UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

OR

For the transition period from                      to

IPIX CORPORATION

(Exact name of registrant as specified in its charter)

8000 Towers Crescent Drive, Suite 1350, Vienna, Virginia 22182

Registrant’s telephone number, including area code: (703)847-3660

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 þ 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.

o

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

Yes þ No o The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2004 was $251,702,365 (based on the last sale price of $13.98).

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of March 1, 2005 was 22,077,281.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Stockholders’ Meeting to be held on or about May 13, 2005, 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 and our products, services and industries, derived from publicly available reports and other publications referenced in this annual report. These organizations generally use methodologies 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 or completeness of such information. While we believe this information to be reliable, we have not independently verified such data.

OVERVIEW

IPIX Corporation (“IPIX”) is a premium provider of immersive imaging products for government and commercial applications. We combine experience, patented technology and strategic partnerships to deliver visual intelligence solutions worldwide. Our immersive, 360-degree imaging technology has been used to create high-resolution digital still photography and video products for surveillance, visual documentation and forensic analysis.

2004 was a year of many accomplishments for IPIX. Leveraging our core expertise in immersive image processing, we developed and launched a robust product line of high-resolution cameras for video surveillance applications. Our new products experienced early success within the federal government. Most notably, they were chosen for use at two high-profile, national security events where the need for total situational awareness was critical – the G8 Summit and the Presidential Inauguration; and they are currently being used by the Transportation Safety Administration (TSA) to monitor airport security checkpoints. Additionally, the CommandView-360 product received industry validation by winning the 2004 Product Achievement Award that is presented annually by the Security Industry Association.

Realizing that cameras are but one piece of a total security solution, we put a significant amount of effort during 2004 into establishing value-added partner relationships. Partners serve a three-pronged purpose for the company. They provide complementary technologies, such as digital video recorders, biometric systems and video analytics, to our own product offerings. They can shorten the sales cycle by presenting a one-stop-shop solution to customers, making it easier for them to buy. They also provide a way to extend our sales and distribution channels globally. We have signed partnerships with companies in Europe, Australia, and Russia as well as with several companies in the United States. To facilitate the success of our technical partnerships, we developed and released our Video Software Developer Kit (Video SDK) for our video products. The Video SDK provides a software platform that enables our immersive video products to easily integrate with those of our partners.

On the still photography side of the business, we introduced the IPIX ® Interactive Studio ™ , our strategic platform for establishing a de facto standard for the creation of immersive photography. The IPIX Interactive Studio was launched in February 2004 at the Photo Marketing Association International (“PMAI”) tradeshow. It provides customers a single integrated solution to automate production tasks that previously required separate tools. At that time we also announced the end of life of our legacy IPIX 360 Suite per-image ‘key’ license based products, and introduced a new unlimited annual enterprise licensing approach. In late 2004 we announced and launched an updated suite of tools for the real estate virtual tour marketplace. We released an updated IPIX Real Estate Wizard, which makes shooting immersive images for virtual tour photography affordable, even for low volume customers. We also launched and updated our Host@IPIX virtual tour hosting service to better meet the needs of the US residential real estate market.

2004 also saw a strong realignment of our core competencies with our strategic business goals. The InfoMedia business unit, formerly responsible for the development, marketing, and sales of immersive photography products, was reintegrated into the company. Still photography product teams now work closely with the video product teams leveraging mature development processes and expertise; and the sales and marketing of both product lines is done as a coordinated effort. In markets where customers benefit from combined products (video and stills) in a single offering, this new structure allows us to do so seamlessly. In addition to reintegrating the InfoMedia business unit, we sold the

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AdMission business unit, which developed and sold products to the online advertising market. In accordance with FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the assets and liabilities related to the AdMission business unit were classified as held for sale at December 31, 2004, and the operations of this business unit were considered discontinued operations. Both changes have provided clarity and focus for our internal operations and a more clear definition of our business to the marketplace. (See Note 11 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.)

We are in the process of shifting our business model from a software developer and value-added camera reseller to a visualization systems and solutions development company. As we continue this shift, we must strategically reposition ourselves in the market from its current position as a point solution provider, to the position of a high-value systems solutions provider. To that end, we are undertaking an aggressive business growth strategy to establish itself as the marketplace solution leader and technical innovator in the immersive image technology and visualization markets. In order to quickly build our capabilities, solidify and strengthen our position in target markets, and achieve operational efficiencies, we plan to aggressively pursue select vertical and product merger and acquisition opportunities.

IPIX MARKETS

Immersive imaging, or the ability to create the viewing perspective of being inside the image, is becoming increasingly popular. However, image creation with many of the existing immersive technologies is labor intensive and requires proprietary hardware. Conditions such as inadequate lighting, subject motion or lack of portability reduce the effectiveness of the image. As a result, market acceptance of these technologies to date has been limited. In order for widespread adoption of immersive imaging by businesses and consumers to occur, we believe new immersive technologies must offer the following benefits:

We believe immersive imaging is becoming more heavily utilized in the field of virtual simulation as actual video replaces computer generated images. Estimates, derived from a 2004 report by Insight Media, indicate that immersive imaging comprises roughly 4-6% of the total virtual simulation/visualization market (estimated to be $2.4 – $3.7 billion international in 2005) and grows at a rate of 20% annually. This projected growth rate is higher than the growth rate of the overall virtual simulation/visualization market.

We are a leading provider of immersive imaging technologies that deliver visual intelligence to our customers. The applications we support and the markets to which we are relevant are global and many. Based on our market research and the successes that we have attained in the market thus far, we apply immersive technology products to physical security, visual documentation, and training simulation applications. We target customers in both the government and commercial markets. Our major market focus has included the Department of Defense, the Department of Homeland Security, banks, retail stores, critical infrastructure, transportation, healthcare and real estate. In the visual documentation markets, customers include a broad cross section of public and private organizations that need to document and index places or events. For these customers, our solutions provide a visual documentation format that can simply and quickly capture the complete details of an environment.

We believe the market for immersive still photography content will provide steady, long-term growth as the panoramic imaging marketplace continues to expand and mature. Additionally, ongoing concerns about security, the need to be

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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.

Visual Media Markets

Our traditional immersive still photography markets benefit from the simplicity and ease of use of our two-shot capture process for creating immersive virtual tours. These visual media markets find promotional value in presenting products, places, or events to a wide audience of potential customers. Market segments include:

Observation and Surveillance Market

We believe that the market for observation and surveillance represents an excellent opportunity for IPIX and our immersive and infrastructure offerings. We believe our numerous applications will enable us to penetrate this large and growing segment within the security industry. According to the 2004 Security Industry Annual Report published by Lehman Brothers, the global market size for video equipment and installation has been estimated at $5 — $6 billion, with the United States accounting for $2 — $3 billion of this total.

Immersive technology in surveillance applications:

As the market demand for high quality images and reliable cameras increases, we believe IPIX is well positioned to capture a share of this vertical market.

