ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                                  THREE MONTHS
                                                      ENDED
                                                    MARCH 31,
                                            ------------------------
                                             2000              2001
                                            ------            ------
Revenues                                     100.0%            100.0%
Cost of revenues                              57.5              49.8
                                            ------            ------
Gross profit                                  42.5              50.2
                                            ------            ------
Operating expenses
  Sales and marketing                        187.2             102.1
  Research and development                    28.6              25.9
  General and administrative                  66.1              40.1
  Stock-based compensation                    33.5              12.8
  Goodwill amortization                         --               6.4
  Restructuring and impairment                  --              31.5
  Loss on disposal of assets                    --              18.6
  Merger expenses                            183.2                --
                                            ------            ------
     Total operating expenses                498.6             237.3
                                            ------            ------
Other income (expense), net                   10.7              (2.0)
                                            ------            ------

Net loss before extraordinary gain          (445.4)           (189.1)

Extraordinary gain                              --               9.5
                                            ------            ------
     Net loss                               (445.4)%          (179.6)%
                                            ======            ======

QUARTER ENDED MARCH 31, 2001 COMPARED TO THE QUARTER ENDED MARCH 31, 2000

Revenues. Total revenues increased to $9,523,000 in the first quarter of 2001, compared to $8,283,000 in the first quarter of 2000, an increase of $1,240,000 or 15.0%. This increase was due primarily to the increased sales of our open imaging platform, Rimfire, which we acquired through the acquisition of PictureWorks Technology, Inc. in the second quarter of 2000.

Cost of Revenues. Cost of revenues consists of our direct expenses associated with the capture, processing, hosting and distribution of virtual tours and the costs of the digital camera and related components included in an iPIX kit. In addition, cost of revenues include transaction fees paid to affiliates who display our virtual tours on their web sites, fees paid to resellers of our virtual tours and infrastructure and bandwidth costs related to Rimfire revenues. Cost of revenues decreased to $4,745,000 in the first quarter of 2001, compared to $4,766,000 in the first quarter of 2000, a decrease of $21,000. Cost of revenues as a percentage of total revenues decreased from 57.5% in the first quarter of 2000 to 49.8% in the first quarter of 2001. This decrease, as a percentage of revenues, was the result of a lower volume of virtual tour deliveries and the increase in Rimfire based revenues.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries for marketing, sales, business development and field operations personnel. Sales and marketing expenses also include commissions and related benefits for sales personnel and consultants, traditional advertising and promotional expenses, trademark licensing and technology access and sponsorship fees paid to affiliates in order to facilitate availability of our tours on their web

sites. Sales and marketing expenses decreased to $9,719,000 in the first quarter of 2001, compared to $15,507,000 in the first quarter of 2000, a decrease of $5,788,000, or 37.3%. This decrease is due primarily to a decrease in our sales force, decreased costs relating to technology access and sponsorship fees and decreased advertising and branding expenses.

Research and Development. Research and development expenses consist primarily of personnel costs and fees paid to third party developers. Research and development expenses increased to $2,472,000 in the first quarter of 2001, compared to $2,365,000 in the first quarter of 2000, an increase of $107,000, or 4.5%. This increase was due primarily to increased personnel and related costs associated with expanding our research and development efforts to build and enhance our digital media infrastructure.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related benefits for administrative and executive staff, fees for professional services and general office and occupancy expenses. General and administrative expenses decreased to $3,814,000 in the first quarter of 2001, compared to $5,478,000 in the first quarter of 2000, a decrease of $1,664,000 or 30.4%. This decrease was due primarily to a decrease in personnel and related costs and professional services.

Stock-based Compensation. Stock-based compensation expense consists of the amortization of deferred compensation related to stock options granted to employees and others prior to our initial public offering with an exercise price below the deemed fair market value of our common stock on the date of grant and to the amortization of fair value of warrants issued to non-employees. The related compensation is amortized over the vesting period of the options. Expense related to the warrants is amortized over the term of the agreements to which they relate. Stock-based compensation expense decreased to $1,218,000 in 2001, compared to $2,774,000 in the first quarter of 2000.

