HEALTHGATE DATA CORP, 10-Q, 2000-11-14

HEALTHGATE DATA CORP
10-Q, 2000-11-14
BUSINESS SERVICES, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-28701

HEALTHGATE DATA CORP.
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of incorporation or organization)

04-3220927
(I.R.S. Employer Identification No.)

25 CORPORATE DRIVE, SUITE 310, BURLINGTON, MASSACHUSETTS
(Address of principal executive offices)

01803
(Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 685-4000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.

Yes X No
--- -

The number of shares outstanding of the registrant's common stock as of
November 6, 2000 was 17,958,998.

<PAGE>

HEALTHGATE DATA CORP.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000

INDEX
<TABLE>
<CAPTION>

PART I. FINANCIAL INFORMATION PAGE
----

<S> <C>
Item 1. Financial Statements

Condensed Consolidated Balance Sheet at September 30, 2000 (unaudited) and
December 31, 1999................................................................................ 3

Condensed Consolidated Statement of Operations for the three months ended September 30, 2000
and 1999 (unaudited)............................................................................. 4

Condensed Consolidated Statement of Operations for the nine months ended September 30, 2000
and 1999 (unaudited) ............................................................................ 5

Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2000 and
1999 (unaudited) ................................................................................ 6

Notes to Condensed Consolidated Financial Statements............................................. 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 12

Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................... 26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................................................................ 27
Item 2. Changes in Securities and Use of Proceeds........................................................ 27
Item 6. Exhibits and Reports on Form 8-K................................................................. 27

Signatures ................................................................................................. 29
</TABLE>

2
<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HEALTHGATE DATA CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>

SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 955,522 $ 578,560
Marketable securities 19,762,530 -
Accounts receivable, including receivables from related parties
of $395,077 and $49,125 at September 30, 2000 and
December 31, 1999, respectively, and net of allowance for
doubtful accounts of $121,035 and $50,000 at September 30,
2000, and December 31, 1999 respectively 3,383,838 705,578
Unbilled accounts receivable 55,326 35,825
Prepaid advertising 4,153,351 4,500,000
Prepaid expenses and other current assets 1,024,972 318,514
------------ ------------
Total current assets 29,335,539 6,138,477
Fixed assets, net 4,649,285 1,302,368
Capitalized software 659,155 -
Marketing and distribution rights, net 9,375,000 17,535,000
Deferred offering costs - 2,055,491
Other assets 256,400 131,586
------------ ------------
Total assets $ 44,275,379 $ 27,162,922
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligation $ 332,231 $ 442,668
Accounts payable 4,426,616 3,060,189
Customer deposits 418,532 558,066
Accrued payroll and other expenses 3,622,271 2,050,070
Deferred revenue 5,486,273 1,667,565
------------ ------------
Total current liabilities 14,285,923 7,778,558
Long-term portion of capital lease obligation 282,989 439,743
Long-term note payable - 1,517,295
------------ ------------
Total liabilities 14,568,912 9,735,596
------------ ------------
Redeemable convertible preferred stock - 15,626,726
------------ ------------
Common stock and other stockholders' equity:
Common stock, $.01 par value;
Authorized: 100,000,000 shares
Issued and outstanding: 17,943,412 and 5,219,251 shares
at September 30, 2000 and December 31, 1999, respectively 179,435 52,192
Additional paid-in capital 99,242,073 38,681,954
Accumulated deficit (69,402,560) (35,930,662)
Deferred compensation (312,481) (1,002,884)
------------ ------------
Total common stock and other stockholders' equity 29,706,467 1,800,600
------------ ------------
Commitments and contingencies (Note 6)
Total liabilities, redeemable convertible
preferred stock and common stock and other
stockholders' equity $ 44,275,379 $ 27,162,922
============ ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL
STATEMENTS.

3
<PAGE>

HEALTHGATE DATA CORP.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>

THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Revenue, including revenue from related parties of
$310,925 and $176,572 in 2000 and 1999, respectively $ 2,315,729 $ 683,828
Costs and expenses:
Cost of revenue 1,055,300 569,770
Research and development (excluding stock based compensation
of $6,180 and $87,920 in 2000 and in 1999, respectively) 1,338,722 1,138,244
Sales and marketing (excluding stock based compensation
of $11,588 and $35,192 in 2000 and in 1999, respectively) 6,932,667 1,096,964
General and administrative (excluding stock based compensation
of $44,807 and $69,824 in 2000 and in 1999, respectively) 1,192,660 534,487
Marketing and distribution rights amortization 1,125,000 2,574,000
Stock based compensation 62,575 192,936
------------ ------------
Total costs and expenses 11,706,924 6,106,401
------------ ------------
Loss from operations (9,391,195) (5,422,573)

Charge for impaired investment (3,487,219) -
Interest and other income (expense), net 291,965 (93,032)
------------ ------------
Net loss (12,586,449) (5,515,605)
Preferred stock dividends and accretion of preferred stock
to redemption value - 344,563
------------ ------------
Net loss attributable to common stockholders $(12,586,449) $ (5,860,168)
============ ============
Basic and diluted net loss per share attributable to
common stockholders (0.70) (1.28)
============ ============
Shares used in computing basic and diluted net loss per
share attributable to common stockholders 17,900,825 4,568,412
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL
STATEMENTS.

