional camera mount. The directional mount allows the user to swivel the camera to adjust the direction in which the camera is pointed. The InSight camera may be mounted in a parapet or rampart enclosure for outdoor use. The InSight camera fills a void that currently exists in the security video surveillance market for a fixed, high resolution (1.0+ mega-pixel image), network camera that is capable of delivering video at full-motion frame rates.

IPIX XProtect Security Management Software

High-end users of security products need to efficiently manage, store and retrieve their image streams. To meet this need IPIX Security has entered into a strategic relationship with Milestone Systems A/S, a security management software company located in Denmark. Milestone is a leader in network video recorder software and is an enabling technology for our new digital camera product line. Milestone has integrated their XProtect Security Management Software with our products. The Milestone XProtect software provides a user friendly interface to a network camera that allows the user to build, manage and control a network of digital cameras and record and playback the video outputs of each camera on the network. Users can digitally pan-tilt-zoom within the scene on both live and recorded video. Milestone software is easily scalable and can be used with a single camera installed at a single location, or across an entire enterprise consisting of hundreds or thousands of cameras spread around a multi-building campus, or a geographical area that is local, regional, national or global in scope. Milestone has agreed to provide its market leading software to IPIX Security for our new product line of network cameras and has agreed not to support any other companies competing in the same technology space as IPIX Security.

SECURITY MARKET

In the government security market, we are directing our marketing and sales channel development efforts on infrastructure protection related to ports, harbors, waterways, dams, conventional and nuclear power stations, utilities, airports and mass transit rail systems. In the military, we are concentrating on developing sales channels with system integrators involved in perimeter force protection, unmanned vehicles and special operations.

In the commercial security market, we are developing a network of resellers who are experts in providing IT network security solutions to commercial and government customers. In addition, we are building a network of resellers in the security system integrator community to help us penetrate the banking, industrial, institutional, health care, education, cultural and commercial building markets. We are also licensing our technology to leading digital video recorder (“DVR”), network video recorder (“NVR”) and digital camera original equipment manufacturers.

SECURITY SALES AND MARKETING

Our sales and marketing group focuses on indirect sales and direct sales. Our seven sales professionals are located across the United States, and are focused on developing new sales channels with business partners and maintaining and strengthening strategic relationships with existing partners and customers in our target markets.

Our marketing efforts focus on supporting our indirect sales channel partners with trade shows, advertising, marketing collateral materials, co-marketing programs, public relations campaigns, sales tools and training and education on our products and programs. We generate qualified sales leads that shorten the sales cycle time so new business opportunities close faster. We are committed to being responsive to our customers, providing high quality products at stable prices and including our partners’ and customers’ feedback directly into our product planning process.

Go-to Market Strategy

IPIX Security must market itself and its products directly to end-users, architects, specifying engineers, consultants and general contractors for the commercial market and to the proscribers and specifiers within the federal, state and local government. In addition, IPIX Security will sell its products through a world-wide network of indirect sales channel partners who are knowledgeable about local market conditions and requirements, have established relationships in the local security market and enable us to more quickly penetrate the market.

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We believe this strategy will enable us to achieve meaningful revenues from the market while controlling our operating and support expenses and develop multiple sales and marketing channels for IPIX Security products and services including:

Indirect Sales Channel Partners

We seek to partner with established security system integrators, prime government contractors and resellers to help penetrate the commercial and governmental security and observation markets. We are also developing distribution agreements with partners in a wide range of countries that allow us to deploy our technology into regions of the world that would normally require significant time and effort for marketing and development.

Business Development and Strategic Direct Sales

In addition to our indirect sales channels, IPIX Security employs a team of seven senior sales professionals focused on new business development opportunities and strategic direct sales across our target markets. Through our professional services organization, IPIX Security seeks opportunities to obtain research and development contracts with government research organizations and prime government contractors to provide our technology and engineering services to applications involving robotics, unmanned vehicles for the military and intelligent software for object classification and tracking.

