<PAGE>   1
      As filed with the Securities and Exchange Commission on May 22, 1998
                                                      Registration No. 333-_____
================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549
                             -----------------------
                                    FORM S-1

             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                              IVI PUBLISHING, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                 <C>                            <C>       
               MINNESOTA                                        7372                          41-1686038
(State of incorporation or organization)            Primary Standard Industrial    (IRS Employer Identification No.)
                                                    Classification Code Number
</TABLE>

                          808 HOWELL STREET, SUITE 400
                            SEATTLE, WASHINGTON 98101
                                 (206) 583-0100
--------------------------------------------------------------------------------
        (Address, including zip code, and telephone number including area
               code, of registrant's principal executive office)

                   ROBERT N. GOODMAN, CHIEF EXECUTIVE OFFICER
--------------------------------------------------------------------------------
                          808 HOWELL STREET, SUITE 400
                            SEATTLE, WASHINGTON 98101
                                 (206) 583-0100
--------------------------------------------------------------------------------
       (Name, address, including zip code, and telephone number, including
                        area code, of agent for service)
                    ----------------------------------------

                        Copies of all communications to:
                                 C. Kent Carlson
                            Christopher H. Cunningham
                            Preston Gates & Ellis LLP
                           701 Fifth Avenue Suite 5000
                         Seattle, Washington 98104-7078
                                 (206) 623-7580

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AT SUCH TIME OR
TIMES AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AS THE SELLING
SHAREHOLDERS SHALL DETERMINE.

        If any of the Securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [X]

        If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

        If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

        If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]


<PAGE>   2
        If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]

                         CALCULATION OF REGISTRATION FEE


<TABLE>
<CAPTION>
    TITLE OF EACH CLASS OF             AMOUNT TO BE             PROPOSED MAXIMUM              PROPOSED MAXIMUM          AMOUNT OF
    SECURITIES REGISTERED               REGISTERED         OFFERING PRICE PER SHARE(1)   AGGREGATE OFFERING PRICE   REGISTRATION FEE
    ---------------------              ------------        ---------------------------   ------------------------   ----------------
<S>                                 <C>                    <C>                           <C>                        
Common Stock, $0.01 par value       2,150,000 shares(2)         $7.40625                      $15,923,437.50            $4,697.41
</TABLE>


(1)     Estimated solely for the purpose of calculating the registration fee
        pursuant to Rule 457(c).

(2)     Pursuant to Rule 416 under the Securities Act of 1933, there are also
        being registered such indeterminate number of additional shares of
        Common Stock as may be issuable upon (i) conversion of the Series B
        Convertible Preferred Stock described herein and payment of dividends
        thereon in additional shares of Preferred Stock pursuant to the
        provisions of such Preferred Stock and (ii) upon exercise of the
        Warrants described herein.

        THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.


                                       ii
<PAGE>   3
                                   PROSPECTUS

                              IVI PUBLISHING, INC.

                        2,150,000 Shares of Common Stock

        The shares offered hereby (the "Shares") consist of shares of common
stock, $.01 par value ("Common Stock"), of IVI Publishing, Inc., a Minnesota
corporation (the "Company"), that may be offered and sold from time to time by
the shareholders described herein under "Selling Shareholders" (the "Selling
Shareholders") or by pledgees, donees, transferees, or other successors in
interest that receive such shares as a gift, distribution, or other non-sale
related transfer. The Company will not receive any of the proceeds from the sale
of the Shares by the Selling Shareholders. The Company has agreed to bear all
expenses in connection with the registration of the Shares being offered by the
Selling Shareholders. The Company has agreed to indemnify the Selling
Shareholders against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").

        The Shares may be sold from time to time in transactions on the NASDAQ
Small Cap Market ("Nasdaq SmallCap") at the market prices then prevailing, in
privately negotiated transactions or otherwise. In connection with any sales,
the Selling Shareholders and any brokers and dealers participating in such sales
may be deemed to be "underwriters" within the meaning of the Securities Act. See
"Plan of Distribution."

        On April 10, 1998, the Company sold 5,000 shares of its Series B
Convertible Preferred Stock, $.01 par value (the "Preferred Stock"), and
warrants to purchase 66,778 shares of Common Stock (the "Warrants") to the
Selling Shareholders in a private transaction. The Shares being offered hereby
by the Selling Shareholders may be acquired, from time to time, upon conversion
of the Preferred Stock, including additional shares of Preferred Stock which may
be issued as dividends on the Preferred Stock, exercise of the Warrants, or in
all three circumstances. The Shares include such presently indeterminate number
of additional shares of Common Stock as may be issued on conversion of the
shares of its Preferred Stock held by the Selling Shareholders pursuant to the
provisions of the Certificate of Designation of the Preferred Stock regarding
determination of the applicable conversion price and on exercise of the
Warrants. The actual number of shares of Common Stock issued or issuable upon
conversion of the Preferred Stock is subject to adjustment depending on factors
which cannot be predicted by the Company at this time, including, among others,
the future market prices of the Common Stock.

        The Common Stock is listed on the Nasdaq SmallCap under the symbol IVIP.
On May 21, 1998, the closing price for the Common Stock was $7.375.

        THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS-EFFECT
ON FORWARD LOOKING STATEMENTS" BEGINNING ON PAGE 5 FOR CERTAIN FACTORS RELATED
TO THIS OFFERING.

            THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
               THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
                 COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
                  OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
                         CONTRARY IS A CRIMINAL OFFENSE.

        No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not lawfully be made. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as to which information has
been given herein.

           The date of this Prospectus is ______________ _____, 1998.


<PAGE>   4
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                            Page
<S>                                                                                                         <C>

AVAILABLE INFORMATION........................................................................................3

PROSPECTUS SUMMARY...........................................................................................4

RECENT DEVELOPMENTS..........................................................................................4

RISK FACTORS-EFFECT ON FORWARD LOOKING STATEMENTS............................................................5

YEAR 2000 COMPLIANCE.........................................................................................9

SELECTED FINANCIAL DATA.....................................................................................10

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................11

BUSINESS....................................................................................................16

DESCRIPTION OF PROPERTY.....................................................................................24

USE OF PROCEEDS.............................................................................................24

SELLING SHAREHOLDERS........................................................................................25

PLAN OF DISTRIBUTION........................................................................................26

DIRECTORS AND EXECUTIVE OFFICERS............................................................................27

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................................30

DESCRIPTION OF SECURITIES...................................................................................31

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.........................32

MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS.....................................................33

EXECUTIVE COMPENSATION......................................................................................34

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................................37

LEGAL MATTERS...............................................................................................37

EXPERTS.....................................................................................................37

FINANCIAL STATEMENTS.......................................................................................F-1

INFORMATION NOT REQUIRED IN PROSPECTUS....................................................................II-1

SIGNATURES................................................................................................II-7
</TABLE>


                                       2
<PAGE>   5
                              AVAILABLE INFORMATION

        The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and files reports and other
information with the Securities and Exchange Commission (the "Commission") in
accordance therewith. Such reports, proxy statements, and other information
filed by the Company are available for inspection and copying at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth St., N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission. The Common Stock is currently listed on the
Nasdaq Small Cap Market under the symbol IVIP.

        No dealer, salesman, or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus, and,
if given or made, such information and representation must not be relied upon as
having been authorized by the Company. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby in any state to any person to whom it is unlawful to make such offer in
such state. Neither the delivery of this Prospectus nor any sales made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof.


                                       3
<PAGE>   6
                               PROSPECTUS SUMMARY

        The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
and related notes thereto appearing elsewhere in this Prospectus. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements.

                                   THE COMPANY

        IVI Publishing, Inc. ("IVI" or the "Company") was incorporated under the
laws of the State of Minnesota in 1990. The Company corporate offices,
previously located in Minnesota, are now located at 808 Howell Street, Suite 
400, Seattle, Washington 98101 and its telephone number is (206) 583-0100.

                                  THE OFFERING


Securities offered..................... 2,150,000 shares of Common Stock (plus
                                        an indeterminate number of additional
                                        shares of Common Stock issuable by the
                                        Company upon conversion of the Preferred
                                        Stock, including issuance of dividends
                                        on the Preferred Stock in the form of
                                        additional shares of Preferred Stock,
                                        and exercise of the Warrants). See
                                        "Description of Securities."

Common Stock to be outstanding 
after the offering..................... Approximately 12,289,710 shares
                                        (assuming exercise of all Warrants and
                                        further assuming that the Preferred
                                        Stock and dividends issuable thereon,
                                        are converted into Common Stock at the
                                        maximum rate allowable by the terms of
                                        the agreements relating to the issuance
                                        of the Preferred Stock).

Use of Proceeds........................ The Company will receive no proceeds
                                        from the sale of the Common Stock by the
                                        Selling Shareholders.

Risk Factors........................... Investment in the Common Stock involves
                                        a high degree of risk. See "Risk
                                        Factors."

Nasdaq Small Cap Market symbol......... IVIP


                               RECENT DEVELOPMENTS

        Change of Core Business Focus. In the first quarter of 1998, the
management of the Company, including the Board of Directors, determined to
change the core business focus of the Company from the development, sales and
support of CD-ROM products to an Internet Web Site design and hosting company
(primarily of the Web Site onhealth.com). See "Risk Factors-Effect on Forward
Looking Statements" and "Business."

        Private Placement. On April 10, 1998, the Company raised $5,000,000,
less expenses, through the sale to the Selling Shareholders of 5,000 shares of
Preferred Stock and the issuance of the Warrants. See "Selling Shareholders."


                                       4
<PAGE>   7
                RISK FACTORS-EFFECT ON FORWARD LOOKING STATEMENTS

        Prospective investors should carefully consider the factors set forth
below, in addition to the other information contained and incorporated in this
Prospectus, in evaluating an investment in the Common Stock, offered hereby.

        Limited Operating History and Accumulated Deficit; Continuing Operating
Losses. The Company was incorporated in 1990 and has been operating continuously
since 1991. However, it has only been active online since 1996 and the OnHealth
network web site made its debut in July 1997 ("OnHealth Network"). The Company,
therefore, has a limited history of operation on which to base analysis of
financial results relating to its internet Web Site hosting of healthcare
information. Since its founding in 1990, the Company has generated an 
accumulated deficit of approximately $80.8 million and has incurred significant
losses in each of the last five years. The Company's ability to generate
profits will be dependent upon creating services with high degrees of leverage.
In turn, that will require creation of significant revenue streams from its
online properties, earning substantial gross margins on those revenue streams
and controlling its costs of operation. The Company anticipates continued
significant operating losses at least through 1998, as the OnHealth flagship
site is redesigned and the OnHealth Network is enhanced. There is no assurance
that the Company will ever attain profitability.

        Shift to Advertising Revenues May Not Replace Revenues from Sales of
CD-ROMs. Since its inception until early 1998, a vast percentage of the
Company's revenues were based on development, sales and support of CD-ROM
titles. In January 1998, the company's new management team determined to change
the Company's core business focus to Internet Web site hosting of health care
related content and the dissemination of health and wellness information from
the Company's web sites. The principal form of revenue from this business model
is advertising. Although revenues from CD-ROMs have declined significantly since
1995, advertising revenues may never be sufficient to offset such declines in
revenue. Since the Company has not completed this transformation, there are no
results on which to base the potential profitability or viability of the
Company. The Company will face essentially the same risks and uncertainties of
any new venture, and there can be no assurance that the Company will be anymore
successful in this venture than in its previous business activities.

        Reliance on Advertising Revenues. The Company's new business model
provides that the Company will derive a substantial portion of its revenues from
the sale of advertisements on its Web pages. For the year ended December 31,
1997, advertising revenues did not represent a significant portion of the
Company's total revenues. The Company's strategy is to continue to develop
advertising and other methods of generating revenues. The Company is in the
early stages of licensing its products and technology and in implementing its
advertising program. The Company's ability to generate significant advertising
revenues will depend, among other things, on advertisers' acceptance of the
Internet as an attractive and sustainable medium, the development of a large
base of users of the Company's products and services possessing demographic
characteristics attractive to advertisers and the expansion of the Company's
advertising sales force. In addition, there is fluid and intense competition in
the sale of advertising on the Internet, resulting in a wide range of rates
quoted by different vendors for a variety of advertising services which makes it
difficult to project future levels of advertising revenues which will be
realized generally or by any specific company. Further, significant and
consistent investment on the Internet by many advertisers is dependent upon
validation that the Internet is an effective advertising medium, which
validation has not yet occurred and which is essential to the achievement of
steady and predictable advertising revenues. See "Business--Marketing and
Promotion" and "Business--Web Activities: Prospective."

        Mature Market; Unproven Acceptance of the Company's Products and
Services; Uncertain Adoption of the Internet as an Advertising Medium. The
market for the Company's products and services has recently rapidly matured,
leading to significant reductions in income since 1995. The market is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed products and services for use on the Internet. The
Company's market is highly dependent upon the increased use of the Internet for
information publication, distribution and commerce, and on the development of
the Internet as an advertising medium. The Company's future operating results
will depend upon the continued emergence of the Internet advertising market, the
successful implementation of the Company's advertising program and its ability
to establish licensing relationships for the Company's content with leading
Internet businesses. There can be no assurance, however, that the Internet
advertising market will develop as an attractive and sustainable medium, that
the Company will achieve market acceptance of its health related products and
services or that the Company will be able to execute its business plan


                                       5
<PAGE>   8
successfully. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. The industry is young and has few proven
products. Moreover, critical issues concerning the commercial use of the
Internet (including security, reliability, cost, ease of use and access, quality
of service and acceptance of advertising) remain unresolved and may impact the
growth of Internet use or the placement of advertisements on the Internet. If
widespread commercial use of the Internet does not develop, or if the Internet
does not develop as an attractive medium for advertising, the Company's
business, results of operations and financial condition will be materially
adversely affected.

        Because the market for the Company's products and services is new and
evolving, it is difficult to predict the size of this market and growth rate, if
any. There can be no assurance that the market for the Company's products and
services will develop or that satisfactory demand for the Company's products or
services will emerge or become sustainable. If the market fails to develop,
develops more slowly than expected or becomes saturated with competitors, or if
the Company's products and services do not achieve or sustain market acceptance,
the Company's business, results of operations and financial condition will be
materially adversely affected. See "Business--Web Activities: Prospective."

        Unpredictability of Future Revenue Streams; Potential Fluctuations in
Quarterly Results. Since the Company's online operating history is very limited
and the economics of the Internet are still evolving, it is difficult to
forecast future revenues with a high degree of accuracy. While the investments
that the Company plans in personnel, product and development are largely fixed
and are committed to in the near term, the expected operating profits are highly
variable with respect to consumer demand over the longer term. For this reason,
shortfalls in consumer demand will have a significant negative impact on Company
profitability.

        Results are expected to vary to some extent on a quarterly basis. The
advertising and retail industries typically experience their best quarter in the
fourth quarter of each year, and to the extent that the Company relies upon
advertising and transactional revenues, its revenues will be similarly variable.
Due to the health related nature of editorial content, management believes that
OnHealth revenues will not be as seasonal as the remainder of the advertising
and retail industries. Since the Company's expense levels are based upon
anticipated advertising and licensing revenue, the Company may not be able to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in relation to the Company's
expectations would have an immediate adverse impact on the Company's business,
results of operations and financial condition. In addition, the Company plans to
significantly increase its operating expenses to fund greater levels of research
and development, increase its sales and marketing operations, develop new
distribution channels, broaden its customer support capabilities and establish
brand identity and strategic alliances.

        The Company expects CD-ROM sales, as a percentage of gross revenues, to
continue to decrease significantly and continue to be subject to the seasonality
that generally affects the computer software business. Typically net revenues,
gross margins and operating income are fairly constant in the first, second and
third quarters and are highest during the fourth quarter. This seasonality is
due principally to the increased demand for the Company's CD-ROM products during
the holiday season. Because revenues from other segments of the Company's
integrated publishing and Web site hosting strategies are not subject to the
same seasonality, the development of these aspects of the Company's business in
1997 did reduce the impact the seasonality in the CD-ROM segment of the
Company's business has on the Company's operations.

        Reliance On External Financing. The Company's operations generated a
negative cash flow during 1997. The degree to which the Company is a net user of
cash is likely to increase in 1998, as a result of the expansion plans for the
OnHealth Network and as a consequence of focusing on a new business model. The
Company will therefore depend upon external financing for operations and
liquidity. There can be no assurance that additional capital, on a debt or
equity basis, will be found, or if found that it will be on economically viable
terms. See "Recent Developments".

        Competition. There are a number of competitors currently delivering
online health content, and it is likely that more competitors will emerge in the
near future. Many of today's competitors are better financed, have longer
operating histories and better brand recognition than the Company, and some have
internal distribution or cross-promotional opportunities to support their online
ventures that the Company does not have and can not replicate for a reasonable
investment. It is possible that existing or emerging competitors may be able to
secure critical editorial 


                                       6
<PAGE>   9
content or distribution relationships on an exclusive basis, or may raise a
provider's expectation about the value of such assets. For these reasons,
increased competition may result in diminished profit margins, market share or
brand value. The Company expects that competition will increase online in the
future due to more entrants introducing competitive products and industry
consolidation, which could result in better-financed competitors.

        The intense competition in the consumer software business continues to
accelerate as an increasing number of companies, many of which have financial,
managerial, technical and intellectual property resources greater than those of
the Company, offer products that compete directly with one or more of the
Company's products. Sales of products on older platforms have declined, and
there can be no assurance that sales of these products will not decline further
or experience lower than expected sales levels. There can be no assurance that
sales of the Company's existing products will continue to sustain market
acceptance and to generate significant levels of revenue in subsequent quarters.
In addition, retailers of the Company's products typically have a limited amount
of shelf space and promotional resources for which there is intense competition.
There can be no assurance that retailers will continue to purchase all of these
products or provide these products with adequate levels of shelf space and
promotional support.

        Dependence on Key Personnel. The Company's development and operation,
especially of its new business focus, is expected to be substantially dependent
on the services of its President and Chief Executive Officer, Robert N.Goodman
and on the Company's Editor-in-Chief, Rebecca Farwell. The loss of either 
Mr. Goodman's or Ms. Farwell's services could materially and adversely affect 
the Company's business prospects. The Company is also dependent on the continued
service of certain other key management as well as its software engineering
personnel, the loss of whose services could significantly delay the achievement
of the Company's planned development objectives. The Company has not purchased
key man life insurance on any of its personnel. Achievement of the Company's
business objectives will require substantial additional expertise in the areas
of technology, finance, manufacturing and marketing. The Company is actively
seeking additional qualified personnel. Competition for qualified personnel is
intense, and the loss of key personnel, or the inability to attract and retain
the additional highly skilled personnel required for the expansion of the
Company's activities, could have a material adverse effect on the Company's
business and results of operations. See "Business - Employees."

        Risks Related To System Development and Operation. The enhancement of
OnHealth.com as part of the OnHealth Network is dependent upon various
development efforts which will be performed by in-house Company employees and by
contractors. There can be no assurance that this development effort will be
completed in a timely fashion. To the extent that development is incomplete or
delayed, the Company will incur additional development expense and may lose a
portion of its advantage to competitors.

        All companies that rely on the Web are dependent upon the continuous,
reliable and secure operation of Web servers and related hardware and software.
To the extent that service is interrupted, consumers will be inconvenienced and
commercial clients will suffer from a loss in advertising or transaction
delivery. These shortfalls will directly result in a revenue loss to the
Company.

        The Company's computer and communications hardware are protected through
physical and software safeguards. However, they are still vulnerable to fire,
earthquake, flood, power loss, telecommunications failures, physical or software
break-ins and similar events. The Company does not have full redundancy for all
of its computer and telecommunications facilities and it does not carry business
interruption insurance to protect it in the event of a catastrophe. Such an
event could lead to significant negative impacts on the Company's operating
results and financial condition.

        Management of Potential Growth. To accommodate the demand of additional
editorial content and distribution channels for the OnHealth Network, the
employee base could grow significantly from the March 31, 1998 level of 25
employees. The expansion of the Company's workforce could place a significant
strain on the Company's management, financial resources and infrastructure.
There is no assurance that the Company will be able to attract and retain
employees with the appropriate skill sets, or that the Company will be able to
manage growth effectively. If the Company is unable to manage growth in the
coming years, there could be an adverse affect on the Company's operations.

        Risk Associated with Certain Litigation. In February 1996, an action in
the District Court of Hennepin County (Minnesota) was brought by T. Randal
Productions et al. against the Company and one current and two 


                                       7
<PAGE>   10
former employees. The plaintiffs make various allegations, including
misappropriation of corporate opportunities and trade secrets by the Company and
its employees and sought award of monetary damages, exemplary damages and
royalties substantially in excess of $10,000,000. In November 1997, a jury found
that there was no joint venture between T. Randal and the Company and/or any of
its employees but awarded T. Randal $480,000 plus interest for damages sustained
to its business. The jury verdict is subject to motions for a new trial, amended
findings and for judgment notwithstanding the verdict and to appeal to the Court
of Appeals. The plaintiffs also have an action pending against certain
affiliates of the Company on the same grounds on which the action against the
Company was based. The Company has indemnified these principles against any
damages arising out of these claims. While the Company is unable to predict the
ultimate outcome of this legal action, an outcome whereby T. Randal was
completely successful on its claim would have a material adverse effect on the
Company and could cause it to discontinue operations.

        Risks of New Business Areas. Some of the incremental opportunities that
will comprise the OnHealth Network may follow business models that are
unfamiliar to the Company today, or that are completely without precedent. These
expansions will require significant commitment of resources and time, and there
is no assurance that the Company will benefit from being the first entrant in a
new business or economic model, or that such business or economic model will be
viable. It is also possible that new businesses or economic models will impair
the Company's ability or reputation with respect to existing customers or
suppliers, to the detriment of the OnHealth brand. A lack of market response or
the failure of an economic model could have detrimental effects on the Company's
results.