4
<PAGE>

HEALTHGATE DATA CORP.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------------
<S> <C> <C>
Revenue, including revenue from related parties of
$981,162 and $575,700 in 2000 and 1999, respectively $ 8,273,814 $ 1,735,925
Costs and expenses:
Cost of revenue 3,516,226 1,445,377
Research and development (excluding stock based compensation
of $27,812 and $249,429 in 2000 and in 1999, respectively) 5,086,323 2,803,666
Sales and marketing (excluding stock based compensation
of $61,373 and $96,148 in 2000 and in 1999, respectively) 17,042,856 2,681,099
General and administrative (excluding stock based compensation
of $170,600 and $163,354 in 2000 and in 1999, respectively) 3,259,307 1,503,660
Marketing and distribution rights amortization 9,403,000 2,941,000
Stock based compensation 259,785 508,931
------------ ------------
Total costs and expenses 38,567,497 11,883,733
------------ ------------
Loss from operations (30,293,683) (10,147,808)

Charge for impaired investment (3,487,219) -
Unamortized debt discount write off (475,821) -
Interest and other income (expense), net 891,010 (317,897)
------------ ------------
Net loss (33,365,713) (10,465,705)
Preferred stock dividends and accretion of preferred stock
to redemption value 106,186 8,393,261
------------ ------------
Net loss attributable to common stockholders $(33,471,899) $(18,858,966)
============ ============
Basic and diluted net loss per share attributable to
common stockholders (2.04) (4.14)
============ ============
Shares used in computing basic and diluted net loss per
share attributable to common stockholders 16,382,785 4,558,824
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL
STATEMENTS.

5
<PAGE>

HEALTHGATE DATA CORP.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>

NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(33,365,713) $(10,465,705)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 13,319,332 3,416,910
Stock based compensation 259,785 508,931
Unamortized debt discount write off 475,821 -
Charge for impaired investment 3,487,219 -
Revenue associated with equity instruments (1,407,492) -
Other (net) 129,308 1,270
------------ ------------
Changes in assets and liabilities:
Accounts receivable (2,678,260) (320,757)
Unbilled accounts receivable (19,501) (55,556)
Prepaid advertising (3,074,351) -
Prepaid expenses and other current assets (706,458) (20,788)
Deferred offering costs 2,055,491 (1,461,859)
Other assets (124,814) (128,288)
Accounts payable 1,366,427 1,401,457
Customer deposits (139,534) 554,750
Accrued payroll and other expenses 1,572,201 631,333
Deferred revenue 1,738,981 586,691
------------ ------------
Net cash used in operating activities (17,111,558) (5,361,052)
------------ ------------

Cash flows from investing activities:
Purchases of marketable securities (49,272,372) -
Proceeds from sales and maturities of marketable securities 29,509,842 -
Purchases of fixed assets (3,894,993) (410,429)
Expenditures for capitalized software (695,155) -
------------ ------------
Net cash used in investing activities (24,316,678) (410,429)
------------ ------------
Cash flows from financing activities:
Payments of capital lease obligations (354,863) (229,565)
Payment of long-term note payable (2,000,000) -
Payment of Series E preferred stock dividends (465,358) -
Proceeds from issuance of preferred and common stock,
net of issuance costs 44,625,419 5,847,957
------------ ------------
Net cash provided by (used in) financing activities 41,805,198 5,618,392

Net increase (decrease) in cash and cash equivalents 376,962 (153,089)
Cash and cash equivalents, beginning of period 578,560 960,831
------------ ------------
Cash and cash equivalents, end of period $ 955,522 $ 807,742
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 139,000 $ 439,000
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

6
<PAGE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES

HealthGate entered into capital leases for certain computer equipment
totaling approximately $88,000 and $523,000 during the nine months ended
September 30, 2000 and 1999, respectively.

On January 1, 2000, the exercise price of a warrant issued to General
Electric Company ("GE") was adjusted from $9.49 to $3.46 per share pursuant
to the terms of the warrant. As a result, the fair value of the warrant
increased by $1.2 million, which was recorded as marketing and distribution
rights.

