RECOVERY NETWORK INC, SB-2, 1999-07-02

RECOVERY NETWORK INC
SB-2, 1999-07-02
MOTION PICTURE & VIDEO TAPE PRODUCTION

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1999.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

THE RECOVERY NETWORK, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S> <C> <C>
COLORADO 7812 39-1731029
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

1411 5TH STREET, SUITE 250
SANTA MONICA, CALIFORNIA 90401
(310) 393-3979

(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
WILLIAM D. MOSES
PRESIDENT
THE RECOVERY NETWORK, INC.
1411 5TH STREET, SUITE 250
SANTA MONICA, CALIFORNIA 90401
(310) 393-3979
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)

COPIES OF COMMUNICATIONS TO:
BECKMAN, MILLMAN & SANDERS, LLP
116 JOHN STREET
NEW YORK, NEW YORK 10038
TELEPHONE: (212) 406-4700
TELECOPIER: (212) 406-3750

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.

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

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

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

CALCULATION OF REGISTRATION FEE

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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SECURITY PRICE REGISTRATION FEE
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Common Stock par value $0.01
per share................... 1,680,000(1) $0.32 $537,600 $156.00
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Common Stock par value $0.01
per share................... 1,000,000(2) $0.01 $10,000 $3.00
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Common Stock par value $0.01
per share................... 102,915(3) $0.32 $32,933 $10.00
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Total Registration Fee.............................................................................. $169.00(2)
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Previously Paid..................................................................................... $435.00
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Paid With This Filing............................................................................... $0
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(1) Includes (a) the estimated number of shares that may be issued upon the
exercise of the reset right provision contained in the Subscription
Agreement and (b) the estimated number of shares issuable upon the exercise
of certain outstanding purchase warrants.

(2) Pursuant to Rule 457(c) of the Securities Act, calculated based upon the
average of the bid and asked price of the Common Stock as of August 10,
1998.

(3) Issuable upon exercise of certain warrants.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

PROSPECTUS
2,782,915 Shares of
THE RECOVERY NETWORK, INC.
Common Stock

This Prospectus relates to an aggregate of 2,782,915 shares (the "Shares")
of Common Stock, $.01 par value per shares ("Common Stock"), of The Recovery
Network, Inc. (the "Company") which may be offered and sold from time to time,
by the Selling Shareholders named herein (the "Selling Shareholders"),
consisting of (i) 350,000 shares of Common Stock issued to certain subscribers
(the "Subscribers") pursuant to each Subscription Agreement dated June 10, 1999
between the Company and each of the Subscribers (collectively, the
"Agreements"); (ii) shares of Common Stock, representing an
estimate of shares issuable to the Subscribers pursuant to certain provisions of
the Agreements, including but not limited to exercise of the Reset Rights by the
Subscribers and exercise of the Put Rights by the Company; (iii) 175,000 shares
of Common Stock reserved for issuance to the Subscribers upon their exercise of
warrants issued pursuant to the Agreements and exercisable at an exercise price
of $0.35 per share until June 10, 2002 (the "Warrants"); (iv) an aggregate of
35,000 shares of Common Stock issued to certain parties who served as placement
agents (the "Placement Agents") in the Private Placement (as defined herein);
(v) an aggregate of 1,000,000 shares of Common Stock issuable upon the exercise
of warrants issued to various Noteholders (as defined herein); and (vi) an
aggregate of 102,915 shares of Common Stock issuable pursuant to an agreement
held by an individual. The Company will not receive any proceeds from the sale
of the Shares by the Selling Shareholders. See "Selling Shareholders".

The Shares may be offered for sale from time to time by the Selling
Shareholders or their pledgees, donees, transferees or other successors in
interest, in the over-the-counter market, in privately negotiated transactions
or otherwise, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Shares may be sold
directly by the Selling Shareholders or through one or more broker-dealers. Such
broker-dealers may receive compensation in the form of commissions, discounts or
concessions from the Selling Shareholders and/or purchasers of Shares for whom
such broker-dealers may act as agent, or to whom they may sell as principal, or
both (which compensation as to a particular broker-dealer may be in excess of
customary commissions). The Selling Shareholders and such broker-dealers may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933
(the "Securities Act"), and any discounts, commissions and concessions and any
profits realized on any sale of the Shares may be deemed to be underwriting
compensation. See "Selling Shareholders" and "Plan of Distribution".

The Common Stock is listed on the Nasdaq Bulletin Board as OTC BB: RNET.
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THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 8.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is June 30, 1999
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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference includes, but is not
limited to, those discussed in "Risk Factors."

THE COMPANY

Recovery Network, Inc. (the "Company") is a digital media company drawing
on the converging digital technologies of the Internet and cable television to
deliver alternative and behavioral health programming, products and services to
a national audience.

The Recovery Network cable television programming service reaches
approximately 5.0 million cable households. The Recovery Television Network will
serve to market and drive traffic to the Company's web site, thereby enhancing
e-commerce revenue generation opportunities including sales of books, tapes,
herbs and vitamins, tele-counseling services, and other behavioral health
programming, services and products ideally suited to its target audience.

RnetHealth.com, the internet operation, will provide a branded, integrated,
Web-based solution via a public platform for consumers, as well as, a business
to business platform for the administrative, communications and information
needs of managed care companies, insurance companies and employers.

The Company's primary market is those impacted by social and behavioral
health issues (i.e. substance abuse, domestic violence, depression, eating
disorders, et al) that are interested in traditional and alternative solutions.
This market represents over 100 million Americans at a cost to the economy in
excess of five hundred billion dollars annually in increased health care
expenses, crime and lost productivity.

Recovery Network's National Partnership for Recovery and Prevention (NPRP)
consists of over 50 prominent national health, recovery and prevention
organizations that represent over 40 million people throughout the United
States.
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THE OFFERING

SECURITIES OFFERED BY THE SELLING
SHAREHOLDER..................... 2,782,915 shares(a)

COMMON STOCK OUTSTANDING BEFORE
AND AFTER THE OFFERING HEREBY..... 15,493,407 shares(b)

NASDAQ SYMBOL..................... OTC BB: RNET
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(a) Includes: (i) 350,000 shares of Common Stock issued to the Subscribers
pursuant to the Agreements; (ii) 1,120,000 shares of Common Stock,
representing an estimate of shares issuable to the Subscribers pursuant to
certain provisions of the Agreements, including but not limited to exercise
of the Reset Rights by the subscribers and exercise of the Put Rights by the
Company; (iii) 175,000 share of Common Stock reserved for issuance pursuant
to the Warrants; and (iv) an aggregate of 35,000 shares of Common Stock
issued to the Placement Agents in the Private Placement.

(b) Represents shares of Common Stock outstanding as of June 24, 1999. As the
offering relates to shares of Common Stock to be sold from time to time by
the Selling Shareholders, no additional shares of Common stock will be
outstanding as a result of the offering hereby. Does not include: (i)
1,253,605 shares of Common Stock issuable upon exercise of stock options
granted to employees and consultants of the Company; (ii) 2,415,000 shares
of Common Stock issuable upon exercise of the Redeemable Warrants (as
defined herein); (iii) 420,000 shares of Common Stock issuable upon exercise
of warrants granted to Whale Securities Co., L.P.; (iv) 515,498 shares of
Common Stock issuable upon exercise of warrants issued by the Company,
including 500,000 shares of Common Stock issuable upon exercise of the
Financing Warrants (as defined herein); (v) an indeterminable number of
shares of Common Stock issuable by the Company if it fails to register, or
to maintain an effective registration statement with respect to, the
Financing Shares (as defined herein), the shares of Common Stock issuable
upon exercise of the Financing Warrants; (vi) an indeterminable number of
shares of Common Stock over the number of shares of Common Stock offered
hereby that are issuable by the Company pursuant to the Reset Rights and the
Put Rights; (vii) 157,096 share of Common Stock that are issuable to the
Subscribers but, pursuant to the rules of the Nasdaq SmallCap Market, may
not be issued by the Company without the approval of the Company's
shareholders.

SUMMARY FINANCIAL INFORMATION

The summary financial data set forth below is derived from and should be
read in conjunction with the audited financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.

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<TABLE>
<CAPTION>
NINE MONTH PERIOD FISCAL YEAR
ENDED MARCH 31, JUNE 30,
(UNAUDITED) (AUDITED)
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1998 1999 1997 1998
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<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 409,202 $ 947,392 $ 33,464 $ 894,758
Net loss...................... $(5,210,003) $(5,640,951) $(3,817,652) $(8,261,734)
Basic and diluted loss per
share....................... $ (1.27) $ (.75) $ (1.87) $ (1.91)
Weighted average number of
shares outstanding.......... 4,116,757 7,566,733 2,044,339 4,336,405
</TABLE>

<TABLE>
<CAPTION>
AT MARCH 31, 1999
(UNAUDITED)
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ACTUAL PRO FORMA(a)

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BALANCE SHEET DATA:
Working deficit................................ $(2,184,271) $(1,859,771)
Total assets................................... 1,901,625 2,226,125
Total liabilities.............................. 2,672,368 2,672,368
Shareholders' deficit.......................... (770,743) (446,243)
</TABLE>

(a) Gives effect to the issuance of 350,000 shares of Common Stock to the
Subscribers for net proceeds of approximately $324,500 and 35,000 shares of
Common Stock issued to the placement agents. Does not give effect to any
additional shares of Common Stock that may be issuable pursuant to the exercise
of warrants to purchase 175,000 shares of Common Stock or pursuant to any other
provision of the Agreements or pursuant to exercise of any outstanding options
or warrants.

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RISK FACTORS

Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should carefully consider
these risk factors, together with all the other information included or
incorporated by reference in this prospectus, before you decide whether to
purchase shares of out common stock.

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are typically
identified by the words "believe," "expect," "intend," "estimate" and similar
expressions. Those statements appear in a number of places in this report and
include statements regarding the intent, belief or current expectation of the
Company or its directors or officers with respect to, among other things, trends
affecting the Company's financial conditions and results of operations and the
Company's business and growth strategies. Such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
results may differ materially from those projected, expressed or implied in the
forward-looking statements as a result of various factors (such factors are
referred to herein as "Cautionary Statements"). The accompanying information
contained in this Prospectus, including the information set forth under "Plan of
Operation" and "Business" identifies important factors that could cause such
differences. Such forward-looking statements speak only as of the date of this
report, and the Company cautions potential investors not to place undue reliance
on such statements. The Company undertakes no obligation to update or revise any
forward-looking statements. All subsequent written or oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.

LACK OF MEANINGFUL REVENUES; SIGNIFICANT AND CONTINUING LOSSES; EXPLANATORY
PARAGRAPH IN INDEPENDENT PUBLIC ACCOUNTANTS REPORT. The Company was organized in
1992, was reorganized in 1995 and was in the development stage until its
acquisition of FMS in December 1997. Since its inception, the Company has been
primarily engaged in test broadcasting of The Recovery Network in limited
markets (which was launched nationally in April 1997), affiliate marketing and
development, acquisition and production of programming, establishing Recovery
Talk Radio and the Help Line and forming relationships with individuals and
organizations in the recovery field. Accordingly, the Company has a limited
relevant operating history upon which an evaluation of the Company's performance
and prospects can be made. Such prospects must be considered in light of the
numerous risks, expenses, problems, and difficulties typically encountered in
establishing a new business and launching and expanding a cable television
network. The Company has not generated any meaningful revenues and does not
expect to generate any meaningful revenues for the foreseeable future. To date,
the company has incurred significant net losses, including net losses of
$3,817,652 and $8,261,734 for the years ended June 30, 1997 and 1998,
respectively, and losses of $5,210,003 and $5,640,951 for the nine months ended
March 31, 1998 and 1999, respectively. At March 31, 1999, the Company had a
deficit accumulated of $19,799,804 and, since March 31, 1999, the Company has
continued to incur significant losses. The Company expects to incur substantial
up-front capital expenditures and operating costs in connection with the
operation and expansion of The Recovery Network (including its internet
operations), satellite transmission of its programming and the development and
production of television programming, which will result in significant losses
for the foreseeable future. There can be no assurance that the Company will ever
generate significant revenues or achieve profitable operations. The Company's
independent public

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accountants have included an explanatory paragraph in their report on the
Company's financial statements, stating that certain factors raise substantial
doubt about the Company's ability to continue as a going concern. See "Plan of
Operation" and Financial Statements.

SIGNIFICANT CAPITAL REQUIREMENTS; CONTINUING NEED FOR ADDITIONAL FINANCING.
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 and financing activities. During the nine-month period ended March
31, 1999, the Company's operating cash flow requirements exceeded operating cash
flow sources by $3,933,652 due to among other things, losses incurred and costs
associated in programming development. The Company has current arrangements with
respect to, or potential sources of, additional financing (refer to 8-K filed
June 15, 1999), 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. It is currently anticipated that the Company has funds
sufficient to sustain operations through September 1999. In addition, any
additional equity financing may involve substantial dilution to the interests
of the Company's then existing shareholders.

UNCERTAINTY OF ABILITY TO IMPLEMENT PLAN OF OPERATION. The Company's
proposed plan of operation and prospects will be largely dependent on the
success of its affiliate marketing efforts, including its ability to enter into
affiliation agreements with operators of local cable systems with a significant
number of subscribers or other arrangements for the airing of The Recovery
Network, its ability to successfully operate under the Transponder Contract,
develop or acquire sufficient television programming to enable the Recovery
Network to expand its hours of broadcast, achieve significant viewer loyalty,
attract advertisers and develop or enter into arrangements for the supply of
products, such as videotapes, audio cassettes and books to merchandise. The
Company has limited experience in developing and operating a cable television
network and marketing recovery and prevention-related products and services, and
there is limited information available concerning the potential performance or
market acceptance of The Recovery Network and recovery and prevention-related
products and services. There can be no assurance that the Company will be able
to implement its business plan successfully or that unexpected expenses,
problems, or technical difficulties will not occur which would result in
material delays in its implementation.

NEW CONCEPT; UNCERTAINTY OF MARKET ACCEPTANCE OF THE RECOVERY NETWORK BY
INTERNET USERS, SUBSCRIBERS AND ADVERTISERS. The Recovery Network and the
Company's recovery and prevention-related products and services via the Internet
involves a new business concept. As is typical in the case of a new concept,
demand and market acceptance of The Recovery Network (Rnethealth.com) and
recovery and prevention-related products and services are subject to a high
level of uncertainty. To-date, the Company has not conducted any independent
market, concept feasibility studies or any additional market testing activities,
although it plans to. The Company's prospects will be significantly affected by
the success of its strategic efforts to align the business with healthcare
institutes and healthcare providers, the acceptance of its Internet content by
potential users and subscribers and its ability to attract advertisers.
Achieving market acceptance for The Recovery Network and the Company's recovery
and prevention-related products and services will require significant effort and
expenditures by the Company to create awareness and demand by Internet users,
advertisers and other host that potentially will utilize The Recovery Network.

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UNCERTAINTY OF CONTENT DEVELOPMENT AND CONTENT ACQUISITION. The Company
will be required to commit considerable time, effort, and resources to
development and acquire an expansive library of content, beyond the programming
it already posses. The Company's development and production efforts are subject
to all of the risks inherent in the development and acquiring of new content,
including unexpected delays, expenses, technical problems and difficulties, as
well as the possible insufficiency of funds to complete satisfactory development
and acquisitions, which could result in abandonment or substantial change in
content. There can be no assurance that the Company's development and
acquisition efforts will be successfully completed on a timely basis, or at all,
or that unexpected events will not occur which would result in increased costs
or material delays in development.

BROADCAST INTERRUPTIONS AND EQUIPMENT FAILURES. The Company is dependent
upon the Transponder Contract to provide the necessary services to enable The
Recovery Network to broadcast its programming through cable systems with which
the Company directly enters into affiliation agreements. It is possible that the
Company could experience broadcast interruptions and equipment failures, which
could last for a significant period of time. Broadcast interruptions or
equipment failures affecting broadcasting of The Recovery Network's programming
could adversely affect viewer perception of, and advertiser confidence in, The
Recovery Network and could result in loss of advertising revenue, which could
have a material adverse effect on the Company.

