File Number: 000-28285

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K/A
Amendment No. 2

(MARK ONE)

|/x/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

or

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM  TO

COMMISSION FILE NUMBER: 000-28285

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MEDICALOGIC/MEDSCAPE, INC.(Exact name of registrant as specified in its charter)

OREGON(State or other jurisdiction of
incorporation or organization)

93-0890696(I.R.S. Employer Identification No.)20500 NW EVERGREEN PARKWAY, HILLSBORO, OREGON(Address of principal executive offices)

97124(Zip Code)


Registrant's telephone number, including area code:(503) 531-7000

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

Securities
registered pursuant to Section 12(g) of the Act: Common Stock, no par value per share

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

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

The aggregate market value of the registrant's common stock held by nonaffiliates as of April 16, 2001 was approximately $71,447,000.

The number of shares outstanding of the registrant's common stock as of April 16, 2001 was 56,203,054.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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MedicaLogic/Medscape, Inc.    Annual Report on Form 10-K

Table of Contents

|          |  |                                                                                      |  | Page
|--------- |  | ------------------------------------------------------------------------------------ |  | ----
|Part I    |  |                                                                                      |  |     
|Item 1.   |  | Business                                                                             |  | 1   
|Item 2.   |  | Properties                                                                           |  | 16  
|Item 3.   |  | Legal Proceedings                                                                    |  | 16  
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                  |  | 17  
|Item 4A.  |  | Executive Officers of the Registrant                                                 |  | 17  
|Part II.  |  |                                                                                      |  |     
|Item 5.   |  | Market for Registrant's Common Equity and Related Stockholder Matters                |  | 19  
|Item 6.   |  | Selected Financial Data                                                              |  | 20  
|Item 7.   |  | Management's Discussion and Analysis of Financial Condition and Results of Operation |  | 20  
|Item 7A.  |  | Quantitative and Qualitative Disclosures About Market Risk                           |  | 39  
|Item 8.   |  | Financial Statements and Supplementary Data                                          |  | 40  
|Item 9.   |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |  | 71  
|Part III. |  |                                                                                      |  |     
|Item 10.  |  | Directors and Executive Officers of the Registrant                                   |  | 72  
|Item 11.  |  | Executive Compensation                                                               |  | 74  
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management                       |  | 78  
|Item 13.  |  | Certain Relationships and Related Transactions                                       |  | 81  
|Part IV.  |  |                                                                                      |  |     
|Item 14.  |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                     |  | 82  
|          |  | Signatures                                                                           |  | 85  

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PART I

ITEM 1. BUSINESS

General

MedicaLogic/Medscape, Inc. d.b.a. Medscape (together with its subsidiaries "Medscape" or the "Company") is a leading provider of digital health record
systems and information to the healthcare industry. Medscape develops digital health record applications that are designed to improve healthcare through the timely delivery of clinical data and
information to healthcare professionals and consumers. The Company also provides online health information including medical news, articles, and conference coverage through its Internet portals,
Medscape.com and CBSHealthWatch.com. Medscape's products and services are designed to enhance and improve the quality, cost, efficiency, safety and outcome of healthcare.

The Company engages in and derives substantially all of its revenues from three operating segments, Digital Health Record (DHR) applications, Internet Portals and Transcription
Services. Selected financial information relating to the Company's operating segments is contained in the Management Discussion and Analysis and Note 10 of the Notes to Consolidated Financial
Statements.

Medscape's DHR applications replace or augment the paper medical record, provide decision support and facilitate the flow of clinical information necessary for patient care,
potentially increasing both efficiency and safety. As of December 31, 2000, Medscape DHR systems housed digital records for more than 17.2 million patients. The DHR application derives
revenues from software licenses, monthly service subscriptions and support and consulting fees. DHR application customers include academic medical centers such as Baylor College of Medicine,
healthcare delivery networks such as Providence Health System in Portland, Oregon (which provides regional healthcare to customers through a combination of hospitals, clinics, physician practices, and
other healthcare facilities and services), and both the NASA space shuttle program and the International Space Station program.

Medscape's Internet portals include Medscape.com and CBSHealthWatch.com. Through Medscape.com, the Company provides up-to-date medical news, articles, and conference coverage as well
as accredited continuing professional education programs. As of December 31, 2000, more than 560,000 physicians



and 1.6 million non-physician healthcare professionals (such as nurses or physician assistants) worldwide had registered at Medscape.com, and during the year 2000 more than 100,000 hours of
accredited continuing professional education were delivered via the site. Through CBSHealthWatch.com, the Company provides health information tailored to the healthcare consumer's perspective.
CBSHealthWatch.com is the exclusive Internet healthcare site integrated into CBS News programming and is promoted on some Viacom, Inc. media properties, including CBS. The Internet portal line of
business derives revenue primarily from advertising and sponsorship.

Medscape's transcription services is a Web-based medical transcription system that digitizes and transports voice across electronic networks and the Internet, and connects physicians
with their medical records stored in Medscape's clinical database. The transcription services derives revenues from monthly service fees.

The Company is working to integrate its existing offerings to customers by combining a number of the Company's products and services, and also to support the creation of reports and
data produced from Medscape's DHR products and Internet portals. These reports will provide only aggregated, de-identified statistical information about substantial populations in order to protect the
privacy of individuals' health information. These integrated offerings will focus on the education of physicians and patients about new treatments, on improved safety and appropriateness of
prescribing, on recruitment of patients for clinical research trials, or on other matters. The Company recently announced two transactions that represent the first step in presenting an integrated
offering. In our agreement with GlaxoSmithKline, the world's largest pharmaceutical company, we combined the sale of sponsorship and promotional services on our Internet portals with the sale of
aggregated statistical data on disease

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management from our DHR systems. In our agreement with General Motors Corporation (GM), the nation's largest private purchaser of healthcare services, we combined GM sponsorship of sales of our DHR
products and our new Medscape Mobile handheld software. These products will provide both a prescription writer and access to information from our Internet portals to physicians who treat GM patients.
GM will also receive reports and other aggregated information intended to assist GM in managing the quality of healthcare for its employees, retirees, and their families. Revenues we may earn from GM
depend on the combined effect of our offerings in helping GM achieve its healthcare objectives.

The
Company's strategy is to provide a wide array of products and services that can be embraced by healthcare professionals and consumers at various levels of technical
sophistication, and to encourage users who have experienced the benefits of Medscape's Internet portals to progressively adopt the Company's increasingly comprehensive clinical applications in
manageable steps of complexity and functionality. The rapid post-launch adoption of the Company's Medscape Mobile product is a recent example of this strategy in practice. Another aspect of the
Company's strategy is to integrate the information contained in and allow communication between its various products. For example, AboutMyHealth, a Web-based offering for consumers, allows patients to
view their physician-created DHR online as well as to communicate with their doctor's office to request prescription refills, make appointments or ask questions. As another example, in certain
portions of the Company's DHR
applications, the user can, with a single click, jump from a patient's diagnosis or medication directly to current Medscape.com news and articles on that specific topic.

The Company was incorporated in Oregon in May 1985 as MedicaLogic, Inc. The Company's name was changed to MedicaLogic/Medscape, Inc. in May 2000. Since September 2000, the Company has
done business under the trade name Medscape. The Company expanded its products and services in 2000 as a result of its strategic merger with Medscape, Inc. ("Medscape, Inc."), and the acquisitions of
Total eMed, Inc. ("Total eMed") and AnywhereMD.com, Inc. ("AnywhereMD.com"). These strategic mergers and acquisitions added the following assets, respectively: leading Internet healthcare portals,
Web-based transcription capability for the creation of digital health records, and wireless prescribing technology for the Palm O/STM platform.

PRODUCTS AND SERVICES

DIGITAL HEALTH RECORD APPLICATIONS

The primary target markets for the Company's DHR applications consist of healthcare providers and healthcare consumers. The Company's DHR applications include
the Medscape Charts suite, Logician by Medscape, Medscape Mobile for healthcare providers and AboutMyHealth for healthcare consumers.

Medscape Charts Suite

The Medscape Charts suite is comprised of low-cost, Web-enabled applications that work within existing paper-based clinical workflows
to help manage costs and potentially improve the quality and efficiency of healthcare services. The Medscape Charts suite includes:

Medscape Encounter

Medscape Encounter (formerly "Logician Internet") is a Web-enabled application that eliminates additional effort for the physician to create Health
Care Finance Administration (HCFA) compliant chart notes of patient encounters as well as automatically maintaining a summary of key patient data to aid clinical decision making. Medscape Encounter
enables physicians to:



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Medscape Chart Room

Medscape Chart Room provides storage of patient charts utilizing technologies that are supportive of HIPAA regulations. The Chart Room allows physicians and
authorized staff access to key clinical data from any Web browser, subject to correct user authentication. Compared to a paper-based system, this improves the availability of data to support clinical
decision-making and has the potential to reduce medical errors.

The
Web-hosted chart room is a key aspect of Medscape Charts. With Medscape Encounter, charts and chart notes are created on the physician's computer and then can be
printed for use in paper charts. At the physician's convenience, he or she then connects to the Internet to store the encrypted chart notes in a central database at Medscape's data center. To keep the
information safe during transmission and in storage, Medscape uses technology similar to that used by banks and financial institutions to secure online financial transactions. This
state-of-the-art technology provides strong levels of security during communications between the user's computer and the data center at Medscape. The data is backed
up regularly to minimize the risk of loss in case of a computer system failure. Once stored, charts are accessible from any connection to the Internet with the authorized member name and password.

Medscape Practice Profiles

Medscape Practice Profiles is a series of tools for providing interactive analysis on a particular patient population to better understand care trends, analyze
adherence to nationally approved care guidelines, and access authoritative content and medical literature relating to the problems being treated or medications being used. Practice Profiles provides a
collection of automated, interactive reports to help improve patient management.

With
Practice Profiles physicians can:



Practice
Profiles enables physicians to assess their own clinical practices and has the potential to improve the overall quality and efficiency of the healthcare provided.

Currently,
Medscape is developing future releases for applications within the Medscape Charts suite including electronic submission of laboratory orders and receipt of results,
electronic receipt, signature, and filing of transcription and external documents, and facilitation of the private exchange of

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messages, documentation, and patient data among a team of healthcare providers in support of an episode of patient care.

Logician by Medscape

Logician by Medscape is a client-server based electronic medical record application for healthcare practices. This application has the potential to allow
healthcare practices to gain efficiencies in clinical care and practice improvement through automated workflows and online access to all clinical information. It is available under both perpetual
license and subscription models, and may be deployed as a locally hosted application or under an application service provider (ASP) model. Due to the need for a significant investment in computer
infrastructure and office re-engineering, adoption of Logician by Medscape has been largely focused among integrated healthcare delivery systems and large group practices having an
existing Information Systems infrastructure.

From
1990 to 1995, the Company developed first-generation DHR applications for the PC-DOS environment. In 1996, the Company released Logician by Medscape for the Windows
client-server environment and subsequently delivered several major upgrade releases including version 5.4, released in 2000, that incorporates enhancements related to clinical content, security data
import/export, encounter form editing and Web accessibility. The Company's current customers for this class of products include Baylor College of Medicine, Memorial-Hermann Hospital System, MeritCare
Health System, the NASA Space Shuttle program and the International Space Station Program, Providence Health System, Riverside Health System, Texas Children's Hospital, Wake Forest University, Baptist
Medical Center and more than 50 others.

Logician
by Medscape provides the following benefits:



Medscape
continues to develop and deploy ambulatory electronic medical record applications and enhancements for group practices and integrated delivery networks. The Company believes
the availability of an ASP model will encourage further adoption of Logician by Medscape by enabling healthcare organizations to reduce up front costs and ease reliance on their internal IT resources.

Looking
forward, Medscape is currently developing Logician by Medscape 5.5. A key objective for this release is to enhance connectivity between Logician by Medscape and Medscape
Charts by supporting the exchange of patient records between enterprises and referring physicians. Medscape plans to also make changes to assist physicians with adhering to the new HIPAA regulations
designed to further protect patient privacy and confidentiality. It is Medscape's expectation that these efforts will significantly benefit both current and new Logician by Medscape customers, further
driving adoption of Medscape's DHR applications.

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Logician ASP by Medscape

In 2000, Medscape began offering an ASP model of Logician by Medscape to help physicians to:



Logician
ASP by Medscape incorporates all the features of Logician by Medscape while reducing the initial capital for the necessary, but costly, server-side computer
systems and associated network support staff.

Medscape Mobile Suite

Medscape introduced a suite of software applications known as Medscape Mobile for handheld (PDA) devices in September 2000. Medscape Mobile is a suite
of applications designed for the Palm operating system. These applications give physicians access to patient-specific information and to relevant information for clinical decision-making
on an industry leading platform. Medscape Mobile is already in use by over 43,000 physicians. In its initial phase, Medscape Mobile offers exclusive access to the Tarascon ePharmacopoeia,
the electronic version of Tarascon's portable drug reference, the Pocket Pharmacopoeia®. According to medical bookstore distribution figures, the printed Pocket Pharmacopoeia®
is the market leader in the professional drug reference area. In a survey published in 1999, 97% of surveyed physicians and physicians in training rated it as the "most useful" or "essential" item in
their white coat pockets.

The Company recently announced two transactions that represent the first step in presenting an integrated offering. In our agreement with GlaxoSmithKline, the world's largest
pharmaceutical company, we combined the sale of sponsorship and promotional services on our Internet portals with the sale of aggregated statistical data on disease management from our DHR systems. In
our agreement with General Motors Corporation (GM), the nation's largest private purchaser of healthcare services, we combined GM sponsorship of sales of our DHR products and our new Medscape Mobile
handheld software. These products will provide both a prescription writer and access to information from our Internet portals to physicians who treat GM patients. GM will also receive reports and
other aggregated information intended to assist GM in managing the quality of healthcare for its employees, retirees, and their families. Revenues we may earn from GM depend on the combined effect of
our offerings in helping GM achieve its healthcare objectives. Medscape Mobile also offers the Medscape Reader for Palm-based access to Medscape.com articles and conference coverage and a
Medical Calculator that includes over 50 dosing and clinical formulas.

We plan to enhance future releases of Medscape Mobile to include applications that help physicians work with patients and with the reimbursement system. Planned enhancements include a
prescription writer with integral formulary management (the ability to display health plan coverage information about prescription drugs), additional reference material about possible
drug-drug interactions, and a "charge capture" solution that enables physicians to enter codes that enable them to more easily get paid for their services when they are away from their
office location.

AboutMyHealth.com

Medscape released AboutMyHealth.com, the first-physician-patient communications tool powered by Medscape's DHR on December 5, 2000 in order to serve the
needs of healthcare consumers concerned about their health, or the healthcare of their dependents. Upon mutual consent, AboutMyHealth.com allows patients and their physicians to share information
about the patient's

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personal health and ongoing disease management by using information captured during office examinations or other physician/patient encounters. Patients can electronically contact their physician's
office with requests to schedule appointments and refill medications through an encrypted Internet connection. Patients can also communicate with their clinic or physician both during and outside of
regular office hours through AboutMyHealth.com's online messaging service. Unlike traditional email connections, AboutMyHealth.com includes authentication technology for both patients and physicians
to protect confidentiality. Physicians can communicate with patients privately, provide patients with a summary view of their digital health record, provide contextual links to authoritative health
information, news and educational materials through CBSHealthWatch.com. Patients can also use AboutMyHealth.com to store personal and family health information for ongoing health management or future
reference.

INTERNET PORTALS

Medscape.com

Medscape.com is designed primarily for physicians and other healthcare providers. In December 2000, Medscape was recognized for its achievement and
excellence at the 2000 eHealthcare World Awards Ceremony in New York. Medscape.com earned the Gold Awards for Best Healthcare Search Engine and Best Healthcare Portal. The eHealthcare World Awards are
based on criteria such as content and design, structure and functionality, navigation, interactivity, customer service and creative use of advertising and marketing. Our site was also listed in Forbes
magazine's "Top Ten" healthcare Web sites in February 2001. Through Medscape.com, users can access various subjects, based on their



practice or needs from the latest medical news, to medical conference coverage, financial information, and medical texts. In addition, physicians can:



Medscape.com
offers specialists, primary care physicians, and other health professionals a robust and integrated multi-specialty medical information and education tool. Medscape.com
is built around practice-oriented content. Each specialty site pools, filters, and delivers pertinent, regularly updated content from tens of thousands of medical journal articles, expert-authored
state-of-the-art surveys in disease management, conference coverage from major medical meetings, and more. All of Medscape.com's articles are
Web-enhanced and cross linked for online browsing and smart information retrieval. All of the content can also be easily downloaded and printed for reading offline. Some of Medscape.com's
key features include:



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In
addition to clinical information resources, Medscape.com offers a suite of professional and practice tools, including:



Based
on the number of credits awarded in 2000, the Company believes that Medscape.com is one of the world's largest providers of online continuing medical education (CME) programs
for healthcare professionals. The site offers a selection of free, regularly updated continuing education activities for physicians, registered nurses, pharmacists and other health professionals. The
majority of CME activities have been planned and implemented in accordance with the Essential Areas and Policies of the Accreditation Council for Continuing Medical Education (ACCME), and have been
produced in collaboration with ACCME-accredited CME providers. Medscape.com recently began providing instant CME (iCME) Certificates. Selected Medscape.com CME activities offer instant,
printable CME certificates online. In addition, there is now an Instant CME Tracker function. Activities tagged for iCME are automatically entered into the CME Tracker as they are completed for
credit, and the certificates are available to be printed as needed from the Medscape.com site.

CBSHealthWatch.com

In September 1999, Medscape launched its first consumer Web site, CBSHealthWatch.com. CBSHealthWatch.com is designed to help families and individuals
make better-informed healthcare decisions and to simplify management of their healthcare needs. The site provides personalized, authoritative medical content written for the consumer, access to
professional content on Medscape.com and interactive personal health management tools, such as health diaries. On August 3, 1999, Medscape entered into a strategic relationship with CBS
Corporation, (subsequently acquired by Viacom, Inc.) under which CBSHealthWatch.com is the exclusive Internet healthcare site integrated into CBS News programming and is promoted on CBS as well as
certain other Viacom media properties. In December 2000, CBSHealthWatch.com was recognized for its achievement and excellence at the 2000 eHealthcare World Awards Ceremony held in New York.
CBSHealthWatch.com by Medscape received the Bronze award for Best Healthcare Portal and during February 2001 was also named one of the Top 100 Internet sites by PC Magazine.

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TRANSCRIPTION SERVICES

Medscape Transcription Services is designed to allow physicians to document patient encounters and produce a DHR without manual entry of information into a
computer, which allows access to and analysis of information that was previously unavailable due to the inefficiency of storing, in paper format, millions of individual health records.

Physicians'
use of handheld, wireless or phone devices to dictate patient encounters is consistent with their current practice, thus, the adoption of Medscape Transcription Services
does not require a change in behavior. The dictation and selected demographic data is downloaded to the Medscape Transcription national data center in Nashville, Tennessee through the use of a virtual
private network (VPN). Once the voice and demographic information is compiled, the work is routed via the Internet to home-based medical transcriptionists (MTs) located across the country
who are employed and trained by Medscape. After the patient encounter is transcribed, the physician or other healthcare provider can view, edit and electronically sign the record over the Internet in
a protected environment with a standard Web browser. The final electronic document can then be e-mailed, faxed or printed onsite, or any combination of these formats, depending on the
established workflow patterns of the clinic and physicians. Medscape Transcription Services provides the ability to maintain both digital and paper health records depending on the system used by the
physician's practice.

INTEGRATED OFFERINGS AND OTHER PRODUCTS

The Company is currently developing integrated offerings which combine a number of the Company's products and services, and may also be augmented with reports
and data produced from its DHR products and Internet portals. Potential integrated offerings include the following:



The
Company is also developing applications to provide the ability to conduct clinical transactions from its DHR applications, including the following:



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CUSTOMER SERVICE AND SUPPORT

Medscape believes effective customer service is essential to attracting and retaining physician usage of the Company's electronic healthcare applications and
consumer usage of the Company's Internet-based services. Medscape understands the demands of the healthcare community for person-to-person responsiveness. Medscape provides a
wide range of customer support services through a staff of customer service personnel, multiple call centers and an e-mail help desk. The Company also offers Web-based support
services that are available outside of normal business hours and are frequently updated to improve existing information and to support new services. The Company's ongoing telephone support is
accessible by a toll-free telephone number and is available from either 5 a.m. to 6 p.m. Pacific time, Monday through Friday or, for an additional charge, outside of normal
business hours. The Company's operators screen all requests for telephone support and direct the call to the appropriate customer service personnel. Technical support personnel are responsible for
consulting with the Company's strategic partners about technical support issues and for resolving technical problems encountered by users, strategic partners or other parties. Medscape also employs
technical support personnel who work closely with the Company's direct sales force, distribution partners and customers. Medscape provides its customers with the ability to purchase maintenance for
the Company's applications and services, which includes technical support and upgrades. Medscape service and support professionals also provide training programs for the Company's customers.

In
addition, the Company provides enterprise planning, site evaluation, work-flow preparation, interface development and installation and training of physicians and their
staff in connection with the implementation of Medscape's Logician digital health record application. Enterprise and site evaluations allow Medscape to understand how best to implement the Company's
Logician by Medscape application within the physician's enterprise and office work flow environment. The objective of the implementation process is to maximize the benefits of digital health records
to the physician's enterprise and practice.

SALES AND MARKETING

Medscape markets its products and services to an increasingly diversified network of physicians, pharmaceutical companies, large private healthcare consumers,
and integrated healthcare delivery networks and healthcare consumers. In 1998, VHA, Inc. accounted for approximately 20% of total revenues. During 1999, Baylor College of Medicine accounted for
approximately 16% of total revenues, and Texas Children's Hospital accounted for approximately 13% of total revenues. Due primarily to the expansion and diversification of the Company's customer base,
no single customer comprised more than 10% of total revenues during 2000. The Company's current customers also include General Motors Corporation, one of the nation's largest private consumers of
healthcare services and GlaxoSmithKline, one of the world's largest pharmaceutical companies. Other customers include academic medical centers such as Baylor College of Medicine, integrated healthcare
delivery networks such as Providence



Health System in Portland, Oregon, and the NASA space shuttle program and the International Space Station program.

The
Company's sales and marketing programs are organized around the Company's main customer segments: pharmaceutical companies, integrated healthcare delivery systems, physicians in
private practice, self-insured employers and personal healthcare consumers. The Company's products and services are distributed by a nationwide direct sales force, a complementary inside
sales team, a select number of strategic distribution partners and directly through the Internet. Medscape also partners with national consulting firms and systems integrators to deliver complete
information technology solutions for large system customers.

Pharmaceutical Companies.Medscape sells advertising and sponsorships, market research and other services to
pharmaceutical companies. Medscape's Internet capabilities and informational resources offer advantages over traditional mail surveys and focus groups in terms of speed and cost savings.

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Private Healthcare Consumers.Medscape recently began selling to private healthcare consumers. Medscape's technologies
may help its partners to achieve improvement in the quality of patient care by reducing medical errors and may lead to reducing healthcare costs.

Integrated Healthcare Delivery Systems.Medscape approaches the integrated healthcare delivery system market primarily
through direct sales and distribution partners. Medscape believes the Company's access to premier reference accounts plays an important role in the Company's sales process.

Physicians in Private Practice.Medscape promotes the Company's products and services to physicians in private practice
with programs designed to take advantage of the value of peer-to-peer relationships in the physician community. In contrast to the national image-building campaign required for
sales to large health systems, Medscape is building the Company's individual physician sales and marketing campaign around activities that will increase adoption of Medscape Charts. Sales will be
offered primarily through online subscription capabilities supported by an inside telephone sales team.

Personal Healthcare Consumers.Medscape believes marketing programs for personal healthcare consumers are likely to be
more successful when they are supported by the existing relationship between the physician or local health system and their patients. Medscape believes the Company's launch of AboutMyHealth.com will
contribute to that relationship and related marketing efforts.

Medscape's
sales, marketing and business development resources are located at the Company's facilities in Oregon, New York, and Tennessee, while the Company's account representatives
are deployed throughout the United States.

STRATEGIC RELATIONSHIPS

Medscape forms strategic alliances where the relationship affords Medscape an opportunity to advance and accelerate the development of new markets, to develop
new products and services, and to enhance existing products and services. The objectives and goals for a strategic alliance can also include technology exchange and joint sales and marketing. Certain
of our strategic alliances are listed below:

General Motors Corporation.General Motors Corporation (GM), the world's largest vehicle manufacturer, designs, builds
and markets cars and trucks worldwide. GM is also the United States' largest private purchaser of healthcare. In January 2001, GM and Medscape entered into an e-business healthcare
alliance. In accordance with the agreement, GM will sponsor the use of certain of Medscape's computer-based technologies to facilitate improvement in the quality of patient care by reducing medical
errors while lowering healthcare costs for GM. Under the alliance, GM and Medscape will cooperate on a three-year program to encourage U.S. physicians to use hand-held computer
devices which use applications from the Medscape Mobile suite of products for prescriptions and to adopt Medscape's digital health record application Medscape Logician ASP. As part of the strategic
alliance, GM received warrants for 5 million shares of Medscape common stock. GM and Medscape will also share in the cost savings realized by GM primarily from physician usage of Medscape
Mobile applications.

Viacom Inc.Viacom Inc. is a leader in the creation, promotion, and distribution of entertainment, news,
sports, and music. In July 1999, the Company and CBS Corporation, which subsequently merged with Viacom Inc., entered into an agreement under which the Company will receive approximately
$150 million in advertising and promotion in the United States over a seven-year period. Medscape also was granted a license to the "CBS" trademark and "Eye" design and selected
health-related news content. As part of this strategic relationship, Medscape provides some healthcare-related content to CBS radio and television news broadcasts as well as certain other Viacom media
properties. Additionally, CBSHealthWatch.com is the exclusive healthcare Internet site integrated into CBS News programming.