Goodwill Amortization. Amortization of intangible assets was $608,000 in the first quarter 2001, compared to $0 in the first quarter of 2000. The amortization was a result of goodwill associated with the acquisitions during the second quarter of 2000 after the write-down of goodwill in the fourth quarter of 2000.

Merger Expenses. Merger expenses consist of costs incurred as a result of the merger of Interactive Pictures and bamboo.com that occurred on January 19, 2000. Merger expenses in the first quarter of 2000 were $15,175,000 and consisted primarily of underwriting, legal and accounting, and printer's fees.

Extraordinary Gain. The extraordinary gain of $901,000 results from the sale of assets used to provide residential real estate virtual tours that were related to the pooling of Interactive Pictures Corporation and bamboo.com. The sale transaction took place within a year of the pooling transaction.

Loss on Disposal of Assets. The loss on the disposal of assets of $1,769,000 is the result of the sale of assets used to provide residential real estate virtual tours that consisted of the remaining residential real estate assets that were unrelated to the pooling of Interactive Pictures Corporation and bamboo.com.

Restructuring and Impairment Charges. During the first quarter 2001, we recorded a restructuring charge of $1,878,000 consisting of expenses associated with a reduction in our workforce, lease obligations for vacated offices, and a write down of abandoned office equipment of $1,122,000 to its net realizable value.

Other Income (Expense). Other income (expense) consists primarily of interest earned on cash and investments and interest paid on capital leases. Net interest and other income decreased to $(187,000) in the first quarter of 2001, compared to $892,000 in the first quarter of 2000, a change of $1,079,000. This change was due primarily to decreased earnings on our cash investments related to a lower cash balance and increased interest payments related to capital leases.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $20,997,000 for the three months ended March 31, 2000 and $11,416,000 for the three months ended March 31, 2001. Net cash used for operating activities in each of these periods is primarily a result of net losses and changes in net operating assets.

Net cash provided by investment activities was $13,201,000 for the three months ended March 31, 2000 and $14,391,000 for the three months ended March 31, 2001. Net cash provided by investing activities was related to the net purchases and maturities of short-term investments, the acquisition of computer software and hardware and other equipment and proceeds from the sale of assets.

Net cash provided by (used in) financing activities was $1,242,000 for the three months ended March 31, 2000 and $(399,000) for the three months ended March 31, 2001. The net cash provided by (used in) financing activities for these periods was due primarily to the exercise of stock options and the repayment of capital lease obligations.

Although we have no material commitments for capital expenditures, we anticipate that the rate of capital expenditures and other expenses consistent with our operations, personnel and marketing activities will be a material use of our cash resources for the foreseeable future. We may also use our cash resources to acquire or license technology, products or business related to our current business.

We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures

until June 30, 2001. On May 14, we announced that we had executed definitive agreements with Paradigm Capital Partners and Memphis Angels, LLC for an investment by the parties of up to $30 million. The agreement calls for the investment to occur in two tranches. Tranche A consists of $10 million in convertible notes and warrants, of which $3 million was currently funded and $7 million is expected to be funded on or before May 30, 2001. Tranche B is expected to close after the annual shareholder meeting that will occur in the summer of 2001 and will include up to an additional $20 million in convertible preferred stock. Although the documents contemplate the sale of up to $30 million of our Series B Preferred Stock, there is no assurance that we will sell the entire amount. If we do not sell the entire amount of Series B Preferred Stock, we will need to raise additional funds to support our operations. We may seek these funds through the issuance of debt or equity securities. Any of the equity securities may result in additional substantial dilution to our stockholders. There can be no assurance that our capital requirements will be available in amounts or on terms acceptable to us, if at all. If we are unable to raise the needed funds, we may be forced to sell assets or discontinue operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if so, the type of hedge transaction. The adoption of SFAS 133 has not had a material impact on the Company.

