U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


 
[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 
         OF 1934

         For the fiscal year ended June 30, 1998

                                       OR


[X}      TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

         For the transition period from ____________ to ____________


                          Commission File No.: 0-22913

                           THE RECOVERY NETWORK, INC.
                  --------------------------------------------
                 (Name of Small Business Issuer in Its Charter)


                Colorado                                 39-1731029
    --------------------------------       -------------------------------------
     (State or Other Jurisdiction of       (IRS Employer Identification Number)
     Incorporation or Organization)

     1411 5th Street, Suite 250, Santa Monica, CA                   90401 
     ---------------------------------------------                  -----      
       (Address of Principal Executive Offices)                   (Zip Code)

Issuer's telephone number, including area code:  (310) 393-3979
                                                 --------------

Securities registered under Section 12(b) of the Exchange Act:  None
                                                                ----

Securities registered under Section 12(g) of the Exchange Act:
                                                    Common Stock, $.01 par value
                                                    ----------------------------

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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  [ ]



[ ]      Check if there is no  disclosure  of  delinquent  filers in response to
         Item  405 of  Regulation  S-B is not  contained  in this  form,  and no
         disclosure will be contained, to the best of registrant's knowledge, in
         definitive proxy  information  statements  incorporated by reference in
         Part III of this Form 10-KSB or any amendment to this Form 10-KSB.

The issuer's revenues for its most recent fiscal year totaled $894,758.

The aggregate market value of the voting stock held by  non-affiliates  computed
by  reference  to the  average of the bid and asked  prices as  reported  by the
National Quotation Bureau as of September 16, 1998 was approximately $9,999,944.

There were  5,977,920  shares of Common Stock  outstanding  as of September  16,
1998.


                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None
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                                     PART I


Item  1.      Description of Business.

General

              The Recovery  Network,  Inc.  (the  "Company")  is a digital media
company  organized to address the social and behavioral health issues of persons
affected by alcoholism,  substance abuse, nicotine addiction,  eating disorders,
domestic  violence and child abuse,  depression,  behavioral  and mental  health
problems. Drawing on the converging technologies of cable television,  telephone
services and the Internet,  the Company addresses the aforementioned  social and
behavioral  issues  through  broadcasting  The  Recovery  Network(TM),  a  cable
television network which commenced test-broadcasting on a limited basis in March
1996, was launched  nationally via satellite  transmission in April 1997; airing
Recovery Talk Radio(TM),  a nationally  syndicated talk radio program introduced
in December 1996 and now available on 53 stations;  and providing information to
viewers and listeners through a toll-free  telephone help-line (the "Help Line")
about where to obtain information and help in their  communities.  The Help Line
has also led to the Company's  developing Recovery  TeleCare(TM),  a specialized
telephone  counseling  service  available to callers at a cost. The Company also
owns a 50% interest in RecoveryNet Interactive, L.L.C. ("Recovery Interactive"),
a joint venture with TCII (an affiliate of  Tele-Communications,  Inc.,  "TCI"),
formed in August 1996 to provide behavioral health care products and services to
managed care organizations,  Health Management Organizations ("HMOs"),  Employee
Assistance  Programs  ("EAPs"),  and other  organizations  offering or providing
behavioral health care services, as well as to address the social and behavioral
health issues through an integrated multimedia platform.

Overview

              The Recovery Market

              The Company  believes that the market for programming  directed at
social and  behavioral  health  issues  consists of four  groups:  (i)  friends,
families  and  co-workers  (the  "Affected  Others") of persons  afflicted  with
alcoholism,  substance abuse,  nicotine  addiction,  eating disorders,  domestic
violence and child abuse,  depression,  behavioral  and mental  health  problems
("Recovery  Issues");  (ii)  persons who are already in  recovery  ("Persons  in
Recovery")  and seek the daily  support and  connection  to others in  recovery;
(iii)  afflicted  persons who are not yet in recovery  either  because  they are
unaware of the resources that are available or are unwilling or unable to attend
meetings or seek help publicly ("Afflicted  Persons");  and (iv) persons seeking
to prevent the onset of these problems and select  positive  life-style  choices
("Prevention Issues"), particularly families with children. The Company believes
that these four groups make up a significant portion of the nation's population.

              While the Company expects that its general  viewing  audience will
be those interested in reality based programming,  a substantial  portion of its
audience  is expected  to be the  Affected  Others.  According  to The  American
Journal of Psychiatry Official Practice Guide published in November

                                       -2-

<PAGE>

1995,  approximately  56  million  persons in the  United  States  are  directly
affected by alcohol  abuse or  addiction  alone.  The National  Association  for
Children of  Alcoholics  estimated  that in 1995 there were  approximately  26.8
million  children of alcoholics in the United  States.  A substantial  number of
employers and coworkers are affected by alcohol abuse in the workplace.

              Persons  in  Recovery   include  the  millions  of  Americans  who
regularly  attend  meetings  of  various  support  groups,  such  as  Alcoholics
Anonymous,   Al-Anon,   Overeaters  Anonymous,   Cocaine  Anonymous,   Narcotics
Anonymous, or are in some other form of treatment,  including counseling.  While
this group is smaller than the Affected  Others,  the Company  believes that The
Recovery  Network's  programming will provide a useful and important  service to
Persons in Recovery, and that members of this group are likely to make an effort
to seek out the Company's  programming and to inform others in their  respective
support groups about The Recovery Network.

              Afflicted  Persons include the estimated 43 million Americans who,
according to the 1995  National  Household  Survey on Drug Abuse (the  "National
Household  Survey"),  are heavy or binge  drinkers  and the  approximately  12.8
million who use illegal drugs.  Afflicted Persons also include approximately 20%
of the female population between the ages of 12 and 30 that Anorexia and Related
Disorders,  Inc. in 1992 estimated had a major eating  disorder such as anorexia
or bulimia or some of its  symptoms,  and the 59% of the adult  population  that
Scientific  American,  in August 1996,  estimated met the current  definition of
clinical obesity.

              Afflicted  Persons also include persons  suffering from depression
and persons who wish to quit smoking.  In 1993, The National Institute of Health
estimated that more than 11 million Americans  suffered from depression and that
one in eight persons will be affected by depression sometime in their lives. The
National  Household  Survey  estimates that there were 61 million  Americans who
were current  smokers in 1995,  many of whom the Company  believes  wish to quit
smoking.

              With the recent  substantial  rise in drug use,  especially  among
adolescents,  the  Company  believes  that  there is and will  continue  to be a
growing interest in Prevention Issues, particularly in families with adolescents
ages 13 to 18.  According to the National  Household  Survey,  the percentage of
adolescents  using illegal drugs increased 105% from 1992 to 1995, and, in 1995,
approximately  18% of 18 to  20-year  olds  and  approximately  15.6%  of 16 and
17-year  olds used illegal  drugs.  A recent  survey by the  National  Center on
Addiction  and  Substance  Abuse cited  drugs as the number one  problem  facing
teenagers.

              Despite  the  perceived  size  of  the  market  for  recovery  and
prevention-related  products and  services,  the Company  believes that there is
currently no effective national marketplace to enable suppliers of such products
and services to reach their target  consumers.  The Company  believes  that,  to
date,  consumers seeking recovery and  prevention-related  products and services
have  done so  primarily  through  local  support  groups,  such  as  Alcoholics
Anonymous,  local treatment centers,  counseling  through health  professionals,
churches and schools in their  communities,  and from self-help  books and other
materials. A disadvantage of these traditional sources is that they all

                                       -3-

<PAGE>



require, to some extent,  that the consumer publicly  acknowledge that he or she
is seeking  information.  The Company  believes  that many persons in its target
audience may be reluctant to seek help publicly.

              The Cable Television Market

              Cable  television was first  developed in the late 1940s primarily
to serve rural communities unable to receive broadcast  television  signals.  By
June 1995,  there were more than 11,200  cable  systems  serving over 60 million
subscribers  in over 32,000  communities  in the United  States.  Of these cable
systems,  259 of them have 50,000 or more subscribers.  The largest cable system
in the country has over 1,000,000  subscribers,  but only the 30 largest systems
have  200,000  subscribers  or more.  Cable  system  operators  range from large
multiple system operators  ("MSOs") that own many systems to small,  independent
systems that serve as few as several  thousand  households.  The 10 largest MSOs
control  231 of the 259  largest  systems  and have  approximately  80% of their
subscribers. Despite this concentration,  each system operates under a franchise
from the government of the local  community in which it is located.  Thus,  MSOs
and  other  cable  operators  have  to  contract  with  the  local   franchising
authorities for each cable system.

              The cable  industry is regulated by federal and state  governments
in part to help local  communities  insure that their  community  receives  some
benefit  from the  valuable  local  rights-of-way  it grants to the cable system
operator. Many local franchising authorities require that cable systems devote a
portion of their channel capacity to public access, educational and governmental
access  channels.  Many communities also expect cable systems to offer a minimum
amount of channel capacity,  certain system design features and programming that
either  originates  from or  addresses  the  needs  and  interests  of the local
community.  This concept is commonly  referred to in the industry as "localism."
Prominent  individuals  in the cable  industry are aware that,  for a variety of
reasons, the industry has not fulfilled on the promise of localism.  The Company
believes that, as cable  franchise  contracts  expire and are subject to renewal
over the next several years,  many cable systems will need to upgrade and expand
channel  capacity as well as to demonstrate to the  communities  their continued
commitment to localism to obtain renewal.

              Most programming  decisions for the majority of cable systems that
are owned by MSOs are made at the MSO level in negotiations  between the MSO and
the various television networks.  Typically, these negotiations,  if successful,
result in one of two  types of  affiliation  agreement.  In one,  the  agreement
specifically identifies which local cable systems will carry the programming and
does not directly  involve the cable system in  negotiations.  In the other, the
agreement  specifies  terms that are  approved at the MSO level but requires the
network to negotiate  affiliation  agreements with each individual cable system.
These  latter  agreements  are  sometimes  called "SSI  Agreements".  Many cable
systems also have local  channels  which are  designed to serve the  community's
needs and  interests,  and the decision to add  programming to these channels is
typically  left to the discretion of the local cable system  manager.  Some, but
not all,  networks,  receive license fees  calculated on a per  subscriber,  per
month basis. According to an industry survey of 41 networks in 1996, 38 networks
received  monthly fees ranging from $.03 per  subscriber to $.70 per  subscriber
and three  networks  did not receive  license  fees.  Of those 38 networks  that
received  license fees, 22 networks  received  license fees ranging from $.10 to
$.29. Generally, networks that air less than 16 hours of

                                       -4-

<PAGE>



programming per day do not receive license fees.  Also, new networks often offer
their  programming  for some  period of time after  their  launch  free to cable
systems that sign affiliation  agreements within a certain time after launch. In
some cases, newly-launched networks also provide affiliates with monetary launch
support or other financial incentives in order to secure initial carriage.

              Channel  capacity  on most  cable  systems is  currently  limited.
Channel  capacity is  generally a function of the  bandwidth  of the  individual
cable system's  infrastructure.  Recently  developed digital  technologies offer
cable systems a cost effective method for expanding  channel  capacity.  Digital
technologies enable the cable systems to compress multiple digital channels into
the bandwidth  currently required for a single analog channel.  The cable system
sends the compressed,  multi-channel  signal to a subscriber's  home where it is
decompressed by a digital converter box ("digibox"). This new technology permits
a cable system to expand  significantly its current channel capacity with a much
lower capital investment than would be required to install fiber optic cables or
to make other major  infrastructure  upgrades.  TCI, one of the nation's largest
MSOs, has stated its intention to provide  digiboxes to all of its  subscribers,
and TCI, along with a consortium of other MSOs,  recently announced an order for
25 million digiboxes to be delivered and installed over the next few years.

              The recent  introduction of direct satellite  services ("DSS") has
also  increased  pressure on cable  systems to offer more channels and services.
DSS systems offer their  subscribers more than twice as many channels as all but
a small number of cable systems,  with better audio and video quality. The price
of the satellite dishes required to receive programming has dropped to the point
that  DSS  is  currently  price  competitive  with  premium  cable.  There  were
approximately  4.5  million  DSS  subscribers  in February  1997,  and  industry
analysts expect that number to reach approximately 19 million by the year 2000.

              The  Company   believes  that  the  combination  of  DSS  and  the
conversion  of cable  systems from analog to digital  signal  transmission  will
create substantial  additional channel capacity over the next several years. The
Company believes that these developments will hasten the full time launch of The
Recovery Network.

The Recovery Network

              In  April  1997,  the  Company   launched  The  Recovery   Network
nationally  via satellite  transmission  under a nesting  contract (the "Nesting
Contract")  with  Access  Television  Network  ("ATN").  Pursuant to the Nesting
Contract,  ATN  provided  satellite  uplink,  master  control and other  related
services (collectively,  the "ATN Services") on its satellite transponder to The
Recovery  Network for two hours of broadcast  time every day to  subscribers  of
cable systems with which ATN had affiliation  agreements.  The Nesting Contract,
as amended, expired on August 31, 1998.

              In May 1998,  the Company  entered into a five year  contract with
Group W Network  Services,  a division of CBS  Corporation,  to provide  program
origination,  master control operations, uplink and C-Band Satellite transponder
services (the  "Transponder  Contract").  The  Transponder  Contract  allows the
Company to  broadcast  24 hours a day,  rather  than the 2 hours a day under the
Nesting Contract.  On September 1, 1998, the Company began broadcasting a 4 hour
block of
                                       -5-

<PAGE>



programming that it repeats 6 times a day to 16 cable systems with approximately
3,000,000 subscribers. The Company's programming schedule allows cable operators
the flexibility to receive the Company's signal transmission at any time.

              The Transponder  Contract,  however,  does not provide the Company
with access to subscribers as did the Nesting Contract.  Therefore,  in addition
to its current  distribution,  the Company is seeking 4 hours of broadcast  time
per day in local cable  systems in a large  number of  markets.  The Company has
identified  all local cable  systems in the United  States with at least  50,000
subscribers  and  is  engaged  in  a  general  marketing  campaign   ("affiliate
marketing") directed at those approximately 250 systems.

              Affiliate Marketing Strategy

              The Company's strategy for obtaining  affiliation  agreements with
cable  systems is based on the  premises  that  cable  systems  are  effectively
monopolies  franchised  by  local  governments,  and in  order  to  renew  their
franchises, many cable systems will need to demonstrate a commitment to localism
by providing programming that benefits the local community, and that although it
will be  difficult  to obtain a full time  dedicated  channel  for a new network
until new digital  technologies  expand channel capacity,  more channel capacity
will become available over the next several years.

              The first  premise  forms the basis for the  Company's  grassroots
affiliate marketing  strategy.  The Company believes that The Recovery Network's
programming  offers local cable  systems an  opportunity  to  demonstrate  their
commitment to localism.  The Company's  commitment  to  programming  focusing on
social  and  behavioral  health  issues  has  helped  to  establish  significant
community support for its programming. In addition, the formation by the Company
of The National Partnership for Recovery and Prevention (the "Partnership"),  an
umbrella coalition of national recovery and prevention organizations, has helped
to establish The Recovery Network's  credibility and social significance.  Based
on such  successes,  the  Company  believes  that  its  ability  to  enter  into
affiliation  agreements has significantly  improved. The Company is also seeking
support  from  other  grassroots   organizations,   local  politicians  and  law
enforcement  agencies and officials,  and believes that the socially responsible
nature of The Recovery Network's programming will help it obtain that support.

              The  second  premise  accounts  for  the  Company's   strategy  in
obtaining  four  hours of air time per day in a large  number  of  markets.  The
satellite  transmission  signal  provided  under  the  Transponder  Contract  is
available to all cable systems in the United  States.  Furthermore,  because the
Company's  programming  is in a 4 hour  block  repeated  6  times  a day,  cable
operators are now able to receive the Company's signal at any time,  rather than
only during the 2 hours its was carried under the Nesting Contract.  This allows
cable  operators much greater  flexibility in fitting the Company's 4 hour block
into their existing schedules.

              Many cable  systems  are aware of the  potential  benefits to them
from  airing  The  Recovery  Network's  programming.  Such  benefits  include  a
demonstration  of the cable system's  support for localism and the political and
public relations benefits from offering socially responsible programming

                                       -6-

<PAGE>



to its viewers. With channel capacity currently so limited, however, the cost of
committing  a dedicated,  full time channel to The Recovery  Network in order to
receive those benefits could be too high for some cable systems.  Therefore, the
Company is initially asking cable systems to carry The Recovery Network for only
4 hours per day. Many cable systems, including the 259 largest systems, have the
capacity to provide those hours. There can be no assurance,  however,  that such
systems will continue to have available channel capacity or otherwise be willing
to air  The  Recovery  Network.  With  the  support  of  local  communities  and
politicians for socially responsible programming, the Company believes, although
there can be no assurance,  it will be able to enter into affiliation agreements
for these initial 4 hours.

              With its programming now airing on a number of cable systems,  the
Company can concentrate on building viewer loyalty and advertiser  awareness and
promoting revenue opportunities including advertising sales through such Company
entities as Recovery  Interactive,  Recovery TeleCare and Recovery Direct. Since
many of the Company's viewers are "appointment viewers" (that is, they are aware
of when the Company's  programming airs and schedule time to see it, rather than
finding  it  through   "channel   surfing"),   the  Company   believes  that  by
demonstrating  an ability to attract  viewers  and  advertisers,  it will create
increased demand for The Recovery  Network's  programming.  As demand increases,
the Company  expects to enter into  additional  affiliation  agreements with new
cable systems and increase the number of daily  programming  hours with existing
affiliates.  As channel capacity increases, the Company believes it will be able
to expand into a full time network. There can be no assurance, however, that the
Company will be able to enter into  additional  affiliation  agreements with new
cable  systems or increase the number of daily  programming  hours with existing
affiliates  or that the Company  will be able to expand into a full time digital
network.

              The Company has  identified  all local cable systems with at least
50,000  subscribers and is engaged in a general  marketing  campaign directed at
those systems.  The Company has  established a promotional  world wide web site,
which  contains  programming  schedules,  information  about the Company and the
Partnership and links to sources of recovery  information on the world wide web.
The  Company  will  also  rely on  traditional  marketing  tools,  such as mail,
telephone,  trade  advertisements,  public relations and  participation in trade
shows  and  conferences  in  connection  with its  general  affiliate  marketing
strategy.

              The  Company  is  initially   seeking  to  enter  into  short-term
affiliation  agreements  with local cable  systems  with a term of one year that
provide for 4 hours of airing per day, with no license fees paid to the Company,
and have a 30-day  termination  clause.  The  agreements  also  provide that the
programming  can be aired on local  origination  and on public,  educational and
government   access  channels  or  on  other  channels  at  the  cable  system's
discretion.

Recovery Interactive

              The Company owns a 50% interest in Recovery  Interactive,  a joint
venture  with  TCI  Online  RecoveryNet  Holdings,  Inc.,  an  affiliate  of TCI
("TCII"),  formed on August 1, 1996 to provide  behavioral  health care products
and services ("Recovery Interactive Services") to managed

                                       -7-

<PAGE>



care agencies,  HMOs,  EAPs,  large group medical  practices,  state,  local and
federal   governments  and   governmental   agencies,   corporations  and  other
organizations offering or providing health care services (collectively,  "Health
Care  Entities")  as well as to provide  information,  interaction  and  support
addressing  social  and  behavioral  issues  through  an  integrated  multimedia
platform,  including  a site on the world  wide web.  As of June 30,  1998,  the
Company  and TCII  have  each  made a  capital  contribution  in the  amount  of
approximately  $668,000 to Recovery Interactive.  Neither party may transfer its
ownership  interest in the joint venture  until June 30, 1999.  After such date,
the  members  have a right  of  first  refusal  with  respect  to the sale of an
ownership interest by the other member. Pursuant to the joint venture agreement,
to the  extent  distributions  of cash are made by  Recovery  Interactive,  such
distributions will be made equally to TCII and the Company.