IPIX SECURITY COMPETITION

Current manufacturers of camera systems for the security and surveillance markets are substantially larger than we are and have access to significant amounts of capital. IPIX Security has several direct competitors, including: RemoteReality, Egg Systems, Sony and American Dynamics. We believe our patent protected de-warping software and our use of fisheye lens provides us an advantage over our competitors.

IPIX AD TECHNOLOGIES

In June 2003, we amended our existing agreement with eBay for use of our Rimfire Technology to power eBay Picture Services. Rimfire Technology was a key driver behind the increased adoption of photo use within eBay listings. Listings using images at the inception of the eBay agreement were 8% of total listings, this increased to over 80% of all listings in late 2003, producing material revenue for both parties. The core value and significant scale of the service had grown to make it impractical to continue as an outsourced solution, and the parties agreed to a licensing and transition agreement completed in November of 2003. We retained all current and future technology rights and expertise in the Rimfire technology.

Leveraging the success of creating visual ads for listings on eBay and other partners, we expanded the functionality of our core platform to serve the growing needs of on-line advertising in the broader advertising market of publishing. IPIX Ad Technologies (“Ad Technologies”) is focused on the “directional advertising market.” Directional advertising directs buyers to sellers when they’re ready to buy, so there is an established need. Examples include newspaper classified ads (print and on-line), yellow pages (print and on-line), paid search engines and other paid directories.

THE MARKET

The directional advertising market, long held by print publishers (newspapers and yellow pages), is a market under attack by companies such as Google, Overture and eBay, which are beginning to take significant advertising revenue from the print publishers. This fundamental shift in the directional advertising market is being driven by consumers who are increasingly moving on-line for purchases. As advertisers follow the consumer they drive the rapidly growing need for tools that allow them to effectively reach qualified leads in an increasingly complicated on-line environment.

We believe that local advertising of goods and services, which is largely comprised of small and medium enterprises (“SME”), is lagging the consumer movement, creating a gap in the supply and demand of directional advertising.

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According to industry analysts such as The Kelsey Group, eMarketer and BizRate.com, the directional advertising market is estimated to be a very large market and today most of its advertising dollars are spent with traditional publishers such as newspaper classifieds and yellow page directories. Local advertising spending by private parties and small businesses is estimated to be half of market. There are over 10 million widely distributed SMEs in the U.S. today and their advertising budgets generally average six thousand dollars a year. SMEs do the majority of their business within a 50 mile radius of their location and over 70% of all SMEs do not have, need or maintain a website.

To meet the need of SME advertisers, while competing with the downward pricing pressure from competition, publishers must adopt effective self-service tools that allow the SME advertiser to compete with national business on-line, minimizing or eliminating the current barriers. There also is a need to help bridge the transition from print to web, as both have a place in a local business advertising strategy.

We believe these self-service tools must:

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simplify the creation process;

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make it cost effective, flexible and easily updated;

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improve the relevancy of local search results;

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not be dependent on a web site; and

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make advertisements media rich with photos, maps, coupons contact information and more.

THE AD TECHNONOGIES SOLUTION

Since 2001 our comprehensive media platform, Rimfire, has allowed both print and on-line publishers to provide services to advertisers enabling them to easily and elegantly capture, transform, manage and distribute digital media with little or no technical expertise. During 2003, we extended the functionality of our technology to meet the needs of the SMEs for creating self-service directional advertising on-line and in-print. We market this product under the trade name of “AdMission.”

AdMission makes professional-quality directional advertising accessible to SMEs and individuals. AdMission offers simple, intuitive self-serve ad creation tools to publish “visually-enhanced” directional ads in real-time, maximizing ad effectiveness, both on-line and in-print. AdMission, through enhanced visual content, also helps advertisers communicate their value to consumers more efficiently and effectively than traditional display or text-only ads, resulting in higher-qualified leads. Integrated into a publishers advertising system, the result is an easy to use self-service tool for creating media rich directional advertisements.