INFLATION

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

ADDITIONAL FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

RISKS RELATING TO OUR BUSINESS, FINANCES AND OPERATIONS

DUE TO OUR LIMITED CASH RESOURCES, WE WILL BE FORCED TO CEASE OPERATIONS UNLESS WE ARE SUCCESSFUL IN OBTAINING ADDITIONAL CAPITAL OR IN PURSUING STRATEGIC ALTERNATIVES

Although we have announced that we have entered into an agreement in which an investor will purchase up to $30 million of our Series B Preferred Stock, we have only received $3 million of the investment. We anticipated receiving an additional $7 million of the investment upon the satisfaction of certain conditions. There can be no assurance that these conditions will be satisfied. Further, we will not receive the remaining $20 million until after our stockholder meeting in July, 2001. As such, if we fail to receive any additional financing other than the initial $3 million, we anticipate that our current cash, cash equivalents and cash generated from operations will only be sufficient to meet our anticipated cash needs to approximately June 30, 2001, although there can be no assurance in this regard. Accordingly, in that instance, we will require an additional, substantial capital infusion to continue our operations. There can be no assurance that the remaining investment will occur or that additional capital will be available to us. If we are unsuccessful in completing the announced financing transaction or securing alternative financing, we may be required to cease operations, and our common stock will have no value.

WE HAVE INCURRED SUBSTANTIAL LOSSES AND WE MAY NEVER BECOME PROFITABLE

We have incurred substantial net losses and experienced negative cash flow, and we expect our operating losses and negative cash flow to continue. Although our revenues have increased over the past years, we may not be able to sustain future revenue growth. In addition, our expenses continue to increase as we expand our sales and marketing efforts, increase the number of employees and invest in an expansion of services and product development. Further, as of March 31, 2001, we had an accumulated deficit of $467,404,000. Accordingly, we cannot offer any assurances that revenues will ever exceed expenses or that we will become profitable.

OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DROP

We believe that our quarterly operating results could vary significantly in the future and that quarter-to-quarter comparisons should not be relied upon as indications of future performance. In some future quarterly periods the operating results may fall below the expectations of securities analysts and investors, which could significantly harm or depress the trading price of our common stock. Among the factors which could significantly affect our future performance are:

- the uncertainty of market acceptance of our products or services;

- the introduction of new or enhanced products and services, or changes in pricing policies by us or our competitors;

- cyclical economic swings in the real estate market that are caused by various factors, including changes in interest rates, changes in economic conditions and seasonal changes in geographic regions;

- the rate at which we can recruit, train and integrate employees;

- our ability to manage multiple relationships among various customers and strategic partners;

- our ability to expand sales, marketing and customer service operations;

- our ability to maintain our research and development activities; and

- economic conditions specific to the Internet or all or a portion of the technology sector.

OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET

We received a notice from the Nasdaq National Market on March 19, 2001 that our common stock has been trading at below $1.00 per share for more than thirty consecutive days. As such, we are in danger of being delisted by the Nasdaq National Market. If a delisting were to occur, our common stock would trade on the OTC Bulletin Board or in the "pink sheets" maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result.

OUR FUTURE SUCCESS IS DEPENDENT UPON KEY DISTRIBUTION AFFILIATES

The ability to broadly distribute digital media content over the Internet is vital to our business. Through agreements between our affiliates and third parties, our online tours may also be viewed on AOL, Excite@Home Network, GO

Network/Infoseek, Homestore.com, MSN and Yahoo! We must continue to have access to these sites and maintain existing relationships in order to maintain a competitive advantage for our business. If we lose any of our distribution affiliates or if any of our distribution affiliates loses its relationship with any major Internet portal, it could have a material adverse effect on our business.