INNOVATIVE TECHNOLOGY

The technical basis of our still and video products is our patented ability to optically capture wide field-of-view images at a location, and to process, store, and replay those images in a manner that recreates the perception of being at that location. We use a fisheye lens to fully visualize an environment by capturing a full 360-degree field of view from a digital still image or video camera. We then de-warp the image to compensate for distortion errors that are inherent in fisheye images and present the image in a manner that can be easily understood by the viewer. The resulting image can be viewed in any direction, up-down, left-right, and horizon to horizon, with no blind spots. The viewer can easily navigate within the image by moving a cursor inside the image or using the navigation controls.

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We have developed still photography and video processing software technologies that facilitates the development of end-user software solutions, and the integration of IPIX camera products into 3^rd party image and video processing systems. We offer innovative high-resolution, digital cameras and camera system solutions that are highly attractive to end-users because they are easy to operate, reduce the number of conventional cameras that we believe are required to provide adequate coverage and thereby reduce installation labor and material costs. Our two-shot still photography process creates a light-weight, expansive image that is interactively viewable and fast to download over the Internet. Our 360-degree viewing capability gives the market a way to significantly enhance situational awareness. Our still and video image products provide users with a robust documentation capability as well as a forensic analysis tool.

To continue to be a technology innovator, we are working with leading universities and experts in the fields of visualization and imaging. We have also formed a Research and Development (R&D) team and are actively responding to government solicitations. These government funded projects are designed to transition from R&D, to development, and then to full product commercialization. By attracting the best and brightest in the industry to our R&D group, we are able to raise the bar in immersive imaging products and continue to strengthen our brand.

IPIX COMPETITION

Immersive imaging competition is increasing globally. IPIX is the recognized brand in the immersive imaging industry. Since the early 1990’s with the introduction of our first video surveillance product, the OMNIview™, through the late 1990’s with our focus on digital photography based virtual tours, and through today, with our renewed emphasis on internet protocol enabled digital video cameras, we believe we have set the standard for immersive imaging systems. Even so, we face competition from a wide range of competitive solutions.

In the surveillance markets, IPIX high-resolution immersive video cameras face competition from analog CCTV camera manufacturers, digital camera manufacturers and from immersive video technology providers. In the analog CCTV marketplace, one IPIX camera can replace up to 4 analog cameras. A single IPIX camera can also replace a CCTV camera with a mechanical pan-tilt-zoom mechanism. In both cases, the IPIX camera offers a simpler, more reliable and higher quality solution which provides for a total situational awareness at a location, with a digital pan-tilt-zoom that will not break down. In the digital, Internet (IP) camera marketplace, we believe IPIX offers an attractively priced upgrade that allows a single camera to see an entire environment, unlike competing products with a limited field-of-view. Competing IP cameras with a limited field of view translate into a higher cost solution to achieve the same coverage as an IPIX camera.

Competitors offering immersive technology solutions in the security marketplace have several disadvantages compared to the IPIX fisheye lens based approach to full environment surveillance. Specifically, several competitors offer a mirror-based approach for capturing a panoramic view. These solutions fail to capture entire environments, missing potentially critical activity occurring around the camera. These devices utilize a reflective surface to capture a 360-degree field-of-view in a single shot, and are touted by their providers as the easiest way to capture a panorama. A large number of competitors offer parabolic mirror devices with differentiation based mainly on vertical field-of-view. While these devices are simple in operation, they do not capture a full 360-degree spherical image. Most of these devices capture about a 100-degree fixed vertical field-of-view. Because the vertical field-of-view is limited, each manufacturer must decide ahead of time the predominant application for the device, allowing the corresponding general field-of-view to be captured. For example, one device is targeted at real estate virtual tours. This device provider has oriented the field-of-view downward, so that from a relatively high perspective, most of a room can be captured. It is possible that based on the user’s needs, more than one of these devices may be required. Also, these devices are typically large and bulky, and since they utilize a mirror, are subject to scratching or damage. Finally, since they use only one shot, they are the solution most directly limited by camera resolution.

Other competitors offer multi-camera heads, which are bandwidth and computationally intensive since they require processing from a large number of cameras. Multi-headed camera devices are configurations of typically 5 or more cameras that are synchronized together to capture video. In the minimum configuration, five headed cameras are oriented as if in a cube, with the top and four sides each being captured by a separate camera. Software or proprietary

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hardware is then required to stitch the separate images together into a single frame. In one configuration, 12 cameras are oriented to capture a full sphere whereby no stitching is required. Other variations exist using flat mirrors or other types of lenses. The major characteristic of all multi-headed camera devices is that an extraordinary amount of data must be captured, recorded and processed for subsequent playback. Also, depending on the number of cameras and the quality of the stitching, there may be artifacts which limit the quality of the image. In contrast, the IPIX solution requires either one or two cameras at most to capture a full environment, leading to the most efficient solution possible.

In the visual media and visual documentation markets for immersive still photography, we face competition from several key competitors. At the most basic level, options for capturing panoramic images are becoming more ubiquitous in the consumer photography marketplace. Wide field-of-view camera options such as the Advance Photo System (APS) and tools for software stitching multiple images taken hand-held offer a very rudimentary solution. This type of panoramic photography is nothing more than a simulation of immersive photography offered by IPIX. The resulting image does not capture a full 360-degree view, and the images captured are not interactively navigable. Most often, these images are used to make hard copy prints. We believe this type of photography is not suitable for surveillance, visual documentation and forensic analysis markets which require visual intelligence.

Our immersive still photography products also face competition from mirror-based solutions and from multi-headed cameras systems. These options again fail to capture an entire environment or offer a cost effective solution for most customers. Additionally, IPIX immersive still photography products face competition from panoramic scanning cameras. Scanning cameras are high-quality devices that capture very high resolution immersive images. These cameras generally range in cost from $10,000 to $30,000. These cameras utilize a linear sensor, much like those used in flat bed scanners. This sensor is rotated 360-degree to capture a complete panorama. Aside from the high costs, these cameras are complex and require the expertise of a professional photographer. Additionally, at the highest resolution, these cameras can take up to 15 minutes to complete a full scan, which renders them inappropriate for immersive image capture in scenes where there is motion.

Traditionally, our most direct competition in the immersive still photography market has been with single-row panorama stitching solutions. An important feature of these software stitchers is that in order to capture a full panorama, depending on the field-of-view of the camera lens, anywhere from 12 to 24 images may be needed in order to capture a 360-degree panorama. The large number of images complicates the photography process substantially. More images means more files on the computer to track and more chances for something to go wrong in the capture phase. Single row panorama software products do not capture full spherical images. For those professional grade stitchers that do support spherical immersive still photography, the entire process steps up to an additional level of complication. A more complicated rig is required and the number of images needed increases to 36. Even with the complexities of capture, certain customers do value the higher-quality resolution possible by taking a single row panorama of 12 to 24 images and stitching them together. With the introduction of the IPIX Interactive Studio, we have announced strategic partnerships whereby IPIX will be offering this type of functionality integrated into our solution.