The AdMission solution is provided as an ASP service to publishers, allowing then an accelerated time to market. By outsourcing to us, publishers can leveraging our proven technology platform, extensive experience and infrastructure built over the last three years while providing large scale transaction services to eBay and other partners.

The major components of the AdMission solution include:

AdMission Acquire

AdMission Acquire leverages proprietary technology to allow end users to easily select or drag-and-drop media content to ad templates which can be published both off-line and on the Web without the need to process the image with expensive and complex desktop software ahead of time. AdMission Acquire accepts a wide and growing variety of file formats and converts the files to publisher specifications automatically, without user intervention. AdMission’s smart-sizing feature allows the user to supply files of any size without the worry of upload times for submission, or viewing times. AdMission automatically prepares the media for transmission by optimizing its size to the requirements of the site. Unlike traditional web-based file upload mechanisms, AdMission makes it easy to upload many files at once and associate those files with their respective data.

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AdMission Process

Once media is received by AdMission, it is processed to meet customer specifications. AdMission’s plug-in architecture and configurable account rules enable services such as the transformation of still images into interactive advertisements, slide shows, images watermarked with text or graphics or new capabilities created by us or our third party developers. Challenging and complex imaging tasks such as formatting, color correction, press calibration, sizing and cropping, are handled automatically behind the scenes according to the publishers specifications. Instant previews of the media supplied prevent incorrect submissions, increase up sells and increase customer satisfaction.

AdMission Distribute

After media has been processed, it is stored on a highly scalable and fault tolerant infrastructure designed to handle high volumes of user submissions and to match our customers’ rapid pace of growth. AdMission goes beyond serving up static media, providing multiple viewing and distribution capabilities. For example, media items can be requested with dynamic transforms, allowing for optimized output for a variety of publisher templates, formats and output devices. AdMission provides pre-built, optimized viewing templates that provide compelling visual ads with minimal integration work.

By integrating our technology, publishers offer new functionality to SMEs and individuals to create visual ads whether they have a website presence or not. And, by offering an outsourced solution, we provide our customers with an alternative to building a costly infrastructure, enabling them to utilize scarce technical resources in other mission critical capacities.

AD TECHNOLOGIES MARKETS

We have directed our sales efforts and channel strategies toward the industry leaders within the following segments of the directional advertising market.

Newspaper Classifieds: Newspapers rely on the revenue streams from classified advertisement. We allow newspapers to offer enhanced visual ads to their customers to produce compelling ads both on-line and in-print. We have worked extensively with our newspaper customers and understand the unique needs of the traditional publisher. The AdMission system is also offered as an integrated self-service component of the ad order entry system, or through the call center sales force. Sellers require an easy to use method for uploading media elements to accompany their item listing and buyers have greater confidence in items they can view and inspect on-line. In our experience, listings with images attract more buyers and sell for higher prices. With AdMission, classified sites can offer enhanced visual ad services that make adding media to ads easy, as well as affordable and efficient.

Yellow Page Directories: Traditional yellow page providers have many of the same challenges and opportunities as newspaper publishers. They are the historically dominant vehicle for SME local advertising and have an extensive feet-on-the-street sales force. We present them with an up-sell opportunity from the traditional printed yellow page ad to visually rich and dynamic on-line advertisements that can be additionally enhanced with coupons and other call-to-action elements that can be updated as frequently as business needs demand. For Internet yellow page publishers, we offer a cost-effective self-serve visually enhanced ad opportunity that does not require an SME to have a website nor technical expertise.

Search: The search directory companies have extensive self-serve advertising vehicles for creating a national reach, but are not as effective in producing relevant and actionable results for local search. By incorporating the enhanced visual ad capabilities of AdMission, consumers can find relevant data at their fingertips. Search platforms can leverage our technology to gain access to the SME advertiser who needs to differentiate their offering from large national advertisers, yet cost effectively create compelling media rich ads that attract qualified consumers.