WE DEPEND UPON THIRD-PARTY RELATIONSHIPS FOR ASSISTANCE IN MARKETING AND HOSTING DIGITAL MEDIA CONTENT

We depend upon a third party Internet service provider to host and maintain our production servers for all of our digital media content. As part of our end-to-end solutions, our servers host digital media content for some of our customers. The performance of our web hosting facility systems is critical to our business and reputation. Any system failure, including network, software or hardware failure, that causes an interruption in the delivery of digital media content or a decrease in responsiveness of web site service could result in reduced revenue, and could be harmful to our reputation and brand. Our Internet service provider does not guarantee that its Internet access will be uninterrupted, error free or secure. Any disruption or decreased response time in Internet access by our provider could significantly harm our business. Further, our insurance may not adequately compensate us for any losses that may occur due to any failures in the system or interruptions in the service.

IF OUR OFFERINGS ARE NOT ACCEPTED BY THE BUSINESS AND CONSUMER MARKETS, OUR FUTURE GROWTH WOULD BE LIMITED

We currently sell the overwhelming majority of our offerings to the business market. We are dependent upon the continued and expanded use of our offerings by the business market and the acceptance of our offerings by individual consumers. We have only made limited sales to individual consumers and cannot assure that they will be willing to purchase and use our offerings. Thus, both the timing and growth of market acceptance for our offerings are subject to a high level of uncertainty. Acceptance of our offerings is highly dependent on a number of factors, including:

- the availability, quality and price of competing products and services;

- the development of technologies that will facilitate the use of our offerings by businesses and consumers;

- the ease-of-use and performance of our offerings; and

- the success of our marketing efforts.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND THESE RIGHTS MAY BE CHALLENGED BY OTHERS, WHICH COULD SUBJECT US TO SIGNIFICANT LIABILITY FOR DAMAGES AND INVALIDATION OF OUR INTELLECTUAL PROPERTY RIGHTS

We rely on a combination of patent, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to protect our intellectual property rights. Our success is heavily dependent upon our ability to enforce and protect these rights, and we cannot assure you that we will be successful in protecting these rights. Also, our patents, service marks or trademarks may be challenged and invalidated or circumvented. In addition, we are exposed to infringement of our intellectual property in foreign markets because our intellectual property is protected under United States laws that may not extend to foreign uses.

We have been involved in litigation relating to the protection of intellectual property rights and could be involved in future litigation as third parties develop products that we believe infringe on our patents and other intellectual property rights. We have experienced attempts to misappropriate our technology, and we expect those attempts may continue. We are currently involved in litigation in which our rights to technology have been challenged. A determination against us in this lawsuit would have a material adverse effect on our business.

OUR MARKET IS HIGHLY COMPETITIVE, AND OUR BUSINESS MAY FAIL IF WE ARE UNABLE TO COMPETE SUCCESSFULLY

The market for visual content and other digital media solutions is new and rapidly evolving. We currently compete with other providers of immersive imaging technology, including Be Here Corp. and MGI Software. Each of these companies develops and markets imaging products and services that provide a panoramic image experience.

We cannot assure you that others will not develop technologies that are similar or superior to our technologies, duplicate our technologies or design around our patents. To compete effectively, we must:

- introduce new versions of, and enhancements to, our products and services;

- price our products and services at appropriate and competitive levels; and

- provide strong marketing support to promote our products and services.

Some of our competitors have greater financial, marketing, distribution and technical resources than we do. In addition, we compete with other companies in the traditional two-dimensional photography industry. Traditional photographs have significant and established customer acceptance. Our success will be dependent on our ability to compete with companies offering similar immersive imaging products and with companies in the traditional photography industry. If we are unable to compete effectively, our business may fail.

IF OUR VISUAL CONTENT SOLUTIONS AND IMMERSIVE IMAGES FOR E-COMMERCE DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE, OUR BUSINESS WILL NOT GROW

Our success will depend in large part on widespread market acceptance of immersive imaging for e-commerce. If the online market for these products develops more slowly than expected, or if our visual content solutions do not achieve widespread market acceptance, our business will grow more slowly than expected.

