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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF  1934  FOR  THE FISCAL  YEAR ENDED DECEMBER 31, 1998

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934 FOR THE  TRANSITION  PERIOD FROM _________TO__________.

                         COMMISSION FILE NUMBER 0-22212

                            ONHEALTH NETWORK COMPANY
             (Exact name of registrant as specified in its charter)

               WASHINGTON                             41-1686038
      (State or other jurisdiction of               (I.R.S. Employer
       incorporation or organization)              Identification No.)

         808 HOWELL STREET, SUITE 400
               SEATTLE, WASHINGTON                      98101
  (Address of principal executive offices)            (Zip Code)

       Registrant's telephone number, including area code: (206) 583-0100

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


Securities registered pursuant to Section 12(b) of the Act:
                                      NONE
Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $0.01 par value

     Indicate by a 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 the
Form 10-K. [ ]

Aggregate market value of voting stock held by non-affiliates of the registrant
   as of March 9, 1999:  $178,383,285

Number of shares outstanding of the registrant's class of common stock as of 
   March 9, 1999:  15,856,292

                      DOCUMENTS INCORPORATED BY REFERENCE:
     Portions of  registrant's  definitive  Proxy  Statement for its 1999 Annual
Meeting of Shareholders are incorporated herein by reference into Part III.

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                                TABLE OF CONTENTS

                                                                           PAGE
                                                                           ----
                                     Part I
Item 1.  Business............................................................3
Item 2.  Properties.........................................................20
Item 3.  Legal Proceedings..................................................20
Item 4.  Submission of Matters to a Vote of Security Holders................21

                                     Part II
Item 5.  Market For Registrant's Common Equity and Related 
          Stockholder Matters...............................................22
Item 6.  Selected Financial Data............................................23
Item 7.  Managements's Discussion and Analysis of Financial Condition
          and Results of Operations.........................................24
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.........28
Item 8.  Financial Statements And Supplementary Data........................28
Item 9.  Changes in and Disagreements With Accountants on Accounting
          and Financial Disclosure..........................................28

                                    Part III
Item 10. Directors and Executive Officers of Registrant.....................29
Item 11. Executive Compensation.............................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management.....29
Item 13. Certain Relationships and Related Transactions.....................29

                                     PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....30
Signatures..................................................................33




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                                     PART I

ITEM 1.  BUSINESS

FORWARD-LOOKING STATEMENTS

This  Annual  Report  on Form  10-K and the  documents  incorporated  herein  by
reference  contain  forward-looking  statements  based on current  expectations,
estimates and projections about the Company's industry, management's beliefs and
certain  assumptions made by management.  All statements,  trends,  analyses and
other  information  contained  in this  report  relative to trends in net sales,
gross margin, anticipated expense levels and liquidity and capital resources, as
well  as  other  statements  including,  but  not  limited  to,  words  such  as
"anticipate,"  believe,"  "plan,"  "estimate,"  "expect,"  "seek," "intend," and
other  forward-looking  statements are not guarantees of future  performance and
are subject to certain  risks and  uncertainties  that are difficult to predict.
Accordingly,  actual  results may differ  materially  from those  anticipated or
expressed  in  such  statements.  Particular  attention  should  be  paid to the
cautionary  statements  involving the Company's limited operating  history,  the
unpredictability  of its future revenues,  the unpredictable and evolving nature
of  its  business  model,  the  intensely   competitive  nature  of  the  online
environment,  risks  associated with capacity  constraints and the management of
Company growth.  Except as required by law, the Company undertakes no obligation
to update any forward-looking statement, whether as a result of new information,
future events or otherwise.

GENERAL

OnHealth  Network  Company  ("OnHealth" or the "Company")  intends to become the
leading  Internet  resource  dedicated to the  management  of family  health and
well-being. The Company is an Internet-based provider of high quality health and
medical information and applications to a broad base of consumers. The Company's
Internet site, onhealth.com,  produces and distributes original, relevant health
content  including  in-depth  reports,   personalized   information   retrieval,
geographically  specific guides to health services and  information,  editorials
and interactive  community  environments.  By leveraging  management's  years of
experience  in  developing  businesses,  its skill in working  with  third-party
content providers,  and its unique knowledge of consumers of health information,
the Company  has created a broad site  appealing  to health  consumers.  The key
attributes for success in this venture  include  building  high-value  editorial
content,  maintaining  a friendly and easily  accessible  site on the  Internet,
building  trust and  credibility,  and  creating  a  conducive  environment  for
community  among site users.  The Company has entered into, and intends to enter
into  additional   distribution   relationships   with  businesses   which  have
significant  reach on the Internet,  such as search engines,  portals,  Internet
access  providers,  community,  news information and content and other specialty
sites,  media companies,  promotional  programs and other  traditional  media to
build the OnHealth  brand and drive  traffic to the site.  Capitalizing  on this
broad reach,  the Company plans to create multiple revenue streams by leveraging
the branding,  customer set, and market  awareness  created by the  onhealth.com
site.  OnHealth  intends  to  generate   advertising  revenue  by  appealing  to
advertisers   through   its   ability  to  reach   targeted   demographics   and
psychographics.  Additional  products and services,  such as transactional based
e-commerce,   subscription  and  syndication,   will  be  developed  to  exploit
opportunities as they present themselves in the marketplace.

The Company was  founded in August 1990 in the State of  Minnesota.  The Company
went public in 1993 as IVI Publishing,  Inc. Until January 1998, its traditional
line of business had been CD-ROM development,  production and distribution.  The
best known title, "Mayo Clinic Ultimate Medical Guide",  along with other CD-ROM
works,  has been  distributed  through  retail and  computer OEM  channels.  The
Company's predecessor was also a supplier of video, animation and graphic assets
to  America's  Health  Network,  a health  and  medical  cable TV  channel,  and
published  a book  version of its  CD-ROM,  "Taking  Control of Your  Health" in
conjunction with Time Life Medical.

The  Company's  first foray onto the  Internet was a Web site,  O@sis,  which it
developed on a joint venture basis with the Mayo Foundation in July 1996. Due to
philosophical  differences  regarding the strategic  direction of the site, full
ownership of O@sis was later transferred to the Mayo Foundation with the Company
receiving a $2.7 million termination settlement and the return of IVI Publishing
Inc. stock held by Mayo. The Company's  current  relationship with Mayo consists
of a content contract and certain agreements concerning CD-ROM properties.

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INDUSTRY OVERVIEW

THE INTERNET
The Internet is an increasingly  significant  global medium for  communications,
information  and commerce and continues to  experience  rapid growth in its user
base. International Data Corporation estimates that the number of Internet users
will grow to approximately 320 million by 2002 from  approximately 69 million at
the end of 1997. The Company  believes that the growth in Internet use is due to
a number of  factors  including  a large  and  growing  installed  based of PCs,
improvements in network infrastructure and easier and more cost effective access
to the Internet.  Current trends that specifically impact the Company's business
model include the following:

         INCREASING  ADOPTION  OF  INTERNET  USE BY WOMEN.  Women tend to be the
         healthcare  decision-makers within their households,  and therefore the
         seekers of health and  wellness  information.  Internet use among women
         has increased  rapidly in recent years, from 5% in early 1994 to 46% in
         1998  and  is  expected  to  increase  to  51% in  1999,  according  to
         International Data Corporation.

         INTERNET  USERS  VIEW THE WORLD  WIDE WEB AS AN  IMPORTANT  INFORMATION
         RESOURCE. Approximately 90% of Internet users use the Internet at least
         once  a  month  and  more  than  70%  visit  at  least  one  "News  and
         Information"  site. In addition,  17 million U.S.  adults  searched for
         health information in the 12 months ended July 1998 and is estimated to
         increase to over 30 million in 2000, according to Cyber Dialogue.  This
         number of U.S.  adults  searching  for  health  information  equals the
         number of searchers of financial information and is just slightly below
         the number of news seekers.

         ONLINE  ADVERTISING  HAS  EMERGED AS A MORE  SIGNIFICANT  COMPONENT  TO
         MARKETERS'  MEDIA  MIX.  Online  advertising  in the  United  States is
         projected to grow from $1.9 billion in 1998 to $4.4 billion in the year
         2000 and $7.7 billion in 2002, according to Jupiter Communications.

         E-COMMERCE  HAS  BECOME  A  SIGNIFICANT  CHANNEL  OF  DISTRIBUTION  FOR
         MERCHANDISERS.  According to International Data Corporation,  worldwide
         e-commerce is projected to increase from $12.4  billion,  at the end of
         1997, to approximately $425 billion in 2002. Average annual spending by
         individuals  is expected to rise over the same period from  $375/person
         to $672/person.

HEALTHCARE
According to the Congressional Budget Office, annual healthcare  expenditures in
the U.S.  have grown  from  approximately  $470  billion in 1982 to more than $1
trillion  in 1998,  representing  more than 14% of the gross  national  product.
Stimulating  this growth is an aging U.S.  population which is starting to enter
its prime  years for drug and  healthcare  expenditures.  According  to the U.S.
Bureau of the Census,  the number of individuals over the age of 65 is projected
to increase from approximately 26 million in 1981 to 35 million by 2000, or from
11.5% to 13.0% of the total U.S. population.

Dramatic  changes  in the U.S.  healthcare  delivery  system  are  causing  more
patients to bear more healthcare costs on an out-of-pocket basis.  Concurrently,
more people are attempting to manage their own health rather than relying solely
on medical  practitioners.  As consumers demand more information,  wider choices
and greater involvement in healthcare  decision-making,  they are seeking health
information  in greater  numbers and from a wider variety of sources.  Moreover,
the  "baby-boomer"  consumer is  characterized as highly educated and technology
literate,  increasingly  leveraging  technology  in general and the  Internet in
particular to gain greater access to information.  The fragmented nature of this
information,   whether  it  be  from  sources  such  as  written   publications,
television,  radio or the Internet,  as well as the failure of available sources
to properly  address the wide variety of  information  needs and  activities  of
consumers, provides a large business opportunity for OnHealth.


ONHEALTH'S STRATEGY

The  Company  believes  it is  well  positioned  to  capitalize  on  the  market
opportunities  created  by the rising  consumer  demand  for  relevant,  timely,
high-quality health and wellness information and the emergence of the World Wide
Web as a medium for both communications and commerce. The Company's strategy for
achieving its goal of becoming the premier network of health-related channels on
the Internet consists of the following:

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         CREATE THE LEADING  INTERNET  RESOURCE  DEDICATED TO THE  MANAGEMENT
         OF FAMILY HEALTH AND WELL-BEING.
                -Differentiate  the  onhealth.com  site from  other  sources  of
                 health and Wellness  information by continuing to offer content
                 that  occupies  the  targeted  and  practical   ground  between
                 "lifestyle"  Editorial content and undifferentiated  "clinical"
                 reference material.
                -Develop high quality, unique and independent editorial content.
                -Provide  personalization  to enable users to obtain information
                 on specific  diseases or  conditions  that are of importance to
                 them,  retrieve  e-mail,  track  personal  health  records  for
                 themselves and their families,  obtain local weather and pollen
                 information  and  participate  in relevant  discussion  groups,
                 among other things.
                -Provide  "intelligent" links to other reliable, relevant online
                 content.
                -Provide  regularly  updated  content to encourage  user return
                 visits.
                -Produce a  user-friendly,  easily  accessible  and  editorially
                 attractive format.  Provide interactive,  community and "smart"
                 search capabilities.
                -Offer   consumers   the  ability  to  purchase   health-related
                 products.
                -Provide interactive tools and programs such as risk assessments
                 and behavior programs to help consumers actively  manage  their
                 health and well being.
                -The above will  drive  frequent  usage and long user  sessions,
                 thereby  establishing an effective  platform for advertisers to
                 reach their targeted demographics.

         DRIVE TRAFFIC AND MAXIMIZE THE ONHEALTH.COM BRAND.
                -Enter into distribution agreements with Internet search engines
                 and portals and strategic alliances with other specialty sites.
                -Facilitate   increased  user  traffic   through  an  integrated
                 advertising campaign utilizing multiple channels.
                -Utilize  "best-of-breed"  partners such as  TBWA/Chiat  Day and
                 Fleishman-Hillard to facilitate OnHealth's marketing and public
                 relations efforts.
                -Establish pre-eminent market share and build barriers to entry.

         FUEL REVENUE GROWTH.
                -Develop      multiple      revenue      streams       including
                 advertising/sponsorship,  e-commerce/transactions, subscription
                 and syndication.
                -Create a differentiated and productive advertising  environment
                 to include a wide variety and depth of sponsorship  areas and a
                 targeted, creative beyond-banner program.
                -Market  acceptance  of the  onhealth.com  site  will  allow the
                 Company to produce  additional  content,  products and services
                 for its end-user base.


ONHEALTH.COM

INTRODUCTION

Onhealth.com  provides  timely and relevant  coverage of health news and issues,
substantive resources and references,  community  discussions,  direct access to
experts, interactive tools and exclusive "smart" search capabilities directly to
health  consumers.  Onhealth.com  enables consumers to actively and successfully
manage the health and well-being of themselves and their  families.  On July 20,
1998, the Company launched its redesigned flagship site,  signaling a commitment
to  provide  the  healthcare  consumer's  best  interactive  source  for  health
information  and services.  By logging onto  onhealth.com,  consumers  will find
aggressive  coverage of  important  health  issues and deep  database  reference
materials in an interactive and personalized format. The site consists of unique
services and features.

ONHEALTH.COM CURRENT SERVICES AND FEATURES

             -DAILY  BRIEFINGS:  Each day,  onhealth.com  publishes  health  and
              medical news  filtered  and  tailored to what is most  practically
              relevant  to the key  demographic.  Daily  Briefings  include:  1)
              ORIGINAL  SUMMARIES  of the  most  important  health-related  news
              stories,  including  links to deeper  material and 2) DAILY HEALTH
              TIPS  covering  everything  from  diet  and  nutrition  to  stress
              reduction and relaxation techniques.

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             -IN-DEPTH REPORTS:  Each week,  onhealth.com  publishes new reports
              that cover a broad range of health  topics  in-depth.  Examples of
              topics include nutrition, stress management, emotional well-being,
              managed care and breast cancer.  Onhealth.com's  In-Depth  Reports
              provide  information  beyond the superficial  coverage  offered by
              "lifestyle"  health  sites but in an  insightful  and  informative
              manner which removes the medical jargon found in "clinical" health
              sites to  provide  meaningful  coverage  of a full range of health
              issues.  Content for  OnHealth's  In-Depth  Reports is produced by
              carefully  selected and respected  journalists who are assigned by
              OnHealth's staff of editors.

             -THE ONHEALTH PERSONAL HEALTH TRACKER: Personal Health Tracker is a
              free,  personal,  private  service  to  track,  retrieve  and save
              important health information for onhealth.com users. The exclusive
              Personal Health Tracker  searches a hand-selected  universe of the
              Internet's best health and medical resources and sends the user an
              e-mail,  on  either  a daily or  weekly  basis  according  to user
              specifications, when new information is found. The Personal Health
              Tracker  searches  against a user's selection of topics on a daily
              basis  and  can  be   customized  to  provide  the  most  relevant
              information for a user's specific healthcare needs.

             -CITY HEALTH  GUIDES:  Onhealth.com  currently  provides  localized
              information guides for 14 U.S. cities, providing timely, practical
              information  and  resource  listings  for  onhealth.com's   users.
              Services include local health news, community resources, calendars
              of  health-related  events,  classes and support  groups and local
              pollen, UV and pollution counts.

             -ASK OUR EXPERTS:  Onhealth.com's  exclusive  columnists cover core
              beats that the site's  users have said are most  important to them
              by  answering  questions  in an in-depth  format.  Columns like "A
              Woman's  Body,"  "Active  Aging,"  "Sex  Matters,"  "Power  to the
              Patient," "The Holistic Pediatrician" and "Alternative Health" are
              written by expert medical and science writers to whom users always
              have direct access for comments, questions and suggestions.

             -CONDITION CENTERS: Partnering with some of medicine's top research
              and  clinical  institutions,   onhealth.com's   condition-specific
              Condition Centers give consumers  hands-on patient guides,  expert
              answers,  community support and the latest medical updates to help
              them most  successfully  manage chronic  conditions.  For example,
              institutions such as the Beth Israel Deaconess Cancer Center,  the
              International Diabetes Center and the Mount  Sinai  Cardiovascular
              Institute  will  support  those who are  managing  such  difficult
              conditions as breast cancer,  diabetes and  cardiovascular  health
              problems.  Additional  Condition Centers for asthma,  allergy, and
              gastrointestinal disorders will be launched in 1999.

             -ONHEALTH  LIVE  HOSTED  BY  BROOKE  GLADSTONE:  Journalist  Brooke
              Gladstone  of National  Public Radio hosts  onhealth.com's  weekly
              live  Internet-audio  interview show featuring  leading health and
              wellness  experts.  Users can ask  questions  during  the show and
              listen to  previous  shows  through  the  extensive  archive.  The
              program airs every Tuesday night.

             -NEWSLETTER:  Onhealth.com  users can  receive a free  e-mail  with
              alerts to the latest in-depth reports,  columns,  events and more.
              The newsletter is delivered free every Tuesday.

             -ILLNESS AND DISEASE DATABASE:  Onhealth.com offers a comprehensive
              reference  tool which  enables the site's users access to the most
              comprehensive   medical   conditions   database  online.   Through
              Conditions  A-Z,  users can access  information on a full range of
              medical conditions.

             -USP DRUG  DATABASE:  Onhealth.com  users  have  access to the most
              comprehensive  pharmacy  database online.  Through  onhealth.com's
              deep pharmacy reference, users can find information on the effects
              of a  specific  drug,  its  appropriate  use  and  potential  side
              effects.

             -ALTERNATIVE  PRACTICES:  Onhealth.com provides coverage of several
              of  the  most  widely  recognized  alternative  medical  therapies
              including  Acupressure,  Hydrotherapy,  Naturopathy  and Ayurvedic
              medicine.

             -HERBAL INDEX:  Onhealth.com  offers the most comprehensive  herbal
              database  on-line.  Users  have  access to  general  descriptions,
              target ailments,  preparations  and special  information on a wide
              variety of herbs including Echinacea,  Gingko, St. John's Wort and
              many others.


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             -RECOMMEND  A  DOCTOR:  Onhealth.com  has  assembled  a  nationwide
              database  of  good  doctors  that  have  been  recommended  by its
              community  of users.  Over two  thousand  exceptional  doctors are
              currently listed, and the database continues to grow.