        Risks Associated With Strategic Alliances. The Company may elect to
enter into strategic alliances with respect to content provision, promotion,
distribution or technology, among other areas. Such alliances carry risks that
are associated with any alliance. These risks may include difficulty in
coordinating the roles of strategic allies, the possibility of disruption of the
Company's core business, maintenance of editorial or quality standards and the
potential to damage relationships with current Company employees. There is no
assurance that the Company's alliances will avoid these and similar risks.

        Rapid Technological Change. The Internet's technology is changing at a
rapid pace. In order to remain competitive, the Company must remain at the
forefront of the new features and capabilities that are being and that will be
introduced. This may entail a continuous level of development and capital
spending. If the Company is unable to make these changes, for financial,
operational, legal, or any other reason, it risks a loss of market share and
some portion of its brand identity.

        Reliance On External Content. The Company intends to produce only a
portion of the editorial content that will be found on the OnHealth Network, and
none of the content utilized by CD-ROM or cable television distribution media.
It will be reliant on third-party firms that have the expertise, technical
capability, name recognition, and willingness to syndicate product content for
branding and distribution by others. As health-related content grows on the Web,
there may be increasing competition for the best product suppliers, which may
result in a competitor to the Company acquiring a key supplier on an exclusive
basis, or in significantly higher content prices. Such an outcome could make the
OnHealth Network less attractive or useful for an end user, or could reduce the
profitability of IVI. Either event would have a materially adverse impact on the
Company's results.

        Governmental Regulation and Legal Issues. The Company is not governed by
any laws of any government entity, other than general business and taxation
regulations and the general regulations that surround online enterprises.
However, with the growing popularity of online usage, various new regulations
are possible which may affect privacy, intellectual property rights, marketing,
pricing, content, or other issues. The adoption of additional laws in this field
may reduce consumer demand for online services, or adversely impact the
Company's cost of doing business. Either outcome could have a material adverse
affect on the Company's financial results.

        Control By Existing Shareholders. As of May 15, 1998, the Company's
executive officers, directors and 5% shareholders and their affiliates
beneficially own approximately 44%, of the Company's outstanding shares of
Common Stock. Accordingly, these individuals will have the ability to influence
the election of the Company's directors as well as significant corporate matters
requiring approval by the shareholders of the Company. Such concentration of
ownership and the lack of cumulative voting also may have the effect of delaying
or preventing a change in control of the Company.


                                       8
<PAGE>   11
        Absence of Dividends. The Company has not paid cash dividends since its
inception. The Company intends to retain all of its earnings, if any, for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. Pursuant to the Company's Articles of Incorporation and
Bylaws, the payment of dividends is subject to the discretion of the Company's
Board of Directors and any terms and conditions imposed by law.


NOTE REGARDING FORWARD LOOKING STATEMENTS

        Certain statements made in this Prospectus, summarized here, are
forward-looking statements that involve risk and uncertainties, and actual
results may be materially different. Factors that could cause actual results to
differ include, but are not limited to those identified:

-   The expectation that the Company will become the leading on-line health
    information network depends on the Company's ability to obtain high quality
    editorial content, its ability to implement effective traffic building
    programs, as well as other general market conditions and competitive
    conditions within this market, including the introduction and further
    development of competitive web sites.

-   The expectation that the Company will re-release its OnHealth.com web site
    in the third quarter of 1998 and that it will launch a family of web sites
    to be included in the OnHealth network depends upon successful development
    efforts and meeting the currently scheduled timetable for such development,
    as well as being able to obtain any necessary or desired licensing or other
    content rights on a timely basis.

-   The expectation that the Company will see a growth in revenues and positive
    net income as a result of its shift in focus to its on-line health network
    depends on customer interest, the ability to obtain successful revenue
    sources from advertisers, as well as other general market and competitive
    conditions within the on-line health network market.

-   On April 10, 1998, the Company completed a $5,000,000 non-voting
    Convertible Redeemable Preferred Stock financing. The Company believes that
    the proceeds from this financing transaction, in addition to cash and cash 
    equivalents and anticipated operating cash flows will allow the Company to
    continue to meet its ongoing financial obligations and operate through, at
    least December 31, 1998.

-   The Company's net revenues have declined 69% in the past two years to
    approximately $3.8 million in 1997. This is largely attributable to the 
    shift in the Company's focus from CD-ROM publishing and marketing to online
    publishing. Management anticipates that the shift in focus will result in
    growth in revenues and in positive net income in future years. The Company 
    has accumulated net losses of approximately $80.8 million through 
    March 31, 1998.

                              YEAR 2000 COMPLIANCE

        The Company has determined that it will need to modify or replace
significant portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company's Year
2000 initiative is being managed by internal staff. The activities are designed
to ensure that there is no adverse effect on the Company's core business
operations and that the transactions with customers, suppliers and financial
institutions are fully supported. The Company is well underway with these
efforts, which are scheduled to be completed by 1999. While the Company believes
its planning efforts are adequate to address its Year 2000 concerns, there can
be no guarantee that the systems of other companies on which the Company's
systems and operations rely will be converted on a timely basis and will not
have a material effect on the Company. The cost of the Year 2000 initiative is
not expected to be material to the Company's results of operations or financial
position.


                                       9
<PAGE>   12
                             SELECTED FINANCIAL DATA

        The following table presents summary historical financial information of
the Company. The financial information as of December 31, 1997, 1996, 1995, 1994
and December 31, 1993 has been derived from the financial statements. The
audited balance sheet at December 31, 1997 and 1996 and the related statements 
of operations, cash flows and changes in shareholders' equity (deficit) for 
each of the three years in the period ended December 31, 1997 and the notes 
thereto (the "Audited Financial Statements"), together with unaudited 
information as of and for the three months ended March 31, 1998 and 1997, 
appear elsewhere in this Prospectus. This summary financial information should 
be read in conjunction with the Financial Statements and other financial 
information included elsewhere in this Prospectus.


<TABLE>
<CAPTION>
                                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:                                               Year Ended December 31
                                               1997               1996               1995               1994               1993
                                             --------           --------           --------           --------           --------
<S>                                          <C>                <C>                <C>                <C>                <C>     
Net revenue                                  $  3,761           $  9,470           $ 11,970           $  7,013           $  2,264
Cost of revenues                                2,541              5,076              6,231              2,402                580
                                             --------           --------           --------           --------           --------
Gross margin                                    1,220              4,394              5,739              4,611              1,684

Cost and expenses:
      Product development                       4,243              5,651              7,494             19,503              6,614
      Sales and marketing                       1,347              2,705              7,473              9,694              2,586
      General and administrative                6,892              6,364              5,647              5,585              1,495
      Investment in affiliate                                                                            2,263
                                             --------           --------           --------           --------           --------

Loss from operations                          (11,262)           (10,326)           (14,875)           (32,434)            (9,011)

Other income, net                                 315                169                641              1,177                184
                                             --------           --------           --------           --------           --------

Net loss                                      (10,947)           (10,157)           (14,234)           (31,257)            (8,827)


Preferred stock dividends                        (100)              (119)               (20)
Preferred stock accretion                         (43)               (60)
Preferred stock deemed dividend                (2,875)
                                             --------           --------           --------           --------           --------
Net loss applicable to common stock
                                             ($13,965)          ($10,336)          ($14,254)          ($31,257)          ($ 8,827)
                                             ========           ========           ========           ========           ========

Net loss per common share
      Basic and diluted                      ($  1.73)          ($  1.36)          ($  1.90)          ($  4.75)          ($  5.11)
                                             ========           ========           ========           ========           ========


BALANCE SHEET DATA:                                                              December 31
                                               1997               1996               1995               1994               1993
                                             --------           --------           --------           --------           --------
Cash, cash equivalents and
      short-term investments                 $  2,488           $  3,462           $  7,759           $ 20,653           $ 19,835
Working capital (deficiency)                   (1,252)             3,230              8,607             20,735             19,622
Total assets                                    4,577             13,411             18,352             32,101             22,561
Convertible
      subordinated debentures                                      3,500
Total liabilities                               4,559              8,606              3,627              5,133              1,556
Convertible redeemable preferred
stock                                                              1,905              1,845
Shareholders' equity                               18              2,900             12,880             26,968             21,005
</TABLE>


                                       10
<PAGE>   13
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

OVERVIEW

        Since its inception, the Company's strategy has been to develop online
and cable television platforms, as well as maintain its staple platform,
CD-ROMs, in order to enhance an integrated approach to publishing electronic
health and medical information. In 1997, the Company was distributing its health
and medical information to end users via all three platforms. Under this
strategy, the Company was never able to attain profitability, and, at December
31, 1997, had an accumulated deficit of $78,576,000. In 1997, the Company's
Board of Directors revised its business strategy and brought in an entirely new
management team and other key employees skilled in the development of internet
websites. The Company's current strategy is to focus its resources on the
development of an internet-delivered, consumer-oriented network of health and
wellness sites.

RESULTS OF OPERATIONS

        The following table sets forth selected income statement data of IVI
Publishing, Inc. and such data as a percentage of net revenues for the three
years ended December 31, 1997.

<TABLE>
<CAPTION>
                                                                 Year ended December 31,
                                                              (Dollar amounts in thousands)

                                       1997                               1996                              1995
                                       ----                               ----                              ----
<S>                       <C>                  <C>           <C>                  <C>           <C>                  <C> 

Net Revenues              $  3,761              100%         $  9,470              100%         $ 11,970              100%
Gross margin                 1,220               32%            4,394               46%            5,739               48%
Operating expenses          12,482              332%           14,720              155%           20,614              172%
Operating loss             (11,262)            (299)%         (10,326)            (109)%         (14,875)            (124)%
Net loss                  ($10,947)            (291)%        ($10,157)            (107)%        ($14,234)            (119)%
</TABLE>

REVENUES

Revenues for 1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
                                               1997               1996               1995
                                           -----------        -----------        -----------
<S>                                        <C>                <C>                <C>        

Product sales and licensing revenue        $ 1,990,000        $ 5,152,000        $ 8,333,000
Contract development revenue                 1,220,000          1,346,000          1,637,000
Cable television licensing revenue             493,000          1,972,000          1,000,000
Online revenue                                  58,000          1,000,000          1,000,000
                                           -----------        -----------        -----------

Net revenues                               $ 3,761,000        $ 9,470,000        $11,970,000
                                           ===========        ===========        ===========
</TABLE>


        Sales for 1997, 1996 and 1995 of $3,761,000, $9,470,000 and $11,970,000,
respectively, represent a decrease of 60% from 1996 to 1997 and 21% from 1995 to
1996. The 60% decrease in 1997 is due to a substantial reduction in product
sales and licensing revenue of $3,162,000, or 61%, a substantial reduction in
cable television licensing revenue of $1,479,000, or 75%, and a decrease in
online revenue from $1,000,000 to $58,000. The 21% decrease in 1996 is due
primarily to lower product sales and licensing revenue which declined
$3,181,000, or 38%, relative to the previous year. This was partially offset by
a $972,000 increase in cable television licensing revenue.

PRODUCT SALES AND LICENSING REVENUE


                                       11
<PAGE>   14
        Product sales and licensing revenue has declined steadily from 1995 to
1997. The decrease in revenue of $3,162,000 from 1996 to 1997 was a result of
increased competition and lower unit sales as the Company shifted its focus to
its online efforts and released fewer new CD-ROM products. In 1998, the Company
expects a continued shift in focus toward the online efforts, and anticipates
intense competition to continue in the CD-ROM business.

        In late 1995, the Company signed a new CD-ROM distribution agreement
which resulted in a lower net sales price to the Company on products sold and
contributed to the decrease of $3,181,000 in revenue from 1995 to 1996. Also
during this period, increased competition for shelf space led to further price
erosion in addition to a decrease in unit sales.

CONTRACT DEVELOPMENT REVENUE

        Contract development revenues decreased slightly from 1996 to 1997, and
from 1995 to 1996. The decrease represents management's efforts to control costs
and focus on more profitable contracts.

CABLE TELEVISION LICENSING REVENUE

        Cable television licensing revenue reflects revenue from the content
and royalty agreement with America's Health Network (AHN). Under the agreement,
the Company is licensing its multimedia content to AHN from May 1995 to March
25, 2001, and is to receive a minimum of $11,000,000 in licensing royalties
over the life of the agreement. This revenue was being recognized evenly over
the life of the contract. Due to the gradual increase in actual payments versus
the straight-line revenue recognition policy, a receivable was recorded for the
difference between the revenue recognized and the cash received during the
early years of the contract. The $972,000 increase in revenue from 1995 to 1996
was a result of a full year of revenue in 1996 compared to a partial year in
1995. The $1,479,000 decrease in revenue from 1996 to 1997 was a result of
AHN's inability to make the required payment due to its financial difficulties.
In June 1997, as a result of the Company not receiving its quarterly payment,
the outstanding AHN receivable was fully reserved. As a result of the
uncertainty of AHN's ability to pay royalties under the agreement, the Company
began recognizing royalty revenue only on a cash basis. In December, AHN
resumed payments and the Company received a royalty payment of $1,313,000. This
payment was applied against the previously recorded receivable, and the related
bad debt reserve of $1,313,000 was reversed. At December 31, 1997, the Company
has a fully reserved receivable of $715,000.

ONLINE REVENUES

        The online revenues recorded in 1995 and 1996 related to nonrefundable
advances payable to the Company under the exclusive agreement signed with AT&T
in October 1995. Online revenues decreased $942,000 from 1996 to 1997 due the
discontinuance by AT&T of the AT&T Healthsite in August 1996. The $58,000 in
revenue in 1997 was generated through the sale of site sponsorships, advertising
and premium services on its OnHealth.com and former O@sis Web site. In September
1997, the Company entered into an agreement with Mayo Foundation which included
the full transfer to Mayo of the Company's ownership interest in the O@sis
Website (See Note 15 to the financial statements).

GROSS MARGIN

        Gross margin as a percentage of net revenues was 32% in 1997 compared to
46% in 1996. The decrease in gross margin in 1997 was primarily due to decreases
in higher margin cable television licensing and online revenue and to a lesser
extent to continued lower margin realized on CD-ROM sales.

        Gross margin as a percentage of net revenues was 46% in 1996 compared to
48% in 1995. The slight reduction in gross margin percentage was due to lower
gross margins realized on CD-ROM retail sales due to decreased pricing as a
result of increased competition.

OPERATING EXPENSES


                                       12
<PAGE>   15
Product Development

        Product development expenses were $4,243,000 for 1997, a decrease of
$1,408,000, or 25% from 1996, due to the Company's release of fewer CD-ROM
products and its shift to online publishing.

        Product development expenses decreased in 1996 to $5,651,000 from
$7,494,000 in 1995, or 25% resulting from fewer CD-ROM titles being developed
combined with management's efforts to reduce costs.

SALES AND MARKETING

        Sales and marketing expenses were $1,347,000 in 1997, compared to
$2,705,000 in 1996. The decrease of 50% was a result of the release of fewer
CD-ROM titles in 1997, decreases in expenditures to promote the Company's
products and a smaller expense structure created by the downsizing of operations
in late 1996.

        Sales and marketing expenses were $2,705,000 in 1996, compared to
$7,473,000 in 1995. The decrease of 64% is primarily a result of the delegation
of retail product distribution to Davidson in September of 1995. Additionally,
there were fewer CD-ROM titles in 1996 than in 1995, which contributed to
reduced marketing expenses.

GENERAL AND ADMINISTRATIVE

        General and administrative expenses were $6,892,000 in 1997 compared to
$6,364,000 in 1996. The increase of 8% was due to extensive litigation and
special charges in 1997. The Company recorded $808,000 in expenses related to a
settlement of litigation with Viridis, Inc. and received an adverse jury award
of $480,000, plus interest from a dispute with T. Randal Productions, et al. in
1997 (See Note 17 to the financial statements). In the fourth quarter of 1997,
the Company recorded charges of $1,572,000 for the relocation of the Company's
headquarters from Minneapolis, Minnesota to Seattle, Washington. These charges
included $610,000 in severance to officers and employees and $973,000 for asset
dispositions and lease termination costs (See Note 17 to the financial
statements). Also in 1997, the Company wrote-off $1,741,000 in other assets
related to an agreement with Time Life, Inc. (See Note 4 to the financial
statements). Excluding the litigation and special charges, the Company's
reduction in general and administrative expenses was the result of the
downsizing of the facilities and personnel and management's efforts to
streamline operating costs.

        General and administrative expenses were $6,364,000 in 1996 compared to
$5,647,000 in 1995. The overall increase of 13% was due to special charges
incurred in the third and fourth quarters of 1996. These charges included
$978,000 related to the downsizing of facilities and personnel. Additionally,
there was a write-off of an $836,000 receivable to bad debt expense. Finally, in
the fourth quarter, there was a special charge of $300,000 due to an adverse
arbitration award. Excluding these special charges, the resulting decrease in
general and administrative expenses was the result of management's efforts to
streamline operating costs.

INTEREST INCOME (EXPENSE)

        Interest income was $106,000 in 1997 and $203,000 in 1996. The decrease
of 48% was due to decreases in cash balances in 1997. Interest expense was
$264,000 in 1997 compared to $34,000 in 1996. Interest expense increased in 1997
because the Company's convertible subordinated debentures were issued in late
1996 and were outstanding for most of 1997.

        Interest income was $203,000 in 1996 compared to $641,000 in 1995. The
decrease was due to lower cash balances.

OTHER INCOME, NET

        Other income was $473,000 in 1997 which included a $2,700,000 cash
payment that the Company received in connection with the transfer of ownership
of the Company's O@sis Web site to Mayo and an expense of $2,229,000 in
connection with the Company's conversion of its Convertible Subordinated
Debentures in 1997. The expense represents the excess of the fair market value
of Common 


                                       13
<PAGE>   16
Stock issued over the fair value of the Common Stock issuable pursuant to the
original conversion terms of the debentures. The Company did not have any other
income in 1996 or 1995.

LIMITATION ON USE OF NET OPERATING LOSS AND OTHER TAX CREDIT CARRYFORWARDS

        At December 31, 1997, the Company had available net operating loss
carryforwards of approximately $64,699,000 and available research and
development credits of approximately $326,000 for federal income tax purposes.
The balance of the net operating loss carryforwards of $64,699,000 and the
credits expire at various times through 2012. The research and development
credits will also be subject to limitations under the regulations. These
carryforwards are subject to Internal Revenue Code Section 382 which limits the
availability of net operating losses to offset current taxable income if
significant ownership changes have occurred for federal tax purposes. The
Company incurred "ownership changes," pursuant to regulations currently in
effect under Internal Revenue Code Section 382, as a result of sales of the
Company's Preferred Stock in 1992 and 1993 and may have incurred ownership
changes since that time .

LIQUIDITY AND CAPITAL RESOURCES

        The Company's cash and cash equivalents at December 31, 1997 were
$2,488,000. The Company used $909,000 of cash in operating activities in 1997,
compared to $8,256,000 in 1996. The decrease in cash used by operating
activities in 1997 was a result of the Company carrying a larger receivable
balance in 1996 and incurring larger losses from operations, net of special
charges in 1996. The Company did not generate or use significant cash in 1997 in
investing or financing activities. In 1996, the Company generated $3,737,000 of
cash primarily from financing activities primarily from the issuance of
$3,500,000 of 9% Convertible Subordinated Debentures.

        The Company believes that its cash and cash equivalents, in addition to
$5,000,000 which the Company obtained in early April through a private equity
placement to certain institutional investors, will be sufficient to fund its
operations through December 31, 1998. (See Note 2 of the financial statements.)
However, the Company's projected costs in 1998 in connection with the redesign
and the launch of the onhealth.com website, and associated personnel, marketing
and distribution costs, will be substantial. Any material unforeseen increases
in expenses or reductions in projected revenues will likely require the Company
to seek additional debt or equity financing to be able to continue operations.
Because of the Company's financial history, there is no assurance that such
financing could be obtained, or, if obtained that the terms of the financing
would be acceptable.

THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997


RESULTS OF OPERATIONS

        The following table sets forth selected income statement data of IVI
Publishing, Inc. and such data as a percentage of net revenues for the three
months ended March 31, 1998 and 1997.

<TABLE>
<CAPTION>
                                         Three months ended March 31,
                                         (Dollar amounts in thousands)
                          ----------------------------------------------------------
                            1998                             1997
                          -------                          -------
<S>                       <C>                <C>           <C>                 <C> 
Net revenues              $   330             100%         $ 1,719             100%
Gross margin                 (358)           (108%)            949              55%
Operating expenses          1,907             578%           2,471             144%
Operating loss             (2,265)           (686%)         (1,522)            (89%)
Net loss                  ($2,253)           (683%)        ($1,624)            (94%)
</TABLE>

REVENUES

        Revenues for the three months ended March 31, 1998 and 1997 were as
follows:


                                       14
<PAGE>   17
<TABLE>
<CAPTION>
                                               1998          1997
                                              ------        ------
<S>                                           <C>           <C>   
Product sales and licensing revenue           $   44        $  888
Contract development revenue and other           197           338
Cable television licensing revenue                 0           493
Online revenue                                    89             0
                                              ------        ------
Net revenues                                  $  330        $1,719
</TABLE>

        Sales for the three months ended March 31, 1998 of $330,000 represent a
decrease of 81% relative to the previous year. The decrease is primarily
attributable to reduced product sales and licensing revenue which decreased from
$888,000 to $44,000 and cable television licensing revenue which decreased from
$493,000 to $0. The decrease in product sales and licensing revenue is a result
of market conditions for CD ROM products, and the Company's lack of new CD ROM
product releases as it transitions to an internet-focused business. The decrease
in cable royalty revenues reflects a cash basis revenue recognition policy
related to a cable television contract with America's Health Network (AHN).
Online revenue was generated from the Company's OnHealth.com web site through
site sponsorships and advertising.