              Recovery  Interactive  has  developed and is continuing to develop
Recovery  Interactive  Services  for Health  Care  Entities  and their  clients.
Recovery  Interactive  currently  plans to  deliver  these  services  through  a
platform allowing access by computer, telephone or television.

              Pursuant to the joint venture agreement,  TCII agreed to cause its
affiliate,  @Home Corp.  ("@Home"),  to enter into an affiliation agreement with
Recovery Interactive.  @Home was formed to distribute  interactive media content
by cable, utilizing recently developed cable modems. Cable modems are capable of
delivering  data at rates far higher  than the current  telephone-based  modems.
This  higher  speed is expected  to allow  delivery  of much more  sophisticated
interactive media, including high resolution,  true color graphics,  full motion
video and CD-quality audio. Current  telephone-based  modems are able to deliver
primarily  text and low resolution  graphics,  with very limited audio and video
capability.  @Home  has  begun  limited  trials,  but  does  not to date  have a
significant  installed  base of cable  modems.  There can be no  assurance  that
Recovery Interactive and @Home will enter into an affiliation agreement on terms
favorable to Recovery Interactive, or at all, or that @Home will ever expand its
base beyond the current trials.

              Recovery  Interactive  is a development  stage company and has not
yet  generated  any  revenues.  The  Company  believes  that the  generation  of
meaningful revenues will depend on Recovery  Interactive's ability to enter into
license  agreements  with Health Care Entities and upon further  development  of
Recovery  Interactive's  products. As of June 30, 1998, Recovery Interactive has
not generated any revenues,  and has incurred  operating losses of approximately
$1,870,000  since its  inception.  Recovery  Interactive  will seek to  generate
revenues from monthly  subscriber  fees generated from the Recovery  Interactive
web  site,  merchandising  and from  Health  Care  Entities  and  employers  for
delivering  mental  and  behavioral  health  benefits  to  covered  individuals.
Although the Company believes that Recovery Interactive will provide the Company
with  significant  opportunities  relating to an interactive  on-line  business,
there  can be no  assurance  that  Recovery  Interactive  will  be  commercially
successful.

Recovery Talk Radio

              In December  1996,  the Company  launched  Recovery Talk Radio,  a
nationally  syndicated  audience  participation  talk radio  program on the Talk
America Radio Network which focuses on Recovery  Issues and  Prevention  Issues.
Currently, the Company is airing on 53 stations. Recovery

                                       -8-

<PAGE>



Talk Radio is based in Boston,  and  listeners  can call in to the  program on a
toll-free 800 telephone number.

              Recovery Talk Radio  continues to be a marketing  vehicle to drive
viewers to The Recovery  Network in those areas where both  Recovery  Talk Radio
and The Recovery Network are available.  In areas where only Recovery Talk Radio
is  available,  the show serves as the  catalyst  for  listeners  to request The
Recovery Network programming from their local cable operators or to seek out the
Help Line.  The Company  intends for the radio show to also drive  listeners  to
Recovery TeleCare and to the Recovery Interactive world wide web site.

Help Line / Recovery TeleCare

              In March 1996,  the Company  commenced  operations  of a toll free
help-line  and  referral  service for the viewers of The  Recovery  Network (the
"Help Line"). During the hours which The Recovery Network is airing, the Company
displays a toll-free  telephone number for viewers to call for information about
how to obtain additional help in their communities. Telephone calls are answered
seven  days a week  during the hours of 6:30 to 7:30 a.m.  (EST) and  Mondays to
Fridays  during the hours of 9:00 a.m.  to 5:00 p.m.  (EST) by a trained  crisis
response  counselor  provided to the Company by the  Substance  Abuse and Mental
Health Service Administration (SAMHSA) at no cost to the Company.

              Recently, the Company has announced Recovery TeleCare,  which is a
natural  progression of the Help Line. Through Recovery  TeleCare,  a caller can
receive,  for  a  fee,  immediate  specialized   counseling  that  is  discrete,
anonymous, and in the privacy of one's home.

              To the extent that the Company enters into affiliation  agreements
to air The Recovery  Network in additional  communities,  the Company expects to
expand caller capacity of the Help Line, as well as expand its existing national
database  of local  groups,  treatment  centers  and other  sources  of help and
information.  The Company also intends to use the projected expanded call center
capacity to also offer  recovery  and  prevention-related  products and services
directly to its viewers.

              The Company does not generate any revenues from the Help Line, and
does not  receive  any fees or  commissions  for this  service,  including  from
referrals  made by the Help Line.  The Company  operates the Help Line solely to
provide  support to its  viewers and as a community  service.  The Company  also
expects  that  providing  the  toll-free  Help Line will help build and maintain
viewer loyalty and support for The Recovery Network.

The National Partnership for Recovery and Prevention

              The Partnership,  an umbrella  coalition of national  recovery and
prevention  organizations,  was formed in November  1996 to work in  conjunction
with the Company to employ the Company's television, radio and interactive media
services to develop and distribute effective and accurate information concerning
alcoholism  and  addiction.  The Company's  goal is to provide a Partnership  of
prominent national prevention and recovery organizations, public figures who are
passionate about

                                       -9-

<PAGE>



recovery and prevention,  and corporations and institutions  that are willing to
support the Company's mission. To date, the Company has identified and partnered
with more than 50 recovery and  prevention  organizations  representing  over 40
million constituents.  Member organizations of the Partnership currently include
African American Parents for Drug Prevention,  Community Anti-Drug Coalitions of
America,  Dharma  Associates,  Gateway  Foundation,  Hands Across Cultures,  ISA
Associates,  National Asian Pacific American  Families Against  Substance Abuse,
National Association of Addiction Treatment Providers,  National Drug Prevention
League,  National  Families  in  Action,  National   Hispanic/Latino   Community
Prevention  Network,  National  Parents  Resource  Institute for Drug Education,
National   Treatment   Consortium,   Physicians   for   Prevention,   Prevention
Intervention  and Treatment  Coalition for Health,  The Bralove Group, The Miami
Coalition for a Safe and Drug Free Community and The Village.

              Depending on their interests and abilities,  partners may have the
opportunity to review and comment on The Recovery Network's programming, provide
ideas for programming that is of interest to their  constituencies  and, in some
cases,  produce  programming.  The Recovery  Network may also air public service
messages from the partners and otherwise help them disseminate  information that
is important to them. With a national  platform,  the  Partnership  will seek to
help focus the attention of government  and society on the issues of interest to
the  Partnership's  members  and also  foster  better  communication  among  its
members,  their  constituencies  and the communities they are designed to serve.
The Company  believes that the member  organizations  of the Partnership will be
instrumental in helping the Company  demonstrate to cable operators a high level
of community  support for The Recovery Network and how carriage of the Company's
programming  can help the local  operator  fulfill the promise of localism.  The
Company believes that the individual  constituents of the  Partnership's  member
organizations will account for a significant portion of the initial audience for
The Recovery Network's programming, and the Company expects that the Partnership
will communicate to its constituents  information  about The Recovery  Network's
programming schedule and availability.

Recovery Direct

              The Company  believes  that the market for  products  and services
addressing social and behavioral health issues is significant.  The Company also
believes  that,   because  it  is  attempting  to  create  a  nationwide  medium
specifically  targeting  this  market,  if  successful,  it will be in a  unique
position to offer such  recovery and  prevention-related  products and services.
The Company has formed a subsidiary, Recovery Direct, through which it will seek
to develop  recovery and  prevention-related  products and services to market on
The  Recovery  Network,  as well as on Recovery  Talk Radio,  the Help Line and,
through Recovery Interactive,  on the Internet. The Company intends for Recovery
Direct to offer a variety  of  self-help  and  recovery  and  prevention-related
products,  including videos of the Company's  programming  aired on The Recovery
Network and audio tapes of programs  aired on Recovery Talk Radio.  In addition,
the  Company  intends  for  Recovery  Direct to offer  tapes and videos by other
well-known individuals in the recovery field.

                                      -10-

<PAGE>



              The Company will also seek to enter into  arrangements  with third
parties to  provide or develop  recovery  and  prevention-related  products  and
services  and to research  opportunities  for the direct  marketing  of products
advertised  on The  Recovery  Network  and on  Recovery  Talk  Radio  through  a
toll-free 800 telephone number.

Competition

              The Recovery  Network  will  compete  with all other  existing and
planned television  networks and other television  programming for available air
time,  channel capacity,  advertiser revenue and revenue from license fees. Many
of these  television  networks  and  producers  of  television  programming  are
well-established,  have reputations for success in the development and operation
of  television  networks  and/or  development  of television  programming,  have
established  significant viewer loyalty and have significantly greater industry,
financial,  marketing,  programming,  personnel  and  other  resources  than the
Company.  In addition,  if cable television  channel  capacity  increases as the
Company  expects   competition  from  smaller  competitors  and  other  start-up
television networks could increase significantly.

              Although the Company is not aware of any  television  network with
programming  directed  at social  and  behavioral  health  issues,  there are an
increasing  number of recently  introduced or planned cable networks which focus
on overall life-style, self-improvement and health themes and there are numerous
programs  which  address  social and  behavioral  health  issues.  Such networks
include,  America's  Health Network which provides  daily live  programming  and
prerecorded  programming  relating to health issues,  The Health Channel,  which
provides  programming  about  health,  medicine  and  wellness,  Health-Net,  an
interactive health-related program aimed at aging baby boomers, and Jones Health
Network,   which  provides   instruction  to  persons  seeking   credentials  or
accreditation  in the health  field.  Moreover,  because The Recovery  Network's
programming  is intended to provide  information  and support to persons  facing
social and  behavioral  health  issues,  The Recovery  Network and the Company's
recovery and  prevention-related  products and services  will compete with other
products and services which perform similar  functions,  such as support groups,
self-help  videos,  audio  cassettes  and books and  helplines.  There can be no
assurance  that the Company will be able to  successfully  compete for air time,
channel capacity, advertiser time or viewership.

Government Regulation

              The  cable  television   industry  is  subject  to  extensive  and
frequently  changing  federal,  state and local laws and substantial  regulation
under these laws by governmental agencies,  including the Federal Communications
Commission  ("FCC").  Regulations  governing  the rates  that can be  charged to
subscribers  by cable  systems not in markets  subject to effective  competition
from other  multichannel  video program  distributors could adversely affect the
ability of cable systems with limited channel capacity to finance  rebuilding or
upgrading  efforts to increase  channel  capacity or  otherwise  restrict  their
ability  to add new  programming  such as The  Recovery  Network.  In  addition,
federal  "must-carry"  rules requiring cable operators to devote up to one-third
of their  channels to carriage of local  commercial  TV broadcast  stations (and
additional channels for noncommercial

                                      -11-

<PAGE>



educational TV stations);  commercial leased access rules designating 10% to 15%
of system channels for lease by unaffiliated  programmers;  and local regulatory
requirements  mandating  additional channel set-asides for public,  governmental
and educational use could reduce channel  availability  which might otherwise be
available for The Recovery Network on many cable systems.  Statutory  provisions
and FCC rules governing relationships among cable systems and competing forms of
multichannel video program  distribution,  as well as the relationships  between
the  Company  and  its  cable  system  affiliates  could  adversely  affect  the
marketability  of the  Company's  programming  and the ability of the Company to
enter into  arrangements for the  distribution of its programming.  In addition,
the cable  systems and radio  stations  that carry the  Company's  programs  are
regulated by the FCC and, therefore, are subject to its rules and policies, such
as those relating to sponsorship identification, broadcast of indecent language,
provision of equal  opportunities for political  candidates and related measures
pertaining to program content and format.  Failure of the Company's  programs to
comply with one or more of these rules could  subject the cable systems or radio
stations  to FCC  fine  or  other  sanctions,  adversely  affect  the  Company's
relationship with such entities and result in the discontinuation of carriage of
the Company's programming by such entities.

              Federal  and state  regulation  governing  interactive  or on-line
information  services  and  potentially  affecting  the  activities  of Recovery
Interactive  is  currently   evolving.   Regulations   governing   purchases  of
information  services via toll-free  telephone calls and laws governing obscene,
indecent, or otherwise unlawful  communications have been adopted, and there can
be no  assurance  whether  such laws and  regulations  will be  applied  to, and
therefore  affect,   the  business  and  operations  of  Recovery   Interactive.
Additional laws and  regulations  are currently being  considered by the federal
government and many state and local governments.  There can be no assurance that
these or existing laws or regulations  will not be applied in a manner that will
adversely  affect  the  Company's  business  or  operations.  Moreover,  the FCC
currently  is  considering  proposals  that  could  increase  the  charges  most
individuals and entities pay to access Internet and on-line services,  which, if
adopted, could adversely affect the Company's business or operations.

              The FCC does regulate  common carriers whose services are used for
purchases of information  services via toll-free telephone calls or pay-per-call
services,  which regulation could affect the Help Line, Recovery Interactive and
certain other  products and services  contemplated  by the Company.  The Federal
Trade  Commission  also has  jurisdiction  over the provision of such  services.
Among the FCC's regulations are disclosure  requirements and other prerequisites
to charging  calling parties for such services.  The FCC also regulates  certain
marketing   methods  such  as  the   permissible   time  periods  for  telephone
solicitations  to residences,  the maintenance of do-not-call  lists, and use of
autodialers,  facsimile machines and artificial or prerecorded voice systems for
marketing  purposes.  It is  uncertain  at this time whether or how any of these
requirements can or will apply to or affect the Company's business or operations
or its business  relationship with entities providing the  communications  links
used by it or its customers.

              The  Communications  Decency Act ("CD Act") would make it unlawful
to: (i)  knowingly  send to a minor or display in a manner  available to a minor
"obscene",   "indecent"   or  "patently   offensive"   communications   using  a
telecommunications  device or on-line service, (ii) send such a communication to
anyone with the intent to annoy, threaten or harass; or (iii) allow a

                                      -12-

<PAGE>



telecommunications  facility under one's control to be used for such purpose.  A
preliminary  injunction  against  enforcement  of  the CD Act  with  respect  to
indecent or patently  offensive  communications  has been affirmed by the United
States Supreme Court,  which found the CD Act's  provisions to violate the First
Amendment.  Although it is unlikely  that the enjoined  provisions of the CD Act
will ever become effective,  there can be no assurance that information  content
made available on or through Recovery Interactive's offerings, by the Company or
by users of those  offerings  would not violate the CD Act, if it were to become
effective,  or similar  legislation that Congress might enact in the future,  or
that  attempts to implement  defenses to such  legislation  would not  adversely
affect the Company's business or operations. Federal laws dealing with obscenity
and child  pornography as well as various state laws similar to those laws or to
the CD Act may  also  apply  to  information  content  available  on or  through
Recovery Interactive's offerings. There is no assurance that those laws will not
be applied in a manner  that will  adversely  affect the  Company's  business or
operations.

              Proposals  for  additional  or  revised  statutory  or  regulatory
requirements are considered by Congress, the FCC and state and local governments
from time to time,  and a number of such  proposals are under  consideration  at
this time.  It is  possible  that  certain of the  provisions  and  requirements
described  herein are now,  and in the future may be, the  subject of federal or
state legislation, agency proceedings or court litigation. It is not possible to
predict what legislative,  regulatory or judicial changes,  if any, may occur or
their impact on the Company's business or operations.

Proprietary Information

              The Company has pending  applications  in the United States Patent
and Trademark Office for fifteen  trademarks,  including the "Recovery  Network"
trademark.  The  Company  has  registered  the  trademark  "R Net".  The Company
believes that its trademarks and  copyrights,  including the "Recovery  Network"
trademark and tradename and the signature look of the network,  have significant
value and are important to the  marketing and promotion of The Recovery  Network
and  the  Company's  recovery  and  prevention-related  products  and  services.
Although the Company believes that its trademarks and copyrights do not and will
not infringe  trademarks or violate proprietary rights of others, it is possible
that existing trademarks and copyrights may not be valid or that infringement of
existing or future trademarks or proprietary  rights may occur. In the event the
Company's  trademarks or copyrights infringe trademarks or proprietary rights of
others, the Company may be required to change the name of its network,  proposed
television shows, radio talk show or obtain a license. There can be no assurance
that the Company will be able to do so in a timely manner,  on acceptable  terms
and  conditions,  or at all.  Failure  to do any of the  foregoing  could have a
material adverse effect on the Company.  In addition,  there can be no assurance
that the Company will have the financial or other resources necessary to enforce
or defend a trademark  infringement  or  proprietary  rights  violation  action.
Moreover,  if the Company's  trademarks or copyrights infringe the trademarks or
proprietary rights of others,  the Company could,  under certain  circumstances,
become  liable for damages,  which could have a material  adverse  effect on the
Company.

                                      -13-

<PAGE>



              The Company also relies on trade secrets and proprietary  know-how
and employs various methods to protect its concepts, ideas and the documentation
of its television programming concepts in development. However, such methods may
not afford  complete  protection  and there can be no assurance that others will
not  independently  develop  similar  know-how or obtain access to the Company's
know-how, concepts, ideas and documentation.  Furthermore,  although the Company
has or expects to have  confidentiality and non-competition  agreements with its
employees,  and  appropriate  consultants,  there can be no assurance  that such
arrangements will adequately  protect the Company's trade secrets or that others
will not independently develop programming similar to that of the Company.

Insurance

              The  operation  of  a  television,  radio  and  interactive  media
business  subjects  the  Company  to  possible  liability  claims  from  others,
including  viewers,  listeners  and callers to the Help Line for claims  arising
from the unauthorized use of name or likeness,  invasion of privacy,  defamation
and slander. The Company maintains general liability insurance (with coverage in
amounts of up to $1,000,000 per occurrence and $1,000,000 per annum),  including
insurance  relating to personal injury and advertising  injury, in amounts which
the Company currently considers adequate.


Employees

              The Company currently has 27 full time employees, of which six are
engaged  in   affiliate   sales,   four  in   programming,   and   seventeen  in
administration. The Company also from time to time retains a number of marketing
and political consultants to support its grassroots marketing efforts nationwide
and in local communities.

Item  2.      Description of Property.

              The Company leases offices of approximately  10,000 square feet in
Santa Monica, California pursuant to a five-year lease that expires in May 2002.
The monthly rental is currently  $20,000 per month and will increase annually to
a maximum  rental of $25,000 per month.  The Company has an option to extend the
lease  through May 2004 at a price to be  negotiated  by the parties  based upon
then prevailing rental rates.

Item  3.      Legal Proceedings.

              The  Company  is not a party to, nor is any of its  property,  the
subject of, any material pending legal proceeding.


                                      -14-

<PAGE>



Item  4.      Submission of Matters to a Vote of Security Holders.

              On May 28, 1998, the Company's  annual meeting of shareholders was
held (the "Meeting").  At the Meeting,  the shareholders  approved the following
matters:

              1.  Election of the  following  individuals  as  directors  of the
Company for a term of one year:

                    George Henry, William D. Moses, Donald J. Masters, Nimrod J.
                    Kovacs,  Joe C. Wood,  Jr., Mark S. Gold,  M.D.,  and Morgan
                    Lambert Howe

              Mr.  Wood,  Dr.  Gold and Ms.  Howe have since  resigned  from the
Company's  Board of  Directors.  Charlotte  Schiff-Jones  was  appointed  to the
Company's Board of Directors by the remaining  members of the Board of Directors
to replace Mr. Wood, Dr. Gold and Ms. Howe.