RISKS RELATING TO THE DEVELOPMENT AND SUPPLY OF RECOVERY RELATED PRODUCTS;
RISKS RELATED TO RECOVERY DIRECT; UNCERTAINTY OF COMMERCIAL ACCEPTANCE OF
RECOVERY RELATED PRODUCTS. The Company has just recently begun to enter into
arrangements for the supply of recovery and prevention-related products to
market and to offer them to the public, and has generated approximately $947,000
of revenues through March 31, 1999 from its product sales activities.
Development of such business is subject to all of the risks associated with the
development of a new line of business, including unexpected delays, as well as
insufficiency of funds to complete satisfactory development of products and
services. To the extent the Company enters into arrangements for the supply of
recovery and prevention-related products with third parties, the Company will be
dependent upon its suppliers to, among other things, satisfy the Company's
quantity and performance specifications and to dedicate sufficient production
capacity to meet the Company's scheduled delivery requirements. Additionally,
the Company has not conducted and does not intend to conduct any formal market
studies or feasibility studies for any potential products. Achieving market
acceptance for recovery and prevention-related products will require substantial
marketing efforts, expenditure of significant funds and use of commercial time
on The Recovery Network and Recovery Talk Radio otherwise available for sale to
advertisers to inform potential customers of potential products. There can be no
assurance that the Company will continue to be able to develop or enter into
arrangements for the supply of recovery and prevention-related products or that
the Company's efforts will result in successful product commercialization or
initial or continued market acceptance for any potential recovery and
prevention-related products.

FACTORS AFFECTING CABLE TELEVISION INDUSTRY. The Company's business is
concentrated in the cable television industry, which is continually evolving,
and subject to rapid change. Recently, direct satellite services ("DSS") and
digital cable deployment and advances in signal compression/decompression
technologies have begun to create additional channel capacity and new
opportunities for television networks. There can be no assurance, however, that
DSS or such other technologies will be further developed or utilized to

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expand channel capacity. The Company's growth strategy is based, in part, upon
the continued growth of the cable and DSS industries and the expected increased
availability of channel capacity. If the cable industry grows slower than
expected or ceases to grow or if channel capacity does not expand as rapidly as
expected, or ceases to grow, the Company may not be able to enter into a
sufficient number of affiliation agreements or other arrangements for the
carriage of The Recovery Network, which would have a material adverse effect on
the Company.

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 focusing principally on
Recovery Issues and Prevention 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
Recovery Issues and Prevention Issues. Moreover, because The Recovery Network's
programming is intended to provide information and support to persons facing
Recovery Issues and Prevention 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 airtime,
channel capacity, advertiser time or viewership.

UNCERTAINTY OF PROTECTION OF PROPRIETARY INFORMATION. The Company has
pending registration applications in the United States Patent and Trademark
Office for four trademarks, including the "Recovery Network" trademark. The
Company believes that its trademarks and copyrights, including "The Recovery
Network" 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.

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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 and 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 and 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 AND POTENTIAL LIABILITY. 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.
Nevertheless, a partially or completely uninsured claim against the Company, if
successful, could have a material adverse effect on the Company.

CONTROL BY MANAGEMENT. The Company's current executive officers and
directors in the aggregate, beneficially own approximately 18.7% of the
outstanding Common Stock. Accordingly, such persons may have the ability to
exert significant influence over the election of the Company's Board of
Directors and other matters submitted to the Company's shareholders for
approval.

DEPENDENCE ON KEY PERSONNEL; NEED FOR QUALIFIED PERSONNEL. We are highly
dependent on our executive officers and senior management, and we likely will
depend on the senior management of any significant business we embark upon in
the future. The loss of the services of any of our current executive officers or
key employees or any member of senior management of any acquired business could
have a material adverse effect on out business, results of operations and
financial condition.

NO DIVIDENDS. To date, the Company has not paid any cash dividends on the
Common Stock and does not expect to declare or pay dividends on the Common Stock
in the foreseeable future. In addition, the payment of cash dividends may be
limited or prohibited by the terms of future loan agreements or the future
authorization and issuance of Preferred Stock.

RISK OF LOW-PRICED STOCKS. Rules 15g-1 through 15g-9 promulgated under the
Securities Exchange Act of 1934 ("Exchange Act") impose sales practice and
disclosure requirements on certain brokers and dealers who engage in certain
transactions involving "a penny stock." Currently the Company's Common Stock is
considered a penny stock for purposes of the Exchange Act. The additional sales
practice and disclosure requirements imposed on certain brokers and dealers
could impede the sale of the Company's Common Stock in the secondary market. In
addition, the market liquidity for the Company's securities may be severely
adversely affected, with concomitant adverse effects on the price of the
Company's securities.

Under the penny stock regulations, a broker or dealer selling penny stock
to anyone other than an established customer or "accredited investor"
(generally, an individual with

9
<PAGE> 11

net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with his or her spouse) must make a special suitability
determination for the purchaser and must receive the purchaser's written consent
to the transaction prior to sale, unless the broker or dealer or the transaction
is otherwise exempt. In addition, the penny stock regulations require the broker
or dealer to deliver, prior to any transaction involving a penny stock, a
disclosure schedule prepared by the Securities and Exchange Commission ("SEC")
relating to the penny stock market, unless the broker or dealer or the
transaction is otherwise exempt. A broker or dealer is also required to disclose
commissions payable to the broker or dealer and the registered representative
and current quotation for the securities. In addition, a broker or dealer is
required to send monthly statements disclosing recent price information with
respect to the penny stock held in a customer's account and information with
respect to the limited market in penny stocks.

10
<PAGE> 12

USE OF PROCEEDS

The Company will not receive any proceeds from the sale of the Shares by
the Selling Shareholders. However, on June 11, 1999, the Company entered into
Subscription Agreements (the "Agreements") with certain Subscribers (see
"Selling Shareholders"). Pursuant to the Agreements, the Company is entitled to
receive proceeds up to $500,000 upon the closing of this transaction (the
"Private Placement"). In addition to the proceeds received in the Private
Placement, the Company may receive $1.5 million pursuant to a "put" provision in
the Agreements that is subject to various conditions, including those relating
to re-listing on NASDAQ and timing. There can be no assurance that the Company
will exercise the Put Rights or receive any of the proceeds therefrom. The
Company is using the net proceeds from the sale of the Shares to the Subscribers
for working capital, general corporate purposes and for expenses from June
through September 1999.

The Company anticipates that the proceeds of the Private Placement,
together with projected revenues from operations, will be sufficient to fund the
Company's operations and capital requirements until September 30, 1999. There
can be no assurance, however, that such funds will not be expended prior thereto
due to unanticipated changes in economic 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. Proceeds not immediately
required for the purposes described above will be invested principally in
short-term bank certificates of deposit, short-term securities, United States
Government obligations, money market instruments and/or other interest-bearing
investments.

DIVIDEND POLICY

We have not paid dividend on our common stock and we do not anticipate
paying dividends in the foreseeable future. We intend to retain future earnings,
if any, to finance the expansion of our operations and for general corporate
purposes. 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.

PLAN OF DISTRIBUTION

The Shares may be offered for sale from time to time by the Selling
Stockholder or their pledgees, donees, transferees or other successors in
interest, in the over-the-counter market, in privately negotiated transactions
or otherwise, at market prices prevailing at the

11
<PAGE> 13

time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Shares may be sold directly by the Selling Shareholders
or through one or more broker-dealers. Such broker-dealers may receive
compensation in the form of commissions, discounts or concessions from the
Selling Shareholders and/or purchasers of Shares for whom such broker-dealers
may act as agent, or to whom they may sell as principal, or both (which
compensation as to a particular broker-dealer may be in excess of customary
commissions). The Selling Shareholders and such broker-dealers may be deemed to
be underwriters within the meaning of the of Securities Act, and any discounts,
commissions and concessions and any profit realized on any sales of the Shares
may be deemed to be underwriting compensation.

LEGAL PROCEEDINGS

On March 23, 1999, Michele LeBlanc filed a lawsuit against the Company in
United States District Court for the Central District of California, Western
Division. The complaint lists 10 separate counts including wrongful termination
and violation of Federal securities laws. Generally, the plaintiff seeks
unspecified compensatory damages, attorneys' fees and costs.

The Company believes that Ms. LeBlanc's claims are completely without merit
and intends to seek summary judgment as to all claims contained in Ms. LeBlanc's
complaint.

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<PAGE> 14

CAPITALIZATION

The following table sets forth (i) short-term debt and total capitalization
of the Company as of March 31, 1999, and (ii) the pro forma capitalization at
such date after giving retroactive effect to the issuance of 350,000 shares of
Common Stock to the Subscribers for net proceeds of approximately $324,500 and
35,000 shares of Common Stock issued to the placement agents.

<TABLE>
<CAPTION>
ACTUAL PRO FORMA(a)
------------ ------------
(UNAUDITED)
<S> <C> <C>
Short-term debt, including current portion of capital lease
obligation................................................ $ 771,029 $ 771,029
------------ ------------
Long-term obligation under capital lease, net of current
maturities................................................ $ 6,005 $ 6,005
------------ ------------
Shareholders' equity:
Common Stock, $0.01 par value: 25,000,000 shares authorized,
9,657,336 shares issued and outstanding, pro forma........ $ 96,573 $ 100,423
Additional paid-in capital.................................. 19,619,517 19,940,167
Pre-paid consulting cost.................................... (687,029) (687,029)
Deficit..................................................... (19,799,804) (19,799,804)
------------ ------------
Total shareholders' deficit....................... (770,743)
------------
Total capitalization.............................. (764,738) $ (440,238)
============ ============
</TABLE>

13
<PAGE> 15

PRICE RANGE OF COMMON STOCK
AND RELATED SHAREHOLDER MATTERS

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 March 31, 1998 to March 31, 1999. The quotations represent inter-dealer
quotations without adjustment for retail mark-ups, markdowns or commissions and
may not represent actual transactions:

<TABLE>
<CAPTION>
COMMON REDEEMABLE
STOCK WARRANTS UNITS
--------------- --------------- -------------
HIGH LOW HIGH LOW HIGH LOW
------ ------- ------ ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended March 31, 1998........... $4.06 $3.19 $1.00 $0.625 $3.875 $3.50
Quarter Ended June 30, 1998............ $4.41 $2.75 $1.625 $0.4375 N/A N/A
Quarter Ended September 30, 1998....... $2.63 $1.63 $0.625 $0.125 N/A N/A
Quarter Ended December 31, 1998........ $1.50 $0.3125 N/A N/A N/A N/A
Quarter Ended March 31, 1999........... $0.875 $0.375 N/A N/A N/A N/A
</TABLE>

As of the date of this Prospectus, the Company has outstanding 15,493,407
shares of Common Stock owned by approximately 141 holders of record, and
2,413,900 Redeemable Warrants owned by approximately (3) holder of record.

14
<PAGE> 16

PLAN OF OPERATION

LIQUIDITY AND CAPITAL RESOURCES

From April, 1999 through June 25, 1999, the Company has been engaged in
continuing efforts to raise capital and conserve cash, which has resulted in the
issuance of 5,836,071 shares of common stock. This activity is summarized as
follows and is described in more detail in the paragraphs below:

<TABLE>
<CAPTION>
ACTIVITY DESCRIPTION NUMBER OF SHARES INCREASE IN EQUITY
- -------------------- ---------------- ------------------
<S> <C> <C>
Settlement of accounts payable................ 767,098 $666,173
Options/warrants exercised.................... 1,171,999 74,500
Shares granted to current/former
employees................................... 645,899 0
Shares granted for consulting services........ 900,000 0
Shares issued pursuant to certain reset
rights...................................... 1,711,075 0
Shares granted to Board of Directors.......... 200,000 0
Shares acquired pursuant to June 1999
Subscription Agreement (including 35,000
shares issued for placement fees)........... 385,000 350,000
Shares in escrow pending cash receipt from
subscriber pursuant to June 1999
Subscription Agreement (including 5,000
shares to be issued to placement fees)...... 55,000 0
</TABLE>

The Company's primary capital requirements in the next twelve months will
be to fund the costs of developing its Internet operations and to fund its
affiliate marketing efforts, 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 continue to exceed its cash flow from
operations. At March 31, 1999, the Company had a working capital deficit of
$2,184,271. Due to (among other things) the lack of meaningful revenues, and
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.

On June 29, 1998, the Company entered into certain subscription agreements
(the "Agreements") with seven investors (collectively, the "Subscribers"). Such
Agreements were amended in October 1998. 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) 1,250,000
shares (the "Shares") of Common Stock for $2,500,000, or $2.00 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) 500,000 shares of Common Stock upon the exercise
of warrants (the "Warrants"). Through March 31, 1999, 1,213,736 of additional
shares had been issued to the Subscribers pursuant to the Reset Rights, with an
additional 1,711,075 issued after March 31, 1999. As of June 25, 1999, no
additional shares will be issued pursuant to these Reset Rights.

15
<PAGE> 17

The Warrants were exercisable at exercise prices between $4.00 and $6.00
per share. An amendment to the Private Placement agreement that was executed in
December 1998 resulted in the Subscribers relinquishing their right to the
Warrants on January 4, 1999. The Warrants subsequently were allowed to lapse
without being exercised.

On September 24, 1998 and in connection with the 1998 Private Placement,
the shareholders of the Company approved the issuance of 346,449 shares of
common stock (including 13,115 shares of common stock for placement services)
and a three year warrant to purchase 30,000 shares of common stock at $5.50 per
share for gross proceeds of approximately $750,000.

In March 1999, the Company settled an agreement with a service provider
(previously recorded as of June 30, 1998) whereby 200,000 shares of unregistered
common stock that were previously agreed to be issued. In connection with this
settlement, the Company reversed the previously recorded amounts: $625,000 of
additional paid-in capital and consulting expense of $344,000. In connection
with this settlement, the 200,000 related unregistered stock options were
re-issued to the principal of the service provider and repriced at $0.375 per
share. The Company recorded additional paid-in capital and consulting expense of
$22,000 due to the re-issuance of these options. Subsequent to March 31, 1999,
172,000 of these options were exercised for $64,500.

In connection with other consulting arrangements, the Company has issued
warrants to acquire a total of 1,150,000 shares of unregistered common stock at
exercise prices ranging from $1.00 to $4.00. Many of these warrants were
repriced at prices ranging from $0.50 to $0.75 in an effort to encourage the
exercise of these warrants. 622,000 of these warrants have been exercised for
$745,000 during the nine-month period ended March 31, 1999.

In December 1998, the Company reached an agreement with a group of
shareholders to lend the Company $725,000 as bridge financing, which is intended
to help provide the Company with financing prior to the consummation of a
long-term equity financing arrangement. The financing called for notes secured
by the Company's 20% interest in RI later renegotiated for the notes to be
secured by 100% of recoverynetwork.com., which would pay a 10% per annum rate of
interest. The Company would repay the notes on or before October 31, 1999 or
upon the closing of equity financing in the amount of $2,000,000 or above. The
note holders were granted warrants to purchase 1,500,000 shares of common stock
at $.01 per share, with the warrants expiring in January 2003. Since March 31,
1999, 999,999 of these warrants have been exercised for $10,000.

The Company has embarked on a program to settle accounts payable by issuing
unregistered stock in lieu of a cash payment. In April and June, 1999, the
Company has issued 767,000 shares of common stock, including 500,000 to Group W,
in settlement of approximately $666,173 in liabilities. This amount has been
classified to equity after quarter end. The Company is in the process of
settling additional liabilities in a like manner.

In April 1999, the Company entered into an agreement with third parties to
sell its interest in RI for $850,000 and to receive its website back from RI.

On June 10, 1999, the Company entered into a Subscription Agreement with
certain subscribers wherein the Company would receive up to $500,000 in exchange
for 500,000 shares of stock upon execution of the agreement (subscriptions
received through June 25, 1999 total $350,000) and the Company's put option for
an additional $1,500,000 in exchange for 1,500,000 shares of stock exercisable
within two weeks after the Company gets re-listed on the NASDAQ SmallCap Market
and other various conditions. The exercise of the put o[p]tion is also
contingent upon numerous other items. The Company's actu[e]al net proceeds
through June 25, 1999 after repayment of May 1999 promissory note of $50,000 and
payment for legal costs, was approximately $275,000. In addition, the
Subscription Agreement calls for shares to be issued to placement agents of 10%
of the total shares subscribed[space](35,000 shares through June 25, 1999). The
Subscription Agreement also calls for additional shares to be issued to
placement agents pursuant to the put option of up to 150,000 shares.