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VHA, Inc.A nationwide network of more than 1,750 leading community-owned healthcare organizations and their
physicians, the VHA network comprises approximately 24% of U.S. community hospitals, with over 175,000 physicians. Logician by Medscape is a core application of VHA's Physician Linkage
strategy, developed by VHA Information Services to provide physician practices with electronic access to patient information and clinical decision-support tools.

COMPETITION

Digital Health Record and Transcription Competitors

High growth, intense competition, and technological change characterize the market for electronic healthcare information services and e-commerce.
Medscape faces competition from many companies with significantly greater financial resources, well-established brand names and large installed customer bases. Medscape expects significant
competition from:

Traditional Healthcare Information System Vendors.These vendors, including Cerner Corporation, Epic Systems
Corporation, IDX Corporation, McKesson/HBOC, Medic, a division of Misys PLC, Shared Medical Systems Corporation, CyBear, Inc., Eclipsys Corp., QuadraMed Corp, and MedPlus, Inc. focus on
providing information systems to large healthcare enterprises and physician practice groups. They have large installed bases of customers and generally offer solutions to a broad range of customer
problems.

Vendors with PDA-based Solutions.The rapid adoption of PDA handheld devices (notably using the Palm
operating system or the Pocket PC platforms) has given credence to a new generation of vendors providing applications that run on those platforms. While many of the proposed business models remain
unproven, the high relative penetration of handheld devices suggests that any vendor who achieves success in this market has the opportunity to achieve a significant foothold. Potential competitors in
this category include AllScripts, ePocrates, ePhysician, iScribe, Parkstone, and others.

Other Healthcare Information System Consolidators or Disintermediators.The availability of Web-based
consolidators and the transition of the healthcare supply chain economics to the Internet have paved the way for other vendors to play the role of either strongly complementary partners or formidable
competitors. These could include any of the service suppliers seeking to maintain control of the supply chain such as the national labs (LabCorp, Quest), the Pharmacy Benefit Management companies
(Merck-Medco, ExpressScripts, AdvancePCS), business consolidators such as WebMD, Medem, or Healthvision or major players in the supply chain network such as NDC, Envoy, or others. The Company also
expects significant competition from transcription service vendors including MedQuist, EdiX, HealthScribe, Lernout & Hauspie (L&H) and Capital MT.

Also,
Internet healthcare companies are focusing on a wide variety of areas including automating financial, administrative and clinical transactions, such as WebMD and Iscribe;
attracting physicians and other health professionals with clinical content, tools and medical education, such as Mediconsult, Healthgate, theheart.org and Healthstream; targeting the consumer health
area, including drkoop.com, iVillage and HealthCentral for content as well as online pharmacies such as Drugstore.com, Inc.

Each
of these companies can be expected to compete with the Company within segments of the evolving Internet healthcare market. Major Internet companies, including those not currently
specializing in the healthcare industry, may also enter the Company's markets. Certain of these companies may have longer operating histories, larger customer bases, substantially greater financial,
technical, sales and marketing resources and greater name recognition than Medscape does and the Company may not be able to compete successfully against these companies.

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Internet Portal Competitors

The Company faces competition both in attracting visitor traffic and in generating revenue across all its business lines. Medscape competes with numerous
companies and organizations for the attention of medical professionals and consumers including traditional off-line media such as print journals, conferences, continuing medical education
programs and symposia. Medscape also faces significant competition from online information resources. There are many healthcare-related Web sites available on the Internet. Also, several large
consumer sites offer specialized healthcare channels as part of their general services. In addition, there are many companies that provide non-Internet based marketing and advertising
services to the healthcare industry. These competitors include advertising agencies, consulting firms, marketing and communications companies and contract sales and marketing organizations.

Some
of the Company's current and potential competitors may have competitive advantages compared to Medscape, including:



The
Company believes that the principal competitive factors in attracting and retaining members are the depth, breadth and timeliness of services and brand recognition. Other
important factors in attracting and retaining members include ease of use, quality of service and cost. Medscape believes that the principal competitive factors that will continue to attract
advertisers and sponsors to Medscape.com and its consumer sites include price, the number of medical professionals and consumers who use Medscape's Web sites, the demographics of its member base and
the creative implementation of advertisement placements.

Competition
is likely to increase as new companies enter the market and current competitors expand their services. There can be no assurance that Medscape will be able to compete
successfully against current and future competitors or that the competitive pressures Medscape faces will not seriously harm its business.

TECHNOLOGY

Digital Health Record Applications

The Company's DHR applications use a fault tolerant configuration of Web, application and database server computers interconnected through redundant, high
speed network components at Medscape's third-party data center. The data center incorporates various technologies to protect the transmission of sensitive and confidential patient medical record data
over the Internet. These include authentication, data encryption techniques, network firewalls, personnel policies, controlled physical access to the data centers and security audits of those sites.
The Company's services are linked to systems that provide data protection through techniques such as replication. Medscape requires on-site backup power systems in the data center and
intends to install similar facilities in any of the Company's back-up data centers. These safeguards are designed to provide a reliable and protected environment for the storage and
exchange of confidential patient and customer data. Although Medscape believes the Company's facilities are resistant to systems failure and sabotage, Medscape is in the process of further developing
and implementing disaster recovery and contingency operation plans.

The
Company's Logician by Medscape product line runs on Oracle Corporation's database products. Medscape licenses these databases from Oracle under an Oracle alliance agreement. As an
alliance member, Medscape has been given the right to sublicense the database software to the Company's customers.

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Internet Portals

Medscape's Internet portals are supported by reliable and expandable system platforms. Using a combination of proprietary online solutions and commercially
available licensed technologies, the Company has deployed systems for online content dissemination, site analysis, and web and email based member support.

The
Company has developed a database management and online publication system to index, retrieve and display information. This system allows for rapid searching, viewing and
distribution of content including text, photos, graphics and other images. The Company's hardware and software systems are based on a distributed processing model that allows applications to be
distributed among multiple parallel servers. The Company's hardware servers, storage systems, Internet connections and networks are designed to allow its online systems to operate 24 hours a
day and seven days a week.

The
Company maintains offsite redundant systems and facilities and has outsourced its Web-hosting operations to a third party facility, Exodus Communications. The Company
undertook this outsourcing to help provide faster and more reliable connections to the Internet and enhanced reliability and expandability.

Transcription Services

The Company's transcription and voice capture applications use a fault tolerant configuration of Web, application and database servers interconnected through
redundant, high speed network components at Medscape's data center in Nashville. The data center incorporates various technologies to protect the transmission of highly sensitive and confidential
patient medical record data over the Internet. These include authentication, network firewalls, personnel policies, controlled physical access to the data center and security audits. All mission
critical servers and their data are protected via both hardware and software backup. Medscape has installed onsite backup power systems in the data center. These safeguards are designed to provide a
reliable and protected environment for the storage and exchange of confidential patient and customer data. Although Medscape believes its facilities are resistant to systems failure and sabotage, the
Company is in the process of further developing and implementing disaster recovery and contingency operation plans.

DEVELOPMENT AND ENGINEERING

Medscape believes the Company's future success will depend on its ability to continue to maintain and enhance the Company's Internet portals, DHR software
applications and other services. Medscape has developed applications and services in-house and through acquisitions. Medscape intends to continue to work closely with other strategic
partners in certain developmental efforts.

Medscape has several significant projects currently in development. These include the continued enhancement of Logician by Medscape and Medscape Charts product lines, its Internet
portals Medscape.com and AboutMyHealth.com., the co-branded AOL/CBSHealthWatch.com web sites, and the introduction of new product lines such as those within the Medscape Mobile suite. Medscape expects
the Medscape.com project will be completed in late 2001 or early 2002 and the Medscape Mobile prescription writer will be available in late 2001. Completion dates are subject to uncertainty due to
their technical complexity and the funding needs of the projects. Projects are expected to be funded from working capital.

Rapid
technological developments and evolving industry standards characterize the emerging market for Internet-based business models, digital health records and associated transaction
processing. The emerging nature of this market and its rapid evolution will require that Medscape continually improve the performance, features and reliability of its products and services in response
to competing offerings.

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Medscape seeks to use when possible the most effective and innovative technologies. The success of new product and service introductions is dependent on several factors, including:
proper definition of new applications or services; appropriate staffing of expertise on the particular assignment; timely completion and introduction of new products and services; and differentiation
of new products and services from those of Medscape's competitors.

GOVERNMENT REGULATION AND HEALTHCARE REFORM

The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of
healthcare organizations. Proposals to reform the U.S. healthcare system have been and will continue to be considered by the U.S. Congress. These programs may contain proposals to increase or decrease
government involvement in healthcare or change the operating environment for the Company's potential customers. Healthcare organizations may react to these proposals and the uncertainty surrounding
these proposals by curtailing or deferring investments, including those for the Company's products and services. On the other hand, changes in the regulatory environment have in the past increased and
may continue to increase the needs of
healthcare organizations for cost-effective information management, which may enhance the marketability of the Company's applications and services. Medscape cannot predict with any
certainty what impact, if any, these proposals or healthcare reforms might have on the Company's business, financial condition and results of operations.

A
final rule promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") in December 2000 regulates the use and disclosure of individually
identifiable information in any form, whether written, oral or electronic, by health plans, providers and clearinghouses. Under certain circumstances, HIPAA requires patient consent from health plans,
health care providers, and clearing houses prior to the disclosure of protected identifiable health information. HIPAA also establishes rules about individuals' rights to access or amend their own or
someone else's medical information, and to receive written notice of information practices, including uses of such information by health plans, providers and clearinghouses. Such organizations, as
well as the associates they do business with, will need to establish procedures and systems that will help achieve this and to accommodate individuals' requests. HIPAA and various state laws, in
relation to the concern about patient record confidentiality, require holders of medical records to implement security and other necessary measures, which may prove to be expensive and restrict health
care providers from utilizing our products for the transmission of medical records. Final HIPAA regulations on the topic of security for health information are expected in the near future.

Because
of its relationships with organizations covered by the HIPAA privacy regulations, Medscape will need to provide contractual assurances to those organizations that Medscape's
products and services are consistent with applicable requirements of the regulations. Although the regulations themselves will not become effective until early 2003, the Company is already receiving
inquiries from customers about HIPAA compliance. Medscape's Digital Health Record products already contain many features that can assist customers in achieving HIPAA compliance. The Company intends
for all its products and services to meet applicable HIPAA requirements by the time those regulations become effective.

The
United States Food and Drug Administration is responsible for assuring the safety and effectiveness of medical devices under the federal Food, Drug and Cosmetic Act. Computer
applications and software are considered medical devices and subject to regulation by the FDA when they are indicated, labeled or intended to be used in the diagnosis of disease or other conditions,
or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. The Company does not believe that any of our current applications or
services are subject to FDA jurisdiction or regulation; however, the Company plans to expand its application and service offerings into the areas that may subject the Company to FDA regulation. Any
compliance with FDA regulations could prove to be time consuming, burdensome and expensive, which could have

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a material adverse effect on the Company's ability to introduce new applications or services in a timely manner.

The
confidentiality of patient records and the circumstances under which records may be released for inclusion in Medscape's databases are subject to state and federal laws. These
laws require holders of medical records to implement security measures that may require substantial expenditures by the Company or materially restrict the ability of healthcare providers to submit
information from patient records using Medscape's applications.

In
addition to existing state and federal laws and the HIPAA regulations, the United States or any state may adopt legislation to attempt to protect the privacy of medical records or
healthcare information. Any legislation addressing these issues could affect the way in which Medscape is allowed to conduct business, especially those aspects that involve the collection or use of
personal information, and could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, it may take years to determine the extent to which
existing laws governing issues such as property ownership, libel, negligence and personal privacy are applicable to the Internet.

Outside
the United States, regulations concerning the Internet, privacy and transborder data flows are considerably more developed than regulations in the U.S. Medscape has developed
some applications and services to be used on a worldwide basis and, consequently, may be required to comply with international regulations concerning the Internet and e-commerce, as well
as with U.S. regulations. Medscape is not certain of the immediate effect these regulations will have on the Company's business. These regulations also may have an adverse effect on Medscape's ability
to compete internationally.

The
tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals have been made at the federal, state and local level and by some foreign
governments that could impose taxes on the sale of goods and services and some other Internet activities. A recently passed law places a temporary moratorium on specific types of taxation on
e-commerce. Medscape cannot predict the effect of current attempts at taxing or regulating commerce over the Internet. Any legislation that substantially impairs the growth of
e-commerce could have a material adverse effect on the Company's business, financial condition and results of operations.

INTELLECTUAL PROPERTY RIGHTS

Medscape protects its intellectual property rights through a combination of license agreements, trademark, service mark, trade secret and copyright law, and
contractual restrictions. The Company has been issued a number of trademarks and service marks by U.S. and foreign governmental authorities. The Company has applied for the registration of other
trademarks, service marks, and patents in the U.S. and internationally. Medscape also holds a number of domain names and has applications for numerous domain names pending. Medscape seeks to protect
its source code for its software, documentation and other written materials under trade secret and copyright laws. Medscape licenses its software under signed license agreements, which impose
restrictions on the licensee's ability to utilize the software. The Company also enters into confidentiality agreements with employees, consultants, and other third parties and generally seeks to
control access to and distribution of technology, documentation and other proprietary information.

Medscape licenses from Oracle database software on which it depends to operate its business. This license is perpetual and is subject to termination only in the event of a breach of
the license agreement. CBS has licensed to Medscape the right to use the the "CBS" trademark and the "Eye" design and selected health-related news content. This license expires in August 2006.

Medscape
intends to remain dedicated to industry standards and to take steps to protect proprietary rights. Despite Medscape's efforts, there can be no assurance that intellectual
property and other proprietary rights will be free from infringement by third parties. In addition, the global nature of

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the Internet makes it impossible to control the ultimate destination of services, and effective copyright and trademark protection may be unenforceable or limited in foreign countries.

EMPLOYEES

As of December 31, 2000, Medscape employed approximately 1,030 persons, of whom there were approximately 430 in sales, general, and administrative
services, 400 in medical transcription, and 200 in technical development and support. None of the Company's employees is a member of a labor union or is covered by a collective bargaining agreement
and the Company has never experienced a work stoppage. The Company believes it has good relations with its employees.

Item 2. Properties

The Company's principal corporate offices are located at sites in Hillsboro, Oregon and New York, New York. The Company's main headquarters are in Hillsboro,
Oregon totaling approximately 121,000 square feet of space under leases that expire in December 2007. During October 2000, the Company's New York corporate office was relocated to a
facility consisting of approximately 83,000 square feet under two separate leasing agreements. Both agreements are in effect through January 2005 with (5) year renewal options. The
Company also leases space for offices in Houston, Texas and Atascadero, California.

Additionally,
the Company leases space for its transcription services in Franklin, TN totaling approximately 26,000 square feet of space under a lease that expires in
April 2005. For the transcription services, Medscape also leases a data center located in Nashville, TN totaling 13,729 square feet of space under a lease that expires in August 2003. In
addition, Medscape leases space for a regional training center in Minot, North Dakota and a regional office in Altamont, New York.

The
Company owns substantially all of the equipment used in its facilities, except a few items held under a capital lease arrangement. The Company believes that its existing
properties are in good condition and suitable for the conduct of its business. The Company believes its facilities are adequate for its current operations and that additional leased space can be
obtained if needed.

Item 3. Legal Proceedings

On August 20, 1999, Medquist MRC, Inc. filed a suit in the District Court for the Northern District of Ohio (Medquist MRC, Inc. v. John H.
Dayani and Network Health Services, Inc.) against Network Health Services, Inc., predecessor to Total eMed, Inc. In November of 1999, venue in the case was transferred to the
United States District Court for the Middle District of Tennessee. The plaintiff alleged breach of fiduciary duty of loyalty, misappropriation of trade secrets, tortious interference with contract,
and unjust enrichment. Specifically, Medquist MRC alleged that Mr. Dayani, who served on the Medquist MRC board of directors both prior to and after founding Network Health Services,
misappropriated certain trade secrets from Medquist MRC and used those trade secrets to develop Network Health Services' business concepts and customer base. The complaint also alleged that Network
Health Services committed other actionable offenses as described above.  On March 14, 2001, in order to avoid costly, prolonged litigation, the parties finalized a settlement
of this lawsuit. None of the parties admitted to any wrongdoing in the settlement. Medscape's payment obligation under the settlement agreement is $2 million, which is expected to be funded
from Medscape shares deposited in an escrow account by the former shareholders of Total eMed in connection with Medscape's acquisition of Total eMed.

Medscape
is not currently subject to any other material legal proceedings.

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Item 4. Submissions of Matters to a Vote of Securities Holders

No matters were submitted to a vote of security holders during the fourth quarter of Medscape's 2000 fiscal year.

Item 4A. Executive Officers of the Registrant

|Name                 |  | Age |  | Position                                                                                  
|-------------------- |  | --- |  | ------------------------------------------------------------------------------------------
|Mark K. Leavitt      |  | 50  |  | Chairman                                                                                  
|David C. Moffenbeier |  | 49  |  | Chief Executive Officer and President                                                     
|Kevin D. Hutchinson  |  | 37  |  | Chief Operating Officer                                                                   
|Donald A. Bloodworth |  | 44  |  | Executive Vice President and Chief Financial Officer                                      
|Mark E. Boulding     |  | 40  |  | General Counsel and Executive Vice President,
Government and Regulatory Affairs, Secretary
|George D. Lundberg   |  | 67  |  | Executive Vice President, Editor in Chief                                                 
|Arthur N. Leibowitz  |  | 53  |  | Executive Vice President, Digital Health Strategy and Business Development                
|Kelly Gill           |  | 46  |  | Executive Vice President, Transcription Services                                          
|Thomas M. Watson     |  | 51  |  | Executive Vice President, Application Sales                                               

Mark
K. Leavitt, MD, PhD has been Chairman of the Board of the Company since 1985. Dr. Leavitt founded MedicaLogic in 1985 and served as the Chief Executive Officer from 1985
until May 2000. From 1992 to 1996 he served as a faculty member for St. Vincent Internal Medicine Family Practice and concurrently served as Medical Director and Regional Information Systems
Director for Sisters of Providence Health Care System from 1992 to 1994. From 1982 to 1992, Dr. Leavitt operated a private
practice of internal medicine. From December 1997 to June 1998, he served on the Board of Directors of Physician Partners, Inc.

David
C. Moffenbeier became President and Chief Executive Officer in May 2000. From 1994 until May 2000, he served as Chief Operating Officer of the Company.
Mr. Moffenbeier has been a Director of the Company since 1994. From 1993 to 1994, Mr. Moffenbeier served as Chairman of the Board of Directors of Summit Design Inc., a supplier of
software tools for integrated circuits. Previously, Mr. Moffenbeier co-founded Mentor Graphics Corp., a manufacturer of hardware and software for electronic design automation, where
he served as a Director from 1981 to 1993 and as its Chief Financial Officer from 1981 to 1984, its Vice President of International Sales from 1985 to 1988 and its Vice President of Worldwide Sales
from 1989 to 1993. He currently serves on the Board of Directors of Providence Good Health Plan, a health care management organization.

Kevin
D. Hutchinson became the Chief Operating Officer in September 2000. Prior to joining the Company, he served as the Vice President of Business Operations of
VHA, Inc. from January 2000 to September 2000 and as a participating member of the Senior Management Executive Committee. Mr. Hutchinson held various other positions with VHA,
Inc. from October 1995 to September 2000. Prior to October 1995, he held various positions in sales and sales management with International Business Machines Corporation and with Oracle Corporation.

Donald
A. Bloodworth became the Chief Financial Officer in December 2000. Prior to joining the Company, Mr. Bloodworth served as Chief Financial Officer for GST
Telecommunications from March 2000 to December 2000. From September 1999 to March 2000, he was the Vice President and

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Corporate Controller of 3Com Corporation. From October 1997 until September 1999, he was the Vice President of Business Systems Integration for PacifiCorp. From April 1997 until September 1997,
Mr. Bloodworth was the Corporate Controller for AirTouch Communications. Prior to April of 1997, Mr. Bloodworth served for thirteen years in various finance capacities at PacifiCorp,
including Corporate Controller.

Mark
Boulding became the General Counsel and Executive Vice President of Government and Regulatory Affairs when Medscape, Inc. merged with the Company in May 2000. Prior
to the merger, Mr. Boulding served as the General Counsel and Vice President of Regulatory Affairs of Medscape, Inc. from June 1999 to May 2000. Prior to joining Medscape,
Mr. Boulding was a lawyer in private practice in Washington D.C. from 1991 to June 1999. Mr. Boulding is a co-founder and sits on the Board of Directors of the Internet
Healthcare Coalition. He also participates as Medscape's representative on the Board of Directors of the Health Internet Ethics ("Hi-Ethics") self-regulatory association.

George
D. Lundberg, MD became the Executive Vice President and Editor in Chief when Medscape, Inc. merged with the Company in May 2000. Prior to the merger, he served as Editor
in Chief of Medscape, Inc. from February 1999 to May 2000. Dr. Lundberg became a Director of the Company in August 2000. Prior to joining the Company, he served as Editor of the Journal of the American Medical
Associationand also served as the Editor in Chief ofScientific Information and
Multimedia, a publication of the American Medical Association, for seventeen years.

Arthur
N. Leibowitz, MD became the Executive Vice President, Digital Health Strategy and Business Development and a Director in December 2000. Prior to joining the Company, he
served as the Chief Medical Officer for Aetna U.S. Healthcare from 1992 to December 2000 and held various other positions from 1987 to 1992. Prior to 1987, Dr. Leibowitz was in private
practice.

Kelly
Gill became the Executive Vice President, Transcription Services in May 2000 when Total eMed, Inc. was acquired by the Company. He has served as the Chief
Operating Officer of Total eMed, Inc. since August 1999. Prior to joining Total eMed, Inc., he served as the President and Chief Executive Officer of Healthcare
Innovations, Inc. from August 1997 to July 1999. From March 1995 to August 1997 he served as the President of American Rehability Services, Inc.

Thomas
M. Watson became the Executive Vice President, Application Sales in May 2000. Prior to May 2000, he served as Senior Vice President, Worldwide Sales and
Professional Services of the Company since March 1999 and from 1997 to March 1999, Mr. Watson served as Vice President, Sales. Prior to joining the Company, Mr. Watson
served as Vice President of Sales at PHAMIS Inc. from 1989 to 1997. Prior to 1989, he held senior sales and management positions at McDonnell Douglas Health Systems, Shared Medical Systems, and
Mercy Catholic Medical Center.

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PART II

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

The Company's common stock has traded on the Nasdaq National Market under the symbol "MDLI" since December 10, 1999. Prior to that date, there was no
public market for the Company's common stock and, therefore, no quoted market prices for the Company's common stock are available for the periods prior to December 10, 1999.

As
of December 31, 2000, Medscape had 55,657,348 shares of common stock outstanding held by approximately 452 shareholders of record. Because many of such shares are held by
brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders.

The
following table sets forth the high and low sales prices reported on the Nasdaq National Market for the Company's common stock for the periods indicated:

|     |  | Quarter Ended                                    |  | Low |       | High
|---- |  | ------------------------------------------------ |  | --- | ----- | ----
|1999 |  | December 31, 1999 (commencing December 10, 1999) |  | $   | 18.25 |     
|2000 |  | March 31, 2000                                   |  |     | 13.13 |     
|     |  | June 30, 2000                                    |  |     | 5.94  |     
|     |  | September 30, 2000                               |  |     | 3.50  |     
|     |  | December 31, 2000                                |  |     | 1.50  |     

The
Company has never declared or paid any cash dividends on its common stock. The Company currently intends to invest cash generated from operations, if any, to support the
development of its business and does not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors
after taking into account various factors, including the Company's financial condition, operating results and current and anticipated cash needs.

In
June 2000, Medscape issued 5,707 shares of Common Stock to Baylor College of Medicine pursuant to an agreement described in the Company's prospectus dated December 9,
1999 that provides for the issuance of shares of Common Stock to Baylor upon certain purchases of Logician licenses from the Company. The shares were issued to Baylor as a result of purchases of
Logician licenses by institutions in Houston, Texas totaling approximately $90,000. The estimated value of the shares at the time of issuance was approximately $7.88 a share. The shares of Common
Stock were offered and sold by Medscape in accordance with the exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
promulgated under the Securities Act of 1933.

Changes in Securities and Use of Proceeds

On May 11, 2000 the Company issued approximately 7,450,000 shares of our common stock as consideration for the acquisition of Total eMed, Inc.,
valued at approximately $317.9 million. In addition to the issuance of the Company's common stock, the consideration included (i) approximately $4.7 million in cash paid for
professional fees; (ii) the substitution of stock options to purchase approximately 550,000 shares of the Company's common stock in replacement of the Total eMed options held primarily by Total
eMed's employees, who joined the Company after the closing of the acquisition, valued at approximately $21.2 million.

On
May 19, 2000 the Company issued approximately 14,932,000 shares of our common stock as consideration for the merger with Medscape, Inc., valued at approximately
$637.1 million. In addition to the issuance of the Company's common stock, the consideration included (i) approximately

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$4.7 million in cash paid for professional fees; (ii) the substitution of stock options and warrants to purchase approximately 2,545,000 shares of our common stock valued at
approximately $82.3 million in replacement of the Medscape, Inc., options held primarily by Medscape, Inc.'s employees, who joined the Company after the closing of the merger, and
warrants held primarily by America Online, Inc.