PRODUCTS

We believe we offer the broadest line of solutions in the immersive technology industry. These solutions include cameras kits, software tools, services, infrastructure and training to support immersive imaging. Camera systems include all of the components necessary to capture high quality immersive still photography or video. Versions are available for consumer or professional level photographers.

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Our products enable the creation of immersive or spherical photographic images or video through the use of a wide angle or fisheye lens. IPIX still photography or video content is either a 180 x 180 degree (hemispherical) view taken with a single shot, or a 360 x 180 degree view, taken by two back-to-back hemispherical shots. Our technology can also be used for more than two shots to create higher resolution final content.

Immersive Video Products

The video product portfolio consists of three product lines with various configurations within each product line. The product lines are: 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 achieve economies of scale in manufacturing.

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 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 and ceiling-mount.

We believe the uses and applications of the CommandView are virtually limitless. Unlike the cameras it replaces, CommandView provides complete and continuous situational awareness. The CommandView camera sees everything at the same time and monitors everything in its field of view with no blind spots.

CommandView360

CommandView360 utilizes two camera sub-assemblies, mounted back-to-back, and one fisheye lens on each camera to provide full 360-degree coverage of the area of concern. Full 360-degree coverage means the camera 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 easy and efficient and allows the operator to get on target quickly 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.

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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.

InSight

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:

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. We believe 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.

XProtect Security Management Software

High-end users of security products need to efficiently manage, store and retrieve their image streams. To meet this need, we have a strategic relationship with Milestone Systems A/S, a security management software company located in Denmark. 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.

Immersive Still Photography Products

IPIX Camera Systems Featuring Interactive Studio

We sell complete immersive still photography solutions which include fisheye enabled camera systems and IPIX software, including either the IPIX Interactive Studio, the IPIX® GPS Mapping System or IPIX GRIDs System. We also serve the real estate market with a special IPIX Real Estate Wizard and an online virtual tour hosting service Host@IPIX. 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. By integrating the end-to-end process, including production workflow

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and image editing and output options, our platform enhances the workflow efficiency for providing high quality results.

The IPIX Interactive Studio™ (“Interactive Studio”) is our strategic platform for creating a de facto standard for the creation of immersive photography. The technology underlying the IPIX Interactive Studio is a multi-tiered software platform called the Image Creator Platform (“ICP”).

ICP is the core of our still photography products. The ICP is an open architecture that we can use to create end user products ourselves, or OEM license to strategic partners who want to leverage the functionality of the platform in their own vertical market solutions. The system is compatible with both Windows and Macintosh platforms and is flexible enough to integrate a wide range of traditional media types such as flat images and panoramas into a single workflow. We and our OEM licensees can provide value-added features through a plug-in architecture that maintains a consistent workflow for the end user.

Because Interactive Studio ™ is based on a plug-in architecture, updates and enhancements can be added easily. During 2004 we added support for:

IPIX GPS Mapping System

IPIX MARKETING AND SALES

The IPIX marketing organization plays two key roles. First, it serves as the messenger of the market by capturing requirements from our target market segments and, using a structured methodology, formalizing the requirements into market driven product roadmaps. The second role that marketing plays is that of communicator to the market. Through advertising, public relations, tradeshow events, and clearly defined value propositions, our marketing programs are generating sales leads and a greater awareness of our state-of-the-art immersive technology products in the marketplace.

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To support the growth of our indirect sales channels, marketing provides our partners with co-marketing opportunities, customized collateral materials and a comprehensive web-based partner portal that houses the latest product information and sales tools.

We currently have sales people located in several states across the United States as well as in Europe. We extend our reach into the market through our channel partners. In the commercial markets, we are continuing to grow our network of manufacturer’s representatives (MRs). Our MRs and resellers are experts in providing solutions to a variety of commercial customers. We believe this sales channel will help us penetrate the banking, retail, healthcare, transportation, higher-education, and commercial building markets. We are also licensing our technology to leading digital video recorder, network video recorder and original equipment manufacturers, including ipConfigure, JDS Digital Security Systems, SecurteX™ Digital, ONSSI, D3Data, and Silicor Technologies.

Indirect Sales Channel Partners

We are partnering with established system integrators and resellers to help penetrate the government security 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.

Strategic Direct Sales

In addition to our indirect sales channels, we employ a team of sales professionals focused on new business development and strategic direct sales across our target markets. We are also pursuing 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 unmanned vehicles for the military and intelligent software for object classification and tracking.

Internet and Tele-Email Direct Sales

IPIX still photography products are sold worldwide through a direct sales model. We use a telesales team located in Oak Ridge, Tennessee to handle US and international sales inquiries. We manage an on-line electronic commerce site for execution of sales transactions. The still products are marketed on-line using various keyword sponsored Internet advertising and direct email marketing techniques. 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.

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. Finally, we have a non-exclusive and royalty-free license under numerous U.S. and foreign patents from Sarnoff Corporation and from Motorola, Inc related to immersive imaging technologies and techniques. 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.

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

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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, 2005, we employed 61 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 (www.sec.gov).

Item 2. Properties.

We lease approximately 20,000 square feet of space in Oak Ridge, Tennessee for engineering, R&D, operations and manufacturing and approximately 3,500 square feet of space in Vienna, Virginia for our sales and marketing and our corporate office. We are in the process of exiting approximately 25,500 square feet of office space in San Ramon, California for which approximately 3,500 square feet has been sub-let. 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 June 15, 2003, we filed an action against Ford Oxaal and his company, Minds-Eye-View, in the United States District Court for the Eastern District of Tennessee. In the complaint, we asserted claims for patent infringement, false designation of origin, false description or representation, unfair or deceptive acts and tortious interference in connection with Oxaal’s competing software product marketed under the name “Click Away.” On August 8, 2003, Oxaal filed its answer asserting counterclaims for non-infringement, invalidity, unenforceability, breach of contract, patent misuse, Lanham Act violations and tortious interference. We denied all of Oxaal’s allegations. The case has been stayed pending settlement negotiations, which have since terminated. In response, we have filed a motion to vacate the stay so that our lawsuit can proceed in due course.

On March 4, 2005, Grandeye Ltd. filed a complaint in the United States District Court for the Eastern District of Virginia against us alleging that Grandeye is not infringing our patents, that our patents are invalid and are not owned

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by us and that we engaged in false advertising, unfair competition, tortious interference and antitrust violations. We have filed a motion to move the case to the United States District Court for the Eastern District of Tennessee.

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

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

Item 4. Submission of Matters to Vote of Security Holders

No matters were submitted to a vote of the Company’s stockholders during the fourth quarter of fiscal year 2004.

Item 4A. Executive Officers of Registrant

The following sets forth information with respect to our executive officers as of March 1, 2005:

CLARA M. CONTI has been a director and our president and chief executive officer since September 2004. Prior to joining us, Ms. Conti was President and Chief Executive Officer of ObjectVideo from 2001 to January 2004. ObjectVideo, Inc. is a video security business headquartered in Reston, Virginia. From 2000 to 2001, Ms. Conti was Vice President of eBusiness Solutions for DynCorp, an information technology and outsourcing company headquartered in Reston, Virginia. Prior to joining DynCorp, Ms. Conti was President and Chief Executive Officer of Aurora Enterprise Solutions, a business-to-business internet security products and services firm headquartered in Reston, Virginia. Ms. Conti is a graduate of the University of South Alabama.