The Subscription Agreement contains reset rights ad redemption features.
Under the Subscription Agreement the Company will be required to issue within 60
days of the effective date[space](as defined in the agreement) warrants to the
subscribers to acquire up to an additional 300,000 shares of stock at the rate
of 15,000 shares per $100,000 invested. The Subscription Agreement also contains
placement warrants to be issued to the placement agents of up to 250,000 shares
[space](175,000 issued through June 25, 1999 at $0.35 per share) with an
additional 750,000 shares upon exercise of the put option.

Through Nine months ended March 31, 1999, in connection with various
consulting, service, severance and employment agreements, the Company granted a
total of 1,422,867 shares[space](both registered and unregistered) of common
stock to employees, former employees, consultants and other service providers.
The fair value of these shares totaled approximately $1,073,000, of which
$338,000 is recorded in prepaid consulting expenses as of March 31, 1999 and the
remainder has been recorded in [operating]expenses. Since March 31, 1999, the
Company granted an additional 645,899 shares of stock to employees and former
employees. The fair value of these shares totaled approximately $204,000 and has
been recorded in operating expenses.

Since March 31, 1999, the Company has granted 900,000 shares of stock to a
board member as part of a consulting agreement for his efforts in settling
accounts payable and locating additional sources of capital. The fair value of
these shares totaled approximately $338,000 and has been recorded in operating
expenses. The Company also granted 200,000 shares of stock after March 31, 1999
to the members of the board of directors. The fair value of these shares totaled
approximately $88,000 and has been recorded in operating expenses.

The Company currently anticipates that the proceeds received from the
exercise of stock options and warrants, the financing, the RI settlement and
vendor settlements, together with projected revenues from operations, will be
sufficient to fund the Company's operations and capital requirements until
approximately September 30, 1999. There can be no assurance, however, that such
funds will not be expended prior thereto due to

16
<PAGE> 18

unanticipated changes in economic conditions or other unforeseen circumstances.
The Company has no current arrangements with respect to 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. An 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. In addition, the
Company's equity is currently below the $2 million minimum required for the
listing of the Company's shares on the NASDAQ-Small Cap exchange and has been
delisted. Unless the Company can demonstrate the ability to raise the Company's
equity to an amount in excess of $2 million, and present a plan that will
satisfy NASDAQ's other standards regarding profitability and stock price
stability maintaining minimum bid price over $1.00, the Company's shares may not
be registered on the NASDAQ-Small Cap. A continued delisting from NASDAQ
SmallCap hurts the marketability of the Company's stock, and by extension, the
market price of the Company's stock, which would further hinder the Company's
ability to raise additional capital. The Company's independent public
accountants have included a explanatory paragraph in their report on the
Company's June 30, 1998 Financial Statements, stating that certain factors raise
substantial doubt about the Company's ability to continue as a going concern.

YEAR 2000 COMPLIANCE

The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date
sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from the dates in the "1900's". These
problems may also arise from other sources as well, such as the use of special
codes and conventions in software that makes us of the date field.

STATE OF READINESS AND COST TO ADDRESS THE YEAR 2000 ISSUE

The Company's primary focus has been on its own internal systems. To date,
the Company is in the process of modifying or replacing software components that
it uses. The Company is also communicating with suppliers, distributors,
financial institutions and others with which it does business to evaluate their
Year 2000 compliance plans and state of readiness and to determine the extent to
which the Company will be affected by the failure of others to remediate their
own Year 2000 issues. There can be no assurance that the systems of other
companies on which the Company's systems rely will also be timely converted or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems. Failure to complete the system conversion in a
timely manner could negatively impact the Company's business, financial
condition and results of operations. The cost for such modifications and
replacements is not expected to be material.

17
<PAGE> 19

CONTINGENCY PLAN

Because the Company's Year 2000 conversion is expected to be completed
prior to any potential disruption to the Company's business, the Company has not
yet completed the development of a comprehensive Year 2000 specific contingency
plan. If the Company determines that its business or a portion thereof is at a
material risk of disrupting due to the Year 2000 issue, the Company will work to
enhance its contingency plan.

18
<PAGE> 20

BUSINESS

GENERAL

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, and $5,640,951 for the quarter ended March 31, 1999,
respectively. These net losses are primarily related to its cable television
operations. The Company's Internet operations are currently in the development
stage. The execution of the Company's Plan of Operation as outlined below
requires the Company to raise significant additional capital -- see Liquidity
and Capital Resources section below.

RnetHealth.com, the Internet operation, will provide a branded, integrated,
Web-based solution for the administrative, communications and information needs
of managed care companies, insurance companies and employers as well as deliver
alternative and behavioral healthcare information to the public and consumers.
The Company's primary market is those impacted by social and behavioral health
issues (i.e. substance abuse, domestic violence, depression, eating disorders
and child abuse, etc.) that effect 100 million Americans at a cost to the
economy in excess of five hundred billion dollars annually in increased health
care expenses, crime and lost productivity.

THE INTERNET

The Company's Internet service, RnetHealth.com, will deliver alternative
and behavioral healthcare information to the public and consumers and provide a
branded, integrated, Web-based solution for the administrative, communications
and information needs of managed care companies, insurance companies and
employers.

The RnetHealth.com Web site, (URL WWW.RNETHEALTH.COM), will be designed for
both business and consumers. RnetHealth.com's web destination will consist of
two distinct Web sites -- a business-to-business site and a public site directed
to individuals via the Internet. The business-to-business site will be supported
by mass subscriptions through Employee Assistance Programs ("EAP") suppliers
whom serve employers, health plans, and various government, university and other
payers on a per month, per user basis. The public site will emphasize community,
chat forums, information and interaction and is supported principally by ad
revenue and e-commerce transactions.

19
<PAGE> 21

RnetHealth.com will offer online services offering state-of-the-art
assessment tools, expert information sessions, and an extensive clinically
oriented library of information and treatment options.

BUSINESS-TO-BUSINESS

RnetHealth.com will be the single point of access to electronic data
interchange services, enhanced communications services, and branded content and
other Web-based offerings. For managed care companies, insurance companies and
employers, RnetHealth.com will augment current EAPs by integrating multiple
administrative, communications and research functions into a single, easy to use
Web-based solution.

The commercial site will be tailored to health plans and employers to
augment current EAPs. The site will be supported by mass subscriptions through
EAP suppliers who serve employers, health plans, and various government,
university and other payers on a per month, per user basis.

Increasing concern over the rising cost of healthcare in the United States
has caused a shift from fee-for-service reimbursement to managed care forms of
reimbursement such as capitation and fixed fees. These changes have led many of
the current EAPs in the United States to seek ways to improve efficiency.

Many EAPs are intensive users of administrative, communications and
information services. The Company believes that a significant opportunity exists
for the EAPs to use the Internet to achieve measurable cost savings and improve
the quality of mental and behavioral health care.

Health and medical information is one of the fastest growing areas of
interest on the Internet. According to Media Metrix, an independent Web research
company, health care related content was the second most popular subject of
Web-based information retrieval searches in 1997. According to Cyber Dialogue,
an independent research company, approximately 70% of the persons searching for
health and medical information on the Internet believe the Internet empowers
them by providing them with information. Cyber Dialogue also indicates that
during the 12-month period ended July 1998, approximately 17 million adults in
the United States searched online for health and medical information, and
approximately 50% of these individuals made off-line purchases after seeking
information online.

Furthermore, Cyber Dialogue estimates that the number of adults in the
United States searching for online health and medical information will grow to
approximately 30 million in the year 2000, and they will spend approximately
$150 billion for all types of health-related products and services off-line.

An independent research company, Jupiter Communications, estimates that
expenditures for online health and medical advertising will grow to
approximately $265 million by 2002. We believe that RnetHealth.com will have a
significant opportunity to capitalize on multiple revenue opportunities,
including recurring subscription, advertising and sponsorship revenue.

Key elements of RnetHealth.com's strategy will include being first to
market with an integrated solution for the administrative, communications and
information needs for EAPs, building recognition of our brand, leveraging our
strategic relationships and the sales forces of our strategic distribution
partners, enhancing RnetHealth.com offerings, engaging

20
<PAGE> 22

in complementary acquisitions of technologies, products and services and
capitalizing on multiple revenue opportunities. RnetHealth.com believes that it
has a competitive advantage due to its strategic relationships and integrated
Web-based solution. RnetHealth.com plans on engaging in a marketing and
advertising campaign to increase awareness of the RnetHealth.com brand among
EAPs and the public, as well as entering into strategic relationships with
behavioral, healthcare providers and online market leaders to assist in rapidly
distributing and building RnetHealth.com's brand awareness.

RnetHealth.com also plans on providing access to premium behavioral and
healthcare content via relationships with various content providers. The Company
intends to introduce additional content and enhanced services, through strategic
relationships with other healthcare content providers.

RnetHealth.com plans on becoming the leading national brand on the Internet
and corporate Intranets delivering the online provision of objective information
and high integrity resources for those in need help with work or life related
issues. RnetHealth.com will take advantage of the latest developments in
convergent technologies where the Internet and broadband television provide
access to online services. Recovery Network is the only television network
devoted to behavioral health programming. RnetHealth.com features unique
strengths with its partners including: a University affiliation with the Brain
Institute at the University of Florida; a recognized leader in the Behavioral
Health Industry in its Medical Director, Dr. Mark Gold; and a pending
relationship with the largest managed behavioral care company in the country.
Services will include an Internet/ Intranet site that augments behavioral health
benefit plans, which could be integrated into national health plans as a gateway
between medical benefits and behavioral health benefits. This electronic
Behavioral Health Benefit Plan will be supported by capitated monthly
subscriptions through behavioral health benefit providers who serve employers,
health plans and various government, university and other third party payers.

RnetHealth.com will provide Internet accessibility to a robust and
compelling database of information, educational materials and provider
resources, integrated as a supplemental mode of service delivery to our vendors.

Information is the important factor in helping employees and dependents
lead a more balanced and productive life at work and at home. RnetHealth.com
also offers a broad range of consulting and education resources that employees
and dependents can use to expand their personal expertise. These topics range
from child development, to emergency home repair, to conflict resolution in the
workplace. Online Internet access to skilled social workers with years of
experience in solving a unique range of personal, social and economic issues
will be available in the safety and security of the subscribers' homes.

RnetHealth.com will provide ongoing online support, resources and
counseling to help expatriate and foreign national employees and their families
adjust to international assignments. Special online services will be available
for companies that want to develop policies and systems to prevent crises in the
workplace. These services are designed to help reduce employee trauma and
related costs and therefore create a safer, healthier and more productive
workplace. RnetHealth.com will provide a broad selection of training programs
that address topics ranging from everyday personal issues to international
business practices. Training programs will also be designed specifically for
managers, supervisors and executives.

21
<PAGE> 23

RnetHealth.com will provide online Internet assessments to match callers
with the most appropriate provider, based on individual needs. The client's
provider will manage individual cases. An alternative electronic EAP-driven
model that partners with a claims payer to avoid conflict of interest, which
could compromise sound clinical decisions will be an effective managed care
tool. RnetHealth.com will provide short and long-term online substance abuse
case management for all company-mandated referrals, including drug test
positive, DOT drug test positive and performance attendance behavior.

THE PUBLIC SITE

The public will have access to the RnetHealth.com web site, which will
include premium and proprietary health and behavioral content, chat rooms,
message boards, personalized healthcare information and e-mail updates.

RnetHealth.com's objective is to become the Web's premium brand for
behavioral and health care related services.

Through heavy promotional rotation of the web address on the cable
television network, the Recovery Network's cable television programming service
will market the Web site and web-based services. The public site emphasizes
community, chat, forums, information, and interaction. This site will be
supported principally by advertising revenue and e-commerce transactions.

For consumers, RnetHealth.com provides premium, branded content to assist
consumers in making informed decisions, personalized information about specific
health and behavioral conditions targeted according to the profiles of
individual consumers, and content-specific online communities that allow
consumers to participate in real-time discussions and support networks via the
Web.

RnetHealth.com has determined that the growing behavioral health needs of
the world's population can be met in a cost-effective manner through the
utilization of online electronic delivery systems. Globally more and more
consumers are increasingly interested in using online services and the Internet
to share information and ideas and discover "New Medicine" opportunities for the
treatment of and relief from a wide range of clinical problems in the behavioral
health area. RnetHealth.com is dedicated to creating a" Behavioral and
Alternative Health" consumer based Internet business that addresses all of these
issues. RnetHealth.com will specialize in the production of online forums with
the intent of assisting its members to make online activity a part of their
daily lives and communications. We believe that through engagement in moderated
chat sessions, online lectures (led by experts in the field of behavioral and
alternative health) and open forums, we will attract and retain active members.
The cornerstone of our efforts will be the strong commitment to the most current
clinical and editorial content. RnetHealth.com's commitment to community will
create extremely attractive, comfortable, and interesting neighborhoods in the
digital global village.

RnetHealth.com currently targets the two fastest growing communities on the
Internet: Alternative and Behavioral Health. The consumer populations that make
up these communities are rapidly adopting the use of online services and the
Internet to build and enhance communication.

The Company's Internet business is in development stage and has not yet
generated any revenues. The Company believes that the generation of meaningful
revenues will depend on its ability to enter into license agreements with Health
Care Entities and upon

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further development of its products. The Company will seek to generate revenues
from its Internet business from advertising sales, monthly subscriber fees
generated from the web site, merchandising and from Health Care Entities and
employers for delivering mental and behavioral health information and service to
their members. Although the Company believes that the Internet business will
provide the Company with significant opportunities relating to an interactive
on-line business, there can be no assurance that it will be commercially
successful.

THE TELEVISION NETWORK

The Recovery Network cable television programming service has successfully
secured approximately 5 million homes of cable TV analog distribution for its 4
hour per day program block without paying any launch fees. The network has
distribution with Cablevision Systems, Telecommunications Inc., Cox
Communications, Cable One, Century, FrontierVision, Knology, NCTC, and Time
Warner. Recovery Network's focus is on reality-based programming and production
, which is both informational and process, oriented, providing a daily
connection and support in the privacy of one's own home. 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 digital cable network, and in turn, generate the
traditional licensing fees from cable operators.

Recovery Network will serve to market and drive traffic to RnetHealth.com,
thereby enhancing e-commerce revenue generation opportunities including sales of
books, tapes, herbs and vitamins, tele-counseling services, and other behavioral
health programming, services and products ideally suited to its target audience.

The television network provides a point of differentiation and competitive
advantage for the RnetHealth.com commercial product. The cable television
network brands the interactive business to television viewers and promotes the
RnetHealth.com URL during all network identifications. The television network
provides grass roots marketing for the interactive business to many powerful and
influential community and civic organizations. Traditionally it has been
difficult to garner support from these organizations (e.g. CADCA and National
Guard). The cable network has already secured governmental support for a
national branding and marketing initiative called 24 STRAIGHT, a day of
Prevention and Recovery sponsored by SAMSHA and CSAT.

The sum of broadband video programming, coupled with a public and
commercial web site interactive application, provides a deep and rich experience
for which the user could not attain with the singular parts.

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 allowed the Company to
broadcast 24 hours a day. On September 1, 1998, the Company began broadcasting a
4 hour block of programming that it repeated 6 times a day to 16 cable systems
with approximately 3,000,000 subscribers. The Company's programming schedule
allowed cable operators the flexibility to receive the Company's signal
transmission at any time.

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In April 1999, the Company and Group W amended the terms and conditions of
their satellite services agreement, thereby reducing Recovery Network's monthly
fees by 50%. The Recovery Network now broadcasts a 4 hour block of programming
that is repeated twice daily to approximately 5,000,000 subscribers.

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 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, which provides cable operators a competitive advantage over other
multi-channel programming services. 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 Company believes that 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 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 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.

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As demand increases, the Company expects to enter into additional
affiliation agreements with new cable systems. As digital channel capacity
increases, the Company believes it will be able to expand into a full time
digital network with associated license fees from cable operators. With its
programming now airing on a number of cable systems, the Company can concentrate
on generating e-commerce and advertising sales revenue through both the
television network and Internet business.

The Company can also promote product sales through Recovery Direct through
the aforementioned media. 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. There also can be no assurance that the Company will be able to
generate significant advertising or product sales.

As of the date of this filing, the Company has secured distribution
agreements with two MSOs, National Cable Television Cooperative, Inc. ("NCTC")
and Satellite Services, Inc. ("SSI"). The agreement with NCTC was entered into
on May 18, 1998 (the "NCTC Agreement"). NCTC represents over 8 million cable
households comprising over 1,200 cable systems. Pursuant to the terms of the
NCTC Agreement, the Company has granted to NCTC the non-exclusive right to
distribute the Company's programming to its affiliate systems. The Company does
not receive a license fee for its programming. The NCTC Agreement has a term of
five years.