The
Company's registration statement (No. 333-87825) on Form S-1 for the initial public offering was declared effective by the Securities and Exchange Commission on
December 9, 1999. In the initial public offering, which closed on December 15, 1999, the Company registered and issued 5,900,000 shares of Common Stock. In addition, the Company
registered and issued 885,000 shares upon exercise of an overallotment option granted to the underwriters which closed on December 20, 1999. The managing underwriters for the initial public
offering were Donaldson, Lufkin & Jenrette Securities Corporation. BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and DLJDIRECT Inc. The initial
public offering price was $17 per share, or an aggregate of approximately $115.3 million, including the overallotment option. Underwriter discounts and commissions totaled approximately $8.1.
The Company paid an estimated total of approximately $3.0 million for other expenses in connection with the initial public offering. Proceeds to the Company, net of underwriting discounts,
commissions and other expenses, were approximately $104.3 million. Through December 31, 2000, net proceeds from the initial public offering of approximately $16.8 million were
used to complete mergers and acquisitions, approximately $80.0 million were used for general operating expense for the year ended December 31, 2000 and a net balance of approximately
$9.9 million was invested in short-term investments at December 31, 2000.

Item 6. Selected Financial Data

This summary should be read together with the consolidated financial statements, notes to the consolidated financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this annual report on Form 10-K.
Historical results of operations are not necessarily indicative of future results.

|                                                            |  | Years Ended December 31, |         
|----------------------------------------------------------- |  | ------------------------ | --------
|
|
|Selected Financial Data:                                    |  |                          |         
|Revenues                                                    |  | $                        | 48,155  
|Net loss                                                    |  |                          | (321,471
|Basic and diluted net loss per share                        |  |                          | (6.96   
|Total assets                                                |  |                          | 966,397 
|Long-term obligations, net of current portion               |  |                          | 4,591   
|Convertible redeemable preferred stock subscribed or issued |  |                          | 15,800  
|Total shareholders' equity (deficit)                        |  |                          | 895,727 

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

FORWARD-LOOKING STATEMENTS.

Except for historical information, this report contains, including the following discussions, forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, among others, those
statements using terminology such as "may", "will", "expects", "plans", "estimates", "anticipates", "potential", "believes", "intends" or the negative thereof or other comparable terminology regarding
beliefs, plans, expectations, or intentions regarding the future.

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Forward-looking statements include statements regarding the rate of growth and acceptance of Medscape's Internet and wireless products and services, new products, web sites and services, expected
revenues from advertising, sponsored programs, sponsored content, eCommerce, transcription services, license and subscription fees and the relative mix between revenue sources, the level of research
and development, sales and marketing, administrative and other operating costs, additional investment in staff and infrastructure and additional capital needs. Medscape wishes to caution the reader
that these forward-looking statements involve risks and uncertainties and the factors described under "Risk Factors" may cause Medscape's results to differ materially from those stated in the
forward-looking statements. The following discussions also should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended
December 31, 2000 included herein.

OVERVIEW

Medscape was founded in 1985 as MedicaLogic, Inc., and until 2000 was solely focused on the development, marketing and support of digital health record
systems. The Company expanded its products and services during 2000 as a result of its merger with Medscape, Inc., and the acquisitions of Total eMed, Inc. and AnywhereMD, Inc.
These transactions added the following assets, respectively: leading Internet healthcare portals, Web-based transcription capability for the creation of digital health records, and
wireless prescribing technology for the Palm O/STM platform. Since September 2000, the Company has done business under the name Medscape.

Medscape is a leading provider of digital health record systems for the healthcare industry. The DHR replaces or augments the paper medical record, provides decision support, and
facilitates the flow of clinical information necessary for patient care, potentially increasing both efficiency and safety. As of December 31, 2000, Medscape DHR systems housed digital records
for more than 17.2 million patients. The DHR line of business derives revenues from software licenses, monthly service subscriptions, and support and consulting fees. Customers for this product
line include academic medical centers such as Baylor College of Medicine, healthcare delivery networks such as Providence Health System in Portland, Oregon (which provides regional healthcare to
customers through a combination of hospitals, clinics, physician practices, and other healthcare facilities and services), and both the NASA space shuttle program and the International Space Station
program.

The Company's Internet portals are Medscape.com for physicians and other healthcare professionals, and CBSHealthWatch.com for consumers. Through Medscape.com, the Company provides
medical news, articles, and conference coverage as well as accredited continuing medical education programs. As of December 31, 2000, more than 560,000 physicians and 1.6 million
non-physician healthcare professionals (such as nurses or physician assistants) worldwide had registered at Medscape.com, and during the year 2000 more than 100,000 hours of accredited
continuing medical education were delivered via the site. Through CBSHealthWatch.com, the Company provides health information tailored to the healthcare consumer's perspective. CBSHealthWatch.com is
the exclusive Internet healthcare site integrated into CBS News programming and is promoted on some Viacom media properties, including CBS. The Internet portal line of business derives revenue from
advertising and sponsorship. Customers for this line of business include leading pharmaceutical manufacturing companies such as GlaxoSmithKline, Merck and Pfizer.

Medscape's transcription services is a Web-based medical transcription system that digitizes and transports voice across electronic networks and the Internet, and connects
physicians with their medical records stored in Medscape's clinical database. The transcription services derives revenues from monthly subscription service fees. Selected financial information
relating to the Company's operating segments is contained later in this section and in Note 10 of the Notes to Consolidated Financial Statements.

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The Company is working to integrate its existing offerings to customers by combining a number of the Company's products and services, and is also supporting the creation of reports
and data produced from its DHR products and Internet portals. To protect the privacy of individual, identifiable health information, these reports provide only aggregated, statistical information
about substantial populations. These integrated offerings will focus on the education of physicians and patients about new treatments, on improved safety and appropriateness of prescribing, on
recruitment of patients for clinical research trials, or on other matters. The Company recently announced two transactions that represent the first step in presenting an integrated offering. In our
agreement with GlaxoSmithKline, the world's largest pharmaceutical company, we combined the sale of sponsorship and promotional services on our Internet portals with the sale of aggregated statistical
data on disease management from our DHR systems. In our agreement with General Motors Corporation (GM), the nation's largest private purchaser of healthcare services, we combined GM sponsorship of
sales of our DHR products and our



new Medscape Mobile handheld software. These products will provide both a prescription writer and access to information from our Internet portals to physicians who treat GM patients. GM will also
receive reports and other aggregated information intended to assist GM in managing the quality of healthcare for its employees, retirees, and their families. Revenues we may earn from GM depend on the
combined effect of our offerings in helping GM achieve its healthcare objectives.

MERGER, ACQUISITIONS AND OTHER INVESTMENT

The Company completed its merger with Medscape, Inc. and its acquisition of Total eMed, Inc. during May 2000 by acquiring all the
outstanding capital stock of Medscape, Inc. and Total eMed, Inc. in transactions accounted for using the purchase method of accounting for acquisitions. The Company issued approximately
14,932,000 and 7,450,000 shares, respectively, of the Company's common stock in the transactions. The total purchase price, including acquisition expenses and the estimated fair value of converted
warrants and options, was approximately $1,068 million, and resulted in goodwill of approximately $924 million, which is being amortized over approximately 3 to 4 years.

The
Company has integrated both Medscape, Inc.'s and Total eMed, Inc.'s products into its suite of offerings, including the DHR, creating one of the most comprehensive
offerings of healthcare information solutions anywhere. Accordingly, the Company embarked on a plan to properly size the business and focus our attention and efforts on key success factors. This led
to the consolidation of duplicate functions and activities, resulting in a reduction of the Company's workforce, a reduction in total facilities, and the impairment of certain assets. Medscape expects
full implementation of the workforce reductions during the first quarter of 2001, with the realization of the cost benefits throughout 2001.

In April 2000, the Company acquired AnywhereMD.com, Inc., a company specializing in developing wireless Palm-based handheld devices, offering increased
mobility to physicians in treating patients. The Company purchased all of the outstanding capital stock of AnywhereMD.com, Inc. for approximately $7.8 million in cash, professional fees
and assumed liabilities. The acquisition was accounted for using the purchase method of accounting for acquisitions and, accordingly, the purchase price was allocated to the tangible and intangible
assets acquired and the liabilities assumed based on their fair values at the acquisition date. Goodwill recorded in connection with the purchase was approximately $7.7 million and is being
amortized over 3 years.

The
results of operations and cash flows of all acquisitions during the period have been included in the Company's consolidated financial statements from the respective date of
acquisition forward.

Since
the date of the merger and acquisitions, there has been a substantial decline in the market value of these types of companies. While operating results of these entities are
consistent with original projections, the changed market conditions could result in an impairment of goodwill and other long lived assets if they are disposed of near-term. Competition, worsening
economic conditions or other

22

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factors could also contribute to an impairment of these assets if undiscounted cash flows do not continue to improve.

During June 2000, the Company acquired an approximate 10% interest in Lifechart.com, Inc. for approximately $8.3 million in cash, which is accounted for using the
cost method. The Company also entered into a joint development, sales and marketing agreement with Lifechart.com. By making this investment and entering into an agreement with Lifechart.com, the
Company planned to use Lifechart.com's disease management systems and medical devices to supply clinical information to Medscape's digital health record systems using sponsorship dollars from
interested parties in the healthcare system. By late 2000, however, the Company became concerned about Lifechart.com's ability to continue to fund its operations. In addition, Lifechart.com failed to
make a payment to the Company that was required under the agreement. Based on these events, in December 2000, the Company recorded a loss on its investment in Lifechart.com of approximately
$8.3 million to reduce the carrying amount of the investment to its estimated fair value at December 31, 2000.

RECENT DEVELOPMENTS

In January 2001, the Company announced an e-business healthcare alliance with General Motors Corporation ("GM") whereby GM and Medscape will
cooperate on a three-year program to encourage U.S. physicians to use hand-held computer devices for prescribing drugs and accessing DHRs. GM will sponsor Medscape's
distribution of hand-held Palm OS devices pre-installed with Medscape's prescription software, Medscape Mobile, to a limited number of physicians who treat GM enrollees across
the country. The devices will have the ability to prompt doctors to consider medically equivalent, lower cost and/or generic drug alternatives, and allow for easier compliance with health plan
formulary requirements. They will also include drug reference tools containing drug-drug interaction data. As part of the strategic alliance, GM will receive warrants for 5 million shares of
the Company's common stock, and GM and Medscape will share in any savings from prescription drug claims realized directly from usage of Medscape Mobile.

In
January 2001, Medscape closed a $17.8 million capital financing arrangement of which $15.8 million was received prior to December 31, 2000 and has been
recorded as convertible redeemable preferred stock subscribed. The financing involves the issuance of 5,933,332 shares of convertible preferred stock at $3 per share, with associated warrants to
purchase 4,537,254 shares of common stock at an exercise price of $.01 per share. The preferred stock carries a cumulative annual dividend of $0.27 per share, is convertible into common stock on a
share for share basis at the option of the investors or automatically if certain conditions are met, is redeemable under certain circumstances, is entitled to appoint a director to the Company's board
of directors, and contains approval rights over certain corporate actions. As a result of the closing of the financing, Soros Fund Management LLC and its affiliates own approximately 13.6% of the
Company's issued and outstanding common stock (on an as if converted basis). Entities affiliated with Soros have been involved in previous rounds of financing for Medscape prior to the Company's
initial public offering in December 1999.

23

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RESULTS OF OPERATIONS

The following table sets forth the Company's revenues, operating expenses, other income and expense and net loss as a percentage of total revenues for the
years ended December 31, 2000, 1999 and 1998.

|                    |                                    | Years Ended December 31,           |       
|------------------- | ---------------------------------- | ---------------------------------- | ------
|
|Revenues:           |                                    |                                    |       
|                    | Application license                |                                    | 21.8  
|                    | Subscriptions and support services |                                    | 22.0  
|                    | Sponsorship and advertising        |                                    | 42.5  
|                    | Transcription services             |                                    | 13.7  
|                    |                                    |                                    |       
|                    | Total revenues                     |                                    | 100.0 
|                    |                                    |                                    |       
|Operating expenses: |                                    |                                    |       
|                    | Cost of revenues:                  |                                    |       
|                    |                                    | Application license                |       
|                    |                                    | Subscriptions and support services |       
|                    |                                    | Sponsorship and advertising        |       
|                    |                                    | Transcription services             |       
|                    | Marketing and sales                |                                    | 110.6 
|                    | Research and development           |                                    | 38.7  
|                    | General and administrative         |                                    | 41.7  
|                    | Depreciation and amortization      |                                    | 458.0 
|                    | Restructuring and other charges    |                                    | 53.6  
|                    |                                    |                                    |       
|                    | Total operating expenses           |                                    | 779.7 
|                    |                                    |                                    |       
|                    | Operating loss                     |                                    | (679.7
|                    |                                    |                                    |       
|Other income, net   |                                    | 12.1                               |       
|                    |                                    |                                    |       
|                    | Net loss                           |                                    | (667.6
|                    |                                    |                                    |       

24

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KEY METRICS

The following table highlights the key metrics the Company uses to measure adoption of its products and services (in thousands).

|                                                          |                                             | December 31, |      
|--------------------------------------------------------- | ------------------------------------------- | ------------ | -----
|
|Registered Digital Health Record (DHR) application users: |                                             |              |      
|                                                          | Logician by Medscape                        |              | 11   
|                                                          | Medscape Mobile                             |              | 43   
|                                                          | Other Internet-based and hand-held products |              | 15   
|                                                          |                                             |              |      
|Total registered DHR application users                    |                                             | 69           |      
|                                                          |                                             |              |      
|Total Digital Health Records                              |                                             | 17,200       |      
|                                                          |                                             |              |      
|Registered Internet portal users:                         |                                             |              |      
|                                                          | Physicians                                  |              | 560  
|                                                          | Allied health professionals                 |              | 1,600
|                                                          | Consumers                                   |              | 1,100
|                                                          |                                             |              |      
|Total registered Internet portal users                    |                                             | 3,260        |      
|                                                          |                                             |              |      

---

Clinician
users of Logician by Medscape, the Company's most advanced DHR application, increased approximately 37.5% and 60.0% during each of the years ended
December 31, 2000 and 1999, respectively, due to the continued adoption of Medscape's DHR applications. Medscape Mobile was launched on September 21, 2000 and at December 31,
2000, the Company had approximately 43,000
physician and other healthcare professional users of Medscape Mobile. Clinician users of the Company's other Internet-based and handheld products, including Web-based transcription and
other clinical documentation applications, totaled approximately 15,000 at December 31, 2000.

The
total number of DHRs in the Company's systems at December 31, 2000, 1999, and 1998 increased approximately 112.3% and 39.7% during each of the years ended
December 31, 2000 and 1999, respectively.

Total
registered users of Medscape's Internet portals was approximately 3.3 million as of December 31, 2000 and was comprised of approximately 560,000 registered
physician, 1.6 million registered allied healthcare professional and 1.1 registered consumer users.

Years Ended December 31, 2000, 1999 and 1998

Revenues

The following table presents total revenues of the Company for each of the three years ended December 31, 2000, 1999 and 1998 (in thousands, except
percentages).

|               |                                    | Years ended December 31, |       
|-------------- | ---------------------------------- | ------------------------ | ------
|
|Revenues:      |                                    |                          |       
|               | Application license                |                          | $     
|               | Subscriptions and support services |                          |       
|               | Sponsorship and advertising        |                          |       
|               | Transcription services             |                          |       
|               |                                    |                          |       
|Total revenues |                                    | $                        | 48,155
|               |                                    |                          |       

25

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Application License Revenues

Application license revenues consist of revenues from software license sales of Logician by Medscape, the Company's server-based application.

For the year ended December 31, 2000, total application license revenues decreased from $12.3 million to $10.5 million, or approximately 14.6% compared to the
year ended December 31, 1999. The decrease resulted primarily from seasonal fluctuations in our customers' purchasing cycles, general uncertainty in the U.S. economy, and expansion into
subscription-based models for certain product offerings.

During
the fourth quarter of 2000, the Company amended its agreement with a customer that allowed Medscape to use this customer as a reference site in exchange for shares of the
Company's common stock. Under the terms of the agreement, the issuance of Medscape's common stock is contingent upon sales by the Company of additional licenses to the customer or to third parties in
the customer's geographic area. The amendment reduced the customer's eligibility to receive common stock by 50% and extended the agreement through December 31, 2004. The amendment resulted in
the recognition of approximately $800,000 that had been included in non-current deferred revenue. As of December 31, 2000, the remaining balance in long-term deferred
revenue was approximately $814,000.

For the year ended December 31, 1999, total application license revenues increased from $10.4 million to $12.3 million, or approximately 18.3% compared to the
year ended December 31, 1998. The Company believes this increase resulted primarily from an increase in the average selling price of the Company's licensed products, as well as revenues from
companies acquired during 1999.

Subscriptions and Support Services Revenues

Subscriptions and support services revenues are comprised of recurring charges primarily from users of Medscape's Internet-based, wireless and hand-held
applications (including applications in the Medscape Mobile Suite), Logician ASP products, and installation services and support fees for DHR applications.

For the year ended December 31, 2000, subscriptions and support services revenues increased from $7.5 million to $10.6 million, or approximately 41.3% over the
year ended December 31, 1999. The increase resulted primarily from the introduction of new product offerings and businesses acquired during 2000, as well as the Company's expansion into
subscription-based models for certain product offerings.

For the year ended December 31, 1999, subscriptions and support services revenues increased from $5.8 million to $7.5 million, or approximately 29.3% over the
year ended December 31, 1998. The increase resulted primarily from the introduction of new product offerings and businesses acquired during 1999, as well as the Company's expansion into
subscription-based models for certain product offerings.

Sponsorship and Advertising Revenues

Sponsorship and advertising revenues consist of revenues, primarily from pharmaceutical companies, which sponsor certain activity and purchase advertising
services on Medscape's Internet portals including:



26

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For
the year ended December 31, 2000, sponsorship and advertising revenues were approximately $20.5 million, and were a new source of revenue for the Company resulting
primarily from the merger with Medscape, Inc. completed in May 2000.

Transcription Services Revenues

Transcription services revenues consist of subscription fees charged for the provision of Medscape Transcription services provided to physicians and other
outpatient healthcare delivery systems.

For the year ended December 31, 2000, transcription services revenues were approximately $6.6 million, and were a new source of revenue for Medscape resulting from the
acquisition of Total eMed, Inc. during May 2000. Transcription services revenues are expected to increase at a slower growth rate compared to the Company's other revenue sources, as the Company
intentionally plans to reduce Total eMed's near-term cash requirements.

Operating Expenses

The following table and related discussion highlights the operating expenses of the Company for the years ended December 31, 2000, 1999, and 1998 (in
thousands, except percentages).

|                         |                                 | Years ended December 31,           |        
|------------------------ | ------------------------------- | ---------------------------------- | -------
|
|Total revenues           |                                 | $                                  | 48,155 
|                         |                                 |                                    |        
|Operating expenses:      |                                 |                                    |        
|                         | Cost of revenues:               |                                    |        
|                         |                                 | Application license                |        
|                         |                                 | Subscriptions and support services |        
|                         |                                 | Sponsorship and advertising        |        
|                         |                                 | Transcription services             |        
|                         | Sales and marketing             |                                    |        
|                         | Research and development        |                                    |        
|                         | General and administrative      |                                    |        
|                         | Depreciation and amortization   |                                    |        
|                         | Restructuring and other charges |                                    |        
|                         |                                 |                                    |        
|Total operating expenses |                                 | $                                  | 375,471
|                         |                                 |                                    |        

Cost of Revenues

Cost of revenues includes costs associated with building, maintaining, and upgrading the Company's DHR applications and data centers, certain licensing,
editorial and content development costs, and cost of transcriptionists.

Application Licenses.For the year ended December 31, 2000, costs of application licenses increased from
$1.1 million to $1.2 million, or approximately 9.1% compared to the year ended December 31, 1999, primarily from increases in additonal resources required to support new product
offerings. As a percentage of application license revenues, cost of application licenses increased from 8.7% to approximately 11.6%, primarily from decreased revenues from seasonal fluctuations in our
customers' purchasing cycles and the Company's expansion into subscription-based models for certain product offerings.

For the year ended December 31, 1999, costs of application licenses increased from $0.9 million to $1.1 million, or approximately 22.2% compared to the year ended
December 31, 1998, primarily from

27

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increases in additonal resources required to support additional revenue growth. As a percentage of application license revenues, cost of application licenses increased slightly from 8.4% to
approximately 8.7%.

Subscriptions and Support Services.For the year ended December 31, 2000, costs of subscription and support
services increased from $6.6 million to $17.2 million, or approximately 160.6% compared to the year ended December 31, 1999, primarily from additional resources required to
support new product offerings. As a percentage of subscriptions and support services revenues, costs of subscription and support services inreased from 88.1% to approximately 162.5% resulting
primarily from additional resources required to support the Company's new product offerings and expanded user base.

For the year ended December 31, 1999, costs of subscription and support services increased from $5.4 million to $6.6 million, or approximately 22.2% compared to
the year ended December 31, 1998, primarily from additional resources required to support new product offerings. As a percentage of subscriptions and support revenues, costs of subscription and
support services decreased slightly from 94.6% to approximately 88.1%, resulting primarily from increasing revenues.

Sponsorship and Advertising.For the year ended December 31, 2000, costs of sponsorship and advertising were
$8.6 million, or approximately 18.0% of total revenues and were new costs of revenue for the Company resulting primarily from the merger with Medscape, Inc. completed during May 2000.

Transcription Services.For the year ended December 31, 2000, costs of transcription services was approximately
$10.0 million, or approximately 20.8% of total revenues and was a new cost of revenue for the Company resulting from the acquisition of Total eMed, Inc. completed during May 2000.

Sales and Marketing

Sales and marketing expenses include costs to acquire and retain registered users of the Company's products, the operating expenses associated with ongoing
sales and marketing efforts throughout the Company, and other general marketing costs to support the Company's multiple products and services.

For the year ended December 31, 2000, sales and marketing expenses increased from $19.9 million to $53.3 million, or approximately 167.8% over the year ended
December 31, 1999, and increased slightly as a percentage of total revenues from 101.1% to approximately 110.6%. The increase in sales and




marketing expenses for the year ended December 31, 2000 was primarily due to the addition of costs from companies acquired during 2000, including non-cash expenses related primarily to the CBS
advertising and promotion agreement of approximately $5.1 million, as well as increases in advertising and promotion costs associated with the Company's brand-building strategy, including the
re-naming of the Company to Medscape.

For
the year ended December 31, 1999, sales and marketing expenses increased from $7.4 million to $19.9 million, or approximately 168.9% over the year ended 1998,
and increased as a percentage of total revenues from 45.6% to 101.1%. Sales and marketing expenses for the year ended December 31, 1999 increased primarily from costs related to additional
direct and indirect workforce requirement to promote and launch new products and an increase in trade shows appearances and public relations and advertising efforts in support of these product
launches.

Research and Development

Research and development costs consist primarily of expenses incurred for new application development, software application upgrades, and for enhancements to
and maintenance of the Company's media offerings.

For
the year ended December 31, 2000, research and development expenses increased from approximately $12.2 million to $18.6 million, a 52.5% increase over the
year ended December 31, 1999. The increase in research and development costs was primarily due to the inclusion of related costs from

28

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companies acquired during 2000, as well as an increase in the number of technical employees required to support additional growth of the Company's products and services.

For
the year ended December 31, 1999, research and development expenses increased from $7.6 million to $12.2 million, or approximately 60.5% over the year ended
December 31, 1998. The increases in research and development expense for the year ended 1999 resulted primarily from additional development staff and contractors required to develop new
products and product upgrades, and related equipment and facilities costs totaling approximately $4.9 million.

General and Administrative

General and administrative expenses consist primarily of costs related to the finance, administrative, and legal functions necessary to support the Company's
strategic initiatives.

For
the year ended December 31, 2000, general and administrative expenses increased from $5.0 million to $20.1 million, or approximately 302.0% over the year
ended December 31, 1999. The increase in general and administrative costs primarily resulted from the addition of expenses from companies acquired during 2000, as well as increases in fees for
professional accounting, finance, and legal services associated with compliance with public reporting requirements.

For
the year ended December 31, 1999, general and administrative expenses increased from $1.1 million to $5.0 million, or approximately 354.5% over the year ended
December 31, 1998. The increase in general and administrative costs for the year ended December 31, 1999 resulted from the addition of administrative personnel and the use of contractors
to support the growth of the Company's business and certain other expenses from companies acquired during 1999.

Depreciation and Amortization

Depreciation and amortization expense increased to $220.5 million for the year ended December 31, 2000 compared to $4.1 million for the
year ended December 31, 1999 and $1.5 million for the year ended December 31, 1998. The increase during 2000 resulted primarily of goodwill amortization from the acquisition and
merger of Total eMed, Inc. and Medscape, Inc., respectively, completed in May 2000. The increase in 1999 resulted from the amortization of goodwill from the acquisition of
PrimaCis Health Information Technology, Inc.

Restructuring and Other Charges

During the year ended December 31, 2000, the Company's management approved certain restructuring plans intended to realign Medscape's organization in
accordance with its major product lines, reduce infrastructure and overhead costs, and eliminate duplicative functions. Restructuring and related charges of approximately $17.5 million were
expensed during the year, including non-cash charges of approximately $5.1 million to increase the reserve against shareholders' notes receivable. These charges were comprised of accrued
restructuring costs, which resulted from an anticipated reduction of approximately 300 employees, or approximately 28% of the workforce, across essentially all of the Company's functions and
locations, facility closure costs, including the closing of the San Francisco office, impairments of certain assets, and certain contract cancellation expenses. At December 31, 2000,
approximately 240 of the estimated 300 positions have been eliminated. Approximately $1.8 million relating to these programs was included in current liabilities at December 31, 2000. The
Company expects to substantially complete the initiatives contemplated in its restructuring plans during the first



half of 2001. All severance payments and related charges, which consist primarily of expected payroll and related taxes, are expected to be paid by June 30, 2001. Medscape believes that, upon
conclusion of its restructuring initiatives, its cost structure will be significantly reduced. However, there can be no assurance that such cost reductions can be sustained or that the estimated costs
of such actions will not change.