HEALTHGATE DATA CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND FINANCIAL CONDITION

HealthGate Data Corp. ("HealthGate" or the "Company") leverages the
Internet to provide the highest quality e-Health solutions to healthcare
institutions, corporations and web sites by providing web technology that can
supply up to date, comprehensive content that is reliable, objective, and
credible for professionals, patients, and consumers. The CHOICE(R) e-Health
platform is a dynamic integration of the information and technology that helps
transform each hospital's static web site into an interactive medical resource
for patients and physicians. It provides local hospitals with medical content
from an extensive array of health publishers--in the form of condition related
articles and topical Webzines--allowing each individual organization to create
"e-health communities" by developing closer relationships between its patients,
physicians and local health consumers. The CHOICE e-Health platform supports the
hospital's goal to be the dominant brand and credible source of healthcare
information in the local community. The CHOICE e-Health platform serves as a
technology platform for future Web initiatives. Additionally, HealthGate's
activePress(TM) Publishing Services Division provides publishers with
Web-enabling services that manage the complexities of converting and
distributing traditional healthcare print materials via the Internet.

The accompanying unaudited condensed consolidated interim financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements, and
should be read in conjunction with the audited financial statements included in
HealthGate's Form 10-K for the year ended December 31, 1999. However, in the
opinion of management, the accompanying interim financial statements have been
prepared on the same basis as the audited financial statements, and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of the interim periods presented. The operating
results for the interim periods presented are not necessarily indicative of the
results expected for the full fiscal years or any future period. Certain amounts
in the prior period condensed consolidated financial statements have been
reclassified to conform to the current period presentation.

At September 30, 2000, the Company has $20.7 million of cash and
marketable securities and $15.0 million of working capital. The Company has
incurred substantial losses and negative cash flows from operations in every
fiscal period since inception. For the year ended December 31, 1999, the
Company incurred a loss from operations of $16.3 million, and negative cash
flows from operations of $5.7 million. For the nine months ended September
30, 2000, the Company incurred a loss from operations of $30.3 million and
negative cash flows from operations of $17.1 million. As of December 31, 1999
and September 30, 2000, the Company had accumulated deficits of $35.9 million
and $69.4 million, respectively. The Company plans to reduce its ongoing
capital expenditures and discretionary spending.

Failure to generate sufficient revenues, raise additional capital or
reduce certain discretionary spending will have a material adverse effect on
HealthGate's ability to continue as a going concern and to achieve its
intended business objectives.

2. INITIAL PUBLIC OFFERING AND USE OF PROCEEDS

In January 2000, HealthGate completed an initial public offering of its
common stock and a concurrent private placement of common stock, both at $11.00
per share. HealthGate sold 3,750,000 shares of common stock in the initial
public offering, and 795,454 shares of common stock in the private placement,
for aggregate net proceeds of approximately $44.5 million (after deducting the
public offering's underwriting commissions and the offering expenses). In
connection with the initial public offering, all outstanding shares of
redeemable convertible preferred stock converted into 7,530,556 shares of common
stock.

In February 2000, HealthGate repaid a $2.0 million long-term note payable
with a portion of the net offering proceeds, and wrote off the remaining
unamortized debt discount of approximately $0.5 million. In connection with the
conversion of the outstanding preferred stock, HealthGate paid cash for accrued

7
<PAGE>

dividends on Series E preferred stock totaling $0.5 million. In addition,
HealthGate used a portion of the net offering proceeds to pay first year fees
of $10.3 million under its agreement with NBCi (See, Note 6 below).

3. NET LOSS PER SHARE

Net loss per share is computed in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." Basic net loss per
share is computed by dividing net loss attributable to common stockholders by
the weighted average number of shares of common stock outstanding. Diluted net
loss per share does not differ from basic net loss per share since potential
common shares from conversion of preferred stock and exercise of stock options
and warrants are anti-dilutive for all periods presented.

4 REVENUE RECOGNITION

HealthGate derives revenue primarily from (1) Web site development and
hosting arrangements, including CHOICE(R) Web sites and activePress(TM)
services, (2) content syndication arrangements, (3) advertising and
sponsorships, and (4) user subscription and transaction based fees. Revenue
from Web site development and hosting arrangements and content syndication
arrangements is recognized ratably over the terms of the underlying agreement
which generally ranges from one to three years between HealthGate, the
customer, and if applicable, HealthGate's authorized reseller. For any
arrangement in which HealthGate guarantees advertising commissions to the
customer, HealthGate records fees paid by the customer as a customer deposit,
up to the amount of the applicable guarantee. Payments made to customers
under these guarantees are recorded as reductions of the related customer
deposit. The excess of the fee paid by the customer to HealthGate over
guaranteed advertising and sponsorship commissions, if any, is recognized as
revenue ratably over the term of the underlying agreement. For those
arrangements in which HealthGate guarantees advertising and sponsorship
commissions in excess of the fees paid by the customer, the excess is
recorded as expense upon signing the agreement. For arrangements in which
HealthGate sells through a reseller, HealthGate does not recognize any
revenue until an agreement has been finalized between HealthGate, its
customer, and its authorized reseller, and the Web site has been delivered.
Revenue is not recognized in any circumstances unless collectability is
deemed probable.