KARA H. BRAND has been the chief financial officer, secretary and treasurer of IPIX since January 2005. Ms. Brand joined us in April 2000 as our controller. Prior to joining us, she was the Controller at PictureWorks Technology, Inc. from May 1999 until April 2000. Ms. Brand also held Controller and management accounting positions at LeapFrog Toys, Premenos, Hotel Information Systems and Integral Systems. Ms. Brand has a bachelor’s of science degree in accounting from California State University and a master’s degree in business administration from Golden Gate University.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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Our common stock is traded on the Nasdaq SmallCap Market (symbol: IPIX). As of March 1, 2005, there were 925 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. We have not declared cash dividends during the past two years.

The table below sets forth information relating to our shareholder approved compensation plans as of the end of 2004:

Item 6. Selected Financial Data

Selected Historical Financial Information

The statement of operations data presented below for the years ended December 31, 2002, 2003 and 2004 and the balance sheet data as of December 31, 2003 and 2004 have been derived from our audited consolidated financial statements that are included

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elsewhere in this report. The statement of operations data for the years ended December 31, 2000 and 2001 and the balance sheet data as of December 31, 2000, 2001 and 2002 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.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

Our Business

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

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

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

Products

CommandView - Multi-mega-pixel network cameras, with fisheye lens, patented Full-360 degree viewing technology and camera management software to provide a unique award-winning ‘see everything’ video surveillance and security camera system that can see in all directions, simultaneously with no moving parts and no blind spots.

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

Target Markets

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Business Models

Business Trends and Conditions

On March 31, 2004, we launched a new family of Full-360 degree real-time video camera systems. Shipment of these products to distributors began in late June 2004. These new camera systems are expected to generate revenues from their sale primarily to distributors. During the third quarter of 2004, we received an order for the purchase of $3 million of CommandView video surveillance cameras from our UK distributor. We shipped $0.5 million of cameras from this order in the third quarter of 2004 and $0.4 million of cameras from this order in the fourth quarter of 2004. We expect that the remaining cameras from this order will ship over the first six months in 2005. We continue to develop additional products and features for the security and surveillance market.

Our full-360 degree technology used by the immersive still photography products primarily generates revenues in two ways: licenses of software and the sale of camera equipment. In the past, we utilized “keys” to license our technology to capture and save a single immersive image. With the launch of the IPIX Interactive Studio, we now offer time-based seat or user licenses which permit an unlimited number of immersive images to be captured and saved within a specific time period, usually a year. We sell our immersive products and services primarily into the real estate, travel and hospitality and visual documentation markets. The cost of sales for our licenses is low in proportion to the related revenue. The cost of sales for the sale of camera equipment has generally been 50% to 75% of related revenues.

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

Our immersive still photography products business unit will now market and sell our virtual tour photography solution, the IPIX Interactive Studio, directly to the U.S. real estate market and Homestore will expand its hometour360 program to support in addition to us, a wider range of imaging technologies. As a result, we believe that real estate agents and photographers will benefit from a broader choice of panoramic imaging solutions and enhanced marketing capabilities. The companies will continue to work together to grow the adoption of virtual tours in the U.S. real estate industry. We also provide professional services to customers that request specific customizations or integrations of our products and services. Providing professional services is labor intensive and our cost of sales for professional service tends to be 40% to 60% of revenues.

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iPIX INTERNATIONAL

In the third quarter of 2002, we entered into license, distribution and trademark agreements with Soroof International, a Saudi Arabia-based corporation (“Soroof”). Under the agreements, Soroof became the exclusive distributor for IPIX InfoMedia products outside of North America and Asia through Soroof’s newly established entity, iPIX International (iPIX-I). Under the terms of the agreements, we received a minority equity interest in iPIX-I. During the six months ended December 31, 2002, we recognized $0.6 million of revenue under these agreements. During the year ended December 31, 2003, we recognized $0.4 million of revenue under these agreements. On March 21, 2004, the parties mutually terminated these agreements, and we returned our minority equity interest in iPIX-I. During the year ended December 31, 2004, prior to termination of agreements, we recognized $0.02 million of revenue under these agreements. The termination of the agreements did not have a material impact on our financial condition or expected result of operations.

MANAGEMENT CHANGE

On January 21, 2005, Paul Farmer resigned as the Chief Financial Officer, Executive Vice President, Secretary and Treasurer of, and as an employee of, IPIX Corporation. We entered into a separation agreement with Mr. Farmer, which was filed on January 25, 2005 with the Securities and Exchange Commission as Exhibit 99.1 to a Form 8-K. Under this agreement, we will pay Mr. Farmer a severance payment of $0.1 million, which will be paid in six monthly installments. Any stock options granted to Mr. Farmer will continue to vest through July 25, 2005, and such options must be exercised before October 25, 2005, at which time they expire. The Employment Agreement was terminated effective January 21, 2005, except that certain obligations concerning confidentiality, non-solicitation and non-disparagement will survive termination. Kara Brand, the Company’s Controller, serves as the interim Chief Financial Officer, Treasurer and Secretary of the Company.

CRITICAL ACCOUNTING POLICIES

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

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: revenue recognition; valuation allowances, specifically the allowance for doubtful accounts and inventory reserves; valuation of goodwill and other long-lived assets; and significant accruals. We believe that full consideration has been given to all relevant circumstances that we may be subject to, and our financial statements accurately reflect management’s best estimate of the results of operations, financial position and cash flows for the periods presented.

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

Revenue Recognition

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

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

Transaction hosting revenue is recognized ratably as transactions are performed provided there was persuasive evidence of an arrangement, the fee was fixed or determinable and collection of the resulting receivable was reasonably assured. Revenue generated from professional services is recognized as the related services are performed.

When such professional services are combined with on-going transaction services or are deemed to be essential to the functionality of the delivered software product, revenue from the entire arrangement is recognized while the transaction services are performed, on a percentage of completion method or not until the contract is completed in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” and ARB No. 45, “Long-Term Construction-Type Contracts.” Reimbursements received for out-of-pocket expenses incurred are characterized as revenue in the statement of operations.

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

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

Payments received in advance are initially recorded as deferred revenue and recognized ratably as obligations are fulfilled.

Allowances for Doubtful Accounts

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

Reserve for Inventory Obsolescence

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

Goodwill

We evaluated goodwill for impairment on an annual basis and on an interim basis if events or changes in circumstances between annual impairment tests indicate that the asset might be impaired. In assessing the recoverability of our goodwill, we made assumptions regarding estimated future cash flows and other factors to determine the fair value of the goodwill. These estimates included forecasted revenues and operating expenses, which are inherently difficult to predict. We believe that the accounting estimate related to goodwill is a “critical accounting estimate” because it requires Company management to make assumptions about fair values. During the fourth quarter of 2003, certain events, including the end of the agreement with eBay, led the Company to perform an impairment review of goodwill. The eBay agreement ended in November 2003 and was the primary source of cash flows for the technology associated with goodwill in the AdMission business unit. This review indicated that goodwill was being carried at amounts in excess of the fair value based on estimated discounted future cash flows of the AdMission business unit. As a result, an impairment charge was recorded to expense in the year ended December 31, 2003.