              2. Approval of the Company's 1998 Stock Option Plan.

              3. Ratification and approval of the appointment of Arthur Andersen
LLP as the Company's  independent  public accountants for the fiscal year ending
June 30, 1998.

              At the Meeting,  the  Shareholders did not approve an amendment to
the Company's  Certificate of  Incorporation  to create a new class of 4,000,000
shares of preferred  stock that  authorizes the Board of Directors to both issue
such  preferred  stock in series  and fix the  number of  shares,  designations,
preferences, rights and limitations of each series.

              There was no  solicitation  in  opposition  to the nominees of the
Board of Directors for election to the Board of  Directors.  All nominees of the
Board of Directors  were elected.  The number of votes cast for or withheld were
as follows:

         Nominee                     Votes For          Votes Against
         --------------------        --------------     -------------------
         George Henry                4,568,727            3,950
         William D. Moses            4,568,727            3,950
         Donald J. Masters           4,568,727            3,950  
         Nimrod J. Kovacs            4,568,727            3,950  
         Joe C. Wood, Jr.,           4,568,727            3,950 
         Mark S. Gold, M.D.          4,568,727            3,950 
         Morgan Lambert Howe         4,568,727            3,950 
                                                         

                                                          
                                      -15-

<PAGE>



         The votes cast for ratification of the Company's 1998 Stock Option Plan
were as follows:

                                                         Abstentions and
          Votes For                Against               Broker Non-Votes
         --------------            ----------            ----------------------
          2,435,805                 14,450                240,510


         The votes cast for ratification of Arthur Andersen LLP as the Company's
independent public accountants were as follows:

                                                         Abstentions and
          Votes For                Against               Broker Non-Votes
         --------------           -----------          -----------------------
          4,567,977                  1,000                 3,700


         The  votes  cast  for an  amendment  to the  Company's  Certificate  of
Incorporation  to create a new class of 4,000,000 shares of preferred stock were
as follows:

                                   Against, Abstentions and
          Votes For *              Broker Non-Votes
         --------------            ------------------------------
            2,432,515                     265,250


* Approval of such  matter  required  an  affirmative  vote of a majority of the
outstanding  shares of the Company. On May 28, 1998, there were 4,980,250 shares
of Common Stock outstanding.



                                      -16-

<PAGE>
                                     PART II


Item  5.          Market For Common Equity and Related Stockholder Matters.

Market Information

         Prior to  September  29,  1997,  there was no market for the  Company's
securities.  From  September  29, 1997 until  January 7, 1998,  one share of the
Company's Common Stock and one Redeemable  Warrant (which entitled the holder to
purchase  one share of Common  Stock at a price of $5.50 per share  through  the
close of business on September 29, 2002, or an earlier redemption date) (each, a
"Redeemable  Warrant" and collectively,  the "Redeemable  Warrants") traded as a
unit (each,  a "Unit" and  collectively,  the  "Units").  Starting on January 9,
1998,  shares of the Company's  Common Stock and the  Redeemable  Warrants began
trading  separately.  In all  cases,  the  Company's  Units,  Common  Stock  and
Redeemable  Warrants traded on the Nasdaq SmallCap Market.  The table below sets
forth the high and low  closing bid prices for the Units,  the Common  Stock and
the Redeemable Warrants,  as reported on the Nasdaq SmallCap Market,  during the
period   September  29,  1997  to  June  30,  1998.  The  quotations   represent
inter-dealer  quotations without  adjustment for retail mark-ups,  mark-downs or
commissions and may not represent actual transactions:
<TABLE>
<CAPTION>


                                              Common Stock                  Redeemable                  Units
                                              ------------                   Warrants                   -----
                                                                             --------

                                                High         Low         High         Low         High         Low
<S>                                         <C>           <C>        <C>         <C>         <C>          <C>      
Quarter Ended September 30,                      N/A          N/A         N/A          N/A        75/8         51/4
1997....................................
Quarter Ended December 31,                       N/A          N/A         N/A          N/A        71/4         35/8
1997....................................
Quarter Ended March 31, 1998............        41/8            3           1          5/8        37/8         31/2
Quarter Ended June 30, 1998.............        61/2         23/4        15/8         7/16         N/A          N/A

</TABLE>

Holders

         As of September 16, 1998, the Company has outstanding  5,977,920 shares
of Common  Stock owned by  approximately  110 holders of record,  and  2,413,900
Redeemable Warrants owned by approximately 2 holders of record.


                                      -17-

<PAGE>



Dividends

         The Company has never paid any cash dividends on its Common Stock,  and
the Board of  Directors  does not intend to declare or pay any  dividends on its
Common Stock in the foreseeable  future.  The Board currently  intends to retain
all available  earnings (if any)  generated by the Company's  operations for the
development  and growth of its business.  The  declaration  in the future of any
cash or stock  dividends  on the Common Stock will be at the  discretion  of the
Board and will depend upon a variety of factors, including the earnings, capital
requirements  and  financial  position  of  the  Company  and  general  economic
conditions at the time in question.  In addition,  the payment of cash dividends
on the Common Stock in the future could be limited or prohibited by the terms of
financing  agreements that may be entered into by the Company (e.g., a bank line
of credit or an  agreement  relating to the issuance of debt  securities  of the
Company)  or by the terms of any  Preferred  Stock  that may be  authorized  and
issued.


Item  6.          Plan of Operation.

General

         In April 1997, the Company nationally  launched The Recovery Network, a
cable  television  network.   Pursuant  to  a  nesting  contract  (the  "Nesting
Contract")  with ATN, ATN provided  satellite  uplink,  master control and other
related services (collectively, the "ATN Services") on its satellite transponder
to The Recovery  Network for two hours of telecast time every day to subscribers
of  cable  systems  with  which  ATN had  affiliation  agreements.  The  Nesting
Contract, as amended, expired on August 31, 1998.

         The Company  currently has  affiliation  agreements with 14 Cablevision
systems,  Telecommunications,  Inc. and CableOne (the "Affiliated Systems").  On
September 1, 1998,  The Recovery  Network began  broadcasting  a 4 hour block of
programming that repeats 6 times a day to approximately 3,000,000 subscribers of
the Affiliated Systems. The Company entered into a five year contract with Group
W Network Services, a division of CBS Corporation ("Group W"), pursuant to which
Group W is to supply a fully  dedicated  Digital  Satellite  Transponder  master
control  and uplink  utilizing  Scientific  Atlanta's  Power Vu  equipment  (the
"Transponder  Contract").  The  Transponder  Contract  affords  the  Company the
potential to transmit its signal throughout North America 24 hours a day, 7 days
a week.

         The  Company  has also  identified  and is  targeting  all local  cable
systems in the United States with at least 50,000  subscribers and is engaged in
a general marketing campaign  ("affiliate  marketing")  directed at gaining more
viewers.  The Company intends to evolve into a full-time  cable network,  and in
turn, generate the traditional licensing fees from cable operators.

         The Company anticipates that the continuing  evolution of the Company's
cable television network,  together with its world wide web site on the Internet
and its radio show will enable the

                                      -18-

<PAGE>



Company  to  eventually  market  and  promote  such  revenue   opportunities  as
advertising sales and behavioral health products and services.

         To date, the Company has incurred significant net losses, including net
losses of  $1,223,829,  $3,817,652  and  $8,261,734 for the years ended June 30,
1996, 1997 and 1998, respectively. The Company anticipates that it will generate
revenues from advertising sales on The Recovery Network and Recovery Talk Radio,
merchandising  recovery-related  products and services on The Recovery  Network,
Recovery Talk Radio,  and by seeking  sponsorships  for its programming and from
license fees from cable systems for its programming. The Company does not expect
that it will  generate any  meaningful  revenues  from fees until such time,  if
ever, that The Recovery Network enters into affiliation agreements providing the
Company with a significant  subscriber  base. There can be no assurance that the
Company  will be able to enter into  affiliation  agreements  with  local  cable
systems with a sufficient  number of  subscribers,  achieve  significant  viewer
loyalty or attract  advertisers for The Recovery  Network,  generate  meaningful
revenues or achieve  profitable  operations.  The Company also  anticipates that
Recovery  Interactive  will generate  revenue from monthly  subscriber fees from
managed care companies,  insurance companies and employers for delivering mental
and  behavioral  health  benefits  to  covered   individuals,   advertising  and
merchandising  although there can be no assurance that Recovery Interactive will
generate meaningful revenues or achieve profitable operations.

Liquidity and Capital Resources

         The Company's  primary  capital  requirements in the next twelve months
will  be to  fund  the  costs  of its  affiliate  marketing  efforts,  sales  of
advertising time and producing and acquiring programming,  satellite transponder
costs,  costs for uplink,  master control and transmission  services,  and other
working capital expenses.

         The Company's  capital  requirements  have been and will continue to be
significant  and its cash  requirements  have been  exceeding its cash flow from
operations.  At June 30,  1998,  the  Company had a working  capital  surplus of
$1,497,226.  Due to, among other things, the lack of meaningful revenues,  costs
associated with program development and affiliate marketing efforts, the Company
has been substantially dependent upon various private placements and its initial
public offering to fund its operations.

         During the period from November 1995 through March 1, 1997, the Company
issued in private  placements  745,674  shares of Common Stock at prices ranging
from  $.77 per  share to $3.48  per  share  for net  proceeds  of  approximately
$1,433,767.  Additionally,  the Company raised debt proceeds of $310,000 through
another private placement. See the Company's registration statement on Form SB-2
dated September 29, 1997 for specifics of these financing activities.

         In March and April 1997, the Company completed a private financing (the
"Private  Financing") pursuant to which it issued an aggregate of (i) $2,000,000
principal amount of unsecured  non-negotiable  promissory notes bearing interest
at the rate of 9% per annum (the  "Financing  Notes");  (ii)  400,000  shares of
Common Stock; and (iii) warrants to purchase an aggregate of

                                      -19-

<PAGE>



500,000  shares of Common  Stock at an  exercise  price of $5.50 per share.  The
offering  price was $50,000 per  financing  unit.  After  payment of $200,000 in
placement  agent fees to the placement  agent for the Company in connection with
the Private  Financing,  and other offering expenses of approximately  $262,000,
the Company received net proceeds of  approximately  $1,538,000 from the sale of
the financing units. The net proceeds of the Private  Financing were used by the
Company for, among things,  an affiliate  marketing  campaign in connection with
the  national  launch of The  Recovery  Network,  programming  expenses  for the
production of "Full Circle",  "Testimony" and "Bottoms",  a capital contribution
in the amount of $200,000 to Recovery Interactive and payments under the Nesting
Contract  with ATN in the  amount of  $102,000.  The  Company  repaid the entire
principal  amount of, and accrued  interest on, the  Financing  Notes in October
1997 with proceeds received from its initial public offering.

         During July and August 1997, the Company issued  Promissory  Notes with
an  aggregate  principal  amount of $605,250 to five  lenders  (the  "Promissory
Notes").  The Company  paid to each lender a loan  origination  fee in an amount
equal to 5% of the Promissory  Notes, or approximately  $30,300.  The Promissory
Notes plus $95,000 of interest  thereon were repaid on October 3, 1997.  The net
proceeds from the issuance of the Promissory Notes were used for working capital
purposes. The Company incurred financing costs during the fiscal year ended June
30, 1998 of  approximately  $670,000  relating to the Private  Financing and the
Promissory Notes.

         On October 3, 1997, the Company consummated its initial public offering
("IPO") pursuant to which it issued 2,415,000 units (each, a "Unit").  Each Unit
consisted  of one share of Common Stock and one  redeemable  warrant to purchase
one share of Common Stock at $5.50 per share (each, a "Redeemable Warrant"). The
net  proceeds  received  from the IPO were  $10,141,757,  and the amount of said
proceeds utilized by June 30, 1998 was approximately $9,540,000 used principally
to repay debt and pay operating expenses.

         On June  29,  1998,  the  Company  entered  into  certain  subscription
agreements   (the   "Agreements")   with   7   investors   (collectively,    the
"Subscribers"). Pursuant to the Agreements, the Company is entitled to aggregate
proceeds of up to $5,500,000 (the "Private  Placement").  The Private  Placement
provides for the issuance by the Company of (i) 1,111,110  shares (the "Shares")
of Common Stock for $2,500,000,  or $2.25 per share,  (ii) additional  shares of
Common Stock to the  Subscribers  pursuant to certain  other  provisions  of the
Agreements,  including shares issuable for no additional  consideration pursuant
to the Reset Rights in the Agreements  and shares  issuable for up to $3,000,000
pursuant to a "put" provision in the Agreements (the "Additional  Shares"),  and
(iii)  100,000  shares  of Common  Stock  upon the  exercise  of  warrants  (the
"Warrants").  The Warrants  are  exercisable  at an exercise  price of $5.50 per
share and may be  exercised  at any time or from time to time on or before  June
29, 2001.

         The Company anticipates that the proceeds received from the sale of the
Shares to the  Subscribers in the Private  Placement  (including net proceeds of
$720,000  currently  deposited  with an escrow  agent),  together with projected
revenues from  operations,  will be sufficient to fund the Company's  operations
and capital  requirements  until  December 31, 1998.  There can be no assurance,
however, that such funds will not be expended prior thereto due to unanticipated
changes in economic

                                      -20-

<PAGE>



conditions or other unforeseen  circumstances.  In the event the Company's plans
change or its assumptions change or prove to be inaccurate, the Company could be
required to seek additional  financing  sooner than currently  anticipated.  The
Company has no current  arrangements  with respect to, or potential  sources of,
any additional  financing,  and it is not anticipated that existing shareholders
will  provide  any  portion  of the  Company's  future  financing  requirements.
Consequently,  there can be no assurance that any  additional  financing will be
available to the Company when needed,  on commercially  reasonable  terms, or at
all.  Any  inability  to obtain  additional  financing  when needed would have a
material  adverse  effect on the  Company,  requiring it to curtail and possibly
cease its operations.  In addition,  any additional equity financing may involve
substantial   dilution  to  the  interests  of  the   Company's   then  existing
shareholders.

Item  7.          Financial Statements.

         The  financial  statements  required  hereby  are  located on pages F-1
through F-23.


Item  8.          Changes in  and  Disagreements with Accountants on  Accounting
                  and Financial Disclosures.

         None

                                      -21-

<PAGE>



                                    PART III


Item  9.          Directors,  Executive Officers, Promoters and Control Persons;
                  Compliance with Section 16(a) of the Exchange Act.


Directors and Executive Officers
<TABLE>
<CAPTION>

         The following are the directors and executive officers of the Company:


Name                                                   Age          Position
----                                                   ---          --------

<S>                                                  <C>       <C>                                            
William D. Moses...............................         36          Chief Executive Officer and Chairman of
                                                                    the Board
Gary Horowitz..................................         62          President
Donald J. Masters..............................         52          Executive Vice President and Director
John Wheeler...................................         44          Vice President of Operations
Michael Clark..................................         42          Vice President of Finance
Sandra J. Eddy.................................         46          Vice President of Marketing
Nimrod J. Kovacs...............................         48          Vice Chairman of the Board of Directors
George H. Henry................................         42          Director
Charlotte Schiff-Jones.........................         58          Director
</TABLE>

         William D. Moses has been Chief Executive  Officer of the Company since
November  1994.  Mr.  Moses was named the  Chairman of the Board of Directors in
August 1998 and has been a member of the Board of Directors of the Company since
1995. In January 1993, Mr. Moses  co-founded ATN and served as a director of ATN
from June 1993 to June 1996.  From July 1991 to December  1994,  Mr. Moses was a
managing partner of Axiom Partners,  a New York investment banking and brokerage
firm. From January 1992 to January 1994, Mr. Moses was a money manager for Oscar
Gruss & Co. From 1988 to 1991,  Mr.  Moses  served as an  independent  financial
consultant.  From 1986  through  1987,  Mr. Moses was employed by Bear Stearns &
Co., Inc. Mr. Moses is Honorary  Chair of Cable  Positive and a recipient of the
Ellis Island Gold Medal Award for Humanitarian Service.

         Gary Horowitz has been  President of the Company  since July 1998.  Mr.
Horowitz  was a  production  consultant  from March  1996  until July 1998.  Mr.
Horowitz  was  President,  Chief  Executive  Officer  and a director  of Harmony
Holdings, Inc., from March 1992 until February 1996. Mr. Horowitz was a director
of L.A.  Weekly,  a periodical,  from 1986 until 1995,  its publisher  from 1989
until 1993 and its Chief  Executive  Officer from 1990 until 1993. Mr.  Horowitz
was  President of Jenkins,  Covington,  Newman,  Inc.,  a television  production
organization from 1980 until 1983.

         Donald J.  Masters has been  Executive  Vice  President  of the Company
since May 1997 and a director of the Company since  November  1995.  Mr. Masters
also serves as Chairman of the 
                                      -22-

<PAGE>



Advisory Board and is  responsible  for developing and overseeing the activities
of the National Partnership for Recovery and Prevention.  Mr. Masters co-founded
ATN, and he served as a director of ATN from  January  1993 to March 1996.  From
April 1992 until January 1996, Mr. Masters was a partner in Masters Smith & Co.,
a media consulting firm that provided services to the Company.  From May 1989 to
April 1992,  Mr.  Masters was Vice  President  of  Corporate  Development  and a
founding officer of United  International  Holdings,  Inc. From November 1985 to
May 1989,  Mr.  Masters was Vice  President and General  Counsel of United Cable
Television  Corp.,  where he was  engaged in the  development  of the  Discovery
Channel, E! Entertainment, Preview Guide, and several home shopping channels.

         John Wheeler has been the Company's Vice President of Operations  since
May 1997. From June 1994 through  February 1997 Mr. Wheeler was the president of
a cable  network.  From November 1989 through May 1994,  Mr.  Wheeler  served as
President of Cellular System Management, Inc., a builder and manager of cellular
properties  throughout the United  States.  From February 1982 to July 1987, Mr.
Wheeler was Vice President of Marketing of Metro Mobile CTS, a cellular company.
From  1979 to 1982,  Mr.  Wheeler  served  as Vice  President  of  Vision  Cable
Communications  Inc. Mr. Wheeler served as Northeast  Regional Marketing manager
for Showtime  Entertainment in 1978. Mr. Wheeler began his career at Cablevision
Systems of Long Island in 1976.

         Michael Clark is the Company's  Vice  President of Finance since August
1998.  Mr.  Clark served as Vice  President/Treasurer  of  Associated  Financial
Group,  Inc.  ("AFG") from 1988 to 1998, and prior to this position he served as
Controller  of AFG from March 1986 to December  1987.  From  October  1984 until
March 1986,  Mr. Clark served as Controller for Quest  Resources,  a Los Angeles
based syndicator and operator of alternative  energy  products.  From March 1982
until September 1984, Mr. Clark served as Assistant  Controller for Valley Cable
TV. Mr.  Clark also served as an auditor  for Arthur  Young & Co. in Los Angeles
from July 1978 through March 1982.  Mr. Clark is a graduate of the University of
California, Santa Barbara and has a Master of Science degree from the California
State University at Northridge.

         Sandra J. Eddy has been the Company's Vice President of Marketing since
January 1998. Ms. Eddy has over twenty years of experience in sales,  marketing,
advertising  and sales  training with several  FORTUNE 500  companies,  start-up
programming services and consulting.  From 1992 to 1996, Ms. Eddy was a business
owner and  consultant,  responsible  for all aspects of starting and operating a
small  business.  Ms.  Eddy has held  director  positions  with  Pacific  Sports
Network, The Fashion Channel, and the International  Channel, where she aided in
the development of marketing and affiliate relations and sales.