Advertising revenue is derived principally from short-term advertising
contracts, in which HealthGate typically guarantees a minimum number of
impressions to be delivered to users over a specified period of time for a fixed
fee. Advertising revenue is recognized in the period in which the advertisement
is displayed, at the lesser of the ratio of impressions delivered over total
guaranteed impressions or a straight-line basis over the term of the contract,
provided that no significant HealthGate obligations remain. To the extent that
minimum guaranteed impressions are not met, HealthGate defers recognition of the
corresponding revenue until the guaranteed impressions are delivered.
Sponsorship revenue is recognized ratably over the terms of the applicable
agreements, which generally range from one month to three years. Revenue from
user subscriptions is recognized ratably over the subscription period, and
revenue from transaction-based fees is recognized when the service is provided.

For multi-element service arrangements, each element is accounted for
separately over its respective service period, provided that there is objective
evidence of fair value. If the fair value of each element cannot be objectively
determined, the total value of the arrangement is recognized ratably over the
entire service period. However, for arrangements with multiple service periods
with escalating fees, fees for each service period are recognized ratably over
that period. For arrangements under which HealthGate receives equity instruments
in exchange for services, HealthGate determines the value of the arrangement
based on the fair value of the equity received or the services provided,
whichever is more readily determinable.

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5. LONG-TERM INVESTMENTS

On February 2, 2000, in connection with an e-commerce/sponsorship
agreement dated December 14, 1999, HealthGate received 996,348 shares of
Series H preferred stock in Medical Self Care, Inc. ("SelfCare"), a privately
held provider of health related products and services. HealthGate originally
recorded these shares at cost, subject to periodic review, at a value of
approximately $3.5 million when received. In August 2000, HealthGate filed
suit against SelfCare in U.S. District Court in Boston, Massachusetts,
seeking damages due to SelfCare's breaches of the e-commerce/sponsorship
agreement. The litigation followed HealthGate's notice of termination of the
agreement based on SelfCare's failure to pay fees due under the agreement,
and the filing of an action by SelfCare against HealthGate in California
state court seeking a declaratory judgment that SelfCare is entitled to
rescind the agreement and that HealthGate is not entitled to terminate the
agreement and is not entitled to post-contract remedies. HealthGate has
removed the California action to federal court and moved to dismiss, stay or
transfer it to Massachusetts. HealthGate intends to vigorously assert its
rights in this matter. However, due to the uncertainty of this matter,
HealthGate concluded that its investment in SelfCare was impaired.
Accordingly, HealthGate recorded a charge in the three months ended September
30, 2000 to write-off the carrying value of this investment. Additionally,
revenue recognition related to services provided to SelfCare was suspended
during the third quarter of fiscal 2000.

6. COMMITMENTS AND CONTINGENCIES

HealthGate has entered into agreements to license content for its
services from various unrelated third parties. Future minimum license
payments under these agreements as of September 30, 2000 totaled
approximately $2.5 million, which includes $0.7 million for a content
development and distribution agreement with The Massachusetts Medical Society.

In July 1999, HealthGate received a letter alleging that HealthGate's
Web site induces users to infringe a patent held by a company (the "Holder").
In lieu of pursuing a claim against HealthGate, the Holder offered to provide
HealthGate with a license for unlimited use of the patent for a one-time
payment of between $50,000 and $150,000. There has been no recent activity on
this matter and at this time, HealthGate is unable to predict its outcome.

In October 1999, HealthGate entered into a three-year strategic alliance
agreement with Snap! LLC and Xoom.com, Inc. The rights of Snap! LLC and
Xoom.com, Inc. were subsequently assigned to NBC Internet, Inc. ("NBCi").
Under the original agreement, NBCi was to provide various services to promote
HealthGate's name, the www.healthgate.com Web site, enterprise-based CHOICE
Web sites and the products and services HealthGate offers. In exchange
for the services provided to HealthGate by NBCi during the first year of the
agreement, HealthGate paid Snap a minimum cash fee of $10,000,000 plus a
$250,000 production and content integration fee, and in November 1999
HealthGate issued to Snap 500,000 shares of its common stock. The value of
these shares was $4,500,000 at the time of issuance, which was recorded as
prepaid advertising. The value of 250,000 shares is being amortized as sales
and marketing expense on a straight-line basis over the first year of the
agreement, and the value of the other 250,000 shares is being recognized
based on the delivery of advertising impressions in the first year of the
agreement. In September 2000 HealthGate entered into the second amendment to
this agreement. Under the revised agreement, HealthGate has agreed to pay
NBCi minimum fees of $5,666,666 in cash in the second year and $5,500,000 in
cash in the third year of the agreement for services provided by NBCi in
those years. The revised agreement terminates HealthGate's previous
obligation to pay NBCi $7,500,000 in each of the second and third years for
media fees. The revised agreement also no longer includes contingent payments
by HealthGate for more than a minimal number of click-throughs to a
co-branded NBCi/HealthGate Web site. HealthGate also agreed to redirect its
user traffic from www.healthgate.com to the Health Channel section of NBCi's
consumer Internet portal at www.nbci.com so that NBCi could count all user
traffic as part of its total user base. HealthGate will continue to produce,
maintain, update, and provide content for several portions of NBCi's Health
Channel section. NBCi will serve and sell all