29

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In accordance with the Company's policy to periodically review its long-lived assets for potential impairments, Medscape recorded an $8.3 million charge during the
fourth quarter of 2000 resulting from the write-down to fair value of its investment in Lifechart.com, Inc.

Other Income

For the year ended December 31, 2000, other income increased from $1.1 million to $5.8 million, approximately 427.3% over the year ended
December 31, 1999 primarily from the increase in investment income from cash equivalents and short-term investments generated from the initial public offering. Other income
increased from $0.5 million in 1998 to $1.1 million in 1999. The increase from 1998 to 1999 in other income is primarily attributable to an increase in interest earned on cash and cash
equivalents and short-term investments from issuance of preferred stock and the Company's initial public offering.

Provision for Income Taxes

As a result of net operating losses in 2000 and prior years, the Company made no provision or benefit for federal or state income taxes. As of
December 31, 2000, the Company had net operating loss carryforwards for tax reporting purposes of approximately $281.8 million and research and experimentation credits of approximately
$2.5 million which expire through 2020. Approximately $114.4 million of the net operating loss carryforwards are subject to an annual utilization limitation due to ownership changes in
prior years.

Segment Results of Operations

The Company currently has three reportable operating segments. For further information regarding segments please refer to Note 10Segment
Information contained in the Notes to the Consolidated Financial Statements.

A summary of the segment financial information is as follows:

|                               |                                   | Years Ended December 31,
|------------------------------ | --------------------------------- | ------------------------
|
|Segment revenues:              |                                   |                         
|                               | Digital Health Record application |                         
|                               | Internet portal                   |                         
|                               | Transcription services            |                         
|                               |                                   |                         
|                               | Total revenues                    |                         
|                               |                                   |                         
|Segment loss from operations:  |                                   |                         
|                               | Digital Health Record application |                         
|                               | Internet portal                   |                         
|                               | Transcription service             |                         
|Consolidated and other charges |                                   |                         
|Depreciation and amortization  |                                   |                         
|Restructuring and other charge |                                   |                         
|                               |                                   |                         
|                               | Total loss from operations        |                         
|                               |                                   |                         

Digital Health Record application segment revenues include both application license revenues and subscription and support service revenues. Internet portal segment revenues consist of
sponsorship and advertising revenues. For an overview of the segment revenues, please refer to the consolidated results of operations discussed earlier in this section.

30

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Digital Health Record application

For the year ended December 31, 2000, loss from operations for the Digital Health Record application segment increased from approximately
$20.0 million to $22.8 million, a 14.0% increase over the year ended December 31, 1999. The slight increase was primarily the result of increases in application revenues, which
continued to operate at a negative operating margin during 2000.

For the year ended December 31, 1999, loss from operations for the DHR application segment increased from approximately $5.1 million to $20.0 million, a 292.2%
increase over the year ended December 31, 1998. The increase was primarily the result of additional personnel and other costs required to develop and support the Company's new product
offerings.

Internet Portal

For the year ended December 31, 2000, loss from operations for the Internet portal segment was approximately $9.6 million and represented a new
reportable segment for the Company resulting primarily from the merger with Medscape, Inc. completed in May 2000. The Internet portal segment has a higher gross margin than either of the
Company's other two segments, therefore the Company expects revenue growth in the Internet portal segment to have a positive effect on consolidated operating margins.

Transcription Services

For the year ended December 31, 2000, loss from operations for the transcription service segment was approximately $7.8 million and represented a
new reportable segment for the Company resulting from the acquisition of Total eMed, Inc. completed in May 2000.

Liquidity and Capital Resources

The following table calculates the net operating loss before depreciation, amortization, restructuring and other charges (in thousands):

|                                |                                                                                   | Years Ended December 31, |         
|------------------------------- | --------------------------------------------------------------------------------- | ------------------------ | --------
|
|Operating loss                  |                                                                                   | $                        | (327,316
|Depreciation and amortization   |                                                                                   |                          | 220,528 
|Restructuring and other charges |                                                                                   |                          | 25,815  
|                                |                                                                                   |                          |         
|                                | Operating loss before depreciation, amortization, restructuring and other charges |                          | $       
|                                |                                                                                   |                          |         

As
of December 31, 2000, the Company's cash and cash equivalents balance totaled $43.5 million and short-term investments totaled $9.9 million, a
decrease in total of $85.4 million from the December 31, 1999 balances of $110.3 million and a $28.5 million, respectively.

The
Company's operating activities resulted in net cash outflows of $78.0 million, $12.7 million, and $6.8 million for the years ended December 31, 2000,
1999 and 1998. Cash outflows in 2000, 1999 and 1998 resulted from the Company's expenditures in sales and marketing of $53.3 million, $19.9 million and $7.4 million, and research
and development of $18.6 million, $12.2 million and $7.6 million, respectively, which contributed to operating losses of $327.3 million, $29.1 million and
$7.7 million, respectively. Also contributing to cash outflows in 2000 were decreases in accounts payable of $6.8 million, resulting from the consolidation of accounting functions during
2000. These costs were partially offset by increases in prepaid assets of $2.0 million for purchases of prepaid maintenance contracts, prepaid insurance and prepaid royalties, and an increase
of $1.0 million in deferred revenue due to the Company's increasing base of DHR application licenses.

31

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Investing activities resulted in net cash inflows of $0.5 million for the year ended December 31, 2000 and net cash outflows of $36.6 million and
$1.2 million for the years ended December 31, 1999 and 1998, respectively. Cash outflows in 2000 resulted from fixed asset purchases, comprised of computer hardware and software as well
as leasehold improvements related to leased facilities, of approximately $20.8 million and payments related to business acquisitions of approximately $16.8 million. These costs were
offset by proceeds from short-term investments of $38.2 million. Cash outflows in 1999 resulted from net purchases of investments of $21.9 million in short-term
instruments, $12.5 million related to the purchase of fixed assets and $2.1 million for the acquisition of PrimaCis Health Information Technology, Inc. Cash outflows in 1998 resulted
from $1.3 million related to purchases of fixed assets.

Financing activities provided cash of $10.6 million, $154.9 million and $7.8 million for the years ended December 31, 2000, 1999 and 1998, respectively.
Cash flows in 2000 resulted primarily from the preferred stock subscription received in the amount of $15.8 million and the issuance of $2.6 million of common stock, offset by payments
of long-term liabilities of $7.8 million. In January 2001, the Company closed a $17.8 million capital financing arrangement, of which $15.8 million had been
received and recorded as preferred stock subscription received at December 31, 2000. The financing involved the issuance of 5,933,332 shares of convertible preferred stock at $3 per share. The
preferred stock is convertible into common stock on a share for share basis at the option of the investors, or automatically if certain conditions are met, and is redeemable under certain
circumstances. The preferred stock carries a cumulative annual dividend of $0.27 per share, and holders of the preferred stock will have a priority in bankruptcy or liquidation over all other equity
holders. In connection with this financing, the Company issued warrants to purchase 4,537,254 shares of common stock at an exercise price of $.01 per share. The proceeds from the financing were
allocated between the convertible preferred stock and the associated warrants at the estimated fair value. Net proceeds from this financing will be used to fund future operations. Payment of future
dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results and current
anticipated cash needs.

Cash flows in 1999 resulted primarily from the Company's initial public offering of $105.2 million, and the issuance of preferred stock in the amount of $47.8 million,
offset by payments of $1.9 million for obligations under capital lease agreements and notes payable. Cash flows in 1998 resulted primarily from the issuance of preferred stock of
$6.8 million. During the year ended December 31, 2000, the Company reached agreements to extend the due dates of certain cash payments previously required to have been made by the
Company during the year. In January 2001, Medscape received from America Online, Inc. (AOL) a notice of breach due to the fact that the Company has not made its January 2001 payment to AOL of
approximately $3 million required under their Interactive Services Agreement. The Company did not pay AOL because of a disagreement between the Company and AOL regarding the services provided
by AOL under the agreement. The Company and AOL are in negotiations with respect to this payment and the future of their financial relationship.

In
December 1999, the Company completed its initial public offering and issued 6,785,000 shares of its common stock. The net proceeds from the issuance of the common stock in
the initial public offering were approximately $105.2 million. In addition, the Company closed a round of private funding in May 1999, raising approximately $34.8 million.

Medscape currently anticipates that it will continue to experience modest growth in its operating expenses as it enters new markets for its products and services, increases marketing
activities, increases research and development spending, develops new distribution channels, expands its infrastructure, and improves its operational and financial systems. These operating expenses
will consume a significant amount of the Company's cash resources. Management believes that the Company's current cash balances, its net proceeds from financing activities during 2000 and 2001 and its
anticipated revenue growth will be sufficient to meet its anticipated cash needs for working capital and capital expenditures

32

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throughout 2001. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. If current cash and cash that may be generated from future operations are
insufficient to satisfy the liquidity requirements, the Company may seek additional funds through public or private equity financing or from other sources, including the sale of certain of the
Company's assets. However, there is no certainty that Medscape may be able to obtain adequate or favorable financing and any financing the Company obtains may dilute the ownership interest of its
shareholders prior to the financing. In addition, it is possible that at the time of the sale of certain of the Company's assets, an impairment charge may be incurred for property, plant, and
equipment, identifiable intangible assets or goodwill, if the proceeds do not exceed the carrying amounts of such assets. Additionally, the Company may, from time to time, consider the acquisition of
or investment in complementary businesses, products, services and technologies, which might impact its liquidity requirements or cause the Company to issue additional equity or debt securities.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138,
establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Statement No. 133, as amended, is
effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Because Medscape currently holds no derivative financial instruments and does not currently engage in
hedging activities, adoption of SFAS No. 133 is expected to have no material impact on the Company's financial condition or results of operations.

Factors That May Affect Future Results of Operations

If we do not achieve or maintain broad acceptance of our products and services by medical professionals, patients and other healthcare providers, our business will be harmed.

Our health information systems technology business model depends on our ability both to sell our products and services to medical professionals and other
healthcare providers and to generate usage by a large number of medical professionals and consumers. Failure to achieve broad acceptance of our products and services by physicians and other healthcare
providers would severely limit our ability to implement our business model.

Likewise,
failure to achieve or maintain market acceptance of our web sites would result in a loss of revenue. Market acceptance of our web sites depends upon continued growth in the
use of the Internet generally and, in particular, as a source of healthcare information services for medical professionals and consumers.

Achieving
market acceptance for our products and services will require substantial marketing efforts and the expenditure of significant financial and other resources. Use of our
products and services requires medical professionals to integrate our products and services into their office work flow and to adopt different behavior patterns and new methods of conducting business
and exchanging information. Medical professionals may not choose to use our products and services.

We have a history of net operating losses and may not be profitable in the future.

Failure to achieve or maintain positive cash flows from operations could materially and adversely affect the market price of our common stock. We have incurred
significant losses since we began doing business. As of December 31, 2000, we accumulated losses of approximately $385 million. Further, we reported a net loss for the first quarter of
2001 of $106.2 million or $1.91 per share. We may not achieve favorable operating results or profitability in the foreseeable future.

33

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To remain competitive, we may need additional financing, which may not be available on satisfactory terms or at all.

We expect our existing cash will be sufficient for us to meet our working capital and capital expenditure requirements for at least the next 12 months.
We may, however, need additional financing sooner if we:



If
we raise additional funds through the sale of equity or convertible debt securities, the percentage ownership of existing shareholders will be reduced. In addition, these
transactions may dilute the value of our common stock. We may issue securities with rights, preferences and privileges senior to our common stock. We may not be able to raise additional funds on terms
satisfactory to us or at all.

We have depended, and will depend, on the healthcare industry for a significant portion of our revenues.

Our revenues could seriously decrease if there were adverse developments in the healthcare industry. Our near-term and long-term
prospects depend upon selling our services to both pharmaceutical companies and healthcare providers such as IDNs, hospitals, clinics, and physician practices. Accordingly, our success is highly
dependent on the sales and marketing expenditures of pharmaceutical companies, the technology expenditures of healthcare providers, and our ability to attract these expenditures. Some of the adverse
developments in the healthcare industry that could affect our revenues would be:



Our failure to successfully introduce new products and services in a timely manner could adversely affect our integrated business model and revenues.

Any failure by us to introduce or enhance planned products or to introduce these products on schedule could make it difficult for us to implement our
integrated products and services. Moreover, even if Medscape were able to release a new or enhanced product or service when expected, initial releases of software often contain errors or defects. For
example, past releases of Medscape Logician have contained errors and defects that required us to provide corrections and other upgrades. Developing, integrating, enhancing and customizing such
products and services could be expensive and time consuming.

34

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Intense competition may lead to reduced sales of our products and services and impede our ability to achieve a significant market share.

The health information systems technology sector in which we compete is intensely competitive and subject to fragmentation, high growth and rapid technological
change. In all three segments of our business, Digital Health Record applications, Internet Portals and Transcription Services, we face significant competition from traditional healthcare information
system vendors and Internet healthcare companies as they expand their product offerings. We also currently compete, or potentially compete for audience attention and advertising and sponsorship
expenditures with many providers of web content, information services and products, as well as traditional media and promotional efforts. Many of these companies have significantly greater financial
resources than we have, as well as well-established brand names and large installed customer bases. We may be unable to compete successfully against these organizations or establish
significant market share.

If we are unable to protect our intellectual property rights, our competitive position may be adversely affected.

Our ability to compete depends upon our proprietary systems and technology. The steps we currently take to protect our intellectual property rights may prove
to be inadequate, time consuming and expensive. Misappropriation of our intellectual property may make us less competitive and require us to engage in expensive litigation to enforce or protect our
intellectual property rights or to defend against claims of invalidity.

We
could be subject to intellectual property infringement claims as the number of our competitors grows and the functionality of our products and services overlaps with competing
products. We could incur substantial costs and diversion of management resources defending any infringement claims. In addition, a party making a claim against us could secure a judgement awarding
substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. Licenses for intellectual property of third parties that
might be required for our products or services may not be available on commercially reasonable terms, or at all.

Our systems may experience failures which could cause our revenues to decline.

Any significant interruption in our operations would cause our revenues to decline. We have experienced periodic system interruptions in the past, which may
occur again. Any significant interruptions in our services or an increase in response time could result in a loss of potential or



existing users and members, strategic partners or advertisers and sponsors and, if sustained or repeated, these interruptions could reduce the attractiveness of our web sites to these parties in the
future. Our insurance policies have coverage limits that may not be adequate to compensate us for any material losses that may occur due to disruptions in our service. In the first quarter of 2001,
approximately $6 million of our total revenue of approximately $13.9 million was derived from our Web site operations.

Our
Web sites may be required to accommodate a high volume of traffic and deliver frequently updated information. Users may experience slower response times or system failures due to
increased traffic on these web sites or for a variety of other reasons. We depend on content providers to provide information and data feeds on a timely basis. These web sites could experience
disruptions or interruptions in service due to the failure or delay in the transmission or receipt of this information.

Online security breaches could harm our business.

Our security measures may not prevent security breaches. Substantial or ongoing security breaches on our system or other Internet-based systems could reduce
user confidence in our web sites and other Internet-based products and services, leading to reduced usage and lower revenues. The secure

35

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transmission of confidential information over the Internet is essential in maintaining confidence in our web sites and will be increasingly important as we expand our consumer-oriented and
Internet-based offerings. Consumers generally are concerned with security and privacy on the Internet and any publicized security problems could inhibit the growth of the Internet and, therefore, our
products and services. We will need to incur significant expense to protect and remedy against security breaches.

A party that is able to circumvent our security systems could steal proprietary information or cause interruptions in our operations. Employees who handle proprietary information may
also misappropriate that information. Security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies have coverage limits
that may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties conducting business over the Internet.

Risks Related to the Healthcare Industry and the Internet

The Internet is subject to many legal uncertainties and potential government regulations that may decrease demand for our services, increase our cost of doing business or
otherwise have an adverse effect on our financial results or prospects.

Laws and regulations may be adopted in the future that address Internet-related issues, including online content, user privacy, pricing and quality of products and services. We
believe there is a risk that these laws will disproportionately burden companies that do business on the Internet, which could decrease demand for our services, increase our cost of doing business or
otherwise have a material adverse effect on our financial results and prospects.

For example, the Federal Trade Commission began enforcing requirements under the Children's Online Privacy Protection Act in April 2000. The act applies to the online
collection of personal information from children under 13, and imposes significant compliance burdens and potential penalties on operators of web sites that collect covered information. Because it
does not apply to collection of information other than in an online context, this act disproportionately burdens companies that do business online. In addition to new laws, courts are struggling with
the application of existing laws to the Internet. This legal uncertainty makes it harder for us to operate our business, because we are not able to predict legal risks to the same degree that we would
if we were not doing business on the Internet.

State and Federal laws that protect individual health information may limit our plans to collect, use and disclose that information.

If we fail to comply with laws or regulations governing our use of personally identifiable health information, including medical records, this failure could have a material adverse
effect on our business, operating results and financial condition.

Consumers
sometimes enter private health information about themselves or their family members when using our services. Physicians or other health care professionals who use our
products will directly enter health information about their patients, including information that constitutes a medical record under applicable law, that we will store on our computer systems. Also,
our systems record use patterns when consumers access our databases that may reveal health-related information or other private information about the user. Numerous federal and state laws and
regulations, the common law, and contractual
obligations govern collection, dissemination, use and confidentiality of patient-identifiable health information, including:



36

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Meeting these requirements could result in significant costs, as well as result in the delay or abandonment of some products or services, which could negatively affect our business.
Although we have systems in place for safeguarding patient health information from unauthorized disclosure, these systems may not preclude successful claims against us for violation of applicable law
or other requirements. In some cases, we may place our content on computers that are under the physical control of others, which may increase the risk of an inappropriate disclosure of health
information. For example, we currently contract out the hosting of some of our Web sites to third parties. Any failure by us or our partners to comply with the legal or other requirements concerning
personally identifiable health information could result in material liability.

In addition to our own internal uses of health information that we collect or to which we have access, we intend to develop and sell to third parties medical information systems and
market research services that we will use to collect, analyze and report medical data, medical research, outcomes and financial data pertaining to items such as prescribing patterns and usage habits.
In most cases, we will remove identifying information from the data we sell, and will sell the data only in aggregate form. Some states have enacted legislation regulating the aggregation of health
information and the manipulation, use and ownership of that aggregated data, even when this data does not reveal the patient's identity. Because




this area of the law is rapidly changing, our collection, analysis and reporting of aggregate healthcare data maintained in our database may not at all times and in all respects comply with laws or
regulations governing the ownership, collection and use of this data. Future laws or changes in current laws governing the ownership, collection and use of aggregate healthcare data may necessitate
costly adaptations to our systems or limit our ability to use this data.

In addition, with appropriate authorization from consumers and healthcare professionals, we intend in some cases to market results of research or other data that does contain
identifiable health information. Examples include market research on healthcare products and recruitment for clinical trials. Regulations under HIPAA or similar other laws and regulations may prevent
us from using identifiable information entirely, or may impose significant administrative costs on us (for example, by requiring specific forms of consent or detailed record-keeping). These regulatory
and legal restrictions might limit or even preclude our ability to earn revenues from use of identifiable health information to which we have access.

New rules or legislation concerning privacy of Internet users could adversely affect our business.

In addition to specific laws that relate to medical records or personally identifiable healthcare information, we believe government is likely to create new
rules or laws that address the privacy of Internet users generally. Examples of these types of regulation already exist outside the U.S. For example, nations in the European Union are currently
implementing a Data Privacy Directive regulating the transmission and storage of personal information and data. Because both our web sites and our digital health record applications collect extensive
information about users, complying with new regulatory requirements could significantly increase our cost of operations, delay the introduction of new products and services, require the redesign of
existing products, or limit our ability to use information for our own marketing and research purposes.

37

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Government regulation of advertising and promotional activities may be burdensome and negatively affect our ability to provide some applications or services, which could lead
to higher than anticipated costs or lower than anticipated revenues.

Because our portal business involves advertising and promotion of prescription and over-the-counter drugs and medical devices, any increase in regulation of
these areas by the Federal Drug Administration or the Federal Trade Commission could make it more difficult for us to provide existing or future applications or services to our audience or obtain the
necessary corporate sponsorship to do so. In addition, a federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state laws, prohibit payments that are
intended to induce physicians or others to acquire, arrange for or recommend the acquisition of healthcare products or services. These laws have been



used to restrict promotional activities by pharmaceutical and medical device companies, and might limit the ability of our customers to undertake sponsorship programs with us.

Any current or future government regulatory requirements imposed on us or our advertisers and sponsors could harm us by:



As a consequence of these harms, we might lose advertising or sponsorship revenue, spend significant amounts of our limited resources on regulatory experts in the area of healthcare
compliance, or receive adverse publicity that negatively affects share value.

The FDA may regulate some of our products as medical devices, increasing our cost of doing business and affecting our ability to launch new products.

As we add functionality to our Web sites and clinical applications, we face potential FDA regulation of software. Some computer applications and software are considered medical
devices and are subject to regulation by the FDA, including pre-marketing clearance or approval and post-marketing controls. The FDA's regulatory authority over medical devices is very broad, and in
the past the FDA has expanded its regulation into new areas without any advance notice or rulemaking. If FDA regulations were directly applicable to any of our products and services, complying with
those regulations would be time consuming, burdensome and expensive and could delay or prevent introduction of new products or services. In addition, we do not have any experience in preparing the
required documentation for FDA



clearance or approval of a medical device, including the conduct of supporting clinical trials or other studies, or complying with other FDA regulations that would apply both before and after
clearance or approval. If the FDA required us to meet regulatory requirements for medical devices for some of our products (including our Web sites and clinical applications), we would face increased
compliance costs and delays in bringing products to market. Because the FDA has the discretion to not approve products, we might even be completely prevented from bringing any regulated products to
market, losing both the development costs we put in to the product and any potential revenues from it.

38

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company's exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income Medscape can
earn on the Company's investment portfolio and on the increase or decrease in the amount of any interest expense Medscape must pay with respect to outstanding debt instruments. The risk associated
with fluctuating interest expense is limited, however, to the exposure related to those debt instruments and credit facilities that are tied to market rates. The Company does not plan to use
derivative financial instruments in its investment portfolio. The Company plans to ensure the safety and preservation of its invested principal funds by limiting default risk, market risk and
investment risk. The Company plans to mitigate default risk by investing in low-risk securities. At December 31, 2000, the Company had an investment portfolio of money market funds,
commercial securities and U.S. Government securities, including those classified as short-term investments, of approximately $9.9 million with an average interest rate of 6.4%.
Medscape had outstanding notes payable and capital equipment leases of $2.5 million at December 31, 2000 carrying an average interest rate of approximately 11.6%. If market interest rates were
to increase immediately and uniformly by 10% from levels as of December 31, 2000, the decline of the fair market value of the fixed income portfolio and loans outstanding would not be material.

39

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Item 8. Financial Statements and Supplementary Data

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders of
MedicaLogic/Medscape, Inc.:

We
have audited the accompanying consolidated balance sheets of MedicaLogic/Medscape, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the MedicaLogic/Medscape, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of MedicaLogic/Medscape, Inc. and
subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.



Portland,
Oregon
February 26, 2001

40

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MEDICALOGIC/MEDSCAPE, INC.  AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (in thousands, except share data)

|                                                   |                                                                                                                                                  | December 31,               |                                           
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------------------------------------------
|
|ASSETS                                             |                                                                                                                                                 
|Current assets:                                    |                                                                                                                                                  |                            |                                           
|                                                   | Cash and cash equivalents                                                                                                                        |                            | $                                         
|                                                   | Short-term investments                                                                                                                           |                            |                                           
|                                                   | Accounts receivable, net                                                                                                                         |                            |                                           
|                                                   | Prepaid expenses and other current assets                                                                                                        |                            |                                           
|                                                   |                                                                                                                                                  |                            |                                           
|                                                   |                                                                                                                                                  | Total current assets       |                                           
|Property and equipment, net                        |                                                                                                                                                  |                            | 34,172                                    
|Goodwill and intangibles, net                      |                                                                                                                                                  |                            | 793,588                                   
|Prepaid advertising and other assets, net          |                                                                                                                                                  |                            | 54,893                                    
|                                                   |                                                                                                                                                  |                            |                                           
|                                                   |                                                                                                                                                  | Total assets               |                                           
|                                                   |                                                                                                                                                  |                            |                                           
|LIABILITIES AND SHAREHOLDERS' EQUITY               |                                                                                                                                                 
|Current liabilities:                               |                                                                                                                                                  |                            |                                           
|                                                   | Accounts payable                                                                                                                                 |                            | $                                         
|                                                   | Accrued and other liabilities                                                                                                                    |                            |                                           
|                                                   | Deferred revenue                                                                                                                                 |                            |                                           
|                                                   | Long term liabilities, current portion                                                                                                           |                            |                                           
|                                                   |                                                                                                                                                  |                            |                                           
|                                                   |                                                                                                                                                  | Total current liabilities  |                                           
|Long term liabilities, net of current portion      |                                                                                                                                                  |                            | 4,591                                     
|Long term deferred revenue, net of current portion |                                                                                                                                                  |                            | 814                                       
|Other long term liabilities                        |                                                                                                                                                  |                            | 44                                        
|                                                   |                                                                                                                                                  |                            |                                           
|                                                   |                                                                                                                                                  | Total liabilities          |                                           
|                                                   |                                                                                                                                                  |                            |                                           
|Convertible redeemable preferred stock subscribed  |                                                                                                                                                  |                            | 15,800                                    
|                                                   |                                                                                                                                                  |                            |                                           
|Commitments and contingencies                      |                                                                                                                                                  |                            |                                           
|Shareholders' equity:                              |                                                                                                                                                  |                            |                                           
|                                                   | Preferred stock, 50,000,000 authorized, no par value, no shares issued and outstanding at December 31, 2000 and 1999                             |                            |                                           
|                                                   | Common stock, no par value; authorized 100,000,000 shares; issued and outstanding 55,657,348 and 32,364,391 shares at December 31, 2000 and 1999 |                            |                                           
|                                                   | Common stock notes receivable, net                                                                                                               |                            |                                           
|                                                   | Warrants                                                                                                                                         |                            |                                           
|                                                   | Deferred stock compensation                                                                                                                      |                            |                                           
|                                                   | Accumulated deficit                                                                                                                              |                            |                                           
|                                                   |                                                                                                                                                  |                            |                                           
|                                                   |                                                                                                                                                  | Total shareholders' equity |                                           
|                                                   |                                                                                                                                                  |                            |                                           
|                                                   |                                                                                                                                                  |                            | Total liabilities and shareholders' equity
|                                                   |                                                                                                                                                  |                            |                                           

See
accompanying notes to consolidated financial statements.