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AD TECHNOLOGIES CHANNELS

Indirect Sales Channels

Our strategy is to leverage our relationships with business partners and major market leaders in order to increase our market penetration and revenues while reducing our sales and marketing expenses. This strategy will develop multiple sales and marketing channels for our products and services. We are targeting the top ad order systems providers to integrate our products with theirs making the AdMission product available and a natural enhancement to existing ad creation systems. To date IPIX has partnered with market leaders such as: CCI Europe, Mactive, DTI, PBS and AdStar among the leaders in the industry.

Direct Sales Channels

To increase adoption and accelerate demand creation we also target direct relationships with the top directional ad platform providers both on-line and in-print. We have signed agreements and are in the process of roll outs with: Tribune Media, Cox Communications, Los Angeles Times, Homestore, Seattle Times, Los Angeles Newspaper Group, Scripps-Knoxville News, Cars.com, Yell.com, NewsQuest Digital Media and Haymarket in the UK, as well as others. We also have a direct sales channel strategy for the Internet yellow page companies and the on-line search companies.

Through these relationships, our customers market and sell visually enhanced ad products and services, powered by our technology, to their customers. We believe we benefit from the brand equity and buying recommendations provided by the customer’s sales channel to increase sales and market penetration while maintaining the ability to focus on our technology support and enhancements. We plan to continue to partner with additional vertical market leaders to serve as direct and indirect channels for the promotion and sale of our products and services.

AD TECHNOLOGIES COMPETITION

When selling our services, we often find that potential customers are considering internal development of system components. Our solution provides an end-to-end, integrated solution for acquiring, managing and distributing media content. The time, complexity, cost and expertise required to build and scale such a system, while still having to expend the expertise and resources to make images print-ready, make outsourcing an attractive option. We are continually enhancing our product features and services to maintain the broadest accessibility across browsers, operating systems and file formats, which further increase the advantage of outsourcing to us. Nevertheless, we view internally-built and operated capabilities as competitive.

Where outsourced imaging management capabilities for our target markets are concerned, we view companies such as AdPixx and PictureAds as competitors. We believe that our technology and extensive experience handling large volumes of imaging data serve to differentiate us from these competitors. Several other companies currently operate as self-serve ad creation technology providers for SME’s, with a focus on different markets; however, such companies may choose to expand into the markets currently targeted by AdMission at any time. These companies include: Celebro and DynAccSys in print display ad creation for newspapers; AdLizard in print display ad creation for yellow pages; Amazing Media and PointRoll in on-line banner ad creation. Again, we view our proprietary technology and extensive expertise in image management as a key differentiator.

IPIX INFOMEDIA

Our patented imaging technology enables the creation of panoramic image content through the use of a wide angle or fisheye lens. Our immersive technology represents the easiest way possible to capture the entire field-of-view surrounding a camera. In use, separate 185 degree images are captured and then stitched together to form an interactive panoramic image. When viewing IPIX panoramic images, users are able to select a portion of the scene to view by using their cursor or other pointing device. By moving the cursor in different directions, the user experiences the location in which the image was taken as if they were physically there.

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We believe the market for interactive, panoramic imaging content is poised for steady, long-term growth as the panoramic imaging marketplace continues to expand and mature. Panoramic imaging is becoming a must have in the traditional on-line marketing applications and is finding broader applications across a wide variety of commercial markets.

The IPIX InfoMedia Solution

IPIX InfoMedia (“InfoMedia”) benefits from marketplace drivers that continue to reinforce the need for panoramic imaging. The number of Web sites needing compelling content continues to grow. Acceptance of on-line searching and purchase transactions for travel and hospitality, real estate, automobiles and other markets drive continued demand for panoramic virtual tours in on-line marketing applications. Additionally, ongoing concerns about security, the need to be better prepared in the case of emergency situations and the need to better manage physical assets and infrastructure, have all led to the use of panoramic imaging for visual documentation.