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banner advertisements for HealthGate's content within NBCi's Health Channel
and a portion of the advertising revenue will be shared with HealthGate.
Either NBCi or HealthGate may terminate this agreement if the other party
commits a material breach. If NBCi terminates the agreement based on material
breach by HealthGate, including, non-payment, insolvency, or failure to
deliver or timely update content, HealthGate has agreed to continue to pay
NBCi 55% of all fees payable by the Company under the remaining term of the
agreement. During the three months and nine months ended September 30, 2000,
the Company recorded expense totaling $4.4 million and $10.6 million,
respectively, related to this agreement, which includes $1.4 million and $3.4
million, respectively, of non-cash amortization expense related to the stock
issued.

NBCi is owned partially by National Broadcasting Company, a subsidiary
of General Electric Company. NBCi and General Electric Company are each
principal stockholders of HealthGate.

7. RELATED PARTY TRANSACTIONS

On January 1, 2000, the exercise price of a warrant issued to General
Electric Company for the purchase of 1,189,800 shares of HealthGate common
stock was adjusted from $9.49 to $3.46 per share. As a result of the exercise
price adjustment, the fair value of the warrant increased by $1.2 million.
This increase was calculated using the Black-Scholes option pricing model,
based on an assumed common stock fair value per share of $9.00, 100%
volatility, a term of 4.5 years and an interest rate of 5.94%. This
incremental value was recorded as marketing and distribution rights, and was
amortized over the remaining term of the related development and distribution
agreement. During the three months ended September 30, 2000, no warrant
expense was recorded because the warrant is fully amortized. During the nine
months ended September 30, 2000, HealthGate recorded non-cash amortization
expense of approximately $6.0 million related to this warrant.

8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). The new standard establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. HealthGate does
not expect SFAS No. 133 to have a material effect on its financial position or
results of operations.

In December 1999, the United States Securities and Exchange Commission
issued Staff Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB"). SAB 101 provides the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues, as well as
examples of how the staff applies revenue recognition guidance to specific
circumstances. SAB 101 will be applicable for HealthGate in the quarter ended
December 31, 2000. HealthGate is currently assessing the impact of the
guidance in SAB 101, if any; however, HealthGate does not currently
anticipate that SAB 101 will have a material effect on the Company's
financial position or results of operations.

9. RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS

Costs incurred in the research and development of HealthGate's products are
expensed as incurred, except for certain software development costs. In
accordance with the American Institute of Certified Public Accountants'
Statement of Position 98-1, "Accounting for the Costs of Computer Software

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Developed or Obtained for Internal Use" ("SOP 98-1"), HealthGate capitalizes
costs incurred during the application development stage of software developed
for internal use. During the three months ended September 30, 2000,
development costs of approximately $0.7 million were capitalized. These costs
will be amortized to cost of revenue on a straight-line basis over the
one-year life of the related software.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains certain statements that are
forward-looking and actual results may differ materially from those
contemplated by the forward-looking statements. These forward-looking
statements reflect management's current expectations, are based on many
assumptions and are subject to certain risks and uncertainties. Factors that
might cause or contribute to such differences are described further below and
in the periodic reports and registration statements HealthGate files from
time to time with the Securities and Exchange Commission, including
HealthGate's most recent Form 10-K and most recent registration statement on
Form S-1. Investors are cautioned not to place undue reliance on the
forward-looking statements, which appear elsewhere in this report on Form
10-Q. HealthGate does not intend to update or publicly release any revisions
to the forward-looking statements.

OVERVIEW

HealthGate leverages the Internet to provide the highest quality
e-Health solutions to healthcare institutions, corporations and websites by
providing web technology that can supply up to date, comprehensive content
that is reliable, objective, and credible for professionals, patients, and
consumers. The CHOICE e-Health platform is a dynamic integration of the
information and technology that helps transform each hospital's static web
site into an interactive medical resource for patients and physicians. It
provides local hospitals with medical content from an extensive array of
health publishers--in the form of condition related articles and topical
Webzines--allowing each individual organization to create "e-health
communities" by developing closer relationships between its patients,
physicians and local health consumers. The CHOICE e-Health platform supports
the hospital's goal to be the dominant brand and credible source of
healthcare information in the local community. The CHOICE e-Health platform
serves as a technology platform for future web initiatives. Additionally,
HealthGate's activePress Publishing Services Division provides publishers
with Web-enabling services that manage the complexities of converting and
distributing traditional healthcare print materials via the Internet.