41

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MEDICALOGIC/MEDSCAPE, INC.  AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except share and per share data)

|                         |                                    | Years Ended December 31,           |         
|------------------------ | ---------------------------------- | ---------------------------------- | --------
|
|Revenues:                |                                    |                                    |         
|                         | Application license                |                                    | $       
|                         | Subscriptions and support services |                                    |         
|                         | Sponsorship and advertising        |                                    |         
|                         | Transcription services             |                                    |         
|                         |                                    |                                    |         
|                         |                                    | Total revenues                     |         
|                         |                                    |                                    |         
|Operating expenses:      |                                    |                                    |         
|                         | Cost of revenues:                  |                                    |         
|                         |                                    | Application license                |         
|                         |                                    | Subscriptions and support services |         
|                         |                                    | Sponsorship and advertising        |         
|                         |                                    | Transcription services             |         
|                         | Marketing and sales                |                                    |         
|                         | Research and development           |                                    |         
|                         | General and administrative         |                                    |         
|                         | Depreciation and amortization      |                                    |         
|                         | Restructuring and other charges    |                                    |         
|                         |                                    |                                    |         
|                         |                                    | Total operating expenses           |         
|                         |                                    |                                    |         
|Operating loss           |                                    |                                    | (327,316
|                         |                                    |                                    |         
|                         | Other income, net                  |                                    |         
|                         |                                    |                                    |         
|Net loss                 |                                    | $                                  | (321,471
|                         |                                    |                                    |         
|Net loss per share:      |                                    |                                    |         
|                         | basic and diluted                  |                                    | $       
|                         |                                    |                                    |         
|Weighted average shares: |                                    |                                    |         
|                         | basic and diluted                  |                                    |         
|                         |                                    |                                    |         

See
accompanying notes to consolidated financial statements.

42

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MEDICALOGIC/MEDSCAPE, INC.  AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)        (in thousands, except share data)

|                                                                     |  | Common Stock |   | Common
Stock
Notes
Receivable |           |   |   |         |   |   |        |  |  
|-------------------------------------------------------------------- |  | ------------ | - | ----------------------------- | --------- | - | - | ------- | - | - | ------ |  | -
|
|
|Balance at December 31, 1997                                         |  | 6,654,280    |   | $                             | 3,202     |   | $ | (988    | ) | $ |       |  | $
|Issuance of common stock for acquisition                             |  | 13,750       |   |                               | 55        |   |   |        |   |   |       |  |  
|Issuance of common stock for cash                                    |  | 175,000      |   |                               | 700       |   |   |        |   |   |       |  |  
|Issuance of restricted common stock in exchange for promissory notes |  | 250,000      |   |                               | 1,000     |   |   | (1,000  | ) |   |       |  |  
|Non-cash stock compensation                                          |  |             |   |                               | 110       |   |   |        |   |   |       |  |  
|Options exercised                                                    |  | 34,526       |   |                               | 72        |   |   |        |   |   |       |  |  
|Interest accrued on common stock notes receivable                    |  |             |   |                               |          |   |   | (51     | ) |   |       |  |  
|Net loss                                                             |  |             |   |                               |          |   |   |        |   |   |       |  |  
|                                                                     |  |              |   |                               |           |   |   |         |   |   |        |  |  
|Balance at December 31, 1998                                         |  | 7,127,556    |   |                               | 5,139     |   |   | (2,039  | ) |   |       |  |  
|Issuance of common stock for acquisition                             |  | 750,000      |   |                               | 3,300     |   |   |        |   |   |       |  |  
|Conversion of redeemable preferred stock to common stock             |  | 15,950,747   |   |                               | 97,874    |   |   |        |   |   |       |  |  
|Issuance of restricted common stock in exchange for promissory notes |  | 1,247,500    |   |                               | 9,229     |   |   | (9,229  | ) |   |       |  |  
|Issuance of common stock in exchange for services                    |  | 65,750       |   |                               | 1,314     |   |   | (195    | ) |   |       |  |  
|Issuance of common stock for commission                              |  | 172,763      |   |                               | 1,987     |   |   |        |   |   |       |  |  
|Warrants exercised                                                   |  | 22,500       |   |                               | 13        |   |   |        |   |   |       |  |  
|Options exercised                                                    |  | 242,575      |   |                               | 869       |   |   |        |   |   |       |  |  
|Stock compensation expense                                           |  |             |   |                               | 986       |   |   |        |   |   |       |  |  
|Interest accrued on common stock notes receivable                    |  |             |   |                               |          |   |   | (325    | ) |   |       |  |  
|Deferred compensation related to stock options                       |  |             |   |                               | 4,746     |   |   |        |   |   |       |  |  
|Amortization of deferred compensation related to stock options       |  |             |   |                               |          |   |   |        |   |   |       |  |  
|Issuance of common stock, net of offering costs                      |  | 6,785,000    |   |                               | 104,267   |   |   |        |   |   |       |  |  
|Net loss                                                             |  |             |   |                               |          |   |   |        |   |   |       |  |  
|                                                                     |  |              |   |                               |           |   |   |         |   |   |        |  |  
|Balance at December 31, 1999                                         |  | 32,364,391   |   |                               | 229,724   |   |   | (11,788 | ) |   |       |  |  
|Issuance of common stock for acquisition                             |  | 22,382,039   |   |                               | 1,025,775 |   |   |        |   |   | 32,818 |  |  
|Issuance of common stock for employee stock purchase plan            |  | 212,156      |   |                               | 1,026     |   |   |        |   |   |       |  |  
|Other repurchases                                                    |  | (35,536      | ) |                               | (46       | ) |   |        |   |   |       |  |  
|Options exercised                                                    |  | 734,298      |   |                               | 1,648     |   |   |        |   |   |       |  |  
|Deferred compensation related to stock options forfeited             |  |             |   |                               | (2,752    | ) |   |        |   |   |       |  |  
|Amortization of deferred compensation related to stock options       |  |             |   |                               |          |   |   |        |   |   |       |  |  
|Stock compensation expense                                           |  |             |   |                               |          |   |   |        |   |   |       |  |  
|Increase common stock notes receivable reserve                       |  |             |   |                               |          |   |   | 5,060   |   |   |       |  |  
|Net loss                                                             |  |             |   |                               |          |   |   |        |   |   |       |  |  
|                                                                     |  |              |   |                               |           |   |   |         |   |   |        |  |  
|Balance at December 31, 2000                                         |  | 55,657,348   |   | $                             | 1,255,375 |   | $ | (6,728  | ) | $ | 32,818 |  | $
|                                                                     |  |              |   |                               |           |   |   |         |   |   |        |  |  

See
accompanying notes to consolidated financial statements.

43

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MEDICALOGIC/MEDSCAPE, INC.  AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)

|                                                                                                                                                                               |                                                                               | Years Ended December 31,                               |                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------- | ------------------------------------------------------ | ---------------------------------------------------
|
|Cash flows from operating activities:                                                                                                                                          |                                                                               |                                                        |                                                    
|                                                                                                                                                                               | Net loss                                                                      |                                                        | $                                                  
|                                                                                                                                                                               | Adjustments to reconcile net loss to net cash used by operating activities:   |                                                        |                                                    
|                                                                                                                                                                               |                                                                               | Depreciation and amortization                          |                                                    
|                                                                                                                                                                               |                                                                               | Deferred stock compensation and other non-cash charges |                                                    
|                                                                                                                                                                               | Changes in assets and liabilities, net of balances acquired:                  |                                                        |                                                    
|                                                                                                                                                                               |                                                                               | Accounts receivable                                    |                                                    
|                                                                                                                                                                               |                                                                               | Prepaid expenses and other assets                      |                                                    
|                                                                                                                                                                               |                                                                               | Accounts payable                                       |                                                    
|                                                                                                                                                                               |                                                                               | Accrued liabilities                                    |                                                    
|                                                                                                                                                                               |                                                                               | Deferred revenue                                       |                                                    
|                                                                                                                                                                               |                                                                               |                                                        |                                                    
|                                                                                                                                                                               |                                                                               |                                                        | Net cash used in operating activities              
|                                                                                                                                                                               |                                                                               |                                                        |                                                    
|Cash flows from investing activities:                                                                                                                                          |                                                                               |                                                        |                                                    
|                                                                                                                                                                               | Maturities (purchases) of short-term investments, net of investments acquired |                                                        |                                                    
|                                                                                                                                                                               | Payments related to business acquisitions, net of cash acquired               |                                                        |                                                    
|                                                                                                                                                                               | Purchases of property and equipment                                           |                                                        |                                                    
|                                                                                                                                                                               |                                                                               |                                                        |                                                    
|                                                                                                                                                                               |                                                                               |                                                        | Net cash provided by (used in) investing activities
|                                                                                                                                                                               |                                                                               |                                                        |                                                    
|Cash flows from financing activities:                                                                                                                                          |                                                                               |                                                        |                                                    
|                                                                                                                                                                               | Net proceeds from preferred stock subscription/issuance                       |                                                        |                                                    
|                                                                                                                                                                               | Net proceeds from issuance of common stock                                    |                                                        |                                                    
|                                                                                                                                                                               | Proceeds from (payments of) long-term liabilities, net                        |                                                        |                                                    
|                                                                                                                                                                               |                                                                               |                                                        |                                                    
|                                                                                                                                                                               |                                                                               | Net cash provided by financing activities              |                                                    
|                                                                                                                                                                               |                                                                               |                                                        |                                                    
|                                                                                                                                                                               |                                                                               | Net increase (decrease) in cash and cash equivalents   |                                                    
|Cash and cash equivalents, beginning of period                                                                                                                                 |                                                                               |                                                        | 110,320                                            
|                                                                                                                                                                               |                                                                               |                                                        |                                                    
|Cash and cash equivalents at end of period                                                                                                                                     |                                                                               | $                                                      | 43,543                                             
|                                                                                                                                                                               |                                                                               |                                                        |                                                    
|Summary of non-cash investing and financing activities:                                                                                                                        |                                                                               |                                                        |                                                    
|Fair value at conversion of the outstanding common stock, options and warrants in conjunction with the business combinations with Medscape, Inc. and Total eMed, Inc. (Note 2) |                                                                               | $                                                      | 1,058,593                                          
|Issuance of common stock in exchange for note receivable                                                                                                                       |                                                                               |                                                        |                                                   
|Issuance of common stock for purchase of a business                                                                                                                            |                                                                               |                                                        |                                                   
|Assets acquired or exchanged under capital leases                                                                                                                              |                                                                               |                                                        |                                                   

See
accompanying notes to consolidated financial statements.

44

---



MEDICALOGIC/MEDSCAPE, INC.  AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (in thousands, except share and per share data)

(1) Description of Business and Summary of Significant Accounting Policies

(a) Description of Business

MedicaLogic/Medscape, Inc. d.b.a. Medscape (together with its subsidiaries "Medscape" or the "Company") is a leading provider of digital health record
systems and information to the healthcare industry. Medscape develops digital health record applications that are designed to improve healthcare through the timely delivery of clinical data and
information to healthcare professionals and consumers. The Company also provides online health information including medical news, articles, and conference coverage through its Internet portals,
Medscape.com and CBSHealthWatch.com. Medscape's products and services are designed to enhance and improve the quality, cost, efficiency, safety and outcome of healthcare.

The
Company was incorporated in Oregon in May 1985 as MedicaLogic, Inc. The Company's name was changed to MedicaLogic/Medscape, Inc. in May 2000. Since September 2000, the Company has
done business under the trade name Medscape. The Company expanded its products and services in 2000 as a result of its strategic merger with Medscape, Inc. ("Medscape, Inc."), and the acquisitions of
Total eMed, Inc. ("Total eMed") and AnywhereMD.com, Inc. ("AnywhereMD.com"). These strategic mergers and acquisitions added the following assets, respectively: leading Internet healthcare portals,
Web-based transcription capability for the creation of digital health records, and wireless prescribing technology for the Palm O/STM platform.

(b) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of MedicaLogic/Medscape, Inc. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated. Operations of businesses acquired and accounted for as purchases are consolidated from the date of acquisition or merger forward.

(c) Use of Estimates

Accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect the reported amount
of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.

(d) Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash equivalents. At
December 31, 2000, cash equivalents consisted of commercial paper and a certificate of deposit.

(e) Short-Term Investments

Short-term investments include various corporate debt instruments and have been classified as available-for-sale securities
in accordance with Statement of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Investments in Debt and Equity Securities.At December 31, 2000 short-term investments consisted entirely of commercial paper and are carried at amortized cost, which

45

---

approximates market. Contractual maturities of these investments ranged from approximately 100 to 120 days.

(f) Concentrations of Credit Risk and Other Factors That Could Affect Future Results

The Company invests its cash, and cash equivalents and short-term investments with financial institutions with high credit standing and, by policy, limits the
amounts invested with any one institution, type of security and issuer.

The
Company sells its products to customers, ranging from individual doctors, small to large medical groups, and medical institutions. The Company performs ongoing credit evaluations
of its customers' financial condition and limits the amount of credit extended as deemed appropriate, but generally requires no collateral. The Company maintains reserves for estimated credit losses
and, to date, such losses have been within management's expectations.

A
substantial portion of the Company's revenue is generated from the pharmaceutical industry. Accordingly, Medscape's near-term and long-term prospects depend upon the Company's
ability to attract the sales and marketing expenditures of these companies. The pharmaceutical industry is a highly competitive and closely regulated business. The Company's financial condition,
results of operations and liquidity could be materially affected if adverse conditions in the industry developed, such as a reduction in sales and marketing expenditures, a decrease in the number of
new drugs being developed, the passage of public or private market initiatives or reforms designed to regulate the manner in which pharmaceutical companies promote their products, or the adoption of
current legislative and regulatory proposals to control drug costs for Medicare and Medicaid patients.

The
market for the Company's products is characterized by rapidly changing technology, evolving industry and regulatory standards and changing customer needs. The Company believes
that its future success will depend, in part, upon its ability to enhance its current products and develop new products and services on a timely and cost-effective basis, and to respond to changing
customers needs, new regulations and technological developments. An inability of the Company to generate demand for its product, whether as a result of competition, technological change, economic,
regulatory or other factors, could have a material adverse result on the Company's financial condition, results of operations and liquidity.

The
Company's future results could also be affected if economic conditions worsen in the U.S. A downturn in the economy could have an adverse impact on demand for Medscape's products
and services, and could also contribute to the impairment of the Company's investment and financing portfolios.

(g) Intangible Assets

The value ascribed to acquired intangible assets, including customer lists, trade names, and the workforces-in-place is the estimated
fair value at the acquisition date. Intangible assets are amortized on a straight-line basis, over periods ranging from 2 to 5 years, which represent the estimated remaining
economic lives.

46

---

(h) Property and Equipment

Property and equipment are recorded at cost. Property and equipment under capital leases are recorded at the lower of the present value of minimum lease
payments at the beginning of the lease term or fair value of the leased assets at the inception of the lease. Repairs and maintenance costs are expensed as incurred.

Depreciation
on furniture, equipment and leasehold improvements is calculated on a straight-line basis over the estimated useful lives of the assets, five years for
furniture and two to five years for equipment. Property and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated
useful life of the asset. Amortization of leasehold improvements is recognized over the shorter of the life of the improvement or the remaining life of the lease using the straight-line
method.

(i) Goodwill

Goodwill represents the excess of the aggregate purchase price over the fair value of the tangible and intangible assets acquired in various acquisitions.
Goodwill is amortized on a straight-line basis, over periods ranging from two to four years. The Company assesses goodwill impairment under Accounting Principles Board ("APB") Opinion
No. 17,Intangible Assets, based on an undiscounted cash flows approach. Whenever events occur or circumstances change that indicate an
impairment may have occurred, such as the failure of certain technology to demonstrate promise that it may gain commercial acceptance or the failure of a business segment to achieve certain
performance objectives, the Company estimates the future undiscounted cash flows of the business segment to which goodwill relates. When such estimate of the future undiscounted cash flows, net of the
carrying value of the net tangible and identified intangible assets, is less than the carrying amount of goodwill, the difference will be charged to operations as an impairment loss. For purposes of
determining future undiscounted cash flows of the business segments to which goodwill relates, the Company, based upon historical results, current projections and internal earnings targets, determines
the projected operating cash flows, net of income taxes, of the individual business segment. Through December 31, 2000, no events or circumstances have occurred that triggered an impairment
analysis or resulted in a reduction in the useful life or carrying value of goodwill.

(j) Impairment of Long-Lived Assets

The Company periodically reviews the carrying amounts of property, plant and equipment, identifiable intangible assets and goodwill both purchased in the normal course of business and
acquired through acquisition to determine whether current events or circumstances, as defined in Financial Accounting Standards Board ("FASB") Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, warrant adjustments to such
carrying amounts. This review considers, among other things, the future cash inflows expected to result from the use of the asset and its eventual disposition less the future cash outflows expected to
be necessary to obtain those inflows.



An impairment loss would be measured by comparing the fair value of the asset with its carrying amount. Any write-down is treated as a permanent reduction in the carrying amount of

47

---

the assets. Through December 31, 2000, no events or circumstances have occurred triggering an impairment analysis that resulted in a write-down of carrying value of
long-lived assets.

(k) Software Development Costs

Software development costs are accounted for in accordance with SFAS No. 86,Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed.Under this standard, capitalization of software development costs generally begins upon the establishment of technological feasibility,
subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of the software has been short; therefore, software
development costs qualifying for capitalization have been immaterial. Through December 31, 2000, the Company has not capitalized any software development costs and charged all costs to research
and development expense.

Internal
use software development costs are accounted for in accordance with AICPA Statement of Position (SOP) 98-1,Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.Costs incurred in the preliminary project stage are expensed as incurred and costs incurred in the application
development stage, which meet the capitalization criteria, are capitalized and amortized on a straight-line basis over the estimated useful life of the asset, generally five years.

Website development costs are accounted for in accordance with Emerging Issues Task Force (EITF) 00-2,Accounting for Website Development
Costs. Costs incurred in the planning stage are expensed as incurred and costs incurred in the website application and infrastructure development and operating



stages, which meet the capitalization criteria, are capitalized and amortized on a straight-line basis over the estimated useful life of the asset, generally three years.

(l) Revenue Recognition

Beginning January 1, 1998, the Company adopted SOP 97-2, as amended by SOP 98-4 and SOP 98-9. The Company's
revenue policy before December 31, 1997 was in compliance with the preceding authoritative guidance provided by SOP 91-1,Software Revenue
Recognition.

SOP
97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on vendor specific objective evidence
("VSOE") of the relative fair values of each element in the arrangement. The Company has established sufficient VSOE to ascribe a value to consulting services and post-contract customer
support based on the price charged when these elements are sold separately. Accordingly, license revenue is recorded under the residual method. Under the residual method, revenue is recognized as
follows:



Application license, subscriptions and support services, or Digital Health Record (DHR) revenues consists primarily of revenue from Web-based and client server
applications related support services,

48

---

eCommerce and data. Medscape recognizes DHR revenue from application license fees generally when a signed agreement has been obtained, the delivery of the product has occurred, the fee is fixed and
determinable and collectibility of the license fee is probable. Medscape's term based Logician licenses, including the subscription-based version of Logician and Medscape Encounter (formerly Logician
Internet), are recognized on a subscription basis. The arrangements do not grant the customer a license right to the software and do not provide an option to take delivery of the software. Rather, the
customer pays a periodic subscription fee over a specified period of time. All subscription revenue, which is billed in advance, is recognized over the period earned, generally monthly. Support
services consist of fees for maintenance and customer support services and consulting, training and integration fees which are recognized at the time the related services are performed. Fees for
maintenance and customer support service, conveying the right to obtain upgrades, when and if available, are generally paid in advance and revenue is recognized ratably over the term of the agreement.

Also included in DHR revenue are revenues earned from certain web-based applications, primarily our ASP model. These hosting arrangements are accounted for under EITF
00-3,Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity's
Hardware.Our ASP hosting application resides on a third party's hardware and the customer accesses and uses the software on an as-needed basis over a dedicated
line. The arrangement does not grant the customer a license right to the software and does not provide an option to take delivery of the software. As such, revenues are treated as service contracts
and the portion of the fee allocated to the hosting element is recognized as the service is provided.

Sponsorship and advertising, or Internet portal revenue, is derived from sources including advertising, sponsorship of online journals, medical conferences, market research and
eCommerce. Revenues from advertising are recognized in the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting
receivable is probable. Revenue from sponsored programs, such as medical conferences, are recognized when the conference summary is published on the Company's Web site, providing that no significant
Company obligations remain and collection of the resulting receivable is probable. Revenues from sponsored content, such as clinical modules, is recognized on a percentage of completion basis.
Revenues from market research are recognized upon completion of the project.

Transcription services revenues consist of subscription fees charged for the provision of Medscape Transcription services provided to physicians and other outpatient healthcare
delivery systems. Revenues from transcription services are recognized in the period in which the services are performed and when collection of the resulting receivable is probable.

(m) Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in

49

---

tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce tax assets to the amount more likely than not to be
realized.

(n) Stock-Based Employee Compensation

The Company accounts for its employee stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employeesand related interpretations. Accordingly, compensation expense related to employee stock options is recorded
only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price. The Company adopted the disclosure-only requirements of Statement of Financial
Accounting
Standards (SFAS) No. 123,Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB Opinion
No. 25 for transactions with employees and provide pro forma net income and pro forma earnings per share disclosures for employee stock grants as if the fair-value based method of
accounting had been applied to these transactions.

The
Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services.

(o) Advertising

The Company expenses costs of advertising when the costs are incurred. Advertising expense was approximately $5,889, $1,473 and $896 for the years ended
December 31, 2000, 1999 and 1998.

(p) Net Loss Per Share

In accordance with SFAS No. 128,Earnings Per Share, the Company has reported both basic and diluted net
income per common share for each period presented. Basic income per share is computed on the basis of the weighted-average number of common shares outstanding for the year. Diluted income per share is
computed on the basis of the weighted-average number of common shares plus dilutive potential common shares outstanding. Dilutive potential common shares are calculated under the treasury stock
method. Securities that could potentially dilute basic income per share consist of outstanding stock options and warrants. As the Company had a net loss attributable to common shareholders in each of
the periods presented, basic and diluted net loss per share are the same. The following potential common shares have been excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been anti-dilutive:

Years Ended December 31,2000

1999

1998Shares issuable under stock options and warrants

9,713,909

2,069,303

1,129,724Shares of restricted stock subject to repurchase

250,976

1,211,328

75,945


50

---

As
further discussed in Note 14 Subsequent Events, during January 2001, the Company issued warrants for 5 million shares of Medscape common stock, approximately
5.9 million shares of convertible redeemable preferred stock with warrants for approximately 4.5 million shares of Medscape common stock, and warrants for 300,000 shares of Medscape
common stock.

(q) Comprehensive Income

The Company has adopted SFAS No. 130,Reporting Comprehensive Income. SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and its components in consolidated financial statements. The Statement requires only additional disclosures in the financial
statements; it does not affect the Company's financial position or results of operations. The Company has no material components of other comprehensive loss.

(r) Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate fair value due to
the short-term nature of these instruments. The carrying amounts of capital leases and notes payable approximate fair value as the stated interest rates reflect current market rates. Fair
value estimates are made at a specific point in time, based on relevant market information about the financial instrument when available. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

(s) Reclassifications

Certain reclassifications have been made to the prior year consolidated financial statements and notes to the consolidated financial statements to conform to
the current year presentation.

(2) Merger, Acquisitions and Other Investment

Medscape, Inc.

In May 2000, the Company completed its merger with Medscape, Inc. ("Medscape, Inc.") a Delaware corporation, issuing approximately
14,932,000 shares of the Company's common stock and assuming
approximately 2,545,000 options and warrants in a merger transaction valued at approximately $724.2 million.

The
merger with Medscape, Inc. was accounted for using the purchase method of accounting with the purchase price allocated to assets acquired and liabilities assumed based on
their fair values. The purchase price was comprised of Company common stock issued amounting to approximately $637.1 million valued at $42.6688 per share, option and warrant rights converted
into option and warrant rights of the Company valued at approximately $82.3 million, and professional fees amounting to approximately $4.7 million. The value of option rights converted
at the merger date was determined in accordance with the fair value method under SFAS No. 123 using the following weighted-average assumptions: exercise price of $12.38, volatility of 100%,
expected life of 3 years, interest rate of 6.5%, and no dividends. The value of warrant rights converted at the merger date was determined using the

51

---

Black-Scholes method with the following assumptions: exercise price of $30.96, volatility of 100%, expected life of 6 years, interest rate of 6.5%, and no dividends. Professional fees include
banking fees, legal fees, accounting fees, and fees for other related professional services.