The InfoMedia group continues to be a leader in panoramic imaging technology. Our two-shot photography process creates a light-weight, expansive view image that is interactively viewable and fast to download over the Internet. Our traditional markets, which we continue to serve today, leverage the value of IPIX panoramic imaging as a visual media type that attracts and engages viewers for on-line marketing applications. Customers include professional photographers, creative/design agencies, web developers and marketing agencies. Visual media market customers use IPIX panoramic images for the high-quality and professional way they showcase places, events and products.

New market applications have emerged that benefit from the value of IPIX panoramic imaging in combination with business critical information. These visual documentation markets include facility management, police and fire rescue, government, insurance and corporate enterprise. Unlike the visual media market, the visual documentation market uses the IPIX panoramic images created for their informational value, and often incorporate IPIX panoramic images in a database that links the images to relevant data.

InfoMedia Products

InfoMedia markets hardware and software products that provide a complete solution for easily creating panoramic images. The products are based on patented technology for capturing a Full-360 degree field of view from a digital camera in a manner that is extremely efficient for the user. The products and services offered by InfoMedia center on making this production process simple and efficient. By integrating the end-to-end process, including production workflow, image editing and output options, our platform enhances the workflow efficiency for providing high quality results.

Image Creator Platform (“ICP”)

Drawing from a decade of experience in panoramic imaging software marketing and development, the InfoMedia group has developed and launched its new products built on a core architecture platform. This multi-tiered software platform forms the basis for our product strategy for the next several years.

The platform:

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has an open architecture, multi-function, modular format designed to be the industry standard solution for immersive imaging across a broad range of vertical markets;

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is compatible with both Windows and Macintosh platforms;

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is flexible enough to integrate a wide range of traditional media types such as flat images and panoramas into a single workflow solution;

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opens up our technology for integration into third party products aimed at specific vertical markets (such as forensics); and

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enables a new third party after-market based upon creating ICP plug-ins.

Our legacy Key licensing model is replaced with an open solution that makes it easy for customers to select a license model most appropriate for their particular use. For those companies that license ICP for integration into their own products, ICP includes a customizable user interface that allows quick and easy sub-branding within the user interface. The plug-in architecture also allows ICP to tailor product configurations to the requirements of target markets, allowing the unit to achieve consistency in pricing across the wide range of market opportunity.

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Interactive Studio

The first product built on the ICP platform is the IPIX® Interactive Studio™ (“Interactive Studio”). It is our solution for driving the standardization of panoramic photography. The Interactive Studio, which was announced in February 2004 at the Photo Marketing Association International (“PMAI”) tradeshow, represents a highly strategic move for the company in that we have replaced our proprietary “key” licensing model with a flexible enterprise licensing approach. In the new business model, customers gain unlimited annual access to our technology. Our licensing terms offer them a range of pricing models tuned to their particular needs.

The Interactive Studio offers panorama photographers a single integrated solution that can automate a wide variety of tasks previously requiring separate tools. The Interactive Studio makes creating multiple Full-360 degree images as simple a drag-and-drop of fisheye source images into the application, selecting the output file formats desired and hitting the save button. Doing so, the Interactive Studio can output a wide range of formats, including our legacy (“.ipx”) format, QuickTime’s (“.mov”) format, as well as open file formats like cubic and equirectangular. The Interactive Studio includes features including image editors, image format converter tools and high dynamic range image compositors, not previously available in a single panoramic photography solution. With the Interactive Studio, a single batch of 10s or 100s of images can be stitched, enhanced and output using a highly automated workflow, saving the photographer time while increasing the service options that can be offered to their customers.