         Nimrod J. Kovacs has been a director of the Company  since October 1996
and  serves as Vice  Chairman  of the Board of  Directors  and  Chairman  of the
Company's Executive Committee. Since January 1995, Mr. Kovacs has been President
of Eastern European Electronic Distribution & Global Programming Group of United
International  Holdings,  Inc ("UIH").  From 1991 to 1996,  Mr. Kovacs  directed
UIH's  investments  which included  Kabelkom in Hungary,  Kabelvision in Sweden,
Kabel Net in the Czech Republic, Multicanal in Portugal, and HBO Czech/TV Max in
the Czech Republic.

                                      -23-

<PAGE>



From  1989  to  1992,  Mr.  Kovacs  was  President  of  NJK  International,   an
international  media  consulting  company.  From 1982 to 1989,  Mr.  Kovacs  was
responsible  for the  investments  of  United  Cable,  and  subsequently  United
Artists,  in  the  Discovery  Channel  in  the  United  States  and  Europe,  E!
Entertainment,  Think  Entertainment,  Preview Guide, Bravo UK, and several home
shopping channels.

         George H. Henry served as Chairman of the Board of  Directors  from May
1997 to August 1998 and has been a director of the Company since  December 1995.
Mr. Henry has recently  been named  Chairman of the Executive  Committee.  Since
April 1986,  Mr.  Henry has been  President  of G. Howard  Associates,  Inc.,  a
private  investment firm. Prior to April 1986, Mr. Henry was a Vice President in
the  Corporate  Finance   Department  of  the  predecessor  of  Schroder  &  Co.
Incorporated,  an investment  banking firm.  Mr. Henry is a director of PhoneTel
Technologies,  Inc., a publicly traded telecommunications  company. Mr. Henry is
also Chairman and Chief Executive Officer of ATN. Mr. Henry is also a trustee of
Mitchell College.

         Charlotte  Schiff-Jones  has been a director of the Company  since July
1998.  Since  1997,  Ms.  Schiff-Jones  has been a  consultant  to the  Company,
concentrating on affiliate  marketing  strategy and community outreach projects.
From 1995 to 1997, she was the president of Gamut Media,  a strategic  marketing
and creative  services  agency.  From 1993 to 1995,  she was a consultant to the
President and CEO of Time Warner Cable  Programming;  and from 1988 to 1993, she
was the president of Schiff-Jones Ltd., a consulting firm.

         All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors.  Non-employee  directors
do  not  receive  cash  compensation  for  serving  as  directors.  The  Company
reimburses  directors for reasonable travel expenses incurred in connection with
their activities on behalf of the Company. Each member of the Board of Directors
is eligible to participate in the Company's 1996 Board of Directors and Advisory
Board Plan.

Committees of the Board of Directors

         The Company  established  a Finance and  Compensation  Committee of the
Board of Directors which reviews the compensation for all officers and directors
and  affiliates  of the  Company.  The Board of  Directors  of the  Company  has
approved  all grants of stock  options  since the  Company's  IPO.  Mr. Henry is
Chairman of the  Finance  and  Compensation  Committee  and Mr.  Moses is also a
member of the Finance and Compensation Committee.

         The Company  established  an Audit  Committee of the Board of Directors
which meets with management and the Company's  independent public accountants to
review the adequacy of internal controls and other financial  reporting matters.
Mr. Henry is the Chairman of the Audit Committee and Mr. Kovacs is also a member
of the Audit Committee.

         The  Company  established  an  Executive  Committee  of  the  Board  of
Directors which is responsible for overseeing  strategic planning and operations
for the Company. Mr. Henry is the

                                      -24-

<PAGE>


Chairman  of the  Executive  Committee  and  Messrs.  Masters and Moses are also
members of the Executive Committee.

Compliance with Section 16(a) of the Exchange Act

         The  following  persons have failed to file on a timely  basis  certain
reports  required by Section  16(a) of the  Securities  Exchange  Act of 1934 as
follows:  Each of Messrs.  Moses, Masters and Kovacs has failed to file a Form 4
disclosing the grant of 50,000,  50,000 and 25,000 stock options pursuant to the
Company's 1998 Stock Option Plan.

         During the fiscal year ended June 30, 1998, other than as listed above,
the Company is not aware of any late  filings,  or failure to file,  any reports
required by Section 16(a) of the Exchange Act.


                                      -25-

<PAGE>



Item  10.     Executive Compensation.

         The  following  table  sets  forth  the cash  compensation  paid by the
Company to the chief  executive  officer and all other  executive  officers  who
received  compensation  in excess of $100,000 (the "Named  Executive  Officers")
during fiscal 1998:
<TABLE>
<CAPTION>

                           Summary Compensation Table


                                                                                Long Term
                                                   Annual Compensation    Compensation Awards
                                                   --------------------   ---------------------
                                                                               Shares
                                       Year Ended  Salary ($)              Underlying                  All Other
    Name and Principal Position        June 30,       (b)      Bonus ($)      Options (#)            Compensation
------------------------------------  -----------  ---------  ---------   ---------------------   -----------------

<S>                                    <C>       <C>          <C>             <C>                 <C>        
William D. Moses, Chief Executive        1998      $182,765      --              50,000                  --
  Officer...........................
Donald J. Masters, Executive Vice        1998      $148,420      --              50,000                  --
  President.........................
John Wheeler, Vice President of          1998      $182,373      --                --                    --
  Operations........................
Gregory L. Richey, Chief Financial       1998      $163,335      --              50,000                  --
  Officer (a).......................
-------------------
</TABLE>

(a) Mr. Richey resigned from the Company effective September 18, 1998.
(b) Includes compensation that was earned during the fiscal year ending 6/30/97,
but was deferred until and paid during the fiscal year ending 6/30/98.


                        Option Grants in Fiscal Year 1998

         The  following  table sets forth  information  concerning  the grant of
stock options to the Named Executive Officers during fiscal 1998:
<TABLE>
<CAPTION>

                                       Option Grants During Last Fiscal Year


                                         Number of                %of Total
                                          Shares               Options Granted
                                        Underlying              to Employees            Exercise            Expiration
Name                                  Options Granted          in Fiscal Year         Price ($/sh)             Date
------------------------------     ---------------------    ---------------------   -----------------    ----------------

<S>                                    <C>                       <C>                <C>                    <C>
William D. Moses..............            50,000                    16.2%              $1.56(a)                4/3/03
Donald J. Masters.............            50,000                    16.2                1.56(a)                4/3/03
Gregory L. Richey (b).........            50,000                    16.2                1.56(a)                4/3/03
-------------------
</TABLE>

(a) Such options were granted with an exercise price of $3.15 per share and were
subsequently  repriced.  (b) Mr.  Richey  resigned  from the  Company  effective
September 18, 1998.

         No options of the Company were  exercised by such persons during fiscal
1998.
                    
                                      -26-

<PAGE>



Option Repricing

         In August 1998,  the Board of Directors of the Company voted to approve
the repricing of options to purchase 806,746 shares granted under the Management
Bonus Plan, the 1998 Stock Plan and certain non-plan options,  including options
to purchase 241,667, 129,581 and 50,000 shares granted to Messrs. Moses, Masters
and Richey,  respectively.  Such  repricing was effected by offering to exchange
new options with an exercise price of $1.56 per share, which was the fair market
value of the Common Stock on the date of repricing, for the options then held by
such  optionees.  The new  options  otherwise  would  have  identical  terms and
conditions  as the current  options.  By  repricing  such  options,  the Company
intends to reward key employees, including the Named Executive Officers, holding
such options for their contributions to the Company.

Employment Agreements

         Effective  December 1, 1996,  the Company  entered  into an  employment
agreement with William D. Moses,  the Company's Chief Executive  Officer,  which
expires on September  30, 1998.  The  employment  agreement  provides for a base
compensation  payable to Mr. Moses of $12,000 per month  through  September  30,
1998.  Pursuant to the  agreement,  Mr. Moses is entitled to  participate in any
employee benefit plans and arrangements  when and as implemented by the Company.
In the event of  termination  of Mr. Moses'  employment by the Company,  without
"good cause" (as defined in the employment agreement),  Mr. Moses is entitled to
severance  compensation  equal to the  lesser of his base  salary  and  vacation
compensation  due through  September  30, 1998 and his base salary and  vacation
compensation  for one year,  payable  one-half upon  termination and the balance
ratably  over the  following  six  months.  In the event of  termination  of the
employment agreement by mutual agreement of the Company and Mr. Moses, Mr. Moses
is entitled to such  compensation  as is mutually  agreed on between the Company
and Mr.  Moses but in no event to exceed  the amount of  severance  compensation
payable in the event of  termination  without "good cause." Mr. Moses has agreed
not to compete with the Company during the term of the employment  agreement and
for a period of two years after termination of his employment  relationship with
the Company in the  development or provision of media services or any other line
of business  which the Company is engaged in or forms the intention to engage in
during this  period.  In the event of a "change in  control"  (as defined in the
employment agreement),  Mr. Moses will be deemed to have been terminated without
"good cause", and the covenant not to compete will have no further effect.

         Effective  December 1, 1996,  the Company  entered  into an  employment
agreement  with Donald J. Masters,  the Executive Vice President of the Company,
which expires on November 30, 1998. The employment agreement provides for a base
compensation  payable to Mr.  Masters of $10,000 per month through  November 30,
1998.  Pursuant to the agreement,  Mr. Masters is entitled to participate in any
employee benefit plans and arrangements  when and as implemented by the Company.
In the event of termination of Mr. Master's  employment by the Company,  without
"good cause" (as defined in the employment  agreement),  Mr. Masters is entitled
to severance  compensation,  equal to his base salary and vacation compensation,
at the option of the  Company,  for such period of time between one year and two
years  that the  non-compete  covenant  described  below is in  effect  and such
severance  compensation shall be payable one-half on the date of termination and
the balance

                                      -27-

<PAGE>



shall be payable ratably over six months  following the date of termination.  In
the event of termination of the employment  agreement by mutual agreement of the
Company  and Mr.  Masters,  Mr.  Masters is  entitled  to such  compensation  as
mutually agreed on between the Company and Mr. Masters but in no event to exceed
the amount of severance compensation payable in the event of termination without
"good cause." In addition,  Mr.  Masters has agreed under certain  circumstances
not to compete with the Company during the term of the employment  agreement and
for up to two years after  termination of his employment  relationship  with the
Company in any media business whose programming,  content or services address or
relate to  Recovery  Issues or in any  organization  whose  primary  business is
offering  products and services  relating to Recovery Issues. In connection with
his  employment,  Mr.  Masters was granted an option (the  "Option") to purchase
12,915  shares of Common  Stock at an  exercise  price of $2.32 per  share.  The
Option vests with respect to 10,770 shares on February 1, 1997 and the remainder
vests  ratably  monthly  thereafter.  In the event of a "change in control"  (as
defined in the  employment  agreement),  Mr. Masters will be deemed to have been
terminated  without  "good  cause,"  the  covenant  not to compete  will have no
further  effect and the Option will vest in full. In addition on April 16, 1997,
Mr. Masters was granted an option under the Company's  Management  Bonus Plan to
purchase  12,915 shares of Common Stock at an exercise price of $5.00 per share,
which will vest quarterly over one year commencing on October 1, 1997.

         Effective  May  13,  1997,  the  Company  entered  into  an  employment
agreement  with John Wheeler,  the Company's  Senior Vice President of Sales and
Marketing,  which expires on May 31, 1999. The employment agreement provides for
a base compensation  payable to Mr. Wheeler of $12,000 per month through May 13,
1999.  In addition to the base  salary,  Mr.  Wheeler  will receive a commission
payable quarterly in the amount of $.01 for each additional subscriber household
in excess of one million  subscriber  households  to which an  affiliated  cable
system service delivers a minimum of two hours of the Company's programming,  so
long as the  household  subscriber  does not  already  receive  the  programming
through the  Company's  Nesting  Contract or through any other  agreement  under
which the Company  purchases  carriage  rights.  Pursuant to the agreement,  Mr.
Wheeler  is  entitled  to  participate  in  any  employee   benefits  plans  and
arrangements when and as implemented by the Company. In the event of termination
of Mr. Wheeler's employment by the Company,  without "good cause" (as defined in
the employment  agreement),  Mr.  Wheeler is entitled to severance  compensation
equal to the lesser of his base  salary and  vacation  compensation  due through
March 13, 1999 and his base salary and  vacation  compensation  for ninety days,
payable one-half upon termination and the balance ratably  semi-monthly over the
compensation  reference  period.  In the event of  termination of the employment
agreement by mutual  agreement of the Company and Mr.  Wheeler,  Mr.  Wheeler is
entitled to such  compensation  as is mutually agreed on between the Company and
Mr.  Wheeler  but in no event to exceed  the  amount of  severance  compensation
payable in the event of termination without "good cause." Mr. Wheeler has agreed
not to compete with the Company during the term of the employment  agreement for
a period of one year after  termination of his employment  relationship with the
Company in the  development or provision of recovery media services or any other
line of  recovery  media  services  which the Company is engaged in or forms the
intention  to engage in during this  period.  The  Company  and Mr.  Wheeler are
presently renegotiating Mr. Wheeler's employment agreement.

                                      -28-

<PAGE>



         Effective May 1, 1997, the Company entered into an employment agreement
with Bill Megalos, the Company's Vice President of Production,  which expires on
November 30, 1998. The  employment  agreement  provides for a base  compensation
payable to Mr. Megalos of $10,000 per month through November 30, 1998.  Pursuant
to the agreement, Mr. Megalos is entitled to participate in any employee benefit
plans and arrangements  when and as implemented by the Company.  In the event of
termination of Mr. Megalos's employment by the Company, without "good cause" (as
defined in the  employment  agreement),  Mr.  Megalos is entitled  to  severance
compensation  equal to his base salary and  vacation  compensation  for 90 days,
payable  ratably  over such 90 day period.  In the event of  termination  of the
employment  agreement by mutual  agreement of the Company and Mr.  Megalos,  Mr.
Megalos is entitled to such  compensation  as is mutually  agreed on between the
Company  and Mr.  Megalos  but in no event to exceed  the  amount  of  severance
compensation  payable in the event of  termination  without  "good  cause."  Mr.
Megalos  has  agreed  not to  compete  with the  Company  during the term of the
employment  agreement  and for a period  of one year  after  termination  of his
employment  relationship  with the Company in the  development  or  provision of
recovery  media  services or any other line of recovery media services which the
Company is engaged in or in which the Company forms the intention to engage with
the active participation of Mr. Megalos during this period.

Stock Option Plans

         The Company has adopted four stock option plans,  the 1996 Employee and
Consultants  Stock Option Plan (the "Employee and Consultants  Plan"),  the 1996
Board of Directors  and Advisory  Board Stock  Option Plan (the  "Directors  and
Advisory Board Plan"),  the 1997 Management  Bonus Plan (the  "Management  Bonus
Plan") and the 1998 Stock Plan (the "Stock  Plan").  The Company has reserved an
aggregate  of 940,251  shares of Common  Stock for future  issuance  under these
plans. All options granted or to be granted under these plans are  non-qualified
stock options  ("NQSOs") or incentive stock options  ("ISOs") under the Internal
Revenue Code of 1986, as amended.  The Management  Bonus Plan and the Stock Plan
also  provide  for  non-option  awards,  such as stock  appreciation  rights and
restricted stock awards.

         1996 Employee and Consultants Stock Option Plan

         Effective  December 3, 1996, the Company  established  its Employee and
Consultants Plan for its employees and consultants.  The purpose of the Employee
and  Consultants  Plan is to enable the Company to recognize  the  contributions
made to the Company by its employees and consultants and to provide such persons
with  additional  incentive to devote  themselves  to the future  success of the
Company.  An aggregate of 30,768  shares of Common Stock have been  reserved for
issuance  under the Plan. As of the date hereof,  30,351 options were granted at
an exercise  price of $5.00 per share.  During fiscal 1998,  all options  became
fully vested due to  activation  of a change of control  provision or settlement
terms with former  employees.  The Employee and Consultants Plan is administered
by the Finance and Compensation Committee.

                                      -29-

<PAGE>



         1996 Board of Directors and Advisory Board Stock Option Plan

         Effective  December 3, 1996, the Company  established its Directors and
Advisory  Board Plan. The purpose of the Directors and Advisory Board Plan is to
enable the Company to  recognize  the  contributions  made to the Company by its
directors  and members of the  Advisory  Board and to provide  such persons with
additional  incentive to devote themselves to the future success of the Company.
An aggregate of 113,652  shares of Common Stock are reserved for issuance  under
the Directors and Advisory Board Plan.

         Effective  January 16, 1997,  each  director of the Company on December
31, 1996,  was granted  12,915  options to acquire shares of Common Stock of the
Company at an exercise price of $5.00 per share. Also effective as of such date,
each member of the Advisory Board and each individual who became a member of the
Advisory Board before March 3, 1997, was granted 2,583 options to acquire shares
of Common Stock of the Company at an exercise price of $5.00 per share.  111,069
options  have been granted  under the  Directors  and Advisory  Board Plan at an
exercise  price of $5.00 per share of which  options to purchase  12,915  shares
have been granted to each of Messrs. Henry, Moses, Masters and Kovacs and to two
former  directors.  During fiscal 1998,  all options  became fully vested due to
activation of a change of control  provision.  The Directors and Advisory  Board
Plan is administered by the Finance and Compensation Committee.

         1997 Management Bonus Plan

         Effective  February 6, 1997,  the Company's  shareholders  approved the
Management Bonus Plan to enable the Company to recognize the contributions  made
to the Company by its  directors  and key  personnel and to provide such persons
with  additional  incentive to devote  themselves  to the future  success of the
Company.  The  Company  has  reserved  195,831  shares  for  issuance  under the
Management  Bonus  Plan  and has the  right  to grant  either  non-qualified  or
incentive stock options and other  stock-related  awards.  The exercise price of
incentive stock options granted under the Management Bonus Plan must be at least
100% of the fair market value of the stock  subject to the option on the date of
grant or 110% with  respect to  holders of more than 10% of the voting  power of
the Company's  outstanding Common Stock. Under the terms of the Management Bonus
Plan, the Finance and Compensation Committee determines the fair market value of
the Common Stock. The  exercisability  and term of each option and the manner in
which  it  may be  exercised  is  determined  by the  Finance  and  Compensation
Committee,  provided that no incentive  stock option may be exercised  more than
five years after the date of grant. The Company may grant options for any number
of shares,  except that the value of the shares subject to one or more incentive
stock options  first  exercisable  in any calendar year may not exceed  $100,000
(determined  at  the  grant  date).  The  Finance  and  Compensation   Committee
administers the Management Bonus Plan.

         The Company  has granted  incentive  stock  options to purchase  35,067
shares of Common Stock to several non-key employees of the Company and incentive
stock options to purchase 3,583 shares of Common Stock to two  consultants,  all
of which options are at an exercise price of $1.56 per share.

                                      -30-

<PAGE>



         The Company has also  granted  incentive  stock  options at an exercise
price of $1.56 per share to purchase 35,000,  75,000,  22,601, 12,915 and 10,000
shares to Messrs. Henry, Moses, Wheeler, Masters and Kovacs, respectively. As of
June 30, 1998, there were 194,166 options outstanding under the Management Bonus
Plan, all of which were fully vested due to a change of control  provision which
was activated during fiscal 1998.