The
excess of purchase price over the fair value of net tangible and intangible assets of Medscape, Inc. (goodwill), which amounted to approximately $597.2 million, will
be amortized over three years. The results of operations and cash flows of Medscape, Inc. have been included in the Company's condensed consolidated financial statements from the date of
acquisition forward.

Total eMed, Inc.

In May 2000, the Company completed its acquisition of Total eMed, Inc. ("Total eMed") a Delaware corporation, issuing approximately 7,450,000
shares of the Company's common stock and assuming approximately 550,000 options in a transaction valued at approximately $343.8 million.

The
acquisition of Total eMed was accounted for using the purchase method of accounting with the purchase price allocated to assets acquired and liabilities assumed based on their
fair values. The purchase price was comprised of Company common stock issued amounting to approximately $317.9 million valued at $42.6688 per share, option rights converted into option rights
of Company common stock valued at approximately $21.2 million, and professional fees amounting to approximately $4.7 million. The value of option rights converted at the acquisition date
was determined in accordance with the fair value method under SFAS No. 123 using the following weighted-average assumptions: exercise price of $6.45, volatility of 100%, expected life of
3 years, interest rate of 6.5%, and no dividends. Professional fees include banking fees, legal fees, accounting fees, and fees for other related professional services.

The
purchase price over the fair value of net tangible and intangible assets of Total eMed (goodwill), which amounted to approximately $326.8 million, will be amortized over
four years. The results of operations and cash flows of Total eMed have been included in the Company's condensed consolidated financial statements from the date of acquisition forward.

Other Acquisitions

In April 2000, the Company acquired AnywhereMD.com, Inc., a company specializing in developing wireless Palm-based handheld devices,
offering increased mobility to physicians in treating patients. The Company purchased all of the outstanding capital stock of AnywhereMD.com, Inc., a California corporation, for approximately
$7.8 million in cash, professional fees and assumed liabilities. The acquisition was accounted for using the purchase method. The purchase price was allocated to the




tangible and intangible assets acquired and the liabilities assumed based on their fair values on the acquisition date. The total goodwill recorded in connection with the purchase was approximately
$7.7 million and is being amortized over 3 years.

In
January 1999, the Company acquired PrimaCis Health Information Technology, Inc., a Delaware corporation (PrimaCis). PrimaCis was subsequently renamed MedicaLogic of
Texas, Inc. This acquisition was accounted for as a purchase and the results of operations for the acquired Company are included only from the date of acquisition forward. The total purchase price,
including acquisition

52

---

costs, was approximately $6.5 million and consisted of $2.1 million in cash, the assumption of $1.1 million in liabilities and the issuance of 750,000 shares of common stock at an
estimated fair value of $4.40 per share.

In
connection with the acquisition of PrimaCis, the Company entered into a separate agreement with a customer of PrimaCis under which the Company received a purchase order for 1,500
licenses. The Company delivered 500 licenses to this customer on March 31, 1999 and delivered 1,000 licenses to this customer on June 17, 1999 under a standard license agreement. An
element of this agreement represents a discount on future sales. Therefore, approximately $1.9 million of the license revenue representing this element was deferred. Revenue from this element
is being recognized as sales are completed in accordance with the terms of the separate agreement discussed below or, if earlier, on the expiration of the agreement. In addition, the Company is
performing training and implementation services on a time and materials basis to the customer.

As
part of a separate agreement, as amended in December 2000, if the customer or any third party in the Houston, Texas area purchases additional licenses from the Company, the
Company is obligated to issue shares of common stock to this customer having a then fair market value of 25% of the price of the subsequent licenses, up to $6 million of stock. This agreement
expires on December 31, 2004. The Company issued 5,707 and 172,763 shares of common stock in connection with sales to third parties in
the Houston, Texas area and recorded commission expense of $45 and $1,987 during the years ended December 31, 2000 and 1999, respectively.

On
January 5, 1998, the Company paid $12 in cash and issued 13,750 shares of common stock valued at $4.00 per share to acquire intangible assets of Health Outcome
Technologies, Inc. This acquisition was accounted for as a purchase and results of operations for the acquired company are included only from the date of acquisition forward. In connection with
this acquisition, the Company recorded goodwill of $67, which is being amortized over two years.

Other Investments

In June 2000, the Company acquired an approximate 10% interest in Lifechart.com, Inc. for approximately $8.3 million in cash, which is
accounted for using the cost method. The Company also entered into a joint development, sales and marketing agreement with Lifechart.com. Subsequent to the investment, the Company became concerned
about Lifechart.com's ability to continue to fund its operations. In addition, Lifechart.com failed to make a payment to the Company that was required under the agreement. Management determined that
these events had led to a decline in the fair value of the investment, and the Company recorded a loss on its investment in Lifechart.com of approximately $8.3 million to reduce the carrying
amount of the investment to its estimated fair value at December 31, 2000.

PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma financial information combines the results of operations of the Company, Medscape, Inc. and Total eMed assuming the
respective merger and acquisition were consummated at the beginning of the periods presented. The other investment referred to above was

53

---

not significant and is not included in the pro forma results below. The pro forma results are not necessarily indicative of what would have occurred if the merger and acquisition had been in effect
for the periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations.

Years Ended December 31,2000

1999Revenues

$
58,446

$
36,354Net loss


(518,698
)

(403,142
)Net loss per sharebasic and diluted

$
(9.55
)
$
(11.52
)


The
above pro forma net loss amounts for the years ended December 31, 2000 and 1999 have been adjusted to include the amortization of goodwill and other intangibles related to
the Medscape, Inc. merger and Total eMed acquisition for each period.

(3) Assets

(a) Accounts Receivable

Accounts receivable are shown net of allowance for doubtful accounts of $2,008 and $529 at December 31, 2000 and 1999, respectively. The following table
presents a roll forward of the allowance for doubtful accounts for the indicated periods:

December 31,2000

1999

1998Balance at beginning of period

$
529

$
1,360

$
852Provision


2,736


505


756Charge offs


(1,257
)

(284
)

(248
)Recoveries





(1,052
)

Balance at end of period

$
2,008

$
529

$
1,360


54

---

(b) Property and Equipment

Property and equipment, including equipment under capital leases, consist of the following:

December 31,2000

1999Furniture and equipment

$
41,013

$
16,576Leasehold improvements


8,409


1,519Software development costs


5,141


54,563


18,095Less accumulated depreciation and amortization


(20,391
)

(5,008
)$
34,172

$
13,087


Depreciation
and amortization expense totaled approximately $15,953, $2,516 and $1,503 for the years ended December 31, 2000, 1999 and 1998, respectively.

(c) Goodwill and Intangible Assets

Goodwill and intangible assets consist of the following:

|                              |                                     | December 31,
|----------------------------- | ----------------------------------- | ------------
|
|Goodwill                      |                                     | $           
|Member and customer list      |                                     |             
|Licensing agreement           |                                     |             
|Tradename                     |                                     |             
|Work-in-place                 |                                     |             
|                              |                                     |             
|                              |                                     |             
|Less accumulated amortization |                                     |             
|                              |                                     |             
|                              | Goodwill and intangible assets, net |             
|                              |                                     |             

Amortization
expense totaled approximately $204,575, $1,561 and $34 at December 31, 2000, 1999 and 1998, respectively.

(d) Prepaid Advertising

As a result of the Company's merger with Medscape, Inc. (Note 2), the Company acquired, among other intangible assets, certain assets related to
Medscape, Inc.'s agreements with CBS Corporation ("CBS") which commenced on August 3, 1999. These assets primarily consist of the right to receive approximately $121.1 million of
advertising and promotion from CBS. This prepaid advertising has a discounted, tax effected fair value of approximately $64.8 million, and is included in prepaid advertising and other assets.
Over the remainder of the seven-year term of the Advertising and Promotion Agreement, CBS will arrange for the placement of the remaining balance of advertising and promotion

55

---

in the United States for the Company's consumer and professional web sites and other products and services. Pursuant to the Trademark and Content Agreement, CBS granted the Company a license to use
the "CBS" trademark and "Eye" design and to access health related news content for a seven-year period. Under the agreement CBS retains significant control over the use and presentation of the CBS
health content and CBS trademarks.

Advertising services to be provided by CBS will be expensed as used over the life of the agreement. Included in sales and marketing during the year ended December 31, 2000 was
approximately $4.5 million, of expense related to the utilization of advertising and promotion services under those agreements.

(4) Liabilities

(a) Leases

The Company leases its facilities under non-cancelable operating lease agreements.

Future
minimum lease payments under non-cancelable operating leases are as follows for each of the years ending December 31:

2001

$
2,0252002


2,1502003


2,2752004


2,3002005


1,900Thereafter


3,500Total minimum lease payments

$
14,150


Lease
expense totaled approximately $5,549, $1,591 and $1,073, for the years ended December 31, 2000, 1999 and 1998, respectively.

In
May 1999, the Company entered into a ten year operating lease agreement for office space which was subsequently terminated in 2000. In connection with this lease, the
Company granted options to the lessor to purchase up to 25,000 shares of common stock, at a price of $6.50 per share. The lessor is required to exercise the option within three years of the effective
date of the Company's initial public offering.

The
fair value of the options to be issued to the lessor was determined by applying the Black-Scholes option pricing model using the commitment date of the lease for performance of
the lessor as the measurement date. The per share weighted average fair market value was $4.79 on the date of grant, using the following weighted average assumptions: risk-free interest
rate of 5.75%, zero expected dividend yield, a three year expected life, and volatility index of 100%. The fair value of $120 is being amortized over the lease period.

56

---

(b) Long-term liabilities

Long-term liabilities consists of the following:

|                                                                                                                                                                                                                                                                                                  |  | December 31,
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|
|Notes payable, monthly principal and interest payments of $4; interest at 11% per year; final payment due December 31, 2008; uncollaterized                                                                                                                                                       |  | $           
|Notes payable under term facility, monthly principal and interest payments of $54; interest at two-year Treasury constant maturities plus 5% per year, ranging from 9.45% to 10.43% at December 31, 2000; maturing
between September 2000 and January 2002; collateralized by equipment purchased |  |             
|Note payable under term facility, quarterly principal and interest payments of $38; interest at 7.96% per year; final payment due April 2001; collateralized by equipment purchased                                                                                                               |  |             
|Capital equipment leases, payable in monthly installments of $50; including interest ranging from 6% to 17% per year; due through August 2001; collateralized by equipment purchased                                                                                                              |  |             
|Contract payable, net of discount of $800, payments due approximately quarterly through May 2002                                                                                                                                                                                                  |  |             
|                                                                                                                                                                                                                                                                                                  |  |             
|                                                                                                                                                                                                                                                                                                  |  |             
|Long-term liabilities current portion                                                                                                                                                                                                                                                             |  |             
|                                                                                                                                                                                                                                                                                                  |  |             
|Long-term liabilities net of current portion                                                                                                                                                                                                                                                      |  | $           
|                                                                                                                                                                                                                                                                                                  |  |             

In
January 2001, Medscape received from the holder of the contract payable a notice of breach due to the fact that the Company is delinquent on its 2001 payment to the holder of
approximately $3 million. The Company and AOL are in negotiations with respect to this payment and the future of their relationship.

The
Company leases office furniture and equipment under long-term capital leases, which expire throughout the next year. At December 31, 2000 and 1999, the net book
value of leased furniture and equipment included in property and equipment was approximately $1,072 and $1,368, respectively.

Future
maturities of notes payable for each of the years ending December 31 are as follows:

2001

$
12,1312002


4,3732003


752004


312005


34Thereafter


78Total

$
16,722


57

---

(5) Shareholders' Equity

(a) Stock Incentive Plan

In February 1993, the Company adopted a stock incentive plan that allowed for the issuance of 2,247,192 shares of common stock. Under the 1996 stock
incentive plan, adopted in December 1996, together with the 1993 stock incentive plan, 500,000 shares of common stock were reserved for issuance. The Company's 1996 plan was amended in 1998 and
1999 to reserve an additional 350,000 and 1,900,000 shares of common stock for issuance, respectively, bringing the total under both plans to 4,997,192. In September 1999, the Company adopted
the 1999 stock incentive plan, which authorized the issuance of 2,000,000 shares. An additional 3,507,967 shares reserved for issuance were assumed upon merger and acquisition during 2000. The 1999
plan was amended in May 2000 to reserve an additional 6,000,000 shares, bringing the total shares under all plans to 16,505,159 at December 31, 2000. Under the terms of the plans, the
board of directors is authorized to grant incentive stock options, non-statutory stock options and to sell restricted stock to employees or others providing services or benefits to the
Company. The plans also allow granting of stock bonuses, stock appreciation rights, and other forms of stock based incentives. The 1999 plan provides for the granting to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986 for the granting to employees and consultants of nonstatutory stock options and for the issuance of stock bonuses,
restricted stock and stock appreciation rights. Unless terminated earlier, the 1999 plan will terminate automatically in September 2009.

The
stock incentive plans are administered by the Company's board of directors. The board of directors has the power to determine the terms of the options or rights granted, including
the exercise price, the number of shares subject to each option or right, the character of the grant, the exercisability of the grant and the form of consideration payable upon exercise of options.
The board of directors may delegate administration of the stock incentive plans to a committee.

In
March 1998, Medscape extended the term of all outstanding options from five years to ten years, which constituted a new measurement date. The fair value of the stock as
determined by the board of directors on the date the change was effective was $4.00 per share. 121,025 of these options had exercise prices ranging from $1.60 to $2.00 per share and were fully vested.
For these outstanding options, Medscape recorded a compensation charge of $110 in connection with this change in option terms. The compensation expense was calculated by taking the difference between
the original grant price and the fair value on the new measurement date.

To
qualify as incentive stock options (ISOs), the exercise price must not be less than the fair market value of the common stock at the date of the grant or, in the case of incentive
stock options issued to holders of more than 10% of the outstanding common stock, 110% of the fair market value. The maximum term of incentive stock options is 10 years, or five years in the
case of holders of more than 10% of the Company's outstanding common stock. For incentive stock options exerciseable for the first time by an employee, the aggregate fair market value of the common
stock on the date of the grant may not exceed $100,000 during any calendar year.

Options
granted under the stock incentive plans are generally nontransferable and, unless otherwise determined by the board of directors, must be exercised during the period of the
option holder's employment or service with the Company or within 90 days of termination of employment or service.

58

---



MEDICALOGIC/MEDSCAPE, INC.  AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (in thousands, except share and per share data)

(5) Shareholders' Equity (Continued)

The
stock incentive plans provide that if the Company merges with or into another corporation, or the Company sells substantially all of the Company's assets, each outstanding option
will be assumed by the successor corporation.

The
per share weighted average fair market value, as determined by applying the Black-Scholes option pricing model to stock options granted under the plans during 2000, 1999 and 1998
was $6.22, $5.02 and $3.44, respectively, on the date of grant, with the following weighted average assumptions:

Years Ended December 31,2000

1999

1998Risk-free interest rate

5.10
%
5.875
%
6.0
%Expected dividend yield

0
%
0
%
0
%Years of expected life

7

7

7Expected volatility

100
%
100
%
100
%


Medscape
continues to apply APB Opinion No. 25 in accounting for the plans and compensation cost is generally not recognized for its stock options in the financial statements.
The effect on the Company's net loss, had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123 is as follows:

Years Ended December 31,2000

1999

1998Pro forma net loss

$
(326,279
)
$
(30,895
)
$
(8,342
)Pro forma net loss per share


(7.06
)

(3.39
)

(1.21
)


59

---

Transactions
involving the plans are summarized as follows:

|                                       |                                   | Number
of Shares |            | Weighted Average
Exercise Price
|-------------------------------------- | --------------------------------- | ---------------- | ---------- | -------------------------------
|Options outstanding, December 31, 1997 |                                   | 974,015          |            | $                              
|                                       | Granted                           |                  | 480,493    |                                
|                                       | Exercised                         |                  | (34,526    | )                              
|                                       | Forfeited                         |                  | (206,576   | )                              
|                                       |                                   |                  |            |                                
|Options outstanding, December 31, 1998 |                                   | 1,213,406        |            |                                
|                                       | Granted                           |                  | 2,363,950  |                                
|                                       | Exercised                         |                  | (242,575   | )                              
|                                       | Forfeited                         |                  | (80,905    | )                              
|                                       |                                   |                  |            |                                
|Options outstanding, December 31, 1999 |                                   | 3,253,876        |            |                                
|                                       | Granted                           |                  | 6,718,761  |                                
|                                       | Assumed in merger and acquisition |                  | 2,189,770  |                                
|                                       | Exercised                         |                  | (734,298   | )                              
|                                       | Forfeited                         |                  | (2,469,200 | )                              
|                                       |                                   |                  |            |                                
|Options outstanding, December 31, 2000 |                                   | 8,958,909        |            |                                
|                                       |                                   |                  |            |                                

Options OutstandingOptions ExercisableWeighted
Average
Remaining
Contractual
LifeRange of
Exercise Price

Number of
Outstanding at
December 31, 2000

Weighted
Average
Exercise
Price

Number
Exercisable at
December 31,
2000

Weighted
Average
Exercise
Price$0.03 - 2.31

944,265

9.22

$
1.96

239,908

$
0.993.10 - 4.40

1,011,877

7.36


3.98

758,802


4.035.13 - 5.45

460,800

9.52


5.16

64,561


5.385.94 - 5.94

3,897,947

9.45


5.94

705,921


5.946.43 - 8.06

953,430

8.47


6.71

568,920


6.619.50 - 13.00

898,420

8.53


10.87

404,423


10.6013.38 - 30.19

448,070

9.11


21.93

160,500


23.4530.96 - 30.96

202,622

8.69


30.96

102,743


30.9633.86 - 33.86

123,791

9.13


33.86




36.76 - 36.76

17,687

9.11


36.76

1,818


36.76$0.03 - 36.76

8,958,909

8.96


7.65

3,007,596


7.61


At December 31, 2000, 1,118,626 shares were available for grant.

The
Company has deferred stock compensation of $741 at December 31, 2000. Deferred stock compensation is primarily based on the difference between the deemed fair market value
of common stock and the exercise price of the option or stock on the grant date. Deferred compensation is being amortized over the vesting period of the options, which is generally three years. The
Company

60

---

recognized expenses of $679 in the twelve-month period ended December 31, 2000 related to these grants.

(b)  Stock Warrants

As a result of the Company's merger with Medscape, Inc. in May 2000, outstanding warrants to purchase shares of Medscape, Inc. common
stock were converted to warrants to purchase 0.323 shares of the Company's common stock. At March 31, 2001, warrants to purchase 436,747 shares of the Company's common stock were exerciseable
at $30.96 per share and warrants to purchase 436,747 shares of the



Company's common stock were exercisable at $10.84 per share. These warrants expire in 2006. The warrants were issued in connection with an agreement with America Online, Inc.
("AOL"), under which AOL has agreed to promote the Company's co-branded Websites, through contextual links and banners, on the following AOL properties: AOL, AOL.com,
CompuServe Service, Netscape Netcenter and Digital Cities. The purchase price of the Company's merger with Medscape, Inc. included the value of these warrants, as discussed in Note 2.
The agreement also requires cash payments of $33 million to be paid to AOL, of which, the Company has paid approximately $18 million through December 31, 2000. Approximately
$3.7 million is included in long-term liabilities and the remaining $11.3 million is included in the current portion of long-term liabilities at December 31, 2000. The
remaining payments are due through May 2002.

(c)  Restricted Stock Purchase Agreements

As of the end of December 1999, the Company had sold 2,175,750 shares of common stock at prices ranging from $4.00 to $13.00 to senior management of the
Company. These shares were sold under agreements, which allow the Company, at its option, to repurchase these shares at the original sale price. Under the repurchase agreements associated with
1,958,250 of these shares, the shares subject to repurchase are reduced in equal increments over 36 months from the original vesting dates which range from February 28, 1996 to
December 6, 2002. At December 31, 1999 and 2000, there were approximately 1,211,328 and 250,976 shares, respectively, outstanding that were eligible for repurchase. The Company holds
promissory notes totaling approximately $6.7 million of principal and interest, net of allowance of $5.1 million at December 31, 2000, from current and former senior management in
consideration for the restricted stock discussed above. The notes are with recourse, not collateralized, accrue interest at 6% per year and are payable in full 10 years from the date of the
loan. In connection with these stock issuances, the Company recorded compensation expense of $398 and $986 for the years ended December 31, 2000 and 1999, respectively.

(d)  Shares Issued for Services

In August 2000, the Company granted 41,500 stock options valued at $181 in exchange for consulting services provided by third parties. The stock options
were valued using the Black-Scholes option pricing
model. The per share weighted average fair market value was $5.13 on the date of grant, with the following weighted average assumptions: risk-free interest rate of 6%, expected dividend
yield of 0%, a 7-year term and an expected volatility index of 100%.

61

---

(e)  Employee Stock Purchase Plan

The Company's board of directors has adopted and the shareholders have approved an employee stock purchase plan (ESPP), for the benefit of its employees. A
total of 2,500,000 shares are reserved for issuance under the ESPP.

Except
as described below, all full-time employees of the Company and its designated subsidiaries are eligible to participate in the ESPP. Any employee who would, after a
purchase of shares in an offering under the plan, own or be considered to own five percent or more of the voting power or value of all classes of stock of the Company, or any parent or subsidiary of
the Company, is ineligible to participate in an offering under the ESPP.

Except
for the first offering period, offering periods are two years long and are divided into four six-month purchase periods. The first offering period began on the
effective date of the initial public offering and runs for approximately two years, divided into four purchase periods. On the first day of each offering period, the offering date, each participating
employee is automatically granted an option to purchase shares of the Company's common stock. That option will be automatically exercised on the last day of each purchase period during the offering.
The last day of a purchase period is known as a purchase date. No employee may purchase more than 10,000 shares in each offering period or accrue the right to purchase shares at a rate that exceeds
$25 of fair market value, as determined on the offering date, for each calendar year that the option is outstanding. Each eligible employee may elect to participate in the ESPP by filing a
subscription and payroll deduction authorization. Shares may be
purchased under the ESPP only through payroll deductions of not more than 15 percent of an employee's gross base salary plus commissions. On each purchase date the Company will apply the
amounts withheld to purchase shares for the employee. The purchase price will be the lesser of 85 percent of the fair market value of the Company's common stock on the offering date or on the
purchase date.

The
ESPP is administered by the Company's board of directors. The board of directors may adopt rules and regulations for the operation of the ESPP, adopt forms for use in connection
with the ESPP, decide any question of interpretation of the ESPP or rights arising under the ESPP and generally supervise the administration of the ESPP. The Company pays all expenses of the ESPP
other than commissions on sales of shares for employees' accounts by the custodian.

An
independent custodian maintains the records under the ESPP. Shares purchased by employees under the ESPP are delivered to and held by the custodian on behalf of the employees. By
appropriate instructions from an employee, all or part of the shares may be sold or transferred into the employee's own name and delivered to the employee.

The
board of directors may amend the ESPP, except that increases in the number of reserved shares, other than adjustments authorized by the ESPP, or decreases in the purchase price of
shares offered under the ESPP, require shareholder approval. The board of directors may terminate the ESPP at any time.

During
2000, the Company issued 212,156 shares of common stock valued at $1,026 under the employee stock purchase plan.

62

---

(6)  Other Income

Other income consists of the following:

Years Ended December 31,2000

1999

1998Interest expense

$
(482
)
$
(292
)
$
(187
)Interest income


6,292


1,876


707Other, net


35


(487
)

(54
)Total other income

$
5,845

$
1,097

$
466


(7)  Income Taxes

The Company incurred a loss for both financial reporting and tax return purposes for the years ended December 31, 2000, 1999 and 1998. As such, there
was no current or deferred tax provision for these periods.

The
actual income tax expense differs from the expected tax expense, which is computed by applying the U.S. federal corporate income tax rate of 34% to net loss before income taxes,
as follows:

Years Ended December 31,2000

1999

1998Computed expected income tax benefit

(34.0
)%
(34.0
)%
(34.0
)%Increase (reduction) in income tax expense (benefit) resulting from:State income tax benefit

(1.5
)
(4.1
)
(4.3
)Increase in valuation allowance

13.9

37.8

44.7Research and development credits

(0.1
)
(2.2
)
(8.3
)Goodwill

21.7



Other



2.5

1.9Income tax expense


%

%

%


63

---

The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

Years Ended December 31,2000

1999Deferred tax assets:Deferred revenue

$
315

$
Intangibles


3,492


Furniture and equipment due to differences in depreciation


1,555


Net operating loss and research and experimentation credit carryforwards


110,576


24,588Allowance for doubtful accounts and other accruals


1,239


690Other carryforwards


32


Gross deferred tax assets


117,209


25,278Less valuation allowance


(117,209
)

(25,084
)Net deferred tax assets





194Deferred tax liabilities:Change in method of accounting





(54
)Other





(140
)Net deferred tax liabilities





(194
)Net deferred tax assets and liabilities

$


$



Valuation
allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. The valuation allowance for deferred tax assets as
of December 31, 2000 was approximately $117,209. The net change in the total valuation allowance for the years ending December 31, 2000, 1999 and 1998 was an increase of approximately
$92,125, $10,525 and $3,153 respectively.

Included
in the valuation allowance at December 31, 2000 is $47,059 for deferred tax assets for which subsequently recognized tax benefits, if any, will be allocated to reduce
goodwill of acquired enterprises.