The agreement with SSI was finalized on October 5, 1998 (the "SSI
Agreement", and collectively with the NCTC Agreement, the "MSO Agreements").
Pursuant to the terms of the SSI Agreement, the Company has granted to SSI the
non-exclusive right to distribute the Company's programming to systems owned by
Telecommunications, Inc. and partner systems. The SSI Agreement is effective for
an initial term of seven years and may be renewed for successive five year
periods. The Company does not receive a license fee for its programming during
the initial term, but is entitled to negotiate for fees during any renewal
terms.

In addition to the foregoing, the Company has begun negotiating agreements
with the following MSOs: Cablevision, Time Warner Cable, Bresnan, Insight,
Charter and Cable One. Although the Company has not signed a written agreement
with these MSOs, the Company's programming is currently carried in approximately
1,600,000 households served by Cablevision. Since October, additional launches
include Jones Intercable in Independence, Missouri; Knology in Alabama, Florida
and Georgia; Marcus Cable in Fort Worth, Texas; Time Warner in El Paso, Texas,
Jackson, Mississippi, and Indianapolis, Indiana; Frontiervision; Comcast in
Indianapolis, Indiana; Cable One in Modesto, California; Tele-Communications,
Inc. in Newark, California; Access TV in Carson City, Nevada.

The Network also launched on Denver Community Television (DCTV) to
approximately 112,000 cable households, and on Los Angeles City-controlled
Educational Access Cable Channel 36 to 600,000 homes.

The MSO Agreements represent terms, which have been agreed to between the
Company and the respective MSO. By reaching agreement with the MSOs, the Company
is now free to approach the affiliated local systems of NCTC and SSI regarding
the airing of its programming. Neither the MSOs nor the affiliated local systems
are required, pursuant to the MSO Agreements, to provide the Company with any
subscribers. The Company is initially seeking to enter into short-term
affiliation agreements with local cable

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systems with a term of one year that provide for four hours of airing per day,
with no license fees paid to the Company, and have a 30-day termination clause.
The agreements would 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 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 and through RnetHealth.com. 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. In
addition, the Company intends for Recovery Direct to offer tapes and videos by
other well-known individuals in the recovery field. Recovery Direct currently
sells recovery-related audio and video tapes to the institutional market under
the trade name FMS Productions. The Company is expanding Recovery Direct's
offerings to consumers and simultaneously broadening its traditional marketing
and distribution (i.e. catalog and phone sales) to include and emphasize on-line
marketing and sales. 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 through a toll-free 800 telephone number.

NATIONAL PARTNERSHIP FOR RECOVERY AND PREVENTION

National Partnership for Recovery & Prevention (the "Partnership"), an
umbrella coalition of national recovery and prevention organizations, was formed
in November 1996 to work in conjunction with the Company and other entities in
this arena to employ the Company's 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
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.

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Depending on their interests and abilities, partners may have the
opportunity to review and comment on The Recovery Network's television
programming and Internet content, provide ideas for programming and content 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.

THE MARKETS

THE BEHAVIORAL HEALTH CARE MARKET

The Company believes that the market for Internet content and television
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 substance abuse, eating disorders, domestic violence, depression
and child abuse, and other social and behavioral health issues ("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.

The Company expects that a substantial portion of its audience and
customers will be the Affected Others. According to The American Journal of
Psychiatry Official Practice Guide published in November 1995, approximately 56
million Alcohol abuse or addiction directly affects persons in the United States
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 Recovery Network's Internet
services and television programming will provide a useful and important service
to Persons in Recovery, and that members of

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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 whom 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 which 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 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.

ALTERNATIVE HEALTH

Alternative health serves the diverse group of Americans who are visiting
holistic medical practitioners more frequently than conventional primary care
physicians. People who are interested in alternative health traditionally
consume herbs and nutritional products. Annual sales of vitamins are estimated
to be $10-15 billion in 1999. In 1997 the American Medical Association reported
that Americans spent an estimated $10 billion out-of-pocket on alternative
therapies. The Office of Alternative Medicine at the National Institutes of
Health now fields an estimated 2000 public inquiries per month specific to the
number of people who come visit online Alternative Health sites. Studies in
mainstream medical journals support the argument that between 45%-60% of men and
women ages 25-55 seek alternative medical treatment every year, including
acupuncture,

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chiropractic, biofeedback, homeopathy, meditation, and various herbal and
nutritional therapies.

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.
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
programming per day do not receive license fees. Also, new networks often offer
their programming for some period

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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 currently is 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.

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 and Discovery Health, which provide daily live
programming and prerecorded programming relating to health

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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
airtime, 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 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 to FCC fines 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 the Internet business 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 the Internet business. 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.

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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 Internet business. 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.

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 registration applications in the United States
Patent and Trademark Office for four trademarks, including the "Recovery
Network" trademark. The Company believes that its trademarks and copyrights,
including "The Recovery Network" 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.

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.

32
<PAGE> 34

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 6 full time employees engaged in affiliate/
marketing sales, programming, accounting, and in general 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.

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 rent 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.

33
<PAGE> 35

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George H. Henry..................... 45 Chairman of the Executive Committee
of the Board of Directors
William D. Moses.................... 36 President, Chairman of the Board of
Directors
Charlotte Schiff Jones.............. 58 Director
Brad Parobek........................ 35 Director
Jay Handline........................ 35 Director
Stacey Romm......................... 31 Chief Financial Controller
</TABLE>

GEORGE H. HENRY served as Chairman of the Board of Directors from May 1997
to November 1998, and has been a director of the Company since December 1995.
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 Access Television Network ("ATN").
Mr. Henry is also a trustee of Mitchell College.

WILLIAM D. MOSES serves as the Company's President of the Company. Mr.
Moses is co-founder of the Company and has been a director 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.

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.

BRAD PAROBEK serves as the Company's Senior Vice President of Affiliate
Sales. Mr. Parobek is a 13-year veteran of the Cable and Telecommunications
industry and served on numerous boards and committees throughout his tenure.
From 1989-1995, he was a member of the Board of Directors of the North Central
Cable and Telecommunications Association. He presently is a member of the Board
of Directors of Rocky Mountain Empire Venture and Nanny's Baby Wraps in Denver,
CO.

JAY HANDLINE serves as the Company's Executive Vice President and will be
overseeing the expansion of the Company's website and e-commerce move. Mr.
Handline successfully helped launch Lifescape 1to1, LLC (formerly
RecoveryNetInteractive, LLC)

34
<PAGE> 36

formed in August 1996, as a joint venture between TCI Digital Health Group and
The Recovery Network, Inc. Prior to this, Mr. Handline was involved in the
start-up of the Company. In 1995, he served as Senior Vice President of Business
Development, in this capacity, Mr. Handline was able to secure private equity
capital and forge successful partnerships to aggregate products, services and
information from dozens of world-class partners.

STACEY ROMM joined the Company's Finance Department in September 1998. She
presently serves as the Chief Financial Controller. From 1995 to 1998, Ms. Romm
worked for International Home Improvement as the Financial Manager. Prior to
1995, Ms. Romm was in charge of the finance department for LaPlaya Plumbing.

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

In October 1996, 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 Committee also
administers the 1996 Employee and Consultants Stock Option Plan, the 1996 Board
of Directors and Advisory Board Retainer Plan, the 1997 Management Bonus Plan,
and the 1998 Stock Option Plan. Mr. Henry is Chairman of the Finance and
Compensation Committee and Messrs. Moses and Masters (until his resignation in
May 1999) are also members of the Finance and Compensation Committee.

In May 1997, the Company established an Audit Committee of the Board of
Directors that 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.

In October 1996, 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 Chairman of the Executive Committee
and Messrs. Moses and Masters (until his resignation in May 1999) are also
members of the Executive Committee.

35
<PAGE> 37

EXECUTIVE COMPENSATION

The following table sets forth the cash compensation paid by the Company to
executive officers that received compensation in excess of $100,000 (the "Named
Executive Officers") during fiscal 1997, and 1998:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------- LONG TERM
YEAR COMPENSATION AWARDS
NAME AND ENDED SHARES UNDERLYING ALL OTHER
PRINCIPAL POSITION JUNE 30 SALARY BONUS($) OPTIONS(#) COMPENSATION
------------------ ------- -------- -------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
William D. Moses..... 1997 $109,000 -- 75,000
1998 $150,000
Gregory Richey....... 1997 $138,335 -- $25,000(a)
1998 $159,057
John Wheeler......... 1997 $135,642 --
1998 $157,000
Donald Masters....... 1997 $125,078 --
1998 $128,812
William Megalos...... 1997 $125,078 --
1998 $110,000
</TABLE>

- -------------------------
(a) Paid pursuant to termination of employment agreement between the Company and
Mr. Richey.

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

OPTION GRANTS DURING LAST FISCAL YEAR

<TABLE>
<CAPTION>
NAME SHARES UNDERLYING PERCENTAGE OF EXERCISE PRICE EXPIRATION DATE
---- ----------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
William Moses........... 50,000 16.2% $1.56* 4/3/03
Donald Masters.......... 50,000 16.2% $1.56* 4/3/03
</TABLE>

- -------------------------
* Such options were granted with an exercise price of $3.15 per share and were
subsequently repriced.

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

36
<PAGE> 38

OPTION REPRICING

In April 1998, the Board of Directors of the Company voted to approve the
repricing of options to purchase 435,986 shares granted under the Management
Bonus Plan and the 1998 Stock Plan, including options to purchase 62,915,
62,915 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. In April 1999, approximately
603,742 options previously granted under the 1997 Plan and 1998 Plan were
canceled. These options may or may not be re-issued at a later date.

STOCK OPTION PLANS

Recovery Network, Inc. has adopted 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 principal provisions of the plans are summarized
below. This summary is qualified in its entirety by reference to the provisions
of each of the plans.

PURPOSE. The purpose of the plans is to grant incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code and
non-qualified stock options as a means to provide an incentive to selected
directors, officers, employee and consultants to acquire a proprietary interest
in Recovery Network, Inc., to continue in their positions with us and to
increase their efforts on our behalf.

ADMINISTRATION. The plans are administered by the board or a committee
appointed by the board. Under the plans, the plan administrator has the
authority to, among other things: (a) select the eligible persons to whom
options will be granted, (b) determining the size, type and the terms of each
option granted, (c) adopted, amend and rescind rules and regulation for the
administration of the plans, and (d) decide all questions and settle all
controversies and disputes of general applicability that may arise in connection
with the plans.

SHARES AVAILABLE FOR ISSUANCE. A maximum of 30,768, 113,652, 195,831,
600,000 shares of Recovery Network, Inc. common stock is available for issuance
under the 1996 plan, 1997 plan, and the 1998 plan, respectively.

OPTIONS. Each option granted under the plans is evidenced by an agreement
that states the terms and conditions of the grant. The exercise price of an
option granted under any of the plans shall not be less than 100% of the fair
market value of the stock at the time of grant. Each option plan granted under
the plans will be exercisable at the times and in the amounts determined in
accordance with the agreements. In addition the board, in its discretion, may
accelerate the exercisability of any option under any of the plans.

Options granted under the plans are not transferable and are only
exercisable by the grantee during the grantee's lifetime. Each option shall
terminate at the time specified in the agreements.

NON-PLAN STOCK OPTIONS

In 1996, the Company has granted approximately 123,039 non-plan stock
options to acquire shares of Common Stock, of which 110,432 were granted at an
exercise price of $2.32 per share, 2,867 were granted at an exercise price of
$.77 per share and 9,749 were granted at an exercise price of $5.00 per share.
No non-plan options were granted during 1997. During 1998, the Company granted
approximately 1,283,915 non-plan stock options to selected directors, officers,
employees and consultants.

STOCK COMPENSATION PLAN

Effective February 19, 1999, the Company established the 1999 Employee and
Consultant's Stock Compensation Plan (the "Plan"). The purpose of the Plan is
to compensate employees and certain consultants of the Company for services by
issuing to them stock in lieu of cash payments. An aggregate of 1,500,000
shares of Common Stock are reserved for issuance under the Plan.

In June 1999, the Company established the Employee Stock Compensation Plan
(the "Employee Stock Plan") the purpose of the Employee Stock Plan is to
provided employees with an incentive to maintain the long-term performance and
profitability of the Company. A maximum of 1,300,000 shares of may be issued
under the Employee Stock Plan.

37
<PAGE> 39

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 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

38
<PAGE> 40

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.

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 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.

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

39
<PAGE> 41

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.

40
<PAGE> 42

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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 President and 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 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

41
<PAGE> 43

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 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.

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.

On June 29, 1998, the Company entered into certain subscription agreements
(the "Agreements") with seven investors (collectively, the "Subscribers"). Such
Agreements were amended in October 1998. 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) 1,250,000
shares (the "Shares") of Common Stock for $2,500,000, or $2.00 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) 500,000 shares of Common Stock upon the exercise
of warrants (the "Warrants"). The Warrants are exercisable at exercise prices
between $4.00 and $6.00 per share.

In October 1998, in connection with various consulting and service
agreements, the Company agreed to issue, in exchange for consulting and other
services, a total of 58,000 shares of Common Stock, options to purchase 400,000
shares of Common Stock, 50,000 of which are exercisable at $2.50 per share and
350,000 of which are exercisable at $2.00 per share. The options immediately
vest, and have various registration rights. If fully exercised, the aggregate
proceeds from the exercise of the stock options and warrants would be $825,000.
As of November 19, 1998, a total of $316,000 of the options had been exercised.

On December 7, 1998, the Company entered into an agreement with G. Howard
Associates, Inc. ("Howard") wherein Howard would represent the Company, on an
exclusive basis with respect to certain investors in connection with raising
capital for the Company. For its services, Howard would receive a cash fee equal
to 6% of the total consideration received by the Company and to reimburse Howard
for its out-of-pocket expenses. The fee is due at the closing of a said
transaction. Such agreement with Howard was amended in April 1999. The amendment
expanded Howard's representation to include (a) the sale of the Company's 20%
ownership in RecoveryNetInteractive; (b) the settlement with certain creditors
identified; and, (c) assistance in raising $300,000 of additional capital.
Pursuant to this amendment, Howard would receive 900,000 newly issued shares of
the Common Stock and a reduction in warrants held by Howard and/or George Henry.

42
<PAGE> 44

In December 1998, in connection with $725,000 notes payable by the Company,
the Company granted warrants to purchase 500,000 unregistered shares at $0.01
per share to a group of shareholders (the "Noteholders"). In April 1999, the
Company renegotiated the terms of the $725,000 notes payable to certain
shareholders. In exchange for extending the due date to October 1999 (six
months), the Company granted another 1,000,000 warrants at $0.01 per share.
Approximately 999,999 shares to date have been exercised.

In March 1999, in connection with an aggregate $100,000 investment by
certain investors, the Company agreed to issue notes convertible into Common
Stock of the Company.

In April 1999, the Company entered into an agreement with third parties to
sell its interest in RecoveryNet Interactive, LLC ("RI") and to receive its
web-site back from RI.

On June 11, 1999, entered into a Subscription Agreement (the "Agreement")
with certain Subscribers (the "Private Placement"). The Private Placement
provides for the issuance upon closing by the Company of (i) 350,000 shares (the
"Shares") of Common Stock for $350,000, or $1.00 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
$1,500,000 pursuant to a "put" provision in the Agreement (the "Additional
Shares"), and (iii) 35,000 shares of Common Stock and 175,000 placement warrants
exercisable at $0.35 per common share, as partial compensation to the placement
agents in the Private Placement.

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 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.

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<PAGE> 45

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information, as of May 12, 1999,
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>
NO. OF SHARES PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER(A) BENEFICIALLY OWNED(B) OF CLASS
--------------------------------------- --------------------- ----------
<S> <C> <C>
William D. Moses.................................. 1,847,153(c) 12%
George H. Henry(d)................................ 1,138,768(e) 11.4%
Donald J. Masters(f).............................. 294,074(g) 2.9%
Continental Capital & Equity Corporation(h)....... 600,000(i) 6.1%
John Wheeler(j)................................... 122,951(k) 1.2%
Charlotte Schiff-Jones(l)......................... 67,915(m) *
All directors and executive officers as a group (5
persons)........................................ 18.7%
</TABLE>

- -------------------------
* Less than 1%.