GROSS MARGIN

        Gross margin as a percentage of net revenues was (108%) for the three
months ended March 31, 1998 compared to 55% for the comparable period in 1997.
The negative gross margin percentage in 1998 is primarily the result of royalty
expenses related to cable television licensing revenue, but is in part due to
the high cost of revenues related to the CD ROM business.

OPERATING EXPENSES

PRODUCT DEVELOPMENT

        For the three months ended March 31, 1998, product development expenses
were $728,000, representing a $583,000, or 44%, decrease relative to the same
period in 1997. The decrease relates to the shift away from the CD-ROM product
development business and toward an internet focused business.

SALES AND MARKETING

        Sales and marketing expenses for the three months ended March 31, 1998
increased $42,000, or 11%, relative to the same three months in 1997. Although
expenses are comparable, 1998 expenditures are focused primarily on internet
marketing and sales activities while 1997 activities include expenditures for
the Company's CD-ROM business.

GENERAL AND ADMINISTRATIVE

        For the quarter ended March 31, 1998, general and administrative
expenses decreased $23,000, or 3%, relative to the same period in the previous
year. Lower professional fees in 1998 were partially offset by higher travel and
related expenses.

INTEREST INCOME (EXPENSE)

        The quarter ended March 31, 1998 has net interest income of $12,000
compared to net interest expense of $59,000 for the quarter ended March 31,
1997. The 1998 net interest income includes interest income generated from cash
equivalents. The 1997 net interest expense includes interest income from cash
equivalents that is more than offset by interest expense related to $3,500,000
in convertible subordinated debentures which were converted into common stock
during the fourth quarter of 1997.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES


                                       15
<PAGE>   18
        At March 31, 1998, the Company had cash and cash equivalents of
$571,000. Total cash used by operating activities during the three months ended
March 31, 1998 totaled $1,983,000 and is primarily due to a net loss of
$2,253,000. Investing activities used cash of $18,000 for purchases of computer
equipment. Financing activities provided cash of $84,000 from stock option
exercises.

        On April 10, 1998, the Company completed a $5,000,000 non-voting
Convertible Redeemable Preferred Stock financing. The Company believes that the
proceeds from this financing transaction, in addition to cash and cash
equivalents and anticipated operating cash flows will allow the Company to
continue to meet its ongoing financial obligations and operate through, at least
December 31, 1998.


                                    BUSINESS

        The Company intends to become the premier network of health-related
channels on the World Wide Web to help adults make smarter, better-informed
health decisions. IVI was incorporated in August 1990 in the State of Minnesota
under the name Interactive Television, Inc. Its name was subsequently changed to
Interactive Ventures, Inc. in March 1991, and to IVI Publishing, Inc. in August
1993. IVI has created interactive programs for some of America's best-known
content owners. The Company has also distributed content in various forms of
media and in partnership with some of America's most prestigious media firms.
Historically, IVI's attention and resources have been directed to the cable
television, CD-ROM and online interactive media markets. The Company expects to
leverage its years of experience in developing content for interactive media,
its skill in working with third-party medical content providers, and its
knowledge of consumers of medical information to develop the leading online
health information network.

        The Company's flagship site, located at www.onhealth.com, opened in July
1997 and is currently being enhanced and redesigned. The Company intends to
re-release OnHealth in the third quarter of 1998. To reflect its new
Web-oriented focus, the Company plans to propose to shareholders at the 1998
Annual Meeting a corporate name change to "OnHealth Network Company," as part of
a reincorporation under Washington law

        The Company's common stock is listed on Nasdaq SmallCap under the symbol
"IVIP."

        The Company plans to distinguish itself in the market for consumer
health-related information and commerce by "cutting through the clutter" of the
Internet and locating and packaging the best informational, transactional and
archival content for its customers. By doing so, the Company will attain high
levels of targeted usage and an attractive editorial context, both of which are
necessary for creating an advertising-supported medium.

        IVI's first Web venture was the development, production, and hosting of
Mayo Health O@sis which was jointly owned with the Mayo Foundation and which
went live in July 1996. Under the initial intent of the venture, the Mayo
Foundation was to provide intellectual property and IVI Publishing was to
provide production, hosting and marketing services. Revenues were to be split
between the companies. IVI transferred full ownership of the Mayo O@sis website
to Mayo Foundation in September 1997. See "Mayo Relationship and Transfer of
Ownership of Mayo Health O@sis Web Site."

        The Company's previous principal line of business consisted of CD-ROM
development, production, and distribution. IVI's best-known title has been Mayo
Clinic Ultimate Medical Guide. The Company has also produced numerous other
CD-ROM titles. IVI continues to distribute these products through retail
channels and computer OEM (bundling) channels, but its future business focus
will de-emphasize reliance on revenues from such sales.

        IVI has had a significant venture with Time Life Books, including the
production of a CD-ROM, "Taking Control of Your Health" as well as other titles.
The Company is also a supplier of content to America's Health Network (AHN), a
health and medical cable TV network, which began with AHN's launch in March
1996. IVI also develops web sites for third parties. To date, web development
customers have been primarily from the medical field.

        The Company's net revenues have declined 69% in the past two years to
approximately $3.8 million in 1997. This is largely attributable to the shift in
the Company's focus from CD-ROM publishing and marketing to 


                                       16
<PAGE>   19
online publishing. Management anticipates that the shift in focus will result in
growth in revenues and in positive net income in future years. The Company has
accumulated net losses of approximately $80.8 million through March 31, 1998.

WEB ACTIVITIES: CURRENT

        The Company believes that it will be able to create the best online
resources for equipping users to actively and successfully manage their health
and well-being. By doing so, management believes that it can create a large,
loyal and active user base, and, by extension, that it can create a significant
hub for online advertising and transactional commerce. The key attributes for
success in this venture include building deep, high-value editorial content
(proprietary, licensed, and linked); developing a friendly, accessible and
useful editorial character; creating an image of trust and credibility;
encouraging a sense of community among site users; and striving to develop the
OnHealth brand as the leading brand in its segment.

WEB ACTIVITIES: PROSPECTIVE

        The Company intends to launch a family of Web sites that leverage the
branding, customer set, and market awareness created by the OnHealth site. The
editorial focus, business models, and revenue streams of these additional sites
are still under development. Collectively, IVI intends to call these sites and
the OnHealth flagship site the OnHealth Network.

MARKETING AND PROMOTION

        The Company's strategy is designed to strengthen the OnHealth brand
name, drive traffic to the network of OnHealth Network sites, build the duration
and frequency of visitor usage, encourage user loyalty and develop incremental
revenue opportunities. Some of the specific strategies that are, or will be,
employed to do so include:

        Advertising: Raising awareness of the OnHealth brand through banner
advertising campaigns in relevant high-traffic sites. Online advertising may
also be supplemented through brand based media outside the web.

        Public relations: An active campaign by which the OnHealth brand and its
products are highlighted in news, features and related editorial contexts to
increase consumer and trade awareness.

        Promotion: Traffic building programs with publicity value will be
implemented quarterly. Relevant and preferred listings in directories, databases
and search engines will also be pursued.

        Cooperative Marketing: Co-promotion through compatible editorial sites
and media partners.

        Syndication: OnHealth editorial content will appear on other sites, in
exchange for payment or for promotional consideration.

CONTENT STRATEGY

        The Company's goals for its editorial content are to create high-value,
useful, accessible, and trustworthy editorial elements for its users. These
elements may be:

        Proprietary: Created exclusively for OnHealth by Company employees or
contractors.

        Syndicated: Licensed for distribution via OnHealth, on an exclusive or
non-exclusive basis.

        Linked: OnHealth may "point" to other content elsewhere on the World
Wide Web. Although this content is not exclusive to OnHealth, the Company adds
value by finding and pre-qualifying the best health-related content on the
Internet.

        Additional content to be added to the Network in the future may include
high-value content, which may be licensed in context of user models that go
beyond advertising support.


                                       17
<PAGE>   20
        Management believes that through a combination of these content
strategies, the OnHealth brand can create a unique product that will have more
user value and will have a potential for greater levels of usage than any
health-related content now on the World Wide Web.

OTHER IVI ACTIVITIES

        Agreement With and Investment in America's Health Network ("AHN")

        As part of its integrated publishing strategy, the Company has developed
a strategic relationship with AHN to provide health and medical programming on
cable television. AHN has developed a consumer health information cable
television network which features a physician and other health care
professionals responding to viewers' call-in questions interspersed with home
shopping segments featuring health related products. AHN began broadcasting on
March 25, 1996.

        The Company entered into an agreement with AHN dated May 25, 1995 (the
"AHN Agreement") pursuant to which the Company agreed to provide health and
medical information for AHN's cable television programming. The AHN Agreement
provides that the health and medical content produced by the Company for
broadcast on AHN shall remain the property of the Company but shall be licensed
exclusively to AHN for use in a televised program. AHN has agreed to pay the
Company a fee for the production of content used by AHN equal to the Company's
cost of producing or obtaining the requested content plus 15%. In addition, AHN
has agreed to pay the Company $11,000,000 in royalties over the life of the AHN
Agreement. The Company recognized $493,000 in royalty revenue in 1997, and
applied additional payments made by AHN against previously reserved receivables.
The Company expects to receive $2,250,000 in cash during 1998 under this
agreement. The first $715,000 will be applied against the previously reserved
receivables. The AHN Agreement extends to five years beyond the date AHN began
broadcasting. The amount of future royalties is subject to reduction, however,
in the event the Company fails to deliver health and medical content in
accordance with the terms of the agreement. The royalties will also be reduced
to 25% of their original amount in the event the Company terminates the
exclusivity provisions of the AHN Agreement. In the event AHN achieves its
revenue forecasts for its first five years of operations, the Company may earn
additional royalties which are payable within 45 days after the end of the fifth
year of AHN's operations.

        The Company holds an equity position in AHN which it acquired in March
1994 in exchange for an investment of $2,000,000, which was expensed in 1994.
AHN subsequently has acquired additional financing from other investors. The
Company estimates that its percentage interest in the equity of AHN at December
31, 1997 is approximately 4%.

        Over the past year, AHN has been unable to consistently make the minimum
payments under this agreement, due to its own lack of funding. In late 1997,
however, AHN received new venture funding, became current on payments owed to
IVI, and its contractual relationship with IVI continues.

        Time Life Relationship

        The Company has established a strategic relationship with Time Life to
broaden its content base. In February 1994, the Company entered into a license
agreement (the "First Time Life Agreement") with Time Life for the exclusive
license to develop, manufacture and distribute to third party resellers
interactive multimedia versions of six Time Life books. In September 1994, the
Company and Time Life entered into a second license agreement (the "Second Time
Life Agreement") which grants the Company an exclusive right-of-first-offer for
the right to publish non-print versions for any and all health and/or medical
material and/or titles which Time Life intends to publish for commercial
purposes in print media.

        Pursuant to the First Time Life Agreement, three titles for children
were released during 1994. In order to focus on its integrated publishing
strategy to distribute health and medical information primarily to adult
audiences, the Company has suspended efforts to produce any further children's
titles and is closing out remaining inventory of the titles.


                                       18
<PAGE>   21
        Pursuant to the Second Time Life Agreement, the first title developed by
the Company was Taking Control Of Your Health. Released in September 1996, this
home medical guide on CD-ROM provides comprehensive information on alternative
and conventional medicine. Based on the book from Time Life entitled The Medical
Advisor - The Complete Guide to Alternative & Conventional Treatments, released
in September 1996, the content for this product was developed by a team of over
60 physicians.

        As compensation for developing the Taking Control of Your Health
concept, the Company granted Time Life 60,000 restricted shares of its Common
Stock. Under the Second Time Life Agreement, the Company funded Time Life's
development of the print version of the series at an estimated cost of
approximately $2.2 million through September 1996. At December 31, 1996, the
Company recorded an asset of $1,778,000, which represented the Company's
payments to Time Life, net of royalty payments received from Time Life. The
Company's policy was to amortize this asset over the period that revenues were
recognized. During 1997, revenues from the print version were not as high as
anticipated, and management determined that the asset was not realizable.
Accordingly, the Company wrote-off the then remaining asset balance and expensed
$1,741,000 in general and administrative expenses. Time Life retains the right
for marketing and distributing the print version of each title while the Company
has the sole right for the marketing and distribution of the non-print versions
of the title. The Company has the right to receive a royalty from Time Life for
the sale of the print version of the title and has a royalty-free license for
the distribution of the electronic version of the title. The term of the license
is perpetual from the date the title was accepted by the Company. Time Life has
the right to approve the final versions of the title, which approval shall not
be unreasonably withheld, prior to distribution. To date, Time Life has not
refused approval for a title developed by the Company.

        Massachusetts Medical Society License Agreement

        In November 1994, the Company and Massachusetts Medical Society ("MMS")
entered into a license agreement pursuant to which the Company was granted an
exclusive license to develop and distribute to end users the digital format
versions of the monthly newsletter "Health News" currently published by MMS. In
exchange for these rights, the Company assisted MMS with the funding of the
newsletter at a rate of $250,000 per year for the three years ended November
1997. The Company will also pay MMS a royalty based on a percentage of the net
revenues earned by sale of the digital format versions of the newsletter.

        The term of the license agreement is five years after the date on which
the design format was approved by MMS and the content was available to the
Company and will thereafter automatically renew for periods of one year each.
MMS has the sole right to and responsibility for the marketing and distribution
of the title in any non-digital format. MMS has the right to approve the final
form of each digital newsletter, which approval shall not be, and to date has
not been, unreasonably withheld or delayed, prior to distribution.

        Web Site Production

        The Company operates a New Media division whose goal is to build Web
sites for third parties. Third party customers currently include Searle, North
Memorial Hospital, MGI Pharma, and St. Jude Medical Center.

        Mayo Relationship and Transfer of Ownership of Mayo Health O@sis Web
Site

        Until the third quarter of 1997, the Company's relationship with Mayo
had been one of the most significant elements in the Company's development. Mayo
Foundation, parent corporation for Mayo Foundation for Medical Education and
Research, is the legal entity under which Mayo Clinic Group Practices, Mayo
Medical School and certain other Mayo institutions operate. In September 1997,
the Company completed a transfer of control and ownership interest in the Mayo
Health O@sis Internet web site to Mayo. The principal terms of the transfer of
ownership included: 1) Mayo made a cash payment to the Company of $2.7 million;
2) Mayo returned 490,000 shares of the Company's common stock which Mayo had
received as partial payment in two previous license agreements with the Company;
3) Mayo agreed to make payments to the Company of certain royalties on all net
revenues received by Mayo in connection with O@sis and certain non-O@sis
Internet projects through the year 2001; 4) Mayo was released from the Company's
previously granted "right of first offer" on all Mayo products published in
electronic media; and 5) Mayo assumed all O@sis operational expenses retroactive
to January 1, 1997. In addition, the Company is no longer required to gain
Mayo's approval before entering into agreements concerning 


                                       19
<PAGE>   22
the health or medical education materials of another entity.

        Current Mayo License Agreements

        In April 1991, the Company entered into a License Agreement (the "1991
License Agreement") pursuant to which it obtained an exclusive five-year license
from Mayo and William Morrow Company to develop, manufacture and distribute
interactive multimedia versions of Mayo Clinic Family Health Book. William
Morrow receives a minimum annual royalty, or if greater, a percentage of net
sales of the title. In December 1995, the Company amended the agreement with
Mayo and William Morrow to include online distribution rights and to extend the
rights period until September 2000.

        In April 1993, the Company and Mayo entered into a License Agreement
(the "1993 License Agreement") which granted the Company an exclusive license to
develop, produce and market up to ten title areas with specific content to be
determined jointly by Mayo and the Company, in all digital optical electronic
publishing formats. The licenses with respect to the ten title areas are
severable, so that if one is terminated the others are not affected. Mayo
retains the right to market the titles developed under the 1993 License
Agreement to end users or persons employing or educating end users. The term of
the license is ten years for each title from the date of first commercial sale.
The term as to any new edition of a title recommences when the new edition is
released. Mayo retains broad approval rights with respect to the substance of
each title, the marketing plan, the business plan and advertising and
distribution and also receives a royalty based on a percentage of net sales for
each title. All of the Company's CD-ROM titles produced in conjunction with
Mayo, excluding Mayo Clinic Family Health Book, were granted under the 1993
License Agreement.

        In September 1994, the Company and Mayo entered into another License
Agreement (the "1994 License Agreement") which grants the Company, for a period
of five years, the right to produce up to five additional titles in various
interactive or multimedia formats. The licenses with respect to each other are
severable so that if one is terminated the others are not affected. The term of
the license is ten years from the date of first commercial sale and the term, as
to any new edition of a title, recommences when the new edition is released.
Mayo Health O@sis, which was sold back to Mayo in September 1997, is the only
title produced under the 1994 License Agreement.

        Mayo CD-ROM Titles

        Pursuant to its still existing license agreements with Mayo (see "Mayo
License Agreements"), the Company markets six consumer reference titles or
packages and one professional title, all on CD-ROM.

        Consumer Reference CD-ROM Titles

        Mayo Clinic Family Health. This title is a source of health care
information for family members of all ages, including information on nutrition,
wellness, first aid, the health care system and the symptoms, prognosis and
treatment for more than 1,000 diseases and disorders. In September 1997, the
Company introduced the updated version 4.0 of Mayo Clinic Family Health, adding
built-in Microsoft Internet Explorer browser support for linking to Mayo Health
O@sis web site, several new graphics and illustrations and a new Personal Food
Pyramid.

        Mayo Clinic Family Pharmacist. Released in June 1994 and updated with a
new 1997 drug database, this title is a comprehensive home reference guide to
prescription and over-the-counter medications and therapeutic and diagnostic
procedures. The USP, DI Volume II, "Advice for The Patient" (The United States
Pharmacopeial Convention, Inc.) is the core database for the disc and has been
supplemented with information provided by pharmacists and physicians from Mayo.
The Company also added built-in Microsoft Internet Explorer browser support for
linking to Mayo Health O@sis on the Internet.

        Mayo Clinic Ultimate Medical Guide II. Released in September 1997, it is
a combination of the latest versions of both Mayo Clinic Family Health and Mayo
Clinic Family Pharmacist packaged together. This powerful combination of two
highly-acclaimed titles is packed with information essential to family health.
With Mayo Clinic Family Health, consumers can search for in-depth facts about
diseases, nutrition, anatomy, common symptoms, home safety and more. Mayo Clinic
Family Pharmacist offers details on thousands of drugs, early detection and
first aid.


                                       20
<PAGE>   23
        Mayo Clinic - The Total Heart. This title is a comprehensive source of
information concerning the heart, cardiovascular disease, diet plans and
exercise programs to promote a healthy heart. The print version of the title,
entitled Mayo Clinic Heart Book, was released by Mayo in August 1993, and the
Company released the interactive multimedia version in October 1993.

        Mayo Clinic Sports, Health & Fitness. Released in November 1994, this
title was developed in cooperation with the Mayo sports medicine department and
in collaboration with ESPN. It is an individualized interactive fitness,
nutrition, and sports physiology guide.

        Mayo Clinic Health Encyclopedia. First released in 1994 and updated in
1995, this product combines all four Mayo Clinic CD-ROM titles into a single
package.

        Professional CD-ROM Title

        PrimePractice. This title is a comprehensive resource developed to meet
the ongoing education needs of primary care physicians. PrimePractice is a
CD-ROM series marketed to physicians in North America specializing in internal
medicine, general practice or family practice. The first issue of this series
was completed in July 1994 and the last in December 1996. Subscribers to
PrimePractice receive a CD-ROM series covering current topics of interest to
primary care physicians including the latest developments in cardiovascular
disease, endocrinology, gastroenterology, hematology, pulmonary medicine and
other areas. Each issue of the series provides the physician with ten hours of
continuing medical education credits (CME). By subscribing to the series, a
physician can obtain up to 40 hours of CME on an annual basis. Although
requirements for annual CME vary from state to state, most primary care
physicians are required to obtain 50 hours of CME per year.

        In December 1995, the Company entered into a Distribution Agreement with
Churchill Livingstone whereby Churchill Livingstone agreed to market
PrimePractice to physicians and others with influence over physicians'
continuing education. Before entering into this agreement, the Company marketed
PrimePractice through its own sales staff, catalogs and health sciences
bookstores. Churchill Livingstone was acquired by Harcourt Brace, Inc. in
September 1997 and the Company and representatives of Harcourt Brace, Inc. are
currently discussing a termination and settlement related to the Distribution
Agreement.

        Agreement With Davidson & Associates, Inc. for CD-ROM Distribution

        In late 1995, the Company entered into an agreement with Davidson &
Associates, Inc. to strengthen distribution capabilities. Under the agreement,
Davidson handles the sales and marketing of the Company's consumer oriented
family health reference CD-ROM titles. Davidson is a leading publisher and
distributor of multimedia educational and entertainment software for both the
home and school markets. As such, the Company believes that this agreement has
provided greater access to consumer channels while enabling the Company to focus
its marketing and sales staff on the Company's online business.

        Marketing, Distribution and Manufacturing of CD-ROMs

        The Company's non-retail distribution is done outside of the Davidson
agreement. This includes arrangements and sales to original equipment
manufacturers ("OEM") for bundling with the OEM's hardware. Bundling consists of
selling software titles to computer hardware vendors and computer and peripheral
manufacturers for inclusion with their products. In addition to revenue,
bundling creates positive word-of-mouth endorsements from consumers of the
Company's titles which could ultimately lead to greater sales at the retail
level.

        The number of CD-ROM titles competing for retail shelf space has
increased substantially in recent years. In addition, the distribution channels
through which the Company sells its products are known for rapid change.
Mergers, consolidations and financial difficulties of both distributors and
retailers are typical as is the emergence of new retailers. This environment
breeds an intense competition among software products for shelf space and
retailer support. In order to remain competitive and maintain distributor
relationships, the Company's policy is to accept product returns from its
distributors.