At
December 31, 2000, the Company has available federal and state net operating loss carryforwards for tax purposes of approximately $281,789 and research and experimentation
credits of approximately $2,512, which expire through 2020. Approximately $114,391 of the net operating losses are subject to annual utilization limitation due to ownership changes in prior years.

(8)  Restructuring Charges

Primarily as a result of the merger and acquisition described in Note 2, the Company adopted certain restructuring plans during the year ended
December 31, 2000. The restructuring plans resulted in charges related to the consolidation of duplicate functions and activities. These actions resulted in a

64

---

reduction of approximately 300 employees, or approximately 28% of the workforce, across essentially all of the Company's functions and locations, a reduction in total facilities, including closing of
the San Francisco office, and impairment of certain assets.

Restructuring charges are primarily comprised of costs associated with severance packages, cancellation of lease agreements, and impairments of abandoned technologies and property and
equipment. These charges totaled approximately $17.5 million for the year ended December 31, 2000, including non-cash charges of approximately $5.1 million to increase the reserve
against shareholders' notes receivable. At December 31, 2000, approximately 240 of the estimated 300 positions have been eliminated. Approximately $1.8 million relating to these programs
was included in current liabilities at December 31, 2000. All severance payments and related charges, which consist primarily of expected payroll and related taxes, are expected to be paid by
June 30, 2001.

As
of December 31, 2000, the following amounts were recorded:

|                                                   |  | Employee
severance and
related
expenses |        | Impairments of
technology and
intangible
assets |   | Abandonment
and
impairment of
facilities,
property and
equipment |  | Total
|-------------------------------------------------- |  | --------------------------------------- | ------ | ----------------------------------------------- | - | ---------------------------------------------------------------- |  | -----
|2000 restructuring charges                         |  | $                                       | 11,287 |                                                 | $ | 3,108                                                            |  | $    
|Write-offs/payments                                |  |                                         | 9,542  |                                                 |   | 3,108                                                            |  |      
|                                                   |  |                                         |        |                                                 |   |                                                                  |  |      
|Restructuring accrual balance at December 31, 2000 |  | $                                       | 1,745  |                                                 | $ |                                                                 |  | $    
|                                                   |  |                                         |        |                                                 |   |                                                                  |  |      

The
above provisions and related restructuring reserves are estimates based on the Company's current knowledge. Adjustments to the restructuring provisions may be necessary in the
future based on further developments regarding restructuring related costs.

(9)  Commitments and Contingencies

In September 1999, Medscape entered into a license agreement with L&H Applications USA, Inc. L&H has granted to the Company a
non-exclusive, non-transferable license to incorporate L&H's product into the Company's Logician family of products. The Company may be required to make additional minimum
payments in accordance with this agreement of up to $1,075 during 2001.

In
February 1999, the Company entered into an agreement to issue common stock to a customer at the fair market value up to $6,000, in consideration for allowing the Company to
use this customer as a reference site. Issuance of stock is contingent upon sales of additional licenses to the customer or to third parties in the customer's geographic area. Since the date of
inception, the Company has issued 178,470 shares of common stock with an estimated fair value of $9.45 per share to this customer through December 31, 2000. The Company has recorded the expense
associated with this grant as a component of marketing and sales expense. The stock agreement expires December 31, 2004.

65

---

The Company is involved in various claims and legal actions in the normal course of business. The most significant of these are described below. In the opinion of management, the
ultimate disposition of outstanding claims and legal actions will not have a material effect on the Company's consolidated financial position, results of operations or liquidity.

On
August 20, 1999, Medquist MRC, Inc. filed a suit in the District Court for the Northern District of Ohio, Medquist MRC, Inc. v. John H. Dayani and Network
Health Services, Inc., against Network Health Services, Inc., predecessor to Total eMed, Inc. In November of 1999, venue in the case was transferred to the United States District
Court for the Middle District of Tennessee. The plaintiff filed an amended complaint on June 1, 2000 that alleges breach of fiduciary duty of loyalty, misappropriation
of trade secrets, tortious interference with contract, and unjust enrichment. Specifically, Medquist MRC alleges that Dayani, who served on the Medquist MRC board of directors both prior to and after
founding Network Health Services, misappropriated certain trade secrets from Medquist MRC and used those trade secrets to develop Network Health Service's business concepts and customer base. The
complaint also alleges that Network Health Services committed other actionable offenses as described above. A scheduling order has been entered in this case setting it for trial in
November 2001. The case is presently in the discovery phase. The Company does not believe that it interfered in any way with the plaintiff's economic relationships and it intends to defend
itself vigorously should the case proceed to trial.

The
Financial Accounting Standards Board (FASB) has issued an Exposure Draft ("Draft"),Business Combinations and Intangible Assets-Accounting for
Goodwill, that proposes significant changes to the current accounting for goodwill and intangible assets. If adopted in its current form, the Company's financial results may be
impacted in the future. Currently, the Draft would require companies to discontinue the current practice of amortizing goodwill over its useful life and instead require companies to perform impairment
tests when certain events or circumstances indicate the fair value of goodwill may be less than the carrying amount.

(10)  Segment Information

During the fourth quarter of 2000, Medscape's operations and corresponding organizational structures were organized into three strategic business unit groups
that offer products and services tailored for particular market segments. In accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related
Information, the Company is required to describe its reportable segments and provide data that is consistent with the data made available to the Company's management to
allocate resources and assess performance. Information for prior periods has been reclassified to conform to the current year presentation.

Medscape's
reported segments consist of Digital Health Record (DHR) applications (application licenses and support services), Internet portals (sponsorship and advertising), and
transcription services (transcription services). The DHR applications segment develops and markets DHR applications for
physicians, healthcare professionals, and patients by using advanced technologies to link healthcare professionals and consumers to physicians. Internet Portals provide healthcare professionals and
consumers with timely, relevant, and authoritative professional and consumer healthcare information available through the Company's branded media properties, including Medscape.com and

66

---

CBSHealthWatch.com. Medscape Transcription provides transcription services for physicians in the outpatient market and provides premium web-based medical transcription services to
physicians by utilizing digital voice capture, dedicated circuits, and the Internet to connect physicians and professional medical transcriptionists through a national data center.

The
Company measures the performance of its operating segments based on segment operating income, which includes sales and marketing expenses, research and development costs, and
other overhead charges directly attributable to the operating segment. Certain expenses that are managed outside of the operating segments are excluded from segment operating income. These consist
primarily of corporate charges, including other income and expense items, unallocated shared expenses, taxes, and restructuring and merger charges. Gains and losses associated with the sale of
business assets are also excluded from segment operating income. Asset information by operating segment is not reported since Medscape does not identify assets by segment. The accounting policies of
the segments are the same as those used in the preparation of Medscape's consolidated financial statements.

The
Company does not have material revenues or assets outside the United States. During 2000, no single customer accounted for more than 10% of total revenues. During 1999, one
customer accounted for approximately 16% of the Company's total revenues, and another customer accounted for approximately 13%. During 1998, one customer accounted for approximately 20% of total
revenues.

|                                  |                | Years Ended December 31, |  
|--------------------------------- | -------------- | ------------------------ | -
|
|Digital Health Record application |                |                          |  
|                                  | Revenue        |                          | $
|                                  | Operating loss |                          |  
|Internet portal                   |                |                          |  
|                                  | Revenue        |                          |  
|                                  | Operating loss |                          |  
|Transcription service             |                |                          |  
|                                  | Revenue        |                          |  
|                                  | Operating loss |                          |  
|Consolidated and other            |                |                          |  
|                                  | Revenue        |                          |  
|                                  | Operating loss |                          |  
|                                  |                |                          |  
|Consolidated segment totals       |                |                          |  
|                                  | Revenue        |                          |  
|                                  | Operating loss |                          | $
|                                  |                |                          |  

67

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The
following table reconciles consolidated segment operating loss to the Company's consolidated net loss.

|                                              |  | Years Ended December 31, |         
|--------------------------------------------- |  | ------------------------ | --------
|
|Consolidated segment operating loss           |  | $                        | (80,973 
|Corporate and other unallocated shared income |  |                          | 5,845   
|Depreciation and amortization                 |  |                          | (220,528
|Restructuring and other charges               |  |                          | (25,815 
|                                              |  |                          |         
|Net loss                                      |  | $                        | (321,471
|                                              |  |                          |         

(11)  401(k) Plan

The Company and its subsidiaries sponsor several 401(k) deferred savings plans, covering substantially all employees. Employees generally become eligible to
participate in the plan upon employment. Employees may contribute up to 15% of their pay to the plan, subject to the limitation of $10.5 by the Internal Revenue Code. All employee contributions vest
immediately. Medscape has not made any matching contributions, but does pay administrative costs for the plan. These costs were not significant for any period presented.

(12)  Related Party Transactions

The Company has accepted promissory notes totaling $6,728 of principal and interest amount, net of the allowance, at December 31, 2000 from its officers
and certain other employees in consideration for restricted stock issued. These notes accrue interest at 6% per year and are payable in full 10 years from the date of the underlying loan.

The
Company also loaned an officer approximately $104 to help pay for relocation expenses, under an unsecured promissory note, which bears interest at 6% per year. The note is payable
in full on the earlier to occur of the sale of his residence located in Portland, Oregon, the termination of his employment, or July 1, 2001. The note is prepayable in full without penalty and
was paid in full plus accrued interest during 2000.

68

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(13)  Quarterly Financial Information (unaudited)

|                   |                                    | March 31,
2000  |         | June 30,
2000 |       | September 30,
2000 |       | December 31,
2000 |          | March 31,
1999 |        | June 30,
1999 |       | September 30,
1999 |        | December 31,
1999 |      
|------------------ | ---------------------------------- | --------------- | ------- | ------------- | ----- | ------------------ | ----- | ----------------- | -------- | -------------- | ------ | ------------- | ----- | ------------------ | ------ | ----------------- | -----
|Revenues:          |                                    |                 |         |               |       |                    |       |                   |          |                |        |               |       |                    |        |                   |      
|                   | Application licenses               |                 | $       | 3,439         |       | $                  | 1,134 |                   | $        | 2,530          |        | $             | 3,391 |                    | $      | 1,507             |      
|                   | Subscriptions and support services |                 |         | 2,169         |       |                    | 2,094 |                   |          | 3,428          |        |               | 2,945 |                    |        | 1,490             |      
|                   | Sponsorship and advertising        |                 |         |              |       |                    | 6,313 |                   |          | 6,145          |        |               | 7,999 |                    |        |                  |      
|                   | Transcription
services             |                 |         |              |       |                    | 1,348 |                   |          | 2,397          |        |               | 2,823 |                    |        |                  |      
|                   |                                    |                 |         |               |       |                    |       |                   |          |                |        |               |       |                    |        |                   |      
|                   |                                    | Total revenues: |         |               | 5,608 |                    |       | 10,889            |          |                | 14,500 |               |       | 17,158             |        |                   | 2,997
|Operating expenses |                                    |                 | 22,149  |               |       | 91,722             |       |                   | 126,955  |                |        | 134,930       |       |                    | 6,634  |                   |      
|Net loss           |                                    |                 | (14,726 | )             |       | (78,870            | )     |                   | (111,058 | )              |        | (116,817      | )     |                    | (3,426 | )                 |      
|Net loss per share |                                    |                 | (0.45   | )             |       | (1.85              | )     |                   | (2.02    | )              |        | (2.12         | )     |                    | (0.48  | )                 |      

(14)  Subsequent Events (unaudited)

(a) General Motors Corporation

General Motors Corporation (GM), the world's largest vehicle manufacturer, designs, builds and markets cars and trucks worldwide. GM is also the United States'
largest private purchaser of healthcare. In January 2001, GM and Medscape entered into an e-business healthcare alliance. Under the alliance, GM and Medscape will cooperate on a three-year program to
encourage U.S. physicians to use hand-held computer devices which use applications from the Medscape Mobile suite of products for prescriptions and to adopt Medscape's DHR application Medscape
Logician ASP. As part of the strategic alliance, GM received warrants for 5 million shares of common stock, valued at approximately $12.5 million. The warrants were valued using the
Black-Scholes option pricing model using the following assumptions: exercise price of $2.31, volatility of 70%, contractual life of 5 years, risk-free interest rate of 5.0% and no
dividends. Under the terms of the agreement, the warrants were non-forfeitable and fully vested at the date of grant. In addition, GM is restricted by certain sale lock-up
periods, as specified in the agreement. The value of the warrants issued under this alliance will be amortized as a non-cash sales discount over the life of the agreement from
approximately June 2001 through June 2004. GM and Medscape will also share in any cost savings realized by GM primarily from physician usage of Medscape Mobile applications.

(b) Convertible Redeemable Preferred Stock Subscribed

The Company issued approximately 5.9 million shares of Series 1 convertible redeemable preferred stock pursuant to a financing round that closed
on January 4, 2001. As of December 31, 2000, $15.8 million had been received, in advance of the closing, and is presented in the financial statements as preferred stock
subscribed. The Company received an additional $2 million in January and, at closing, paid approximately $1 million and issued warrants for 300,000 shares of Medscape common stock in
fees associated with the financing. The terms for the Series 1 preferred stock are summarized below.

69

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Dividends

Preferred shareholders are entitled to receive dividends when and if declared by the Company's board of directors at an annual rate of $0.27 per share. The
right to receive dividends on preferred stock is cumulative and shall compound annually. Dividends are deemed to accrue on a daily basis, commencing on the date the Series 1 preferred stock is
first issued. No dividends may be declared or paid on common stock until all declared dividends on preferred stock have been paid. As of December 31, 2000 no dividends had been declared or
paid.

Liquidation Preferences

Upon dissolution, liquidation or winding up of the affairs of the Company, either voluntarily or involuntarily, the preferred shareholders receive preference
in liquidation over the common shareholders of the Company. The liquidation value for each outstanding share is $3 per share, adjusted for any accrued and unpaid stock dividends.

Redemption

The preferred stock is subject to mandatory redemption features under the following circumstances (a) a change in control or (b) a trigger event.
A trigger event is defined as the Company failing to obtain the shareholder approval contemplated by the Preferred Stock and Warrant Purchase Agreement. In the occurrence of either event, each holder
shall have the right to require the Corporation to purchase all or a portion of such preferred stock, for which funds are legally available for redemption. The per share redemption price for each
series of preferred stock is equal to its per share liquidation value, adjusted for any accrued and unpaid stock dividends.

Voting

The holder of each share of each series of preferred stock is entitled to the number of votes the holder would be entitled to if the shares of preferred stock
were converted to common stock.

Conversion

Each share of preferred stock is voluntarily convertible into common stock at any time after the date of issuance at a rate that equals the original issue
price of $3 divided by the conversion price of $3 at the time of issuance, subject to anti-dilution or other adjustments specified in the purchase agreements. Such
anti-dilution provisions include a weighted-average adjustment to the conversion price in the event the Company issues new equity or convertible securities at an issue price or conversion
price below the then applicable conversion price or the then applicable fair market value of a share of Common Stock. Each share of the Series 1 preferred stock shall be automatically converted
into the number of shares of common stock obtained by dividing the per share price by the conversion price, subject to adjustments in accordance with the anti-dilution provisions thereof,
upon the earlier of: (i) the date, which shall be no sooner than January 4, 2002, on which the last sale price of the common stock on NASDAQ has been at least five times the conversion
price for 30 consecutive trading days, with a minimum average trading volume per day of 2% of the number of issued and outstanding shares

70

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of common stock not held by affiliates of the Company and (ii) immediately prior to the closing of a merger, sale of all or substantially all of the Company's assets, or combination in which
the Company's common shareholders receive cash or marketable securities with an aggregate value per share of at least five times the conversion price.

Warrants

In addition to the shares of Series 1 preferred stock, the preferred shareholders were granted warrants for the purchase of approximately
4.5 million shares of the Company's common stock valued at approximately $7.6 million. The warrants are exercisable at the option of the holder for a period of five years, and were
valued using the Black-Scholes option pricing model using the following assumptions: exercise price of $0.01, volatility of 70%, contractual life of 5 years, risk-free interest rate
of 5.0% and no dividends.

Upon closing of the Series 1 preferred stock financing round, the Company paid approximately $1 million and issued additional warrants for 300,000 shares of the
Company's common stock valued at approximately $275 to the Company's placement agent. The warrants are exercisable at the option of the holder for a period of five years, and were valued using the
Black-Scholes option pricing model using the following assumptions: exercise price of $2.40, volatility of 70%, contractual life of 5 years, risk-free interest rate of 5.0% and no
dividends. Total fees of approximately $1.3 million associated with the financing were netted against proceeds received.

Board Representation

The majority of the holders of the Series 1 Preferred Stock shall have the right to elect one member of the Company's board of directors.

(c)  Lifechart.com

By late 2000 the Company became concerned about Lifechart.com's ability to continue to fund its operations. In addition, Lifechart.com failed to make a payment
to the Company that was required under the agreement. Therefore, the Company recorded a loss on its investment in Lifechart.com of



approximately $8.3 million to reduce the carrying amount of the investment to its estimated fair value at December 31, 2000.

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

None

71

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information required by this item concerning executive officers is set forth in Part I of this Report under "ITEM 4A.EXECUTIVE
OFFICERS OF THE REGISTRANT."

DIRECTORS

Set forth below is information as of April 30, 2001 about each director of the Company, including his or her business experience during the past five
years.

Name

Age

PositionMark K. Leavitt

50

Chairman of the BoardDavid C. Moffenbeier

49

DirectorGeorge D. Lundberg, M.D.

67

DirectorArthur N. Leibowitz

53

DirectorThomas A. Croskey

45

DirectorBruce M. Fried

51

DirectorC. Martin Harris

44

DirectorAndrew Heyward

50

DirectorRonald H. Kase

42

DirectorNeal Moszkowski

35

DirectorMark A. Stevens

41

Director


Mark K. Leavitt,Director.Dr. Leavitt has been Chairman of the
Board of the Company since 1985. Dr. Leavitt founded MedicaLogic in 1985 and served as the Chief Executive Officer from 1985 until May 2000. From 1992 to 1996 he served as a faculty
member for St. Vincent Internal Medicine Family Practice and concurrently served as Medical Director and Regional Information Systems Director for Sisters of Providence Health Care System from 1992 to
1994. From 1982 to 1992, Dr. Leavitt operated a private practice of internal medicine. From December 1997 to June 1998, he served on the Board of Directors of Physician
Partners, Inc.

David C. Moffenbeier,Director.Mr. Moffenbeier has been a
director of the Company since 1994. Mr. Moffenbeier became President and Chief Executive Officer in May 2000. From 1994 until May 2000, he served as Chief Operating Officer of the
Company. From 1993 to 1994, Mr. Moffenbeier served as Chairman of the Board of Directors of Summit Design Inc., a supplier of software tools for integrated circuits. Previously,
Mr. Moffenbeier co-founded Mentor Graphics Corp., a manufacturer of hardware and software for electronic design automation, where he served as a director from 1981 to 1993 and as
its Chief Financial Officer from 1981 to 1984, its Vice President of International Sales from 1985 to 1988 and its Vice President of Worldwide Sales from 1989 to 1993. He currently serves on the Board
of Directors of Providence Good Health Plan, a health care management organization.

George D. Lundberg,Director.Dr. Lundberg has been a director
of the Company in August 2000. Dr. Lundberg became the Executive Vice President and Editor in Chief when Medscape, Inc. merged with the Company in May 2000. Prior to the
merger, he served as Editor in Chief of Medscape, Inc. from February 1999 to May 2000. Prior to joining the Company, he served as Editor of the Journal of the American Medical
Association and also served as the Editor in Chief of Scientific Information and Multimedia, a publication of the American Medical Association, for seventeen years.

Arthur N. Leibowitz,Director.Dr. Leibowitz has been a director
of the Company since December 2000. At that time, he also became the Executive Vice President, Digital Health Strategy and Business Development. Prior to joining the Company, he served as the
Chief Medical Officer for

72

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Aetna U.S. Healthcare from 1992 to December 2000 and held various other positions from 1987 to 1992. Prior to 1987, Dr. Leibowitz was in private practice.

Thomas A. Croskey,Director.Mr. Croskey has been a director of
the Company since February 2001. Mr. Croskey has served as the Director of Employment Cost Analysis (ECA) for the General Motors North American Finance Staff since 1996.

Bruce M. Fried,Director.Mr. Fried has been a director since
1998. Since 1998, Mr. Fried has been a partner and chair of the health law group at Shaw Pittman, an international law firm based in Washington, D.C. From 1995 to 1998, Mr. Fried served
as the Health Care Financing Administration's director of the Center for Health Plans and Providers. From 1994 to 1995, Mr. Fried was vice president of federal affairs at FHP International
Corporation, then one of the nation's largest managed care organizations.

C. Martin Harris,Director.Dr. Harris has been a director of
the Company since May 2000. Since 1996, Dr. Harris has served as a staff physician at the Cleveland Clinic Hospital and at the Cleveland Clinic Foundation as well as the chief
information officer and the chairman of the information technology division for the Cleveland Clinic Foundation. From 1987 to 1996, Dr. Harris served as attending
physician for the Hospital of the University of Pennsylvania and as an assistant professor of Medicine at the University of Pennsylvania School of Medicine where he previously worked as an instructor
of clinical medicine. From 1990 to 1993, Dr. Harris served as the associate vice-president of information systems and technology at the University of Pennsylvania Medical Center.
Dr. Harris currently serves as a member of the board of directors for Care Management Sciences Corporation.

Andrew Heyward,Director.Mr. Heyward has been a director of the
Company since February 2001. Mr. Heyward has served as President of CBS News since January 1996. From October 1994 until January 1996, he was Executive Producer of
"CBS Evening News with Dan Rather" and Vice President of CBS News. From February 1993 until October 1994, Mr. Heyward served as Executive Producer of the CBS News Magazine "Eye to
Eye with Connie Chung." Prior to that time, he was responsible for developing CBS's "48 Hours" series. Mr. Heyward serves on the board of directors of Marketwatch.com, Inc.

Ronald H. Kase,Director.Mr. Kase has been a director since
July 1994. Mr. Kase joined New Enterprise Associates, a venture capital investment firm in 1990 and has been a general partner since May 1995. Mr. Kase serves on the boards
of directors of Data Critical Corporation, a wireless healthcare data products company, and several privately held information technology and healthcare companies.

Neal Moszkowski,Director.Mr. Moszkowski has been a director
since May 1999. Since 1998, Mr. Moszkowski has served as a partner of Soros Private Funds Management, LLC. From 1993 to 1998, Mr. Moszkowski was an executive director in the
principal investment area of Goldman Sachs International and a vice president of Goldman Sachs & Co. Mr. Moszkowski serves on the board of directors of Integra Life Sciences Holdings
Corporation, a developer and marketer of medical products, implants and biomaterials, Bluefly, Inc., an off-price apparel Internet retailer, and several private companies.

Mark A. Stevens,Director.Mr. Stevens has been a director since
1994. Mr. Stevens joined Sequoia Capital in 1989 and has been a general partner since 1993. Mr. Stevens serves on the boards of directors of MP3.com, Inc., an online music
Internet company, NVidia Corp., a supplier of graphics processors and software, and Terayon Communication Systems, Inc., a cable modem system supplier, and several privately held Internet and
semiconductor companies.

73

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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than 10 percent of a
registered class of our equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in ownership of the Company's common stock and other equity securities. Officers, directors and greater than
10 percent shareholders are required by the Securities and Exchange Commission regulations to furnish the Company with copies of all Section 16(a) reports filed.

Based
solely upon a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that there was
compliance for the fiscal year ended December 31, 2000 with all Section 16(a) filing requirements applicable to our executive officers, directors and greater than 10 percent
beneficial owners, except that Dr. George Lundberg filed a late report with respect to a purchase of 4,036 shares.

ITEM 11. EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

The Company does not pay any cash fees to directors for attendance at meetings. The Company does reimburse its directors for
out-of-pocket expenses related to attending meetings of the board of directors. Also, it has been the Company's policy to grant to newly-elected, non-employee directors at the
time of election an option to purchase 30,000 shares of the Company's common stock, which options vest over a three-year period.

74

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EXECUTIVE COMPENSATION

The table below shows the annual compensation of the Chief Executive Officer and the next six most highly compensated executive officers of the Company for the
1998, 1999 and 2000 fiscal year.