Because Interactive Studio is based on a plug-in architecture, we are able to work with strategic partners to offer broader solutions to our target markets. We have announced our first two strategic partnerships for ICP. Two leading companies in the panoramic photography marketplace, iSeeMedia and RealViz, previously in competition with InfoMedia, announced plug-in products for the Interactive Studio. These partnerships reinforce our strategy of opening up our technology and growing the panoramic imaging market. Through the Interactive Studio, we provide customers a single solution they can use for the broadest range of panoramic imaging needs

GPS Mapping System

Our GPS Mapping System, developed in partnership with Red Hen, provides everything needed to integrate panoramic and still images into GIS Maps, complete with zoomable layers. The GPS Mapping System includes the GeoBuilder software for batch-building high-resolution panoramic images and Red Hen System’s MediaMapper®, a full-featured map creation and editing software. The GPS Mapping System automatically imports and hotlinks immersive images, still images and other files into multi-layer GIS maps for accurate GPS positioning. The GPS Mapping System allows the user to create interactive visual maps that include immersive images built from the GeoBuilder and other links to visual, audio and textual data. The system works by importing images, matching the time stamps of the images with the log from a GPS unit and then matching the coordinates. These coordinates are then plotted on the maps and linked to the images at the GPS registered locations.

IPIX Movies

The InfoMedia group also markets to the entertainment industry a full service to create IPIX Movies. IPIX Movies are made by capturing two back to back scenes using a fisheye lens on one or more video cameras. The movies are digitized and edited using standard post-production processes, techniques and tools. Each IPIX Movie is processed frame-by-frame for editing, stitching and encoding. Finished movie content can be delivered on DVD’s or viewed over the Internet using either the Real Media format (“.rm”) from Real Networks or our proprietary format and viewer.

IPIX Movies have been used in various travel and hospitality marketing projects as well as on several high profile Hollywood DVD movies releases. Within the travel and hospitality markets examples of the use of the technology include an internet-based promotional for the Atlantis Resort and a virtual helicopter fly-through for the Hawaiian Tourist and Convention Center. IPIX Movies has been used for value-added DVD content for Harry Potter and the Sorcerer’s Stone and Harry Potter and the Chamber of Secrets. Additional high profile Hollywood projects are already in the production stage for release to market in 2004/2005.

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InfoMedia Markets

InfoMedia’s customers include a broad range of industry leaders in the Real Estate, Travel and Hospitality, Automotive, Publishing, eCommerce, Advertising and Promotion, Education and Entertainment industries.

In the Visual Media markets, our customers are content developers whose expertise in photography and multimedia production command a premium with their customers. These markets include professional photographers, advertising and creative media agencies and web development firms. For these markets, InfoMedia solutions provide a distinct visual media format that is compatible with a wide range of production tools and that offers our direct customers a way to command a premium for development services from their customers.

In the Visual Documentation markets, our customers include a broad cross section of public and private sector organizations that use InfoMedia solutions to document and index places or events. For these customers, our solutions provide a distinct visual documentation format that can simply and quickly capture the complete details of an environment. Also, because the visual data can be combined with descriptive information about the location, these markets can leverage the visual documentation in ways that support their organizational goals.

InfoMedia Sales and Marketing

InfoMedia photography products are sold in the U.S. and Canada through a direct sales model. We use a telesales team of two people located in Oak Ridge, Tennessee. We manage an on-line electronic commerce site for execution of sales transactions. Within the U.S., Homestore is the exclusive sales and distribution channel for iPIX Full-360 degree panoramic photography products into the residential real estate market.

Our products are marketed primarily through the use of on-line Internet marketing. We use a variety of mechanisms to generate new customer leads. We utilize keyword based advertising to generate leads from internet search engine queries and drive potential customers to our web site and on-line store. We offer our software for download and in the process capture customer information for follow on marketing. We manage a database of customers from which we run permissions based marketing campaigns.

Additional marketing efforts focus on creating industry awareness at trade shows, industry consortium memberships and sponsorships, advertising, marketing collateral materials, co-marketing programs, public relations campaigns, sales tools and training and education on our products and programs.

Within vertical markets, we co-market with partner companies and lead customers. Their expertise in the market allows use to leverage our resources effectively without having to undertake large direct marketing campaigns. In establishing technology partnerships with companies like RealViz and iSeeMedia, InfoMedia will be able to jointly market products directly to the partner customers, and benefit from partner marketing and awareness building.