                                       21
<PAGE>   24
        All of the Company's CD-ROM titles are currently replicated by Sony Disc
Manufacturing ("Sony"), a division of Sony Electronic Publishing Company. Sony
also warehouses the Company's finished goods inventory and handles order
fulfillment. Although the Company anticipates that its relationship with Sony
will continue, the Company believes that other manufacturers are available to
replicate its titles and handle its order fulfillment.

TECHNOLOGY

        The Company has implemented, and intends to continue to implement, a
combination of proprietary technologies developed in-house by the Company and
commercially obtained, licensed technologies. These technologies are employed in
hosting the Company's Web sites, delivering licensed and original content and
advertising, supporting content development and maintenance, transaction
processing, security, and back-end functions.

COMPETITION

        The editorial environment in interactive media is new, highly
competitive and rapidly evolving. The competitive frame varies depending upon
the area of the company.

        Online Competitors

        There is significant interest in health-related content among online
consumers. Demographic factors and the growth of online audiences suggest that
the popularity of this content will continue to increase. Similarly, major
health advertisers are showing increased levels of interest in the Internet.

        The key operators of health-related sites on the Internet today include:

        Divisions or affiliates of print publishers, including Healthy Ideas
(Rodale Press), Phys (Conde Nast), and Thrive (jointly owned by Time Inc. and
America Online).

        Ventures of online service firms, including Better Health (iVillage) and
Thrive (partly owned by America Online and Time Inc.).

        Public Sector and institutional sites, including the National Institute
of Health and university sites. While these sites compete for viewer time and
attention, they do not typically compete for advertising or transactional
revenues.

        Commercial online services, principally the proprietary health-related
content presented to subscribers to America Online and Microsoft Network.

        Internet sites other than health-related sites, including general
interest sites, such as news sites and search engines, which often host some
health-related content in context of other editorial materials.

        In addition, the online sites compete to some extent with other media,
including print and television. The Company believes that the principal
competitive factors which differentiate OnHealth from competing brands and sites
include timeliness of content, the users' perception of content interactivity,
content reliability and trustworthiness, design and usability factors,
comprehensiveness and level of promotion.

        This level of competition may result in an environment in which content
or promotional expenses to the Company increase. It may also result in a higher
level of competition for key promotional vehicles. The known and prospective
competitors to the Company are often significantly larger and better financed
than the Company and will likely be better able to afford a more intense
competitive environment than the Company.

        Web Site Production Competitors

        The Company's web site production business competes with development
resources in independent production shops, advertising agencies and client
company's' in-house production resources. The Company believes 


                                       22
<PAGE>   25
that competitive factors that favor IVI's Web site production business include
better knowledge of the health marketplace, Company relationships acquired
through the OnHealth Network and an established base of talented professionals.

        CD-ROM Competitors

        The intense competition in the consumer software business continues to
accelerate as an increasing number of companies, many of which have financial,
managerial, technical and intellectual property resources greater than those of
the Company, offer products that compete directly with one or more of the
Company's products. In the CD-ROM line of business, the Company competes with
other CD-ROM publishers for rights acquisition, retail and OEM distribution and
retail shelf space. The key competitive factors that may favor the Company
include the brand names on some of its successful titles and its existing retail
distribution relationships.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company regards its copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to its
success, and relies on trademark, copyright, trade secret and patent protection
to protect its proprietary rights. While the Company tries to assure that the
quality of its brand is maintained through such actions, there can be no
assurance that steps taken by the Company to protect its proprietary rights will
be adequate or that third parties will not infringe on the Company's
intellectual property. In addition, there can be no assurance that third parties
will not assert infringement claims against the Company which, even if not
meritorious, could result in the expenditure of substantial resources and
management effort.

LEGAL PROCEEDINGS

        In February 1996, an action in the District Court of Hennepin County
(Minnesota) was brought by T. Randal Productions et al. against the Company and
one current and two former employees. The plaintiffs made various allegations,
including misappropriation of corporate opportunities and trade secrets by the
Company and its employees and sought award of monetary damages, exemplary
damages and royalties substantially in excess of $10.0 million. In November
1997, a jury found that there was no joint venture between T. Randal and the
Company and/or any of its employees but awarded T. Randal $480,000 plus interest
for damages sustained to its business. The jury verdict and the resulting
judgment entered by the court on March 24, 1998 is subject to motions for a new
trial, amended findings and for judgment notwithstanding the verdict and to
appeal to the Court of Appeals. The plaintiffs also have an action pending
against certain affiliates of the Company on the same grounds on which the
action against the Company was based. The Company has indemnified these
principles against any damages arising out of these claims.

        In 1996, Berkshire Multimedia Group, Inc. ("Berkshire") initiated
mediation regarding a dispute with the Company. Shortly after an unsuccessful
mediation conference was held in September 1996, Berkshire Multimedia Group
filed a demand for arbitration alleging that the Company breached its
obligations under a contract. An arbitration hearing was completed in January
1997, and in February 1997 the arbitration panel awarded Berkshire $300,000.
Hennepin County (Minnesota) District Court vacated that award on May 29, 1997,
and Berkshire appealed the case. The Court of Appeals heard the case in late
1997 and reinstated the original decision of the arbitration panel in January
1998. On February 25, 1998, the Hennepin County (Minnesota) District Court
issued an order directing that judgment be entered against the Company in the
amount of $300,000 plus interest. In March 1998, the Company paid Berkshire
$305,000 in full satisfaction of such judgement.

EMPLOYEES

        As of March 31, 1998, the Company employed 25 people on a full-time
basis. As the situation arises, the Company also uses part-time employees. None
of the Company's employees are represented by a labor union and the Company
considers its relationship with its employees to be good. The Company believes
that some measure of its future success is dependent upon attracting and
retaining qualified employees, and competition for hiring such employees is
intense.


                                       23
<PAGE>   26
                             DESCRIPTION OF PROPERTY

        During 1997, the Company's principal executive and administrative
offices consisted of approximately 40,000 square feet in an office building in
Eden Prairie, Minnesota, a suburb of Minneapolis. The lease also covered
approximately 2,000 square feet of storage space. The Company terminated the
Eden Prairie lease effective March 31, 1998.

        Effective in the first quarter of 1998, the Company's principal
executive and administrative offices are located in Seattle, Washington.
Starting in January 1998, the Company began subleasing approximately 1,500
square feet of office space in Seattle, Washington on a month-to-month basis.
Subsequently, the Company has entered into a lease for approximately 7,000
square feet of space located at 808 Howell Street, suite 400, Seattle,
Washington 98101. The lease expires approximately 62 months from the move in
date which occurred May 1, 1998.

        The Company's sales personnel are currently located in an office
building in Edina, Minnesota, a suburb of Minneapolis. The lease is for
approximately 1,000 square feet and expires in September 1998.

        The Company also leases space in the following locations: (1) 4,124
square feet in an office building in Carlsbad, California ending in June 1999
and (2) 790 square feet in an office building in Carlsbad, California ending in
May 1998. The Company does not currently intend to renew either of these leases


                                 USE OF PROCEEDS

        The Company will not receive any proceeds from the sale of the Common
Stock offered hereby; nor will such proceeds be available for the Company's use
or benefit.


                                       24
<PAGE>   27
                              SELLING SHAREHOLDERS

        On April 10, 1998, Advantage Fund II Ltd. acquired 3,000 shares of
Preferred Stock and 40,067 of the Warrants and Koch Industries, Inc. acquired
2,000 shares of Preferred Stock and 26,711 of the Warrants.

        The following table sets forth certain information regarding the
beneficial ownership of the Common Stock by the Selling Shareholders and as
adjusted to give effect to the sale of the Shares offered hereby:

<TABLE>
<CAPTION>
                                                                                   BENEFICIAL OWNERSHIP
                                                                                     AFTER OFFERING(2)
                                   SHARES BENEFICIALLY                             ---------------------
                                      OWNED PRIOR TO        SHARES BEING 
  SELLING SHAREHOLDER                  OFFERING (1)          OFFERED(1)            SHARES        PERCENT
  -------------------              -------------------      ------------           ------        -------
<S>                                <C>                      <C>                    <C>           <C>

Advantage Fund II Ltd.                  1,290,000             1,290,000             -0-             -0-
                                        ---------             ---------             ---             ---
                                                                                               
Koch Industries, Inc.                     860,000               860,000             -0-             -0-
                                        ---------             ---------             ---             ---
</TABLE>

(1)     The number of shares of Common Stock shown as beneficially owned and
        offered by the Selling Shareholders represents the number of shares
        which the Company has initially agreed to register. Pursuant to Rule 416
        under the Securities Act, the number of shares of Common Stock offered
        by the Selling Shareholders hereby and included in the Registration
        Statement of which this Prospectus is a part also includes such
        presently indeterminate number of additional shares as may be issued on
        conversion of the Preferred Stock, including the payment of dividends
        thereon in additional shares of Preferred Stock pursuant to the
        provisions of the Certificate of Designation of the Preferred Stock
        regarding determination of the applicable conversion price and upon
        exercise of the Warrants. Accordingly, the actual number of shares of
        Common Stock issued or issuable upon the conversion of the Preferred
        Stock and upon exercise of the Warrants thereon is subject to adjustment
        depending upon factors which cannot be predicted by the Company at this
        time, including among others, the future market prices of the Common
        Stock and the payment of dividends on the Preferred Stock in additional
        shares of Preferred Stock. Pursuant to the terms of the Certificate of
        Designation of the Preferred Stock, the Preferred Stock is convertible
        by each holder thereof only to the extent that the number of shares of
        Common Stock then beneficially owned by such holder and its related
        persons (not including shares underlying unconverted shares of Preferred
        Stock) would not exceed 4.9% of the then outstanding shares of Common
        Stock as determined in accordance with Sections 13(d) and 16 of the
        Exchange Act. Accordingly, the number of shares of Common Stock set
        forth for a Selling Shareholder may exceed the actual number of shares
        of Common Stock that the Selling Shareholder could own beneficially at
        any given time through its ownership of the Preferred Stock. The above
        numbers assume that the Selling Shareholders will exercise the Warrants
        for cash. If the Selling Shareholders use the cashless exercise
        alternative, the actual number of shares of Common Stock issued will be
        fewer, depending on the market value of the underlying shares of Common
        Stock immediately prior to exercise.

(2)     Assumes the sale of all of the Shares being offered hereby.

        The Selling Shareholders and their respective officers and directors
have not held any positions or office or had any other material relationship
with the Company or any of its affiliates within the past three years.

        The Company has agreed with the Selling Shareholders to file with the
Commission, under the Securities Act, the Registration Statement of which this
Prospectus forms a part, with respect to the resale of the Shares, and has
agreed to prepare and file such amendments and supplements to the Registration
Statement as may be necessary to keep the Registration Statement effective until
the earlier of (i) three years from the effectiveness of the Registration
Statement (ii) the date that the Selling Shareholders may sell all of its Shares
under Rule 144 of the Securities Act, or (iii) such date that none of the
Selling Shareholders own any of the Shares offered hereby.


                                       25
<PAGE>   28
                              PLAN OF DISTRIBUTION

        The Selling Shareholders may sell the Shares from time to time in
transactions on the Nasdaq SmallCap Market, in the over-the-counter market, in
negotiated transactions, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. The
Selling Shareholders may effect such transactions by selling the Shares to or
through broker-dealers' including block trades in which brokers or dealers will
attempt to sell the Shares as agent but may position and resell the block as
principal to facilitate the transaction, or in one or more underwritten
offerings on a firm commitment or best efforts basis. Sales of Selling
Shareholders' Shares may also be made pursuant to Rule 144 under the Securities
Act, where applicable.

        To the extent required under the Securities Act, the aggregate amount of
Selling Shareholders' Shares being offered and the terms of the offering, the
names of any such agents, brokers, dealers or underwriters and any applicable
commission with respect to a particular offering will be set forth in an
accompanying Prospectus supplement. Any underwriters, dealers, brokers or agents
participating in the distribution of the Shares may receive compensation in the
form of underwriting discounts, concessions or commissions from the Selling
Shareholders or the purchasers of the Shares for whom such underwriters or
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation to a particular underwriter or broker-dealer might be in
excess of customary commissions). The Selling Shareholders will be responsible
for all brokerage commissions and other amounts payable with respect to any sale
of Shares with respect to such Selling Shareholders and any legal, accounting or
other expenses incurred.

        From time to time, one or more of the Selling Shareholders may pledge,
hypothecate or grant a security interest in some or all of the Shares owned by
them, and the pledgees, secured parties or person to whom such securities have
been hypothecated shall, upon foreclosure in the event of default, be deemed to
be Selling Shareholders hereunder. In addition, a Selling Shareholder may, from
time to time, sell short the Common Stock of the Company, and in such instances
the Shares offered hereby may be used to cover such short sales and this
Prospectus may be delivered in connection with such sales.

        From time to time, one or more of the Selling Shareholders may transfer,
pledge, donate or assign such Selling Shareholders' Shares to lenders or others
and each of such persons will be deemed to be a "Selling Shareholder" for
purposes of this Prospectus. The number of Selling Shareholders' Shares
beneficially owned by those Selling Shareholders who so transfer, pledge, donate
or assign Selling Shareholders' Shares will decrease as and when they take such
actions. The plan of distribution for Selling Shareholders' Shares sold
hereunder will otherwise remain unchanged, except that the transferees,
pledgees, donees or other successors will be Selling Shareholders hereunder.

        A Selling Shareholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the Common
Stock in the course of hedging the position they assume with such Selling
Shareholder, including, without limitation, in connection with distributions of
the Common Stock by such broker-dealers. A Selling Shareholder may also enter
into options or other transactions with broker-dealers that involve the delivery
of the Common Stock to the broker-dealers, who may then resell or otherwise
transfer such Common Stock. A Selling Shareholder may also loan or pledge the
Common Stock to a broker-dealer and the broker-dealer may sell the Common Stock
so loaned or, upon a default, may sell or otherwise transfer the pledged Common
Stock.

        In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirements is available and is complied with.

        The Selling Shareholders and any broker-dealers who act in connection
with the sale of Shares hereunder may be deemed to be "underwriters," as such
term is defined in the Securities Act, and any commissions received by them or
profit on any resale of the Shares might be deemed to be underwriting discounts
and commissions under the Securities Act.


                                       26
<PAGE>   29
        Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Shares may not bid for or purchase
shares of Common Stock during a period which commences one business day (5
business days, if the Company's public float is less than $25 million or its
average daily trading volume is less than $100,000) prior to such person's
participation in the distribution, subject to exceptions for certain passive
market making activities. In addition and without limiting the foregoing, each
Selling Shareholder will be subject to applicable provisions of the Exchange Act
and the rules and regulations thereunder, including without limitation,
Regulation M, which provisions may limit the timing of purchases and sales of
shares of the Company's Common Stock by such Selling Shareholder.

        The Company is bearing all costs relating to the registration of the
Shares. Any commissions, discounts or other fees payable to brokers or dealers
in connection with any sale of the Shares will be borne by the Selling
Shareholders, the purchasers participating in such transaction, or both. None of
the proceeds from the sale of the Shares by the Selling Shareholders will be
received by the Company. The Company and the Selling Shareholders each have
agreed to indemnify the other against certain liabilities, including liabilities
arising under the Securities Act.


                        DIRECTORS AND EXECUTIVE OFFICERS

        The names, ages and positions of the directors and executive officers of
the Company as of May 22, 1998 are as follows:

<TABLE>
<CAPTION>
       NAME                                    AGE       POSITION
       ----                                    ---       --------
<S>                                            <C>       <C>
       Robert N. Goodman                        46       President and Chief Executive Officer of the Company
       Michael D. Conway                        30       Controller, Vice President of Finance, Secretary
       Rebecca Farwell                          36       Editor in Chief
       Jim L. Dixon                             33       Vice President of Development
       Deborah K. Taylor                        39       Vice President of Marketing
       Miriam Adelman                           26       Vice President of New Media
       Timothy J. Walsh                         36       Vice President of Sales
       Michael A. Brochu                        44       Chairman of the Board of Directors
       Ronald E. Eibensteiner                   47       Director
       Alan D. Frazier                          46       Director
       Timothy I. Maudlin                       47       Director
       Ann Kirschner                            47       Director
       Ram Shriram                              41       Director
       Rick Thompson                            38       Director
</TABLE>

        Executive officers of the Company are elected at the discretion of the
Board of Directors with no fixed term. There are no family relationships between
or among any of the executive officers or directors of the Company.

BACKGROUNDS OF EXECUTIVE OFFICERS AND DIRECTORS

        ROBERT N. GOODMAN. Mr. Goodman joined the Company in November 1997 as
president and chief executive officer. From April 1997 to November 1997, he was
the director of business development for MSNBC Interactive News, LLC. From
December 1995 to April 1997, Mr. Goodman was an independent consultant working
for Microsoft Corporation. Mr. Goodman was in the process of moving from San
Francisco, CA to Seattle, WA during October and November 1995. From November
1993 to October 1995, he was Assistant General Counsel for 


                                       27
<PAGE>   30
The 3DO Company. From April 1993 to November 1993, Mr. Goodman was General
Counsel for Asymetrix Corporation.

        MICHAEL D. CONWAY. Mr. Conway joined the Company in early January 1998
as controller and vice president of finance. From November 1997 to December
1997, he worked as an independent contractor for PhotoDisc, Inc. - a developer
of high-resolution photographs on CD-ROM , and Sierra On-Line, Inc.- a leader in
entertainment software and a subsidiary of Cendant. From May 1996 to October
1997, Mr. Conway served as the Accounting Manager at Sierra On-Line, Inc. From
August 1994 to May 1996, Mr. Conway served as a Senior Accountant at Deloitte &
Touche LLP. From October 1992 to August 1994, he held various positions at KPMG
Peat Marwick including Senior Accountant. Mr. Conway received his B.A. in
Economics/Accounting from Claremont McKenna College, and his M.B.A. from the
Claremont Graduate School's Peter Drucker School of Management.

        REBECCA FARWELL. Ms. Farwell joined the Company in early February 1998.
Prior to that, she was the editorial director for Discovery Channel Online
(DCOL) and Discovery Publishing. She began her career at the Discovery Channel
in 1987 as the managing editor of TDC Magazine.

        JIM L. DIXON. Mr. Dixon joined the Company in early January 1998 as Vice
President of Development. From October 1996 to December 1997, Jim was the
principal of his own business (The Voodoo Softworks), where he secured several
contracts with Microsoft and other companies as an independent software
development house. From March 1996 to October 1996, he was the lead developer
for Alpenglow, Inc., a small multimedia and web development house. From February
1994 to March 1996, he was the lead developer for Medio Multimedia, Inc.--a
producer of multimedia title and magazine CD-ROMs. And from September 1990 to
February 1994, Jim was a software test manager at Microsoft, in charge of the
Visual Basic products. In 1988, he graduated with a B.S. in Computer Science and
Minor in Business from the Evergreen State College in Olympia, WA.

        DEBORAH K. TAYLOR. Ms. Taylor joined the Company in January 1998 as Vice
President of Marketing. From April 1994 to December 1997, she was employed as a
Senior Vice President, Management Supervisor for Elgin DDB, the Seattle office
of DDB, one of the world's largest advertising and communications agencies,
managing new business and the Nordstrom retail account. From January 1990 to
April 1994, Ms. Taylor was the Vice President, Account Director of McCann
Erickson in Seattle, another worldwide advertising agency. At McCann Erickson,
she ran the strategic communications efforts for several consumer products
accounts. Ms. Taylor has a B.A. in American History from Mills College in
California.

        MIRIAM ADELMAN. Ms. Adelman joined the Company in March 1998 as vice
president of new media. From November 1996 to March 1998, she ran Adelwave
Productions,a sole proprietorship that produced websites for Microsoft. From
June 1994 to November 1996, Miriam worked as an interactive media producer and
marketing consultant for Microsoft. From September 1993 to June 1994, Miriam was
a freelance illustrator for print magazines. Miriam received her BA in studio
art from Carleton College.

        TIMOTHY J. WALSH. Mr. Walsh has been Vice President of Sales and
Marketing since October 1996. Prior thereto, Mr. Walsh was the Vice President of
International Operations at TRO Learning, Inc. from October 1995 to September
1996. Mr. Walsh held various other management positions during his 10 years at
that company.

        MICHAEL A. BROCHU Mr. Brochu was appointed as a member of the Company's
Board of Directors in April 1997 and has also served as Chairman of the Company
since October 1997. Mr. Brochu has served as President and Chief Executive
Officer of Primus since November 1997. From October 1995 to October 1997, he
served as President and Chief Operating Officer of Sierra On-Line, Inc. and as
its Chief Financial Officer and Executive Vice President from July 1994 to
October 1995. From 1987 to July 1994, Mr. Brochu served in the positions of
Senior Vice President, Chief Financial Officer and Chief Operating Officer of
Burlington Environmental.

        RONALD E. EIBENSTEINER Mr. Eibensteiner has been a Director of the
Company since October 1997. He also served as Director of the Company from
February 1991 to June 1997. Mr. Eibensteiner has served as President of Wyncrest
Capital, Inc., a venture capital firm, since he founded it in January 1992. Mr.
Eibensteiner is also 


                                       28
<PAGE>   31
independent consultant. Mr. Eibensteiner is a director of OneLink
Communications, Inc., Reality Interactive, Inc. and Intranet Solutions, Inc.

        ALAN D. FRAZIER Mr. Frazier has been a Director of the Company since
January 1994. He has been managing partner of Frazier & Company LP, a venture
capital firm, since 1991. In addition, Mr. Frazier is a Director of NeoPath,
Inc., InControl, Inc. and Integrated Medical Resources, Inc.

        TIMOTHY I. MAUDLIN Mr. Maudlin was appointed as a member of the
Company's Board of Directors in August 1991. Mr. Maudlin also served as the
Company's Acting President and Chief Executive Officer from October 1997 to
November 1997 and as Chairman from August 1996 to October 1997. Mr. Maudlin has
been Managing Partner of Medical Innovation Partners, a medical venture capital
firm, since December 1988 and has also served as an officer of an affiliated
management company. Mr. Maudlin also serves as a director of Curative Health
Services, Inc.