         1998 Stock Plan

         Effective May 28, 1998, the Company's  shareholders  approved the Stock
Plan. The purpose of the Stock Plan is to provide  participants  an incentive to
maintain and enhance the long-term performance and profitability of the Company.
Only key  employees,  directors and  independent  contractors of the Company and
certain of its  affiliates  are initially  eligible to receive  awards under the
Stock Plan.  Under the Stock Plan,  a maximum of 600,000  shares of Common Stock
are  authorized  to be delivered  by the  Company.  The Company has the right to
deliver  nonqualified or incentive stock options or other stock-related  awards.
As of June 30, 1998, under the Stock Plan, the Company has granted stock options
to purchase an  aggregate  of 494,580  shares at an exercise  price of $1.56 per
share. Subsequent to June 30, 1998, options to acquire another 100,000 shares of
Common Stock were issued with an exercise price of $1.56 per share.

         The Stock Plan is administered by the Board of Directors.  The Board of
Directors has authority to determine  when and to whom to make grants of awards,
the number of shares to be covered by the grants, the types and terms of options
and other  stock-related  awards  granted and the exercise  price of options and
stock appreciation rights, provided that the exercise price of an option and the
appreciation  base of a stock  appreciation  right may not be less than the fair
market  value of the  shares of the  Common  Stock on the date of grant,  except
that, in the case of an incentive  stock option granted to an individual who, at
the time such incentive stock option is granted,  owns shares  possessing 10% or
more of the total  combined  voting power of all classes of Stock of the Company
or its parent or subsidiary  corporations,  the option exercise price may not be
less than 110% of such fair market value on the date of grant.

         Non-Plan Stock Options

         The Company  has  granted  237,256  non-plan  stock  options to acquire
shares of Common  Stock,  of which 87,176 were  granted at an exercise  price of
$2.32 per share,  18,000 were  granted at an exercise  price of $1.56 per share,
23,247  were  granted  at an  exercise  price of $3.10 per share,  106,250  were
granted at an  exercise  price of $3.00 per share and 2,583  were  granted at an
exercise price of $5.00 per share.

         Limitation of Liability and Indemnification

         The  articles  of   incorporation   of  the  Company  provide  for  the
indemnification  of the Company's  directors and officers to the fullest  extent
permitted  by  law.  Insofar  as  indemnification   for  liabilities  under  the
Securities Act may be permitted to directors, officers or controlling persons of
the Company pursuant to the articles of incorporation and the corporation law of
the State of

                                      -31-

<PAGE>



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

         As permitted by the Colorado Business  Corporation Act, the Articles of
Incorporation  provide  that  directors  and officers of the Company will not be
personally  liable to the Company or its  shareholders  for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for breach of a
director's duty of loyalty to the Company or its shareholders,  (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under section 7-108-403 of the Colorado statute relating
to unlawful  distributions  or (iv) for any transaction  from which the director
derived an improper personal benefit. The Articles of Incorporation also provide
(subject to certain  exceptions)  that the Company shall,  to the maximum extent
permitted  from time to time under the law of the State of Colorado,  indemnify,
and upon  request  shall  advance  expenses  to, any  director or officer to the
extent  permitted  under such law as it may from time to time be in effect.  The
Company's bylaws require the Company to indemnify,  to the full extent permitted
by law, any director,  officer,  employee or agent of the Company for acts which
such person reasonably  believes are not in violation of the Company's corporate
purposes  as set forth in the  Articles of  Incorporation.  As a result of these
provisions,  shareholders may be unable to recover damages against the directors
and  officers  of the  Company  for  actions  taken  by  them  which  constitute
negligence,  gross negligence,  or a violation of their fiduciary duties,  which
may reduce the  likelihood of  shareholders  instituting  derivative  litigation
against  directors and officers and may  discourage or deter  shareholders  from
suing directors,  officers,  employees and agents of the Company for breaches of
their duty of care, even though such an action,  if successful,  might otherwise
benefit the Company and its shareholders.

         Advisory Board

         The  Board of  Directors  of the  Company  has  established  a Board of
Advisors (the  "Advisory  Board") to assist the Company in the  development  and
implementation  of its  long-term  strategy and goals and to propose,  adopt and
audit compliance by the Company with programming and business standards that are
consistent  with the delivery of effective,  non-  exploitative,  and non-biased
recovery  based  services.  The Advisory  Board will  recommend to the Company's
Board of Directors the adoption of standards  and practices to provide  guidance
for the Company's  employees in determining  appropriate  programming and online
content,  advertising,  and merchandise sales. The Advisory Board will advise on
technical  matters  and also  serve as an  independent  voice  for the  recovery
community.

                                      -32-

<PAGE>



         The Company has enlisted the membership of eight noted professionals in
the field of recovery, with nationally recognized expertise for their commitment
and  contributions  in the treatment of  alcoholism  and drug  addiction,  child
welfare  issues,  and the treatment and recovery field generally to serve on the
Advisory Board. The following persons serve on the Advisory Board:

         Claudia Black,  Ph.D. is a  nationally-recognized  expert and author on
the issues confronting children of addiction and past Chairperson and founder of
the National  Association  for  Children of  Alcoholics.  Dr. Black  designs and
presents workshops and seminars, and has published several best selling books in
her areas of expertise.

         David Bralove is the founder of a law firm representing substance abuse
and  behavioral  care  providers  nation-wide,  and is  Board  President  of The
National Treatment Consortium.

         Dr. Mark Gold is a Professor of Neuroscience,  Psychiatry and Community
Health and Family Medicine at the University of Florida College of Medicine. Dr.
Gold has been a national leader in the field for 25 years leading  treatment and
the general public toward a greater understanding of the nature of addiction and
its  successful  treatment.  Dr. Gold has done  pioneering  research in tobacco,
alcohol,  cocaine and opiate addictions and has been granted several patents for
his discoveries. Dr. Gold is widely recognized by his peers, the government, the
business community and the general public as a best selling author and addiction
expert.

         Earnie  [Ernie]  Larsen is a  nationally  known  lecturer  on  managing
personal relationships and overcoming dysfunctional behaviors, and an author and
producer  of  over  55  motivational  self-help  books  and  videos.  He is  the
originator  of the process  known as "Stage II  Recovery"  where one attempts to
resolve life issues which often impede spiritual growth.

         Robert Lindsey is a veteran of over 20 years in the field of alcoholism
and drug  addiction  treatment.  Mr.  Lindsey is currently the Vice President of
Longview  Associates,  Inc., a consulting  firm  specializing  in the design and
implementation  of employee  assistance  programs.  Prior to this,  Mr.  Lindsey
served as the Community  Relations  Director at the Betty Ford Center and as the
Executive  Director of the New York State Council on  Alcoholism  and Other Drug
Addictions.

         Father  Joseph  Martin is the  founder of Ashley,  Inc.,  a  non-profit
center  dedicated  to  the  treatment  of  the  chemically  addicted.  He  is an
internationally  recognized  speaker and creator of the film "Chalk  Talk",  the
principal  educational  vehicle on alcoholism for most treatment  centers in the
country.

         Joseph A Pursch, M.D. is a nationally-recognized psychiatrist involved,
since 1962, in the treatment and  rehabilitation  of individuals  with addictive
behaviors.  Dr. Pursch is the former Director of Alcohol  Rehabilitation Service
at the Naval Regional  Medical Center at Long Beach,  California.  An author and
syndicated  columnist,  Dr.  Pursch has  supervised  drug  testing  programs for
numerous sports events and has treated many public figures.  Dr. Pursch has been
on the President's Commission on Alcohol and Drugs since 1979.

                                      -33-

<PAGE>



         David Smith,  M.D. is the founder and  president of the  Haight-Ashbury
free  clinics.  A  specialist  in the field of  addiction  medicine and clinical
toxicology, Dr. Smith is also the founder and executive editor of the Journal of
Psychoactive  Drugs and is the  president of the  American  Society of Addiction
Medicine (ASAM). He is a leader in the areas of treatment of addictive  disease,
the  psychopharmacology  of drugs,  and new strategies in the management of drug
abuse problems.

         The Advisory  Board meets  semi-annually  on a formal basis,  and deals
with individual  issues as they arise.  Advisors serve terms of three years, are
compensated  for  meetings  attended,  and are  eligible to  participate  in the
Company's 1996 Board of Directors and Advisory Board Retainer Plan.

                                      -34-

<PAGE>



Item  11.     Security Ownership of Certain Beneficial Owners and Management.

              The  following  table  sets  forth  certain  information,   as  of
September  16, 1998,  relating to the  beneficial  ownership of shares of Common
Stock  by:  (i)  each  person  or  entity  who is known  by the  Company  to own
beneficially five percent or more of the outstanding  Common Stock, (ii) each of
the Company's  directors  and (iii) all directors and executive  officers of the
Company as a group.
<TABLE>
<CAPTION>

                                                                           Number of shares        Percentage
Name and address of beneficial owner(a)                                 beneficially owned (b)      of class
---------------------------------------                                 ----------------------     -----------

<S>                                                                      <C>                      <C>  
William D. Moses.....................................................      716,681(c)               11.7%
George H. Henry(d)...................................................      344,183(e)                5.7%
Donald J. Masters....................................................      114,342(f)                1.9%
Nimrod J. Kovacs(g)..................................................       40,623(h)                 *
Charlotte Schiff-Jones(i)............................................        5,000(j)                 *
Austost Anstalt Schaan(k)............................................      285,657(l)                4.8%
Balmore Funds S.A(m).................................................      285,657(l)                4.8%
All directors and executive officers as                                  1,243,430(n)               19.7%
     a group (9 persons).............................................
---------------------
* Less than 1%.
</TABLE>

(a)      Unless  otherwise  indicated,  the address for each named individual or
         group is in care of The Recovery Network,  Inc., 1411 5th Street, Suite
         200, Santa Monica, California 90401.
(b)      Each beneficial owner's percentage  ownership is determined by assuming
         that options,  warrants or convertible securities that are held by such
         person  (but  not  those  held  by any  other  person)  and  which  are
         exercisable  within 60 days of September  16, 1998 have been  exercised
         and  converted.  Pursuant  to a "change of  control"  provision,  which
         defines a "change of control" to have occurred if  individuals  who are
         directors at the  beginning of a 24- month period fail to constitute at
         least two-thirds of all directors of the Company during such period, in
         the various stock option  contracts issued to certain of the beneficial
         owners, all stock options  beneficially owned by such person other than
         options  granted  under  the  Company's  1998  Stock  Option  Plan  are
         currently  exercisable.  Assumes a base of  5,977,920  shares of Common
         Stock  before  any  consideration  is  given  to  outstanding  options,
         warrants or convertible securities.
(c)      Includes (i) options to purchase  87,915 shares of Common  Stock,  (ii)
         warrants to purchase  43,750  shares of Common Stock and (iii)  387,356
         shares of Common  Stock held in the name of a trust for the  benefit of
         Mr. Moses' child.

                                      -35-

<PAGE>



(d)      The  address  of the  beneficial  owner is 6860  Sunrise  Court,  Coral
         Gables, Florida 33133.
 (e)     Includes (i) options to purchase 47,915 shares of Common Stock and (ii)
         warrants to purchase 62,500 shares of Common Stock.
(f)      Includes (i) options to purchase  38,745 shares of Common  Stock,  (ii)
         37,212  shares of Common  Stock  held  jointly by Mr.  Masters  and his
         spouse,  (iii) 14,259 shares of Common Stock held in the name of trusts
         for the  benefit of the  children  of Mr.  Masters  and his spouse (Mr.
         Masters  disclaims  beneficial  ownership of the shares of Common Stock
         held in trust) and (iv)  warrants  to purchase  6,250  shares of Common
         Stock held jointly by Mr. Masters and his spouse.
(g)      The address of the beneficial owner is 50 Falcon Hills Drive,  Highland
         Ranch, Colorado 80126.
(h)      Includes (i) options to purchase  22,915  shares of Common  Stock,  and
         (ii)  warrants to purchase  6,250 shares of Common Stock held by Kovacs
         Communication, Inc., of which Mr. Kovacs is a controlling shareholder.
(i)      The address of the  beneficial  owner is 1687 Brickell  Avenue,  Miami,
         Florida 33129.
(j)      Includes  options to purchase  12,915 shares of Common  Stock.  (k) The
         address  of the  beneficial  owner  is 7440  Fuerstentum,  Lichenstein,
         Landstrasse 163.
(l)      Does not include  77,676  shares of Common  Stock  (30,000 of which are
         issuable upon exercise of warrants)  issuable only upon the filing of a
         registration  statement by the Company covering such securities and the
         obtainment of shareholder approval.
(m)      The  address  of  the  beneficial  owner  is  P.O.  Box  4603,  Zurich,
         Switzerland.
(n)      Includes  (i) options to purchase  225,091  shares of Common  Stock and
         (ii) warrants to purchase 118,750 shares of Common Stock.


Item  12.     Certain Relationships and Related Transactions.

              In May  1994,  the  Company  entered  into a  one-year  consulting
agreement with Masters,  Smith & Co. pursuant to which Masters,  Smith & Co. was
engaged to assist the Company in the financing and  development of its business.
Pursuant to the agreement, Masters, Smith & Co. received 42,818 shares of Common
Stock valued at $.93 per share,  $10,000 upon  execution of the  agreement and a
monthly retainer in the amount of $10,000  commencing June 1, 1994. During 1995,
Masters,  Smith & Co.  agreed to accept  64,424 shares of Common Stock valued at
$.93 per share in lieu of such cash payments. Donald J. Masters,  Executive Vice
President  of the  Company,  was a partner of  Masters,  Smith & Co. The Company
believes  that  its  arrangements  with  Masters,  Smith  & Co.  were  fair  and
reasonable  to the Company and were on terms no less  favorable  than could have
been obtained from an unaffiliated party.

              During the period from July 1996 through October 1996, the Company
issued an  aggregate  principal  amount of  $310,000 of  Convertible  Notes in a
private placement. The Company sold a Convertible Note in an aggregate principal
amount of $30,000 to each of George H.  Henry,  a director  of the  Company  and
William D. Moses,  the Company's  Chief  Executive  Officer on July 17, 1996 and
October 14, 1996,  respectively.  In November 1996, Messrs. Henry and Moses each
converted the principal and interest on their Convertible Note into 8,524 shares
of Common Stock

                                      -36-

<PAGE>



at an effective purchase price of $3.68 per share.  Pursuant to the terms of the
Convertible  Notes, as modified by a change in terms offered to all noteholders,
each of Messrs.  Henry and Moses received and exercised  warrants to purchase an
additional 17,048 shares of Common Stock at a purchase price of $2.32 per share.
In addition,  Messrs.  Moses and Henry were granted certain  registration rights
with  respect  to the  shares of Common  Stock  issued  upon  conversion  of the
Convertible Notes and upon the exercise of the warrants.

              Effective  August 30, 1996, the Company  entered into a consulting
and bonus agreement (the  "Consulting  Agreement") with Jonathan Katch, a former
principal stockholder and a former director and officer of the Company and Chief
Executive  Officer of  Recovery  Interactive.  Mr.  Katch was granted a bonus of
12,915  stock  options at an exercise  price of $2.32 per share for his services
relating  to the  creation  of Recovery  Interactive  and for his  services as a
former  officer  and  director of the  Company.  The stock  options  vested upon
execution of the Consulting  Agreement.  In addition,  the Consulting  Agreement
provides that Mr. Katch will serve as a consultant  to the Company's  management
for a period of three years for which Mr. Katch was granted an additional 12,915
stock  options  at an  exercise  price of $2.32 per share.  Such  stock  options
commenced  vesting at the rate of 1,075  stock  options per fiscal  quarter,  on
September 30, 1996.

              From October to November  1996,  the Company  reduced the exercise
price of options  granted to its  non-employee  directors from $3.87 to $2.32 to
encourage  such directors to exercise  their vested  options.  Mr. Henry and Mr.
Kovacs  exercised  options to purchase  28,412 and 6,458 shares of Common Stock,
respectively. Each director was granted certain registration rights with respect
to the shares of Common Stock issued upon exercise of the options.

              During  October and November  1996,  Messrs.  Katch and Moses were
issued 10,763 and 32,287 shares of Common Stock,  respectively,  valued at $2.32
per  share as  reimbursement  for  expenses  incurred  by them on  behalf of the
Company.

              During  October 1996 to January  1997,  the Company sold shares of
Common Stock at $3.48 per share in a private placement. Messrs. Henry and Berman
purchased 28,699 shares and 71,891 shares of Common Stock, respectively, in such
offering at the same price and on the same terms as the other  investors in such
offering.  The purchasers in the private placement,  including Messrs. Henry and
Berman,  were granted certain  registration rights with respect to the shares of
Common Stock purchased.

              On November  22,  1996,  Mr.  Moses  agreed to convert  $49,000 of
deferred  compensation  earned by him from May 1996 to November 1996 into 21,094
shares of Common Stock, at a price of $2.32 per share.

              In March and April  1997,  the  Company  sold an  aggregate  of 40
Financing  Units in the Private  Financing.  Each  Financing Unit consisted of a
$50,000  principal  amount  Financing  Note,  10,000  shares of Common Stock and
12,500 Financing Warrants. The offering price was $50,000 per Financing Unit. In
connection with the Private  Financing,  Mr. Henry purchased 5 Financing  Units;
Paul Graf, a former director of the Company,  purchased 5 Financing  Units;  Mr.
Masters and

                                      -37-

<PAGE>



his spouse  jointly  purchased  .5 Financing  Units;  Mr.  Moses  purchased  3.5
Financing Units; Terrance and Daryl Berman, former principal shareholders of the
Company, purchased 3.5 Financing Units; and Kovacs Communication, Inc., of which
Mr.  Nimrod  Kovacs,  a director  of the Company is a  controlling  shareholder,
purchased .5 Financing Units in the Private Financing.

              In  April  1997,  the  Company   launched  The  Recovery   Network
nationally via satellite  transmission  under the Nesting  Contract entered into
with ATN.  Under the Nesting  Contract,  ATN  provided  the ATN  Services on its
satellite  transponder  to The Recovery  Network for two hours of broadcast time
per day,  one hour in the  morning  and one hour in the  evening.  ATN  provided
distribution of the Company's  programming  into cable systems through  existing
affiliation  agreements  between  ATN  and  those  systems.  Under  the  Nesting
Contract,  the Company was charged a daily rate for  broadcast  time provided by
ATN to the Company with the actual  charges for each calendar  month being based
on the actual monthly number of households  served by ATN  affiliates.  However,
the Nesting  Contract  provided that in no event will charges exceed $60,000 per
calendar month for the first six months of the Nesting Contract,  or $65,000 for
the  subsequent  six  months of the  Nesting  Contract.  ATN had also  agreed to
provide the ATN Services for two additional hours of broadcasting,  if such time
was available,  to the Company at ATN's cost plus 20%, which fee was in addition
to the charges for broadcast time. ATN had also agreed to provide  authorization
services  for  cable  systems  with  which  the  Company  directly  enters  into
affiliation  agreements  to enable the Company to broadcast its  programming  on
such  affiliates'  cable  systems,  provided  that  the  Company  purchased  the
necessary  equipment,  if any.  On February  26,  1998,  the Company  executed a
contract to extend the Nesting Contract. The extension provided for an extension
of services on a  month-to-month  basis  through and until August 31, 1998, at a
monthly  fee  of  $65,000  and  a  one-time   payment  of  $150,000  to  reflect
unanticipated  costs  incurred  by ATN in the  course of  performance  under the
Nesting  Contract.  The Company also granted ATN the right,  for the term of the
Nesting  Contract  and for a period of one year  thereafter,  to match any other
nesting  arrangement  presented  to the  Company by a third  party.  The Nesting
Contract,  as amended,  expired on August 31,  1998.  Mr.  George H. Henry,  the
Chairman  of the Board of the  Company,  is the  Chairman of the Board and Chief
Executive Officer and a principal  shareholder of ATN. Mr. William D. Moses, the
Chief Executive Officer of the Company, is a principal shareholder of ATN.