(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 April 28, 1999 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 are currently exercisable. Assumes a base of 12,975,048 shares
of Common Stock before any consideration is given to outstanding options,
warrants or convertible securities.

(c) Includes (i) options to purchase 200,000 shares of Common Stock and (ii)
warrants to purchase 43,750 shares of Common Stock.

(d) The address of the beneficial owner is 6860 Sunrise Court, Coral Gables, FL
33133.

(e) Includes (i) options to purchase 164,582 shares of Common Stock and (ii)
warrants to purchase 62,500 shares of Common Stock.

(f) The address of the beneficial owner is 333 Adams St., Denver, CO 80206.

(g) Includes (i) options to purchase 142,496 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.

44
<PAGE> 46

(h) The address of the beneficial owner is 195 Wekiva Springs Road, Suite 200,
Longwood, Florida 32779.

(i) Includes an option to purchase 200,000 shares of Common Stock.

(j) The address of the beneficial owner is 2628 Yellowwood Drive, Westlake
Village, California 91631.

(k) Includes an option to purchase 22,601 shares of the Common Stock.

(l) The address of the beneficial owner is 1687 Brickell Ave., #601, Miami, FL
33129.

(m) Includes options to purchase 17,915 shares of the Common Stock.

SELLING SHAREHOLDERS

RELATIONSHIP OF SELLING SHAREHOLDERS WITH THE COMPANY

None of the Selling Shareholders currently has, or within the past three
years has had, any position, office, or other material relationship with the
Company or any predecessor or affiliate of the Company.

SALES OF OUTSTANDING SHARES BY SELLING SHAREHOLDERS

None of the Selling Shareholders have advised the Company, and the Company
is unable to predict, if, when, the extent to which they intend to sell the
Shares being registered hereunder for their respective accounts. Notwithstanding
the foregoing, for purposes of the following Selling Shareholders Table, all of
the Shares are deemed to be offered hereby by the Selling Shareholders for sale
to the public. Based upon the foregoing assumption, the following table sets
forth information, as at June 30, 1999, with respect to (i) each Selling
Shareholder's beneficial ownership of the Company's Common Stock prior to the
offering of any Shares hereunder by such Selling Shareholder, (ii) the number of
Shares which may be offered for sale hereunder and (iii) the number shares of
the Company's Common Stock to be beneficially owned by each Selling Shareholder
after the offering (assuming the sale of all Shares being offered hereunder).

There can be no assurance that any of the Selling Shareholders will offer
for sale any or all of the Common Stock offered by them pursuant to this
Prospectus.

<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY SHARES OF COMMON SHARES OF COMMON
OWNED PRIOR TO STOCK TO BE OFFERED STOCK BENEFICIALLY
NAME OF SELLING SHAREHOLDER OFFERING HEREUNDER OWNED AFTER OFFERING
- --------------------------- ------------------ ------------------- --------------------
<S> <C> <C> <C>
Subscribers
Austost Anstalt Schaan(a)...... 100,000
Balmore Funds S.A.(a).......... 100,000
Amro International, S.A.(a).... 100,000
Nesher, Inc.(a)................ 50,000

Placement Agents
Libra Finance, S.A.(b)......... 120,000
Amro Intenation, S.A.(b)....... 60,000
Talbiya B. Investments. Ltd,(b) 30,000

Additional Selling Shareholders
Martin Chopp................... 24,500
Steven Richman................. 99,999
Janice Gold.................... 50,001
Highborough Services........... 150,000
William D. Moses [Sr.] Martial
Family Trust II .............. 399,999
Mitchell Sahn.................. 102,915
</TABLE>

- -------------------------
(a) Shares deemed beneficially owned prior to the offering include shares issued
or issuable to the Selling Shareholder in the Private Placement (including
shares issuable pursuant to any provision of the Agreements, including but
not limited to those shares

45
<PAGE> 47

issuable pursuant to certain Reset Rights and Put Rights in the Agreements)
and shares reserved for issuance upon exercise of the Warrants.

(b) Shares deemed beneficially owned prior to the offering include shares issued
to the Selling Shareholder as partial compensation for services as placement
agent of the Shares and the Warrants.

46
<PAGE> 48

DESCRIPTION OF SECURITIES

GENERAL

The aggregate number of shares that the Company is authorized to issue is
25,000,000 shares of Common Stock, par value $.01 per share. As of the date of
this Prospectus, the Company had outstanding 15,493,407 shares of Common Stock.

COMMON STOCK

The holders of the Common Stock are entitled to one vote for each share
held of record in the election of directors of the Company and in all other
matters to be voted on by the shareholders. There is no cumulative voting with
respect to the election of directors, with the result that the holders of more
than 50 percent of the shares voting for the election of directors can elect all
of the directors. Holders of Common Stock are entitled (i) to receive such
dividends as may be declared from time to time by the board of directors out of
funds legally available for such purpose, and (ii) in the event of the
liquidation, dissolution, or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities and after provision has been made
for each class of stock, if any, having preference over the Common Stock. All of
the outstanding shares of Common Stock are validly issued, fully paid, and
nonassessable. Holders of Common Stock have no preemptive right to subscribe for
or purchase additional shares of any class of the Company's capital stock.

On June 11, 1999, the Company entered into Subscription Agreements (the
"Agreements") with certain Subscribers. Pursuant to the Agreements, the Company
is entitled to receive proceeds up to $500,000 upon the closing of this
transaction (the "Private Placement"). To-date, the Company has received
$350,000, less placements fees, legal fees, and other applicable fees, and in
exchange the Company issued 350,000 shares of Common Stock, valued at $1.00 to
the investors and 35,000 shares of Common Stock and 175,000 placement warrants
exercisable at $0.35 per common share, as partial compensation to the placement
agents in the Private Placement.

Pursuant to the Agreements, the Subscribers received certain reset rights
(the "Reset Rights") that may require the Company to issue additional shares of
Common Stock to the Subscribers in the future (the "Reset Shares"). The
Subscribers are entitled to additional shares of Common Stock, without the
payment of additional consideration, to account for a decrease in the market
value of the Common Stock after the Subscription Date.

In addition to the proceeds received in the Private Placement, the Company
may receive $1.5 million pursuant to a "put" provision in the Agreements that is
subject to various conditions, including those relating to re-listing on NASDAQ
and timing.

WARRANTS

Each Warrant issued pursuant to the Private Placement entitles the holder
thereof (the "Warrant Holders") to purchase one share of Common Stock at a price
of $0.35, subject to adjustment in certain circumstances, through and including
June 10, 2002.

The Warrant Holders shall have the right to exercise their Warrants until
the close of business on June 10, 2002.

The exercise price and number of shares of Common Stock or other securities
issuable on exercise of the Warrants are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company. However, the Warrants
are not subject to adjustment for issuances of Common Stock at prices below the
exercise price of the Warrants. Reference is made to the Warrant (which has been
filed as an exhibit to this Registration Statement)

47
<PAGE> 49

for a complete description of the terms and conditions therein (the description
herein contained being qualified in its entirety by reference thereto).

The Warrants may be exercised upon surrender of the Warrant on or prior to
the expiration date to the Company at its principal office or at the office of
the Warrant agent appointed by the Company in accordance with the terms of the
Warrant, with the subscription form attached thereto completed and executed as
indicated, accompanied by full payment of the exercise price (in cash or by
certified check or official bank check payable to the order of the Company) for
the number of Warrants being exercised. The Warrant Holders do not have the
right or privileges of holders of Common Stock.

REDEEMABLE WARRANTS

Each Redeemable Warrant outstanding entitles the registered holder thereof
(the "Redeemable Warrant Holders") to purchase one share of Common Stock at a
price of $5.50, subject to adjustment in certain circumstances, through and
including September 29, 2002.

Each Redeemable Warrant is redeemable by the Company at any time, upon
notice of not less than 30 days, at a price of $.10 per Redeemable Warrant,
provided that the closing bid quotation of the Common Stock on all 20 trading
days ending on the third day prior to the day on which the Company gives notice
(the "Call Date") has been at least 150% (currently, $8.25, subject to
adjustment) of the then effective exercise price of the Redeemable Warrants and
the Company obtains the written consent of Whale Securities Co., L.P., the
underwriter in the Company's initial public offering (the "Underwriter") to such
redemption prior to the Call Date. The Redeemable Warrant Holders shall have the
right to exercise their Redeemable Warrants until the close of business on the
date fixed for redemption.

The Redeemable Warrants are issued in registered form under a warrant
agreement by and among the company, American Stock Transfer & Trust Company, as
warrant agent (the "Redeemable Warrant Agent"), and the Underwriter (the
"Redeemable Warrant Agreement"). The exercise price and number of shares of
Common Stock or other securities issuable on exercise of the Redeemable Warrants
are subject to adjustment in certain circumstances, including in the event of a
stock dividend, recapitalization, reorganization, merger or consolidation of the
Company. However, the Redeemable Warrants are not subject to adjustment for
issuances of Common Stock at prices below the exercise price of the Redeemable
Warrants. Reference is made to the Redeemable Warrant Agreement (which has been
filed as an exhibit to the Company's Registration Statement on Form SB-2, as
amended (File No. 333-27787)) for a complete description of the terms and
conditions therein (the description herein contained being qualified in its
entirety by reference thereto).

No Redeemable Warrant will be exercisable unless, at the time of exercise,
the Company has filed a current registration statement with the Commission
covering the shares of Common Stock issuable upon exercise of such Redeemable
Warrant and such shares have been registered or qualified or deemed to be exempt
from registration or qualification under the securities laws of the state of
residence of the holder of such Redeemable Warrant. The Company will use its
best efforts to have all such shares so registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Redeemable Warrants, subject to the terms of

48
<PAGE> 50

the Redeemable Warrant Agreement. While it is the Company's intention to do so,
there can be no assurance that the Company will be able to do so.

REGISTRATION RIGHTS

In March and April 1997, the Company completed a private financing (the
"Private Financing") pursuant to which the Company issued and sold to 21
"accredited investors" an aggregate of 40 units (the "Financing Units")
consisting of an aggregate of (i) $2,000,000 principal amount of unsecured
non-negotiable promissory notes (the "Financing Notes") which bear interest at
the rate of 9% per annum and are due on the earlier of the consummation of this
offering or March 6, 1998; (ii) 400,000 shares of Common Stock (the "Financing
Shares"); and (iii) warrants (the "Financing Warrants") to purchase an aggregate
of 500,000 shares of Common Stock at an exercise price of $5.50 per share. In
connection with the Private Financing, the Company agreed to include the 400,000
Financing Shares and the 500,000 shares issuable upon exercise of the Financing
Warrants (the "Financing Warrant Shares") in a registration statement which the
Company will prepare and file with, and use its best efforts to have declared
effective by, the Commission so as to permit the public trading of the Financing
Shares and Financing Warrant Shares pursuant thereto. If such registration
statement is not declared effective by the Commission within 15 months following
the consummation of the Company's initial public offering, then commencing on
the first day of the 16th month following the consummation of this offering, the
Company shall issue to each holder of Financing Shares and Financing Warrant
Shares, on the first day of each month a registration statement continues not to
have declared effective by the Commission, such number of additional shares of
Common Stock as is equal to 10% of the number of Financing Shares and Financing
Warrant Shares issued to and held by such holder and such number of additional
warrants as is equal to 10% of the number of Financing Warrants issued to and
held by such holder. The holders of the Financing Shares and Financing Warrants
have agreed not to sell or otherwise dispose of any of such securities for a
period of 24 months following the effective date of the Company's Registration
Statement on Form SB-2, as amended (File No. 333-27787).

The Company has granted certain "demand" and "piggyback" registration
rights to the holders of additional 433,223 shares of Common Stock. The demand
registration rights are exercisable, under certain circumstances, commencing
September 29, 1998.

In connection with its initial public offering, the Company has agreed to
grant to the Whale Securities Co., L.P. certain demand and piggyback
registration rights in connection with the 400,000 shares of Common Stock
issuable upon exercise of certain warrants and the additional warrants included
therein.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock are American Stock
Transfer and Trust Company, 40 Wall Street, New York, New York 10005.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (Registration No. 333- ) under the Securities Act
with respect to the Shares (the "Registration Statement"). As permitted by the
rules of the Commission, this
49
<PAGE> 51

Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Shares offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus, and in any document incorporated herein
by reference, as to the contents of any contract or any other document referred
to are not necessarily complete and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement or such document, each such statement being qualified in all respects
by such reference. A copy of the Registration Statement may be inspected without
charge at the Commission's principal office, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the
Registration Statement may be obtained from such office upon the payment of the
fees prescribed by the Commission. The Registration Statement has been filed
through EDGAR and is publicly available through the Commission's Web site
(http://www.sec.gov).

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained
at prescribed rates from the Public Reference Section of the Commission,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information electronically filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
The Common Stock is currently quoted on The NASD OTC Bulletin Board and such
reports and other information can also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.

LEGAL MATTERS

Certain legal matters will be passed upon for the Company by Beckman,
Millman & Sanders, New York, New York.

EXPERTS

[NONE]

50
<PAGE> 52

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE RECOVERY NETWORK, INC.

AUDITED ANNUAL FINANCIAL STATEMENTS
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-6
Notes to Consolidated Financial Statements.................. F-7

UNAUDITED QUARTERLY FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and June 30, 1998............................. F-22
Condensed Consolidated Statements of Operations (unaudited)
for the nine and three months ended March 31, 1999 and
1998...................................................... F-23
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month periods ended March 31, 1999 and
1998...................................................... F-24
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-25

FMS PRODUCTIONS, INC.

AUDITED ANNUAL FINANCIAL STATEMENTS

Report of Independent Auditors.............................. F-31
Balance Sheets as of April 30, 1997 and 1996................ F-32
Statements of Income and Retained Earning for years ended
April 30, 1997 and 1996................................... F-33
Statements of Cash Flow for the years ended April 30, 1997
and 1996.................................................. F-34
Notes to Financial Statements............................... F-35

UNAUDITED QUARTERLY FINANCIAL STATEMENTS

Condensed Balance Sheet (unaudited) at October 31, 1997..... F-41
Condensed Statements of Income (unaudited) for six month
periods ended October 31, 1997 and 1996................... F-42
Condensed Statements of Cash Flow (unaudited) for six month
periods ended October 31, 1997 and 1996................... F-43
Notes to Financial Statements (unaudited)................... F-43

THE RECOVERY NETWORK, INC. PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)

Pro Forma Condensed Consolidated Statements of Operations
for the year ended June 30, 1998 (Unaudited).............. F-45
</TABLE>

F-1
<PAGE> 53

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 Subsidiaries as of June 30, 1998, and
the related consolidated 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.

ARTHUR ANDERSEN LLP

Los Angeles, California
September 23, 1998

F-2
<PAGE> 54

THE RECOVERY NETWORK, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998

<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
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> 55

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> 56

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
convertible notes
payable.................... 142,065 1,420 328,580 -- -- -- 330,000
private placement including
7,749 shares 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 offering 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
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-5
<PAGE> 57

THE RECOVERY NETWORK, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1998
INCREASE (DECREASE) IN CASH

<TABLE>
<CAPTION>
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-6
<PAGE> 58

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,

F-7
<PAGE> 59
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

1. ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS -- (CONTINUED)
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:

<TABLE>
<S> <C>
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
=========
</TABLE>

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:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
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)
=========== ===========
</TABLE>

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

F-8
<PAGE> 60
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

1. ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS -- (CONTINUED)
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 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.

F-9
<PAGE> 61
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

1. ORGANIZATION, LINE OF BUSINESS AND SIGNIFICANT BUSINESS RISKS -- (CONTINUED)
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 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-10
<PAGE> 62
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:

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

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."

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

F-11
<PAGE> 63
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

2. PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
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 Company will
adopt the new standards upon their required effective dates. The effects of
these new standards have not yet been determined.

F-12
<PAGE> 64
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

2. PRINCIPLES OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
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-13
<PAGE> 65
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

3. CAPITALIZED PRODUCTION COSTS

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

<TABLE>
<S> <C>
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
==========
</TABLE>

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.

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.

F-14
<PAGE> 66
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

6. INCOME TAXES

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

<TABLE>
<S> <C>
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................................... $ --
===========
</TABLE>

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.

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.

F-15
<PAGE> 67
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

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.

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).

F-16
<PAGE> 68
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

7. CAPITAL STOCK TRANSACTIONS -- (CONTINUED)
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.

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

F-17
<PAGE> 69
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

8. RELATED PARTY TRANSACTIONS -- (CONTINUED)
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.

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.