        ANN KIRSCHNER Ms. Kirschner was elected as a Director of the Company on
February 23, 1998. She has served as Vice President of NFL Interactive for NFL
Enterprises, Inc. since December 1994, prior to which, she served as President
of Comma Communications for more than two years.

        RAM SHRIRAM Mr. Shriram was elected as a Director of the Company on
February 23, 1998. Mr. Shriram has served as Vice President of Netscape
Communications Corp., an internet company, since November 1994. Mr. Shriram
served as Director, Channel Sales of Network Computing Devices from October 1990
to November 1994.

        RICK THOMPSON Mr. Thompson was elected as a Director of the Company on
February 23, 1998. Mr. Thompson has served as Vice President of Microsoft
Corporation's Hardware Division since October 1987.

        Executive officers are elected by the Board of Directors of the Company
at the first meeting after each annual meeting of shareholders and hold office
until their successors are elected and duly qualified.


                                       29
<PAGE>   32
         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth the number of shares of the Company's
Common Stock beneficially owned by (i) each director and nominee for election to
the Board of Directors of the Company; (ii) each of the named executive officers
in the Summary Compensation Table; (iii) all directors and executive officers as
a group; and (iv) to the best of the Company's knowledge, all beneficial owners
of more than 5% of the outstanding shares of the Company's Common Stock as of
May 15, 1998. Unless otherwise indicated, the shareholders listed in the table
have sole voting and investment power with respect to the shares indicated.

<TABLE>
<CAPTION>
                                                  COMMON SHARES
NAME (AND ADDRESS OF 5%                           BENEFICIALLY                    PERCENT OF
HOLDER) OR IDENTITY OF GROUP(1)                     OWNED(2)                       CLASS(2)
-------------------------------                   -------------                   ----------
<S>                                               <C>                             <C>

Robert N. Goodman                                        0                            --
Michael A. Brochu                                   12,500(3)                         *
Timothy I. Maudlin                                 762,620(4)                        7.4%
Alan D. Frazier                                    251,135(5)                        2.5%
Ronald E. Eibensteiner                             327,062(6)                        3.2%
Ann Kirschner                                            0                            --
Ram Shriram                                              0                            --
Rick Thompson                                            0                            --
Timothy J. Walsh                                    66,053(7)                         *
Joy A. Solomon                                     182,500(8)                        1.8%
Perkins Group                                    1,765,925(9)                       17.4%
 Medical Innovation Partners                       707,922(10)                       6.9%
Wayne W. Mills                                     529,500(11)                       5.2%
Nevis Capital Management, Inc.                     902,800(12)                       8.9%
All Directors and Executive                      1,283,517(13)                      12.2%
 Officers as a Group (9 persons)
</TABLE>

---------------

*       Less than 1% of the outstanding shares of Common Stock.

(1)     The addresses of the more than 5% holders are: Perkins Group (Perkins
        Capital Management, Inc. and Perkins Opportunity Fund) - 730 East Lake
        Street, Wayzata, MN 55391; Medical Innovation Partners and Timothy I.
        Maudlin - 421 Opus Center, 9900 Bren Road East, Minneapolis, MN 55343;
        Alan D. Frazier - Two Union Square, 601 Union Street, Suite 2110,
        Seattle, WA 98101; Wayne W. Mills - 5500 Wayzata Boulevard, Suite 290,
        Minneapolis, MN 55416; Nevis Capital Management, Inc. - 1119 St. Paul
        Street, Baltimore, MD 21202.

(2)     Under the rules of the Securities and Exchange Commission, shares not
        actually outstanding are nevertheless deemed to be beneficially owned by
        a person if such person has the right to acquire the shares within 60
        days. Pursuant to such SEC rules, shares deemed beneficially owned by
        virtue of a person's right to acquire them are also treated as
        outstanding when calculating the percent of class owned by such person
        and when determining the percentage owned by a group.

(3)     Includes 12,500 shares which may be purchased by Mr. Brochu upon
        exercise of currently exercisable options.

(4)     Includes 487,376 shares held by Medical Innovation Fund ("MIF"), 135,853
        shares held by Medical Innovation Fund II ("MIF II") and 909 shares held
        by MICI Limited Partnership ("MLP"); 25,150 shares held by or for family
        members; 83,784 shares which may be purchased by MIF upon the exercise
        of a currently exercisable warrant; and 15,000 shares which may be
        purchased by Mr. Maudlin upon exercise of currently exercisable options.
        Mr. Maudlin is the (i) Managing General Partner of Medical Innovation
        Partners ("MIP"), which is the General Partner of MIF, (ii) Managing
        General Partner of Medical Innovation Partners II ("MIP II"), which is
        the General Partner of MIF II and (iii) General Partner of MLP and an
        officer and principal shareholder of Medical Innovation Capital, Inc.,
        which is the Managing General Partner of MLP.

(5)     Includes 160 shares held by Frazier & Company, Inc., 2,260 shares held
        by Frazier Management LLC, 224,349 shares which may be purchased by
        Frazier & Company, L.P. upon exercise of a currently exercisable warrant
        and 15,000 shares which may be purchased by Mr. Frazier upon exercise of
        currently exercisable options. Mr. Frazier is the sole stockholder of
        Frazier & Company, Inc., which is the managing member of 


                                       30
<PAGE>   33
        Frazier Management, LLC and the managing member of Frazier & Company,
        L.P. Mr. Frazier may be deemed to share voting and investment power with
        respect to such shares. Mr. Frazier disclaims beneficial ownership of
        such shares except to the extent of his pecuniary interest in such
        shares arising from his interest in the entities referred to herein.

(6)     Includes 135,853 shares held by MIF II, 33,750 shares which may be
        purchased by Mr. Eibensteiner upon exercise of currently exercisable
        options and 11,217 shares which may be purchased by Mr. Eibensteiner
        upon exercise of a currently exercisable warrant. Mr. Eibensteiner is a
        limited partner of MIP II, which is a General Partner of MIF II. Mr.
        Eibensteiner disclaims beneficial ownership of such shares.

(7)     Includes 16,053 shares which may be purchased by Mr. Walsh upon exercise
        of currently exercisable options.

(8)     Includes 182,500 shares which may be purchased by Ms. Solomon upon
        exercise of currently exercisable options.

(9)     Of the shares, 1,181,550 shares are owned by clients of Perkins Capital
        Management, Inc. ("Perkins Capital") and 584,375 shares are owned by
        Perkins Opportunity Fund ("Perkins Fund"). Perkins Capital has the sole
        power to vote 1,061,675 shares, including 584,375 shares held by Perkins
        Fund, and no power to vote 703,620 shares. Perkins Capital has the sole
        investment power for all of the shares, including the 584,375 shares
        held by Perkins Fund. The Company has relied on information contained in
        a Schedule 13G Amendment filed with the Securities and Exchange
        Commission on February 11, 1998 by Perkins Capital and Perkins Fund as a
        group.

(10)    Includes 487,376 shares held by MIF, 135,853 shares held by MIF II and
        909 shares held by MLP and 83,784 shares which may be purchased by MIF
        upon exercise of a currently exercisable warrant. MIP is the General
        Partner of MIF, MIP II is the General Partner of MIF II and Timothy I.
        Maudlin is the General Partner of MLP.

(11)    The Company has relied on information contained in a Schedule 13D
        Amendment dated September 10, 1997 filed with the Securities and
        Exchange Commission by Mr. Mills.

(12)    The Company has relied on information contained in a Schedule 13G dated
        April 30, 1998 filed with the Securities and Exchange Commission by
        Nevis Capital Management, Inc., a registered investment advisor.

(13)    Includes 103,520 shares which may be purchased upon exercise of
        currently exercisable options and 308,133 shares which may be purchased
        upon exercise of currently exercisable warrants.


                            DESCRIPTION OF SECURITIES

COMMON STOCK

        The authorized Common Stock of the Company consists of 30,000,000
shares, no par value. As of May 15, 1998, there were approximately 10,136,710
shares of Common Stock outstanding held of record by 117 shareholders. Holders
of Common Stock are entitled to one vote per share on all matters submitted to a
vote of shareholders and may not cumulate votes for the election of directors.
Holders of Common Stock also are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of the liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. All the outstanding shares of Common Stock are, and all
shares of Common Stock to be outstanding upon completion of this offering will
be, fully paid and nonassessable.

SERIES B CONVERTIBLE PREFERRED STOCK

        The Preferred Stock accrues dividends quarterly in the amount of 5% per
annum. The Preferred Stock is convertible into Common Stock as follows: (i)
during the period from April 10 through July 9, 1998, the Preferred Stock,
together with accrued and unpaid dividends, may be converted into Common Stock
at a conversion price equal to $9.73, (ii) during the period from July 10, 1998
through October 7, 1998, the Preferred Stock, together with accrued and unpaid
dividends, may be converted into Common Stock at a conversion price equal to an
average of the closing bid prices of the Common Stock on selected dates prior to
conversion or $9.73, whichever is lower, and (iii) during the period from
October 8, 1998 through January 5, 1999, the Preferred Stock, together with
accrued and unpaid dividends, may be converted into Common Stock at a conversion
price equal to a 5% discount to the average of the closing bid prices of the
Common Stock computed from selected dates prior to the conversion or $9.73,
whichever is lower. Thereafter, each Preferred Share, together with accrued and
unpaid dividends, is convertible at a price per share of Common Stock at a
discount of 10% from the average of the closing bid prices of the Common Stock
computed from selected dates prior to the conversion or $9.73, whichever is
lower. Pursuant to the terms of the Certificate of Designation for the Preferred
Stock, the $9.73 amount and the percentage discounts described above are subject
to adjustment in certain circumstances and no holder can convert such holder's
Preferred Stock if such conversion would cause its beneficial ownership of
Common Stock (other than shares so owned through 


                                       31
<PAGE>   34
ownership of the Preferred Stock) to exceed 4.9%.

WARRANTS

        Other than the Warrants issued to the Selling Shareholders described
below, the Company has outstanding warrants to purchase 547,260 shares of
Common Stock. One, an underwriters' warrant for 100,000 shares of Common Stock
exercisable at a price of $17.04 per share expiring October 6, 1999. Another is
with Frazier Investments for 224,349 shares exercisable at a price of $6.61 per
share expiring June 3, 2000. The balance of the warrants are with various
parties with varying exercise prices.

        The Warrants. On April 10, 1998, in connection with the issuance of the
Preferred Stock, the Company issued to the Selling Shareholders Warrants to
purchase a total of 66,778 shares of Common Stock at an exercise price of $11.23
per share (subject to adjustment). The Warrants expire April 10, 2003.

            DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
                           SECURITIES ACT LIABILITIES

        Article V of the Company's Bylaws (the "Bylaws"), requires
indemnification of directors or officers of the Company to the fullest extent
not prohibited by the Minnesota Business Corporation Act (the "Act"). The
effects of the Bylaws and the Act (the "Indemnification Provisions") are
summarized as follows:

        (a)     The Indemnification Provisions grant a right of indemnification
in respect of any action, suit or proceeding (other than an action by or in the
right of the Company) against expenses (including attorney fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred, if the
person concerned acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the Company, was not
adjudged liable on the basis of receipt of an improper personal benefit and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe the conduct was unlawful. The termination of an action, suit or
proceeding by judgment, order, settlement, conviction or plea of nolo contendere
does not, of itself, create a presumption that the person did not meet the
required standards of conduct.

        (b)     The Indemnification Provisions grant a right of indemnification
in respect of any action or suit by or in the right of the Company against the
expenses (including attorney fees) actually and reasonably incurred if the
person concerned acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the Company, except
that no right of indemnification will be granted if the person is adjudged to be
liable to the Company.

        (c)     Every person who has been wholly successful on the merits of a
controversy described in (a) or (b) above is entitled to indemnification as a
matter of right.

        (d)     Because the limits of permissible indemnification under
Minnesota law are not clearly defined, the Indemnification Provisions may
provide indemnification broader than that described in (a) and (b).

        (e)     The Company may advance to a director or officer the expenses
incurred in defending any action, suit or proceeding in advance of its final
disposition if the director or officer affirms in writing in good faith that he
or she has met the standard of conduct to be entitled to indemnification as
described in (a) or (b) above and furnishes the company a written undertaking to
repay any amount advanced if it is determined that the person did not meet the
required standard of conduct.

        The Company may obtain insurance for the protection of its directors and
officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the persons indemnified may be
entitled under any bylaw, agreement, vote of shareholders or directors or
otherwise. The Company believes that its Articles of Incorporation and Bylaw
provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers.

        Insofar as indemnification for liabilities arising under the Securities
Act of 1933 Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the 


                                       32
<PAGE>   35
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable.


             MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS


        The Company's Common Stock, initially offered to the public on October
6, 1993, is quoted on the Nasdaq SmallCap Market system under the symbol "IVIP."

        The following table sets forth the high and low bid quotations for the
Company's Common Stock as reported by Nasdaq SmallCap for the last two fiscal
years. Such quotations reflect inter-dealer prices, without retail mark-up, mark
down or commission and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
       1998                          HIGH                 LOW
       ----                          ----                 ---
<S>                               <C>                  <C>     
   Second Quarter*                   8.625             $  5.375
    First Quarter                    6.00              $  2.625

       1997
       ----
Fourth Quarter                    $  4 1/4             $  2
    Third Quarter                    4 5/16               2
 Second Quarter                      3 7/8                2 1/16
    First Quarter                    4 1/2                2 7/8

       1996
       ----
Fourth Quarter                    $  3 7/8             $  2 15/16
    Third Quarter                    7 3/8                1 1/8
Second Quarter                       14 3/8               5 7/8
    First Quarter                    14 1/2               11 1/4
</TABLE>

*  Through May 20, 1998.

        At May 15, 1998, there were approximately 117 record holders of the
Company's Common Stock, excluding shareholders whose stock is held either in
nominee name and/or street name brokerage accounts. Based on information which
the Company obtained from its transfer agent, there are approximately 2,508
shareholders of the Company's Common Stock, including shareholders whose stock
is held either in nominee name and/or street name brokerage accounts.

        The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the near
future. To date, the Company has incurred losses and presently expects to retain
its future anticipated earnings to finance development of and expansion of its
business. The payment by the Company of dividends, if any, on its Common Stock
in the future is subject to the discretion of the Board of Directors and will
depend on the Company's earnings, financial condition, capital requirements and
other relevant factors.


                                       33
<PAGE>   36
                             EXECUTIVE COMPENSATION


SUMMARY COMPENSATION TABLE

        The following table sets forth all cash compensation paid or to be paid
by the Company, as well as certain other compensation paid or accrued, during
each of the Company's last three fiscal years to each person who served as Chief
Executive Officer during fiscal 1997 and the only other executive officer who
earned more than $100,000 in salary and bonuses in 1997.

<TABLE>
<CAPTION>
                                                                                      Long Term Compensation
                                                                                 --------------------------------
                                                                                         Awards          Payouts
                                                                                 --------------------------------
                                               Annual Compensation                Restricted               LTIP        All Other
Name and Principal          Fiscal      ------------------------------------     Stock Awards             Payouts    Compensation
     Position                Year       Salary($)      Bonus($)     Other($)         ($)       Options      ($)           ($)
------------------          ------      ---------      --------     --------     ------------  -------    -------    ------------
<S>                         <C>         <C>            <C>          <C>          <C>           <C>        <C>        <C>
Robert N. Goodman            1997        53,548          --            --            --        450,000      --            --
  President and Chief                                                                         
  Executive Officer                                                                           
                                                                                              
Timothy I. Maudlin           1997          0             --            --            --         65,000      --            --
  Former President and                                                                        
  Chief Executive                                                                             
Officer(1)                                                                                    
                                                                                              
Joy A. Solomon               1997       180,000          --            --            --         45,000      --            --
  Former President and       1996       171,000        21,000          --            --        180,000      --            --
  Chief Executive Officer    1995       171,000        45,000          --            --         30,000      --           1,000
                                                                                              
Timothy J. Walsh             1997       113,300        11,330          --            --         84,212      --            --
  Vice President of          1996        27,659        22,729          --            --         30,000      --            --
Sales(2)                                                                                      
</TABLE>

--------------

(1)     Mr. Maudlin, a director of the Company, served as an interim President
        and Chief Executive Officer of the Company from October 1997 to November
        1997, for which he received a stock option to purchase 60,000 shares of
        the Company's Common Stock and no cash compensation.

(2)     Mr. Walsh joined the Company in October 1996.


                                       34
<PAGE>   37
OPTION GRANTS DURING 1997 FISCAL YEAR

        The following table provides information regarding stock options granted
during fiscal 1997 to the named executive officers in the Summary Compensation
Table. The Company has not granted any stock appreciation rights.


<TABLE>
<CAPTION>
                                             Percent of Total
                                                 Options                                            Potential Realizable Value at
                        Number of Shares       Granted to         Exercise or                    Assumed Annual Rates of Stock Price
                       Underlying Options       Employees          Base Price       Expiration        Appreciation for Option
Name                        Granted           in Fiscal Year     Per  Share(1)         Date                   Term(2)
------------------     ------------------    ----------------    -------------      ----------   -----------------------------------
<S>                    <C>                   <C>                 <C>                <C>          <C>       
                                                                                                         5%              10%
                                                                                                         --              ---

Robert N. Goodman          450,000(3)                37.3%          $   2.50         12/10/07       $  707,506        $1,792,960

Timothy I. Maudlin           5,000(4)                 0.4%          $   3.22         02/28/07       $   10,125        $   25,659
                            60,000(5)                 5.0%          $   2.31         10/08/07       $   87,165           220,893

Joy A. Solomon              45,000(6)                 3.7%          $   3.25         02/18/07       $   91,976        $  233,085


Timothy J. Walsh            30,000(6)                 2.5%          $   3.25         02/18/07       $   61,317        $  155,390
                            50,000(5)                 4.1%          $   2.31         10/08/07       $   72,637        $  184,077
                             4,212(7)                 0.3%          $   2.69         10/13/07       $    7,126        $   18,058
</TABLE>

----------

(1)     The exercise price is equal to the fair market value of the Common Stock
        on the date of each grant.

(2)     The potential realizable value portion of the foregoing table
        illustrates value that might be realized upon exercise of the options
        immediately prior to the expiration of their term, assuming the
        specified compounded rates of appreciation on the Company's Common Stock
        over the term of the options. These numbers do not take into account
        provisions of certain options providing for termination of the option
        following termination of employment, nontransferability or vesting over
        periods of up to five years.

(3)     The option was granted on December 11, 1997 and will become exercisable
        to the extent of 37,500 shares on November 10, 1998, 3,125 shares on the
        tenth day of each month from December 10, 1998 through November 10, 2001
        and, subject to acceleration if the Company's stock price reaches
        certain targets, 300,000 shares on November 10, 2002.

(4)     The option was granted on March 1, 1997 and became exercisable to the
        extent of 1,250 shares on each of September 2, 1997 and March 1, 1998
        and will become exercisable to the extent of 1,250 shares on each of
        March 1, 1999 and 2000.

(5)     The option was granted on October 8, 1997 and will become exercisable in
        full on October 8, 2002, subject to acceleration if the Company's stock
        price reaches certain targets.

(6)     The option was granted on February 19, 1997 and will become exercisable
        in full on February 19, 2002, subject to acceleration if the Company's
        stock price reaches certain targets.

(7)     The option was granted on October 13, 1997 and became exercisable to the
        extent of 1,053 shares immediately and, subject to acceleration if the
        Company's stock price reaches certain targets, will become exercisable
        to the extent of 3,159 shares on October 13, 2004.


                                       35
<PAGE>   38
OPTION EXERCISES DURING 1997 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

        The following table provides information as to options exercised by the
named executive officers in the Summary Compensation Table during fiscal 1997
and the number and value of all outstanding options at December 31, 1997. The
Company has no outstanding stock appreciation rights.


<TABLE>
<CAPTION>
                                                                     Number of Unexercised          Value of Unexercised In-the-
                                 Shares                          Options at December 31, 1997         Money Options at December 
                                Acquired          Value                 Exercisable/                     31, 1997 Exercisable/
Name                          on Exercise        Realized               Unexercisable                      Unexercisable(1)
----                          -----------        --------        ----------------------------       ----------------------------
<S>                           <C>                <C>             <C>                                <C>
Robert N. Goodman                  --               --                  0 exercisable                           $0
                                                                    450,000 unexercisable                    $28,350

Timothy I. Maudlin                 --               --                1,250 exercisable                         $0
                                                                    63,750 unexercisable                     $138,600

Joy A. Solomon                     --               --               135,000 exercisable                     $137,500
                                                                    175,000 unexercisable                    $357,500

Timothy J. Walsh                   --               --               16,053 exercisable                         $0
                                                                    98,159 unexercisable                     $12,650
</TABLE>


(1)     Value is calculated on the basis of the difference between the option
        exercise price and $2.563, the closing sale price for the Company's
        Common Stock at December 31, 1997 as quoted on the Nasdaq SmallCap,
        multiplied by the number of shares underlying the option.

COMPENSATION OF DIRECTORS

        DIRECTORS' FEES. The Company's directors receive no fees for attendance
at meetings of the Board of Directors, but they are reimbursed for out-of-pocket
expenses relating to attendance at the meetings; provided, however, Mr. Brochu
is paid an annual fee of $30,000 for his services as Chairman of the Board, as
well as out-of-pocket expenses.

        STOCK OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. The Director Option Plan
has provided for the automatic option grants to each director who is not an
employee of the Company (a "Non-Employee Director") as follows: (i) 25,000 share
option upon initial election and (ii) 5,000 share option on March 1 of each year
thereafter. The per share option price is equal to 100% of the fair market value
of the Common Stock on the date of grant. The options vest to the extent of
one-fourth of the shares immediately and on each of the first three anniversary
dates of the date of grant; provided, however, that the option may be exercised
as to the vested shares during the term of the option beginning six months and
one day after the date of grant. The options expire on the earlier of (i) 10
years after the date of grant (provided, however, that options granted to a
Non-Employee Director who is a party to a partnership or other agreement
requiring a reduction in compensation pursuant to such agreement based on the
value of options granted under the Plan, shall have a five-year term) and (ii)
one year after the Non-Employee Director ceases to be a director for any reason.