             -DISCUSSION GROUPS: Onhealth.com provides a forum to discuss health
              issues and conditions with other  consumers.  In-depth reports and
              Ask  Our  Experts  provide  the  catalyst  for  discussion   among
              consumers  within these groups,  and information can be integrated
              within discussions to provide a meaningful environment.

             -MEDICAL  ADVISORY  BOARD:  Onhealth.com  has  assembled  an active
              Medical  Advisory Board made up of specialists  from the Condition
              Center partner institutions. The board also includes a large panel
              of doctors who review and update the Company's condition reference
              material.

             -INTERCONNECTED DATABASES AND SITE SEARCH: Since the entire site is
              databased,  onhealth.com  is  the  most  dynamically  interrelated
              health site on the web. Each page is categorized and cross-indexed
              so the most relevant  information  from across the site is readily
              available to the user on any given subject.
 
CONTENT DEVELOPMENT

The  Company's  goal  for  its  editorial  content  is  to  continue  to  create
high-value,  useful,  accessible,  and  trustworthy  editorial  elements for its
users.  By  developing  such  content,  the Company  differentiates  itself from
"lifestyle"  health sites and the medical and  scientific  jargon of  "clinical"
health sites. The editorial staff,  working with the health and medical editors,
controls  all  content on a daily  basis.  In general,  the Company  obtains and
produces  content  for  the  onhealth.com   site  in  one  of  three  ways:  (1)
PROPRIETARY:  Created  exclusively  for  OnHealth by Company  employees  or high
quality  contractors  who are  experienced  medical or scientific  writers;  (2)
SYNDICATED:   Licensed  for  distribution  via  OnHealth,  on  an  exclusive  or
non-exclusive  basis following  review by the Company's  staff editors;  and (3)
LINKED:  OnHealth may "point" to other content  elsewhere on the World Wide Web.
Although linked content is not exclusive to OnHealth,  the Company adds value by
finding and pre-qualifying the best health-related content on the Internet.

OnHealth currently has content relationships with the following organizations:

        Reuters
        AccuWeather
        New England Journal of Medicine/Massachusetts Medical Society
        International Diabetes Center
        Mount Sinai Cardiovascular Institute 
        Beth Israel Deaconess Cancer Center
        Time Life Medical

Additional  content  to be  added  to the  network  in the  future  may  include
high-value content,  which may be licensed in the context of user models that go
beyond advertising  support.  Management  believes that through a combination of
these content  strategies,  the OnHealth  brand can create a unique product that
will have more user value and therefore a potential for greater  levels of usage
than any health related content now on the World Wide Web.


TARGETED DEMOGRAPHIC

Onhealth.com is targeted to well-educated,  technology adopting women aged 25-54
who are proactive in seeking  information to actively  maintain their health and
well-being  and reactive in  addressing  health and medical  issues.  OnHealth's
audience  is  skewed  predominantly  female,  as they  are  the  key  healthcare
decision-makers   within  the  household.   According  to   International   Data
Corporation,  women are expected to represent approximately 51% of on-line users
in  1999,  up from  46% in 1998.  OnHealth  believes  that  women  represent  an
attractive  demographic  for  advertisers  since  women have a  disproportionate
control over consumer  spending in the United States.  Industry experts estimate
that women make 75% of the household's healthcare decisions,  control 66% of the
health dollars and spend 80% of a household's discretionary income.


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UNIQUE USERS

According  to an article in the October 19, 1998 issue of Business  Week,  there
are an estimated  15,000  health and  wellness web sites today.  Even though the
re-launch  of  onhealth.com  was on July 20,  1998,  Media  Metrix,  the leading
provider of measurement services for the Internet and digital  technologies,  in
their  December  1998 US  Report,  stated  that  458,000  unique  users  visited
onhealth.com,  ranking the site third among health sites.  This number of unique
visitors  represents more than a 60% increase from the October  report,  ranking
onhealth.com  the third most  trafficked  consumer health and wellness site. The
Company  plans  to  aggressively  grow  its  unique  user  base.  Onhealth.com's
independent  and  unique  content,  ownership  rights  of the  content  and wide
audience  appeal  allows  the  Company  to enter  into  flexible  and  versatile
strategic  relationships to drive traffic. The Company believes that its primary
source  for  driving  traffic  will  result  from   distribution  and  marketing
agreements.


DISTRIBUTION

OnHealth intends to leverage existing and planned distribution agreements in its
execution of a business  model that will generate rapid growth in reach and page
views, thereby creating  opportunities to generate multiple revenue streams. The
Company has and will continue to enter into distribution agreements with leading
search engine and portal companies, major Internet access providers,  community,
news,  information  and  content and other  specialty  sites,  media  companies,
promotional programs,  other traditional media and corporate/HMOs.  Distribution
agreements  serve to build  the brand and to drive  significant  traffic  to the
onhealth.com  Web site. By  increasing  its brand  exposure and traffic  through
significant  distribution  agreements,  onhealth.com  will  seek to be the  most
effective means of advertising  health-related products on the Internet. Current
distribution relationships include:

         SEARCH ENGINES AND PORTALS:

              THE GO NETWORK.  With over 19.8 million unique visitors per month,
              as of January  1999, Go Network is one of the largest sites on the
              web.  As one of only  three  Go  Network  Health  Channel  Premier
              Partners, onhealth.com has a major branded presence - an above the
              fold four-color logo button - and Daily Briefing  headlines on the
              Go.com Health Channel Home page. In addition,  OnHealth's  content
              is  featured   prominently  on  the  health  related  sub-channels
              throughout the site: "Health News & Information,"  "Eating Right &
              Looking Good," "Fitness" and "Wellness."

              PLANET  DIRECT.  As a featured Health  Content  Partner for Planet
              Direct  -  a  comprehensive,   personalized  directory  of  online
              services  - Planet  Direct  features  access to  OnHealth's  Daily
              Briefing,  Daily Health Tips,  Conditions  A-Z database,  pharmacy
              resources,  In-Depth Reports,  Condition Centers, Herbal Index and
              links to OnHealth  Resource  areas.  Planet Direct carries many of
              OnHealth's Ask our Experts,  such as "Sex Matters",  "Power to the
              Patient",  "Alternative Health" and "A Woman's Body". In addition,
              OnHealth's logo appears on Planet Direct's  homepage with a direct
              link to the  Company's  web site.  Planet  Direct is co-branded by
              more than 450 Internet Service  Providers  nationwide and affinity
              groups like RE/MAX, the U.S. Chess Federation,  and Discover Card.
              Planet  Direct,  a wholly owned  subsidiary of CMGI, is a personal
              Web service  that  tailors  members'  online  experience  to their
              interests and local community. By integrating brand name editorial
              content with enhanced links to popular sites and services,  Planet
              Direct  provides  mainstream  consumers with  essential,  everyday
              information such as news, weather, and financial data in a logical
              and intuitive manner,  ensuring easy access to personal  interests
              in a community atmosphere.

              NBC'S SNAP!  As a featured content  provider for the Snap!  Health
              channel,  OnHealth  provides  access to Daily  Briefing,  In-Depth
              Reports and partner content pages for over 180 conditions that are
              prominently  promoted  throughout the health  channel.  Snap! is a
              free Internet directory, search and navigation service that offers
              the  most  powerful  way to  organize  and  find  anything  on the
              Internet.  The  service is  logically  arranged  to give users the
              quickest  route to the best of what  they are  looking  for on the
              Web,  providing   efficient,   high-quality   search  results  and
              directory listings and the most often-used  content.  At the heart
              of the Snap! portal service is a directory of Web sites,  built by
              a team of editors and  reviewers to ensure its quality,  freshness
              and usefulness. Users may either search the directory by using key
              words, or browse through the directory's topics, including: Arts &
              Humanities, Business & Money, Computing & Internet, Entertainment,
              Education,  Health,  Kids & Family,  Living,  Local, News & Media,
              Oddities, People & Society, Science & Technology, Shopping, Sports
              and Travel.

                                       8
<PAGE>

              MICROSOFT'S  WEBTV:  Under the terms of an  agreement  with WebTV,
              Inc., a subsidiary of Microsoft  Corporation,  onhealth.com is the
              primary  supplier the health and wellness  content for the Explore
              Reference and Health category  receiving  prominent  placement and
              promotion  on the  WebTV  homepage.  Onhealth.com  provides  WebTV
              Network service  subscribers with many unique features,  including
              access  to  Daily  Briefing, In-Depth Reports,  Ask  Our  Experts,
              Condition Centers and Resource areas.

              YAHOO!  CHAT:  OnHealth  works with Yahoo!  Chat to produce weekly
              audience driven,  interactive  discussions with the country's most
              prominent  health  and  wellness  experts.  Focusing  on the  most
              probing and crucial health issues of the day, the chats take place
              Wednesdays  at  6  p.m.  Eastern  (3  p.m.   Pacific).   The  chat
              programming is being promoted on both  onhealth.com  and the front
              page of Yahoo! Chat and run of site on Yahoo.

         INTERNET SERVICE PROVIDERS AND OTHER:

              MINDSPRING. As a Health Content Partner for MindSpring, Onhealth's
              four-color  logo is  prominently  featured  with  direct  links to
              onhealth.com.  Onhealth supplies health and wellness  information,
              including In-Depth Reports and Ask Our Experts,  within the Health
              area. MindSpring is a leading Internet service provider focused on
              delivering  outstanding  service  and  support  to its  customers.
              MindSpring's  dial-up  subscribers  can browse the World Wide Web,
              send electronic mail,  participate in informative online chats and
              access over 20,000  newsgroups.  MindSpring  offers local Internet
              service in more than 360 locations  throughout  the United States.
              MindSpring is also a leading  provider of Web Hosting services and
              domain registrations.

              iSYNDICATE:  iSyndicate,  the Web's  leading  content  syndication
              service, will feature access to OnHealth's Daily Briefing, Ask Our
              Experts, and In-Depth Reports as part of its free Express Service,
              now serving over 18,432  sites.  As of the end of February,  there
              were 121  sites  carrying  OnHealth's  headlines.  With a few easy
              steps,  iSyndicate  Express  allows  affiliate  sites to integrate
              selected  headlines  on their  pages,  which  link to the  content
              provider's  site for the  full-text  article.  Headline  links are
              dynamically served and automatically  updated,  allowing affiliate
              sites to feature fresh, professional content, and allowing content
              providers to reach desirable new audiences, build their brand, and
              drive traffic to their site.  Onhealth.com joins some of the Web's
              leading content providers as part of iSyndicate's Express service,
              such as CNET, ZDNet, Reuters and TheStreet.com.

              MOTOROLA:  Motorola's i Kno!  network  features  OnHealth's  Daily
              Briefing.  Pager  customers  can also  choose  to have  the  Daily
              Briefing  sent  directly to their  pagers.  Motorola's  technology
              offers paging companies a broad range of information  preformatted
              and ready for  inclusion in service  bundles that the carrier then
              offers to its  customers.  In addition too  onhealth.com's  health
              news, i Kno!  offers  standard news features such as local weather
              and traffic,  sports,  movie reviews,  national and  international
              news, and financial information.

         COMMUNITY:

              GEOCITIES.  OnHealth is the exclusive  content  provider of health
              information  on  GeoCities.  OnHealth  provides  health  news  and
              information  to  GeoCities,  which  is  featured  in the  "Health"
              Avenue.  Onhealth.com's headlines are also featured throughout the
              Health  sub-avenue  and  subsequent  topic pages,  where users can
              seamlessly link to onhealth.com to access the complete stories.

         NEWS, INFORMATION AND CONTENT SITES:

              AOL'S  DIGITAL  CITY NEW YORK:  OnHealth  provides the first local
              health-related  content area on AOL's  Digital City New York.  The
              "Health Guide" provides  consumers with OnHealth's branded network
              of  interactive  health and wellness  information as well as local
              news,  community resources and listings of health events,  classes
              and  support groups.  OnHealth  offers  to Digital City New York's
              users reliable  health  information and tools that empower them to
              make better decisions about themselves their family's  healthcare.
              OnHealth's  Recommend a Doctor Database  provides a listing of New
              York  doctors  ranked  "good",   "great"  or  "amazing"  by  their
              patients;  the  Conditions  A-Z  database  and  Ask  Our  Experts,
              including  "A  Woman's   Body,"  "Sex   Matters,"   and  "Holistic

                                       9
<PAGE>


              Pediatrician."  Digital City, Inc. is the nation's largest and the
              Internet  Online's  most popular local city resource and community
              guide.  Digital  City  reaches  more than 3 million  people  every
              month,  provides an array of interactive products in 50 cities, an
              delivers locally relevant news, community resources, entertainment
              and  commerce in a dynamic and  easy-to-use  format.  Available on
              America  Online at Keyword:  Digital City, on  CompuServe's  Local
              Channel,   on   Netscape's   NetCenter   and   on   the   Web   at
              www.digitalcity.com,    Digital   City   combines   useful   local
              information, expert reviews, and the personal contributions of the
              people  who use the  service to help  residents  get the most from
              their  communities.  Based in Vienna,  VA,  Digital  City,  an AOL
              Studios business, is owned primarily by America Online and Tribune
              Company.

              THIRDAGE: As a primary health content provider,  ThirdAge features
              OnHealth's Daily Health Tip, In-Depth Reports, Conditions A-Z, and
              Personal Health Tracker within the Health Channel.  ThirdAge Media
              is the leading  media  company for aging  boomers--ThirdAgers--the
              fastest growing segment of the population in the United States and
              worldwide. Third Age Media embraces a fully integrated approach to
              communication  through a  branded  Web  site,  ThirdAge.com;  news
              syndicate and electronic distribution channel, Third Age News; and
              a market research arm, Third Age Research.

              ADVANCE  INTERNET:   Onhealth.com  provides  health  and  wellness
              content for Advance Internet's network of sites (www.advance.net),
              including New Jersey Online,  Alabama Live, Oregon Live,  Michigan
              Live and more. Advance Internet's users can access onhealth.com's,
              Daily  Health  Tips,  OnHealth  Live,  In-Depth  Reports,  Ask Our
              Experts,  and  Daily Briefing, from  their  local  sites.  Advance
              Internet is a subsidiary of Advance  Publications  Inc.,  owner of
              newspapers in 22 cities as well as Conde Nast magazines; CondeNet;
              Parade; and React. Advance Internet Inc. is currently  responsible
              for the development and management of non local Web sites that are
              created in alliance with newspapers  owned and operated by Advance
              Publications Inc.

              COMCAST ONLINE  COMMUNICATIONS.  As a Content Provider for Comcast
              Online  Communications,  OnHealth's four-color logo is prominently
              featured  with direct links to the OnHealth  site.  Onhealth.com's
              content,  including Daily Briefing,  Daily Health Tips,  In-Depth
              Reports,  Ask Our Experts,  and  OnHealth  Live,  are  prominently
              featured  in the  Health  Channel  that  serves 22  markets of the
              InYourTown.com sites and for the Comcast@Home  service.  Comcast's
              popular InYourTown.com sites can take users directly to OnHealth's
              localized  City  Health  Guides.  Comcast  Online  Communications,
              through its  partnership  with @Home Network,  offers  residential
              customers  the  fastest,  easiest,  and most  entertaining  way to
              access the Internet from home in six markets.  InYourTown provides
              unique and local Internet content for Comcast@Home subscribers, as
              well as all Internet users in 23 Comcast Cable markets.

              SAN FRANCISCO CHRONICLE AND NBC AFFILIATE KRON

              THE TAMPA TRIBUNE AND NBC AFFILIATE WFLA

These strategic  relationships  will enable  OnHealth to build brand  awareness,
drive  end-user  traffic to the Web site,  generate  interest with potential and
prospective  distribution  partners,  and  create  visibility  for its  content.
OnHealth's  strategy is to continue to enter into distribution  relationships to
build the OnHealth brand and drive traffic to onhealth.com.

MARKETING & PROMOTION

The Company's  media plan is designed to build brand awareness and drive traffic
to the Company's  onhealth.com web site. The Company has hired TBWA/Chiat/Day as
its  advertising  agency of record,  Fleishman-Hillard  as its public  relations
agency and Thinking Media as its interactive  agency.  The Company's  integrated
marketing  campaign is expected to begin in the second  quarter of 1999 and will
extend over several quarters. The campaign will consist of advertising online as
well as advertising via television,  radio,  magazines,  newspapers and tactical
outdoor ad placements. The Company's strategy includes effectively communicating
that  onhealth.com is an  indispensable  resource for helping  consumers  manage
their family's health.
                                       10
<PAGE>

ADVERTISING REVENUE

OnHealth  believes its  demographic  audience and its ability to target specific
users of its site will be attractive to  pharmaceutical  and other  advertisers.
OnHealth  believes  it  is  able  to  create  a  differentiated  and  productive
advertising environment by providing the following:

       -Targeted programs to reach the most desirable consumers
       -A wide variety and depth of sponsorship areas
       -Long-term exclusive relationships for highly prized condition-specific
        content
       -Creative,  beyond-banner programs that appeal to more aggressive 
        advertisers
       -Personalization and key word targets that provide flexible cross-site
        delivery

Initially, The Company intends to continue to target pharmaceutical advertisers,
and as the Company  achieves  critical mass, the demographics of the target user
should appeal to a broader range of advertisers such as consumer goods companies
and others.  OnHealth utilizes an internal advertising sales department.

Since launching the site, onhealth.com has developed  advertising  relationships
with the following companies:

        Johnson & Johnson
        Astra Pharmaceuticals
        Merck & Co.
        Schering-Plough
        Proctor & Gamble
        Roche Laboratories
        Enzymatic Therapy
        Glaxo Wellcome
        SmithKline Beecham
        Eli Lilly
        Citibank
        Kellogg's
        American Lung Association
        Ortho Biotech
        Behealthynow.com
        Pfizer
        Biogen
        Women.com
        Talkway.com
        Greentree Nutrition
        Cancer Treatment Centers of America
        General Motors
        Jamieson Vitamins
        1-800 Doctors
        Lifewise Insurance
        Hoescht
        Selfcare


                                       11
<PAGE>

E-COMMERCE

The Company believes that for OnHealth to be the single best on-line destination
for consumers to manage their health and  well-being  that it must offer product
purchasing  to its  consumers.  Of the 17 million  adults in the U.S.  searching
on-line for health and medical  information,  approximately  50% of these adults
made off-line purchases after seeking information on the Internet,  according to
Cyber Dialogue. OnHealth plans to launch a shopping page in the first quarter of
1999.  OnHealth plans to partner with various  e-commerce  sites to offer a wide
variety of prescription and over-the-counter  ("OTC") drugs,  vitamins/minerals,
herbs,  supplements,   medical/health-related   supplies,  everyday  health  and
wellness essentials,  beauty products, books, insurance,  financial services and
other appropriate products and services. OnHealth's model is to generate revenue
by focusing on any or all of three areas: 1) fees for guaranteed impressions, 2)
slotting fees and 3) revenue sharing.