The Company distributes its content through a network of Web sites that
comprise the HealthGate Network. The HealthGate Network includes (1)
customized CHOICE Web sites for institutions, principally hospitals and
businesses which are designed as a seamless component of an enterprise
client's Web site and, for certain institutions and businesses, complement
the healthcare information, products and services they already offer or sell
through their own Web sites; (2) portions of the Health Channel section of
NBCi's portal; and (3) other third party Web sites to which HealthGate
provides its proprietary and licensed content. The Company commercially
introduced its CHOICE Web site product in early 1999 and as of September 30,
2000 had delivered 310 CHOICE Web sites to hospitals and other enterprise
clients, which includes 191 CHOICE Web sites delivered to HCA (formerly known
as Columbia/HCA Healthcare Corporation) hospitals.

The Company's business model is still in an emerging stage, and revenue
and income potential from HealthGate's business is unproven. The Company's
limited operating history makes an evaluation of its business and its
prospects difficult. Investors should not use the Company's past results as a
basis to predict future performance. HealthGate has incurred net losses since
its inception and had an accumulated deficit of approximately $69.4 million
as of September 30, 2000. The Company expects to incur additional losses for
the foreseeable future, and cannot assure investors that it will ever achieve
significant revenue or profitability or, if either significant revenue or
profitability is achieved, that the Company would be able to sustain them.

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HealthGate recorded deferred compensation of $2.3 millions in the nine
months ended September 30, 1999, representing the difference between the
exercise price of stock options granted and the fair market value of the
underlying common stock at the date of grants. The difference is recorded as
a reduction of stockholders' equity and is being amortized over the vesting
period of the applicable options, typically three years. Of the total
deferred compensation amount, $63,000 and $0.2 millions was amortized during
the three months ended September 30, 2000 and September 30, 1999,
respectively and $0.3 millions and $0.5 millions was amortized during the
nine months ended September 30, 2000 and 1999, respectively. These amounts
were recorded as stock based compensation. The Company currently expects to
amortize the remaining amounts of deferred compensation as of September 30,
2000 as follows:

October 1, 2000 - December 31, 2000..................... $ 59,000
January 1, 2001 - December 31, 2001..................... $ 235,000
January 1, 2002 - March 31, 2002........................ $ 18,000

On January 1, 2000, the exercise price of a warrant issued to General
Electric Company was adjusted from $9.49 to $3.46 per share, pursuant to the
terms of the warrant. As a result of this exercise price adjustment, the fair
value of the warrant increased by $1.2 million. This incremental value was
recorded as marketing and distribution rights, and will be amortized over the
remaining term of the related development and distribution agreement. During
the nine months ended September 30, 2000, the Company recorded amortization
expense of $6.0 million related to this warrant. During the three months
ended September 30, 2000 no amortization was recorded, as the warrant was
fully amortized. During the three months and nine months ended September 30,
1999, the Company recorded $2.6 million and $2.9 million respectively,
related to this warrant.

During the three months and nine months ended September 30, 2000, the
Company also recorded amortization expense of $1.1 million and $3.4 million,
respectively, related to a warrant for the purchase of 1,941,035 shares of
the Company's common stock, which was issued to HCA in 1999 in connection
with a marketing and reseller agreement.

On February 2, 2000, in connection with an e-commerce/sponsorship
agreement dated December 14, 1999. HealthGate received 996,348 shares of
Series H preferred stock in Medical Self Care, Inc. ("SelfCare"), a privately
held provider of health related products and services. HealthGate originally
recorded these shares at cost, subject to periodic review, at a value of
approximately $3.5 million when received, in August 2000. HealthGate filed
suit against SelfCare in U.S. District Court in Boston, Massachusetts,
seeking damages due to SelfCare's breaches of the e-commerce/sponsorship
agreement. The litigation followed HealthGate's notice of termination of the
agreement based on SelfCare's failure to pay fees due under the agreement,
and filing of an action by SelfCare against HealthGate in California state
court seeking a declaratory judgment that SelfCare is entitled to recind the
agreement and that HealthGate is not entitled to terminate the agreement and
is not entitled to post-contract remedies. HealthGate has removed the
California action to federal court and moved to dismiss, stay or transfer it
to Massachusetts. HealthGate intends to vigorously assert its rights in this
matter. However, due to the uncertainty of this matter, HealthGate concluded
that its investment in SelfCare was impaired. Accordingly, HealthGate
recorded a charge in the three months ended September 30, 2000 to write-off
the carrying value of this investment. Additionally, revenue recognition
related to services provided to SelfCare was suspended during the third
quarter of fiscal 2000.

RESULTS OF OPERATIONS

During the three months and nine months ended September 30, 2000 and 1999,
HealthGate experienced growth in its business and introduced new services.
Therefore, while comparisons are drawn below, in many instances meaningful
conclusions cannot be drawn from them.