        On December 11, 1997, the Board adopted, subject to shareholder
approval, the 1997 Stock Option Plan, which provides for similar automatic
grants to Non-Employee Directors.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS

        In August 1996, the Company entered into a two-year employment agreement
with Joy Solomon, former President and Chief Executive Officer, pursuant to
which Ms. Solomon received an annual base salary of $171,000. Pursuant to a
Separation Agreement and Release of Claims ("Separation Agreement") entered into
between the Company and Ms. Solomon, Ms. Solomon's employment with the Company
terminated on December 31, 1997. Under 


                                       36
<PAGE>   39
the Separation Agreement, Ms. Solomon will receive her base salary as in effect
on December 31, 1997 for the period January 1, 1998 through June 30, 1999. In
addition, the Separation Agreement amended Ms. Solomon's stock options to
provide that the options shall continue to vest according to their respective
vesting schedules until June 30, 1999 and shall be exercisable to the extent
vested until the respective original expiration dates. The Separation Agreement
contains mutual releases and is subject to confidentiality provisions.


                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Alan D. Frazier, a director of the Company, is a principal of Frazier &
Company, L.P. In 1997, the Company paid Frazier & Company, L.P. a total of
$7,230 for financial consulting services.

        On November 22, 1996, the Company issued convertible debentures in the
principal amount of $3,500,250, which were convertible into the Company's Common
Stock at a conversion price of $3.25 per share. On October 1, 1997, primarily to
meet maintenance requirements for continued listing on the Nasdaq SmallCap
Market and to improve its balance sheet as the Company sought various financing
alternatives, the Company reduced the conversion price to $2.00 per share to
provide an incentive for conversion. On October 28, 1997, all of the debentures
were converted into 1,750,125 shares of the Company's Common Stock. Certain
officers, directors and principal shareholders purchased debentures in the
aggregate principal amount of $897,500, which debentures were converted into an
aggregate of 448,750 shares of the Company's Common Stock on October 28, 1997,
including (i) 50,000 shares acquired by Ronald E. Eibensteiner, a director of
the Company, (ii) 100,000 shares acquired by Medical Innovation Fund, a more
than 5% holder and of which Timothy I. Maudlin, a director of the Company, is an
affiliate, (iii) 125,000 shares acquired by Frazier Healthcare Investments,
L.P., of which Alan D. Frazier, a director of the Company, is an affiliate, (iv)
50,000 shares by Timothy J. Walsh, Vice President of Sales of the Company, (v)
10,000 shares acquired by Joy A. Solomon, Former President and Chief Executive
Officer of the Company, and (vi) 113,750 shares acquired by Wayne W. Mills, a
more than 5% holder.

                                  LEGAL MATTERS

        The validity of the Common Stock offered hereby will be passed upon for
the Company by Preston Gates & Ellis LLP, 5000 Columbia Center, 701 Fifth
Avenue, Seattle, Washington 98104.

                                     EXPERTS

        The financial statements of IVI Publishing, Inc. at December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.


                                       37
<PAGE>   40
                              FINANCIAL STATEMENTS



                          Index To Financial Statements



Independent Auditors' Report.........................................   F-2

Balance Sheets.......................................................   F-3

Statements of Operations.............................................   F-4

Statements of Shareholders' (Deficit) Equity.........................   F-5

Statements of Cash Flows.............................................   F-6

Notes to Financial Statements (audited)..............................   F-7


                                      F-1
<PAGE>   41
REPORT OF THE INDEPENDENT AUDITORS



The Board of Directors and Shareholders
IVI Publishing, Inc.

        We have audited the accompanying balance sheets of IVI Publishing, Inc.
as of December 31, 1997 and 1996, and the related statements of operations, cash
flows and shareholders' equity for each of the three years in the period ended
December 31, 1997. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

        We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of IVI Publishing, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.



                                                        /s/
                                                        ERNST & YOUNG LLP



Minneapolis, Minnesota 
February 12, 1998, except for Note 2 as 
to which the date is April 13, 1998


                                      F-2
<PAGE>   42
                              IVI PUBLISHING, INC.
                                 BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                             March 31                     December 31
                                                           (unaudited)
                                                          ------------------------------------------------------
                                                              1998                 1997                 1996
                                                          ------------         ------------         ------------
<S>                                                       <C>                  <C>                  <C>
ASSETS

Current assets:
     Cash and cash equivalents                            $        571         $      2,488         $      3,462
     Accounts receivable, net of allowances
        for returns and doubtful accounts of
       $1,011 in 1997 and $277 in 1996                              65                  337                4,134
     Inventories                                                    46                  150                  155
     Other current assets                                          263                  332                  585
                                                          ------------         ------------         ------------
Total current assets                                               945                3,307                8,336

Furniture and equipment:
     Computers and software                                      2,874                2,856                4,583
     Office equipment                                            1,403                1,403                1,546
     Leasehold improvements                                         --                  683
                                                          ------------         ------------         ------------
                                                                 4,277                4,259                6,812
     Accumulated depreciation                                   (3,184)              (2,989)              (3,622)
                                                          ------------         ------------         ------------
                                                                 1,093                1,270                3,190

Long-term receivables and other assets                              --                   --                1,885
                                                          ------------         ------------         ------------

TOTAL ASSETS                                              $      2,038         $      4,577         $     13,411
                                                          ============         ============         ============



Current liabilities:
     Accounts payable                                     $      1,725         $      1,919         $      3,206
     Other accrued expenses                                      2,464                2,640                1,900
                                                          ------------         ------------         ------------
Total current liabilities                                        4,189                4,559                5,106

Convertible subordinated debentures                                 --                   --                3,500

Convertible redeemable preferred stock                              --                   --                1,905
     (redemption value of $2,000)

Shareholders' equity:
     Common stock, $.01 par value:
         Issued and outstanding shares -
             10,106 and 7,612  at December 31,
             1997 and 1996, respectively                           101                  101                   76
     Additional paid-in capital                                 78,577               78,493               70,453
     Accumulated deficit                                       (80,829)             (78,576)             (67,629)
                                                          ------------         ------------         ------------
Total shareholders' equity                                      (2,151)                  18                2,900
                                                          ------------         ------------         ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                $      2,038         $      4,577         $     13,411
                                                          ============         ============         ============
</TABLE>


See accompanying notes.


                                      F-3
<PAGE>   43
                              IVI PUBLISHING, INC.
                            STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                        Three Months Ended March 31                  Year Ended December 31
                                        ---------------------------       --------------------------------------------
                                           1998             1997             1997             1996             1995
                                        ----------       ----------       ----------       ----------       ----------
                                                (unaudited)
<S>                                     <C>              <C>              <C>              <C>              <C> 
Net revenues                                   330            1,719       $    3,761       $    9,470       $   11,970
Cost of revenues                               688              770            2,541            5,076            6,231
                                        ----------       ----------       ----------       ----------       ----------
Gross margin                                  (358)             949            1,220            4,394            5,739


Operating expenses:
      Product development                      728            1,311            4,243            5,651            7,494
      Sales and marketing                      436              394            1,347            2,705            7,473
      General and administrative               743              766            6,892            6,364            5,647
                                        ----------       ----------       ----------       ----------       ----------
Loss from operations                         2,265           (1,522)         (11,262)         (10,326)         (14,875)

Interest income                                 12               --              106              203              641
Interest expense                                --              (59)            (264)             (34)              --
Other income, net                               --               --              473               --               --
                                        ----------       ----------       ----------       ----------       ----------
Net loss                                    (2,253)          (1,581)         (10,947)         (10,157)         (14,234)
                                        ==========       ==========       ==========       ==========       ==========


Preferred stock dividends                       --              (30)            (100)            (119)             (20)
Preferred stock accretion                       --              (13)             (43)             (60)              --
Preferred stock deemed dividend                 --               --           (2,875)              --               --
                                        ----------       ----------       ----------       ----------       ----------
Net loss applicable to
      common shareholders                   (2,253)          (1,624)      ($  13,965)      ($  10,336)      ($  14,254)
                                        ==========       ==========       ==========       ==========       ==========

Net loss per common share --
      basic and diluted                 ($    0.22)      ($    0.21)      ($    1.73)      ($    1.36)      ($    1.90)
                                        ==========       ==========       ==========       ==========       ==========

Weighted average number of
      common shares outstanding             10,150            7,653            8,056            7,580            7,484
                                        ==========       ==========       ==========       ==========       ==========
</TABLE>


See accompanying notes.


                                      F-4
<PAGE>   44
                              IVI PUBLISHING, INC.
                        STATEMENT OF SHAREHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                 Common                       Additional                               Total
                                                 Shares          Common         Paid-In         Accumulated        Shareholders'
                                               Outstanding        Stock         Capital           Deficit              Equity
                                            ------------------ ------------ ----------------  -----------------  -------------------
<S>                                         <C>                <C>          <C>               <C>                <C>    

BALANCE AT DECEMBER 31, 1994                            7,478          $75          $70,131          ($43,238)              $26,968

Issuance of common stock
    through exercise of options                            46                           166                                     166

Dividends on convertible
    redeemable preferred stock
    ($.01 per share)                                                                   (20)                                    (20)

Net loss                                                                                              (14,234)             (14,234)
                                            ------------------ ------------ ----------------  -----------------  -------------------

BALANCE AT DECEMBER 31, 1995                            7,524           75           70,277           (57,472)               12,880

Issuance of common stock
    through exercise of options                            88            1              355                                     356

Dividends on convertible
    redeemable preferred stock
    ($.06 per share)                                                                  (119)                                   (119)

Preferred stock accretion                                                              (60)                                    (60)

Net loss                                                                                              (10,157)             (10,157)
                                            ------------------ ------------ ----------------  -----------------  -------------------

BALANCE AT DECEMBER 31, 1996                            7,612           76           70,453           (67,629)                2,900

Issuance of common stock
    through exercise of options                            59            1               97                                      98

Dividends on convertible
    redeemable preferred stock
    ($.06 per share)                                                                  (100)                                   (100)

Preferred stock accretion                                                              (43)                                    (43)

Issuance of common stock
    as lawsuit settlement                                 175            2              431                                     433

Return of common stock
    per Mayo agreement                                  (490)          (5)                5                                      --

Debenture conversion                                    1,750           17            5,712                                   5,729

Preferred stock conversion                              1,000           10            1,938                                   1,948

Net loss                                                                                              (10,947)             (10,947)
                                            ------------------ ------------ ----------------  -----------------  -------------------

BALANCE AT DECEMBER 31, 1997                           10,106         $101          $78,493          ($78,576)                  $18

Issuance of Common Stock through                           19                            84                                      84
exercise of options

Net Loss                                                                                               (2,253)              (2,253)
                                                      _______       _______         _______           _______              _______
BALANCE AT MARCH 31, 1998                             $10,125         $101          $78,577          ($80,829)             ($2,151)
                                                      =======       =======         =======           =======              =======

</TABLE>


SEE ACCOMPANYING NOTES.


                                      F-5
<PAGE>   45
                              IVI PUBLISHING, INC.
                             STATEMENTS OF CASH FLOW
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                    Three Months Ended
                                                                 ------------------------
                                                                          March 31                  Year Ended December 31
                                                                 ------------------------    ---------------------------------------
                                                                        (unaudited)
                                                                    1998          1997          1997          1996          1995
                                                                 ----------    ----------    ----------    ----------    ----------
<S>                                                              <C>           <C>           <C>           <C>           <C>        

Operating activities:
       Net loss                                                  ($   2,253)   ($   1,581)   ($  10,947)   ($  10,157)   ($  14,234)
       Adjustments to reconcile net loss to
          net cash used in operating activities:
             Debenture conversion to equity                              --            --         2,229

             Depreciation                                               195           330         1,252         1,409         1,403
             Loss (gain) on disposal of furniture and equipment          --            --           711            (3)          (96)

             Common stock issued as litigation settlement                --            --           433

             Changes in assets and liabilities:
               Decrease (increase) in accounts receivable               272           970         3,797          (926)          240
               Decrease in inventories                                  104           (26)            5           666           363
               Decrease (increase) in other current assets               69            20           253          (139)          137
               Decrease (increase) in other long-term assets             27         1,885          (585)         (365)

               (Decrease) increase in accounts payable                 (370)       (2,292)       (1,287)          843        (1,750)
               Increase in other accrued expenses                        --            --           760           636           224

                                                                 ----------    ----------    ----------    ----------    ----------
       Net cash used in operating activities                         (1,983)       (1,442)         (909)       (8,256)      (14,078)

Investing activities:
       Purchase of furniture and equipment                              (18)          (23)         (104)         (288)       (1,026)
       Proceeds from disposal of furniture and equipment                 --            --            61           510           199

       Purchase of short-term investments                                --            --        (4,388)

       Maturity of short-term investments                                --            --        22,218
                                                                 ----------    ----------    ----------    ----------    ----------
       Net cash (used in) provided by investing activities              (18)          (23)          (43)          222        17,003

Financing activities:
       Net proceeds from issuance of convertible                         --            --
              redeemable preferred stock                                 --            --         1,845

       Preferred stock dividends paid                                    --            --          (120)         (119)

       Proceeds from exercised stock options                             84            74            98           356           166
       Proceeds from issuance of convertible
             subordinated debentures                                     --            --         3,500

                                                                 ----------    ----------    ----------    ----------    ----------
       Net cash (used in) provided by financing activities               84            74           (22)        3,737         2,011
                                                                 ----------    ----------    ----------    ----------    ----------

Net (decrease) increase in cash and cash equivalents                 (1,917)        2,071          (974)       (4,297)        4,936
Cash and cash equivalents at beginning of year                        2,488         2,071         3,462         7,759         2,823
                                                                 ==========    ==========    ==========    ==========    ==========
Cash and cash equivalents at end of year                         $      571    $    2,071    $    2,488    $    3,462    $    7,759
                                                                 ==========    ==========    ==========    ==========    ==========
</TABLE>


See accompanying notes.


                                      F-6
<PAGE>   46
                              IVI PUBLISHING, INC.
                        NOTES TO THE FINANCIAL STATEMENTS
                                DECEMBER 31, 1997


NOTE 1. BUSINESS ACTIVITY

Formation of the Business

IVI Publishing, Inc. (the "Company"), which was founded in 1990 and commenced
operations in early 1991, is engaged in a single business consisting of
electronic publishing of health and medical information in interactive
multimedia formats.

NOTE 2. MANAGEMENT'S PLANS CONCERNING CASH FLOW AND ONGOING OPERATIONS

The Company has experienced recurring losses from operations and has generated
an accumulated deficit from inception through December 31, 1997 of approximately
$78,576,000. These conditions give rise to the question about the Company's
ability to generate positive cash flow and fund operations. In April 1998, the
Company completed a $5,000,000 issuance of non-voting Convertible Redeemable
Preferred Stock (CPS) to two institutional investors. As part of the
transaction, the Company also granted to the investors warrants to purchase an
aggregate of 66,778 shares of the Company's common stock at $11.23125 per share.
The CPS provides for the payment of dividends at a rate of 5%. The CPS also
provides the investors with certain conversion rights into Common Stock of the
Company and allows for redemption of the CPS by the Company. Further, the CPS
holders could require the Company to repurchase the CPS upon the occurrence of
certain events, such as the absence of any bids for the Common Stock for five
consecutive trading days or failure of the Common Stock to be listed for trading
on the AMEX, NASDAQ SmallCap Market, NASDAQ National Market, or the NYSE. The
Company believes that the completion of this financing transaction and
anticipated operating cash flows will allow the Company to continue to meet its
ongoing financial obligations and operate through December 31, 1998.


NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At December 31, 1997 and
1996, cash and cash equivalents consisted principally of United States
Government obligations for which the carrying amount approximates fair value.

Furniture and Equipment

Furniture and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful life of the assets ranging from 5
to 7 years.

Product Development Costs

Product development costs consist principally of compensation to Company
employees, interactive design costs paid to outside consultants, travel and
supplies. Product development also includes costs incurred related to the
acquisition of content under license and publishing agreements. Costs related to
research, design and development of products are charged to product development
expenses as incurred. Under Statement of Financial Accounting Standards No. 86
(SFAS No. 86), software development costs are capitalized beginning when a
product's technological feasibility has been established and ending when a
product is available for general release to customers. The Company has not
capitalized any software development costs since such costs meeting the
requirements of SFAS No. 86 have not been significant.

Revenue Recognition

The Company's revenues consist of product sales and licensing revenue, contract
development revenue, fees relating to the licensing of its content for use on
cable television, and fees for online services.


                                      F-7
<PAGE>   47
Product sales and licensing revenues are made up of retail distribution sales,
direct mail sales, and product sales and royalties on licenses to original
equipment manufacturers (OEM's). These revenues are recognized upon shipment of
the product or when the Company's obligations under the licensing agreements are
complete. Allowances for returns are recorded at the time revenue is recognized.

Contract development revenue is generated through the use of the Company's
personnel and facilities for the creation of custom multimedia products. This
revenue is recognized by contract on a percentage-of-completion basis or at a
specific hourly rate, depending on the terms of the contract.

Revenues are generated through the licensing of the Company's health and medical
content for use on cable television channels. The Company recognized revenue
under its cable television agreement with America's Health Network ("AHN")
during 1997, 1996 and 1995. (See Note 12).

Revenues are generated through the sale of advertising and sponsorships of the
Company's Onhealth web site. These revenues are recognized as they are earned.

During 1996, the Company also generated revenue through the Company's online
agreement with American Telephone and Telegraph ("AT&T"). These revenues were
nonrefundable advances payable to the Company under the exclusive agreement
signed with AT&T. They were recognized as they were earned. (See Note 13).

Revenues for each of the three years ended December 31, 1997, 1996 and 1995 are
as follows:

<TABLE>
<CAPTION>
                             1997            1996            1995
                         -----------     -----------     -----------
<S>                      <C>             <C>             <C>        

Product sales            $ 1,990,000     $ 5,152,000     $ 8,333,000
Contract development       1,220,000       1,346,000       1,637,000
Cable television             493,000       1,972,000       1,000,000
Online                        58,000       1,000,000       1,000,000
                         -----------     -----------     -----------

Net revenues             $ 3,761,000     $ 9,470,000     $11,970,000
                         ===========     ===========     ===========
</TABLE>

Net sales to one OEM manufacturer in 1996 totaled $1,394,000. Additionally, for
1997 and 1996 respectively, $439,000 and $1,972,000 of revenue was recognized
from the Company's content agreement with AHN, and $1,000,000 of revenue was
recognized from the Company's online content agreement with AT&T in 1996.

No individual customer accounted for more than 10% of total net revenues in
1995.

Inventories

All inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of packaging supplies and finished goods.

Advertising Costs

The Company's policy is to expense advertising costs as they are incurred.
Advertising costs were $190,000, $556,000, and $1,732,000 for 1997, 1996, and
1995, respectively.

Impairment of Long-Lived Assets

The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.

Income Taxes

Income taxes are provided based on earnings reported for financial statement
purposes. Deferred income taxes are provided for temporary differences between
financial reporting and income tax basis of assets and liabilities under the
liability method.


                                      F-8
<PAGE>   48
Net Loss Per Share

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share (Statement 128). Statement 128 replaced the calculations of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous rules. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements. The effect of outstanding options, warrants and convertible
securities are excluded from the computation for all periods as their effect is
antidilutive.

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Stock Based Compensation

The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, but
applies Accounting Principles Board Opinion No. 25 Accounting for Stock Issued
to Employees (APB 25) and related interpretations in accounting for its employee
stock options. Under APB 25, when the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recorded.

Reclassifications

Certain amounts for 1996 and 1995 have been reclassified to conform to the 1997
financial statement presentation.

Interim Financial Information

The accompanying financial statements as of March 31, 1998 and for the
three-month periods ended March 31, 1998 and 1997 are unaudited. In the opinion
of management of the Company, these financial statements reflect all 
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial staements. The results of operations for the
three-month period ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the full year ending December 31, 1998.

NOTE 4. OTHER ASSETS

In 1994, the Company entered into an agreement with Time Life, Inc. ("Time
Life") pursuant to which the Company agreed to pay Time Life for the development
of a comprehensive home health reference guide. In exchange, the Company
receives royalty payments in the amount of 5% of Time Life's net revenue from
the sale of the print versions of the product. At December 31, 1996, the Company
recorded an asset of $1,778,000, which represented the Company's payments to
Time Life, net of royalty payments received from Time Life. The Company's policy
was to amortize this asset over the period that revenues were recognized. During
1997, revenues from the print version were not as high as anticipated, and
management determined that the asset was not realizable. Accordingly, the
Company wrote-off the remaining asset balance and expensed $1,741,000 in general
and administrative operating expenses.


NOTE 5. OTHER ACCRUED EXPENSES

Other accrued expenses consist of the following:

<TABLE>
<CAPTION>
                           December 31
                       1997           1996
                    ----------     ----------
<S>                 <C>            <C>       

Litigation loss     $  961,000     $  300,000
Severance              610,000             --
Royalties              501,000        993,000
Rent obligation        252,000        429,000
Other                  316,000        178,000
                    ==========     ==========
Total               $2,640,000     $1,900,000
                    ==========     ==========
</TABLE>


                                      F-9
<PAGE>   49
NOTE 6. COMMON STOCK

As of December 31, 1997 and 1996, the Company had 30,000,000 shares of $.01 par
value capital stock authorized. As of December 31, 1996, the Company had
designated 2,000 of its shares to be 6% Series A Convertible Preferred Stock,
and such designation was canceled in December 1997.