              On January 26,  1998,  Mr. Henry  entered  into an agreement  with
Recovery  Interactive.  Pursuant to such  agreement,  Mr. Henry is entitled to a
percentage  of any  proceeds  from a "change  of  control"  (as  defined  in the
agreement) of Recovery Interactive which exceeds a base amount.

              Charlotte  Schiff-Jones,  a  director  of  the  Company,  provides
consulting  services in the areas of affiliate  marketing and strategic business
development.  During the fiscal  year  ending June 30,  1998,  Ms.  Schiff-Jones
received $58,314 as compensation for such services.

              The Company  believes that all of the foregoing  transactions  and
arrangements  with  affiliates  were fair and reasonable to the Company and were
and  are on  terms  no  less  favorable  than  could  have  been  obtained  from
unaffiliated  third  parties.  There can be no assurance,  however,  that future
transactions or arrangements between the Company and affiliates will continue to
be advantageous  to the Company,  that conflicts of interest will not arise with
respect thereto, or that if
                                      -38-

<PAGE>



conflicts do arise,  they will be resolved in a manner favorable to the Company.
Any such future  transactions  will be on terms no less favorable to the Company
than could be  obtained  from  unaffiliated  parties and will be approved by the
Company's Finance and Compensation Committee.


Item  13.     Exhibits and Reports on Form 8-K.
(a)    Exhibits

Number        Description of Exhibit
------        ----------------------

2.1           Form of  Subscription  Agreement  between  Registrant  and each of
              Austost  Anstalt  Schann,  Balmore  Funds S.A.,  Zakeni  Ltd.,  BL
              Squared  Foundation,  Martin Chopp,  The Sargon Fund, L.P. and TLG
              Realty dated as of June 29, 1998.
2.3           Funds Escrow  Agreement  between the  Registrant,  Austost Anstalt
              Schaan,  Balmore Funds S.A.,  Zakeni Ltd., BL Squared  Foundation,
              Martin  Chopp,  The Sargon  Fund,  L.P.,  TLG Realty and Grushko &
              Mittman dated as of June 29, 1998.
2.4           Shares Escrow  Agreement  between the Registrant,  Austost Anstalt
              Schaan,  Balmore Funds S.A.,  Zakeni Ltd., BL Squared  Foundation,
              Martin  Chopp,  The Sargon  Fund,  L.P.,  TLG Realty and Grushko &
              Mittman dated as of June 29, 1998.
2.5           Agreement  and Plan of Merger  dated as of December 10, 1997 among
              the Registrant,  Recovery Direct, Inc., FMS Productions,  Inc. and
              each of John Frederick, P. Randall Frederick, Jan Smithers, Joe C.
              Wood, Jr., Sharon R. Irish and Charles S. Sapp. ++
3.1           Articles of Incorporation of the Registrant. **
3.2           By-Laws of the Registrant.  **
4.1           Specimen Certificate of the Registrant's Common Stock.  **
4.2           Form of Redeemable  Warrant  Agent  Agreement  (including  Form of
              Redeemable Warrant). **
4.3           Form  of  Underwriter's   Warrant  Agreement  (including  Form  of
              Underwriter's Warrant). **
4.4           1996 Employee and Consultants Stock Option Plan.  **
4.5           Amendment to 1996 Employee and Consultants Stock Option Plan.  **
4.6           1996 Board of Directors and Advisory Board Stock Option Plan. **
4.7           Amendment  to 1996 Board of  Directors  and  Advisory  Board Stock
              Option Plan. **
4.8           1997 Management Bonus Plan.  **
4.9           Amendment to 1997 Management Bonus Plan.  **
4.10          Form Stock Option Contract.  **
4.11          Form of Promissory  Note issued by the Registrant on July 2, 1997.
              **
4.12          1998 Stock Plan.  +
4.13          Form of Warrant.
4.14          Form of  Registration  Rights  Agreement  dated  December 10, 1997
              between the Registrant
              and each of the Sellers.++
10.1          Operating Agreement of RecoveryNet Interactive, L.L.C. dated as of
              August 1, 1996. **

                                      -39-

<PAGE>

10.2          Channel  Nesting  Agreement  between  the  Registrant  and  Access
              Television Network, Inc. dated as of April 10, 1997. **
10.3          Employment  Agreement  between the Registrant and William D. Moses
              effective as of December 1, 1996. **
10.4          Non-Disclosure and Inventions Agreement between the Registrant and
              William Moses dated as of January 30, 1977. **
10.5          Employment  Agreement  between the  Registrant  and Donald Masters
              effective as of December 1, 1996. **
10.6          Non-Disclosure  and Inventions  Agreements  between the Registrant
              and Donald Masters dated as of February 3, 1997. **
10.7          Employment Agreement between the Registrant and John Wheeler dated
              as of May 13, 1997. **
10.8          Employment  Agreement  between the Registrant and William  Megalos
              dated as of May 1, 1997. **
10.9          License  Agreement  between  RecoveryNet  Interactive,  L.L.C. and
              Merit Behavioral Care Corporation dated as of May 1, 1997. **
21.1          List of Subsidiaries.  **
27.1          Financial Data Schedule.

---------------------------------
*      Incorporated   by  reference  to  the  same   numbered   exhibit  to  the
       Registrant's Registration Statement on Form SB-2, file number 333-61421.
**     Incorporated   by  reference  to  the  same   numbered   exhibit  to  the
       Registrant's Registration Statement on Form SB-2, file number 333-27787.
+      Incorporated  by  Reference to Exhibit A to the  Registrant's  Definitive
       Proxy  Statement  on Schedule  14A filed by the  Registrant  on April 29,
       1998.
++     Incorporated by Reference to Exhibit 2.1 to the Registrant's December 15,
       1997 Form 8-K.
++     Incorporated by Reference to Exhibit 4.1 to the Registrant's December 15,
       1997 Form 8-K.


(b)    Reports on Form 8-K

       The  Company  filed a report on Form 8-K on  December  15,  1997 (date of
earliest event reported). Other than the foregoing, the Company did not file any
such reports during the fiscal year ended June 30, 1998.


                                      -40-

<PAGE>
<TABLE>
<CAPTION>


                          INDEX TO FINANCIAL STATEMENTS

THE RECOVERY NETWORK, INC. AND SUBSIDIARY


<S>                                                                             <C>        
Report of Independent Public Accountants........................................   F-2     

Consolidated Balance Sheet as of June 30, 1998..................................   F-3     

Consolidated Statements of Operations for the years ended June 30, 1997
     and 1998...................................................................   F-4     

Consolidated Statements of Shareholders' (Deficit) Equity for the years ended
     June 30, 1997 and 1998.....................................................   F-5     

Consolidated Statements of Cash Flows for the years ended June 30, 1997
     and 1998...................................................................   F-7     

Notes to Consolidated Financial Statements......................................   F-8
                                                
</TABLE>
                                           
                                       F-1

<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To The Recovery Network, Inc.:

We have  audited the  accompanying  consolidated  balance  sheet of The Recovery
Network,  Inc. (a Colorado  corporation) and Subsidiary as of June 30,1998,  and
the related  statements of operations,  shareholders'  (deficit) equity and cash
flows for the years ended June 30, 1997 and 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of The Recovery Network, Inc. and
Subsidiary  as of June 30,  1998 and the results of their  operations  and their
cash  flows for the years  ended  June 30,  1997 and 1998,  in  conformity  with
generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
the Company  will  continue as a going  concern.  As  discussed in Note 1 to the
consolidated  financial  statements,  the  Company  has  recurring  losses  from
operations  that  raises  substantial  doubt  about its ability to continue as a
going  concern.  The  ability of the  Company  to operate as a going  concern is
dependent upon its ability (1) to obtain sufficient  additional capital,  (2) to
distribute its  programming and services  through  multimedia  channels,  (3) to
achieve a  critical  mass of  viewers  to  attract  advertisers  and  healthcare
providers and (4) to acquire and develop appropriate  programming for broadcast.
The Company plans to raise additional working capital through private and public
offerings.  The success of future  activities  cannot be determined at this time
and there are no assurances  that if achieved,  the Company will have sufficient
funds to execute  its  intended  business  plan or generate  positive  operating
results.  The consolidated  financial  statements do not include any adjustments
relating to the  recoverability  and classification of asset carrying amounts or
the amount and  classification  of  liabilities  that  might  result  should the
Company be unable to continue as a going concern.


                                                        /s/  ARTHUR ANDERSEN LLP

Los Angeles, California
September 23, 1998

                                       F-2

<PAGE>
<TABLE>
<CAPTION>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY                   

                           CONSOLIDATED BALANCE SHEET
                               AS OF JUNE 30, 1998

                                     ASSETS


                                                                                           
<S>
CURRENT ASSETS:                                                                 <C>   
     Cash.......................................................................     $2,219,145                    
     Accounts receivable, net of allowance of $35,000...........................        254,750                        
     Current portion of capitalized programming costs, net......................        191,500         
     Inventory..................................................................         55,624         
     Prepaid expenses...........................................................         59,220
                                                                                      ---------     
         Total current assets...................................................      2,780,239                        
CAPITALIZED PROGRAMMING COSTS, net..............................................        765,962                        
FURNITURE AND EQUIPMENT, net....................................................        203,189                      
INVESTMENT IN JOINT VENTURE.....................................................            -                        
OTHER...........................................................................         35,530
                                                                                      ---------                   
                                                                                     $3,784,920
                                                                                      =========     
                      LIABILITIES AND SHAREHOLDERS' EQUITY
                                                                                               
CURRENT LIABILITIES:
                                                                                               
     Accounts payable...........................................................    $   323,391     
     Accrued payroll and benefits...............................................        152,322     
     Accrued professional fees..................................................        131,647     
     Other accrued liabilities..................................................        111,494     
     Accrued royalty expense....................................................        322,630     
     Due to joint venture.......................................................        224,500     
     Current portion of capital lease obligation................................         17,029     
                                                                                  -------------     
                  Total current liabilities.....................................      1,283,013     
CAPITAL LEASE OBLIGATION, net of current portion................................         13,126     
                                                                                  -------------     
                  Total liabilities.............................................      1,296,139
                                                                                  -------------     
COMMITMENTS
                                                                                        
SHAREHOLDERS' EQUITY:
                                                                                               
     Common stock, $.01 par value:
                                                                                               
         Authorized 25,000,000 shares, issued and outstanding 5,791,494 shares..         57,915     
     Additional paid in capital.................................................     17,050,969    
     Prepaid consulting.........................................................      (461,250)     
     Deficit....................................................................   (14,158,853)     
                                                                                  -------------     
                  Shareholders' equity..........................................      2,488,781     
                                                                                  -------------             
                  Total liabilities and shareholders' equity....................  $   3,784,920
                                                                                  =============             
</TABLE>


          The  accompanying  notes  are an  integral  part of this  consolidated
statement.

                                       F-3

<PAGE>

                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                      CONSOLIDATED STATEMENTS OF OPERATIONS

                   FOR THE YEARS ENDED JUNE 30, 1997 AND 1998

<TABLE>
<CAPTION>


                                                                           1997              1998
                                                                           ----              ----
                                                                                                       
<S>                                                                      <C>             <C>     
DOMESTIC SALES.........................................................    $33,464         $894,758
                                                                         ---------        ---------                     
SALARIES AND CONSULTING EXPENSES.......................................  1,175,362        3,346,720                     
GENERAL AND ADMINISTRATIVE EXPENSES....................................    768,938        2,326,807                     
PROGRAMMING EXPENSES...................................................    358,447        1,543,997                     
MARKETING EXPENSES.....................................................    468,017          497,467                     
LOSS ON INVESTMENT IN JOINT VENTURE....................................    300,000          592,500                     
COST OF VIDEO AND PUBLICATION EXPENSE..................................        -            216,889
                                                                         ---------        ---------                     
    Operating Expenses.................................................  3,070,764        8,524,380
                                                                         ---------        ---------                     
    Loss from operations...............................................  3,037,300        7,629,622                     
INTEREST EXPENSE.......................................................    788,235          775,611                     
INTEREST INCOME........................................................    ( 9,683)        (146,044)
                                                                         ---------        ---------                     
    Loss before provision for state income taxes.......................  3,815,852        8,259,189                     
PROVISION FOR STATE INCOME TAXES.......................................      1,800            2,545
                                                                         ---------        ---------                     
NET LOSS............................................................... $3,817,652       $8,261,734
                                                                        ==========       ==========
LOSS PER SHARE INFORMATION:
                                                                                                       
    Basic and diluted loss per share................................... $    (1.87)      $    (1.91)
                                                                        ==========      ===========                     
    Weighted average number of common and common equivalent shares
    outstanding........................................................  2,044,339        4,336,405
                                                                        ==========      ===========    
</TABLE>

          The  accompanying  notes are an  integral  part of these  consolidated
statements.

                                       F-4
<PAGE>
                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY

                   FOR THE YEARS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>

                                                                         Stock
                                  Common Stock      Additional     Subscriptions       Prepaid
                              ------------------      Paid-in          (Notes         Consulting
                              Shares       Amount     Capital        Receivable)         Costs          Deficit          Total
                            -----------------------  ------------  -----------------  -------------  ---------------   ------------

<S>              <C>           <C>        <C>                          <C>           <C>           <C>             <C>
BALANCE, June 30, 1996        1,591,969     $15,920    $1,908,590               $500      $ (1,250)     $(2,079,467)     $(155,707)
   Issuance of common stock
     for consulting services     59,194         592       136,908                  -       (22,500)                -        115,000
   Issuance of common stock
     for conversion of debt,
     accrued interest and
     deferred compensation:
     at $2.32 per share...       31,857         319        73,681                  -              -                -         74,000
     at $2.90 per share...        6,888          69        19,931                  -              -                -         20,000
     at $3.68 per share...       71,033         710       260,790                  -              -                -        261,500
   Issuance of common stock
     for cash:          
     options exercised:
     at $2.32 per share...       73,615         736       170,264                  -              -                -        171,000
     at $0.77 per share...           44           -            33                  -              -                -             33
     warrants exercised under   142,065
     convertible notes payable                1,420       328,580                  -              -                -        330,000
     private placement
     including 7,749 share
     issued for services for
     stock offering.......      146,510       1,465       482,035                  -              -                -        483,500
   Issuance of common stock          
     for an outstanding stock
     subscription.........          216           2           498              (500)              -                -              -
   Shares retired pursuant to a    
     settlement with a
     shareholder..........       (2,141)        (21)       (4,952)                  -              -                -        (4,973)
   Issuance of common stock     
     and warrants for cash net
     of offering costs of
     $260,290 under the
     February 1997 private
     placement............      400,000        4,000     800,350                   -              -                -        804,350
   Amortization of prepaid
     consulting costs.....            -           -             -                  -         18,125                -         18,125
   Net loss...............            -           -             -                  -              -      (3,817,652)    (3,817,652)
                            -----------  ----------  ------------  -----------------  -------------  ---------------   ------------
BALANCE, June 30, 1997        2,521,250      25,212     4,176,708                  -        (5,625)      (5,897,119)    (1,700,824)
   Initial public offering of   
     common stock and
     warrants, net of offerring
     costs of $2,174,743..    2,415,000      24,151    10,117,606                  -              -                      10,141,757
   Issuance of common stock   
     and warrants for cash and
     subscription receivable,
     net of offering costs of
     $205,000 and including
     30,601 shares issued for
     placement services...       808,377      8,083     1,536,917                  -              -                -      1,545,000




</TABLE>
                                       F-5

<PAGE>
<TABLE>
<CAPTION>



                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY

                   FOR THE YEARS ENDED JUNE 30, 1997 AND 1998


                                                                         Stock
                              Common Stock            Additional     Subscriptions       Prepaid
                            ---------------------      Paid-in          (Notes         Consulting
                              Shares       Amount       Capital        Receivable)         Costs          Deficit      Total        
                            ----------  -----------   -----------   ----------------   ------------   --------------  ------------
 
<S>                       <C>          <C>         <C>             <C>                <C>             <C>            <C>

  Services to be received in
     exchange for options and
     shares of common stock
     not yet issued.......            -           -     1,009,000                  -    (1,009,000)                -              -
   Purchase of FMS........       44,000         440       208,560                  -              -                -        209,000
   Exercise of options....        2,867          29         2,178                  -              -                -          2,207
   Amortization of prepaid
     consulting costs.....            -           -             -                  -        553,375                -        553,375
   Net loss...............            -           -             -                  -              -      (8,261,734)    (8,261,734)
                            -----------  ----------  ------------  -----------------  -------------  ---------------   ------------
BALANCE, June 30, 1998        5,791,494     $57,915   $17,050,969  $               -       (461,250)   $(14,158,853)    $2,488,781
                            ===========  ==========  ============  =================  =============  ===============   ============

</TABLE>


          The  accompanying  notes are an  integral  part of these  consolidated
statements.


                                       F-6

<PAGE>
<TABLE>
<CAPTION>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                   FOR THE YEARS ENDED JUNE 30, 1997 AND 1998

                           Increase (Decrease) in Cash

                                                                             1997                1998
                                                                             ----                ----                               
<S>                                                                      <C>                 <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss..............................................                 $ (3,817,652)       $ (8,261,734)                         
     Adjustments to reconcile net loss to net cash used in operating
       activities:
                                                                                                           
     Amortization of notes payable discount............                        585,072              479,568                         
     Amortization of prepaid consulting costs..........                         18,125              553,375                         
     Amortization of deferred financing costs..........                        127,653              130,529                         
     Amortization of capitalized programming costs.....                        118,789              230,360                         
     Depreciation and other amortization...............                          7,584              166,956                         
     Common stock issued for services and interest expense                      32,625                    -                         
     Provision for deferred compensation...............                        136,505                    -                         
     Provision for doubtful accounts...................                              -               16,000                         
     Loss on investment in joint venture...............                        300,000              592,500                         
   Changes in assets and liabilities:                                                                                               
     Accounts receivable...............................                        (25,631)            (194,678)                        
     Inventory.........................................                              -               25,325                         
     Prepaid expenses..................................                        (14,993)             (33,365)                        
     Other assets......................................                         (1,386)              (3,887)                        
     Capitalized programming costs.....................                       (356,389)            (565,783)                        
     Accounts payable, accrued payroll and benefits and other accrued
     liabilities.......................................                        418,142             (66,958)                         
     Accrued royalty expense...........................                              -              157,569                         
     Deferred compensation.............................                       (35,000)             (51,672)                         
     Accrued professional fees.........................                       297,963             (250,587)                         
     Due to shareholders and directors.................                       (39,417)             (65,751)
                                                                         ------------          -----------                          
       Net cash used in operating activities.........                      (2,248,010)          (7,142,233)
                                                                         ------------          -----------                          

CASH FLOWS FROM INVESTING ACTIVITIES:
                                                                                                           
   Cash paid for purchase of FMS.........................                           -              (34,383)                         
   Purchases of furniture and equipment..................                     (45,396)            (206,569)                         
   Investment in joint venture...........................                    (300,000)            (368,000)
                                                                         ------------          -----------                          
     Net cash used in investing activities.............                      (345,396)            (608,952)
                                                                         ------------          -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
                                                                                                           
   Proceeds from borrowings..............................                    1,245,360             574,990                          
   Payments on borrowings................................                     (60,000)          (2,605,250)                         
   Payments on capital lease obligation..................                      (4,511)             (17,175)
                                                                                                           
     Proceeds from the issuance of common stock, warrants and stock
     subscriptions.....................................                     1,788,883           12,332,547                          
   Deferred offering and financing costs incurred........                    (497,962)            (343,558)                         
   Repurchase of common stock............................                      (4,973)                   -    
                                                                         ------------          -----------                          
     Net cash provided by financing activities.........                     2,466,797            9,941,554
                                                                         ============          ===========                          

NET INCREASE (DECREASE) IN CASH                                              (126,609)           2,190,369                          
CASH, beginning of period...................................                  137,492               10,883                          
CASH FROM ACQUISITION OF FMS................................                        -               17,893
                                                                         ------------          -----------                          
CASH, end of period.........................................            $     10,883       $     2,219,145
                                                                         =============         ============
</TABLE>


          The  accompanying  notes are an  integral  part of these  consolidated
statements.
                                       F-7


<PAGE>
      
                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

1.       Organization, Line of Business and Significant Business Risks

         a.       Organization and Line of Business

         The Recovery Network, Inc.  ("Recovery"),  a Colorado corporation,  was
organized to provide information,  interaction and support via television, radio
and  interactive  media  services  to  persons  affected  by or  afflicted  with
alcoholism, drug and substance abuse, eating disorders, depression and a variety
of  behavioral  and mental  health  problems,  as well as to persons  seeking to
prevent  the onset of these  problems  and select  positive  lifestyle  choices.
Recovery was incorporated in May 1992 and commenced operations in February 1993.
Recovery has defined and developed  its  marketing  concept and has procured and
produced programming. Recovery commenced test broadcasting on a limited basis in
March 1996 and was launched nationally for two hours a day in April 1997.

         b.       Acquisitions and Joint Venture

         Recovery Interactive

         Recovery owns a 50% interest in Recovery  Interactive  ("RI"),  a joint
venture with TCI Online Recovery Net Holdings,  Inc.  ("TCIR"),  an affiliate of
Tele-Communications,  Inc.  ("TCI"),  formed on August  1,  1996 to  commence  a
business to provide behavioral health care products and services to managed care
organizations  and  other  organizations   offering  or  providing  health  care
services,  as well as to provide information,  interaction and support regarding
recovery  issues  and  prevention  issues,   through  an  integrated  multimedia
platform. During 1997 and 1998, Recovery and TCI each made capital contributions
to RI and incurred expenses on RI's behalf aggregating to approximately $300,000
and $368,000,  respectively.  The Joint Venture agreement is to continue through
December 31, 2044.  Recovery's  investment in the Joint Venture is accounted for
under the equity method of accounting. Recovery recorded a loss on investment in
the joint venture for its entire  investment of $300,000 in 1997 and $592,500 in
1998 which includes amounts to be paid to RI for operating losses incurred by RI
through June 30, 1998.