F-18
<PAGE> 70
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

10. OPTIONS AND WARRANTS -- (CONTINUED)
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:

<TABLE>
<CAPTION>
SHARES EXERCISE SHARES SHARES SHARES
GRANTED PRICE VESTED EXERCISED TERMINATED
- ------- -------- ------- --------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>

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):

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
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)
</TABLE>

F-19
<PAGE> 71
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

10. OPTIONS AND WARRANTS -- (CONTINUED)
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:

<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
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
</TABLE>

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.

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:

<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999........................................................ $236,000
2000........................................................ 247,000
2001........................................................ 254,000
2002........................................................ 225,000
--------
$962,000
========
</TABLE>

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

F-20
<PAGE> 72
THE RECOVERY NETWORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:

<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999.................................................. $22,350
2000.................................................. 18,711
-------
41,061
Less amounts representing interest.................... (10,906)
Less Current portion.................................. (17,029)
-------
$13,126
=======
</TABLE>

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-21
<PAGE> 73

THE RECOVERY NETWORK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash.............................................. $ 90,829 $ 2,219,145
Accounts receivable, net.......................... 73,535 254,750
Current portion of capitalized
Programming costs, net......................... 220,000 191,500
Inventory......................................... 62,696 55,624
Prepaid expenses.................................. 35,032 59,220
------------ ------------
Total current assets...................... 482,092 2,780,239
------------ ------------
CAPITALIZED PROGRAMMING COSTS, net.................. 515,586 765,962
FURNITURE AND EQUIPMENT, net........................ 214,212 203,189
INVESTMENT IN JOINT VENTURE......................... 619,650 --
OTHER, net.......................................... 70,085 35,530
------------ ------------
$ 1,901,625 $ 3,784,920
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable..................................... $ 754,000 $ --
Accounts payable and accrued liabilities.......... 1,211,692 587,207
Accrued professional fees......................... 206,805 131,647
Accrued royalty expense........................... 476,837 322,630
Current portion of capital lease obligation....... 17,029 17,029
Due to joint venture.............................. -- 224,500
------------ ------------
Total current liabilities................. 2,666,363 1,283,013
CAPITAL LEASE OBLIGATION, net of current portion.... 6,005 13,126
------------ ------------
Total liabilities......................... 2,672,368 1,296,139
------------ ------------
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value:
Authorized -- 25,000,000 shares
Issued and outstanding, 9,657,336 shares at
March 31, 1999, and 5,791,494 at June 30,
1998......................................... 96,573 57,915
Additional paid-in capital........................ 19,619,517 17,050,969
Prepaid consulting costs.......................... (687,029) (461,250)
Deficit........................................... (19,799,804) (14,158,853)
------------ ------------
Shareholders' equity (deficit)................. (770,743) 2,488,781
------------ ------------
$ 1,901,625 $ 3,784,920
============ ============
</TABLE>

F-22
<PAGE> 74

THE RECOVERY NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ -------------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES....................... $ 268,433 $ 281,665 $ 947,392 $ 409,202
---------- ----------- ----------- -----------
OPERATING EXPENSES (GAIN):
Salaries and consulting...... 866,021 773,781 3,153,255 1,460,824
Marketing.................... 233,401 467,758 396,506 1,125,607
General and administrative... 222,274 460,141 1,592,613 980,008
Programming.................. 168,653 438,875 1,496,726 998,686
Gain on investment in joint
venture................... (597,675) 167,400 (597,675) 317,400
Cost of video and publication
sales..................... 91,313 75,219 309,377 91,202
---------- ----------- ----------- -----------
Operating expenses... 983,987 2,383,174 6,350,802 4,973,727
---------- ----------- ----------- -----------
Loss from operations...... (715,554) (2,101,509) (5,403,410) (4,564,525)
INTEREST EXPENSE............... (285,375) (5,584) (299,253) (770,841)
INTEREST INCOME................ 2,000 48,191 62,686 125,363
---------- ----------- ----------- -----------
Loss before provision for
state income taxes...... (998,929) (2,058,902) (5,639,977) (5,210,003)
PROVISION FOR STATE INCOME
TAXES........................ -- -- 974 --
---------- ----------- ----------- -----------
Net Loss.................. $ (998,929) $(2,058,902) $(5,640,951) $(5,210,003)
========== =========== =========== ===========
LOSS PER SHARE INFORMATION:
Based and diluted loss per
Share........................ $ (.14) $ (.41) $ (.75) $ (1.27)
========== =========== =========== ===========
Weighted average number of
common and common equivalent
Shares outstanding........... 7,142,575 4,980,250 7,566,733 4,116,757
========== =========== =========== ===========
</TABLE>

F-23
<PAGE> 75

THE RECOVERY NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR NINE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income loss..................................... $(5,640,951) $(5,210,003)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of notes payable discount......... 255,000 479,568
Amortization of deferred offering and financing
costs....................................... -- 130,529
Amortization of and allowances for capitalized
programming costs........................... 626,000 116,270
Depreciation and amortization.................. 90,056 53,589
Common stock issued for services and interest
expense..................................... 795,016 --
Provision for doubtful accounts................ -- 7,000
(Gain) loss on investment in joint venture..... (597,675) 317,400
Changes in assets and liabilities:
Accounts receivable.............................. 181,215 (44,562)
Inventory........................................ (7,072) 11,711
Prepaid expenses................................. 24,188 (211,706)
Other assets..................................... (34,655) (2,507)
Capitalized programming costs.................... (249,917) (332,812)
Accounts payable and accrued liabilities......... 624,485 (124,948)
Accrued professional fees........................ 75,158 (284,784)
Due to joint venture............................. (74,500) --
Due to shareholders and directors................ -- (65,751)
----------- -----------
Net cash used in operating activities....... (3,933,652) (5,161,006)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for purchase of FMS....................... -- (34,383)
Purchases of furniture and equipment................ (101,079) (134,903)
Investment in joint venture......................... (150,000) (317,400)
----------- -----------
Net cash used in investing activities....... (251,079) (486,686)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............................ 499,000 574,990
Payments on borrowings.............................. -- (2,605,250)
Payments on capital lease obligations............... (7,121) (12,655)
Proceeds from the issuance of common stock.......... 1,664,536 10,715,355
Deferred offering and financing costs incurred...... (100,000) (343,558)
----------- -----------
Net cash provided by financing activities... 2,056,415 8,328,882
----------- -----------
NET (DECREASE) INCREASE IN CASH....................... $(2,128,316) $ 2,681,190
CASH, beginning of period............................. 2,219,145 10,883
CASH FROM ACQUISITION OF FMS.......................... 17,893
CASH, end of period................................... $ 90,829 $ 2,709,966
</TABLE>

F-24
<PAGE> 76

THE RECOVERY NETWORK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999

NOTE A -- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and the instructions to Form 10-QSB related to
interim period financial statements. Accordingly, these condensed consolidated
financial statements do not include certain information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, the accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring accruals) which, in
the opinion of management, are necessary in order to present the financial
statements fairly. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited financial statements, and notes thereto, which are
included in the Company's Registration Statement on Form SB-2 (File No.
333-61421 dated November 2, 1998), and the Company's Annual Report on Form
10-KSB, for the year ended June 30, 1998.

NOTE B -- ISSUANCE OF COMMON STOCK

On September 24, 1998, and in connection with the 1998 Private Placement,
the shareholders of the Company approved the issuance of 346,449 shares of
common stock (including 13,115 shares of common stock for placement services)
and a three year warrant to purchase 30,000 shares of common stock at $5.50 per
share for gross proceeds of approximately $750,000.

In October 1998, the 1998 Private Placement agreement was amended (the
"Amendment"), whereby an additional 138,890 shares of common stock were issued.
Total shares of common stock issued under the 1998 Private Placement, including
the Amendment shares, were 1,250,000 shares, for gross proceeds of $2,500,000
(or $2.00 per share). Warrants to purchase an additional 400,000 shares of
common stock were also granted at exercise prices ranging from $4.00 to $6.00
per share. These additional warrants were originally exercisable until December
2001. An amendment to the Amendment was executed in December 1998 whereby the
expiration for the warrants was changed to January 4, 1999. The warrants expired
without being exercised.

Pursuant to the Amendment, 1998 Private Placement subscribers (the
"Subscribers") agreed not to sell their 1,250,000 shares of common stock until
December 21, 1998 (the "Lock-Up"), during which period the Subscribers had
granted a transferable option to sell 900,000 of such shares at $3.00 per share
(the "Option") to a minority shareholder of the Company. The Subscribers could
have elected not to sell up to 450,000 shares of common stock under the Option.
Had the Option been exercised, the Lock-Up would have been extended until
February 16, 1999 for all unsold shares and Subscriber reset rights would have
been forfeited. The Lock-Up and Option expired thereafter. Total expenses
incurred in connection with these series of transactions in fiscal 1999 are
approximately $100,000.

The Company has issued 1,213,736 registered shares of common stock through
March 31, 1999 pursuant to the Subscribers' reset rights.

F-25
<PAGE> 77
THE RECOVERY NETWORK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
MARCH 31, 1999

Through March 31, 1999, certain warrants were exercised by paying the
Company in cash. These exercises total 622,000 unregistered shares for $745,000.

Through March 31, 1999, in connection with various consulting, service,
severance and employment agreements, the Company granted a total of 1,314,867
shares (both registered and unregistered) of common stock to employees, former
employees, consultants and other service providers. The fair value of these
shares totaled approximately $1,073,000, of which $338,000 is recorded in
prepaid consulting expenses as of March 31, 1999 and the remainder has been
recorded in operating expenses.

In March 1999, the Company settled an agreement with a service provider
(recorded on the books as of June 30, 1998) whereby 200,000 shares of
unregistered common stock that were previously agreed to be issued were not
issued. In connection with this settlement, the Company reversed $625,000 of
additional paid-in capital and previously recorded consulting expense of
$344,000. In connection with this settlement, the 200,000 related unregistered
stock options were re-issued to the principal of the service provider and
repriced at $0.375 per share. The Company recorded additional paid-in capital
and consulting expense of $22,000 due to the re-issuance of these options.
Subsequent to March 31, 1999, 172,000 of these options were exercised (see Note
I below).

NOTE C -- GRANTING OF STOCK OPTIONS AND WARRANTS

In connection with $725,000 notes payable issued by the Company to a group
of shareholders (the "Noteholders") in December 1998, the Company granted
warrants to purchase 500,000 unregistered common shares at $0.01 per share. The
pro-rata fair value of these warrants of approximately $326,000 is included in
equity, with the debit being recorded as a debt discount and being amortized
into interest expense through April 1999. Subsequent to quarter end, additional
warrants were issued to the Noteholders in conjunction with renegotiating the
due date of these notes (see Note I below).

In connection with employee services and consulting arrangements, the
Company has granted options to acquire a total of 442,165 shares of common stock
(both registered and unregistered) to various employees, former employees and
Board of Director members through March 31, 1999. These options have exercise
prices between $0.59 and $2.00 per share and were generally immediately vested.
The estimated value of certain non-employee options within this group of
options, at the time of grant, totaled approximately $20,000 and has been
included in equity.

In connection with other consulting arrangements, the Company has issued
warrants to acquire a total of 1,150,000 shares of common stock unregistered at
exercise prices ranging from $1.00 to $4.00. Many of these warrants were
repriced at prices ranging from $0.50 to $0.75 in an effort to encourage the
exercise of these warrants. As noted above, 622,000 of these warrants have been
exercised for $745,000 during the nine-month period ended March 31, 1999. The
estimated value of these warrants at the time of grant (and/or repricing) is
approximately $551,000, of which approximately $328,000 is recorded in

F-26
<PAGE> 78
THE RECOVERY NETWORK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
MARCH 31, 1999

prepaid consulting expenses as of March 31, 1999 and the remainder has been
recorded in operating expenses

NOTE D -- ACQUISITION OF FMS

On December 10, 1997, Recovery acquired 100 percent of the issued and
outstanding common stock of FMS Productions, Inc. ("FMS"). The unaudited pro
forma results of operations for the nine months ended March 31, 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 are as
follows:

<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
MARCH 31,
1998
-----------------
<S> <C>
Pro forma total revenues.................................... $ 1,107,000
===========
Pro forma net loss.......................................... $(5,302,000)
===========
Pro forma weighted average number of common shares.......... 4,142,931
===========
Pro forma loss per common share............................. $ (1.28)
===========
</TABLE>

NOTE E -- LOSS PER SHARE

Net loss per share is based on the weighted average number of common shares
outstanding and dilutive common stock equivalents during the periods presented.
Options and warrants to purchase 5,450,835 shares of common stock (at prices
ranging from $.01 to $9.075) and 3,378,282 shares of common stock (at prices
ranging from $0.77 to $9.075) were outstanding as of March 31, 1999 and 1998,
respectively, and were excluded from the computation of loss per share assuming
dilution as they would have been anti-dilutive.

NOTE F -- SIGNIFICANT BUSINESS RISKS

GOING CONCERN

The accompanying condensed consolidated 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 Internet, cable and other multimedia channels,
(3) to achieve a critical mass of viewers and/or visitors to attract advertisers
and healthcare providers, and (4) to acquire and develop appropriate programming
and/or content for distribution. 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,

F-27
<PAGE> 79
THE RECOVERY NETWORK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
MARCH 31, 1999

the Company will have sufficient funds to execute its intended business plan or
generate positive operating results.

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 ("Group W"), a division of CBS Corporation, to provide program
origination, master control operations, up-link and C-Band Satellite transponder
services (the "Transponder Contract"). It is possible that Group W 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"). 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 operators. Currently, the

F-28
<PAGE> 80
THE RECOVERY NETWORK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
MARCH 31, 1999

Company has carriage agreements with a number of major multi system operators
and strategic cable systems throughout the country. Presently, the Company's
programming in available on 34 cable systems serving approximately four million
cable subscribers.

On April 15, 1999, the Company entered into a settlement agreement with
Group W. The Company settled its $513,072 obligation to Group W by issuing
500,000 shares of stock (with a fair value of $265,000), paying cash of $150,000
and agreeing to pay a note payable of $75,000 with 10% interest due December
1999. This Company realized a gain of $248,072 in connection with this
settlement.

NOTE G -- RECOVERY INTERACTIVE, L.L.C. ("RI")

In October 1998, the Company and TCI agreed to amend the joint venture to
admit a new partner. Based on the amount of cash brought into the venture by
this new partner for a minority interest, the Company was able to recompute the
estimated fair value of its investment. In accordance with Staff Accounting
Bulletin Topic 5H, the Company has recognized a gain of approximately $600,000,
representing the per unit price received by RI from the new partner in excess of
the Company's carrying value multiplied by the Company's new ownership
percentage. This investment was sold after year end for an additional
gain -- see Note I below.

NOTE H -- NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS

The Statement of Financial Accounting Standards No. (SFAS) 130 "Reporting
Comprehensive Income" was adopted as of September 30, 1998. The implementation
of SFAS 130 did not have an impact on the Company's results of operations. There
were no adjustments to net loss to arrive at comprehensive income (loss).

NOTE I -- SUBSEQUENT EVENTS

ISSUANCE OF COMMON STOCK

In April 1999, an option holder exercised 172,000 options at $0.375 per
share by tendering a payment of $64,500 to the Company.

The Company has embarked on a program to settle all accounts payable by
issuing unregistered stock in lieu of a cash payment. Based on the market price
of the stock on the date of settlement (less a 15% non-marketable discount), in
April and May, 1999, the Company has issued 767,098 shares of stock (including
shares issued to Group W) in settlement of $666,173 in liabilities. The Company
is in the process of settling additional liabilities in a like manner.

In April 1999, the Company granted to a director 900,000 shares of
unregistered common stock for consulting services in connection with settling
liabilities and raising additional capital. The fair value of this stock was
approximately $394,000.

F-29
<PAGE> 81
THE RECOVERY NETWORK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
MARCH 31, 1999

STOCK OPTIONS AND WARRANTS

In April 1999, the Company renegotiated the terms of its $725,000 notes
payable to certain shareholders. In exchange for extending the due date to
October 1999 (six months), the Company granted another 1,000,000 warrants at
$0.01 per share. The pro-rata fair value of these additional warrants of
approximately $240,000 is included in equity, with the debit being recorded as a
debt discount and being amortized into interest expense through October 1999.
Since March 31, 1999, 999,999 of these warrants have been exercised for $10,000.