NOTE 7. CONVERTIBLE SUBORDINATED DEBENTURES

In November 1996, the Company issued $3,500,000 of 9% Convertible Subordinated
Debentures ($3,325,000 net of debt issue costs). These debentures were converted
into Common Stock on October 28, 1997 at a rate of $2.00 per share, resulting in
the issuance of 1,750,000 shares of Common Stock. The original conversion price
was $3.25 per share. The excess of the fair value of the Common Stock issued
over the fair value of the shares issuable pursuant to the original conversion
terms was $2,229,000 and was recorded as an other expense at the date of
conversion.

On December 31, 1996, the estimated fair value of the Convertible Subordinated
Debentures approximated the recorded amount.


NOTE 8. CONVERTIBLE REDEEMABLE PREFERRED STOCK

In 1995, the Company issued 2,000 shares of 6% Series A Convertible Redeemable
Preferred Stock for $2,000,000 ($1,845,000 net of brokerage expenses) to
Davidson & Associates, Inc., ("Davidson") a distributor of multimedia
educational and entertainment software. The Preferred Stock was converted into
Common Stock on October 30, 1997 at a rate of $2.00 per share, resulting in the
issuance of 1,000,000 shares of Common Stock. The original conversion price was
$11.21 per share. The excess of the fair value of the Common Stock issued over
the fair value of the shares issuable pursuant to the original conversion terms
was $2,875,000 and was recorded as a deemed preferred dividend at the date of
conversion. This deemed dividend increased the net loss applicable to common
shareholders in the calculation of the net loss per share as shown in the
statements of operations.


NOTE 9. STOCK OPTIONS AND WARRANTS

The Company has a 1991 Stock Option Plan (the "Plan") for its employees. The
Plan, which is administered by the Board of Directors, permits the Company to
grant stock options for the purchase of Common Stock. The Plan provides for the
granting of Incentive Stock Options (ISO's) and Non-Qualified Options. In the
case of ISO's, the exercise price must be at least equal to the fair market
value per share of the Common Stock on the date of grant. In the case of
Non-Qualified Options, the exercise price must be at least 85% of the fair
market value per share on the date of grant. Options generally expire nine to
ten years from the date of grant.

In addition, the Company has a Director Stock Option Plan pursuant to which
current non-employee directors are eligible to receive options to purchase
shares of the Company's common stock at the market price on the date of grant.

From time to time, the Company's Board of Directors may grant stock options
outside of either of the existing stock option plans.

In December 1997, the Company's Board of Directors adopted the 1997 Stock Option
Plan for its employees and reserved 1,750,000 shares of the Company's Common
Stock for such plan. The 1997 Stock Option Plan is subject to shareholder
approval at the Company's 1998 Annual Meeting.

Activity in the plans is as follows:


                                      F-10
<PAGE>   50
<TABLE>
<CAPTION>
                                                              Option       Weighted-
                                             Shares           Shares     Average Price
                                            Reserved       Outstanding     Per Share
                                           ----------      -----------   -------------
<S>                                        <C>             <C>           <C>      

TOTAL OUTSTANDING AT DECEMBER 31, 1994        413,000       1,029,000      $   15.72
Options Granted                              (467,000)        467,000          11.04
Options Exercised                             (46,000)                          3.59
Options Canceled                              543,000        (543,000)         19.72
                                           ----------      ----------      
TOTAL OUTSTANDING AT DECEMBER 31, 1995        489,000         907,000          11.53
Options Reserved                              200,000
Options Granted                              (582,000)        582,000           4.98
Options Exercised                             (88,000)                          4.06
Options Canceled                              461,000        (461,000)         13.24
                                           ----------      ----------      
TOTAL OUTSTANDING AT DECEMBER 31, 1996        568,000         940,000           7.10
Options Reserved                            1,750,000
Options Granted                              (684,000)        684,000           2.85
Options Exercised                             (59,000)                          1.64
Options Canceled                              474,000        (474,000)          9.86
                                           ----------      ----------      
TOTAL OUTSTANDING AT DECEMBER 31, 1997      2,108,000       1,091,000      $    3.53
                                           ==========      ==========      
</TABLE>

At December 31, 1997, 1996 and 1995, options to purchase 325,000, 602,000 and
557,000 shares were exercisable, respectively. Exercise prices for the options
outstanding as of December 31, 1997 range from $2.31 to $17.75.


                                      F-11
<PAGE>   51
The following table summarizes information about the stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING                                     OPTIONS EXERCISABLE
                          --------------------------------------------------------        ---------------------------
                                             Weighted-                                                      Weighted- 
                                              Average                  Weighted-                             Average  
Range of Exercise           Number           Remaining                  Average             Number           Exercise  
Prices                    Outstanding     Contractual Life          Exercise Price        Exercisable         Price    
----------------------    -----------     ----------------          --------------        -----------       ---------
<S>                       <C>             <C>                       <C>                   <C>               <C>  

  $2.31 -  2.50              221,000          10 years                $2.31                    9,000          $2.31
           2.51 - 3.00       346,000           9 years                 2.78                  121,000           2.81
           3.01 - 3.50       398,000           9 years                 3.22                   86,000           3.00
           3.51 - 17.75      126,000           7 years                 8.75                  109,000           8.81
  $2.31 - 17.75            1,091,000           9 years                $3.53                  325,000          $4.86
</TABLE>

The Company reserved 547,260 and 559,760 shares of Common Stock for the issuance
of warrants at December 31, 1997 and 1996, respectively, and had warrants
outstanding at those dates to purchase 547,260 and 559,760 shares of Common
Stock at prices ranging from $3.25 per share to $30.94 per share. Warrants
outstanding at December 31, 1997 expire from 1998 through 2000. The warrants
were generally issued to underwriters and investment bankers for services
performed in connection with several of the Company's financing transactions.

In 1997, the Company granted non-qualified options outside any of the Company's
stock option plans to purchase 522,500 shares at prices ranging from $2.31 to
$2.50. These options expire in 2007. Of the options granted, one option to
purchase 60,000 shares becomes exercisable on October 8, 2002. This option
provides for earlier exercise in six 10,000-share tranches as the Company's
stock trades at various prices from $5.00 to $10.00 or more for 40 consecutive
trading days. The accounting for this option may result in the future
recognition of compensation expense.

Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995:

<TABLE>
<CAPTION>
                                     1997          1996          1995
                                   --------      --------      --------
<S>                                <C>           <C>           <C>  
Risk-free interest rate               5.50%         6.21%         5.37%
Dividend yield                           0%            0%            0%
Volatility factor                      .760          .726          .613
Weighted-average expected life      5 years       5 years       5 years
</TABLE>


The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.


                                      F-12
<PAGE>   52
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:

<TABLE>
<CAPTION>
                                                                  1997                  1996                  1995
                                                            --------------        --------------        --------------
<S>                                                         <C>                   <C>                   <C>           
Pro forma net loss applicable to common shareholders        $   14,294,000        $   10,562,000        $   14,378,000
Pro forma net loss per common share -
           basic and diluted                                $         1.77        $         1.39        $         1.92
Weighted average fair value of options
           granted during year                              $         1.74        $         2.99        $         6.15
</TABLE>

The pro forma effect on the net loss for 1997, 1996 and 1995 is not
representative of the pro forma effect on the net loss in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1995.

NOTE 10. COMMITMENTS

The Company leases office space under agreements accounted for as operating
leases. The agreements expire at various times through 1999. Gross rent expense,
including charges for monthly operating costs, was $881,000, $1,433,000, and
$1,287,000 for 1997, 1996 and 1995, respectively. The Company has subleased
certain facilities to various tenants under non-cancelable operating leases
expiring in 1999. The Company also has several license agreements that require
minimum annual royalty payments. Scheduled minimum lease commitments and annual
royalty payments are as follows:

<TABLE>
<CAPTION>
                                                  Royalty
                              Lease              Payments
                           -----------         -----------
<S>                        <C>                 <C>        
               1998        $ 1,191,000         $   303,000
               1999            496,000             212,000
                           -----------         -----------
                             1,687,000             515,000
Less Sublease
      Rental Income           (577,000)
                           -----------         -----------
Total                      $ 1,110,000         $   515,000
                           ===========         ===========
</TABLE>

In 1998, the Company entered into a termination arrangement for its existing
lease in Minneapolis, Minnesota, effective March 31, 1998. As a result of the
arrangement, the Company paid $122,000 and contributed to the lessor $150,000 in
furniture and equipment for satisfaction of the above lease commitments. The
Company entered into new leases in Seattle, Washington and a substantially
smaller facility in Minneapolis, Minnesota. As a result, future minimum lease
commitments related to the new lease agreements would be $61,000 in 1998,
$128,000 in 1999, $134,000 in 2000, $142,000 in 2001, $151,000 in 2002, and
$52,000 thereafter.


NOTE 11. INCOME TAXES

At December 31, 1997, the Company has net operating loss carryforwards of
$64,699,000 for income tax purposes and unused research and development credits
of $326,000 that expire at various times through 2012. These carryforwards are
subject to the limitations of Internal Revenue Code Section 382. This section
provides limitations on the availability of net operating losses to offset
current taxable income if significant ownership changes have occurred for
federal tax purposes. For financial reporting purposes, a valuation allowance
has been recognized to completely reserve for the deferred tax assets related to
those carryforwards. The reserve has been established because of the uncertainty
of future taxable income, which is necessary to realize the benefits of the net
operating loss carryforwards.

Components of the Company's deferred tax assets and liabilities are as follows:


                                      F-13
<PAGE>   53
<TABLE>
<CAPTION>
                                                     December 31
                                           ---------------------------------
                                               1997                 1996
                                           ------------         ------------
<S>                                        <C>                  <C>         
DEFERRED TAX ASSETS:
Accrued expenses and allowances            $  2,788,000         $  2,649,000
Stock issued for license agreements                  --            1,351,000
Research and development credits                326,000              326,000
Net operating loss carryforwards             25,880,000           23,054,000
                                           ------------         ------------
                                             28,994,000           27,380,000
DEFERRED TAX LIABILITIES:
Depreciation                                     16,000              186,000
                                           ------------         ------------
                                                 16,000              186,000
                                           ------------         ------------
Net deferred tax assets
    before valuation allowance               28,978,000           27,194,000
Less valuation allowance                    (28,978,000)         (27,194,000)
                                           ============         ============
NET DEFERRED TAX ASSETS                    $         --         $         --
                                           ============         ============
</TABLE>


NOTE 12. INVESTMENT IN AMERICA'S HEALTH NETWORK

In March 1994, the Company acquired an equity position in America's Health
Network ("AHN"), a health information cable television network that combines
live programming with medical consumer product sales. The network launched on
March 25, 1996.

In the first quarter of 1994, the Company expensed its entire investment of
$2,000,000 along with the related investment banking fees of approximately
$263,000. This approach to the investment was made on the basis that the
invested amounts are not assured of recoverability through future revenue
streams. As of December 31, 1997 and 1996, the Company's underlying equity in
its investment in AHN was $500,000 and $650,000 based on 4% and 8% of AHN's net
assets, respectively. However, because the Company expensed its investment, its
equity in AHN's net assets is not recognized in the balance sheet.

In May 1995, the Company entered into a content and royalty agreement with AHN.
Under the agreement the Company is licensing its multimedia content to AHN from
the date of the agreement until March 25, 2001, five years from the date the
cable television network launched. The Company will receive a minimum of
$11,000,000 in licensing royalties over the life of the agreement. This revenue
was being recognized evenly over the life of the contract. Due to the gradual
increase in actual payments versus the straight-line revenue recognition policy,
a receivable was recorded for the difference between the revenue recognized and
the cash received during the early years of the contract. In June 1997, as a
result of the Company not receiving their quarterly payment, the outstanding AHN
receivable was fully reserved. As such, the revenue recognized is currently on a
cash basis for the AHN royalties. In December, AHN resumed payments but due to
the uncertainty of future payments, the Company continues to recognize revenue
on a cash basis. At December 31, 1997, the Company has a fully reserved
receivable of $715,000 with scheduled payments in 1998. The Company recorded
$493,000, $1,972,000 and $1,000,000 in license royalty revenue in 1997, 1996 and
1995, respectively.


NOTE 13. AGREEMENT WITH AT&T

In October 1995, the Company entered into a four year agreement with AT&T
whereby the Company agreed to provide content for AT&T's HealthSite, a division
of AT&T's Personal Online Service ("POS"), in exchange for guaranteed revenues.
In August 1996, AT&T discontinued the HealthSite, and subsequently discontinued
POS. The Company received the 1996 guaranteed revenue payment of $1,000,000 from
AT&T.

Warrants held by AT&T to purchase up to 20% of the Company's common stock at a
price of $14.00 per share expired on March 31, 1997.


NOTE 14. BENEFIT PLAN


                                      F-14
<PAGE>   54
The Company has a defined contribution salary deferral plan covering
substantially all employees under Section 401(k) of the Internal Revenue Code.
The Plan allows eligible employees to make contributions up to the maximum
amount provided under the Code. The Company may also make a discretionary
contribution to the Plan. No such contributions have been made by the Company.


NOTE 15. MAYO AGREEMENT

In September 1997, the Company entered into an agreement with Mayo Foundation
("Mayo") which included a full transfer of ownership of IVI's O@sis web site to
Mayo and a new arrangement for revenues and cost sharing concerning O@sis. Under
the terms of the agreement, IVI received a $2,700,000 cash payment, an
additional $300,000 cash payment for hosting the web site for a transition
period, and the return of 490,000 shares of IVI common stock. Through the year
2001, the Company will receive a royalty from Mayo on certain revenues generated
by the Mayo Health O@sis site and certain other non-O@sis Internet projects. In
addition, Mayo was released from the Company's "right of first offer" on Mayo
health products produced for electronic media, and Mayo assumed operating
expenses incurred for the web site retroactive to January 1, 1997 which were
recorded as a reduction to product development expenses. The Company recorded
the $2,700,000 payment as other income and recorded the $300,000 payment as
contract development revenue during the third and fourth quarter.


NOTE 16. RELATED PARTY TRANSACTIONS

During 1997 and 1996, the Company subleased approximately 20,000 square feet of
its Eden Prairie office space to Reality Interactive, Inc. Reality Interactive,
Inc. and the Company share a common Board member.

The Company had a note receivable of approximately $88,000 and $229,000 from a
former officer of the Company at December 31, 1997 and 1996, respectively. This
note receivable, included in accounts receivable in the balance sheet, will be
used to offset future contract consulting fees.

During 1996, two officers of the Company participated in the Company's debt
offering. The total amount of debt issued by the Company to these individuals
was $120,000. Additionally, three directors of the Company participated in the
debt offering, either individually or through affiliated organizations. The
total amount of debt issued by the Company to these individuals and
organizations was $550,000. On October 28, 1997, this debt was converted into
common stock at a rate of $2.00 per share (See note 7).


NOTE 17. LEGAL PROCEEDINGS

In March 1996, the Company commenced an action seeking replevin of certain
computer equipment leased to a former contractor, Viridis, Inc. In May of 1996,
Viridis expanded the scope of the action by filing a cross-complaint against the
Company, alleging that the Company breached contractual obligations and
committed various torts by ending its business relationship with Viridis and
seeking $10,000,000. In October 1997, the Company and Viridis entered into a
settlement agreement resolving all disputes between them. Under the terms of
this agreement, the Company issued 175,000 shares of restricted common stock,
paid $225,000 and issued a $125,000 installment note payable in 15 monthly
installments ending December 1998. The estimated value of the shares issued,
$433,000, was recorded as a general and administrative expense at the date of
the settlement. The settlement agreement also called for an additional $25,000
to be paid by the Company when AHN resumed its quarterly payments. The Company
recorded total general and administrative expenses of $808,000 in connection
with the settlement. The outstanding obligations are secured by all of the
Company's assets except its interests in AHN.

In February 1996, an action in the District Court of Hennepin County (Minnesota)
was brought by T. Randal Productions et al. against the Company and one current
and two former employees. The plaintiffs make various allegations, including
misappropriation of corporate opportunities and trade secrets by the Company and
its employees and sought award of monetary damages, exemplary damages and
royalties substantially in excess of $10,000,000. In November 1997, a jury found
that there was no joint venture between T. Randal and the Company and/or any of
its employees but awarded T. Randal $480,000 plus interest for damages sustained
to its business. The jury verdict is subject to motions for a new trial, amended
findings and for judgment notwithstanding the verdict and to appeal to the Court
of Appeals. The plaintiffs also 


                                      F-15
<PAGE>   55
have an action pending against certain affiliates of the Company on the same
grounds on which the action against the Company was based. The Company has
indemnified these principles against any damages arising out of these claims.
While the Company is unable to predict the ultimate outcome of these legal
actions, it is the opinion of management that the disposition of these matters
will not have a material adverse effect on the Company's Financial Statements
taken as a whole.

In 1996, Berkshire Multimedia Group, Inc. ("Berkshire") initiated mediation
regarding a dispute with the Company. Shortly after an unsuccessful mediation
conference was held in September 1996, Berkshire Multimedia Group filed a demand
for arbitration alleging that the Company breached its obligations under a
contract. An arbitration hearing was completed in January 1997, and in February
1997 the arbitration panel awarded Berkshire $300,000. Hennepin County
(Minnesota) District Court vacated that award on May 29, 1997, and Berkshire
appealed the case. The Court of Appeals heard the case in late 1997 and
reinstated the original decision of the arbitration panel in January 1998. On
February 25, 1998, the Hennepin County (Minnesota) District Court issued an
order directing that judgment be entered against the Company in the amount of
$300,000 plus interest. The Company recorded general and administrative expense
of $300,000 in 1996.


NOTE 18. RELOCATION OF OPERATIONS

During 1997, the Company decided to move its primary operating facilities from
Minneapolis, Minnesota to Seattle, Washington in early 1998. As a result,
certain of the Company's leasehold improvements and computer and software
equipment having a carrying value of $721,000 is not transferable, or will not
be utilized in the Company's operations going forward in 1998. The Company plans
to sell salvageable assets in 1998 and has estimated the sale value, net of
related selling costs, to be immaterial. Accordingly, the Company has recorded
an impairment loss of $721,000 in 1997, which is included in general and
administrative expenses. In addition, the Company recorded $252,000 and $610,000
in general and administrative expenses related to lease termination costs and
severance for former officers and employees, respectively.



                                      F-16
<PAGE>   56
                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

        The expenses relating to the registration of the Common Stock, the
Warrants and the Warrant Shares will be borne by the registrant. Such expenses
are estimated to be as follows:

<TABLE>
<S>                                                            <C>      
Registration Fee
  Securities and Exchange Commission                           $4,697.41
Accountants' Fees                                              $_____*__
Legal Fees                                                     $_____*__
Printer's Fees                                                 $_____*__
Miscellaneous                                                  $_____*__
           Total                                               $_____*__
</TABLE>


* To be filed by amendment.

Item 14. Indemnification of Directors and Officers.

        Section 302A.521 of the Minnesota Business Corporation Act provides that
a corporation shall indemnify any person who was or is threatened to be made a
party to any proceeding by reason of the former or present official capacity of
such person, against judgments, penalties and fines, including, without
limitation, excise taxes assessed against such person with respect to an
employee benefit plan, settlements and reasonable expenses, including attorneys'
fees and disbursements, incurred by such person in connection with the
proceeding, if, with respect to the acts or omissions of such person complained
of in the proceeding, such person has not been indemnified by another
organization or employee benefit plan for the same expenses with respect to the
same acts or omissions, acted in good faith, received no improper personal
benefit and Section 302A.255 (which pertains to director conflicts of interest),
if applicable, has been satisfied; in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful; and in the case of acts or
omissions by person in their official capacity for the corporation, reasonably
believed that the conduct was in the best interests of the corporation, or in
the case of acts or omissions by persons in their capacity for other
organizations, reasonably believed that the conduct was not opposed to the best
interests of the corporation. The Company's Articles of Incorporation and Bylaws
do not limit the Registrant's obligation to indemnify such persons.

        The Company's Articles of Incorporation limit the liability of its
directors to the full extent permitted by the Minnesota Business Corporation
Act. Specifically, directors of the Company will not be personally liable for
monetary damages for breach of fiduciary duty as directors except liability for
(i) any breach of the duty of loyalty to the Company or its shareholders, (ii)
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) dividends or other distributions of corporate
assets that are in contravention of certain statutory or contractual
restrictions, (iv) violations of certain Minnesota securities laws, or (v) any
transaction from which the director derives an improper personal benefit.
Liability under federal securities law is not limited by the Company's Articles
of Incorporation.

Item 15. Recent Sales of Unregistered Securities.

        In November 1996, the Company issued $3,500,250 of 9% Convertible
Subordinated Debentures. These debentures were converted into Common Stock on
October 28, 1997 at a rate of $2.00 per share, resulting in the issuance of
1,750,000 unregistered shares of Common Stock. Because the offering involved
only 16 debenture holders and no general solicitation occurred, in addition to
other factors, the issuance did not involve a public offering and therefore the
Company relied upon Section 4(2) of the Security Act of 1933 for such issuance.

        In November 1995, the Company issued 2,000 shares of 6% Series A
Convertible Redeemable Preferred Stock for $2,000,000 to Davidson & Associates,
Inc., in connection with entering into a distribution agreement. The 


                                      II-1
<PAGE>   57
Series A Preferred Stock was converted into Common Stock on October 30, 1997 at
a rate of $2.00 per share, resulting in the issuance of 1,000,000 unregistered
shares of Common Stock. The Company relied on Section 3(a)(9) of the Securities
Act of 1933 on the ground that the issuance was pursuant to conversion of
convertible securities.

        On April 10, 1998, the Company completed the sale of 5,000 shares of its
Series B Convertible Preferred Stock to Advantage Fund II Ltd. and Koch
Industries, Inc. With regard to this sale, the company claims exemption from
registration under Section 4(2) of the Securities Act and Regulation D
promulgated thereunder because, to the Company's knowledge, each of the
purchases was made for the purchaser's own investment purposes and not for
further distribution or resale by accredited investors. In addition, the issuer
satisfied the other applicable requirements of Regulation D in connection with
such offering and sale.