Our future growth, if any, will depend on the following critical factors:

- the growth of the Internet as a tool used in the process of buying and selling products marketed with the help of immersive imaging, including residential real estate;

- our ability to successfully and cost-effectively market our visual content products and services to a sufficiently large number of web sites, including e-commerce web sites and new media sites; and

- our ability to consistently deliver high quality products and fast and convenient service at competitive prices.

IF WE LOSE KEY MEMBERS OF OUR PERSONNEL, OUR FUTURE SUCCESS COULD BE LIMITED

Our future success depends on our ability to attract and retain key management, scientific, technical and other personnel. In addition, we must recruit additional qualified management, scientific, technical, marketing and sales and support personnel for our operations. Competition for this type of personnel is intense, and there can be no assurances that we will be successful in attracting or retaining personnel. In addition, some members of our management team are not bound by non-compete agreements if they are no longer employed by us. The loss of the services of one or more members of our management group or other key employees or the inability to hire additional qualified personnel will limit our ability to grow our business.

OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO ADAPT TO TECHNOLOGICAL CHANGES, AND IF WE FAIL TO ADAPT TO TECHNOLOGICAL CHANGES, OUR OFFERINGS MAY BECOME OBSOLETE

We compete in a market characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements and changing customer demands. These market characteristics are intensified by the emerging nature of the Internet and the multitude of companies offering Internet-based products and services. Thus, our success depends on our ability to adapt to rapidly changing technologies, to adapt our offerings to evolving industry standards and to continually improve the performance, features and reliability of our offerings in response to competitive products and shifting demands of the marketplace. In addition, widespread changes in Internet, networking or telecommunications technologies or other technological alterations could require substantial expenditures to modify our products, services or infrastructure. Failure to adapt to new technology in any of these areas could have a material adverse effect on our business, results of operations and financial condition.

WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR VISUAL CONTENT SOLUTIONS INTO INTERNATIONAL MARKETS

A part of our long-term strategy is to expand into international markets. The success of any additional foreign operations will be substantially dependent upon our entering and succeeding in those markets. We may experience difficulty in managing international operations as a result of competition, technical problems, distance, language or cultural differences.

As we expand our international efforts, we will be subject to a number of risks, including the following:

- failure of foreign countries to rapidly adopt the Internet and digital imaging;

- unexpected changes in regulatory requirements, especially regarding the Internet;

- slower payment and collection of accounts receivable than in our domestic market; and

- political and economic instability.

We can not assure you that we will be able to successfully market our products in foreign markets.

WE ARE SUSCEPTIBLE TO BREACHES OF ONLINE COMMERCE SECURITY

A party able to circumvent our security measures could misappropriate proprietary database information or cause interruptions in operations. As a result, we may need to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by security breaches. This additional expense could harm our business, financial condition and results of operation.

OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY MAKE IT MORE DIFFICULT OR EXPENSIVE TO ACQUIRE US IN THE FUTURE, WHICH COULD NEGATIVELY AFFECT OUR STOCK PRICE

Our amended and restated certificate of incorporation and amended and restated bylaws and applicable provisions of Delaware law contain several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors. In addition, in October of 2000, our board of directors approved a shareholder rights plan that has the effect of making an acquisition of us prohibitively expensive unless our board of directors approves of the acquisition. The provisions of our certificate and bylaws and the Delaware General Corporation Law may make it more difficult or expensive for a third party to acquire a majority of our outstanding voting common stock or delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may negatively effect our stock price.

FORWARD-LOOKING STATEMENTS

This quarterly report contains statements about future events and expectations which are characterized as forward-looking statements. Forward-looking statements are based on our management's beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to them. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. Factors that could contribute to these differences include those discussed in "Risk Factors" of our annual report on Form 10-K filed on April 2, 2001 and those under Additional Factors That May Affect Our Future Results.

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.