         FMS Productions

         On December 10, 1997,  Recovery  acquired 100 percent of the issued and
outstanding common stock of FMS Productions,  Inc. ("FMS" and collectively,  the
"Company") for total  consideration of $225,490.  Consideration  included 44,000
shares of  Recovery's  common stock  valued at $209,000  ($4.75 per share) and a
cash  payment  totaling  $34,383,  less  $17,893 of cash  received  from FMS. In
conjunction  with the  acquisition,  which  has been  accounted  for  under  the
purchase method, acquired net assets were as follows:

                                       F-8

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

1.   Organization, Line of Business and Significant Business Risks - (Continued)


Accounts Receivable..................................    $  50,441
Prepaid expenses.....................................       10,162
Inventory............................................       80,949
Capitalized programming costs........................      384,439
Furniture and Equipment..............................       10,826
Other assets.........................................        5,257
                                                       -----------
Fair Value of acquired assets, excluding cash........      542,074
Accounts payable.....................................     (151,523)
Accrued royalty expense..............................     (165,061)
                                                         ---------
Net purchase price...................................     $225,490
                                                          ========

         Prior to the FMS acquisition,  Recovery was classified as a development
stage company, due to the lack of significant operating revenues.  Effective for
the first  quarter  after the FMS  acquisition  (quarter  ended March 31, 1998),
Recovery  emerged  from  the  development  stage  as a  result  of the  revenues
generated from FMS's operations subsequent to the purchase date.

         The unaudited pro forma results of operations  for the years ended June
30,  1997  and  1998  (reflecting  all  adjustments  which,  in the  opinion  of
management, are necessary for a fair presentation) as if the FMS acquisition was
consummated on July 1, 1997 and 1998, respectively, are as follows:

                                                    1997            1998
                                                -----------     ----------
            Pro forma total revenues            $ 1,214,000     $ 1,593,000
                                                ===========      ==========

            Pro forma net loss                  $(3,915,000)    $(8,354,000)
                                                ============    ============

            Pro forma weighted average
              number of common shares             2,088,339       4,356,055
                                                  =========       =========

            Pro forma loss per common share     $     (1.87)    $    (1.92)
                                                ============    ===========


         c.       Significant Business Risks

         Going Concern

         The accompanying  financial  statements have been prepared assuming the
Company will continue as a going concern.  The Company has recurring losses from
operations and has limited  operating  revenues,  that raises  substantial doubt
about the Company's  ability to continue as a going concern.  The ability of the
Company to  operate as a going  concern is  dependent  upon its  ability  (1) to
obtain  sufficient  additional  capital,  (2) to distribute its  programming and
services through multimedia channels,  (3) to achieve a critical mass of viewers
to attract

                                       F-9

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

1.   Organization, Line of Business and Significant Business Risks - (Continued)

advertisers and healthcare  providers and (4) to acquire and develop appropriate
programming for broadcast. The Company plans to raise additional working capital
through  private  and  public  offerings.   The  successful  outcome  of  future
activities cannot be determined at this time and there are no assurances that if
achieved,  the  Company  will have  sufficient  funds to  execute  its  intended
business plan or generate positive operating results.

         The financial  statements do not include any adjustments related to the
recoverability  and  classification of assets carrying amounts or the amount and
classification  of liabilities that might result should the Company be unable to
continue as a going concern.

         Government Regulations

         The cable  television  industry is subject to extensive and  frequently
changing  federal,  state and local laws and substantial  regulation under these
laws by governmental agencies,  including the Federal Communications  Commission
(the "FCC").  Regulations governing the rates that can be charged to subscribers
by cable  systems not in markets  subject to  effective  competition  from other
multichannel  video program  distributors  could adversely affect the ability of
cable systems with limited channel  capacity to finance  rebuilding or upgrading
efforts to increase channel capacity or otherwise  restrict their ability to add
new programming such as The Recovery Network. In addition,  federal "must-carry"
rules  requiring  cable operators to devote up to one-third of their channels to
carriage of local commercial TV broadcast stations (and additional  channels for
noncommercial education TV stations); commercial leased access rules designating
10 to 15 percent of system channels for lease by unaffiliated  programmers;  and
local regulatory  requirements  mandating further channel set-asides for public,
governmental and educational use could reduce channel  availability  which might
otherwise be available for The Recovery Network on many cable systems. Statutory
provisions  and FCC  rules  governing  relationships  among  cable  systems  and
competing  forms of  multichannel  video  program  distribution,  as well as the
relations  between the Company and its cable system  affiliates  could adversely
affect the marketability of the Company's programming and the flexibility of the
Company in its business dealings with outlets for its programming.

         Dependence upon Group W Network Services

         In May 1998, the Company entered into a five year contract with Group W
Network Service, a division of CBS Corporation,  to provide program origination,
master control operations, uplink and C-Band Satellite transponder services (the
"Transponder Contract"). It is possible that Group W Network Services or Company
affiliates  could experience  broadcast  interruptions  and equipment  failures,
which could last for a significant period of time. The Transponder Contract will
allow the Company to  broadcast  24 hours a day,  rather than the 12 hours a day
under the ATN  nesting  contract  (the  "Nesting  Contract"  - see Note 8).  The
Transponder  Contract,  however,  does not provide  the  Company  with access to
subscribers as did the Nesting Contract.

         Through June 30, 1998,  substantially all the households which received
broadcast of The Recovery Network's programming were provided under the terms of
the  Nesting  Contract.  Starting  September  1, 1998,  the  Company is entirely
dependent on its own affiliate marketing efforts to obtain affiliate  agreements
with cable

                                      F-10

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

1.   Organization, Line of Business and Significant Business Risks - (Continued)


operators.  Currently,  the  Company's  only  significant  arrangement  is  with
Cablevision, which provides the Company with approximately 2 million subscribers
in New York and Boston metropolitan areas.

2.    Principles of Consolidation and Summary of Significant Accounting Policies

         a.       Principles of Consolidation

         The accompanying consolidated statement of operations for 1998 includes
the operating  results of FMS from December 10, 1997 (the  acquisition  date) to
June 30, 1998. All  intercompany  transactions and accounts between Recovery and
its subsidiary have been eliminated in consolidation.

         b.       Use of Estimates

         In the normal  course of preparing  financial  statements in conformity
with generally accepted  accounting  principles,  management is required to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

         c.       Revenue Recognition

         Advertising   revenues  are  recognized  when  the  advertisements  are
broadcast.  Video and  publications  revenues are recognized  when the goods are
shipped or later when accepted by the customer if acceptance is required. During
1998, the Company recorded approximately $695,000, $150,000 and $50,000 of video
and publications, advertising and other revenues, respectively. During 1997, the
Company recorded $33,000 of advertising revenues.

         d.       Cash

         At  times,  the  Company  maintains  cash  balances  over  the  Federal
Depository  Insurance  Corporation  insurable limit of $100,000 per customer per
financial institution.

         e.       Furniture and Equipment

         Furniture and equipment is depreciated  over the estimated useful lives
of the assets using  straight-line  and accelerated  methods.  Estimated  useful
lives range from 3 to 7 years.


                                      F-11

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

2.  Principles of Consolidation and Summary of Significant Accounting Policies -
                               (Continued)

         Furniture and equipment,  at cost, consist of the following at June 30,
1998:


Computer Equipment...........................     $     301,175     
Leasehold improvements.......................            10,000     
Office furniture.............................            58,275     
                                                      ---------     
                                                        369,450
                                                      ---------     
Less accumulated depreciation................         (166,261)
                                                      ---------     
                                                  $     203,189
                                                      ==========
                                                               

         f.       Income Taxes

         The  Company  accounts  for  income  taxes  pursuant  to  Statement  of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.

         Under SFAS 109, deferred income tax assets and liabilities are computed
based on the temporary difference between the financial statement and income tax
basis of assets and  liabilities  using the enacted  marginal income tax rate in
effect for the year in which the differences  are expected to reverse.  Deferred
income tax expenses and credits are based on the changes in the deferred  income
tax assets and liabilities from period to period.

         g.       Deferred Offering Costs

         Costs associated with offerings of Recovery common shares are initially
capitalized  and then netted  with the  proceeds  received  from the sale of the
common  shares  when the  offering is  completed.  If the  intended  offering is
terminated these costs are charged to operations.

         h.       Deferred Financing Costs

         Debt issuance  costs are initially  capitalized  as deferred  financing
costs and  amortized  over the terms of the notes using the  effective  interest
rate method. In the event the notes are repaid prior to their original maturity,
any unamortized  portion of the debt issuance costs  capitalized will be charged
to operations.

         i.       Capitalized Programming Costs

         Capitalized  programming  costs  include  direct  costs of  production,
production overhead and costs to acquire distribution  rights.  Production costs
are  accumulated  by each series  produced or licensed.  Production  overhead is
allocated proportionately to each series produced based on the direct production
costs  incurred for each series  produced.  The costs are charged to earnings as
the series are  broadcast  based on the estimated  number of future  showings in
accordance with SFAS No. 63, "Financial Reporting by Broadcasters."

                                      F-12

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

2.  Principles of Consolidation and Summary of Significant Accounting Policies -
                                (Continued)

         Capitalized  programming  costs are stated at the lower of  unamortized
costs or estimated net realizable  value on a  series-by-series  basis. A series
estimated  net  realizable  value is  periodically  reviewed by  management  and
revised downward when warranted by changing conditions.  Once adjusted,  the new
estimated realizable value establishes a new unamortized cost basis.

         j.       Prepaid Consulting Costs

         The value of common stock and options issued for consulting services is
recorded as prepaid  consulting costs as a component of shareholders'  (deficit)
equity.  Such amounts are amortized,  using the straight-line  method,  over the
life of the consulting agreements.

         k.       Non-Monetary Exchanges

         Accounting for the transfer or distribution  of non-monetary  assets or
liabilities is based on the fair value of the assets or liabilities  received or
surrendered,  which ever is more  clearly  evident.  Where the fair value of the
non-monetary assets received or surrendered cannot be determined with reasonable
accuracy, the recorded book value of the non-monetary assets are used.

         l.       Statements of Cash Flows

         The Company  prepares its  statements  of cash flows using the indirect
method as defined under SFAS No. 95,  "Statement  of Cash Flows."  Required cash
and non-cash transaction disclosures are as follows:

         During 1998,  deferred offering costs of $573,508 were recorded against
proceeds  from  the  IPO.  Deferred  offering  costs  of  $40,000,  paid  to the
underwriters,  were credited toward a two year consulting agreement and recorded
in other assets. Recovery common stock of 44,000 shares was issued in connection
with the acquisition of FMS.

         During 1997,  the Company  issued  shares of common stock in connection
with the  conversion of $270,000 of notes  payable,  the  settlement of deferred
compensation of $74,000 and amounts due to consultants and shareholders for both
past and future  services of $137,500.  The Company also entered into $47,568 of
capital  lease  arrangements  in  connection  with the purchase of furniture and
equipment during the year.

         The Company made cash payments of $2,545 in 1998 and $1,800 in 1997 for
state income taxes.  During 1998 and 1997,  cash  payments for interest  expense
were approximately $166,000 and $13,000, respectively.

         m.       New Financial Accounting Pronouncements

         SFAS No.  130,  "Reporting  Comprehensive  Income"  and  SFAS No.  131,
"Disclosure  About  Segments  of an  Enterprise  and  Related  Information"  are
effective for fiscal years beginning after December 15, 1997. The

                                      F-13

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

2.  Principles of Consolidation and Summary of Significant Accounting Policies -
                             (Continued)

Company will adopt the new standards upon their required  effective  dates.  The
effects of these new standards have not yet been determined.

         n.       Loss per Share

         The Company has adopted  SFAS No. 128,  "Earnings  Per Share"  ("EPS"),
effective for the quarter ending December 31, 1997 and has restated its earnings
per share  disclosure  for all prior  periods  presented to comply with SFAS No.
128. Under SFAS No. 128,  primary EPS is replaced by "Basic" EPS, which excludes
dilution   and  is  computed  by  dividing   income/loss   available  to  common
shareholders by the weighted average number of common shares outstanding for the
period.  "Diluted"  EPS,  which is  computed  similarly  to fully  diluted  EPS,
reflects  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common stock were  exercised or converted  into common stock.
When  dilutive,  stock  options are included as share  equivalents  in computing
diluted earnings per share using the treasury stock method.

         Prior to adoption of SFAS No. 128,  the Company  computed  net loss per
share in accordance with APB No. 15 and Securities and Exchange Commission Staff
Accounting  Bulletin No. 83 (SAB No. 83).  Pursuant to SAB No. 83,  common stock
issued  for  consideration  below the  offering  price of $5.00  per share  (the
"Offering  Price") and stock options and warrants  issued with  exercise  prices
below the Offering Price during the twelve-month  period preceding the IPO, were
previously included in the calculation of common stock, using the treasury stock
method,  as if they were  outstanding  for all  periods  presented  (the  "Cheap
Shares").  The effect of  adopting  SFAS No. 128 was to  decrease  the  weighted
average  shares  outstanding  by 460, 548 shares for the periods  ended June 30,
1997 and prior, as the Cheap Shares are no longer  includable in the calculation
of  earnings  per share.  The effect of adoption of SFAS No. 128 was to increase
the loss per share by $0.35 for the year ended June 30, 1997.

         Dilutive securities of 4,477,170 and 963,282 shares are not included in
the  calculation  of diluted  EPS in the years  ending  June 30,  1998 and 1997,
respectively, because they are antidilutive.

         o.       Reclassifications

         Certain 1997  financial  statement  amounts have been  reclassified  to
conform to the 1998 presentation.

 
                                      F-14
<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998


3.       Capitalized Production Costs

         Capitalized  production  costs, net of amortization,  are summarized as
follows:


Produced programs.................................    $ 683,597              
FMS film library acquired.........................      376,762              
Licensed films....................................      238,575              
                                                      ---------            
                                                      1,298,934              
Amortization......................................    (349,149)
                                                      ---------              
     Net capitalized production costs.............      949,785              
Productions in progress...........................        7,677
                                                      ---------              
Net production costs..............................    $ 957,462
                                                      =========
                                                               

         Based on the Company's estimates of future showings,  75 percent of the
costs will be amortized within the next three years.

4.       Note Payables

         During July and August 1997, Recovery borrowed $605,250 under one year,
15 percent notes payable to unrelated  parties.  The notes provide for a minimum
of $90,790 of interest.  Recovery  incurred $30,260 of deferred  financing costs
related to these  notes.  These notes were paid with the  proceeds  from the IPO
(see Note 7c).

         During  1997 the  Company  issued  $2,000,000  of  promissory  notes in
connection  with the  Company's  March 1997  private  placement.  The notes bear
interest at 9 percent per annum  (estimated  effective  rate is 125 percent) and
were due on the earlier of the consummation of an initial public offering or one
year. These notes and related interest were paid with the proceeds from the IPO.

         In July 1996,  the Company  issued  $310,000 of 10 percent  convertible
debentures  (a total of  $120,000 to certain  shareholders  and  Directors).  In
November and December  1996,  certain  note  holders who  converted  their notes
payable and exercised the resulting  warrants,  were given a reduced  conversion
rate of one share for each $3.68 in  outstanding  principal  and  interest.  The
warrant  exercise  price was also reduced to $2.32 per share  (estimated  market
price at date of  repricing).  Original  conversion  rate and exercise price was
$3.87. Notes totaling $250,000 in principal, accrued interest of $11,500 and the
resulting  warrants were converted into 213,098 shares of common stock.  Cash of
$330,000 was received when the warrants were exercised.

                                      F-15

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

                                  
5.       Deferred Compensation

         During  1997,  an officer  and a former  officer  converted  $74,000 in
deferred  compensation  due them into 31,857  shares of common  stock  valued at
$2.32 per share by the Company.

6.       Income Taxes

         The  components of the net deferred  income tax asset at June 30, 1998,
are as follows:


Carryforward of net operating losses.................      $3,663,000      
Development costs capitalized for tax purposes.......         403,000      
Investment in RI not expensed for tax purposes.......         288,000      
Other temporary differences..........................         131,000
                                                           ----------      
                                                            4,485,000      
Valuation allowance..................................      (4,485,000)
                                                           ----------      
Deferred income tax asset............................    $      -     
                                                           ==========

         The  provision  for  income  taxes of $2,545  and $1,800 for the fiscal
years ended June 30, 1998 and 1997,  respectively,  consist  only of the current
state provision.

         Differences  between the provision for income taxes and income taxes at
the statutory federal income tax rate for the years ended June 30, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>

                                                                1997                               1998
                                                       ----------------------            ----------------------     
                                                       Amount         Percent            Amount         Percent
                                                       ------         -------            ------         -------
<S>                                                 <C>               <C>            <C>                 <C>     
Income tax benefit at federal statutory rate.......   $(1,297,390)      (34.00)%       $(2,808,124)         (34.00)%
                                                                                                                   
State taxes, net of federal income tax effect......          1,800          0.05              2,545            0.03
                                                                                                                   
    Net operating losses and other deferred
    income tax assets not benefited................      1,297,390         34.00          2,808,124           34.00
                                                                                                                   
                                                   $         1,800         0.05%     $        2,545           0.03%
                                                   ===============  ============     ==============  ==============

</TABLE>

         As of June 30,  1998,  the  Company  had  approximately  $9,900,000  of
federal net  operating  loss  carryforwards,  which will expire in fiscal  years
ending  2008 to  2013.  As of June  30,  1998,  the  Company  had  approximately
$4,880,000 of  California  state net operating  loss  carryforwards,  which will
expire in fiscal years ending 2001 and 2003. Under SFAS No. 109, the Company has
recorded  valuation  allowances  against the  realization  of its  deferred  tax
assets. The valuation allowance is based on management's estimates and analysis,
which  include the impact of tax laws which may limit the  Company's  ability to
utilize its tax loss carryforwards.