InfoMedia Competition

We currently compete with several providers of immersive imaging technology. We do not believe any of our competitors are dominant in this industry. We compete with these companies on the basis of ease of use, reliability, end user experience and price. While competitors may offer only components of the end-to-end solution of InfoMedia, they may have greater financial, marketing, distribution and technical resources with which to target our markets. Our success will be dependent upon our ability to compete on the cost-effectiveness and quality of our solutions, the success of our indirect channel partners and the tangible value of our solutions.

INTELLECTUAL PROPERTY

We rely on a combination of patent, copyright, trade secret and trademark laws and contractual restrictions to establish and protect proprietary rights in our products. Our patents are intended to protect and support current and future development of our technology. We currently have over 20 U.S. patents. In addition, we hold international counterparts to many of our U.S. patents in selected countries covering various aspects of our products. We have numerous patent applications pending in the United States as well as international counterparts to many of these applications. There can be no assurance that our current and future patent applications will be granted, or, if granted, that the claims covered by the patents will not be reduced from those included in our applications.

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Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing on the proprietary rights of others. We seek to limit disclosure of our intellectual property by requiring employees, suppliers and customers with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or software or to obtain and use information that we regard as proprietary. We have experienced wrongful use in the past, and although we have taken steps to stop that use, we expect to experience more attempts in the future. The laws of many countries do not protect our proprietary rights to as great an extent as to the laws of the United States. Litigation may be necessary in the future to enforce our intellectual property rights to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. There can be no assurance that the statutory and contractual arrangements we currently depend upon will provide sufficient protection to prevent misappropriation of our technology or deter independent third-party development of competing technologies.

Claims by third parties that our current or future products infringe upon their intellectual property rights may have a material adverse effect on us. Intellectual property litigation is complex and expensive, and the outcome of this litigation is difficult to predict. We have been involved in litigation relating to the protection of our intellectual property rights. Such litigation, and any future litigation, regardless of outcome, may result in substantial expense to us and significant diversion of our management and technical personnel. An adverse determination in any litigation may subject us to significant liabilities to third parties, require us to license disputed rights from other parties, if licenses to these rights could be obtained, or require us to cease using the technology.

EMPLOYEES

As of March 1, 2004, we employed 63 full-time employees. Our employees are not represented by any collective bargaining unit. We believe our relations with our employees are good.

AVAILABLE INFORMATION

Our website is located at www.ipix.com. We make available free of charge through this website all of our Securities and Exchange Commission (“SEC”) filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, as soon as reasonably practicable after those reports are electronically filed with the SEC.

Item 2. Properties.

We lease approximately 13,000 square feet of space in Oak Ridge, Tennessee for our corporate office and operations and approximately 19,000 square feet in San Ramon, California for our co-headquarters. We have exited approximately 6,500 square feet of office space in San Ramon for which approximately half has been sub-let and we are actively marketing the remaining space to potential sub-tenants. If we are unable to successfully sublease our vacated and unoccupied office space, or if any of our current sub-tenants fail to make required lease payments, our business, financial condition, results of operations and cash flows may be adversely affected. (See Note 12 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.)

Item 3. Legal Proceedings.

On November 15, 2002, a First Amended Consolidated Complaint for violation of federal securities laws was filed against Homestore.com, Inc. (“Homestore”) by the California Teachers’ Retirement System (“CalSTRS”). The Complaint is a class action lawsuit filed on behalf of stockholders of Homestore which flows from alleged misstatements and omissions made by Homestore and the other named defendants, which include us. The Complaint alleges that during 2001, Homestore and IPIX entered into fraudulent reciprocal transactions intended to artificially bolster and maintain Homestore’s and our respective stock prices. The Complaint alleges that Homestore’s public statements with respect to these transactions are attributable to us and violate Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. We joined with other co-defendants and filed a joint motion to dismiss, alleging that the

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Complaint fails to state a claim upon which relief may be granted, among other things. On March 7, 2003, the United States District Court for the District of Central California granted our motion to dismiss, with prejudice. However, CalSTRS may appeal this dismissal in accordance with the federal rules of procedure.