In April 1999, the Board of Directors approved the repricing of certain
options (totaling 655,925 shares of common stock). Such repricing was effected
by offering to exchange new options with a purchase price of $0.43 per share
(the fair market value of the common stock on the date of repricing) for options
then held by such optionees. The new options otherwise have identical terms as
the old options.

In April 1999, an additional 1,711,075 shares of common stock were issued
to the Subscribers pursuant to the Reset provisions within the Agreement.

SALE OF INVESTMENT IN RECOVERYNET INTERACTIVE, L.L.C. ("RI")

In April 1999, the Company entered into an agreement with third parties to
sell its interest in RI for $850,000 and to receive its website back from RI.
This transaction resulted in a gain of approximately $597,675 in the statement
of operations. $230,000 of this gain was recorded in April 1999 and the
remainder was recorded in March 1999.

ADDITIONAL FINANCING COMMITMENT/NASDAQ LISTING

On June 10, 1999, the Company entered into a Subscription Agreement with
certain subscribers wherein the Company would receive up to $500,000 in
exchange for 500,000 shares of stock upon execution of the agreement
(subscriptions received through June 25, 1999 total $350,000) and the Company's
put option for an additional $1,500,000 in exchange for 1,500,000 shares of
stock exercisable within two weeks after the Company gets re-listed on the
NASDAQ SmallCap Market and other various conditions. The exercise of the put
option is also contingent upon numerous other items. The Company's actual net
proceeds through June 25, 1999 after repayment of a May 1999 promissory note of
$50,000 and payment for legal costs, was approximately $275,000. In addition,
the Subscription Agreement calls for shares to be issued to placement agents of
10% of the total shares subscribed (35,000 shares through June 25, 1999). The
Subscription Agreement also calls for additional shares to be issued to
placement agents pursuant to the put option of up to 150,000 shares.

The Subscription Agreement contains reset rights and redemption features.
Under the Subscription Agreement the Company will be required to issue within
60 days of the effective date (as defined in the agreement) warrants to the
subscribers to acquire up to an additional 300,000 shares of stock at the rate
of 15,000 shares per $100,000 invested. The Subscription Agreement also
contains placement warrants to be issued to the placement agents of up to
250,000 shares (175,000 shares issued through June 25, 1999 at $0.35 per share)
with an additional 750,000 shares upon exercise of the put option.

The Company is waiting for a hearing date with NASDAQ to discuss the steps
required for the Company to get relisted.

F-30
<PAGE> 82

To the Board of Directors of FMS Productions, Inc.

INDEPENDENT AUDITORS' REPORT

We have audited the accompanying balance sheet of FMS Productions, Inc. as
of April 30, 1997 and 1996 and the related statements of income, retained
earnings, and cash flows for the years then ended. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FMS Productions, Inc. as of
April 30, 1997 and 1996 and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has suffered losses from operations and its
total liabilities exceeds its total assets. This raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 10. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

Bartlett, Pringle & Wolf, LLP

F-31
<PAGE> 83

FMS PRODUCTIONS, INC.

BALANCE SHEET
APRIL 30, 1997 AND 1996

ASSETS

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current Assets:
Cash:
Unrestricted........................................ $ 12,122 $ 12,951
Restricted.......................................... 8,502 9,864
Total cash..................................... 20,624 22,815
Accounts receivable, less allowance for uncollectible
accounts of $18,500 in 1997 and 1996................... 78,353 108,758
Other receivables................................... -- 1,620
Inventories......................................... 48,168 42,334
Production costs, net of amortization of $457,399 and
$450,953 for 1997 and 1996, respectively............... 55,410 56,497
Prepaid expenses.................................... 2,989 2,454
Total current assets................................ 205,544 234,478
Equipment:
Machinery and equipment............................. 32,049 35,495
Furniture and fixtures.............................. 22,773 22,985
Automobiles......................................... 28,500 28,500
Office equipment.................................... 14,784 14,306
98,106 101,286
Less accumulated depreciation....................... (88,043) (89,883)
Net equipment....................................... 10,063 11,403
Other Assets:
Refundable deposits.................................... 5,257 6,398
Total Assets................................... 220,864 252,279

LIABILITIES AND STOCKHOLDER'S EQUITY

Accounts payable......................................... $ 65,849 $ 60,862
Accrued royalties........................................ 160,428 156,155
Accrued payroll and related tax liabilities.............. 33,681 38,225
Deferred revenue......................................... 7,181 8,765
Current portion of long term debt........................ 12,205 38,208
Total current liabilities................................ 279,344 302,215
Long term debt, net of current portion................... 22,846 29,057
Total liabilities........................................ 302,190 331,272
Stockholders' Equity:
Common stock no par value; authorized 2,500 shares Issued
and outstanding 100 shares............................. 700 700
Retained earnings (deficit).............................. (82,026) (79,693)
Total stockholders' equity (deficit)........... (81,326) (78,993)
Total liabilities and stockholders' equity..... 220,864 252,279
</TABLE>

See accompanying notes

F-32
<PAGE> 84

FMS PRODUCTIONS, INC.

STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996

<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Net Sales............................................. $1,180,926 $1,286,710
Cost of Sales......................................... 378,096 406,198
Gross profit.......................................... 802,830 880,512
Operating
Expenses Selling.................................... 379,495 481,347
General and administrative.......................... 420,316 488,986
Interest............................................ 10,208 14,072
Total Operating Expenses.............................. 810,019 984,405
Operating loss........................................ (7,189) (103,893)
Other Income:
Net gain on disposal of assets...................... -- 112
Interest Income..................................... 305 593
Miscellaneous....................................... 5,351 5,000
Total other income.................................... 5,656 5,705
Loss before income taxes............................ (1,533) (98,188)
Provision for income taxes.......................... (800) (800)
Net loss............................................ (2,333) (98,988)
Retained earnings (deficit), beginning of year...... (79,693) 19,295
Retained earnings (deficit), end of year............ (82,026) (79,693)
</TABLE>

See accompanying notes

F-33
<PAGE> 85

FMS PRODUCTIONS, INC.

STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................... $ (2,333) $(98,988)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization............................ 11,587 13,439
Gain on disposal of assets............................... -- (112)
Decrease (increase) in:
Accounts receivable...................................... 30,404 20,003
Other receivables........................................ 1,620 63
Inventories.............................................. (5,834) 12,283
Production costs......................................... (5,359) (781)
Prepaid expenses and refundable deposits................. 606 27,049
Increase (decrease) in:
Accounts payable......................................... 4,987 9,798
Accrued royalties........................................ 4,273 14,138
Accrued payroll and related taxes........................ 4,544 2,665
Deferred revenue......................................... 1,584 --
Net cash provided (used) by operating activities........... 33,823 25,369
Cash Flows from Investing Activities:
Purchase of equipment.................................... (3,800) (5,053)
Net cash used in investing activities...................... (3,800) (5,053)
Cash Flows from Financing Activities:
Repayments under line of credit.......................... -- (42,500)
Principal payments on long-term borrowing................ (32,214) (28,946)
Proceeds from long-term borrowing........................ -- 34,494
Net cash used in financing activities...................... (32,214) (36,952)
Net decrease in cash....................................... (2,191) (67,374)
Cash at beginning of year.................................. 22,815 90,189
Cash at end of year........................................ 20,624 22,815
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest................................................. 10,208 14,072
Income taxes............................................. 800 800
</TABLE>

See accompanying notes

F-34
<PAGE> 86

FMS PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A) Nature of Business

FMS Productions, Inc., located in Carpinteria, California, is a nationwide
distributor of educational films and videos. The Company grants credit to its
customers including educational, correctional, and counseling institutions
throughout the United States, many of which rely on governmental funding.

B) Restricted Cash

Restricted cash represents amounts received from third parties for the
production of films.

C) Inventories

Inventories are stated at the lower of cost (first in, first out) or market
(net realizable value).

D) Equipment

Equipment is stated at cost with depreciation provided over the estimated
useful lives utilizing the straight line and 150% declining balance methods.

The estimated useful lives of all of the assets range from five to seven
years.

E) Production Costs

Production costs consist of negative costs, which are the costs the Company
incurs to produce a film, and other production costs that the Company incurs to
produce books and cassette tapes.

Negative costs are amortized under the individual film-forecast-computation
method. This method amortizes the film costs in relation to an estimate of the
film's revenues over the sales life of the film. Other production costs are
amortized in a similar manner. It is reasonably possible that those estimates of
anticipated gross revenues will be reduced in the near term.

As a result, the carrying amount of the capitalized production costs would
be reduced.

F) Income Taxes

Income taxes are provided for the tax effect of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between methods of depreciating fixed assets,
allowances for doubtful accounts, and reporting of lawsuit settlement expense
for financial and income tax reporting. The deferred tax assets represent the
future tax return consequences of those differences, which will be deductible
when the assets are recovered. Deferred taxes also are recognized for operating
losses that are available to offset future taxable income.

F-35
<PAGE> 87
FMS PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

G) Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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. Estimates also affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.

NOTE 2 -- INVENTORIES

Amounts included in inventory are as follows:

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Pre-production costs....................................... $ 1,836 $ 677
Finished goods........................................... 46,332 41,657
48,168 42,334
</TABLE>

NOTE 3 -- NOTES PAYABLE AND LONG-TERM DEBT

The note payable represents a line of credit secured by accounts
receivable, business assets, inventories and a trust deed on property owned by a
stockholder under a general security agreement. The note was paid off on
February 16, 1996. The company had available a $50,000 line of credit which
expired August 15, 1996.

At April 30, 1996 the Company was in violation of certain restrictive
covenants of its loan agreement with the bank under its term loan. Therefore,
the term loan is classified as current as of April 30, 1996.

F-36
<PAGE> 88
FMS PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Long-term debt is summarized as follows:

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Unsecured 9% note payable to a stockholder of the Company, $ 4,612
payments of principal and interest due in monthly
installments of $532, note was due in full and paid by
January 1, 1997
Loan payable to bank in monthly principal installments of $ 5,993 18,497
$1,042 plus interest. The interest rate is the Wall Street
Journal prime rate plus 2%, which equaled 10.5% and 11% at
April 30,1997 and 1996, respectively. The loan is secured
by all corporate assets and a Company officer's home. The
company officer is a guarantor
Lawsuit settlement, payable in monthly installments of 9,662
$1,000, including interest, plus a final payment of $3,000,
which was paid in full December 1, 1996. Interest is
imputed at 8% based on the Company's incremental borrowing
rate
13.4% note payable to a stockholder of the Company in 29,058 34,494
monthly principal and interest payments of $811. Note is
due in full on February 25, 2001. The note is secured by
accounts receivable, inventories and all other assets of
the Company. The loan is subordinate to the loan payable to
the bank described above
Total long-term debt 35,051 67,265
Less current portion of long-term debt 12,205 38,208
Lon-term debt, net of current portion 22,846 29,057
</TABLE>

Principal repayments are scheduled as follows for the years ending April
30:

NOTE 4 -- LEASE COMMITMENTS

The Company leases its facilities and equipment under month to month
operating lease arrangements. The total expense for the year ended April 30,
1997 and 1996 was $47,378 and $50,390, respectively.

NOTE 5 -- INCOME TAXES

Temporary differences giving rise to the deferred tax assets consist
primarily of the excess of depreciation for financial reporting purposes over
the amount for tax purposes, allowances for accounts receivable reported
differently for financial reporting and tax purposes, and lawsuit settlement
expense accounted for differently for financial reporting and tax purposes.

F-37
<PAGE> 89
FMS PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The provision for income taxes consists of:

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Current tax expense -- State............................... $ 800 $ 800
</TABLE>

The net deferred tax assets include the following components:

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets
Federal.................................................. $29,346 $30,415
State.................................................... 12,252 12,888
Deferred tax asset valuation account
Federal.................................................. (29,346) (30,415)
State.................................................... (12,252) (12,888)
Total deferred tax asset................................... 0 0
Valuation allowance, beginning of year..................... 43,303 23,808
Increase (decrease) in allowance........................... (1,705) 19,495
Valuation allowance, end of year........................... 41,598 43,303
</TABLE>

The Company has available at April 30, 1997 an unused operating loss
carryforward of approximately $206,000 which may be applied against future
federal taxable income; and approximately $142,000 which may be applied against
future state taxable income. These operating loss carryforwards expire in the
years ending April 30, 2011 and 2001, respectively.

NOTE 6 -- DEPRECIATION AND AMORTIZATION EXPENSE

Included in the financial statements for the years ending April 30 are:

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Depreciation expense....................................... $ 5,140 $ 5,380
Amortization of production costs........................... 6,447 8,059
11,587 13,439
</TABLE>

NOTE 7 -- RELATED PARTY TRANSACTIONS

The Company purchased consulting services from a 20% shareholder. For the
year ending April 30, 1996, the Company paid this shareholder $10,800. There
were no amounts paid to this shareholder during the year ending April 30, 1997.
Amounts due to this shareholder and included in trade payables totaled $1,350 as
of April 30, 1997 and 1996.

Also included in trade payables are amounts due to shareholders and
employees for unreimbursed expenses totaling $13,813 as of April 30, 1997.

F-38
<PAGE> 90
FMS PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 -- EMPLOYMENT CONTRACT

The Company has entered into an employment contract with its president
through June 30, 1999 that provides for a minimum annual salary of $65,000 plus
a bonus based on the Company's attainment of specified levels of sales and
earnings. In addition, if the president is terminated for other than cause as
specified in the terms of the contract, the president will be paid severance in
an amount equal to his base salary payable from the date of the event causing
the termination through the expiration date of the agreement plus two times his
bonus for the immediately preceding year. In no event will the amount of
severance payable be less than his base salary for the twelve month period
immediately preceding the date of such termination plus two times his bonus for
the immediately preceding fiscal year, if any such termination is made with in
the final twelve months of the term of the employment contract.

NOTE 9 -- SUBSEQUENT EVENT

The Company received a letter of intent form a potential buyer who would
acquire all of the outstanding stock of the Company, subject to certain
conditions, in exchange for the issuance of the purchasing company's common
stock to the shareholders of FMS Productions, Inc.

The Company's shareholders have accepted this offer. After closing, the
Company would be a wholly owned subsidiary of the purchasing company.

NOTE 10 -- GOING CONCERN

The Company experienced significant declines in sales during the years
ended April 30, 1997 and 1996. In addition, as of April 30, 1997 and 1996, total
liabilities exceeded total assets. As mentioned in Note 9, the Company's
shareholders have accepted an offer to sell all of their outstanding stock. In
addition, management has undertaken a cost reduction plan that has reduced
monthly operating expenses. The success of the pending sale of the Company and
management's cost reduction plan, as well as increasing sales and the Company's
continued ability to obtain necessary short and long-term financing, will be
critical factors in the Company's ability to continue as a going concern.

F-39
<PAGE> 91

THE RECOVERY NETWORK, INC.

PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)

The following unaudited pro forma condensed combining statements of
operations for the year ended June 30, 1998 illustrate the effect of the
acquisition by the Company of FMS Productions, Inc. (FMS) on December 10, 1998
for total consideration of $225,490. Consideration included 44,000 shares of the
Company's common stock valued at $209,000 ($4.75 per share) and a net cash
payment of $16,490. The FMS acquisition is being accounted for as a purchase,
with the assets acquired and liabilities assumed being recorded at estimated
fair market value. The unaudited pro forma combining statements of operations
assumes that this transaction occurred at the beginning of the period presented.

The pro forma adjustments are based upon currently available information
and upon certain assumptions that the Company believes are reasonable. The
acquisition of FMS has been recorded based upon the estimated fair market value
of the tangible assets acquired at the date of acquisition. The adjustments
included in the unaudited pro forma combining financial statements represents
the Company's preliminary determination of these adjustments based upon
available information. There can be no assurance that the actual adjustments
will not differ significantly from the pro forma adjustments reflected in the
pro forma financial information.

The unaudited pro forma combining financial statements are not necessarily
indicative of either future results of operations or results that might have
been achieved if the foregoing transaction had been consummated as of the
indicated dates. The unaudited pro forma combining financial statements should
be read in conjunction with the historical financial statements of the Company
and FMS, together with the related notes thereto, included elsewhere in this
Prospectus and the Registration Statement of which this Prospectus is a part.