Significant Accruals, including Restructuring Charges and Sales Tax

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

RESTRUCTURING ACTIONS

We executed several restructuring actions throughout 2002, 2003 and 2004. These actions and the charges relating to them are described below.

In September 2002, $0.69 million of restructuring charges were recorded related to expenses associated primarily with a negotiated buy-out of certain lease obligations for previously vacated offices. We paid approximately $1.25 million during the fourth quarter of 2002 to end our continuing obligations under certain of those leases related to our Canadian operations.

During the fourth quarter in 2003 and 2004, $0.1 million and $0.2 million, respectively, of restructuring charges were recorded related to expenses associated with the lease obligations from previously vacated office space in San Ramon, CA.

We anticipate to incur costs of approximately $3.0 million in connection with the sale of the AdMission business unit and the closing of its San Ramon office. These costs include approximately $1.2 million in lease termination costs, $0.5 million in asset disposal cost, $0.5 million in severance expenses and $0.8 million associated with accelerated vesting of options held by transferred employees.

The activity in the current and long-term restructuring accruals for the years ended December 31, were as follows:

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OUTLOOK

We have only a limited operating history, and our business model has been modified substantially over the past three years. Our prospects should be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets. To address these risks, we must, among other things, be able to continue to:

Although our revenue grew significantly following our formation, during recent periods, we have been unable to sustain this growth and have had to reduce our expense structure. In addition, our product mix and business units have changed over the past few years. In early 2005, we sold our AdMission business unit to AdMission Corporation. Therefore, you should not consider our historical growth indicative of future revenue levels or operating results. In order to reduce our operating costs to a sustainable level given current revenues, we have gone through several restructurings during the last three years. We begin 2005 focusing our core business on our immersive still and video imaging product lines.

In addition, we are subject to generally prevailing economic conditions and, as such, our success in 2005 will be dependent upon our ability to provide quality products and services, the success of our customers and the appropriations processes of various commercial and governmental entities. We expect to continue to make significant investments in the development, sale and marketing of new products for the security market, which may consume our cash reserves. We are monitoring our cash position carefully and evaluating our future operating cash requirements in the context of our strategy, business objectives and expected business performance. Our focus in 2005 will be to manage cash requirements and focus our operations on efficient spending.

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The following table presents for the periods indicated, the percent relationship to total revenues of select items of our statement of operations:

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RESULTS OF OPERATIONS FOR 2004, 2003 AND 2002

Revenues

Product Revenues

Cost of Revenues

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Operating Expenses

Sales and Marketing. Sales and marketing expenses consist primarily of salaries for marketing, sales and business development personnel. Sales and marketing expenses also include commissions and related benefits for sales personnel and consultants, traditional advertising and promotional expenses. Sales and marketing expenses increased to $4.3 million in 2004 as compared to $3.6 million in 2003 as we continued to build our sales department to support our immersive video products offset by a decrease in our corporate marketing expenses. As a percentage of total revenues, sales and marketing expenses decreased in 2004 to 111% from 140% in 2003 primarily as a result of our increase in revenue. Our sales and marketing expenses remained at essentially the same level for 2003 as compared to 2002. In 2005, we expect our sales and marketing expenses to increase from 2004 levels as we expand our Immersive video and still sales and marketing teams.

Research and Development. Research and development expenses consist primarily of personnel costs related to building and enhancing our digital media infrastructure and immersive imaging technology. As we focused on our immersive imaging technologies in 2004, our spending on research and development increase to $2.1 million in 2004 as compared to $1.7 million in 2003, which was primarily a result of increasing research and development for our new family of Full-360 degree security cameras. As a percentage of revenue, research and development charges decreased to 53% for 2004 from 65% in 2003. As a result of focusing our efforts on developing our security products, our research and development efforts increased by $0.5 million in 2003 over 2002 spending levels. In 2005, we expect our annualized research and development expenses will increase from 2004 spending levels as we increase our focus on the development of new products for our Immersive product lines.

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General and Administrative. General and administrative expenses consist primarily of salaries and related benefits for administrative and executive staff, fees for outside professional services, bad debt expenses and other costs associated with being a public company. The increase in 2004 as compared to 2003 was primarily due to a $1.0 million increase in additional consulting fees to comply with new legislation requiring additional documentation of internal control over financial reporting, and corporate systems enhancements, a $0.1 million increase in our insurance premiums and a $0.1 million decrease in our personnel expenses, which include employee benefits and facilities. Expected general and administrative spending in 2005 should increase slightly when compared to 2004 levels.

Restructuring and Impairment. Restructuring and impairment charges in 2002, 2003 and 2004 are charges related primarily to changed estimates for outstanding lease obligations. See Note 5 in the accompanying financial statements for a more detailed explanation.

Other Income (Expense)

Interest Expense. Interest expense relates to capital lease obligations for our equipment and maintenance.

Interest Income. Interest income consists primarily of interest earned on cash and investments and in 2002 interest earned of $0.3 million on the patent infringement award. Higher interest income earned in 2004 when compared to 2003 was the result of increased investment balances.

Loss on Foreign Currency. Loss on foreign currency in 2003 is due to the recognition of cumulative currency translations from dissolved foreign subsidiaries.

Patent Infringement Award. The patent infringement award in 2002 is due to the collection of a previously awarded court judgment for which all legal remedies for appeal have been exhausted and the case was closed.

Discontinued Operations. On February 11, 2005, we and AdMission Corporation, a privately held Delaware corporation (“AdMission”) closed the transactions under the asset purchase agreement dated January 11, 2005 between the parties (the “Asset Purchase Agreement”). Pursuant to the terms of the Asset Purchase Agreement, IPIX sold to AdMission certain of its assets (including certain patent rights and other intellectual property) and contracts relating to its IPIX AdMission business unit (the “AdMission Business”). In consideration for the sale, IPIX received 1,035,000 shares of the Series A Convertible Preferred Stock of AdMission and a warrant to purchase 200,000 shares of the Common Stock of AdMission. Additionally, AdMission assumed certain liabilities associated with the AdMission

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business unit. In accordance with FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the assets and liabilities related to the AdMission business were classified as held for sale at December 31, 2004, and the operations of this business unit were considered discontinued operations. The operating results of AdMission for 2002 and 2003 were also reclassified to discontinued operations. The sale of assets and liabilities to AdMission consists of fixed assets, prepaid items, deferred revenue and accrued vacation.

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

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

The table below shows net operating revenues, operating expenses and income (loss) reported in discontinued operations for the years ended December 31, 2002, 2003 and 2004 are as follows:

The increase in revenues in 2003 was primarily due to a one-time $8.0 million license fee from eBay for our Rimfire technology and other services. As announced in June 2003, we amended our then current commercial agreement with eBay, which was subsequently extended by eBay to October 31, 2003 for a final $0.45 million additional fee. As of November 1, 2003, we no longer provided any services or products to eBay.