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COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1999

REVENUE

Total revenue was $2.3 million for the three months ended September 30,
2000 compared to $0.7 million for the three months ended September 30, 1999,
an increase of $1.6 million or 229%. Services revenue for the three months
ended September 30, 2000 increased to $1.9 million from $0.5 million for the
three months ended September 30, 1999, due primarily to an increase in the
revenue derived from CHOICE Web site development, implementation and hosting,
including revenue of $0.9 million during the quarter ended September 30, 2000
related to HealthGate's arrangement with HCA. Advertising, sponsorship and
e-commerce revenue increased to $0.4 million in the three months ended
September 30, 2000 from $0.2 million in the three months ended September 30,
1999. In the three months ended September 30, 2000, two customers represented
47% of total revenue, HCA (38%) and Blackwell Science (9%). In the three
months ended September 30, 1999, two customers represented 36% of total
revenue, Blackwell Science (26%) and WebMD (10%). Related party revenue was
$0.3 million and $0.2 million for the three months ended September 30, 2000
and 1999, respectively. The three months ended September 30, 2000 included
related party revenue of $0.2 million and $0.1 million from Blackwell Science
and GE, respectively. The three months ended September 30, 1999 included
related party revenue of $0.2 million from Blackwell Science.

COSTS AND EXPENSES

COST OF REVENUE. Cost of revenue consists primarily of costs involved
with providing Web services, royalties associated with licensed content, and
related equipment and software costs. Cost of revenue increased to $1.1 million
in the three months ended September 30, 2000 from $0.6 million in the three
months ended September 30, 1999, due primarily to higher royalty expenses for
licensed content and depreciation on new equipment purchases to support the
Company's increased service offerings and increased revenue. As a percentage of
total revenue, cost of revenue decreased from 83% for the three months ended
September 30, 1999 to 46% for the three months ended September 30, 2000.

RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and related costs associated with the development and
support of the Company's Web-based service offerings. Research and development
expenses increased to $1.3 million for the three months ended September 30, 2000
from $1.1 million for the three months ended September 30, 1999, due primarily
to salaries and related costs from the addition of technical and development
personnel and consultants. During the three months ended September 30, 2000,
development costs of $0.7 million were capitalized. These costs will be
amortized on a straight-line basis over the one-year life of the related
software.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, and related costs for sales and marketing personnel,
as well as the cost of advertising, marketing and promotional activities.
Sales and marketing expenses increased to $6.9 million in the three months
ended September 30, 2000 from $1.1 million in the three months ended
September 30, 1999. This increase was primarily due to expenses of $4.4
million associated with the Company's agreement with NBCi for the three
months ended September 30, 2000, which includes $1.4 million of non-cash
amortization charges associated with the shares of HealthGate common stock
issued to NBCi in November 1999. This increase was also due to higher
salaries and related costs associated with increased staffing to support the
increased volume in business.

GENERAL AND ADMINISTRATIVE. General and administrative expense consists
primarily of salaries and related costs for executive and administrative
personnel, as well as legal, accounting and insurance costs. General and
administrative expenses increased to $1.2 million in the three months ended
September 30, 2000 from $0.5 million in the three months ended September 30,
1999. This increase was

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due primarily to salaries and related costs for newly hired personnel, increased
professional service fees, and costs associated with being a public company.

MARKETING AND DISTRIBUTION RIGHTS AMORTIZATION. During the three months
ended September 30, 2000, non-cash amortization expense of $1.1 million was
recorded in connection with the warrants issued to HCA in November 1999. During
the three months ended September 30, 1999, non-cash amortization expense of $2.6
million was recorded related to the warrants issued to GE.

STOCK BASED COMPENSATION. During the three months ended September 30,
2000 and 1999, the Company recorded stock based compensation expense totaling
$0.1 million and $0.2 million, respectively. The remaining deferred
compensation balance at September 30, 2000 is being amortized over the
vesting period of the individual options. See further discussion under
"Overview," above.

INTEREST AND OTHER INCOME (EXPENSE), NET

Interest and other income (expense), net, for the three months
ended September 30, 2000 was income of $0.3 million compared to expense of
$0.1 million for the three months ended September 30, 1999, including debt
discount and issuance cost amortization totaling $23 thousand related to the
Company's long-term note payable. This improvement is the result of the
Company's ability to repay its long-term debt and maintain cash investments
in the current year with the proceeds received from the Company's initial
public offering and concurrent private placement in January 2000.

INCOME TAXES

HealthGate has incurred significant losses for all periods from
inception through September 30, 2000. A valuation allowance has been recorded
for the entire deferred tax asset as a result of uncertainties regarding the
utilization of the asset due to the Company's lack of earnings history.