F-40
<PAGE> 92
PMS PRODUCTIONS, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
OCTOBER 31, 1997

<TABLE>

ASSETS
<S> <C>
CURRENT ASSETS
Cash ............................................................... $ 34,867
Accounts receivable, less allowance for uncollectible
accounts of $18,500 .............................................. 55,172
Inventories ........................................................ 85,876
Productions costs, net of amortization of $462,121 ................. 53,331
Prepaid expenses ................................................... 9,866
--------
Total current assets ........................................... 239,112
FURNITURE AND EQUIPMENT, net ......................................... 11,175
REFUNDABLE SECURITY DEPOSIT .......................................... 5,257
--------
$255,544
========
LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable ................................................... $ 83,007
Accrued royalties .................................................. 160,172
Accrued payroll and related tax liabilities ........................ 16,579
Deferred revenue ................................................... 7,146
Current portion of long-term debt .................................. 6,212
--------
Total current liabilities ...................................... 273,116

LONG-TERM DEBT, net of current portion ............................... 19,333
--------
Total liabilities .............................................. 292,449
--------

COMMITMENT & CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, no par value:
Authorized 2,500 shares
Issued and outstanding 100 shares ................................ 700
Accumulated deficit ................................................ (37,605)
--------
Shareholders' deficit ............................................ (36,905)
--------
$255,544
========
</TABLE>

The accompanying notes are an integral part of this condensed balance sheet.

F-41
<PAGE> 93
FMS PRODUCTIONS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
for the Six Month Periods Ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net Sales $698,195 $648,641
Cost of Sales 210,768 192,913
-------- --------
Gross profit 487,427 455,728
-------- --------
Operating Expenses
Selling 225,240 197,671
General and administrative 216,405 212,884
Interest 3,661 4,949
-------- --------
Total operating expenses 445,306 415,504
-------- --------
Operating income 42,121 40,224
Other income 3,100 --
-------- --------
Income before provision for income taxes 45,221 40,224
Provision for income taxes 800 800
-------- --------
Net income $ 44,421 $ 39,424
======== ========
</TABLE>
The accompanying notes are an integral part of
these condensed statements.

F-42
<PAGE> 94
FMS PRODUCTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Month Period Ended October 31, 1997 and 1996

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net cash provided by operating activities $27,596 $24,880
------- -------
Cash flows from investing activities
Purchases of equipment (3,847) (3,362)
------- -------
Cash flows from financing activities
Principal payments on borrowings (9,506) (17,915)
------- -------
Net increase in cash 14,243 3,603
Cash, beginning of period 20,624 22,815
------- -------
Cash, end of period $34,867 $26,418
======= =======
</TABLE>

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

FMS PRODUCTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1997

Note 1 Unaudited Information as of October 31, 1997
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principals for
interim financial statements and the Securities and Exchange Commission's Rule
10-1, "Interim Financial Statements." Accordingly, these unaudited condensed
financial statements do not include certain information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, the accompanying unaudited condensed financial statements contain all
adjustments (consisting only of normally recurring accruals) which, in the
opinion of management, are necessary in order to present the financial
statements fairly. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. These
unaudited condensed financial statements should be read in conjunction with FMS
Productions, Inc.'s audited financial statements and notes thereto included in

F-43
<PAGE> 95
the Form 8-K/A.

Note 2 -- Inventories

Inventories primarily consist of finished goods and are stated at the
lower of cost (first-in, first-out) or market (net realizable value).

F-44
<PAGE> 96

THE RECOVERY NETWORK, INC.

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 1998

<TABLE>
<CAPTION>
RECOVERY
NETWORK(1) FMS(2) ADJUSTMENTS CONSOLIDATED
----------- -------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Advertising.............................. $ 150,780 -- -- $ 150,780
Video and publication.................... 694,078 698,195 -- 1,392,273
Other.................................... 49,900 -- -- 49,900
Total revenues........................... 894,758 698,195 -- 1,592,953
OPERATING EXPENSES
Salaries and consulting.................. 3,346,720 272,606 19,500(3) 3,638,826
Marketing................................ 497,467 82,828 -- 580,295
General and administrative............... 2,326,807 83,111 -- 2,409,918
Programming.............................. 1,543,997 -- -- 1,543,997
Loss on investment in joint venture...... 592,500 -- -- 592,500
Cost of book and publication sales....... 216,889 210,768 30,000(4) 457,657
Operating expenses....................... 8,524,380 649,313 49,500 9,223,193
Income (loss) from operations............ (7,629,622) 48,882 (49,500) (7,630,240)
INTEREST EXPENSE......................... (775,611) (3,661) 2,000(5) (777,272)
INTEREST INCOME.......................... 146,044 -- -- 146,044
Income (loss) before provisions for
income taxes........................... (8,259,189) 45,221 (47,500) (8,261,468)
PROVISION FOR STATE
INCOME TAXES............................. (2,545) (800) -- (3,345)
Net income (loss)........................ (8,261,734) $ 44,421 (47,500) (8,264,813)
LOSS PER SHARE INFORMATION:
Loss per share and loss per share
assuming dilution...................... (1.91) -- (1.90)
Weighted average number of common and
common equivalent shares outstanding... 4,336,405 19,650(6) 4,356,055
</TABLE>

- -------------------------
(1) Includes the historical results of operations of the Company for the year
ended June 30, 1998, which includes the results of FMS from the date of
acquisition (December 10, 1997).

(2) Includes the historical results of operations of FMS for the period from May
1, 1997 through October 31, 1997.

(3) Increase in officers' salaries based upon new employment agreements.

(4) Amortization of FMS's television rights

(5) Reduction in interest expense due to retirement of note payable to FMS
Shareholder.

(6) Increase in weighted average shares to acquire FMS as if consummated on July
1, 1997.

F-45
<PAGE> 97

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The articles of incorporation of the Registrant provide for the
indemnification of the Registrant's directors and officers to the fullest extent
permitted by law. Insofar as indemnification for liabilities under the
Securities Act of 1933 may be permitted to directors, officers or controlling
persons of the Registrant pursuant to the articles of incorporation and the
corporation law of the State of Colorado, the Registrant 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.

As permitted by the Colorado Business Corporation Act, the Articles of
Incorporation provide that directors and officers of the Registrant will not be
personally liable to the Registrant 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 Registrant 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 Registrant shall, to the
maximum extent permitted form 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 Registrant's bylaws require the Registrant to indemnify, to the full
extent permitted by law, any director, officer, employee or agent of the
Registrant for acts which such person reasonably believes are not in violation
of the Registrant'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 Registrant 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 Registrant for breaches of their duty of care, even though such an
action, if successful, might otherwise benefit the Registrant and its
shareholders.

II-1
<PAGE> 98

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the various expenses, which will be paid by
the Registrant in connection with the issuance and distribution of the
securities being registered. With the exception of the registration fee and the
NASD filing fee, all amounts shown are estimates.

<TABLE>
<S> <C>
Registration fee
Nasdaq listing expenses fee
Blue sky fees and expenses (including legal and filing fees)
Printing expenses (other than stock certificates)
Legal fees and expenses (other than Blue Sky)
Accounting fees and expenses
Miscellaneous expenses
--------
Total
========
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

During the period from July 1996 through October 1996, the Registrant sold
10% Convertible Promissory Notes (the "Convertible Notes") in the aggregate
principal amount of $310,000. From November 1996 through January 1997,
Convertible Notes in the aggregate principal amount of $250,000 and interest of
approximately $11,500 were converted into an aggregate of 71,033 shares of
Common Stock. The noteholders also received and exercised warrants for 142,065
shares of Common Stock resulting in proceeds to the Registrant of approximately
$330,000. The remaining outstanding Convertible Note in the principal amount of
$60,000 was repaid in March 1997 from the net proceeds of a private financing
(the "Private Financing"), and in connection with such repayment the Registrant
issued to the holder warrants to purchase 15,498 shares of Common Stock,
exercisable at a price of $3.87 per share. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act.

In October 1996, the Registrant issued to two shareholders of the
Registrant 16,144 shares of Common Stock valued at $2.32 per share for
consulting services rendered by such shareholders, and the Registrant issued
7,749 shares of Common Stock valued at $3.48 per share for consulting services.
In issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.

During October and November 1996, an officer and a former officer of the
Registrant were issued 43,050 shares of Common Stock, respectively, valued at
$2.32 per share as reimbursement for expenses incurred by them on behalf of the
Registrant, and the Registrant reduced the exercise price of 73,615 options from
$3.87 to $2.32 and all of such options were exercised. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.

From October 1996 through January 1997, the Registrant sold 138,761 shares
of Common Stock for a price per share of $3.48 for proceeds of approximately
$483,500. The Registrant issued 7,749 shares in consideration of services
rendered in connection with such offering. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act.

In November 1996, the Registrant issued 31,857 shares of Common Stock,
valued at $2.32 per share to officers of the Registrant upon conversion of
deferred compensation

II-2
<PAGE> 99

earned by such officers. In issuing such securities, the Registrant relied on
the exemption provided by Section 4(2) of the Securities Act.

In November 1996, the Registrant issued 6,888 shares of Common Stock valued
at a price of $2.90 upon the conversion of a promissory note. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.

In March and April 1997, the Registrant sold to 21 "accredited investors"
in the Private Financing an aggregate of (i) $2,000,000 principal amount of
promissory notes (the "Financing Notes") which bear interest at the rate of 9%
per annum and are due on the earlier of the consummation of this offering or
March 6, 1998; (ii) 400,000 shares of Common Stock; and (iii) warrants (the
"Financing Warrants") to purchase an aggregate of 500,000 shares of Common Stock
at an exercise price of $5.50 per share. Whale Securities, L.P., the underwriter
in the Registrant's initial public offering, acted as placement agent in
connection with the Private Financing and received a placement agent fee of
$200,000 in connection with such offering. In issuing such securities, the
Registrant relied on the exemption provided by Section 4(2) of the Securities
Act and Rule 505 of Regulation D promulgated under the Securities Act.

In June 1997, the Registrant sold $605,250 aggregate principal amount of
promissory notes which bear interest at 15% due on the earlier of two business
days after the consummation of the Registrant's initial public offering and July
2, 1997. The lender received an origination fee of 5% paid out of the proceeds
of the note. In issuing the note, the Registrant relied on the exemption
provided by Section 4(2) of the Securities Act.

In June 1998, the Registrant issued (i) 1,111,110 shares of Common Stock,
valued at $2.25 per share, to 7 "accredited investors" and (ii) warrants to
purchase 100,000 shares of Common Stock at an exercise price of $5.50 per share
(the "Private Placement"). In issuing such securities, the Registrant relied on
the exemption provided by Rule 506 of Regulation D promulgated under the
Securities Act.

In June 1998, the Registrant issued 43,716 shares of Common Stock as
partial compensation to the placement agents in the Private Placement. In
issuing such securities, the Registrant relied on the exemption provided by
Section 4(2) of the Securities Act.

In October 1998, the Registrant issued a total of 58,000 shares of Common
Stock, options to purchase 400,000 shares of Common Stock, 50,000 of which are
exercisable at $2.50 per share and 350,000 of which are exercisable at $2.00 per
share, in connection with various consulting and service agreements. If all
options and warrants were exercised, proceeds from the exercise of the stock
options and warrants would be $825,000. As of March 30, 1998, a total of
$775,000 of the options had been exercised

On December 7, 1998, the Registrant entered into an agreement with G.
Howard Associates, Inc. ("Howard") wherein Howard would represent The Recovery
Network, Inc., on an exclusive basis with respect to certain investors in
connection with raising capital for the Company. An April amendment expanded
Howard's representation of The Recovery Network, Inc. Pursuant to this
amendment, Howard received 900,000 newly issued shares of the Common Stock and a
reduction in warrants held by Howard and/or George Henry.

In December 1998, in connection with $725,000 notes payable by the
Registrant, warrants to purchase 500,000 unregistered shares at $0.01 per share
were issued to a group of shareholders (the "Noteholders"). In April 1999, the
Company renegotiated the terms

II-3
<PAGE> 100

of the $725,000 notes payable to certain shareholders. In exchange for extending
the due date to October 1999 (six months), the Company granted another 1,000,000
warrants at $0.01 per share. As of June 11, 1999, a total of $10,000 of the
warrants had been exercised.

For the months of February, March and April, executive officers and other
employees of The Recovery Network, Inc. received stock in lieu of salaries.

In March 1999, in connection with an aggregate $100,000 investment by
certain investors, the Registrant issued notes convertible into Common Stock of
the Company.

In June 1999, the Registrant issued 350,000 shares of Common Stock, valued
at $1.00 to five investors and 35,000 shares of Common Stock and 175,000
placement warrants exercisable at $0.35 per common share, as partial
compensation to the placement agents in the Private Placement. In issuing such
securities, the Registrant relied on the exemption provided by Section 4(2) of
the Securities Act.

ITEM 27. EXHIBITS

<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<C> <S>
2.1 Form of Subscription Agreement between Registrant and each
of Austost Anstalt Schann, Balmore Funds, S.A., Amro
International, S.A., and Nesher, Inc. dated as of June 11, 1999.*
2.3 Funds Escrow Agreement between Registrant and each of Austost
Anstalt Schaan, Balmore Funds S.A., Amro International, S.A., and
Nesher, Inc. dated as of June 11, 1999.*
2.4 Shares Escrow Agreement between Registrant and each of Austost
Anstalt Schaan, Balmore Funds S.A., Amro International, S.A., and
Nesher, Inc. dated as of June 11, 1999.*
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).**
4.5 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.*
</TABLE>

II-4
<PAGE> 101

<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<C> <S>
4.14 Form of Registration Rights Agreement dated December 10,
1997 between the Registrant and each of the sellers.++
5.1 Opinion of Beckman, Millman & Sanders, LLP.*
10.2 Channel Nesting Agreement between the Registrant and Access
Television Network, Inc. dated as of April 10, 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.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Bartlett, Pringle & Wolf, LLP
23.3 Consent of Parker Chapin Flattau & Klimpl, LLP (included in
Exhibit 5.1).*
24.1 Power of Attorney (see page II-4).
</TABLE>

- -------------------------
* To be filed by amendment.

** 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, 998.

++ 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.

ITEM 28. UNDERTAKINGS

The undersigned Registrant hereby undertakes:

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

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

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement or the most recent
post-effective amendment thereof which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement; provided, however, that paragraphs (1)(i) and (1)(ii) do not
apply if the registration statement is on Form S-3, Form S-8, and the
Information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Company
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.

II-5
<PAGE> 102

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

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

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserting by such director, officer or controlling person in
connection with the securities being registered, the Registrant 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 Act and will
be governed by the final adjudication of such issue.

II-6
<PAGE> 103

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, in Santa Monica County,
State of California, on the 30th day of June, 1999.

THE RECOVERY NETWORK, INC.

By: /s/ WILLIAM D. MOSES
-----------------------------------
William D. Moses
President

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William D. Moses, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all amendments (including
post-effective amendments) to this registration statement (or any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting upon said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or either of them or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ GEORGE H. HENRY Chairman of Executive June 30, 1999
- --------------------------------------------- Committee and Director
George H. Henry

/s/ WILLIAM D. MOSES President and Chairman of June 30, 1999
- --------------------------------------------- the Board of Directors
William D. Moses

/s/ STACEY ROMM Chief Financial Officer June 30, 1999
- ---------------------------------------------
Stacey Romm

/s/ BRAD PAROBEK Director June 30, 1999
- ---------------------------------------------
Brad Parobek
</TABLE>

II-7
<PAGE> 104

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JAY HANDLINE Director June 30, 1999
- ---------------------------------------------
Jay Handline

/s/ CHARLOTTE SCHIFF JONES Director June 30, 1999
- ---------------------------------------------
Charlotte Schiff Jones
</TABLE>

II-8
<PAGE> 105

EXHIBIT INDEX

<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<C> <S>
23.3 Consent of Parker Chapin Flattau & Klimpl, LLP (included in
Exhibit 5.1).*
24.1 Power of Attorney (see page II-4).
</TABLE>

- -------------------------
* To be filed by amendment.

** 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, 998.

++ 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.

<PAGE> 1

EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report for The Recovery Network, Inc. included in this Form SB-2 registration
statement and to all references to our Firm included in this registration
statement.

/s/ ARTHUR ANDERSEN, LLP

Los Angeles, California
June 30, 1999

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on From SB-2 of The Recovery Network, Inc. of our report
dated June 30, 1997 relating to the financial statements of FMS Productions,
Inc. As of and for the years ended April 30, 1997 and 1996, which appears in
such Prospectus.

/s/ Bartlett, Pringle & Wolf, LLP

Santa Monica, California
June 28, 1999