LIQUIDITY AND CAPITAL RESOURCES

The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities and other commitments in the normal course of business. The report of our independent registered public accounting firm contains an explanatory paragraph stating that significant matters exist concerning us that raises substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary if we are unable to continue as a going concern.

Since inception, we have financed our operations through our registered public offerings, the private placements of capital stock, a convertible debenture, a convertible promissory note, capital lease obligations and warrant and option exercises. We finished 2004 with approximately $14.9 million in cash reserves (cash and cash equivalents of $12.8 million, short-term restricted investments of $0.6 million, long-term restricted cash of $0.6 million and short-term investments of $0.9 million).

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Summary Consolidated Cash Flow Data

Net cash provided by (used in) operating activities was $9.0 million for year ended December 31, 2003 and $(15.2) million for the year ended December 31, 2004. Net cash used by operating activities in 2004 was primarily the result of net loss of $14.7 million and investment in our inventory of $2.1 million offset by $1.0 million of non-cash depreciation charged during the year.

Net cash used in investment activities was $0.9 million for the year ended December 31, 2003 and $0.4 million for the year ended December 31, 2004. The decrease was the result of lower purchases of computer software and hardware ($0.5 million).

Net cash provided by (used in) financing activities was $(0.8) million for the year ended December 31, 2003 and $18.1 million for the year ended December 31, 2004. Net cash provided by financing activities in 2004 was primarily related to $4.9 million of net proceeds from the private placement of common stock in April 2004, $5.4 million of proceeds from the exercise of additional investment rights issued in connection with the April 2004 private placement, $5.3 million of proceeds from the exercise of stock options, $3.0 million of proceeds from the exercise of Series B Preferred warrants, $0.4 million of proceeds from the sale of common stock to employees under our ESPP, net of $0.4 million of payments made on capital lease obligations and $0.5 million in dividends paid relating to the conversion of Series B Preferred Stock.

Contractual Obligations

The table below shows our contractual obligations as of December 31, 2004:

On February 3, 2005, we entered into a lease agreement with Oak Ridge Technical Center Partners - One, L.P.. The Lease is for a period of five years beginning May 1, 2005. The base rent is approximately $0.313 million per year and will increase by approximately $0.005 million each year beginning in 2006. In addition to the base rent, we are required to pay certain taxes and a pro rata share of operating expenses. We are also responsible for the costs of certain tenant improvements associated with the new facility, but will be entitled to reimbursement for certain costs from the Landlord. The Lease also provides for three 36 month renewal options at 95% of the then prevailing fair market rents.

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With the sale of the AdMission business unit, the liability resulting from the Qwest co-location agreement was assigned, including all of our interest in the agreement, to AdMission Corporation.

We are monitoring our cash position carefully and evaluating our future operating cash requirements in the context of our strategy, business objectives and expected business performance. We finished 2004 with approximately $14.9 million in cash reserves (cash and cash equivalents of $12.8 million, short-term restricted investments of $0.6 million, long-term restricted cash of $0.6 million and short-term investments of $0.9 million). At December 31, 2004, $0.1 million future lease payments have been prepaid and reflected in our assets held for sale for discontinued operations. Additionally, at December 31, 2004, the $0.6 million long-term restricted cash has been restricted related to certain lease obligations related to the discontinued operations and will be relieved in the first quarter of 2005.

In 2005, we plan to launch new products in our immersive video and still product lines. Depending upon the success of each of our these products, the timeliness of collection of our accounts receivable and other potential working capital needs, as well as the timing and rate of revenue growth and our ability to control costs, we may require additional equity or debt financing to meet future working capital or capital expenditure needs. There can be no assurance that such additional financing will be available or if available, that such financing can be obtained on terms satisfactory to us. If we are not able to raise additional funds, we may be required to significantly curtail some of our operations and this would have an adverse effect on our financial position, results of operations and cash flow.

Management’s focus in 2005 will be to manage our cash requirements and focus our operations on efficient spending. Our long-term strategy remains unchanged. We will continue to make significant investments in sales and marketing as well as research and development for all segments in order to fulfill our expectations in the development of new immersive products and services.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123-R, “Share-Based Payment” to replace SFAS No. 123, “Accounting for Stock-Based Compensation” and APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS123-R requires, among other things, that all share-based payments to employees, including grants of stock options, be measured based on their grant-date fair value and recognized as expense in the financial statements effective for interim or annual periods beginning after June 15, 2005. Unless observable market prices exist, the grant-date fair value is estimated using an appropriate option-pricing model as determined by management. Management must also make certain assumptions about employee option exercise habits, forfeiture rates and select an appropriate amortization methodology for recognizing compensation expense. The Statement requires a modified prospective method of adoption. Under this method, compensation expense will be recorded in the financial statements for 1) all awards granted after July 1, 2005 and the 2) future vesting of awards outstanding as of July 1, 2005. Companies may also elect to restate their previously issued financial statements to provide consistency across all periods presented under a modified retrospective method. Management believes the adoption of SFAS 123-R will have a material impact on the Company’s consolidated results of operations and earnings per share but has not yet determined the method of adoption that will be applied or whether adoption will result in expense amounts materially different from those currently provided under the pro forma disclosures (See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K).

INFLATION

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

As of December 31, 2004, we had $14.9 million of cash reserves. Our interest income is sensitive to changes in the general level of United States interest rates, particularly since the majority of our investments are in short-term

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instruments. Due to the nature of our short-term investments, we concluded that we do not have material market risk exposure.

Item 8. Financial Statements and Supplementary Data.

The consolidated financial statements and financial statement schedule of the Company, together with the reports thereon of Armanino McKenna LLP and PricewaterhouseCoopers LLP, independent registered public accounting firms, are set forth on the pages indicated in Item 15 (a) of this Annual Report on Form 10-K.

This Form 10-K contains certain forward-looking statements regarding, among other things, the anticipated financial and operating results of the Company. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to publicly release any modifications or revisions to these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, us. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different form any future results, performance or achievements expressed or implied by such forward-looking statements.

RISK FACTORS

Our limited operating history and recent changes in our customer base makes it difficult to evaluate our business

In early 2004, we launched several new products for video surveillance and immersive photography. Additionally, in February 2005, we sold our AdMission business unit. As a result, we have a limited operating history of the Company as it will operate in 2005 and upon which you can base an evaluation of our business and prospects. Our prospects must be considered in the light of the risks, uncertainties, expenses and difficulties frequently encountered by companies that have undertaken a substantial business restructuring. To address these risks and uncertainties, we must, among other things:

We may not be successful in accomplishing these objectives.

We have a history of losses, and we expect to continue to incur losses and may not achieve or maintain profitability.