SUMMARY COMPENSATION TABLE

|                                                                                   |  |                |  |                         |  |                      |  | Long-term Compensation Awards |  |             | 
|---------------------------------------------------------------------------------- |  | -------------- |  | ----------------------- |  | -------------------- |  | ----------------------------- |  | ----------- | 
|
|
|
|Mark K. Leavitt
Chairman of the Board                                              |  | 2000
1999
1998 |  | 243,000
210,000
208,333 |  | 
100,000
          |  | 
66,000
60,000               |  | 200,000

 | 
|David C. Moffenbeier
President and Chief Executive Officer                         |  | 2000
1999
1998 |  | 240,000
190,000
238,333 |  | 
100,000
50,000     |  | 
66,000
60,000               |  | 200,000

 | 
|Thomas M. Watson
Executive Vice President, Application Sales                       |  | 2000
1999
1998 |  | 212,500
150,000
150,000 |  | 
107,574
75,559     |  | 

                         |  | 75,000

  | 
|George D. Lundberg, M.D.
Executive Vice President, Editorial and Editor-in-Chief   |  | 2000
1999
1998 |  | 150,250

             |  | 43,858

           |  | 

                         |  | 232,390

 | 
|Blackford F. Middleton
Senior Vice President Clinical Informatics (3)              |  | 2000
1999
1998 |  | 193,333
160,000
158,333 |  | 15,000
15,000
15,000 |  | 
33,000
30,000               |  | 100,000

 | 
|Paul T. Sheils
Vice Chairman of MedicaLogic/Medscape and President of Medscape (4) |  | 2000
1999
1998 |  | 47,500

              |  | 46,438

           |  | 

                         |  | 

       | 
|Frank J. Spina
Chief Financial Officer (6)                                         |  | 2000
1999
1998 |  | 172,917
47,560
        |  | 50,000

           |  | 

                         |  | 200,000

 | 

---

75

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OPTION GRANTS IN LAST FISCAL YEAR

The following table shows grants of stock options to Company's Chief Executive Officer and to each of the named executive officers for the year ended
December 31, 2000. Company has never granted any stock appreciation rights. The percentages in the table below are based on options to purchase an aggregate of 7,113,123 shares of common stock
granted under Company's stock option plan in the year ended December 31, 2000 to our employees, consultants and directors. The exercise price per share of each option was equal to the fair
market value of the common stock on the date of grant as determined by the board of directors. Potential realizable values are net of exercise price before taxes, and are based on the assumption that
our common stock appreciates at the annual rate shown,
compounded annually, from the date of grant until the expiration of the ten-year term. These numbers are calculated based on the requirements of the SEC and do not reflect our estimate of
future stock price growth.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

|Individual Grants        |  |                   |  |            
|------------------------ |  | ----------------- |  | -----------
|
|
|
|
|Mark K. Leavitt          |  | 200,000           |  | 2.8        
|David C. Moffenbeier     |  | 200,000           |  | 2.8        
|Thomas M. Watson         |  | 75,000            |  | 1.1        
|George D. Lundberg, M.D. |  | 32,300
200,000
90 |  | .05
2.8
0.0
|Blackford F. Middleton   |  | 100,000           |  | 1.4        
|Paul T. Sheils           |  |                  |  |           
|Frank J. Spina           |  | 200,000           |  | 2.8        

76

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FISCAL YEAR END OPTION VALUES

The following table sets forth information concerning the number and value realized as to options exercised during 2000 and options held at December 31,
2000 by the individuals named in the Summary Compensation Table and the value of those options held at such date. The options exercised were not exercised as SARs and no SARs were held at year end.

AGGREGATED OPTION/SAR EXERCISES IN  LAST FISCAL YEAR AND FY-END  OPTION/SAR VALUES

|                        |  |         |  |   |           | Number of Securities Underlying Unexercised Options/SARs At Fiscal Year-End |        |  |         | 
|----------------------- |  | ------- |  | - | --------- | --------------------------------------------------------------------------- | ------ |  | ------- | 
|
|
|
|
|Mark K. Leavitt         |  |        |  |   |          |                                                                             | 33,333 |  | 166,667 | 
|David C. Moffenbeier    |  |        |  |   |          |                                                                             | 33,333 |  | 166,667 | 
|Thomas M. Watson        |  |        |  |   |          |                                                                             | 12,500 |  | 62,500  | 
|George D. Lundberg, M.D |  | 20,185  |  | $ | 374,271   |                                                                             | 42,509 |  | 242,371 | 
|Blackford F. Middleton  |  |        |  |   |          |                                                                             | 16,667 |  | 83,333  | 
|Paul T. Sheils          |  | 288,346 |  | $ | 1,694,349 |                                                                             | 58,879 |  |        | 
|Frank J. Spina          |  |        |  |   |          |                                                                             | 19,999 |  |        | 

---

Employment Agreements

Agreement with George D. Lundberg, M.D.Under a four-year employment agreement, dated February 15,
1999, George D. Lundberg became the Company's Editor in Chief at an annual base salary of $200,000. The employment agreement also provides for an annual cash bonus of at least $25,000

If
Dr. Lundberg's employment is terminated for any reason other than his death, disability or serious misconduct, any incentive stock options that have not yet fully vested
will vest upon termination. In addition, Dr. Lundberg will be entitled to a payment equal to his annual salary and annual bonus in effect at the time of termination. However, the incentive
stock options are forfeited if Dr. Lundberg is terminated for serious misconduct. Also, if Dr. Lundberg's employment is terminated because of his death or disability, Dr. Lundberg
or his estate may exercise any vested incentive stock options within 90 days after termination.

Under
his employment agreement, Dr. Lundberg agreed not to compete with the Company and not to solicit the Company's customers or employees for one year after the termination
of his employment, with limited exceptions. Dr. Lundberg may terminate his employment with the Company for any reason upon 60 days prior written notice.

77

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee of the board of directors during 2000 included C. Martin Harris, Ronald H. Kase and Mark A. Stevens, none of whom were
employees of the Company. During 2000, no executive officer of the Company served as a member of the compensation committee (or other board
committee performing equivalent functions) or as a director of another entity, one of whose executive officers served as a member of the compensation committee or as a director of the Company.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to the beneficial ownership of Common Stock as of April 16, 2001 by the Company's
directors, certain executive officers and directors and executive officers as a group, and each person known by the Company to beneficially own more than 5% of the outstanding shares of common stock.
Beneficial ownership is determined under the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities.

Unless
indicated otherwise below, the address for each listed director and officer is MedicaLogic/Medscape, Inc., 20500 NW Evergreen Parkway, Hillsboro, Oregon 97124. Except as
indicated by footnote, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares of
common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying options or warrants held by that person that are exercisable within
60 days of April 16, 2001, but excludes shares of common stock underlying options held by any other person. Percentage of beneficial ownership is based on 56,203,054 shares of the
Company's common stock outstanding as of April 16, 2001.

|                                                                                                      |  | Number of Shares Beneficially Owned |     |           | 
|----------------------------------------------------------------------------------------------------- |  | ----------------------------------- | --- | --------- | 
|
|General Motors Corporation
300 Renaissance Center
Detroit, MI 48265-3000                              |  | 5,000,000                           | (2) | 0         | 
|Viacom Inc.
Attn: Law Department
1515 Broadway Ave
New York, NY 10036-8901                            |  | 4,695,892                           |     | 0         | 
|Entities associated with Sequoia Funds
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025 |  | 2,803,847                           | (3) | 0         | 
|New Enterprise Associates
2490 Sand Hill Road
Menlo Park, CA 94025                                    |  | 2,353,596                           |     | 0         | 
|Quantum Industrial Partners LDC
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles             |  | 2,842,930                           | (4) | 1,666,666 | 

78

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|SFM Domestic Investment LLC
c/o Soros Fund Management LLC
888 Seventh Avenue
NewYork,NY 10016         |  | 2,842,930 | (5)  | 1,666,666 |  | 4,509,596 |  | 7.8  | %
|----------------------------------------------------------------------------------------------------- |  | --------- | ---- | --------- |  | --------- |  | ---- | -
|Mark A. Stevens
3000 Sand Hill Rd.
Bldg. 4, Ste. 280
Menlo Park, CA 94025                             |  | 2,809,680 | (6)  | 0         |  | 2,809,680 |  | 4.9  | %
|Ronald H. Kase
2490 Sand Hill Road
Menlo Park, CA 94025                                               |  | 2,383,596 | (7)  | 0         |  | 2,383,596 |  | 4.2  | %
|Bruce M. Fried
2300 N. Street, NW
Washington, DC 20037                                                |  | 26,250    | (8)  | 0         |  | 26,250    |  | *    |  
|Neal Moszkowski
888 Seventh Avenue Suite 3300
New York, NY 10106                                      |  | 30,000    | (9)  | 0         |  | 30,000    |  |      |  
|C. Martin Harris, M.D.
c/o Cleveland Clinic Foundation
9500 Euclid Foundation H18
Cleveland, OH 44195 |  | 0         |      | 0         |  | 0         |  | *    |  
|Thomas A. Croskey
General Motors
482-C30-D36
300 Renaissance Center
Detroit, MI 48265-3000            |  | 0         |      | 0         |  | 0         |  | *    |  
|Andrew Heyward
CBS News
524 West 57 Street
New York, NY 10019-2985                                    |  | 0         |      | 0         |  | 0         |  | *    |  
|Mark K. Leavitt                                                                                       |  | 1,155,550 | (10) | 0         |  | 1,155,550 |  | 2.1  | %
|David C. Moffenbeier                                                                                  |  | 729,622   | (11) | 0         |  | 729,622   |  | 1.3  | %
|George D. Lundberg, M.D                                                                               |  | 122,382   | (12) | 0         |  | 122,382   |  | *    |  
|Arthur N. Liebowitz, M.D.                                                                             |  | 66,668    |      | 0         |  | 66,668    |  | *    |  
|All directors and executive officers as a group (17 persons):                                         |  | 7,708,927 | (13) | 0         |  | 7,708,927 |  | 13.7 | %

---

79

---

Sequoia Capital Growth Fund

1,726,745Sequoia Capital VI

400,914Sequoia Technology Partners III

110,219Sequoia Technology Partners VI

22,028Sequoia Capital Franchise Fund

473,685Sequoia Capital Franchise Partner

52,632Sequoia 1995

17,624Total

2,803,847


Relationship

Name of Sequoia EntityGeneral partner

Sequoia Capital VISequoia Technology Partners VIManaging member

Sequoia Capital Franchise FundSequoia Capital Franchise PartnersParticipates in voting control of shares

Sequoia Capital Growth Fundof Medscape held of record by

Sequoia 1995these entities:

Sequoia Technology Partners III


The
share amount also includes 5,833 shares subject to an option held of record by Mr. Stevens that is exerciseable within 60 days of April 16, 2001.

|Holder of Record                 |  | Securities                                      
|-------------------------------- |  | ------------------------------------------------
|New Enterprise Associates VI, LP |  | 2,353,596 shares of common stock                
|Ronald H. Kase                   |  | Option to purchase 30,000 shares of common stock

Mr. Kase
disclaims beneficial ownership of the shares held of record by New Enterprise Associates. The option held of record by Mr. Kase is exercisable within
60 days of April 16, 2001.

Mr. Moszkowski
is also a non-managing member of SFM Domestic Investments LLC. Mr. Moszkowski does not have voting or dispositive power over shares held of
record by Quantum Industrial Partners LDC or SFM Domestic Investments LLC.

80

---

The
share amount also includes 73,333 shares subject to an option held of record by Mr. Moffenbeier that is exerciseable within 60 days of April 16, 2001.

ITEM 13. CERTAIN TRANSACTIONS AND RELATIONSHIPS

In connection with our series 1 preferred stock financing in January 2001, we sold an aggregate of 3,333,332 shares of series 1 preferred
stock and warrants to purchase an aggregate of 2,549,018 shares of common stock for an aggregate price of approximately $10 million to Quantum Industrial Partners LDC and SFM Domestic
Investments LLC, both of which are affiliates of Neil Moszkowski, one of our directors.

Bruce
M. Fried, a member of the board of directors, is a partner in a law firm retained by us to provide legal counsel about government affairs and trademark issues.

81

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PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1) Financial Statements

The
following is the index to the consolidated financial statements:

MEDICALOGIC/MEDSCAPE, INC. AND SUBSIDIARIES    INDEX TO FINANCIAL STATEMENTS

|                                                              |                                                 | Page
|------------------------------------------------------------- | ----------------------------------------------- | ----
|MedicaLogic/Medscape, Inc.Consolidated Financial Statements: |                                                 |     
|                                                              | Independent Auditors' Report                    |     
|                                                              | Consolidated Balance Sheets                     |     
|                                                              | Consolidated Statements of Operations           |     
|                                                              | Consolidated Statements of Shareholders' Equity |     
|                                                              | Consolidated Statements of Cash Flows           |     
|                                                              | Notes to Consolidated Financial Statements      |     

(a)(2) Financial Statement Schedule.

Schedules
have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.

(a)(3) Exhibits

|(a)      |  |                                                                                                                                                       
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(4)   |  | Agreement of Reorganization and Merger dated as of February 21, 2000 among Medicalogic, Inc., Medscape, Inc., and Moneypenney Merger Corp.            
|2.2(4)   |  | Agreement of Reorganization and Merger dated as of February 21, 2000 among Medicalogic, Inc., Total eMed Inc., and AQ Merger Corp.                    
|3.1(7)   |  | 1999 Restated Articles of Incorporation.                                                                                                              
|3.1.1(6) |  | Articles of Amendment to the 1999 Restated Articles of Incorporation.                                                                                 
|3.1.2(8) |  | Articles of Amendment to the 1999 Restated Articles of Incorporation                                                                                  
|3.2(6)   |  | Restated Bylaws.                                                                                                                                      
|10.1(8)  |  | 2001 Third Amended and Restated Investor Rights Agreement.                                                                                            
|10.2(1)* |  | 1993 Stock Incentive Plan.                                                                                                                            
|10.3(1)* |  | 1996 Stock Incentive Plan, as amended.                                                                                                                
|10.4(1)* |  | 1999 Stock Incentive Plan.                                                                                                                            
|10.5(3)* |  | Amendment to 1999 Stock Incentive Plan.                                                                                                               
|10.6(1)* |  | Form of Incentive Stock Option Agreement.                                                                                                             
|10.7(1)  |  | Form of Restricted Stock Purchase Agreement (Performance).                                                                                            
|10.8(1)  |  | Form of Restricted Stock Purchase Agreement.                                                                                                          
|10.9(2)  |  | Form of Warrant, dated March 5, 1999, entitling Credit Suisse First Boston Corporation to purchase up to 14,667.5 shares of Registrant's common stock.
|10.10(2) |  | Warrant, dated September 3, 1999, entitling America Online, Inc. to purchase 1,352,158 shares of Registrant's Class A common stock.                   
|10.11(2) |  | Performance Warrant, dated September 3, 1999, entitling America Online, Inc. to purchase 1,352,158 shares of Registrant's Class A common stock.       

82

---

|10.12(5)   |  | Form of Warrant, dated February 15, 2000, entitling Lazard Freres & Co. LLC to purchase 100,000 shares of Registrant's Common Stock.                                                                                
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13(8)   |  | Stock Purchase Agreement, dated April 17, 2000, between Medicalogic, Inc. and AnywhereMD.com, Bryan Hixson, and Harold Hartsell.                                                                                    
|10.14(8)   |  | Preferred Stock and Warrant Purchase Agreement, dated December 22, 2000, between Medicalogic/Medscape Inc., Quantum Industrial Partners LDC, SFM Domestic Investments LLC, and certain other Investors.             
|10.14.1(8) |  | Amendment to Preferred Stock and Warrant Purchase Agreement, dated December 22, 2000.                                                                                                                               
|10.15(8)   |  | Form of Warrants, dated January 4, 2001, issued to Quantum Industrial Partners LDC, SFM Domestic Investments LLC, and certain other Investors in connection with the Preferred Stock and Warrant Purchase
Agreement.
|10.16(8)   |  | Form of Warrant, dated January 24, 2001, entitling General Motors Corporation to purchase 5,000,000 shares of Company's common stock.                                                                               
|10.17(2)   |  | Common Stock Purchase Agreement between Medscape, Inc. and CBS Corporation, dated as of July 4, 1999.                                                                                                               
|10.18(2)   |  | Form of Stockholders Agreement between Medscape, Inc. and CBS Corporation, dated July of 1999.                                                                                                                      
|10.19(2)   |  | Form of Advertising and Promotion Agreement between Medscape, Inc. and CBS Corporation, dated July of 1999.                                                                                                         
|10.20(2)   |  | Form of Joinder Agreement among certain Medscape, Inc. shareholders, dated July of 1999, in connection with the Stockholders Agreement dated July of 1999.                                                          
|10.21(2)   |  | Form of Trademark and Content Agreement between Medscape, Inc. and CBS Corporation, dated July of 1999.                                                                                                             
|10.22(2)   |  | Form of Subscription Agreement with CBS Corporation.                                                                                                                                                                
|10.23(1)   |  | Agreement to Issue Shares of common stock between Medicalogic, Inc. and Baylor College of Medicine, dated as of February 16, 1999.                                                                                  
|10.23.1(8) |  | Amendment, dated December 27, 2000, to the Agreement to Issue Shares of common stock.                                                                                                                               
|10.24(1)   |  | Industrial Business Park Lease between Medicalogic, Inc. and Evergreen Corporate Center LLC dated January 15, 1997, as amended July 15, 1999.                                                                       
|10.24.1(8) |  | Amendment, dated November 24, 1999, to the Industrial Business Park Lease between Medicalogic, Inc. and Evergreen Corporate Center LLC.                                                                             
|10.25(8)   |  | Agreement of Lease between Total eMed, Inc. and Highwoods/Tennessee Holdings, LP, dated November 22, 1999.                                                                                                          
|10.26(2)   |  | Agreement of Lease between Medscape, Inc. and 224 W 30 LLC, dated May 26, 1999.                                                                                                                                     
|10.26.1(8) |  | Amendment, dated April 5, 2000 to the Agreement of Lease between Medscape, Inc. and 224 W 30 LLC.                                                                                                                   
|10.26.2(8) |  | Second Amendment, dated April 5, 2000 to the Agreement of Lease between Medscape, Inc. and 224 W 30 LLC.                                                                                                            
|10.27.1(8) |  | Amendment, dated January 1, 2000, to the Oracle Alliance Agreement between Medicalogic, Inc. and Oracle Corporation.                                                                                                
|10.28(2)*  |  | Employment Agreement between Medscape, Inc. and George D. Lundberg, M.D., dated February 15, 1999.                                                                                                                  
|10.29(2)*  |  | Employment Agreement between Medscape, Inc. and Mark Boulding, dated June 28, 1999.                                                                                                                                 
|10.30(2)   |  | Preferred Share Purchase Agreement among Softwatch Ltd., and Medscape, Inc.(as purchaser) and certain other purchasers, dated June 15, 1999.                                                                        

83

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|10.31(2)  |  | License and Web Site Development Agreement between Medscape, Inc. and Softwatch, Inc., dated June 15, 1999.                                
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|10.32(2)  |  | Stock Purchase Agreement between Medscape, Inc. and National Data Corporation, dated July 7, 1999.                                         
|10.33(2)+ |  | Form of License and Product Development Agreement between Medscape, Inc. and National Data Corporation, dated July of 1999.                
|10.34(2)+ |  | Interactive Services Agreement between America Online, Inc. and Medscape, Inc., dated September 3, 1999.                                   
|10.35(2)  |  | Side Letter between America Online, Inc. and Medscape, Inc. dated September 22, 1999 in connection with the Interactive Services Agreement.
|21.1(8)   |  | Subsidiaries of the Company.                                                                                                               
|23.1(9)   |  | Consent of Independent Auditors.                                                                                                           
|          |  |                                                                                                                                            

---

Index
to Footnotes:

The
Company filed a report on Form 8-K, dated December 22, 2000, announcing the execution of an agreement for the private placement of preferred stock and warrants.

84

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

MEDICALOGIC/MEDSCAPE, INC.Date: May 29, 2001

By:

/s/DAVID C. MOFFENBEIERDavid C. Moffenbeier President and Chief Executive Officer


85

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Exhibit Index

|2.1(4)     |  | Agreement of Reorganization and Merger dated as of February 21, 2000 among Medicalogic, Inc., Medscape, Inc., and Moneypenney Merger Corp.                                                                          
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.2(4)     |  | Agreement of Reorganization and Merger dated as of February 21, 2000 among Medicalogic, Inc., Total eMed Inc., and AQ Merger Corp.                                                                                  
|3.1(7)     |  | 1999 Restated Articles of Incorporation.                                                                                                                                                                            
|3.1.1(6)   |  | Articles of Amendment to the 1999 Restated Articles of Incorporation.                                                                                                                                               
|3.1.2(8)   |  | Articles of Amendment to the 1999 Restated Articles of Incorporation                                                                                                                                                
|3.2(6)     |  | Restated Bylaws.                                                                                                                                                                                                    
|10.1(8)    |  | 2001 Third Amended and Restated Investor Rights Agreement.                                                                                                                                                          
|10.2(1)*   |  | 1993 Stock Incentive Plan.                                                                                                                                                                                          
|10.3(1)*   |  | 1996 Stock Incentive Plan, as amended.                                                                                                                                                                              
|10.4(1)*   |  | 1999 Stock Incentive Plan.                                                                                                                                                                                          
|10.5(3)*   |  | Amendment to 1999 Stock Incentive Plan.                                                                                                                                                                             
|10.6(1)*   |  | Form of Incentive Stock Option Agreement.                                                                                                                                                                           
|10.7(1)    |  | Form of Restricted Stock Purchase Agreement (Performance).                                                                                                                                                          
|10.8(1)    |  | Form of Restricted Stock Purchase Agreement.                                                                                                                                                                        
|10.9(2)    |  | Form of Warrant, dated March 5, 1999, entitling Credit Suisse First Boston Corporation to purchase up to 14,667.5 shares of Registrant's common stock.                                                              
|10.10(2)   |  | Warrant, dated September 3, 1999, entitling America Online, Inc. to purchase 1,352,158 shares of Registrant's Class A common stock.                                                                                 
|10.11(2)   |  | Performance Warrant, dated September 3, 1999, entitling America Online, Inc. to purchase 1,352,158 shares of Registrant's Class A common stock.                                                                     
|10.12(5)   |  | Form of Warrant, dated February 15, 2000, entitling Lazard Freres & Co. LLC to purchase 100,000 shares of Registrant's Common Stock.                                                                                
|10.13(8)   |  | Stock Purchase Agreement, dated April 17, 2000, between Medicalogic, Inc. and AnywhereMD.com, Bryan Hixson, and Harold Hartsell.                                                                                    
|10.14(8)   |  | Preferred Stock and Warrant Purchase Agreement, dated December 22, 2000, between Medicalogic/Medscape Inc., Quantum Industrial Partners LDC, SFM Domestic Investments LLC, and certain other Investors.             
|10.14.1(8) |  | Amendment to Preferred Stock and Warrant Purchase Agreement, dated December 22, 2000.                                                                                                                               
|10.15(8)   |  | Form of Warrants, dated January 4, 2001, issued to Quantum Industrial Partners LDC, SFM Domestic Investments LLC, and certain other Investors in connection with the Preferred Stock and Warrant Purchase Agreement.
|10.16(8)   |  | Form of Warrant, dated January 24, 2001, entitling General Motors Corporation to purchase 5,000,000 shares of Company's common stock.                                                                               

86

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|10.17(2)   |  | Common Stock Purchase Agreement between Medscape, Inc. and CBS Corporation, dated as of July 4, 1999.                                                     
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|10.18(2)   |  | Form of Stockholders Agreement between Medscape, Inc. and CBS Corporation, dated July of 1999.                                                            
|10.19(2)   |  | Form of Advertising and Promotion Agreement between Medscape, Inc. and CBS Corporation, dated July of 1999.                                               
|10.20(2)   |  | Form of Joinder Agreement among certain Medscape, Inc. shareholders, dated July of 1999, in connection with the Stockholders Agreement dated July of 1999.
|10.21(2)   |  | Form of Trademark and Content Agreement between Medscape, Inc. and CBS Corporation, dated July of 1999.                                                   
|10.22(2)   |  | Form of Subscription Agreement with CBS Corporation.                                                                                                      
|10.23(1)   |  | Agreement to Issue Shares of common stock between Medicalogic, Inc. and Baylor College of Medicine, dated as of February 16, 1999.                        
|10.23.1(8) |  | Amendment, dated December 27, 2000, to the Agreement to Issue Shares of common stock.                                                                     
|10.24(1)   |  | Industrial Business Park Lease between Medicalogic, Inc. and Evergreen Corporate Center LLC dated January 15, 1997, as amended July 15, 1999.             
|10.24.1(8) |  | Amendment, dated November 24, 1999, to the Industrial Business Park Lease between Medicalogic, Inc. and Evergreen Corporate Center LLC.                   
|10.25(8)   |  | Agreement of Lease between Total eMed, Inc. and Highwoods/Tennessee Holdings, LP, dated November 22, 1999.                                                
|10.26(2)   |  | Agreement of Lease between Medscape, Inc. and 224 W 30 LLC, dated May 26, 1999.                                                                           
|10.26.1(8) |  | Amendment, dated April 5, 2000 to the Agreement of Lease between Medscape, Inc. and 224 W 30 LLC.                                                         
|10.26.2(8) |  | Second Amendment, dated April 5, 2000 to the Agreement of Lease between Medscape, Inc. and 224 W 30 LLC.                                                  
|10.27.1(8) |  | Amendment, dated January 1, 2000, to the Oracle Alliance Agreement between Medicalogic, Inc. and Oracle Corporation.                                      
|10.28(2)*  |  | Employment Agreement between Medscape, Inc. and George D. Lundberg, M.D., dated February 15, 1999.                                                        
|10.29(2)*  |  | Employment Agreement between Medscape, Inc. and Mark Boulding, dated June 28, 1999.                                                                       
|10.30(2)   |  | Preferred Share Purchase Agreement among Softwatch Ltd., and Medscape, Inc. (as purchaser) and certain other purchasers, dated June 15, 1999.             
|10.31(2)   |  | License and Web Site Development Agreement between Medscape, Inc. and Softwatch, Inc., dated June 15, 1999.                                               
|10.32(2)   |  | Stock Purchase Agreement between Medscape, Inc. and National Data Corporation, dated July 7, 1999.                                                        
|10.33(2)+  |  | Form of License and Product Development Agreement between Medscape, Inc. and National Data Corporation, dated July of 1999.                               

87

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|10.34(2)+ |  | Interactive Services Agreement between America Online, Inc. and Medscape, Inc., dated September 3, 1999.                                   
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|10.35(2)  |  | Side Letter between America Online, Inc. and Medscape, Inc. dated September 22, 1999 in connection with the Interactive Services Agreement.
|21.1(8)   |  | Subsidiaries of the Company.                                                                                                               
|23.1(9)   |  | Consent of Independent Auditors.                                                                                                           

---

Index
to Footnotes:

88

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