OnHealth has recently  partnered  with  drugstore.com  as its exclusive  on-line
drugstore.  The agreement  consists of several major components to be rolled out
in  a  multi-phased   approach.   The  first  phase  consists  of  drugstore.com
advertisements  placed  throughout  the  onhealth.com  site.  The  second  phase
consists of establishing  links from  onhealth.com to drugstore.com  through the
network allowing  OnHealth's users to purchase  products sold by  drugstore.com.
For example,  a user searching for  information on arthritis will be offered the
latest  news,  in-depth  reports,  discussion  groups,  and links to related OTC
products.  The links connecting  consumers to drugstore.com's  inventory will be
clearly identified as advertisements,  giving users immediate access to products
related to their area of interest. To ensure a smooth transition for users going
from onhealth.com to drugstore.com,  the OnHealth logo and return button will be
prominently  featured  on the entry  and exit  pages on  drugstore.com  that are
accessed by OnHealth users.

TECHNOLOGY AND SYSTEMS

The Company's Web site is made available with the latest  Internet  hardware and
software technologies.

Exodus IT-class  co-location  facilities provide the Company with a secure, high
availability and high bandwidth space for its servers.  This includes  redundant
OC-3 and OC-12  backbone  connections  to the  Internet,  uninterruptible  power
supplies  with  diesel   generator   backup,   all  housed  in  a  copper-lined,
earthquake-proof  building. Direct connections via "T-1" and DSL lines allow the
main office to connect seamlessly and reliably to the servers and the Internet.

A farm of Intergraph IS-8000 and IS80 mission-critical servers are housed behind
a  redundant  F5 Big/IP  switcher  for  complete  software  and  hardware  fault
tolerance and load leveling.  These servers run Microsoft  Windows NT Enterprise
Server  with  Internet  Information  Server  4.0,  Active  Server  Pages  with a
proprietary  page caching system and  publishing  tools for Web page hosting and
production  management.  The resulting  performance in  preliminary  tests shows
dominance over other competitive sites. All advertisement  hosting and reporting
is  handled  through   NetGravity  Ad  Server,  a  powerful  ad  management  and
forecasting toolset.

The Web site's  Personal Health Tracker and Search  features  utilize  Microsoft
SiteServer  tools and  technologies.  This provides the customized Web crawling,
user  profile  management,  nightly  process  runs and e-mail  support  that the
Personal Health Tracker requires.

Microsoft  SQL  Server  databases  are  heavily  used for all  content,  process
management and tracking needs.  Offsite  backups occur regularly  throughout the
day to protect against a total system failure.

The Company  believes the site has been built from the ground up as an extremely
stable,  scaleable,  and high  performance  solution for OnHealth's  current and
future  needs.  See "FACTORS  THAT MAY AFFECT  FUTURE  RESULT--Risks  Related To
System Operation."


COMPETITION

The editorial  environment in interactive  media is new, highly  competitive and
rapidly evolving. Since the Internet's  commercialization in the mid-1990's, the
number of Web sites on the  Internet  competing  for  consumers'  attention  and
spending has proliferated with no substantial barriers to entry, and the Company
expects that  competition  will  continue to  intensify.  The Company  competes,
directly  and  indirectly,  for users,  distributors,  advertisers  and  content


                                       12
<PAGE>

providers.  The  Company  believes  that the  principal  competitive  factors in
attracting and retaining users is the depth,  breadth and timeliness of content,
the ability to offer  compelling  and  relevant  content and brand  recognition.
Other  important  factors in attracting and retaining users include ease of use,
service quality and cost.

ONLINE COMPETITORS

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

         DIVISIONS OR AFFILIATES OF PRINT  PUBLISHERS;  including  Healthy Ideas
         (Rodale  Press),  PHYS (Conde Nast),  Thrive  (owned by Oxygen  Media),
         MediConsult,  Dr. Koop and HealthScout (a service of RX Remedy, Inc., a
         market research firm.)

         VENTURES OF ONLINE  SERVICE  FIRMS;  including Better Health (iVillage)
         and Thrive (owned by Oxygen Media), Medscape and WebMD.

         PUBLIC SECTOR AND INSTITUTIONAL SITES; including the National Institute
         of Health, Mayo Clinic,  InteliHealth and university sites. While these
         sites  compete for viewer  time and  attention,  they do not  typically
         compete for advertising or transactional revenues.

         PORTALS/SEARCH  ENGINES;  principally  the  proprietary  health-related
         content  presented to subscribers to America Online,  MSN.com,  Yahoo!,
         Excite, etc.

         INTERNET  SITES  OTHER THAN  HEALTH-RELATED  SITES;  including  general
         interest sites, such as news sites and search engines, which often host
         some   health-related   content  in  the  context  of  other  editorial
         materials.

OTHERS

In addition, the online sites compete to some extent with other media, including
print and television.

The Company  believes the  principal  competitive  factors  which  differentiate
OnHealth from competing  brands and sites include the  onhealth.com  brand name,
the  independence  and uniqueness of content,  the users'  perception of content
interactivity,  content  reliability and  trustworthiness,  design and usability
factors, comprehensiveness and level of promotion.

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

INTELLECTUAL PROPERTY

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

EMPLOYEES

As of December 31, 1998, the Company employed 34 people on a full-time basis. Of
the total, 18 were in product development, 10 in sales and marketing and six (6)
in general and administrative.  When conditions demand it, the Company also uses
part-time employees.  None of the Company's employees are represented by a labor
union and the Company  considers its relationship with its employees to be good.

                                       13
<PAGE>

The Company  believes that some measure of its future  success is dependent upon
attracting and retaining  qualified  employees,  and competition for hiring such
employees is intense.

FACTORS THAT MAY AFFECT FUTURE RESULTS

In  addition  to other  information  in this  Annual  Report on Form  10-K,  the
following factors should be considered in evaluating the condition and prospects
of the Company.  These  factors may have a  significant  impact on the Company's
future operating results.

     RELIANCE ON  EXTERNAL  FINANCING.  We  completed  a $14.3  million  private
     placement of common stock in January 1999.  Based on the private  placement
     and our cash and cash  equivalents  at December 31, 1998, we expect to have
     sufficient resources to meet our ongoing financial  obligations and operate
     at least through  December 31, 1999.  Our  operations  generated a negative
     cash flow  during  1998.  The degree to which we are a net user of cash may
     increase  during the calendar 1999, as a result of the expansion  plans for
     the OnHealth network and our marketing and distribution  relationships  and
     as a consequence of focusing on a new business  model. We are exploring and
     will continue to explore external financing to ensure continued  operations
     beyond  December  31,  1999.  There  can be no  assurance  that  additional
     capital, on a debt or equity basis, will be found, or if found that it will
     be on economically viable terms. If additional funds are raised through the
     issuance of equity or convertible debt securities, the percentage ownership
     of our shareholders will be reduced, shareholders may experience additional
     dilution and such  securities  may have rights,  preferences  or privileges
     senior to those of the holders of common stock.

     LIMITED OPERATING  HISTORY AND ACCUMULATED  DEFICIT;  CONTINUING  OPERATING
     LOSSES. We were  incorporated in 1990 and have been operating  continuously
     since 1991.  However,  we have only been active  online  since 1996 and the
     OnHealth  network web site was  established  in July 1997 and relaunched in
     July 1998. Because of this limited history on the Internet, there is little
     information  investors can use to analyze our financial results relating to
     our Internet web site. Since 1990, we have generated an accumulated deficit
     of approximately  $90 million  (through  December 31, 1998). Our ability to
     generate  profits depends upon our ability to attract  consumers to our web
     site  and how we  leverage  those  visits.  This  means  we need to  create
     significant  revenue  streams  from our web site,  earn  substantial  gross
     margins on those  revenue  streams and control our costs of  operation.  We
     anticipate continued significant operating losses at least through 1999, as
     the OnHealth web site is improved and marketed and the OnHealth  network is
     enhanced.  There  can be no  assurance  that  profitability  will  ever  be
     attained.

     SHIFT TO  ADVERTISING  REVENUES  MAY NOT  REPLACE  REVENUES  FROM  SALES OF
     CD-ROMS.  Since we began  operations in 1990 and until early 1998,  most of
     our revenues were based on development, sales and support of CD-ROM titles.
     In January 1998, the new management team changed our core business focus to
     Internet  web  site  hosting  of  health  care  related   content  and  the
     dissemination  of health and wellness  information  from our web site.  The
     principal form of revenue from this business model is advertising. Revenues
     from CD-ROMs have declined  significantly since 1995; however,  advertising
     revenues may never be sufficient to offset such declines in revenue.  There
     is little  information  available to assess the potential  profitability or
     viability of our business.  In other words,  we  essentially  face the same
     risks and  uncertainties of any new venture,  and there can be no assurance
     that we will be any more  successful  in this  venture than in our previous
     business activities.

     RELIANCE ON ADVERTISING  REVENUES. We anticipate that a substantial portion
     of our revenues will come from the sale of advertisements on our web pages.
     Our  strategy is to continue to develop  advertising  and other  methods of
     generating  revenues.  We are in the early stages of licensing our products
     and technology and in  implementing  our advertising  program.  To generate
     significant advertising revenues, several things need to happen:

                  1. Advertisers must accept the Internet as an attractive place
                     to advertise;

                  2. We need to attract a large  number of  consumers to our web
                     site; and

                  3. Those  consumers need to have  demographic  characteristics
                     attractive to advertisers.

     IMMATURE  ADVERTISING MARKET. There is fluid and intense competition in the
     sale of advertising on the Internet.  Advertising rates quoted by different
     vendors vary widely,  which makes it difficult to project  future levels of

                                       14
<PAGE>
     advertising  revenues.  Further,  significant  and  consistent  use  of the
     Internet by many advertisers depends upon confirmation that the Internet is
     an effective  advertising  medium.  To date,  advertisers have not by their
     actions become convinced of that.

              The Internet as an advertising medium has not been available for a
              sufficient  period of time to gauge its  effectiveness as compared
              with traditional  advertising media. No standards have been widely
              accepted   for   the   measurement   of   the   effectiveness   of
              Internet-based  advertising.  Internet advertising rates are based
              in part on  third-party  estimates  of users of an  Internet  site
              (referred to as "impressions").  Such estimates are often based on
              sampling   techniques  or  other  imprecise   measures,   and  may
              materially   differ  from  our  estimates.   We  do  not  know  if
              advertisers  will  accept our or other  parties'  measurements  of
              impressions.

              Filter software programs that limit or remove  advertising from an
              Internet  user's  desktop are available to  consumers.  Widespread
              adoption  or  increased  use of  such  software  by  users  or the
              adoption of such  software by certain  Internet  access  providers
              could  have a  material  adverse  effect  upon  the  viability  of
              advertising  on  the  Internet  and on our  business,  results  of
              operations and financial condition.

     SHORT TERM NATURE OF ADVERTISING CONTRACTS; GUARANTEE OF MINIMUM IMPRESSION
     LEVELS.  Substantially all of our advertising contracts have been for terms
     averaging one to three months in length,  with  relatively few  longer-term
     advertising  contracts.  Many of our  advertising  customers  have  limited
     experience  with  Internet  advertising,   and  may  not  believe  Internet
     advertising to be effective  compared to traditional  advertising media. We
     cannot  assure you that our current  advertisers  will continue to purchase
     advertisements on our web site.

              Our  advertising  contracts  typically  guarantee the advertiser a
              minimum  number  of  impressions.   To  the  extent  that  minimum
              impression  levels  are not  achieved  for any  reason,  we may be
              required to "make good" or provide  additional  impressions  after
              the contract term. Providing additional  impressions may adversely
              affect the  availability  of advertising  inventory.  This may, in
              turn,  adversely  affect our business,  results of operations  and
              financial condition.

     NEED TO ENHANCE AND DEVELOP  ONHEALTH.COM TO REMAIN COMPETITIVE.  To remain
     competitive,  we must  continue to enhance and improve the  responsiveness,
     functionality  and features of onhealth.com  and develop other products and
     services.  Enhancements  of or  improvements  to our web site  may  contain
     undetected    programming   errors   that   require    significant   design
     modifications,  resulting in a loss of consumer confidence and user support
     and a  decrease  in the value of our  brand  name  recognition.  We plan to
     develop and introduce new features,  functions, products and services, such
     as increased capabilities for user personalization and interactivity.  This
     will  require  the  development  or  licensing  of   increasingly   complex
     technologies.  We may not succeed in  developing or  introducing  features,
     functions,  products and services that will attract consumers. Such failure
     would likely have a material  adverse  effect on our  business,  results of
     operations and financial condition.

     FAILURE  TO  ACHIEVE  BRAND  IDENTITY.  We believe  that  establishing  and
     maintaining  brand identity is a critical  aspect of our efforts to attract
     and expand our user base,  Internet traffic and advertising  relationships.
     We believe  that  brand  recognition  will  become  increasingly  important
     because of the minimal barriers to entry for competing web sites. We intend
     to  increase  our  brand  awareness   through   advertising   campaigns  in
     publications,  radio,  online  media and other  marketing  and  promotional
     efforts.  If we  cannot  build  a brand  recognition  that  consumers  (and
     eventually  advertisers)  seek out,  we will  likely be unable to  generate
     revenues.

              Developing brand recognition is a complex process.  It depends, in
              part, on our success in providing a high quality  experience.  The
              value of our  brand  could be  diluted  by a  variety  of  events,
              including poor consumer or advertiser reaction to our web site and
              services offered on the web site.

     UNPREDICTABILITY  OF FUTURE  REVENUE  STREAMS;  POTENTIAL  FLUCTUATIONS  IN
     QUARTERLY RESULTS. Because our online operating history is very limited and
     the  economics  of the  Internet  are still  evolving,  it is  difficult to
     forecast  future  revenues with a high degree of accuracy.  The advertising
     and retail industries typically experience their best quarter in the fourth
     quarter  of each  year,  and to the  extent  that we rely upon  advertising
     revenues, our revenues could similarly fluctuate. Due to the health-related
     nature of editorial content,  however, we believe that our revenues may not
     be as seasonal as the remainder of the advertising  and retail  industries.
     Since  our  expense  levels  are based  upon  anticipated  advertising  and
     licensing revenue, we may not be able to adjust spending in a timely manner
     to  compensate  for any  unexpected  revenue  shortfall.  Accordingly,  any
     significant  shortfall  in  relation  to our  expectations  would  have  an
     immediate  adverse  impact  on our  business,  results  of  operations  and

                                       15
<PAGE>

     financial  condition.  In addition,  we plan to increase  significantly our
     operating  expenses  to develop new  distribution  channels,  fund  greater
     levels of  research  and  development,  increase  our  sales and  marketing
     operations,  broaden our customer support  capabilities and establish brand
     identity and strategic alliances.

     DEPENDENCE  ON  THIRD-PARTY  RELATIONSHIPS.  We are and will continue to be
     significantly  dependent  on  a  number  of  third-party  relationships  to
     increase traffic on onhealth.com and thereby generate  advertising revenues
     and  maintain  the current  level of service and variety of content for our
     users. We are generally  dependent on other web site operators that provide
     links to onhealth.com.

              Most of our arrangements with third-party Internet sites and other
              third-party  service  providers  do  not  require  future  minimum
              commitments  to use  our  services,  are  not  exclusive  and  are
              short-term or may be terminated  at the  convenience  of the other
              party.  Moreover,  we do not have  agreements with the majority of
              other web site operators that provide links to  onhealth.com,  and
              such web  site  operators  may  terminate  such  links at any time
              without  notice.  There can be no  assurance  that  third  parties
              regard  our  relationship  with  them as  important  to their  own
              respective businesses and operations,  that they will not reassess
              their commitment to us at any time in the future or that they will
              not develop their own competitive services or products.

              There  can be no  assurance  that we  will  be  able  to  maintain
              relationships  with third  parties that supply us with software or
              products that are crucial to our success, or that such software or
              products will be able to sustain any third-party  claims or rights
              against  their use.  Also, we cannot assure you that the software,
              services or products of those  companies  that  provide  access or
              links to our services or products will achieve  market  acceptance
              or commercial success.  Accordingly, we cannot assure you that our
              existing   relationships   will  result  in   sustained   business
              partnerships,  successful  service  or  product  offerings  or the
              generation of significant  revenues for us. Failure of one or more
              of our  strategic  relationships  to  achieve or  maintain  market
              acceptance or commercial success or the termination of one or more
              successful  strategic  relationships could have a material adverse
              effect  on our  business,  results  of  operations  and  financial
              condition.

     COMPETITION.  There are a number of competitors currently delivering online
     health content,  and it is likely that more  competitors will emerge in the
     near future. Many of today's  competitors are better financed,  have longer
     operating  histories and better brand recognition than we do, and some have
     internal  distribution or  cross-promotional opportunities to support their
     online  ventures that we do not have and can not replicate for a reasonable
     investment.  It is possible  that existing or emerging  competitors  may be
     able to secure critical editorial content or distribution  relationships on
     an exclusive basis, or may raise a provider's  expectation  about the value
     of such assets.  For these  reasons,  increased  competition  may result in
     diminished  profit  margins,  market  share or  brand  value.  The  intense
     competition in the consumer software business continues to accelerate as an
     increasing number of companies,  many of which have financial,  managerial,
     technical and  intellectual  property  resources  greater than ours,  offer
     products  that  compete  directly  with  one or  more  of our  products  or
     services.  We believe that the principal  competitive factors in attracting
     advertisers   include  the  amount  of  traffic  on  our  web  site,  brand
     recognition,  customer  service,  the  demographics  of our user base,  our
     ability to offer targeted  audiences and the overall cost  effectiveness of
     the  advertising  medium we offer.  We believe  that the number of Internet
     companies relying on  Internet-based  advertising  revenue,  as well as the
     number of advertisers and the number of users, will increase  substantially
     in the future.  Accordingly,  we will likely  face  increased  competition,
     resulting in increased  pricing pressures on our advertising  rates,  which
     could have a material adverse effect on our business,  results of operation
     and financial condition. See "BUSINESS--Competition."