The extent of our future losses and the timing of profitability are highly uncertain, and we may never achieve profitable operations. As of December 31, 2004, we had a total accumulated deficit of approximately $518 million. Historically, our net sales have varied significantly. We will need to generate additional revenue to achieve profitability in the future. If we are unable to achieve profitability or to maintain profitability if achieved, it may have a material adverse effect on our business and stock price and we may be unable to continue operations at the current levels, if at all. We cannot provide any assurances that we will generate additional revenues or achieve profitability.

Additional capital or strategic alternatives may be required for us to continue our operations and as a result, our independent registered public accounting firm’s report includes an explanatory paragraph that states that significant matters exist, including the change in the relationship with our largest customer, that raise substantial doubt about our ability to continue as a going concern

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If we are not successful in increasing our revenues or cutting costs, we may be required to reduce operations further or seek additional private equity financing or financing from other sources, or consider other strategic alternatives, including a possible merger, sale of assets or other business combination or restructuring transactions. There can be no assurances that additional financing or strategic alternatives will be obtainable on terms acceptable to us or that any additional financing would not be substantially dilutive to existing stockholders. The holders of our Series B preferred stock have rights that are senior to those of the holders of our common stock in the event of the sale of our Company or in the event of our liquidation, dissolution or winding up. We have included a “going concern” footnote in our audited financial statements for fiscal 2004. See Financial Statements – Note 3.

Our operating results are highly dependent on the development of new products and technologies, and marketing them in order to generate revenue from new markets

Our results are subject to risks related to our significant investment in developing and introducing new products and services. These risks include: (i) difficulties and delays in the development, production, testing and marketing of products and services; (ii) customer acceptance; (iii) the development of industry standards; (iv) the significant amount of resources we must devote to the development of new technology; and (v) the ability to differentiate our products or services and compete with other companies in the same markets.

We may not be able to develop and market new products and technologies and generate revenues. This could have a material adverse effect on our financial results.

Our operating results are highly dependent on obtaining adequate supplies of the components of our products

Our ability to meet customer demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers and internal manufacturing capacity. Although we work closely with our suppliers to avoid these types of shortages, there can be no assurances that we will not encounter these problems in the future. A reduction or interruption in supplies or a significant increase in the price of one or more supplies could have a material adverse effect on our revenues and operating results.

Failure to manage expenses would prevent us from achieving profitability

We may have to increase our operating expenses in order to increase our customer base, enhance our brand image and support our growing infrastructure. In order for us to become profitable, we must increase our revenues and gross profit margins sufficiently to cover current and future operating expenses. If we fail to do so, we may never achieve sustained profitability.

In response to the loss of revenues from our largest customer in the fourth quarter of 2003 and challenging market conditions, we initiated certain cost-reduction programs. In late 2003, we reduced the number of employees in the business unit that previously supported our largest customer. In February of 2005, we sold this business unit to AdMission Corporation as previously disclosed. We continue to streamline our cost structure but recognize the need to increase some sales and marketing costs that directly benefit the sale of security products. As a result, we hope to lower our future break-even revenue level. In order to be successful, however, we must replace this lost revenue. If we fail to do so, we may be required to implement further cost reductions that could adversely affect our business.

Since the first half of 2000, we have been reducing costs and simplifying our product portfolios in all of our businesses. We discontinued product lines, exited businesses, consolidated operations and reduced our employee population. The impact of these cost-reduction efforts on our revenues and profitability may influence our ability to successfully complete these ongoing efforts; our ability to generate the level of cost savings we expect or that are necessary to enable us to effectively compete; the risk that we may not be able to retain key employees; our manufacturing capabilities; and the performance of other parties under outsourcing arrangements.

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An important cost-reduction action is to outsource most of our network operations. While we have business and risk management plans in place in case delivery, quality or capacity is significantly reduced or eliminated by a co-location facility, our current size does not allow us to have numerous alternative vendors; and, accordingly, our operations could be disrupted for extended periods of time. As a result, we could have difficulties performing our services and our revenues and operating result could be negatively impacted.

Another cost-reduction action has been to develop outsourcing arrangements for the design and/or manufacture of certain products and components. If these third parties fail to deliver quality products and components on time and at reasonable prices, we could have difficulties fulfilling our orders and our revenues and operating results could be negatively impacted.

Our quarterly results may fluctuate, which could make financial forecasting difficult and increase volatility in our common stock

Our revenues and operating results may vary significantly from quarter-to-quarter. As a result, quarter-to-quarter comparisons of our revenues and operating results may not be meaningful. In addition, due to our limited operating history and restructuring, it may be difficult to predict our future revenues and results of operations accurately. It is likely that, in one or more future quarters, our operating results will fall below the expectations of investors. If this happens, the trading price of our common stock is likely to be materially and adversely affected.

We are dependent on a few products

We anticipate that most of our revenue growth in the future, if any, will come from our visual intelligence technologies within both the commercial and government market segments. We may not be able to successfully increase sales of our current product offering. Additionally, our efforts to market new products and enhancements to our existing products may not be successful. If we are unable to continue to develop our products or if we are not successful in marketing and selling our new products, our financial condition could be materially and adversely affected.

Our success depends on our ability to protect our intellectual property

We rely on trademark, copyright and patent law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. If we are not successful in protecting our intellectual property, there could be a material adverse effect on our business.

While we believe that our issued patents and pending patent applications help to protect our business, there can be no assurance that:

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 have been involved in litigation in

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which our rights to technology have been challenged. The cost of such litigation, or the determination against us in this type of lawsuit, could have a material adverse effect on our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm’s audit of that assessment has required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources. Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

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, engineering, technical and other personnel. In addition, we must recruit additional qualified management, engineering, technical and marketing and sales and support personnel for our operations. Competition for this type of personnel is intense, and we may not be successful in attracting or retaining personnel. We do not maintain key person life insurance for any of our personnel. 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 do so, 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 business into international markets

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

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

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

We are susceptible to breaches of on-line 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.

Conversion of Series B Preferred Stock into Common Stock and the payment of accrued dividends associated with such Preferred Stock could adversely affect stockholders

The holders of our Series B preferred stock may at their election convert each share of preferred stock into approximately 9.2 shares of our registered common stock. Accrued dividends on the preferred stock become due and payable upon such conversions. The holder of the preferred stock may elect to receive the dividends in additional common stock or cash. As a result, these conversions could require us to use available funds to finance dividends or dilute existing shareholders by introducing new common stock into the market. As a result, our financial condition or the market price of our common stock could be adversely affected.

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 stockholder 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 affect our stock price.

Because many of our product and service offerings are intended to enhance Internet commercial transactions, the success of our business will be dependent upon continued growth of Internet commerce

Many of our products and services are intended to enhance and facilitate commercial transactions over the Internet. Our future revenues are substantially dependent upon the widespread acceptance and use of the Internet and other on-line services as a medium for commerce by consumers and sellers. If continued acceptance and growth of Internet use does not occur, it could have a material adverse effect on our business.

The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and in the amount of traffic. Continued development and maintenance of the Internet’s infrastructure to handle this increased traffic must continue. In addition, timely development of complimentary products, such as high-speed modems, providing reliable Internet access and services will also be required.