                                      II-2
<PAGE>   58
Item 16. Exhibits and Financial Statement Schedules.

(a)

      EXHIBIT
         NO.                             DESCRIPTION
      -------                            -----------

        3.1     Amended and Restated Articles of Incorporation of the Company,
                incorporated herein by reference to Exhibit No. 3.2 to the
                Company's Registration Statement on Form S-1, No. 33-76496 (the
                1994 S-1)

        3.2     Bylaws of the Company, incorporated herein by reference to
                Exhibit No. 3.2 to the Company's Registration Statement on Form
                S-1, No. 33-67064 (the 1993 S-1)

        4.1     Form of Subscription Agreement relating to the purchase of the
                Series B Preferred Stock

        4.2     Form of Registration Rights Agreement

        4.3     Form of Common Stock Purchase Warrant

        4.4     Certificate of Designation for the Series B Convertible
                Preferred Stock of the Registrant

        5       Opinion of Preston Gates & Ellis LLP regarding legality

        10.1    License Agreement, dated April 24, 1991, among the Company,
                William Morrow Company and Mayo Foundation for Medical Education
                and Research, as amended, incorporated herein by reference to
                Exhibit No. 10.1 to the 1993 S-1

        10.2    Electronic Publishing License, Development and Marketing
                Agreement, dated April 28, 1993, between the Company and Mayo
                Foundation for Medical Education and Research, incorporated
                herein by reference to Exhibit No. 10.4 to the 1993 S-1

        10.3    401(k) Savings and Investment Plan, incorporated herein by
                reference to Exhibit No. 10.9 to Amendment No. 1 to the 1993 S-1

        10.4    1991 Stock Option Plan, as amended, incorporated herein by
                reference to Exhibit No. 10.11 to the 1994 S-1

        10.5    IVI Publishing, Inc. Director Stock Option Plan, as amended,
                incorporated herein by reference to Exhibit No. 10.12 to the
                1994 S-1

        10.6    License Agreement, dated February 9, 1994, between the Company
                and Time Life, Inc. and First Amendment to Titles Development
                Agreement, dated as of February 9, 1994 between the Company and
                Time Life, Inc., incorporated herein by reference to Exhibit No.
                10.19 to the 1994 S-1

        10.7    Lease Agreement, dated March 30, 1994, between the Company and
                Ryan/Wilson Limited Partnership, incorporated herein by
                reference to Exhibit No. 10.25 to the 1994 S-1

        10.8    License, Development and Marketing Agreement, dated September
                28, 1994, between the Company and Time Life, Inc., incorporated
                by reference to Exhibit No. 10.25 to the Company's Form 10-K for
                the year ended December 31, 1994*

        10.9    1994 License, Development and Marketing Agreement, dated
                September 27, 1994, between the Company and Mayo Foundation for
                Medical Education and Research, incorporated by reference to
                Exhibit No. 10.26 to the Company's Form 10-K for the year ended
                December 31, 1994*

        10.10   License Agreement, dated November 10, 1994, between the Company
                and Massachusetts Medical Society, incorporated by reference to
                Exhibit No. 10.27 to the Company's Form 10-K for the year ended
                December 31, 1994*

        10.11   Sublicense Agreement, dated December 31, 1994, between the
                Company and Georg von Holtzbrinck GmbH & Co., incorporated by
                reference to Exhibit No. 10.28 to the Company's Form 10-K for
                the year ended December 31, 1994*


                                      II-3
<PAGE>   59
        10.12   Agreement between America's Health Network, Inc. and the
                Company, dated May 25, 1995, incorporated by reference to
                Exhibit 10.14 to the Company's Form 10-K for the year ended
                December 31, 1995*

        10.13   Amendment No. 2 to License Agreement among William Morrow
                Company, Mayo Foundation for Medical Education and Research and
                the Company, dated December 29, 1995, incorporated by reference
                to Exhibit 10.18 to the Company's Form 10-K for the year ended
                December 31, 1995*

        10.14   Financial Advisor and Consulting Agreement with Frazier &
                Company LP, dated July 14, 1994, as amended by a letter
                agreement, dated June 28, 1995, incorporated by reference to
                Exhibit 10.19 to the Company's Form 10-K for the year ended
                December 31, 1995**

        10.15   First Amendment dated June, 27, 1994 and Second Amendment dated
                October 10, 1995 to Lease Agreement between the Company and
                Ryan/Wilson Limited Partnership, incorporated by reference to
                Exhibit 10.20 to the Company's Form 10-K for the year ended
                December 31, 1995

        10.16   Agreement dated April 1995 among Ryan/Wilson Limited
                Partnership, Wilson Learning Corporation the Company regarding a
                certain lease, incorporated by reference to Exhibit 10.21 to the
                Company's Form 10-K for the year ended December 31, 1995

        10.17   Distribution on Consignment Agreement, dated February 29, 1996
                between the Company and Davidson & Associates, Inc. ,
                incorporated by reference to Exhibit 10.22 to the Company's Form
                10-K for the year ended December 31, 1995*

        10.18   Sublease Agreement, dated January 31, 1996, between the Company
                and The McGraw-Hill Companies, Inc. related to a property leased
                by Woodland Hills Property-W, Inc. pursuant to a May 23, 1993
                lease with the Company, incorporated by reference to Exhibit
                10.23 to the Company's Form 10-K for the year ended December 31,
                1995

        10.19   Employment Agreement between the Company and Joy A. Solomon,
                dated August 7, 1996, incorporated herein by reference to
                Exhibit 10.24 to the Company's Form 10-K for the year ended
                December 31, 1996**

        10.20   Separation Agreement between the Company and Ronald G. Buck,
                dated August 1, 1996, incorporated herein by reference to
                Exhibit 10.25 to the Company's Form 10-K for the year ended
                December 31, 1996**

        10.21   Notice of Lease Term to Sublease Agreement, dated April 1, 1996,
                between the Company and The McGraw-Hill Companies, Inc. related
                to a property leased by Woodland Hills Property-W, Inc. pursuant
                to a May 23, 1993 lease and January 31, 1996, Sublease with the
                Company, incorporated herein by reference to Exhibit 10.26 to
                the Company's Form 10-K for the year ended December 31, 1996

        10.22   Sublease Agreement, dated September 17, 1996, between the
                Company and Reality Interactive, Inc. for the fourth floor
                portion of the Main Lease between the Company and Ryan/Wilson
                Limited Partnership, Wilson Learning Corporation, incorporated
                herein by reference to Exhibit 10.27 to the Company's Form 10-K
                for the year ended December 31, 1996

        10.23   Letter of Employment to Tim Walsh, dated September 19, 1996, for
                the position of Vice President of Sales and Marketing for the
                Company, incorporated herein by reference to Exhibit 10.28 to
                the Company's Form 10-K for the year ended December 31, 1996**

        10.24   Settlement Agreement and Mutual Release dated September 12, 1997
                between the Company and Mayo Foundation for Medical Education
                and Research, incorporated herein by reference to Exhibit 10.1
                to the Company's Form 10-Q for the quarter ended September 30,
                1997

        10.25   Sublicense Agreement dated September 12, 1997 between the
                Company and Mayo Foundation for Medical Education and Research,
                incorporated herein by reference to Exhibit 10.2 to the
                Company's Form 10-Q for the quarter ended September 30, 1997

        10.26   Separation Agreement and Release of Claims dated January 26,
                1998 between the Company and Joy A. Solomon incorporated herein
                by reference to Exhibit 10.26 to the Company's Form 10-K for the
                year ended December 31, 1997**


                                      II-4
<PAGE>   60
        10.27   Letter Agreement dated November 9, 1997 between the Company and
                Robert Goodman, incorporated herein by reference to Exhibit
                10.27 to the Company's Form 10-K for the year ended December 31,
                1997**

        10.28   Nonqualified Stock option Agreement dated December 11, 1997
                between the Company and Robert Goodman, incorporated herein by
                reference to Exhibit 10.1 to the Company's Form 10-Q for the
                quarter ended March 31, 1998**

        23.1    Consent of Ernst & Young LLP

        23.2*** Consent of Preston Gates & Ellis LLP

        24      Power of Attorney

        27.1+   Financial Data Schedule

---------------

*       Portions of the Exhibit have been deleted pursuant to the Company's
request for confidential treatment pursuant to Rule 24b-2 promulgated under the
Securities Act of 1933, as amended

**      Management Agreement or Compensatory Plan or Arrangement

***     Contained within Exhibit 5

+       To be filed by amendment.
                                      II-5
<PAGE>   61
(b)

REPORT OF THE INDEPENDENT AUDITORS

The Board of Directors and Shareholders
IVI Publishing, Inc.

We have audited the financial statements of IVI Publishing, Inc. as of December
31, 1997 and 1996, and for each of the three years in the period ended December
31, 1997, and have issued our report thereon dated February 12, 1998, except for
Note 2 as to which the date is April 13, 1998 (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.



                                                   /s/ Ernst & Young LLP

Minneapolis, Minnesota 
February 12, 1998 except for Note 2 as 
to which the date is April 13, 1998



                                      II-6
<PAGE>   62

                              IVI PUBLISHING, INC.

                SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS

                             YEARS ENDED DECEMBER 31

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                            Additions 
                                                           Balance at       Charged to                                Balance at
                                                           Beginning        Costs and                                 End
                                                           of Period        Expenses             Deductions           of Period
                                                           ----------       ----------           ----------           ----------
<S>                                                        <C>              <C>                  <C>                  <C>       
Year Ended December 31, 1997
      Allowance for doubtful accounts receivable,
      promotional allowances and sales returns             $      277       $    2,336           $   (1,602)(1)       $    1,011
      Allowance for obsolete inventory                            485              200                 (234)(2)              451
                                                           ----------       ----------           ----------           ----------
                                                           $      762       $    2,536           $   (1,836)          $    1,462
                                                           ==========       ==========           ==========           ==========

Year Ended December 31, 1996
      Allowance for doubtful accounts receivable,
      promotional allowances and sales returns             $      753       $    1,675           $   (2,151)(1)       $      277
      Allowance for obsolete inventory                            682              365                 (562)(2)              485
                                                           ----------       ----------           ----------           ----------
                                                           $    1,435       $    2,040           $   (2,713)          $      762
                                                           ==========       ==========           ==========           ==========

Year Ended December 31, 1995
      Allowance for doubtful accounts receivable,
      promotional allowances and sales returns             $      730       $    1,659           $   (1,636)(1)       $      753
      Allowance for obsolete inventory                            124              698                 (140)(2)              682
                                                           ----------       ----------           ----------           ----------
                                                           $      854       $    2,357           $   (1,776)          $    1,435
                                                           ==========       ==========           ==========           ==========
</TABLE>

(1)     Deductions represent accounts receivable determined to be uncollectable
        and therefore charged against the allowance account; accounts 
        receivable determined to be uncollectable due to return of product(s); 
        and accounts credited due to promotional and administrative allowance 
        arrangements with distributors

(2)     Write-offs of inventory

                                      II-7

<PAGE>   63

Item 17. Undertakings.

        The undersigned registrant hereby undertakes:

        (1)     To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

                (i)     To include any prospectus required by section 10(a)(3)
        of the 1933 Act;

                (ii)    To reflect in the prospectus any facts or events arising
        after the effective date of this registration statement (or the most
        recent post-effective amendment thereof) which, individually or in the
        aggregate, represent a fundamental change in the information set forth
        in this registration statement. Notwithstanding the foregoing, any
        increase or decrease in volume of securities offered (if the total
        dollar value of securities offered would not exceed that which was
        registered) and any deviation from the low or high end of the estimated
        maximum offering range may be reflected in the form of prospectus filed
        with the Commission pursuant to Rule 424(b) if, in the aggregate, the
        changes in volume and price represent no more than a 20% change in the
        maximum aggregate offering price set forth in the "Calculation of
        Registration Fee" table in the effective registration statement;

                (iii)   To include any material information with respect to the
        plan of distribution not previously disclosed in this registration
        statement or any material change to such information in this
        registration statement.

        (2)     That, for the purpose of determining any liability under the
1933 Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

        (3)     To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.

        (4)     Insofar as indemnification for liabilities arising under the
1933 Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.


                                      II-8
<PAGE>   64
                                   SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington, on the 22nd day of May,
1998.

                                       IVI PUBLISHING, INC.

                                       By     \s\ Robert N. Goodman    
                                         _____________________________________
                                                  Robert N. Goodman
                                         President and Chief Executive Officer



        Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed by the following persons
in the capacities indicated on the 22nd day of May, 1998.


<TABLE>
<CAPTION>
                 SIGNATURES                                      TITLE
                 ----------                                      -----
<S>                                             <C>

                     
                     *                          President, Chief Executive Officer, Director
--------------------------------------------    (Principal Executive Officer)
             Robert N. Goodman

                     *
--------------------------------------------    Controller, Vice President and Secretary
             Michael D. Conway                  (Principal Financial and Accounting Officer)

                     *
--------------------------------------------    Chairman of the Board of Directors
             Michael A. Brochu

                     
--------------------------------------------    Director
              Alan D. Frazier

                     *
--------------------------------------------    Director
           Ronald E. Eibensteiner

                     
--------------------------------------------    Director
             Timothy I. Maudlin

                     
--------------------------------------------    Director
               Ann Kirschner

                     *
--------------------------------------------    Director
                Ram Shriram

                     *
--------------------------------------------    Director
               Rick Thompson
</TABLE> 
            


* By /s/ Robert N. Goodman
     ------------------------
         Robert N. Goodman
         Attorney in Fact


                                      II-9
<PAGE>   65
                                EXHIBIT INDEX



      EXHIBIT
         NO.                             DESCRIPTION
      -------                            -----------

        3.1     Amended and Restated Articles of Incorporation of the Company,
                incorporated herein by reference to Exhibit No. 3.2 to the
                Company's Registration Statement on Form S-1, No. 33-76496 (the
                1994 S-1)

        3.2     Bylaws of the Company, incorporated herein by reference to
                Exhibit No. 3.2 to the Company's Registration Statement on Form
                S-1, No. 33-67064 (the 1993 S-1)

        4.1     Form of Subscription Agreement relating to the purchase of the
                Series B Preferred Stock

        4.2     Form of Registration Rights Agreement

        4.3     Form of Common Stock Purchase Warrant

        4.4     Certificate of Designation for the Series B Convertible
                Preferred Stock of the Registrant

        5       Opinion of Preston Gates & Ellis LLP regarding legality

        10.1    License Agreement, dated April 24, 1991, among the Company,
                William Morrow Company and Mayo Foundation for Medical Education
                and Research, as amended, incorporated herein by reference to
                Exhibit No. 10.1 to the 1993 S-1

        10.2    Electronic Publishing License, Development and Marketing
                Agreement, dated April 28, 1993, between the Company and Mayo
                Foundation for Medical Education and Research, incorporated
                herein by reference to Exhibit No. 10.4 to the 1993 S-1

        10.3    401(k) Savings and Investment Plan, incorporated herein by
                reference to Exhibit No. 10.9 to Amendment No. 1 to the 1993 S-1

        10.4    1991 Stock Option Plan, as amended, incorporated herein by
                reference to Exhibit No. 10.11 to the 1994 S-1

        10.5    IVI Publishing, Inc. Director Stock Option Plan, as amended,
                incorporated herein by reference to Exhibit No. 10.12 to the
                1994 S-1

        10.6    License Agreement, dated February 9, 1994, between the Company
                and Time Life, Inc. and First Amendment to Titles Development
                Agreement, dated as of February 9, 1994 between the Company and
                Time Life, Inc., incorporated herein by reference to Exhibit No.
                10.19 to the 1994 S-1

        10.7    Lease Agreement, dated March 30, 1994, between the Company and
                Ryan/Wilson Limited Partnership, incorporated herein by
                reference to Exhibit No. 10.25 to the 1994 S-1

        10.8    License, Development and Marketing Agreement, dated September
                28, 1994, between the Company and Time Life, Inc., incorporated
                by reference to Exhibit No. 10.25 to the Company's Form 10-K for
                the year ended December 31, 1994*

        10.9    1994 License, Development and Marketing Agreement, dated
                September 27, 1994, between the Company and Mayo Foundation for
                Medical Education and Research, incorporated by reference to
                Exhibit No. 10.26 to the Company's Form 10-K for the year ended
                December 31, 1994*

        10.10   License Agreement, dated November 10, 1994, between the Company
                and Massachusetts Medical Society, incorporated by reference to
                Exhibit No. 10.27 to the Company's Form 10-K for the year ended
                December 31, 1994*

        10.11   Sublicense Agreement, dated December 31, 1994, between the
                Company and Georg von Holtzbrinck GmbH & Co., incorporated by
                reference to Exhibit No. 10.28 to the Company's Form 10-K for
                the year ended December 31, 1994*


<PAGE>   66
        10.12   Agreement between America's Health Network, Inc. and the
                Company, dated May 25, 1995, incorporated by reference to
                Exhibit 10.14 to the Company's Form 10-K for the year ended
                December 31, 1995*

        10.13   Amendment No. 2 to License Agreement among William Morrow
                Company, Mayo Foundation for Medical Education and Research and
                the Company, dated December 29, 1995, incorporated by reference
                to Exhibit 10.18 to the Company's Form 10-K for the year ended
                December 31, 1995*

        10.14   Financial Advisor and Consulting Agreement with Frazier &
                Company LP, dated July 14, 1994, as amended by a letter
                agreement, dated June 28, 1995, incorporated by reference to
                Exhibit 10.19 to the Company's Form 10-K for the year ended
                December 31, 1995**

        10.15   First Amendment dated June, 27, 1994 and Second Amendment dated
                October 10, 1995 to Lease Agreement between the Company and
                Ryan/Wilson Limited Partnership, incorporated by reference to
                Exhibit 10.20 to the Company's Form 10-K for the year ended
                December 31, 1995

        10.16   Agreement dated April 1995 among Ryan/Wilson Limited
                Partnership, Wilson Learning Corporation the Company regarding a
                certain lease, incorporated by reference to Exhibit 10.21 to the
                Company's Form 10-K for the year ended December 31, 1995

        10.17   Distribution on Consignment Agreement, dated February 29, 1996
                between the Company and Davidson & Associates, Inc. ,
                incorporated by reference to Exhibit 10.22 to the Company's Form
                10-K for the year ended December 31, 1995*

        10.18   Sublease Agreement, dated January 31, 1996, between the Company
                and The McGraw-Hill Companies, Inc. related to a property leased
                by Woodland Hills Property-W, Inc. pursuant to a May 23, 1993
                lease with the Company, incorporated by reference to Exhibit
                10.23 to the Company's Form 10-K for the year ended December 31,
                1995

        10.19   Employment Agreement between the Company and Joy A. Solomon,
                dated August 7, 1996, incorporated herein by reference to
                Exhibit 10.24 to the Company's Form 10-K for the year ended
                December 31, 1996**

        10.20   Separation Agreement between the Company and Ronald G. Buck,
                dated August 1, 1996, incorporated herein by reference to
                Exhibit 10.25 to the Company's Form 10-K for the year ended
                December 31, 1996**

        10.21   Notice of Lease Term to Sublease Agreement, dated April 1, 1996,
                between the Company and The McGraw-Hill Companies, Inc. related
                to a property leased by Woodland Hills Property-W, Inc. pursuant
                to a May 23, 1993 lease and January 31, 1996, Sublease with the
                Company, incorporated herein by reference to Exhibit 10.26 to
                the Company's Form 10-K for the year ended December 31, 1996

        10.22   Sublease Agreement, dated September 17, 1996, between the
                Company and Reality Interactive, Inc. for the fourth floor
                portion of the Main Lease between the Company and Ryan/Wilson
                Limited Partnership, Wilson Learning Corporation, incorporated
                herein by reference to Exhibit 10.27 to the Company's Form 10-K
                for the year ended December 31, 1996

        10.23   Letter of Employment to Tim Walsh, dated September 19, 1996, for
                the position of Vice President of Sales and Marketing for the
                Company, incorporated herein by reference to Exhibit 10.28 to
                the Company's Form 10-K for the year ended December 31, 1996**

        10.24   Settlement Agreement and Mutual Release dated September 12, 1997
                between the Company and Mayo Foundation for Medical Education
                and Research, incorporated herein by reference to Exhibit 10.1
                to the Company's Form 10-Q for the quarter ended September 30,
                1997

        10.25   Sublicense Agreement dated September 12, 1997 between the
                Company and Mayo Foundation for Medical Education and Research,
                incorporated herein by reference to Exhibit 10.2 to the
                Company's Form 10-Q for the quarter ended September 30, 1997

        10.26   Separation Agreement and Release of Claims dated January 26,
                1998 between the Company and Joy A. Solomon incorporated herein
                by reference to Exhibit 10.26 to the Company's Form 10-K for the
                year ended December 31, 1997**


<PAGE>   67
        10.27   Letter Agreement dated November 9, 1997 between the Company and
                Robert Goodman, incorporated herein by reference to Exhibit
                10.27 to the Company's Form 10-K for the year ended December 31,
                1997**

        10.28   Nonqualified Stock option Agreement dated December 11, 1997
                between the Company and Robert Goodman, incorporated herein by
                reference to Exhibit 10.1 to the Company's Form 10-Q for the
                quarter ended March 31, 1998**

        23.1    Consent of Ernst & Young LLP

        23.2*** Consent of Preston Gates & Ellis LLP

        24      Power of Attorney

        27.1+   Financial Data Schedule

---------------

*       Portions of the Exhibit have been deleted pursuant to the Company's
request for confidential treatment pursuant to Rule 24b-2 promulgated under the
Securities Act of 1933, as amended

**      Management Agreement or Compensatory Plan or Arrangement

***     Contained within Exhibit 5

+       To be filed by amendment.