     DEPENDENCE ON KEY PERSONNEL. Our development and operation is substantially
     dependent on the services of our  President  and Chief  Executive  Officer,
     Robert N. Goodman and on our General Manager,  Rebecca Farwell. The loss of
     either  Mr.  Goodman's  or Ms.  Farwell's  services  could  materially  and
     adversely  affect our  business  prospects.  We are also  dependent  on the
     continued  service of certain other key  management as well as our software
     engineering personnel, the loss of whose services could significantly delay
     the  achievement  of  our  planned  development  objectives.  We  have  not
     purchased key man life  insurance on any of our  personnel.  Achievement of
     our business  objectives will require substantial  additional  expertise in
     the  areas  of  technology,   finance,  and  marketing.  We  actively  seek
     additional  qualified  personnel.  Competition for qualified  personnel is
     intense,  and the loss of key  personnel,  or the  inability to attract and
                                       

                                       16
<PAGE>
 
     retain the  additional highly  skilled personnel required for the expansion
     of our  activities, could have a  material adverse  effect on our business,
     results of  operations  and  financial condition.

     RELIANCE  ON  INTELLECTUAL  PROPERTY  AND  PROPRIETARY  RIGHTS.  We  regard
     substantial  elements  of  our  web  site  and  underlying   technology  as
     proprietary  and attempt to protect them by relying on  trademark,  service
     mark,  copyright and trade secret laws and  restrictions  on disclosure and
     transferring   title  and  other   methods.   We  also  have  entered  into
     confidentiality  agreements with our consultants and in connection with our
     license  agreements with third parties and generally seek to control access
     to and distribution of our technology,  documentation and other proprietary
     information.  Despite  these  precautions,  it may be possible  for a third
     party  to copy or  otherwise  obtain  and use our  proprietary  information
     without  authorization  or to  develop  similar  technology  independently.
     Effective  trademark,  service mark,  copyright and trade secret protection
     may not be  available  in every  country  in which  our  services  are made
     available  through  the  Internet,  and  policing  unauthorized  use of our
     proprietary information is difficult.

              Legal standards relating to the validity, enforceability and scope
              of protection of certain  proprietary  rights in  Internet-related
              businesses are uncertain and still evolving,  and no assurance can
              be  given  as to  the  future  viability  or  value  of any of our
              proprietary rights. There can be no assurance that the steps taken
              will prevent  misappropriation  or infringement of our proprietary
              information,  which  could have a material  adverse  effect on our
              business, results of operations and financial condition.

              Litigation   may  be  necessary  in  the  future  to  enforce  our
              intellectual  property rights,  to protect our trade secrets or to
              determine  the  validity  and scope of the  proprietary  rights of
              others.  Such  litigation  might result in  substantial  costs and
              diversion of resources and management attention.  We cannot assure
              you that  our  business  activities  will  not  infringe  upon the
              proprietary  rights of  others,  or that  other  parties  will not
              assert  infringement  claims against us,  including claims that by
              directly or indirectly providing hyperlink text links to web sites
              operated by third parties.  Moreover, from time to time, we may be
              subject to claims of our alleged  infringement  of the trademarks,
              service  marks and  other  intellectual  property  rights of third
              parties.  Such  claims  and any  resultant  litigation,  should it
              occur,  might  subject us to  significant  liability  for damages,
              might result in invalidation  of our proprietary  rights and, even
              if  not  meritorious,   could  result  in  substantial  costs  and
              diversion of resources and  management  attention and could have a
              material adverse effect on our business, results of operations and
              financial condition.

              We  currently  license  from third  parties  certain  technologies
              incorporated  into  onhealth.com.  As we continue to introduce new
              services that incorporate new technologies,  we may be required to
              license  additional  technology from others.  We cannot assure you
              that these  third-party  technology  licenses  will continue to be
              available   on   commercially   reasonable   terms,   if  at  all.
              Additionally,  we cannot  assure you that the third  parties  from
              which we currently  license our technology  will be able to defend
              their   proprietary   rights   successfully   against   claims  of
              infringement.   As  a  result,   any  inability  to  obtain  these
              technology  licenses  could result in delays or  reductions in the
              introduction  of  new  services  or  could  adversely  affect  the
              performance of our existing  services until equivalent  technology
              can be identified, licensed and integrated.

     LIABILITY FOR INFORMATION  RETRIEVED FROM OR TRANSMITTED OVER THE INTERNET;
     LIABILITY  FOR PRODUCTS SOLD OVER THE  INTERNET.  Because  materials may be
     downloaded  by the  online or  Internet  services  that we  operate  or the
     Internet  access  providers  with  which we have  relationships  and may be
     subsequently  distributed to others,  there is a potential that claims will
     be made  against us for  defamation,  negligence,  copyright  or  trademark
     infringement  or other  theories  based on the nature  and  content of such
     materials.  In addition,  the increased  attention  focused upon  liability
     issues and legislative proposals could materially impact the overall growth
     of Internet  use.  We could also be exposed to  liability  with  respect to
     third-party  information  that may be  accessible  through our web site, or
     through content and materials that may be posted by our users on discussion
     boards that we offer.  Such claims might  include,  among others,  that, by
     directly or indirectly providing hyperlink text links to web sites operated
     by third parties, we are liable for copyright or trademark  infringement or
     other wrongful  actions by such third parties through such web sites. It is
     also possible that, if any third-party content information  provided on our
     web site contains  errors,  third parties could make claims  against us for
     losses incurred in reliance on such information.

              Even to the  extent  such  claims do not result in  liability,  we
              could  incur  significant  costs in  investigating  and  defending
              against such claims.  The  imposition  of potential  liability for
              information  carried on or disseminated  through our systems could
              require us to  implement  measures to reduce our  exposure to such

                                       17
<PAGE>

              liability,  which  may  require  the  expenditure  of  substantial
              resources and limit the attractiveness of our services to users.

              Our general liability insurance may not cover all potential claims
              to which we are exposed or may not be adequate  to  indemnify  for
              all  liability  that may be imposed.  Any  imposition of liability
              that is not  covered  by  insurance  or is in excess of  insurance
              coverage  could have a material  adverse  effect on our  business,
              results of operations and financial condition.

     RISKS RELATED TO SYSTEM OPERATION.  All companies that rely on the Internet
     are  dependent  upon the  continuous,  reliable  and  secure  operation  of
     Internet  servers and related  hardware  and  software.  To the extent that
     service is  interrupted,  consumers will be  inconvenienced  and commercial
     clients will suffer from a loss in  advertising  or  transaction  delivery.
     These  shortfalls would directly result in a revenue loss. Our computer and
     communications   hardware  are  protected  through  physical  and  software
     safeguards.  However, they are still vulnerable to fire, earthquake, flood,
     power loss, telecommunications failures, physical or software break-ins and
     similar events.  We do not have full redundancy for all of our computer and
     telecommunications  facilities  and  do  not  carry  business  interruption
     insurance to protect us in the event of a catastrophe.  Such an event could
     lead to significant negative impacts on our operating results and financial
     condition.  We are also dependent  upon third parties to provide  potential
     users with web  browsers and Internet  and online  services  necessary  for
     access to our web site. In the past,  users have  occasionally  experienced
     difficulties  with  Internet and online  services  due to system  failures,
     including  failures unrelated to our systems.  Any sustained  disruption in
     Internet  access  provided by third parties  could have a material  adverse
     effect on our business, results of operations and financial condition.

     IMPACT OF THE YEAR 2000.  The Year 2000 issue is the  potential  for system
     and   processing   failures  of   date-related   data  and  the  result  of
     computer-controlled systems using two digits rather than four to define the
     applicable year. For example,  computer  programs that have  time-sensitive
     software  may  recognize a date using "00" as the year 1900 rather than the
     year 2000. This could result in system failure or  miscalculations  causing
     disruptions  of  operations,  including,  among other  things,  a temporary
     inability  to  process  transactions,  send  invoices  or engage in similar
     normal business activities.

              We could be affected by Year 2000 issues related to  non-compliant
              information  technology  ("IT")  systems or non-IT systems that we
              operate  or  that  are   operated  by  third   parties.   We  have
              substantially  completed  assessment  of our internal and external
              (third-party) IT systems and non-IT systems.  At this point in our
              assessment,  we are not currently  aware of any Year 2000 problems
              relating  to  systems we  operate  or that are  operated  by third
              parties that would have a material effect on our business, results
              of operations or financial condition,  without taking into account
              our efforts to avoid such  problems.  Based on our  assessment  to
              date, we do not anticipate that costs  associated with remediating
              our  non-compliant  IT systems or non-IT systems will be material,
              although there can be no assurance to such effect.

              To the extent that our assessment is finalized without identifying
              any  additional  material  non-compliant  IT systems we operate or
              that are operated by third  parties,  the most  reasonably  likely
              worst case Year 2000  scenario  is a systemic  failure  beyond our
              control,  such as a  prolonged  telecommunications  or  electrical
              failure.  Such a  failure  could  prevent  us from  operating  our
              business, prevent users from accessing our web site, or change the
              behavior of  advertising  customers or persons  accessing  our web
              site. We believe that the primary  business risks, in the event of
              such  failure,   would  include,  but  not  be  limited  to,  lost
              advertising revenues, increased operating costs, loss of customers
              or persons accessing our web site, or other business interruptions
              of  a  material  nature,  as  well  as  claims  of  mismanagement,
              misrepresentation,  or breach of contract, any of which could have
              a material  adverse effect on our business,  results of operations
              and financial condition. We have not made any contingency plans to
              address such risks.

     MANAGEMENT OF POTENTIAL  GROWTH.  To  accommodate  the demand of additional
     editorial content and distribution  channels for the OnHealth network,  the
     employee base could grow  significantly from the December 31, 1998 level of
     34  employees.  The  expansion of our  workforce  could place a significant
     strain on our management, financial resources and infrastructure. We cannot
     assure you that we will be able to attract  and retain  employees  with the
     appropriate  skill  sets,  or  that  we  will  be  able  to  manage  growth
     effectively.  If we are unable to manage growth in the coming years,  there
     could be an adverse affect on our operations.


                                       18
<PAGE>


     RISK ASSOCIATED WITH CERTAIN LITIGATION. In February 1996, an action in the
     District  Court of  Hennepin  County  (Minnesota)  was brought by T. Randal
     Productions  et al.  against  the  Company  and one  current and two former
     employees.    The   plaintiffs   made   various   allegations,    including
     misappropriation  of  corporate  opportunities  and  trade  secrets  by the
     Company and its employees and sought award of monetary  damages,  exemplary
     damages and royalties substantially in excess of $10.0 million. In November
     1997,  a jury found that there was no joint  venture  between T. Randal and
     the company and/or any of its employees but awarded T. Randal $480,000 plus
     interest for damages sustained to its business.  Plaintiffs moved for a new
     trial,  amended findings and for judgment  notwithstanding the verdict. The
     jury verdict was upheld by the trial court.  The  plaintiffs  appealed this
     decision to the Minnesota  Court of Appeals.  In March 1999,  the Minnesota
     Court of Appeals  affirmed  the  decision of the trial  court.  The Company
     believes the plaintiffs will petition for a rehearing which Company counsel
     believes will not be successful. The plaintiffs also have an action pending
     against certain  affiliates of the Company on the same grounds on which the
     action  against the Company was based.  The Company has  indemnified  these
     affiliates  against any damages  arising out of these  claims.  Counsel has
     advised the Company that the jury verdict in the action against the Company
     should be controlling in this action against the affiliates.

     RELIANCE ON EXTERNAL  CONTENT.  We intend to produce  only a portion of the
     editorial  content that will be found on the OnHealth  network.  We will be
     reliant on third-party firms that have the expertise, technical capability,
     name recognition, and willingness to syndicate product content for branding
     and  distribution by others.  As  health-related  content grows on the web,
     there may be increasing  competition for the best product suppliers,  which
     may result in a competitor  acquiring a key supplier on an exclusive basis,
     or in significantly  higher content prices.  Such an outcome could make the
     OnHealth network less attractive or useful for an end user, or could reduce
     our profitability.  Either event would have a materially adverse impact our
     results.

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

     SECURITY  RISKS.  Experienced  programmers  or "hackers"  could  attempt to
     penetrate our network  security.  Because a hacker who is able to penetrate
     our network security could misappropriate  proprietary information or cause
     interruptions  in our products and  services,  we may be required to expend
     capital and resources to protect against or to alleviate problems caused by
     such parties. In addition, we may not have a timely remedy against a hacker
     who is able to penetrate our network  security.  Such  purposeful  security
     breaches could have a material  adverse effect on our business,  results of
     operations  and  financial   condition.   In  addition,   the   inadvertent
     transmission of computer viruses could expose us to a material risk of loss
     or litigation and possible liability.

     IMPACT OF  GENERAL  ECONOMIC  CONDITIONS.  Time  spent on the  Internet  by
     individuals,  purchases  of  new  computers  and  purchases  of  membership
     subscriptions to Internet sites are typically  discretionary  for consumers
     and may be particularly  affected by adverse trends in the general economy.
     The success of our operations depends to a significant extent upon a number
     of factors relating to discretionary consumer spending,  including economic
     conditions  (and  perceptions  of such  conditions by consumers)  affecting
     disposable consumer income such as employment, wages and salaries, business
     conditions,  interest rates,  availability of credit and taxation,  for the
     economy as a whole and in  regional  and local  markets  where we  operate.
     There can be no  assurance  that  consumer  spending  will not be adversely
     affected by general economic conditions,  which could negatively impact our
     results of operations or financial condition. Any significant deterioration
     in general  economic  conditions or increases in interest rates may inhibit
     consumers'  use of  credit  and  cause a  material  adverse  effect  on our
     revenues and  profitability.  In addition,  our business strategy relies on
     advertising  by  and  agreements   with  other  Internet   companies.   Any
     significant  deterioration  in general  economic  conditions that adversely
     affected these companies  could also have a material  adverse effect on our
     business, results of operations and financial condition.

     DIVIDENDS.  We intend to retain all of our earnings, if any, for use in the
     business and do not anticipate paying any cash dividends in the foreseeable
     future.  Pursuant to our Articles of Incorporation and Bylaws,  the payment
     of dividends is subject to the discretion of our Board of Directors and any
     terms and conditions imposed by law.


                                       19
<PAGE>


OTHER

PRODUCT DEVELOPMENT/RESEARCH AND DEVELOPMENT
In  1998,  1997,  and  1996,  product  development   expenses  were  $3,744,000,
$4,243,000 and $5,651,000,  respectively.  In addition in 1997 and 1996, product
development  expenses paid for by third  parties were  $682,000 and  $1,204,000,
respectively.

PROTECTION OF PROPRIETARY RIGHTS
We regard the  software we own as  proprietary  and rely upon a  combination  of
copyrights,   trade  secret  laws,   employee  and  third-party   non-disclosure
agreements and other methods to protect our  intellectual  property.  We believe
that copyright  protection for our intellectual  property is less significant to
our success than factors such as the  knowledge,  ability and  experience of our
personnel,  and the  quality of our new  product  development  and  distribution
efforts.

BACKLOG
We had no significant backlog at fiscal year end of 1998, 1997, or 1996.

MAJOR CUSTOMERS
Three  customers  represent  40%,  16% and 13% of net revenue for the year ended
December 31, 1998; one customer represents 12% of net revenue for the year ended
December  31,  1997;  and three  customers  represent  15%,  21%, and 11% of net
revenue in 1996. The revenue  recorded from the customer which represents 40% of
the net  revenue  in 1998 was the  result of a $603,000  payment  received  from
Churchill  Livingstone  related to minimum sales  requirements form a terminated
CD-ROM  distribution  agreement.  In 1997,  we  recognized  revenue  of $493,000
from  our content  agreement with America Health Network  ("AHN").  Net sales to
an  OEM  manufacturer  in 1996 totaled  $1,394,000.  Also in 1996, we recognized
$1,000,000 of  revenue from our online  content  agreement with AT&T, which  was
terminated  in  that year. At December 31, 1998, two customers comprised 36% and
20% of outstanding  accounts receivable.  Two customers  represented 77% and 27%
of accounts receivable at December 31, 1997.



ITEM 2.         PROPERTIES

Effective  the first  quarter of 1998,  the  Company's  principal  executive and
administrative offices are located in Seattle,  Washington. In January 1998, the
Company  subleased  approximately  1,500 square feet of office space in Seattle,
Washington  on  a  month-to-month  basis.   Subsequently,   the  Company  leased
approximately  7,000 square feet of space  located at 808 Howell  Street,  Suite
400, Seattle, Washington 98101. The lease expires July 1, 2003.

Effective October 1998, the Company  subleased  approximately 525 square feet of
office space  located at 420  Lexington  Avenue,  Suite 300, New York,  New York
10170. The lease expires in September 1999.

During 1997,  the  Company's  principal  executive  and  administrative  offices
consisted  of  approximately  40,000  square feet in an office  building in Eden
Prairie,   Minnesota,   a  suburb  of   Minneapolis.   The  lease  also  covered
approximately  2,000 square feet of storage  space.  The Company  terminated the
Eden  Prairie  lease  effective  March 31,  1998.  Prior to leasing the New York
facility,  the Company's  sales  personnel were located in an office building in
Edina, Minnesota, a suburb of Minneapolis. The lease was for approximately 1,000
square feet and expired in September  1998. The Company also leases space in the
following  locations:  (1) 4,124 square feet in an office  building in Carlsbad,
California  ending in March 1999; and (2) 790 square feet in an office  building
in Carlsbad,  California  ending in May 1998.  The Company did not renew the 790
square feet lease,  and does not currently intend to renew the 4,124 square feet
lease.  The Company has a subtenant in the 4,124 square feet space through March
1999.

ITEM 3.         LEGAL PROCEEDINGS

In February 1996, an action in the District Court of Hennepin County (Minnesota)
was brought by T. Randal  Productions et al. against the Company and one current
and two former  employees.  The plaintiffs made various  allegations,  including
misappropriation of corporate opportunities and trade secrets by the Company and
its  employees  and sought  award of  monetary  damages,  exemplary  damages and
royalties  substantially  in excess of $10.0  million.  In November 1997, a jury


                                       20
<PAGE>

found that there was no joint venture  between T. Randal and the company  and/or
any of its  employees  but awarded T. Randal  $480,000 plus interest for damages
sustained to its business.  Plaintiffs  moved for a new trial,  amended findings
and for judgment notwithstanding the verdict. The jury verdict was upheld by the
trial court.  The  plaintiffs  appealed this decision to the Minnesota  Court of
Appeals.  In March 1999, the Minnesota Court of Appeals affirmed the decision of
the trial  court.  The Company  believes  the  plaintiffs  will  petition  for a
rehearing which Company counsel believes will not be successful.  The plaintiffs
also have an action  pending  against  certain  affiliates of the Company on the
same grounds on which the action against the Company was based.  The Company has
indemnified  these  affiliates  against any damages arising out of these claims.
Counsel has advised the Company that the jury verdict in the action  against the
Company should be controlling in this action against the affiliates.

ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of 1998.



                                       21
<PAGE>



                                     PART II

ITEM 5.         MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS

The Company's Common Stock,  initially  offered to the public on October 6, 1993
under the symbol  "IVIP".  Since June 17, 1998, the Common Stock has been quoted
on the NASDAQ SmallCap Market system under the symbol "ONHN."

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

                                               HIGH                  LOW
                                          --------------        --------------
                1998
                ----------------------
                Fourth Quarter            $     6 5/8           $      2 3/16
                Third Quarter                  11 3/8                  3 5/8
                Second Quarter                  8 5/8                  4 7/8
                First Quarter                   6                      2 5/8


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

At March 9, 1999,  based on  information  received from the  Company's  transfer
agent on the Company's common stock, there were approximately 160 record holders
of the Company's Common Stock, excluding shareholders whose stock is held either
in nominee name and/or street name brokerage accounts.

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

RECENT SALES OF UNREGISTERED SECURITIES

On April 10, 1998, the Company sold to certain investors a total of 5,000 shares
of the company's Series B Convertible Preferred Stock. In addition,  the Company
issued to the same  investors  warrants to purchase a total of 66,778  shares of
the  Company's  common  stock.  As an issuance to  sophisticated  investors  not
involving any public  offering,  the sale of the series B Convertible  Preferred
Stock and the  issuance of the  warrants  was exempt  under  Section 4(2) of the
Securities Act and Regulation D thereunder.

On October 30, 1998, the Company closed a transaction  involving the issuance of
1,000,898  shares of common stock.  On December 14, 1998,  the Company  closed a
transaction  involving  the  issuance  of 542,419  shares of common  stock.  The
December 14, 1998 transaction resulted from the exercise of an put option by the
Company issued to it in the October 30, 1998  transaction.  The shares of common
stock  issued on October  30,  1998 and  December  14,  1998 were  issued to two
different  accredited  investors.  The  terms  of  these  issuances  potentially
obligated the Company to issue  additional  shares of common stock (depending on
the future performance of the Company's common stock (the "Reset  Provisions")).
Such Reset Provisions only relate to those shares purchased by the two investors
on October 30, 1998 and  December 14,  1998.  As of March 12,  1999,  all of the
shares of common  stock  subject to the Reset  Provisions  have been sold and no
such Reset Provisions apply to any of the Company's outstanding Common stock. As
an issuance to sophisticated  investors not involving any public  offering,  the
sale of the shares of Common Stock subject to such Reset  Provisions  was exempt
under Section 4(2) of the Securities Act and Regulation D thereunder.

During  January 1999,  the Company  completed a $14,278,000  private  placement,
which resulted in the issuance of 2,596,000 shares of the Company's common stock
at $5.50 per share. As an issuance to sophisticated  investors not involving any


                                       22
<PAGE>

public offering, the sale of the shares of common stock was exempt under Section
4(2) of the Securities Act and Regulation D thereunder.

ITEM 6.         SELECTED FINANCIAL DATA

         The selected  financial data presented  below has been derived from the
financial  statements  of the  Company.  For  additional  information,  see  the
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                     (In thousands, except per share data)
                                       ------------------------------------------------------------------
                                           1998         1997         1996         1995          1994
                                       ----------    ----------   ----------   ----------     ----------
<S>                                    <C>           <C>          <C>          <C>            <C>  
SUMMARY OF OPERATIONS:
Net revenue                            $   1,522     $   3,761    $   9,470    $  11,970      $   7,013
Loss from operations                     (11,019)      (11,262)     (10,326)     (14,875)       (32,434)
Net loss                                 (10,939)      (10,947)     (10,157)     (14,234)       (31,257)
Net loss applicable to
   common shareholders                 $ (11,964)    $ (13,965)   $ (10,336)   $ (14,254)     $ (31,257)
Net loss per common share:
     Basic and diluted                 $   (1.12)    $   (1.73)   $   (1.36)   $   (1.90)     $   (4.75)


BALANCE SHEET DATA:
Cash, cash equivalents and
   short-term investments              $   2,119     $   2,488   $    3,462   $    7,759      $  20,653
Working capital (deficiency)              (1,158)       (1,252)       3,230        8,607         20,735
Total assets                               3,894         4,577       13,411       18,352         32,101
Convertible subordinated                                                                     
   debentures                                  -             -        3,500            -             -
Total liabilities                          4,195         4,559        8,606        3,627          5,133
Convertible redeemable                                                                       
   preferred stock                             -             -        1,905        1,845              -
Shareholders' equity (deficit)              (301)           18        2,900       12,880         26,968


</TABLE>


                                       23
<PAGE>



ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS

OVERVIEW

OnHealth  Network  Company  ("OnHealth" or the "Company")  intends to become the
leading  Internet  resource  dedicated to the  management  of family  health and
well-being. The Company is an Internet-based provider of high quality health and
medical information and applications to a broad base of consumers. The Company's
Internet site, onhealth.com,  produces and distributes original, relevant health
content  including  in-depth  reports,   personalized   information   retrieval,
geographically   specific  guides  to  healthcare   services  and   information,
editorials and interactive community environments.

Until  January  1998,  its   traditional   line  of  business  had  been  CD-ROM
development,  production  and  distribution.  The Company was also a supplier of
video,  animation  and graphic  assets to a health and medical cable TV channel.
Under this strategy, the Company was never able to attain profitability, and, at
December 31, 1997,  had an  accumulated  deficit of  $78,576,000.  In 1997,  the
Company's  Board of Directors  revised its  business  strategy and brought in an
entirely new management team and other key employees  skilled in the development
of internet  websites.  In 1998 the Company was focused on the development of an
Internet-delivered,  consumer-oriented  network  of health and  wellness  sites.
OnHealth  intends to generate  advertising  revenue by appealing to  advertisers
through  its  ability  to  reach  targeted   demographics  and   psychographics.
Additional  products  and  services,  such as  transactional  based  e-commerce,
subscription and syndication, will be developed to exploit opportunities as they
present themselves in the marketplace.


RESULTS OF OPERATIONS

The  following  table sets forth  selected  income  statement  data for OnHealth
Network Company and such data as a percentage of net revenues for the year ended
December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>

                                                           Year Ended December 31,
                                                            (Dollars in thousands)
                                  --------------------------------------------------------------------------
                                            1998                    1997                     1996
                                  --------------------------------------------------------------------------
                                      AMOUNT     PERCENTAGE   AMOUNT     PERCENTAGE   AMOUNT     PERCENTAGE
<S>                                <C>             <C>       <C>           <C>      <C>            <C>

Net revenue                        $     1,522      100%     $   3,761      100%    $    9,470      100%
Gross margin                               755       50%         1,220       32%         4,394       46%
Operating expenses                      11,774      774%        12,482      332%        14,720      155%
Loss from operations                   (11,019)    (724%)      (11,262)    (299%)      (10,326)    (109%)
Net loss                           $   (10,939)    (719%)    $ (10,947)    (291%)   $  (10,157)    (107%)

</TABLE>


REVENUE

Revenue for the year ended December 31, 1998, 1997 and 1996 was as follows:

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                                           (In thousands)
                                                          --------------------------------------------------
                                                              1998             1997              1996
                                                          --------------   --------------   ----------------
<S>                                                       <C>             <C>               <C>

Product sales and licensing revenue                       $         754    $       1,990    $       5,152
Online revenue                                                      388               58            1,000
Contract development revenue and other                              380            1,220            1,346
Cable television licensing revenue                                    -              493            1,972
                                                          ==============   ==============   ================
Net revenues                                              $       1,522    $       3,761    $       9,470
                                                          ==============   ==============   ================
</TABLE>


                                       24
<PAGE>

Net revenue for 1998,  1997 and 1996 of $1,522,000,  $3,761,000 and  $9,470,000,
respectively, represent a decrease of 60% from 1997 to 1998 and 60% from 1996 to
1997.  The 1997 to 1998  decrease is due to a  substantial  reduction in product
sales and  licensing  revenue of  $1,236,000,  or 62%, a  reduction  in contract
development  revenue and other of  $840,000,  or 69%,  and a reduction  in cable
television  licensing  revenue  of  $493,000,  or  100%.  These  decreases  were
partially offset by a $330,000,  or 569%, increase in online revenues.  The 1998
product  sales and  licensing  revenue  includes a $603,000  payment  related to
minimum sales requirements from a terminated CD ROM distribution agreement.  The
decrease  from 1996 to 1997 is due to a  substantial  reduction in product sales
and licensing  revenue of $3,162,000,  or 61%, a substantial  reduction in cable
television  licensing  revenue of  $1,479,000,  or 75%, and a decrease in online
revenue from $1,000,000 to $58,000.

PRODUCT SALES AND LICENSING REVENUE
Product  sales and licensing  revenue have  declined  steadily over the past few
years. The decrease  generally  reflects market  conditions for CD ROM products,
the Company's cancellation of a CD ROM distribution  agreement,  and the lack of
new CD ROM  product  releases as the Company  shifted  its focus  toward  online
efforts.  In 1995, the Company entered into a five year  distribution  agreement
which allowed for the promotion,  marketing and  distribution  of certain of the
Company's  CD-ROM  products.  The agreement  also provided for minimum levels of
sales through the year 2000. In December 1998,  the Company  received a $603,000
payment related to minimum sales requirements from the termination of the CD ROM
distribution   agreement.   The  Company  does  not  anticipate   receiving  any
significant  product  sales and  licensing  revenue  from CD ROM products in the
future.

ONLINE REVENUES
From 1997 to 1998,  online  revenues  increased  from  $58,000 to  $388,000,  an
increase of $330,000,  or 569%.  The increase in 1998  reflects  increased  site
sponsorship and  advertising  revenue from the Company's  onhealth.com  web site
which was redesigned and  re-launched in July 1998. The 1997 online  revenues of
$58,000  included site  sponsorships,  advertising and premium  services revenue
related to  onhealth.com  and the former O@SIS web site. In September  1997, the
Company entered into an agreement with Mayo  Foundation  which included the full
transfer to Mayo of the Company's  ownership interest in the O@SIS web site. The
online revenues in 1996 relate to nonrefundable  advances payable to the Company
under  the  exclusive  agreement  signed  with  AT&T  in  October  1995  and the
discontinuance by AT&T of the AT&T Health site in August 1996.

CONTRACT DEVELOPMENT REVENUE AND OTHER
From 1997 to 1998, contract  development  revenues and other decreased $840,000,
or 69%. The decrease  generally  reflected the Company's shift toward the online
efforts.  From 1996 to 1997, contract  development  revenues and other decreased
slightly,  representing  management's efforts to control costs and focus on more
profitable contracts.

CABLE TELEVISION LICENSING REVENUE
Cable television licensing revenue reflects revenue from the content and royalty
agreement with America's Health Network (AHN). Under the agreement,  the Company
is  licensing  multimedia  content to AHN starting in May 1995 and is to receive
minimum  licensing  royalties  over the life of the  agreement.  The revenue was
being  recognized  evenly over the expected  life of the  agreement.  Due to the
gradual increase in actual payments versus the straight-line revenue recognition
policy,  a  receivable  was  recorded  for the  difference  between  the revenue
recognized  and the cash received  during the early years of the  contract.  The
$1,479,000 decrease in revenue from 1996 to 1997 was a result of AHN's financial
difficulties.  In June  1997,  as a result  of the  Company  not  receiving  its
quarterly payment, the outstanding AHN receivable was fully reserved.

GROSS MARGIN

Gross margin as a percentage  of net revenues was 50% in 1998 compared to 32% in
1997.  The  improvement  in gross margin in 1998 was  primarily  due to the high
margins  on  online  revenue  and  the  product  sales  distribution   agreement
termination revenue.

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

                                       25
<PAGE>


OPERATING EXPENSES

PRODUCT DEVELOPMENT
In 1998, product development expenses included primarily development, editorial,
design and production  costs related to the Company's  onhealth.com web site. In
1997, development costs include primarily onhealth.com  development costs and CD
ROM development costs. From 1997 to 1998, product development expenses decreased
from  $4,243,000  to  $3,744,000,  a decrease of $499,000,  or 12%. The decrease
reflects no new 1998 CD ROM product  releases,  and a shift  towards an Internet
focused business.

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

SALES AND MARKETING
Sales and marketing  expenses in 1998 were  $5,626,000 as compared to $1,347,000
in 1997, an increase of $4,279,000,  or 318%. The increase  primarily relates to
increased marketing activities for the Company's  onhealth.com web site. In July
1998,  the  Company  began a  marketing  campaign  to promote  the launch of the
onhealth.com web site which included online and radio advertising.  In addition,
the Company  incurred  distribution  costs related to agreements  signed in July
1998 with GeoCities and Go Network.

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

GENERAL AND ADMINISTRATIVE
General  and  administrative  expenses  were  $2,404,000  in 1998,  compared  to
$6,892,000 in 1997, a decrease of $4,488,000, or 65%. General and administrative
expenses  consist  primarily of  compensation  to  administrative  and executive
personnel, fees for professional services, facility costs and bad debt expenses.
The large decrease in 1998 relative to 1997 reflects substantially reduced legal
costs,  reduced bad debt costs,  and general  cost  cutting  measures  including
reduced rent costs from the Company's relocation to smaller facilities. The 1997
costs also included  certain  special  charges  including  costs to relocate the
Company from Minneapolis, Minnesota to Seattle, Washington.

General  and  administrative  expenses  were  $6,892,000  in  1997  compared  to
$6,364,000  in 1996.  The  increase of 8% was due to  extensive  litigation  and
special charges in 1997. The Company recorded  $808,000 in expenses related to a
settlement of litigation  with Viridis,  Inc. and received an adverse jury award
of $480,000, plus interest from a dispute with T. Randal Productions,  et al. in
1997. In the fourth quarter of 1997, the Company  recorded charges of $1,572,000
for the relocation of the Company's headquarters from Minneapolis,  Minnesota to
Seattle,  Washington.  These charges included  $610,000 in severance to officers
and employees and $962,000 for asset  dispositions and lease termination  costs.
Also in 1997,  the Company  wrote-off  $1,741,000 in other assets  related to an
agreement with Time Life, Inc. Excluding the litigation and special charges, the
Company's reduction in general and administrative expenses was the result of the
downsizing  of  the  facilities  and  personnel  and  management's   efforts  to
streamline operating costs.

OTHER INCOME (EXPENSE)

Other expense was $4,000 in 1998,  compared to other income of $473,000 in 1997.
The 1998 other expense of $4,000 included a $285,000 loss related to fixed asset
disposals,  a $562,000 gain related to the  collection of a previously  reserved
accounts  receivable,  and a $281,000  revenue  sharing  payment  related to the
collection of the receivable.

The 1997 other income of $473,000  included a  $2,700,000  cash payment that the
Company  received in connection  with the transfer of ownership of the Company's
O@sis Web site to Mayo. This was partially offset by other expense of $2,229,000
in  connection  with  the  Company's  conversion  of  Convertible   Subordinated
Debentures. The expense represents the excess of the fair market value of Common
Stock  issued over the fair value of the Common Stock  issuable  pursuant to the
original conversion terms of the debentures.


                                       26
<PAGE>

INTEREST INCOME (EXPENSE)

Net  interest  income was $84,000 in 1998  compared to net  interest  expense of
$158,000 in 1997.  The net  interest  income in 1998  relative  to net  interest
expense in 1997 reflects the lack of debt in 1998 relative to 1997. The 1997 net
interest expense includes  interest expense of $264,000 related to $3,500,000 in
convertible  subordinated  debentures,  which were outstanding for ten months in
1997. These debentures were converted to common stock in October 1997.

Net  interest  expense was $158,000 in 1997  compared to net interest  income of
$169,000 in 1996. The net interest expense in 1997 versus net interest income in
1996  reflects  lower  interest  income  earned  from cash and cash  equivalents
balances in 1997 relative to 1996 and higher  interest  expenses in 1997 related
to 1996. The interest expense relates to the Company's $3,500,000 in convertible
subordinated debentures which were outstanding for two months in 1996 versus ten
months in 1997. These debentures were issued in November 1996 and were converted
to common stock in October 1997.

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

At December 31, 1998, the Company had available net operating loss carryforwards
of approximately  $81,910,000 and available research and development  credits of
approximately  $339,000 for federal income tax purposes.  The net operating loss
carryforwards  and the  credits  expire at various  times  through  2013.  These
carryforwards  are subject to the  limitations of Internal  Revenue Code Section
382. This section  provides  limitations  on the  availability  of net operating
losses to offset current  taxable income if significant  ownership  changes have
occurred for federal tax purposes.  The Company  incurred  "ownership  changes,"
pursuant to regulations  currently in effect under Internal Revenue Code Section
382, as a result of sales of the Company's  Preferred Stock in 1992 and 1993 and
may have incurred ownership changes since that time.

INFLATION

Management  believes  that  inflation  has  not  had a  material  impact  on the
Company's results of operations.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998,  the Company had cash and cash  equivalents of $2,119,000.
Total cash used by operating  activities  during 1998 was $9,962,000,  which was
primarily due to a net loss of $10,939,000.  Investing  activities used net cash
of $472,000 primarily for purchases of computer equipment.  Financing activities
provided cash of  $10,065,000  primarily  from two private  placements of common
stock  of  $5,690,000;  a  $5,000,000  Convertible  Redeemable  Preferred  Stock
financing; and $1,068,000 from stock option exercises.

Subsequent  to the year ended  December  31,  1998,  the  Company  received  net
proceeds of $14,278,000  from a private  placement of 2,596,000 shares of common
stock.

The  Company  believes  that  its  cash  and  cash  equivalents,  including  the
$14,278,000  received in the January 1999 private placement,  will be sufficient
to fund its  operations  through  December  31,  1999.  Operations  generated  a
negative  cash flow  during  1996,  1997 and  1998,  and the  Company  expects a
significant use of cash in 1999 as it markets and expands the  onhealth.com  web
site.  Any material  unforeseen  increase in expenses or reductions in projected
revenues  will  likely  require the  Company to seek  additional  debt or equity
financing.  If additional  cash is required,  the Company may need to reduce its
expenditures  or curtail  certain  operations.  There can be no  assurance  that
additional  capital,  on a debt or equity basis, will be found, or if found that
it will be on economically viable terms.

YEAR 2000

The Year 2000  issue is the  potential  for system and  processing  failures  of
date-related data and the result of computer-controlled systems using two digits
rather than four to define the applicable year. For example,  computer  programs
that have  time-sensitive  software may  recognize a date using "00" as the year
1900  rather  than the year  2000.  This  could  result  in  system  failure  or
miscalculations  causing  disruptions  of  operations,  including,  among  other
things, a temporary inability to process  transactions,  send invoices or engage
in similar normal business activities.