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

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

Item 4. Submission of Matters to Vote of Security Holders

No matters where submitted to a vote of the Company’s stockholders during the fourth quarter of fiscal year 2003.

Item 4A. Executive Officers of Registrant

The following sets forth information with respect to our executive officers as of March 1, 2004:

DONALD W. STRICKLAND has been the chief executive officer of IPIX since May 2001 and has been president and chief operating officer since October 2000. Mr. Strickland joined IPIX in April 2000 and served as executive vice president until his appointment as president and chief operating officer in October 2000. Prior to joining us, Mr. Strickland was president and chief executive officer of PictureWorks Technology, Inc. from March 1996 until March 2000. From June 1993 until March 1996, Mr. Strickland held the position of vice president, Imaging and Publishing at Apple Computer. Prior to joining Apple in June 1993, Mr. Strickland spent twenty years at Eastman Kodak Company where he held a succession of positions in engineering, sales, marketing and executive management. Mr. Strickland holds several degrees including a bachelor’s degree in physics from Virginia Tech, a master’s degree in physics from the University of Notre Dame, a master’s degree in optics from the University of Rochester, a master’s degree in management from the Stanford Sloan School of Management and a law degree from George Washington University.

PAUL A. FARMER has been the chief financial officer, executive vice president and treasurer of IPIX since June 2001. Prior to joining us, Mr. Farmer was the chief financial officer of Buzzsaw.com from June 2000 to June 2001. Prior to Buzzsaw, Mr. Farmer was chief financial officer, chief administrative officer and executive vice president of CCAi Consulting from June 1998 to June 2000. Prior to CCAi, Mr. Farmer was chief financial officer of TCSI, Inc. from June 1994 to June 1998 and vice president and corporate controller of Technology Solutions Company from November 1990 to June 1994. Mr. Farmer is a CPA and was with Price Waterhouse from January 1982 through November 1990. Mr. Farmer holds a bachelor’s degree in accounting from the University of Illinois and a masters in business administration from the University of Chicago.

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SARAH F. PATE has been the executive vice president, general manager of IPIX’s Transactional Services Group since December 2001, and has been with IPIX since April 2000. Prior to joining us, Ms. Pate was vice president in charge of operations for PictureWorks Technology, Inc., from August 1995 until March 2000. Ms. Pate has extensive experience in financial services and in managing large and small organizations. She spent 12 years with Household International serving as president of Household Bank, director of sales at Household Finance Corporation and several other high-level management roles. Ms. Pate holds a bachelor’s degree in business administration from the University of Washington.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock is traded on the Nasdaq SmallCap Market (symbol: IPIX). As of March 1, 2004, there were 1,003 stockholders of record. The following table reflects the range of the high and low bid information for our common stock for the periods indicated:

We currently intend to retain all future earnings to finance the continuing development of our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends in the future will depend upon our financial condition, future loan covenants, capital spending requirements and earnings, as well as other factors the board of directors may deem relevant.

The table below sets forth information relating to our shareholder approved compensation plans as of the end of 2003:

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Item 6. Selected Financial Data

Selected Historical Financial Information

The statement of operations data presented below for the years ended December 31, 2001, 2002 and 2003 and the balance sheet data as of December 31, 2002 and 2003 have been derived from our audited consolidated financial statements that are included elsewhere in this report. The statement of operations data for the years ended December 31, 1999 and 2000 and the balance sheet data as of December 31, 1999, 2000 and 2001 are derived from audited consolidated financial statements that are not included in this report. These results are not necessarily indicative of results to be expected for any future period. You should read the data presented below together with our consolidated financial statements and related notes to those statements and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report.