                                      F-16

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998



6.       Income Taxes - (Continued)

         Additionally,  pursuant to Internal  Revenue  Service code section 382,
the Company's existing net operating loss carryforwards,  and other deferred tax
assets and  liabilities,  may be  unavailable  for future use due to significant
ownership changes of Recovery's common stock.

7.       Capital Stock Transactions

     
         a.       The $3.48 Placement

         During  November 1996 through  January 1997,  Recovery  issued  138,761
shares of common  stock for cash of $483,500  ($3.48 per share).  Recovery  also
issued 7,749 shares in  consideration  of services  rendered in connection  with
such placement.

         b.       The March 1997 Private Placement

         In March 1997,  Recovery  consummated a private  financing  pursuant to
which it issued 40 units of  Recovery's  securities  at  $50,000  per unit.  The
private  financing  included an aggregate of (i) $2,000,000  principal amount of
promissory  notes;  (ii) 400,000  shares of common stock;  and (iii) warrants to
purchase an aggregate of 500,000  shares of common stock at an exercise price of
$4.00 per share,  which was  subsequently  changed  to $5.50 per share.  The net
proceeds for the offering were  $1,512,654.  A loan  discount of $1,064,640  was
recorded and  allocated  to the common stock issued and warrants  granted in the
private  placement  based upon the  relative  fair values of the debt and equity
instruments  issued.  Amortization of $585,072 and $479,568 of the loan discount
has been  charged  to  operations  as  interest  expense  during  1997 and 1998,
respectively.  Offering costs of  approximately  $487,000 were incurred of which
approximately  $228,000 was  capitalized as debt offering costs and amortized as
interest expense in 1997 and 1998. The balance of $259,000 was charged to equity
as cost of raising the equity proceeds.

         c.       Initial Public Offering

         On October 3, 1997,  Recovery  consummated its IPO pursuant to which it
issued 2,415,000 units. Each unit consisted of one share of common stock and one
warrant to purchase one share of common stock at $5.50 per share. The units were
sold for $5.10 per unit for net proceeds of approximately $10,142,000.

                                      F-17

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998


7.       Capital Stock Transactions - (Continued)

         d.       1998 Private Placement

         In June 1998, the Company issued (i) 808,377 shares of common stock for
net proceeds of approximately  $1,545,000,  and (ii) warrants to purchase 70,000
shares of common stock at an exercise  price of $5.50 per share through June 29,
2001 (the "1998  Private  Placement").  The shares  were  issued at a 25 percent
discount  when  compared  to current  public  trading  prices at the time of the
placement. The Company placed or is to place 346,449 shares of common stock into
escrow.  Once  shareholder  approval  is  obtained,  the shares and a warrant to
purchase  30,000  shares  will be  released  from  escrow  for net  proceeds  of
approximately $720,000.

         The 1998  Private  Placement  also  provides for  additional  shares of
common  stock to be issued  pursuant  to certain  other  provisions  of the 1998
Private  Placement  agreement,  including  shares  issuable  for  no  additional
consideration pursuant to certain reset rights (as defined in the agreement) and
shares  issuable for up to $3,000,000  pursuant to the put rights (as defined in
the agreement).

         e.       Other Stock Transactions

         During April 1998,  the Company  entered  into a  consulting  agreement
whereby  consulting  services were to be rendered in exchange for 200,000 shares
of common  stock and options to purchase  200,000  shares of common  stock.  The
securities are to vest through  September  1998. No securities  have been issued
under the agreement,  however,  approximately 106,000 shares of common stock and
options to purchase  approximately 106,000 shares of common stock have vested as
of June 30,  1998.  In 1998,  the Company has recorded  compensation  expense of
approximately $522,000 related to this agreement.

         During  November 1996 the exercise price of 67,157  options  granted in
fiscal year 1996 to three members of the Board of Directors was reduced to $2.32
(estimated  market  price  at date of  repricing)  per  share  and  vesting  was
accelerated so that all options  became fully vested.  At that time, the options
to purchase  67,157  shares of common  stock were  exercised.  Other  options to
purchase 6,458 shares of common stock at $2.32 per share were also exercised.
         
         f.         Other

         Effective  February  10,  1997,  the Company  approved a one for 7.7432
reverse split of common  stock.  Unless  otherwise  indicated,  all  information
relating  to  the  number  and  price  per  share  of  common   stock  has  been
retroactively adjusted to reflect the stock split.

          In  management's  opinion,  all of the  above  transactions  have been
recorded at the estimated  fair market value of  Recovery's  common stock at the
date of grant.


                                      F-18

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998



8.       Related Party Transactions

         a.       Compensation

         During  fiscal  years 1997 and 1998,  cash  payments  of  approximately
$708,000 and $660,000,  respectively,  were made to shareholders  and Directors,
including  affiliated  companies,  for  compensation in connection with services
rendered.

         b.       Shares issued to shareholders

         During  October  and  November   1996,  the  Company  issued   existing
shareholders  a total of 43,050  shares of common stock valued by the Company at
$2.32 per share for  reimbursement  of $100,000  of  expenses  paid for by these
shareholders.  During  February and March 1997,  other  shareholder  claims were
settled for  $100,000  and the  shareholder  surrendered  2,141 shares of common
stock.  When tendered in December  1996, the shares were valued at $4,973 ($2.32
per share) by the Company.

         c.       ATN Satellite Nesting Contract

         In April 1997, the Company  entered into the Nesting  Contract with ATN
(a related  company)  under which ATN will  provide the Company  with  satellite
uplink,  master control and other related services on its satellite  transponder
for two hours of broadcast time per day. The Nesting  Contract expired on August
31, 1998.

         During  1997 and 1998,  the Company  made cash  payments of $57,000 and
$847,585, respectively to ATN.

9.       Employment Agreements

         The Company and its  wholly-owned  subsidiary have entered into certain
employment  agreements  with  employees,   shareholders  and/or  Directors.  The
agreements expire at various dates from September 30, 1998 to February 28, 2000.
The  agreements  provide for minimum  monthly  cash  compensation  ranging  from
approximately  $10,000 to $12,500,  and quarterly  commissions  to an officer of
$0.01 for each  subscriber  household,  as  defined,  in  excess of one  million
households.

         The  employment  agreements  provide  certain option rights and contain
certain  non-compete and severance pay clauses,  as defined,  in the agreements.
Future  minimum  payments  required  under the amended  and  revised  employment
agreements  are  approximately  $721,000  and  $170,000 in fiscal years 1999 and
2000, respectively.

                                      F-19

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998



10.      Options and Warrants

         Stock Options

         The  Company  has  four  stock  option  plans:  the 1996  Employee  and
Consultants  Stock Option Plan,  the 1996 Board of Directors and Advisory  Board
Retainer Stock Option Plan, the 1997  Management  Bonus Plan, and the 1998 Stock
Plan.  A total of 940,251  shares of common  stock are  reserved  for  issuance,
pursuant to options granted and to be granted under these plans.  110,085 shares
are available for grant under the plans as of June 30, 1997. Options pursuant to
the 1996 and 1997 plans have fully  vested as of June 30, 1998,  resulting  from
change of  control  provisions  being  activated  due to changes in the Board of
Directors of the Company.  Options under the 1998 plan generally vest over three
years. All plan options generally expire in four to five years.

         The plans  provide for option  grants at exercise  prices not less than
the fair market value on the date of grant.  All options  granted under the 1996
plans were at an exercise  price of $5.00 per share.  All grants  under the 1997
and 1998  plans  were  repriced,  effective  August  3,  1998,  as the  Board of
Directors of the Company  approved the repricing of options to purchase  806,746
shares  granted under these two plans,  certain  non-plan  options and an option
granted after June 30, 1998. Such repricing was effected by offering to exchange
new options with an exercise price of $1.56 per share, which was the fair market
value of the common stock on the date of repricing, for the options then held by
such optionees. The new options otherwise have identical terms and conditions as
the current original options.

         Effective during fiscal year 1997, the Company granted non-plan options
to acquire 110,423 shares of common stock for services  rendered and pursuant to
certain employment agreements. All options are fully vested as of June 30, 1998,
resulting from change of control  provisions  being  activated due to changes in
the Board of Directors of the Company. All options expire in 2001.

         During 1997 and 1998,  non-plan  options to  purchase  3,583 and 18,000
shares, respectively, of common stock were granted. The options' exercise prices
are $5.00 per share in 1997 and $1.56 per share in 1998.  Options  vest  monthly
commencing July 1997 and April 1998. The options expire five years from the date
of grant.  During 1998, 1,000 of these options reverted back to the Company upon
termination of employment of an optionee.

         During April 1998, the Company  granted  106,250  non-plan  options for
consulting services at an exercise price of $3.00 per share.  Options are vested
when granted and expire in five years.

         The  following  is a  summary  of all  options  granted  to  employees,
directors and consultants to acquire the Recovery's  common stock as of June 30,
1998:
                                      F-20

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998



10.      Options and Warrants - (Continued)


         Shares    Exercise      Shares       Shares        Shares              
        Granted      Price       Vested      Exercised    Terminated
        -------      -----       ------      ---------    ----------
                                                                            
        147,586      $5.00      144,003          -            3,583
                                                                    
         23,247      $3.10       23,247          -         
                                                                    
        106,250      $3.00      106,250          -         
                                                                    
         87,176      $2.32       87,176          -         
                                                                    
        806,576      $1.56      267,993          -           98,830
                                                                                

                  The  Company  has  adopted  SFAS  No.  123,   "Accounting  for
Stock-Based  Compensation,"  issued in  October  1995.  In  accordance  with the
provisions  of SFAS no.  123,  the  Company  applies  APB Opinion 25 and related
interpretations in accounting for its stock options plans and, accordingly, does
not  recognize  compensation  cost.  If the  Company  had  elected to  recognize
compensation  cost based on the fair value of the options  granted at grant date
as  prescribed  by SFAS No.  123,  net loss and loss per share  would  have been
increased to the pro forma amounts  indicated in the table below (in  thousands,
except per share amounts):

                                            Year Ended        Year Ended
                                           June 30, 1997     June 30, 1998
                                           -------------     -------------      
                                                                             
Net loss   as reported                      $   3,818        $   8,262          
Net loss   pro forma                        $   3,911        $   8,532          
Loss per share   as reported                $  (1.87)        $  (1.91)          
Loss per share   pro forma                  $  (1.91)        $  (1.97)          

        The fair value of each option  grant is  estimated  on the date of grant
 using the Black-Scholes option-pricing model with the following assumptions:

                                            1997                  1998
                                            ----                  ----
                                                                    
Expected dividend yield                     0.00%                 0.00%         
Expected stock price volatility             0.00%                72.32%         
Risk free interest rate                     6.00%                 6.00%         
Expected life of options                    5 years               5 years
                                                                                

         The weighted  average fair value of options  granted during fiscal year
1998 is $1.00.  During 1997, the weighted  average fair value of options granted
was $0.31.


                                      F-21

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

11.      Options and Warrants- (Continued)
                                     
         Warrants

         At June 30, 1998, there were 3,350,498 warrants  outstanding related to
the Company's debt and equity offerings, including the IPO. 500,000 warrants are
exercisable  through  March  2002 at $5.50  per share and  15,498  warrants  are
exercisable  through  March 1999 at $3.87 per  share.  2,415,000  warrants  were
issued  in  connection  with  the  Company's  IPO  and are  exercisable  through
September 2002 at $5.50 per share. 420,000 underwriter warrants were also issued
in connection with the IPO and are exercisable  through  September 2002 at $8.25
to $9.075 per share.

11.      Commitments

         a.       Operating Leases

         During March 1997, the Company  executed an operating  lease  agreement
for its office  facilities that expires in April 2002. Under the agreement,  the
Company has an option to extend the lease through May 2004.  The lease  requires
that the  Company  also pay for  certain  insurance  coverages  and common  area
charges  throughout  the  term  of  the  lease.  The  aggregate  minimum  future
commitments under operating leases are as follows:

Year Ending June 30,

                                                   
1999...........................            $236,000                             
2000...........................             247,000                             
2001...........................             254,000                             
2002...........................             225,000                             
                                           --------        
                                           $962,000
                                           ========        

         Rent  expense  charged  to  operations  in  fiscal  1997 and 1998  were
approximately $79,600 and $339,000, respectively.

                                      F-22

<PAGE>


                    THE RECOVERY NETWORK, INC. AND SUBSIDIARY


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

11.      Commitments - (Continued)

         b.       Capital Leases

         The Company leases certain office  equipment  under a capital lease. At
June 30, 1998, minimum lease payments under the terms of the lease agreement are
as follows:


Year Ending June 30,

                                                             
1999............................................      $22,350                   
2000............................................       18,711                   
                                                      -------       
                                                       41,061                   
Less amounts representing interest..............      (10,906)                  
Less Current portion............................      (17,029)
                                                      -------                   
                                                      $13,126
                                                      =======       

         c.       Transponder Contract

         In May 1998, the Company entered into a five year contract with Group W
Network  Services to provide  program  origination,  master control  operations,
uplink and C-Band  Satellite  transponder  services.  The contract  requires the
Company to make monthly payments of approximately $85,000.

                                      F-23



<PAGE>




                                   SIGNATURES

              In accordance with the  requirements of Section 13 or 15(d) of the
Securities  Exchange Act of 1934, the registrant caused this report to be signed
on its  behalf by the  undersigned,  thereunto  duly  authorized,  Santa  Monica
County, State of California, on September 27, 1998.

                           THE RECOVERY NETWORK, INC.



                                                     By:  /s/ William D. Moses
                                                          ----------------------
                                                              William D. Moses
                                                         Chief Executive Officer

              In accordance with the requirements of the Securities Exchange Act
of 1934,  this report has been signed by the following  persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

                               Signature and Title




<S>                                                                             <C>            
/s/ William D. Moses                                                                September 27, 1998
------------------------------------------------------
William D. Moses, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)




/s/ Donald J. Masters                                                               September 27, 1998
-------------------------------------------------------
Donald J. Masters,
Executive Vice President and Director




/s/ Michael Clark                                                                   September 27, 1998
-------------------------------------------------------
Michael Clark, Vice President of Finance
(principal accounting and financial officer)

<PAGE>



/s/ Nimrod J. Kovacs                                                                September 27, 1998
-------------------------------------------------------
Nimrod J. Kovacs,
Vice Chairman of the Board of Directors




/s/ George H. Henry                                                                 September 27, 1998
------------------------------------------------------
George H. Henry, Director




/s/ Charlotte Schiff Jones                                                          September 27, 1998
------------------------------------------------------
Charlotte Schiff Jones, Director

</TABLE>

<PAGE>



                                  Exhibit Index


Number              Description of Exhibit
------              ----------------------

2.1                 Form of Subscription  Agreement between  Registrant and each
                    of Austost Anstalt Schann,  Balmore Funds S.A., Zakeni Ltd.,
                    BL Squared  Foundation,  Martin Chopp, The Sargon Fund, L.P.
                    and TLG Realty dated as of June 29, 1998.
2.3                 Funds  Escrow  Agreement  between  the  Registrant,  Austost
                    Anstalt Schaan,  Balmore Funds S.A., Zakeni Ltd., BL Squared
                    Foundation,  Martin Chopp, The Sargon Fund, L.P., TLG Realty
                    and Grushko & Mittman dated as of June 29, 1998.
2.4                 Shares  Escrow  Agreement  between the  Registrant,  Austost
                    Anstalt Schaan,  Balmore Funds S.A., Zakeni Ltd., BL Squared
                    Foundation,  Martin Chopp, The Sargon Fund, L.P., TLG Realty
                    and Grushko & Mittman dated as of June 29, 1998.
2.5                 Agreement  and Plan of Merger  dated as of December 10, 1997
                    among   the   Registrant,   Recovery   Direct,   Inc.,   FMS
                    Productions,  Inc.  and each of John  Frederick,  P. Randall
                    Frederick,  Jan Smithers,  Joe C. Wood, Jr., Sharon R. Irish
                    and Charles S. Sapp. ++
3.1                 Articles of Incorporation of the Registrant. **
3.2                 By-Laws of the Registrant.  **
4.1                 Specimen Certificate of the Registrant's Common Stock.  **
4.2                 Form of Redeemable  Warrant Agent Agreement  (including Form
                    of Redeemable Warrant). **
4.3                 Form of Underwriter's  Warrant Agreement  (including Form of
                    Underwriter's Warrant). **
4.4                 1996 Employee and Consultants Stock Option Plan. **
4.5                 Amendment  to 1996  Employee  and  Consultants  Stock Option
                    Plan. **
4.6                 1996 Board of  Directors  and  Advisory  Board Stock  Option
                    Plan. **
4.7                 Amendment  to 1996 Board of  Directors  and  Advisory  Board
                    Stock Option Plan. **
4.8                 1997 Management Bonus Plan.  **
4.9                 Amendment to 1997 Management Bonus Plan.  **
4.10                Form Stock Option Contract.  **
4.11                Form of Promissory  Note issued by the Registrant on July 2,
                    1997. **
4.12                1998 Stock Plan.  +
4.13                Form of Warrant.
4.14                Form of  Registration  Rights  Agreement  dated December 10,
                    1997 between the Registrant and each of the Sellers.++
10.1                Operating Agreement of RecoveryNet Interactive, L.L.C. dated
                    as of August 1, 1996. **
10.2                Channel Nesting  Agreement between the Registrant and Access
                    Television Network, Inc. dated as of April 10, 1997. **

<PAGE>

10.3                Employment  Agreement  between the Registrant and William D.
                    Moses effective as of December 1, 1996. **
10.4                Non-Disclosure   and   Inventions   Agreement   between  the
                    Registrant  and William  Moses dated as of January 30, 1977.
                    **
10.5                Employment  Agreement  between  the  Registrant  and  Donald
                    Masters effective as of December 1, 1996. **
10.6                Non-Disclosure   and  Inventions   Agreements   between  the
                    Registrant  and Donald Masters dated as of February 3, 1997.
                    **
10.7                Employment Agreement between the Registrant and John Wheeler
                    dated as of May 13, 1997. **
10.8                Employment  Agreement  between  the  Registrant  and William
                    Megalos dated as of May 1, 1997. **
10.9                License Agreement between  RecoveryNet  Interactive,  L.L.C.
                    and Merit  Behavioral  Care  Corporation  dated as of May 1,
                    1997. **
21.1                List of Subsidiaries.  **
27.1                Financial Data Schedule
---------------------------------
*      Incorporated   by  reference  to  the  same   numbered   exhibit  to  the
       Registrant's Registration Statement on Form SB-2, file number 333-61421.
**     Incorporated   by  reference  to  the  same   numbered   exhibit  to  the
       Registrant's Registration Statement on Form SB-2, file number 333-27787.
+      Incorporated  by  Reference to Exhibit A to the  Registrant's  Definitive
       Proxy  Statement  on Schedule  14A filed by the  Registrant  on April 29,
       1998.
++     Incorporated by Reference to Exhibit 2.1 to the Registrant's December 15,
       1997 Form 8-K.
++     Incorporated by Reference to Exhibit 4.1 to the Registrant's December 15,
       1997 Form 8-K.