                                       27
<PAGE>

We could be affected by Year 2000 issues  related to  non-compliant  information
technology ("IT") systems or non-IT systems that we operate or that are operated
by third parties. We have substantially completed assessment of our internal and
external  (third-party)  IT  systems  and non-IT  systems.  At this point in our
assessment,  we are not currently  aware of any Year 2000  problems  relating to
systems we  operate  or that are  operated  by third  parties  that would have a
material effect on our business,  results of operations or financial  condition,
without  taking into  account our efforts to avoid such  problems.  Based on our
assessment to date, we do not anticipate that costs  associated with remediating
our  non-compliant  IT systems or non-IT  systems to exceed  $100,000,  although
there  can be no  assurance  to such  effect,  and any such  cost will be funded
through  operating  cash flows.  To date the Company has incurred no significant
costs related to the assessment of, and preliminary  efforts in connection with,
its Year 2000 project and the development of a remediation plan. Management does
not currently expect the Company's  financial condition or results of operations
will be materially  adversely  affected by the Year 2000 issue.  There can be no
guarantee  that the systems of other  companies on which the  Company's  systems
rely will be timely converted,  or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems,  would not have
a material adverse effect on the Company.

To  the  extent  that  our  assessment  is  finalized  without  identifying  any
additional material  non-compliant IT systems we operate or that are operated by
third  parties,  the most  reasonably  likely worst case Year 2000 scenario is a
systemic failure beyond our control,  such as a prolonged  telecommunications or
electrical failure. Such a failure could prevent us from operating our business,
prevent users from accessing our web site, or change the behavior of advertising
customers  or  persons  accessing  our web site.  We  believe  that the  primary
business risks, in the event of such failure,  would include, but not be limited
to, lost advertising  revenues,  increased operating costs, loss of customers or
persons  accessing our web site, or other business  interruptions  of a material
nature,  as well as claims  of  mismanagement,  misrepresentation,  or breach of
contract,  any of which could have a material  adverse  effect on our  business,
results of operations and financial condition.  We have not made any contingency
plans to address such risks.


FORWARD-LOOKING STATEMENTS

Certain  statements  made in this Form  10-K,  which are  summarized  here,  are
forward-looking  statements  that  involve  risk and  uncertainties,  and actual
results may be materially different.  Factors that could cause actual results to
differ include, but are not limited to those identified:

     THE  EXPECTATION  THAT THE COMPANY WILL BECOME THE LEADING  ON-LINE  HEALTH
     INFORMATION  NETWORK DEPENDS ON OUR ABILITY TO CONTINUE TO: (I) OBTAIN HIGH
     QUALITY  EDITORIAL  CONTENT,  (II)  IMPLEMENT  EFFECTIVE  TRAFFIC  BUILDING
     PROGRAMS,  AS WELL AS OTHER GENERAL MARKET CONDITIONS AND (III) COMPETITIVE
     CONDITIONS  WITHIN  THE  MARKET,   (INCLUDING,  BUT  NOT  LIMITED  TO,  THE
     INTRODUCTION AND FURTHER DEVELOPMENT OF COMPETITIVE WEB SITES).

     THE EXPECTATION THAT THE COMPANY WILL SEE A GROWTH IN REVENUES AND POSITIVE
     NET INCOME AS A RESULT OF ITS SHIFT IN FOCUS TO ITS ON-LINE  HEALTH NETWORK
     DEPENDS ON  CUSTOMER  INTEREST,  THE ABILITY TO OBTAIN  SUCCESSFUL  REVENUE
     SOURCES FROM  ADVERTISERS,  AS WELL AS OTHER GENERAL MARKET AND COMPETITIVE
     CONDITIONS WITHIN THE ON-LINE HEALTH NETWORK MARKET.

     FOR ADDITIONAL  INFORMATION REGARDING  FORWARD-LOOKING  STATEMENTS,  PLEASE
     REFER TO THE FIRST  PARAGRAPH IN "ITEM 1.  BUSINESS"  AND "FACTORS THAT MAY
     AFFECT FUTURE RESULTS."

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       The Company  believes  that the market risk arising from holdings of its
financial instruments is not material.

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

       The financial information required  by Item 8  is  included elsewhere in
this Report (see Part IV, Item 14).

ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE

       None.


                                       28
<PAGE>



                                    PART III

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         The  information  required by this Item is incorporated by reference to
the Company's  definitive  proxy statement to be filed within 120 days after the
end of the Company's fiscal year ended December 31, 1998.


ITEM 11.        EXECUTIVE COMPENSATION

         The  information  required by this Item is incorporated by reference to
the Company's  definitive  proxy statement to be filed within 120 days after the
end of the Company's fiscal year ended December 31, 1998.


ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required by this Item is incorporated by reference to
the Company's  definitive  proxy statement to be filed within 120 days after the
end of the Company's fiscal year ended December 31, 1998.


ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required by this Item is incorporated by reference to
the Company's  definitive  proxy statement to be filed within 120 days after the
end of the Company's fiscal year ended December 31, 1998.




                                       29
<PAGE>




                                     PART IV

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

         (1)  FINANCIAL STATEMENTS                                         
                                                                           PAGE
                                                                           -----
              Report of Ernst & Young LLP, Independent Auditors............ F-1
              Balance Sheet as of December 31, 1998 and 1997............... F-2
              Statement of Operations for the years ended
                 December 31, 1998, 1997 and 1996.......................... F-3
              Statement of Shareholders' Equity for the years ended
                 December 31, 1998, 1997 and 1996.......................... F-4
              Statement of Cash Flows for the years ended
                 December 31, 1998, 1997 and 1996.......................... F-5
              Notes to Financial Statements................................ F-6


         (2)  FINANCIAL STATEMENT SCHEDULES                           
                                                                           PAGE
                                                                           ----
              Valuation and Qualifying Accounts                            S-1


              All other  schedules are omitted because they are not applicable,
              or not required  because the required  information  is included in
              the Financial Statements or notes thereto.

         (3)  EXHIBITS AND REPORTS ON FORM 8-K
              (a)  EXHIBITS WITH EACH MANAGEMENT CONTRACT OR COMPENSATORY PLAN
                   OR ARRANGEMENT REQUIRED TO BE FILED IDENTIFIED.

                   See paragraph (c) below.

              (b)  REPORTS ON FORM 8-K.

                   No reports on Form 8-K were filed by the registrant during 
                   the quarter ended December 31, 1998.

              (c)  EXHIBIT LISTING.

                   Certain   exhibits  have  been  previously   filed  with  the
                   Commission and are incorporated herein by reference.



                            ONHEALTH NETWORK COMPANY
                                  EXHIBIT INDEX
                       FISCAL YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                        DESCRIPTION                                           PAGE
-------                      -------------                                         -------
<S>  <C>                                                                             <C>

3.1  Amended  and  Restated  Articles  of  Incorporation  of  the  Company,
          incorporated  herein by reference to Exhibit No. 3.1 to the  Company's
          Registration  Statement on Form S-3, No. 333-69989.  3.2 Bylaws of the
          Company,  incorporated  herein by  reference to Exhibit No. 3.2 to the
          Company's Registration Statement on Form S-3, No. 333-69989.


                                       30
<PAGE>

4.1   Form of Stock Certificate, incorporated herein by reference to Exhibit
          No.  4.1 to the  Company's  Registration  Statement  on Form S-1,  No.
          33-67064
4.2   Statement  of  Registration  Rights -  Preferred  Stock,  incorporated
          herein by reference to Exhibit No. 4.2 to the  Company's  Registration
          Statement on Form S-1, No. 33-67064
4.3   Warrant Agreement,  dated as of July 17, 1992, between the Company and
          Medical Innovation Fund,  incorporated  herein by reference to Exhibit
          No.  4.3 to the  Company's  Registration  Statement  on Form S-1,  No.
          33-67064
4.4   Warrant Agreement,  dated as of November 30, 1992, between the Company
          and Ronald  Eibensteiner,  incorporated herein by reference to Exhibit
          No.  4.4 to the  Company's  Registration  Statement  on Form S-1,  No.
          33-67064
4.5   Warrant Agreement,  dated as of December 20, 1992, between the Company
          and Wayne Mills,  incorporated  herein by reference to Exhibit No. 4.5
          to the Company's Registration Statement on Form S-1, No. 33-67064.
4.7   Registration  Rights  Agreement,  dated  January 29,  1999,  among the
          Company and certain investors named therein                                51
10.1  License  Agreement,  dated April 24, 1991, among the Company,  William
          Morrow Company and Mayo Foundation for Medical Education and Research,
          as amended,  incorporated  herein by  reference to Exhibit No. 10.1 to
          the 1993 S-1
10.2  Electronic  Publishing License,  Development and Marketing  Agreement,
          dated April 28,  1993,  between the  Company and Mayo  Foundation  for
          Medical  Education and Research,  incorporated  herein by reference to
          Exhibit No. 10.4 to the 1993 S-1
10.3  401(k) Savings and Investment Plan,  incorporated  herein by reference
          to Exhibit No. 10.9 to Amendment No. 1 to the 1993 S-1
10.4  1997 Stock Option Plan, as amended,  incorporated  herein by reference
          to the Company's Preliminary Proxy Statement for the Annual Meeting of
          Shareholders  held June 16, 1998 on Form PRE 14A, filed on May 6, 1998
          with the Securities and Exchange Commission file No. 0000-22212
10.5  IVI  Publishing,   Inc.   Director  Stock  Option  Plan,  as  amended,
          incorporated herein by reference to Exhibit No. 10.12 to the Company's
          Registration Statement on Form S-1, No. 33-76496 
10.6  License  Agreement,  dated  February 9, 1994,  between the Company and
          Time Life, Inc. and First Amendment to Titles  Development  Agreement,
          dated as of February 9, 1994 between the Company and Time Life,  Inc.,
          incorporated herein by reference to Exhibit No. 10.19 to the 1994 S-1 
10.7  Lease  Agreement,  dated  March 30,  1994,  between  the  Company  and
          Ryan/Wilson Limited  Partnership,  incorporated herein by reference to
          Exhibit No. 10.25 to the 1994 S-1 
10.8  License,  Development  and Marketing  Agreement,  dated  September 28,
          1994,  between  the  Company  and Time  Life,  Inc.,  incorporated  by
          reference to Exhibit No. 10.25 to the Company's Form 10-K for the year
          ended December 31, 1994*
10.9  1994 License, Development and Marketing Agreement, dated September 27,
          1994,  between the Company and Mayo  Foundation for Medical  Education
          and  Research,  incorporated  by reference to Exhibit No. 10.26 to the
          Company's Form 10-K for the year ended December 31, 1994*
10.10 License  Agreement,  dated November 10, 1994,  between the Company and
          Massachusetts  Medical  Society,  incorporated by reference to Exhibit
          No. 10.27 to the Company's  Form 10-K for the year ended  December 31,
          1994*
10.11 Sublicense  Agreement,  dated  December 31, 1994,  between the Company
          and Georg von  Holtzbrinck  GmbH & Co.,  incorporated  by reference to
          Exhibit  No.  10.28 to the  Company's  Form  10-K  for the year  ended
          December 31, 1994*
10.12 Agreement  between  America's  Health  Network,  Inc. and the Company,
          dated May 25, 1995,  incorporated by reference to Exhibit 10.14 to the
          Company's Form 10-K for the year ended December 31, 1995*
10.13 Amendment No. 2 to License  Agreement  among William  Morrow  Company,
          Mayo  Foundation  for Medical  Education and Research and the Company,
          dated December 29, 1995, incorporated by reference to Exhibit 10.18 to
          the Company's Form 10-K for the year ended December 31, 1995*


                                       31
<PAGE>

10.14 Financial Advisor and Consulting  Agreement with Frazier & Company LP,
          dated July 14, 1994, as amended by a letter agreement,  dated June 28,
          1995, incorporated by reference to Exhibit 10.19 to the Company's Form
          10-K for the year ended December 31, 1995**
10.15 First  Amendment  dated  June,  27,  1994 and Second  Amendment  dated
          October  10,  1995  to  Lease   Agreement   between  the  Company  and
          Ryan/Wilson Limited Partnership,  incorporated by reference to Exhibit
          10.20 to the Company's Form 10-K for the year ended December 31, 1995
10.16 Agreement  dated  April 1995 among  Ryan/Wilson  Limited  Partnership,
          Wilson  Learning  Corporation  the Company  regarding a certain lease,
          incorporated  by reference to Exhibit 10.21 to the Company's Form 10-K
          for the year ended December 31, 1995
10.17 Distribution  on  Consignment  Agreement,   dated  February  29,  1996
          between the Company and Davidson & Associates,  Inc. , incorporated by
          reference  to Exhibit  10.22 to the  Company's  Form 10-K for the year
          ended December 31, 1995*
10.22 Sublease Agreement,  dated September 17, 1996, between the Company and
          Reality  Interactive,  Inc. for the fourth  floor  portion of the Main
          Lease between the Company and Ryan/Wilson Limited Partnership,  Wilson
          Learning  Corporation,  incorporated  herein by  reference  to Exhibit
          10.27 to the Company's Form 10-K for the year ended December 31, 1996
10.24 Settlement  Agreement  and Mutual  Release  dated  September  12, 1997
          between the  Company and Mayo  Foundation  for Medical  Education  and
          Research,  incorporated  herein by  reference  to Exhibit  10.1 to the
          Company's Form 10-Q for the quarter ended September 30, 1997
10.25 Sublicense  Agreement dated September 12, 1997 between the Company and
          Mayo  Foundation  for Medical  Education  and  Research,  incorporated
          herein by reference to Exhibit 10.2 to the Company's Form 10-Q for the
          quarter ended September 30, 1997
10.26 Separation  Agreement  and  Release of Claims  dated  January 26, 1998
          between the Company and Joy A. Solomon**
10.27 Letter  Agreement  dated  November  9, 1997  between  the  Company and
          Robert  Goodman,  incorporated by reference to the Company's Form 10-K
          for the year ended December 31, 1997**
10.28 Subscription Agreement,  dated January 29, 1999, among the Company and
          certain investors named therein                                            65
23.1  Consent of Ernst & Young LLP, Independent Auditors                             80
27    Financial Data Schedule (electronic version only)                              81

-------------
<FN>

**       Management Agreement or Compensatory Plan or Arrangement

</FN>
</TABLE>


                                       32
<PAGE>




                                   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,   in  Seattle,
Washington, on the 31st day of March, 1999.



                                             ONHEALTH NETWORK COMPANY


                                      By:  /s/ ROBERT N. GOODMAN 
                                         ---------------------------------------
                                           Robert N. Goodman
                                           President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the Registrant,  in
the capacities and dates indicated.

<TABLE>
<CAPTION>

       SIGNATURE                                TITLE                               DATE
   -----------------                           -------                            -------

<S>                             <C>                                             <C>

/S/ ROBERT N. GOODMAN           President, Chief Executive Officer and          March 31, 1999
-----------------------           Director (Principal Executive Officer)
     Robert N. Goodman                                                          

/S/ MICHAEL D. CONWAY           Chief Financial Officer, Controller,            March 31, 1999
-----------------------          Secretary and Principal Financial Officer
     Michael D. Conway                                                          

/S/ MICHAEL A. BROCHU           Chairman of the Board                           March 31, 1999
----------------------- 
     Michael A. Brochu                                                         

/S/ ANN  KIRSHNER               Director                                        March 31, 1999
-----------------------
     Ann  Kirshner                                                            

/S/ RAM  SHRIRAM                Director                                        March 31, 1999
-----------------------      
     Ram  Shriram    

/S/ RICK  THOMPSON              Director                                        March 31, 1999
----------------------
     Rick  Thompson                           


</TABLE>
                        



                                       33
<PAGE>

                                                              
                Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Shareholders
OnHealth Network Company

     We have audited the accompanying balance sheets of OnHealth Network Company
as of  December  31,  1998 and 1997 and the related  statements  of  operations,
shareholders'  equity and cash  flows for each of the three  years in the period
ended  December  31, 1998.  Our audits also  included  the  financial  statement
schedule  listed in the Index at Item  14(a).  These  financial  statements  and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material respects,  the financial position of OnHealth Network Company at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.