The Internet has experienced a variety of outages and other delays as a result of computer viruses and other damages to portions of its infrastructure. Outages and delays and infections by computer viruses are likely to continue and affect

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the level of Internet usage generally. We will experience a reduction in revenues and increased expenses as a result of such outages and delays. We will be required to continually make capital investments to enhance our infrastructure and protect our services from computer viruses and other outages and delays on the Internet. The cost of such improvements could have a material adverse effect on our business.

Our market is highly competitive, and our business may suffer if we are unable to compete successfully

The market for our immersive products is rapidly evolving. The market for immersive products and services is also highly competitive. We compete with other providers of immersive imaging technology who develop and market products and services similar to ours. We expect additional competition from other emerging and established companies. There can be no assurance that the Company’s current and potential competitors will not develop products that are more effective than our current or future products, or that our products and technology will not be rendered obsolete by such developments. Some of our competitors have longer operating histories, greater name recognition and significantly greater financial, technical and marketing resources. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to promotion and sale of their products than us. Our business will suffer if we are unable to compete effectively.

Terrorist activities and resulting military and other actions could adversely affect our business

Terrorist attacks in recent years have disrupted commerce throughout the United States and other parts of the world. The continued threat of terrorism within the United States and abroad, and the continued military action and heightened security measures, may cost significant disruptions to global commerce. Such disruptions could result in a general decrease in corporate spending on information technology or our ability to effectively market and sell our products and services. Such events could have material adverse affect on our business.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule13a-14(c)) as of the end of the period covered by this annual report. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were not effective because management has identified certain control defeciencies at December 31, 2004, at least one of which represented a material weakness as discussed below.

(b) Internal Control over Financial Reporting. We are in the process of completing our evaluation and testing of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002 and Item 308(a) of Regulation S-K. In this Annual Report on Form 10-K, we have not published our annual report on internal control over financial reporting (Internal Control Report). We expect to complete our evaluation for the year ended December 31, 2004, and publish our Internal Control Report, prior to April 30, 2005.

Although our management was not able to complete its evaluation of our internal control over financial reporting as of December 31, 2004 in time for this filing, based on the criteria described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, management has identified a control deficiency which represents a material weakness.

The material weakness identified by management was inadequate resources and expertise in accounting necessary to complete an orderly and accurate year end close process as a result of the substantial reorganization of our business

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being effected at year-end and the resignation of Paul Farmer, our Chief Financial Officer on January 21, 2005. Although this deficiency resulted in certain errors in the 2004 period-end close process that were not detected by our financial and accounting staff, it did not result in any material misstatements of our financial statements as of year-end. However, the significance of a deficiency in internal control over financial reporting depends on the potential for a misstatement, not on whether a misstatement actually occurred. A material weakness is defined as a significant deficiency or combination of significant deficiencies, that results in “more than a remote likelihood” that a material misstatement of the annual or interim financial statements will not be prevented or detected. To address this material weakness, we expect to appoint a new Chief Financial Officer in April 2005 and will consider adding additional personnel and other resources to our financial and accounting staff.

Although we have already taken some action to remediate this material weakness, further action may be required to complete our remediation. Our management and Audit Committee will closely monitor the implementation of our remediation plan. The effectiveness of the steps we have taken to date and the steps we are still in the process of completing is subject to continued management review, as well as Audit Committee oversight, and we may make additional changes to our internal control over financial reporting as warranted. Although we have undertaken the initiatives described above, the existence of a material weakness is an indication that there is more than a remote likelihood that a material misstatement of our financial statements will not be prevented or detected. Further, as we continue to evaluate our internal control over financial reporting, additional material weaknesses may be determined to exist that could result in a material misstatement in our annual or interim financial statements not being prevented or detected in a timely manner.

Currently, we are not aware of any material weaknesses in our internal control over financial reporting other than as described above. However, we are continuing to evaluate and test our internal control over financial reporting. There can be no assurance that, as a result of our ongoing evaluation of our internal control over financial reporting, we will not identify additional material weaknesses, or that our evaluation and testing of internal control over financial reporting will be completed by the end of the 45-day extension period granted by the SEC for certain smaller public companies.

As a result of the identified material weakness, upon completion of our evaluation and testing of our internal control over financial reporting, we expect that our management will determine that our internal control over financial reporting, as of December 31, 2004, was not effective.

(c) Changes in Internal Controls. We are in the process of completing our evaluation and testing of internal controls over financial reporting. We have identified certain deficiencies relating to access controls and segregation of duties and are in the process of evaluating their significance to the financial reporting process. We have begun the process of standardizing and substantially increasing documentation of our internal controls and improving segregation of functions and this process continues subsequent to year-end.

Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information called for by this item is incorporated herein by reference to IPIX’s Proxy Statement for its Annual Meeting of Stockholders to be held on or about May 13, 2005, to be filed with the SEC pursuant to Regulations 14A under the Securities Exchange Act of 1934, as amended.

Item 11. Executive Compensation

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The information called for by this item is incorporated herein by reference to IPIX’s Proxy Statement for its Annual Meeting of Stockholders to be held on or about May 13, 2005, to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The information called for by this item is incorporated herein by reference to IPIX’s Proxy Statement for its Annual Meeting of Stockholders to be held on or about May 13, 2005, to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

Item 13. Certain Relationships and Related Transactions.

The information called for by this item is incorporated herein by reference to IPIX’s Proxy Statement for its Annual Meeting of Stockholders to be held on or about May 13, 2005, to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

PART IV

Item 14. Principal Accountant Fees and Services

The information called for by this item is incorporated herein by reference to IPIX’s Proxy Statement for its Annual Meeting of Stockholders to be held on or about May 13, 2005, to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

Item 15. Exhibits and Financial Statement Schedules.

     (a)

     (1) The following documents are filed as part of this Annual Report on Form 10-K:

     (2) Except as provided below, all schedules have been omitted because they are not required or because the required information is contained in the financial statements or notes thereto.

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Report of Independent Registered Public Accounting Firm
On Financial Statement Schedule

To the Board of Directors and Stockholders of
IPIX Corporation:

Our audits of the consolidated financial statements referred to in our report dated March 24, 2004, except as to Note 4, which is as of March 30, 2005 appearing in this Annual Report on Form 10-K also included an audit of the accompanying financial statement schedule, for the years ended December 31, 2003 and 2002. In our opinion, this financial statement schedule, for the years ended December 31, 2003 and 2002, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

San Jose, California
March 24, 2004, except as to Note 4, which is as of March 30, 2005

Report of Independent Registered Public Accounting Firm
On Financial Statement Schedule

To the Board of Directors and Stockholders of
IPIX Corporation

Our audit of the consolidated financial statements referred to in our report dated March 30, 2005 appearing in this Annual Report on Form 10-K also included an audit of the accompanying financial statement schedule for the year ended December 31, 2004. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ ARMANINO McKENNA LLP

San Ramon, California

March 30, 2005

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VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FISCAL YEARS 2002, 2003 AND 2004

(c) Exhibits.

The following exhibits are filed herewith or incorporated by reference:

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