                                            /s/ ERNST & YOUNG LLP
Seattle, Washington
March 15, 1999

                                      F-1



                                       34
<PAGE>





                                          ONHEALTH NETWORK COMPANY
                                               BALANCE SHEETS
                                               (In thousands)
<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                            ---------------------------------
                                                                                 1998              1997
                                                                            ---------------    --------------
<S>                                                                         <C>                <C>

ASSETS:

Current assets:
      Cash and cash equivalents                                             $       2,119      $       2,488
      Accounts receivable, net of allowances of $256 (1998) and
           $1,011 (1997)                                                              509                337
      Inventories                                                                       -                150
      Other current assets                                                            409                332
                                                                            ---------------    --------------
Total current assets                                                                3,037              3,307

Furniture and equipment:                                                     
      Computers and software                                                        1,218              2,856
      Office equipment                                                                291              1,403
                                                                            ---------------    --------------
                                                                                    1,509              4,259
      Accumulated depreciation                                                       (774)            (2,989)
                                                                            ---------------    --------------
Furniture and equipment, net                                                          735              1,270
Other non-current assets                                                              122                  -
                                                                            ===============    ==============
Total assets                                                                $       3,894      $       4,577
                                                                            ===============    ==============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                       $       1,526      $       1,919
     Other accrued expenses                                                         2,669              2,640
                                                                            ---------------    --------------
Total current liabilities                                                           4,195              4,559

Commitments and contingencies

Shareholders' equity:
      Preferred stock, $0.01 par value; authorized, 1,000; issued and
          outstanding, none.                                                            -                  -
      Common stock, $0.01 par value; authorized, 29,000; issued
          and outstanding, 12,800 (1998) and 10,106 (1997)                            132                101
      Additional paid-in-capital                                                   89,082             78,493
      Accumulated deficit                                                         (89,515)           (78,576)
                                                                            ---------------    --------------
Total shareholders' equity (deficit)                                                 (301)                18
                                                                            ---------------    --------------
Total liabilities and shareholders' equity                                  $        3,894     $       4,577
                                                                            ===============    ==============
     
</TABLE>

         The accompanying notes are an integral part of the financial statements

                                      F-2



                                       35
<PAGE>




                                         ONHEALTH NETWORK COMPANY
                                         STATEMENTS OF OPERATIONS
                                   (In thousands, except per share data)

<TABLE>
<CAPTION>


                                                                     Year Ended December 31,
                                                       -----------------------------------------------------
                                                            1998               1997               1996
                                                       ---------------    ---------------    ---------------
<S>                                                    <C>                <C>                <C> 
Net revenue                                            $       1,522      $       3,761      $       9,470
Cost of revenue                                                  767              2,541              5,076
                                                       ---------------    ---------------    ---------------
Gross margin                                                     755              1,220              4,394

Operating expenses:
     Product development                                       3,744              4,243              5,651
     Sales and marketing                                       5,626              1,347              2,705
     General and administrative                                2,404              6,892              6,364
                                                       ---------------    ---------------    ---------------
            Total operating expenses                          11,774             12,482             14,720
                                                       ---------------    ---------------    ---------------
Loss from operations                                         (11,019)           (11,262)           (10,326)

Interest income (expense)                                         84               (158)               169
Other income (expense)                                            (4)               473                  -
                                                       ---------------    ---------------    ---------------
Total interest and other income and expense                       80                315                169
                                                       ---------------    ---------------    ---------------
Net loss                                                     (10,939)           (10,947)           (10,157)

Preferred stock dividends                                       (103)              (100)              (119)
Preferred stock accretion                                       (702)               (43)               (60)
Preferred stock deemed dividend                                 (220)            (2,875)                 -
                                                       ===============    ===============    ===============
Net loss applicable to common shareholders             $     (11,964)     $     (13,965)     $     (10,336)
                                                       ===============    ===============    ===============
Net loss per common share-
     Basic and diluted                                 $       (1.12)     $       (1.73)     $       (1.36)
                                                       ===============    ===============    ===============
Weighted average number of common shares
      outstanding                                             10,680              8,056              7,580
                                                       ===============    ===============    ===============


</TABLE>

        The accompanying notes are an integral part of the financial statements

                                      F-3


                                       36
<PAGE>




                                                  ONHEALTH NETWORK COMPANY
                                             STATEMENTS OF SHAREHOLDERS' EQUITY
                                                       (In thousands)
<TABLE>
<CAPTION>
   
                                                                         Additional                               Total
                                              Common Stock                Paid-In          Accumulated         Shareholders'
                                        Shares          Par Value         Capital            Deficit              Equity
                                     -------------    --------------    -------------     ---------------     ---------------
<S>                                  <C>              <C>               <C>               <C>                 <C>

Balance at December 31, 1995                7,524     $         75      $     70,277      $      (57,472)       $     12,880
Issuance of common stock:
   Exercise of options                         88                1               355                   -                 356
Dividends on convertible
     redeemable preferred stock
     ($0.06 per share)                          -                -             (119)                   -                (119)
Preferred stock accretion                       -                -              (60)                                     (60)
Net loss                                        -                -                -              (10,157)            (10,157)
                                     -------------    --------------    --------------    ---------------     ---------------
Balance at December 31, 1996                7,612               76            70,453             (67,629)              2,900
Issuance of common stock:
   Exercise of options                         59                1                97                   -                  98
   Lawsuit settlement                         175                2               431                   -                 433
Return of common stock per
     Mayo agreement                          (490)              (5)                5                   -                   -
Preferred stock conversion to
     common                                 1,000               10             1,938                   -               1,948
Dividends on convertible
     Redeemable preferred stock
     ($0.06 per share)                          -                -              (100)                  -                (100)
Preferred stock accretion                       -                -               (43)                  -                 (43)
Convertible subordinated debenture
conversion to common                        1,750               17             5,712                   -               5,729
Net loss                                        -                -                 -             (10,947)            (10,947)
                                     -------------    --------------    --------------    ---------------     ---------------
Balance at December 31, 1997               10,106              101            78,493             (78,576)                 18
Issuance of common stock:
   Private placements                       1,543               15             5,675                   -               5,690
   Exercise of options                        371                4             1,064                   -               1,068
   Services                                    47                4               361                                     365
Discount on sale of convertible
     redeemable preferred stock                 -                -               702                   -                 702
Preferred stock conversion to
     Common stock                             733                8             3,622                   -               3,630
Cash dividends on convertible
     redeemable preferred stock
     ($0.05 per share)                          -                -                (3)                  -                  (3)
Non-cash dividends -
     preferred stock                            -                -              (100)                  -                (100)
Accretion of discount on
     preferred stock                            -                -              (702)                  -                (702)
Preferred stock deemed dividend                 -                -              (220)                  -                (220)
Issuance of stock options and
     warrants for services                      -                -               190                   -                 190
Net loss                                        -                -                 -             (10,939)            (10,939)
                                     =============    ==============    ==============    ===============     ===============
Balance at December 31, 1998               12,800     $        132      $     89,082      $      (89,515)     $         (301)
                                     =============    ==============    ==============    ===============     ===============
</TABLE>

  The accompanying notes are an integral part of the financial statements


                                       F-4


                                       37
<PAGE>


                                          ONHEALTH NETWORK COMPANY
                                          STATEMENTS OF CASH FLOWS
                                               (In thousands)
<TABLE>
<CAPTION>

                                                                        Year ended December 31,
                                                           ---------------------------------------------------
                                                               1998               1997              1996
                                                           --------------    ---------------   ---------------
<S>                                                        <C>               <C>               <C>

Cash flows from operating activities:
     Net loss                                              $     (10,939)    $    (10,947)     $     (10,157)
     Adjustments to reconcile net loss to cash used 
      in operating activities:
          Depreciation and amortization                              722             1,252             1,409
          Interest expense associated with debenture 
             conversion                                                -             2,229                 -
          (Gain) loss on disposition of  furniture
             and equipment                                           285               711                (3)
          Provision for (recoveries of) doubtful
             accounts and returns                                   (755)            2,336             1,675
          Amortization of warrants issued for services                 8                 -                 -
          Compensation from stock grants                             130                 -                 -
          Common stock issued as litigation
             settlement                                                -               433                 -
          Common stock issued for services                           365                 -                 -
          Changes in assets and liabilities:
             (Increase) decrease in accounts receivable              583             1,461            (2,601)
             Decrease in inventories                                 150                 5               666
             (Increase) decrease in other current assets             (25)              253              (139)
             (Increase) decrease in other non-current
                assets                                              (122)            1,885              (585)
             Increase (decrease) in accounts payable                (393)           (1,287)              843
             Increase in other accrued expenses                       29               760               636
                                                           --------------    ---------------   ---------------
Net cash used in operating activities                             (9,962)             (909)           (8,256)

Cash flows from investing activities:
     Proceeds from disposition of furniture and
        fixtures                                                     217                61               510
     Capital expenditures                                           (689)             (104)             (288)
                                                           --------------    ---------------   ---------------
Net cash provided by (used in) investing activities                 (472)              (43)              222

Cash flows from financing activities:
      Proceeds from issuance of convertible
        redeemable preferred stock                                 5,000                 -                 -
      Proceeds from issuance of convertible
        subordinated debentures                                        -                 -             3,500
      Proceeds from issuance of common stock:
         Private placements                                        5,690                 -                 -
         Exercise of options                                       1,068                98               356
      Redemption of preferred stock                               (1,690)                -                 -
      Preferred stock dividends paid                                  (3)             (120)             (119)
                                                           --------------    ---------------   ---------------
Net cash provided by (used in) financing activities               10,065               (22)            3,737
                                                           --------------    ---------------   ---------------
Net decrease in cash and cash equivalents                           (369)             (974)           (4,297)
Cash and cash equivalents at beginning of year                     2,488             3,462             7,759
                                                           ==============    ===============   ===============
Cash and cash equivalents at end of year                   $       2,119     $       2,488     $       3,462
                                                           ==============    ===============   ===============

</TABLE>

        The accompanying notes are an integral part of the financial statements

                                      F-5


                                       38
<PAGE>



                            ONHEALTH NETWORK COMPANY
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1998


NOTE 1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF THE BUSINESS

OnHealth  Network  Company,  formerly  known  as  IVI  Publishing,   Inc.,  (the
"Company"),  is engaged in a single business consisting of electronic publishing
of health and medical information in interactive multimedia formats.

USE OF ESTIMATES

The  financial  statements  have been  prepared  in  conformity  with  generally
accepted accounting  principles,  which require management to make estimates and
assumptions  that affect the amounts and  disclosures  reported in the financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial  instruments  of the  Company  consist  of cash and cash  equivalents,
accounts  receivable,  other current assets,  accounts payable and other accrued
expenses.  The Company's other financial instruments generally approximate their
fair values at  December  31,  1998 and 1997 based on the  short-term  nature of
these instruments.

CASH AND CASH EQUIVALENTS

The Company  considers  all highly liquid  investments  with a maturity of three
months or less at the time of purchase to be cash  equivalents.  At December 31,
1998 and 1997, cash and cash equivalents  consisted principally of United States
Government obligations for which the carrying amount approximates fair value.

INVENTORIES

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

FURNITURE AND EQUIPMENT

Furniture  and  equipment  are  stated  at cost and are  depreciated  using  the
straight-line  method  over the  shorter of the  estimated  useful  lives of the
respective assets, generally five to seven years.

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

The Company is potentially  subject to a  concentration  of credit risk from its
trade accounts,  which are not  collateralized.  The Company  performs  periodic
credit reviews of its customers and maintains  reserves for potential losses for
uncollectible accounts.  Such losses have historically been within management's
expectations.

Three  customers  represent  40%,  16% and 13% of net revenue for the year ended
December 31, 1998; one customer represents 12% of net revenue for the year ended
December  31,  1997;  and three  customers  represent  15%,  21%, and 11% of net
revenue in 1996. The revenue  recorded from the customer which represents 40% of
the net revenue in 1998 was the result of a $603,000  payment  received from the
customer  related  to  minimum  sales  requirements  form  a  terminated  CD-ROM
distribution  agreement.  At December 31, 1998, two customers  comprised 36% and
20% of outstanding accounts receivable. Two customers represented 77% and 27% of
accounts receivable at December 31, 1997.


                                       F-6


                                       39
<PAGE>


REVENUE RECOGNITION

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

Online revenue is generated  through the sale of advertising  and sponsorship of
the Company's  onhealth.com  web site.  Advertising and  sponsorship  revenue is
earned based upon the number of impressions delivered.

Product  sales and  licensing  revenue  consists of retail  distribution  sales,
direct  mail  sales,  and product  sales and  royalties  on licenses to original
equipment  manufacturers (OEM's). The revenue is recognized upon shipment of the
product or in accordance with the licensing agreements.  An allowance for return
is recorded at the time revenue is recognized.

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

Revenue  relating to the licensing of the Company's  health and medical  content
for use on cable  television  channels is recognized when payments are received.
The  Company  recognized  revenue  under its  cable  television  agreement  with
America's Health Network ("AHN") during 1997 and 1996. (See Note 12).

Revenues for each of the three years ended December 31, 1998,  1997 and 1996 are
as follows (in thousands):

                                           1998         1997         1996
                                       -----------  ------------  -----------

     Online                            $    388     $      58     $  1,000
     Contract development and other         380         1,220        1,346
     Product sales and licensing            754         1,990        5,152
     Cable television                         -           493        1,972
                                       -----------  ------------  -----------
    Net revenues                       $  1,522     $   3,761     $  9,470
                                       ===========  ============  ===========


PRODUCT DEVELOPMENT COSTS

Product  development  costs consist  principally of payroll and related expenses
for development,  editorial, systems and telecommunications operations personnel
and  consultants,  systems and  telecommunications  infrastructure  and costs of
acquired content.  To date, all product  development costs have been expensed as
incurred.

ADVERTISING COSTS

Advertising  costs are  expensed  as they are  incurred.  Advertising  costs in 
1998, 1997, and 1996 were $3,409,000, $190,000 and $556,000, respectively.

INCOME TAXES

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

                                      F-7


                                       40
<PAGE>


STOCK BASED COMPENSATION

Pursuant to  Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 123,
"Accounting for Stock-Based  Compensation,"  the Company is required to disclose
the  effects on the net loss and per share data as if the Company had elected to
use the  fair  value  approach  to  account  for all  its  employee  stock-based
compensation plans. The Company follows the disclosure-only  provisions SFAS No.
123 but applies Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" (APB 25) and related  interpretations in accounting for its
employee stock options.  Under APB 25, when the exercise price of employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recorded.

LOSS PER COMMON SHARE

Basic earnings per share ("EPS")  excludes any dilutive  effects of common stock
equivalents - options,  warrants and convertible securities - and is computed by
dividing income available to common shareholders by the weighted-average  number
of common  shares  outstanding  during the  period.  Diluted  EPS is computed by
dividing income available to common shareholders by the weighted-average  number
of common stock equivalent shares outstanding.

The effects of common stock  equivalents  are excluded from the  computation for
all periods presented as their effects are anti-dilutive.

RECLASSIFICATIONS

Certain  reclassifications  have been made for  consistent  financial  statement
presentation.

IMPACT OF RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS

SFAS No. 130,  "Reporting  Comprehensive  Income," was issued in June 1997. This
Statement,  adopted by the Company on January 1, 1998, establishes standards for
reporting  and display of  comprehensive  income and its  components  (revenues,
expenses,  gains  and  losses)  in  a  full  set  of  general-purpose  financial
statements.  This  statement  requires  that all items that are  required  to be
recognized under accounting  standards as components of comprehensive  income be
reported in a financial  statement that is displayed with the same prominence as
other  financial  statements.  This  statement  does not affect  the  results of
operations or financial  position of the Company.  As of December 31, 1998, 1997
and 1996,  the  company  had no items that would have been  classified  as other
comprehensive income.

SFAS  No.  131,  "Disclosures  About  Segments  of  an  Enterprise  and  Related
Information,"  was issued in June 1997 and redefined how operating  segments are
determined.   SFAS  No.  131  requires   disclosure  of  certain  financial  and
descriptive information about a company's operating segments. This statement was
adopted by the Company on January 1, 1998.  Provisions of this statement require
annual  disclosure  in the year of adoption  and interim  reporting  for periods
thereafter.  This  statement  does not  affect  the  results  of  operations  or
financial  position  of the  Company.  The  company  operates  in one  principal
business segment across domestic markets.

SFAS No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities,"
was issued in June 1998 and establishes  accounting and reporting  standards for
derivative  instruments,  including certain derivative  instruments  embedded in
other contracts, and for hedging activities.  The statement is effective for all
fiscal years  beginning  after June 15, 1999.  The impact of the adoption of the
provisions  of this  statement  on the results of  operations  or the  financial
position of the Company has not yet been determined.

In March 1998, the Accounting  Standards Executive Committee issued Statement of
Position  98-1  ("SOP  98-1"),  "Accounting for the Costs of  Computer  Software
Developed or Obtained for Internal  Use." SOP 98-1 requires all costs related to
the  development of internal use software  other than those incurred  during the
application development stage to be expensed as incurred.  Costs incurred during
the application  development  stage are required to be capitalized and amortized
over the estimated  useful life of the  software.  SOP 98-1 is effective for the
Company's fiscal year ending December 31, 1999. Adoption is not expected to have
a  material  effect  on the  Company's  financial  statements  as the  Company's
policies are substantially in compliance with SOP 98-1.


                                      F-8


                                       41
<PAGE>



NOTE 2.         LIQUIDITY

The Company has experienced  recurring  losses from operations and has generated
an  accumulated  deficit from  inception  to December 31, 1998 of  approximately
$89,515,000.  At December 31, 1998, the Company has a working capital deficiency
of $1,158,000 and total shareholders'  deficit of $301,000. In January 1999, the
Company  completed a $14.3 million  issuance of the Company's  common stock (see
"Note 19.  Subsequent  Events").  The  Company  believes  that its cash and cash
equivalents,  including the $14.3  million  received in the January 1999 private
placement,  will be sufficient to fund its operations through December 31, 1999.
Operations  generated a negative  cash flow during  1996,  1997 and 1998 and the
Company  expects a significant use of cash in 1999 as it markets and expands the
onhealth.com  web  site.  Any  material   unforeseen  increase  in  expenses  or
reductions  in  projected  revenue  will  likely  require  the  Company  to seek
additional debt or equity financing. If additional cash is required, the Company
may need to reduce its expenditures or curtail certain operations.  There can be
no assurance that additional  capital, on a debt or equity basis, will be found,
or if found that it will be on economically viable terms.

NOTE 3.         COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS

                                                           December 31,
                                                --------------------------------
                                                      1998              1997
                                                ---------------  ---------------
                                                         (In thousands)
       Furniture and equipment:
            Computer hardware                   $       1,032    $       2,160
            Software                                      186              455
            Furniture & fixtures                          220            1,403
            Equipment                                       -              241
            Leasehold improvements                         71                -
                                                ---------------  ---------------
                                                        1,509            4,259
            Less accumulated depreciation                (774)          (2,989)
                                                ===============  ===============
       Total                                    $         735    $       1,270
                                                ===============  ===============

       Other accrued expenses:
            Litigation loss                     $         677    $         961
            Advertising                                   609                -
            Severance                                      90              610
            Royalties                                     338              501
            Rent obligation                                53              252
            Accrued wages and benefits                    175                4
            Payroll taxes                                 358                2
            Other                                         369              310
                                                ---------------  ---------------
       Total                                    $       2,669    $       2,640
                                                ===============  ===============


NOTE 4.         COMMON STOCK

On October 30,  1998,  the  Company  completed a  $3,690,000  private  placement
involving  the issuance of 1,000,898  shares of common stock at $3.69 per share.
On December  14, 1998,  the Company  completed a  $2,000,000  private  placement
involving the issuance of 542,419 shares of common stock at $3.69 per share. The
shares of common  stock  issued on October 30, 1998 and  December  14, 1998 were
issued to two accredited  investors.  The terms of these  issuances  potentially
obligated the Company to issue  additional  shares of common stock (depending on
the future performance of the Company's common stock (the "Reset  Provisions")).
Such Reset Provisions only relate to those shares purchased by the two investors
on October 30, 1998 and  December 14,  1998.  As of March 12,  1999,  all of the
shares of common  stock  subject to the Reset  Provisions  have been sold and no
such Reset Provisions apply to any of the Company's outstanding Common stock.

                                      F-9


                                       42
<PAGE>



NOTE 5.         CONVERTIBLE SUBORDINATED DEBENTURES

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

NOTE 6.         CONVERTIBLE REDEEMABLE PREFERRED STOCK

In April 1998,  the Company  issued  5,000  shares of the  Company's 5% Series B
Convertible  Redeemable  Preferred  Stock (the  "Series B Preferred  Stock") for
$5,000,000.  The Series B Preferred Stock was convertible at various  increasing
discount rates to the market value of the common stock. This discount aggregated
$702,000 and was recorded as preferred  stock accretion over the various periods
of conversion.  During 1998,  3,630 shares of the Series B Preferred  Stock were
converted  into 732,605  shares of the Company's  common stock and 1,470 of such
preferred  shares were  redeemed.  The excess of the  redemption  price over the
carrying value of the preferred shares redeemed was $220,000 and was recorded as
a preferred  stock deemed  dividend.  The preferred  stock  accretion and deemed
dividend  increased  the net  loss  applicable  to  common  shareholders  in the
calculation  of the  1998 net loss  per  share  as  shown in the  statements  of
operations.

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


NOTE 7.         STOCK OPTIONS AND WARRANTS

In December 1997, the Company's Board of Directors adopted the 1997 Stock Option
Plan ("1997 Plan") for its employees, directors and consultants. The Plan, which
is  administered  by the Board of Directors,  permits the Company to grant stock
options  for the  purchase of Common  Stock.  The purpose of the 1997 Plan is to
promote the success of the Company by facilitating  the employment and retention
of competent  personnel and by furnishing  incentive to directors,  officers and
employees of the Company and consultants and advisors to the Company, upon whose
efforts  the success of the Company  will  depend to a large  degree.  Incentive
stock options ("ISOs") and  non-qualified  stock options may be granted pursuant
to the 1997 Plan.

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

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

                                       F-10


                                       43
<PAGE>



The number of shares of the  Company's  common stock that have been reserved for
issuance for such plans total 2,378,000.

Activity  in the 1991  Plan,  1997 Plan and  Director  Stock  Option  Plan is as
follows:

<TABLE>
<CAPTION>
                                                 Remaining
                                                 Number of                  Weighted-
                                                  Shares       Number      Average Price
                                                 Reserved     of Shares     Per Share
                                               ------------  -----------  -------------
                                               ------------  -----------  -------------
<S>                                            <C>           <C>          <C> 

TOTAL OUTSTANDING AT DECEMBER 31, 1995            489,000       907,000    $  11.53
Options Reserved                                  200,000             -
Options Granted                                  (582,000)      582,000        4.98
Options Exercised                                       -       (88,000        4.06
Options Canceled                                  461,000      (461,000       13.24
                                               ------------  -----------
TOTAL OUTSTANDING AT DECEMBER 31, 1996            568,000       940,000        7.10
Options Reserved                                1,750,000             -
Options Granted                                  (684,000)      684,000        2.85
Options Exercised                                       -       (59,000)       1.64
Options Canceled                                  474,000      (474,000)       9.86
                                               ------------  -----------
TOTAL OUTSTANDING AT DECEMBER 31, 1997          2,108,000     1,091,000        3.53
Options Granted                                  (889,000)      889,000        5.05
Options Exercised                                       -      (371,000)       2.88
Options Canceled                                  393,000      (393,000)       3.84
                                               ------------  -----------
TOTAL OUTSTANDING AT DECEMBER 31, 1998          1,162,000     1,216,000     $  4.74
                                               ============  ===========
</TABLE>


At December 31, 1998, 1997 and 1996, options to purchase 237,000,  325,000,  and
602,000 shares were exercisable, respectively.

The following table summarizes  information about the stock options  outstanding
at December 31, 1998:

<TABLE>
<CAPTION>

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

  $2.31 -  2.50         150,000         9 years           $2.31           50,000        $2.31
   2.51 -  3.00          75,000         8 years            2.82           46,000         2.85
   3.01 -  3.50         190,000         8 years            3.32           71,000         3.36
   3.51 -  4.00         205,000        10 years            3.75                -            -
   4.01 -  5.50          77,000        10 years            4.36                -            -
   5.51 -  6.00          30,000         4 years            5.75           30,000         5.75
   6.01 -  6.50         429,000         9 years            6.25                -            -
   6.51 - 26.00          60,000         7 years           10.29           40,000        11.75
                    --------------- --------------- --------------- -------------- ------------

  $2.31 - 26.00       1,216,000         9 years           $3.25          237,000        $4.76

</TABLE>


From time to time,  the  Company's  Board of Directors may grant  stock  options
outside of the existing  stock  option  plans.  In 1997,  the Board of Directors
adopted the  1997-1998  New Hire Stock Option Plan.  This plan  provides for the
granting of 1,213,500  non-qualified  stock options to newly hired  employees in
late 1997 through early 1998. In 1997, the Company  granted  options to purchase
522,500  shares at prices  ranging from $2.31 to $2.50 per share.  These options
expire in 2007. In 1998, the Company granted options to purchase  996,000 shares
at prices ranging from $2.75 to $7.88 per share. These options expire in 2008.


                                       F-11


                                       44
<PAGE>


The options  granted  under this plan had a weighted  average price per share of
$3.33.  Of the  options  granted  in 1997 and 1998,  40,000  and  265,000  stock
options, respectively, were canceled in 1998 and none were exercised.

The pro forma information  regarding net loss and net loss per share required by
SFAS NO. 123 has been  determined  as if the  Company  had  accounted  for its
employee stock options under the fair value method of that  Statement.  The fair
value  for  these  options  has been  estimated  at the  date of  grant  using a
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions for 1998, 1997 and 1996:

                                            1998           1997         1996
                                       -------------  -----------  ------------
    Risk-free interest rate                  5.00%         5.50%        6.21%
    Dividend yield                              0%            0%           0%
    Volatility factor                         .817          .760         .726
    Weighted-average expected life         5 years       5 years      5 years


The  weighted-average  fair value of options  granted during 1998, 1997 and 1996
was $2.97, $1.74, and $2.99,  respectively.  The Black-Scholes  option valuation
model was developed for use in estimating  the fair value of traded options that
have no vesting  restrictions and are fully  transferable.  In addition,  option
valuation models require the input of highly  subjective  assumptions  including
the  expected  stock price  volatility.  Because the  Company's  employee  stock
options  have  characteristics  significantly  different  from  those of  traded
options,  and because changes in the subjective input assumptions can materially
affect the fair value estimate,  in management's opinion, the existing models do
not  necessarily  provide a  reliable  single  measure  of the fair value of its
employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options'  vesting  period.  The  Company's  pro
forma information follows:

<TABLE>
<CAPTION>

                                                                     1998             1997         1996
                                                                --------------   -------------  ------------
                                                                    (In thousands, except per share data)

<S>                                                            <C>               <C>               <C> 

Net loss applicable to common shareholders - as reported        $     (11,964)   $   (13,965)    $  (10,336)
Net loss applicable to common shareholders - pro forma                (12,970)       (14,294)       (10,562)
Basic and diluted net loss per share - as reported                     $(1.12)        $(1.73)        $(1.36)
Basic and diluted net loss per common share  pro forma                 $(1.21)        $(1.77)        $(1.39)

</TABLE>


The  pro  forma  effect  on the  net  loss  for  1998,  1997,  and  1996  is not
representative  of the pro forma effect on the net loss in future years  because
it does not take into  consideration pro forma  compensation  expense related to
grants made prior to 1995.

As of  December  31,  1998 and 1997 the  Company  had  warrants  outstanding  to
purchase 678,577 and 547,260 shares of Common Stock at prices ranging from $3.25
per share to $30.94 per share.  Warrants outstanding at December 31, 1998 expire
from 1999 through 2003. The warrants were generally  issued to underwriters  and
investment  bankers for  services  performed in  connection  with several of the
Company's financing transactions.

Common stock reserved for future issuance at December 31, 1998 is as follows:

             1991, 1997 and Director Stock Option Plans             2,378,000
             1997 - 1998 New Hire Plan                              1,213,500
             Warrants                                                 678,577
                                                                 =============
                                                                    4,270,077
                                                                 =============

                                       F-12


                                       45
<PAGE>



NOTE 8.        LOSS PER COMMON SHARE

The components of basic and diluted loss per common share are as follows:
<TABLE>
<CAPTION>

                                                    1998               1997              1996
                                                --------------    ---------------    -------------
                                                  (In thousands, except per share amounts)
<S>                                             <C>               <C>                <C>

Net loss applicable to common shareholders
     (numerator)                                 $   (11,964)     $     (13,965)      $  (10,366)
                                                ==============    ===============    =============

 Weighted average common shares outstanding
     (denominator)                                    10,680              8,056            7,580
                                                ==============    ===============    =============

Loss per share:
     Basic and diluted                          $      (1.12)     $       (1.73)      $    (1.36)
                                                ==============    ===============    =============

</TABLE>

NOTE 9.        COMMITMENTS AND CONTINGENCIES

The Company  leases  office space under  agreements  accounted  for as operating
leases. The agreements expire at various times through 2003. Gross rent expense,
including  charges for monthly  operating  costs,  was  $522,000,  $881,000  and
$1,433,000  for 1998,  1997 and 1996,  respectively.  The Company has  subleased
certain  facilities to various  tenants under  non-cancelable  operating  leases
expiring in 1999. The Company also has several marketing agreements that require
minimum  payments to be made.  Scheduled  minimum lease  commitments  and annual
marketing payments are as follows:

                                                                Marketing
                                              Lease              Payments
                                       --------------------  -----------------
                                                   (In thousands)

                       1999            $              176     $          1,885
                       2000                           134                  100
                       2001                           142                   50
                       2002                           151                    -
                       2003                            52                    -
                                       --------------------  ------------------
                                                      655                2,035
             Less sublease rental
                  income                             (162)                   -
                                       --------------------  ------------------
             Total                     $              493    $           2,035
                                       ====================  ==================


                                       F-13


                                       46
<PAGE>



NOTE 10.        SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>


(In thousands)                                                          Year Ended December 31, 1998
                                                              -------------------------------------------------
                                                                  1998             1997              1996
                                                              -------------    --------------    --------------
<S>                                                           <C>              <C>               <C>
Cash paid during the years for:
   Interest                                                   $           -    $         298     $           -
   Income taxes                                                           7                5                10

Non-cash investing and financing transactions:
   Conversion of preferred stock to common stock                      3,630            1,948                 -
   Conversion of convertible subordinated debentures                      -            5,729                 -
   Preferred stock/warrant discount                                     702                -                 -
   Preferred stock/warrant discount accretion                          (702)             (43)              (60)
   Preferred stock dividends                                            100                -                 -
   Stock options and warrants issued for services                       190                -                 -
   Preferred stock deemed dividend                                        -            2,875                 -
   Common stock issued as litigation settlement                           -              433                 -

</TABLE>


NOTE 11.        INCOME TAXES

At December  31,  1997,  the Company has net  operating  loss  carryforwards  of
$81,910,000 for income tax purposes and unused research and development  credits
of $339,000 that expire at various times through 2013. These  carryforwards  are
subject to the  limitations  of Internal  Revenue Code Section 382. This section
provides  limitations  on the  availability  of net  operating  losses to offset
current  taxable  income if  significant  ownership  changes  have  occurred for
federal tax purposes.  For financial reporting  purposes,  a valuation allowance
has been recognized to completely reserve for the deferred tax assets related to
those carryforwards. The reserve has been established because of the uncertainty
of future taxable income,  which is necessary to realize the benefits of the net
operating loss carryforwards.

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

                                                       December 31,
                                        ----------------------------------------
                                               1998                  1997
                                        -------------------   ------------------
                                        -------------------   ------------------
DEFERRED TAX ASSETS:
Accrued expenses and allowances         $     1,223,000       $     2,788,000
Research and development credits                339,000               326,000
Net operating loss carryforwards             28,669,000            25,880,000
                                        -------------------   ------------------
                                             30,231,000            28,994,000
DEFERRED TAX LIABILITIES:
Depreciation                                     15,000                16,000
                                        -------------------   ------------------
                                                 15,000                16,000
                                        -------------------   ------------------
                                        -------------------   ------------------
Net deferred tax assets                                        
    before valuation allowance               30,216,000            28,978,000
Less valuation allowance                    (30,216,000)          (28,978,000)
                                        ===================   ==================
NET DEFERRED TAX ASSETS                 $             -       $             -
                                        ===================   ==================


NOTE 12.        INVESTMENT IN AMERICA'S HEALTH NETWORK

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

In the first  quarter of 1994,  the Company  expensed its entire  investment  of
$2,000,000  along with the  related  investment  banking  fees of  approximately
$263,000.  This  approach  to the  investment  was  made on the  basis  that the


                                       F-14


                                       47
<PAGE>


invested  amounts  are not  assured of  recoverability  through  future  revenue
streams.  As of December 31, 1998 and 1997, the Company's  underlying  equity in
its  investment  in  AHN  was  approximately  $100,000  and  $500,000  based  on
approximately 1% and 4% of AHN's net assets, respectively.  However, because the
Company  expensed  its  investment,  its  equity  in  AHN's  net  assets  is not
recognized on the balance sheet.

In May 1995, the Company entered into a content and royalty  agreement with AHN.
Under the agreement the Company licensed its multimedia  content to AHN starting
in May 1995 and was to receive minimum licensing  royalties over the life of the
agreement.  This revenue was being  recognized  evenly over the expected life of
the  contract.  Due to the  gradual  increase  in  actual  payments  versus  the
straight-line  revenue  recognition  policy,  a receivable  was recorded for the
difference between the revenue recognized and the cash received during the early
years of the  contract.  In June 1997,  as a result of the Company not receiving
its quarterly payment, the outstanding AHN receivable was fully reserved. Due to
the uncertainty of future payments,  the Company began recognizing  revenue on a
cash basis.  In December 1997 and in early 1998,  AHN made  payments  which were
applied  against the  receivable.  At December 31, 1998, the Company has a fully
reserved  receivable  of  $153,000  and AHN had failed to make  three  scheduled
payments totaling  $1,688,000.  The Company recorded $0, $493,000 and $1,972,000
in license royalty revenue in 1998, 1997 and 1996, respectively.

NOTE 13.        AGREEMENT WITH AT&T

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

NOTE 14.        BENEFIT PLAN

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

NOTE 15.        MAYO AGREEMENT

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

NOTE 16.        RELATED PARTY TRANSACTIONS

During 1998, 1997 and 1996, the Company  subleased  approximately  20,000 square
feet of its Eden  Prairie  office  space to Reality  Interactive,  Inc.  Reality
Interactive,  Inc. and the Company  share a common Board  member.  The lease was
terminated in 1998.

During 1996,  two officers of the Company  participated  in the  Company's  debt
offering.  The total  amount of debt issued by the Company to these  individuals
was $120,000.  Additionally,  three directors of the Company participated in the
debt offering,  either  individually or through  affiliated  organizations.  The
total  amount  of  debt  issued  by  the  Company  to  these   individuals   and
organizations  was $550,000.  On October 28, 1997,  this debt was converted into
common stock at a rate of $2.00 per share (see "Note 5. Convertible Subordinated
Debentures").


                                      F-16


                                       48
<PAGE>



NOTE 17.        LEGAL PROCEEDINGS

In February 1996, an action in the District Court of Hennepin County (Minnesota)
was brought by T. Randal  Productions et al. against the Company and one current
and two former  employees.  The plaintiffs made various  allegations,  including
misappropriation of corporate opportunities and trade secrets by the Company and
its  employees  and sought  award of  monetary  damages,  exemplary  damages and
royalties  substantially  in excess of $10.0  million.  In November 1997, a jury
found that there was no joint venture  between T. Randal and the company  and/or
any of its  employees  but awarded T. Randal  $480,000 plus interest for damages
sustained to its business.  Plaintiffs  moved for a new trial,  amended findings
and for judgment notwithstanding the verdict. The jury verdict was upheld by the
trial court.  The  plaintiffs  appealed this decision to the Minnesota  Court of
Appeals.  In March 1999, the Minnesota Court of Appeals affirmed the decision of
the trial  court.  The Company  believes  the  plaintiffs  will  petition  for a
rehearing which Company counsel believes will not be successful.  The plaintiffs
also have an action  pending  against  certain  affiliates of the Company on the
same grounds on which the action against the Company was based.  The Company has
indemnified  these  affiliates  against any damages arising out of these claims.
Counsel has advised the Company that the jury verdict in the action  against the
Company  should be  controlling  in this action  against the  affiliates.  As of
December 31, 1998, the Company has accrued $480,000 plus estimated court costs.

NOTE 18.        RELOCATION OF OPERATIONS

During early 1998, the Company relocated its primary  operating  facilities from
Minneapolis,  Minnesota  to  Seattle,  Washington.  As a result,  certain of the
Company's Minnesota  leasehold  improvements and computer and software equipment
having a carrying value of $721,000 were not  transferable  or were not utilized
in the  Company's  Seattle  operations.  In 1997,  the Company had estimated and
recorded  the  related   relocation   expense  of  $721,000  as  a  General  and
Administrative  expense. In addition,  in 1997 the Company recorded $252,000 and
$610,000 in general and  administrative  expenses  related to lease  termination
costs and severance for former officers and employees, respectively.

NOTE 19.        SUBSEQUENT EVENTS

During January 1999, the Company completed a $14,278,000  private placement, 
which resulted in the issuance of 2,596,000 shares of the Company's common stock
at $5.50 per share.




                                      F-16


                                       49
<PAGE>



                                             ONHEALTH NETWORK COMPANY
                                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                                  (In thousands)
<TABLE>
<CAPTION>


                                                                  Additions
                                                                 Charged to                             
                                                                 (Recoveries                                   
                                               Balance at        Credited to)                               Balance
                                               Beginning          Costs and                                 at End 
                                               of Period           Expenses           Deductions           of Period
                                            ---------------     ---------------      -------------       -------------
<S>                                         <C>                 <C>                  <C>                 <C>

Year Ended December 31, 1998:
Allowance for doubtful accounts
     receivable, promotional
     allowances and sales returns           $       1,011         $     (755)  (3)   $          -  (1)   $        256
Allowance for obsolete inventory                      451                 50                    -  (2)            501
                                            ===============     ===============      =============       =============
                                            $       1,462         $     (705)                   -        $        757
                                            ===============     ===============      =============       =============


Year Ended December 31, 1997:
Allowance for doubtful accounts
     receivable, promotional
     allowances and sales returns           $         277         $     2,336        $     (1,602) (1)   $      1,011
Allowance for obsolete inventory                      485                 200                (234) (2)            451
                                            ---------------     ---------------      -------------       -------------
                                            $         762         $     2,536        $     (1,836)       $      1,462
                                            ===============     ===============      =============       =============

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

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

2)   Write-offs of inventory.

3)   The $755 net credit to costs and expenses is primarily due to the 1998 
     recovery of an account previously written off.

</FN>
</TABLE>


                                       S-1



                                       50
<PAGE>