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COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 1999

REVENUE

Total revenue was $8.3 million for the nine months ended September 30,
2000 compared to $1.7 million for the nine months ended September 30, 1999,
an increase of approximately $6.6 million or 388%. Services revenue for the
nine months ended September 30, 2000 increased to $5.4 million from $1.2
million for the nine months ended September 30, 1999, due primarily to an
increase in the revenue derived from CHOICE Web site development,
implementation and hosting, including revenue of $2.6 million in 2000 related
to the Company's arrangement with HCA. Advertising, sponsorship and
e-commerce revenue increased to $2.9 million for the nine months ended
September 30, 2000 from $0.5 million for the nine months ended September 30,
1999. In the nine months ended September 30, 2000, two customers represented
(52%) of total revenue, HCA (32%) and SelfCare (20%) (however, no revenue was
recorded for SelfCare in the three months ended September 30, 2000 - see
"Legal Proceedings," below). In the nine months ended September 30, 1999, two
customers represented (36%) of total revenue, Blackwell Science (26%) and
WebMD (10%). Related party revenue was $0.9 million and $0.6 million for the
nine months ended September 30, 2000 and 1999, respectively. The nine months
ended September 30, 2000 included related party revenue of $0.6 million and
$0.3 million from Blackwell Science and GE, respectively. The nine months
ended September 30, 1999 included related party revenue of $0.6 million from
Blackwell Science.

COSTS AND EXPENSES

COST OF REVENUE. Cost of revenue increased to $3.5 million for the nine
months ended September 30, 2000 from $1.4 million for the nine months ended
September 30, 1999, due primarily to higher royalty expenses for licensed
content and depreciation on new equipment purchases to support the Company's
increased service offerings. Cost of revenue as a percentage of revenue
decreased from 83% for the nine months ended September 30, 1999 to 42% for the
nine months ended September 30, 2000.

RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$5.1 million in the nine months ended September 30, 2000 from $2.8 million in
the nine months ended September 30, 1999, due primarily to salaries and related
costs from the addition of technical and development personnel and consultants.
During the nine months ended September 30, 2000, development costs totaling
$0.7 million were capitalized. These costs will be amortized on a straight-line
basis over the one-year life of the related software.

SALES AND MARKETING. Sales and marketing expenses increased to $17.0
million in the nine months ended September 30, 2000 from $2.7 million in the
nine months ended September 30, 1999. This increase was primarily due to
expenses associated with the Company's agreement with NBCi of $10.6 million in
2000, which includes $3.4 million of non-cash amortization charges associated
with the shares of HealthGate common stock issued to NBCi in November 1999. This
increase was also due to higher salaries and related costs associated with newly
hired sales and marketing personnel.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $3.3 million in the nine months ended September 30, 2000 from $1.5 million in
the nine months ended September 30, 1999. This increase was due primarily to
salaries and related costs for newly hired personnel, increased professional
service fees, and costs associated with being a public company.

MARKETING AND DISTRIBUTION RIGHTS AMORTIZATION. During the nine months
ended September 30, 2000, non-cash amortization expense of $6.0 million and $3.4
million was recorded in connection with the warrants issued to General Electric
Company and HCA, respectively. During the nine months ended September 30, 1999,
non-cash amortization expense of $2.9 million was recorded related to the
warrant issued to General Electric Company.

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<PAGE>

STOCK BASED COMPENSATION. During the nine months ended September 30, 2000
and 1999, HealthGate recorded stock based compensation expense totaling $0.3
million and $0.5 million respectively. The remaining deferred compensation
balance at September 30, 2000 is being amortized over the vesting period of the
individual options. See further discussion under "Overview," above.

UNAMORTIZED DEBT DISCOUNT WRITE OFF

In February 2000, HealthGate repaid its $2.0 million long-term note
payable, and wrote off the remaining unamortized debt discount of approximately
$0.5 million.

INTEREST AND OTHER INCOME (EXPENSE), NET

Interest and other income (expense), net, for the nine months ended
September 30, 2000 was income of $0.9 million compared to expense of $0.3
million for the nine months ended September 30, 1999, including debt discount
and issuance cost amortization totaling $64 thousand related to the Company's
long-term note payable. This improvement is the result of the Company's
ability to repay its long-term debt and maintain cash investments in the
current year with the proceeds received from the Company's initial public
offering and concurrent private placement in January 2000.

INCOME TAXES

HealthGate has incurred significant losses for all periods from inception
through September 30, 2000. A valuation allowance has been recorded for the
entire deferred tax asset as a result of uncertainties regarding the utilization
of the asset due to the Company's lack of earnings history.

LIQUIDITY AND CAPITAL RESOURCES

Since inception and prior to HealthGate's January 2000 initial public
offering and concurrent private sale of common stock, operations were primarily
financed by the private placement of debt and equity securities. In January
2000, HealthGate completed its initial public offering of common stock and a
concurrent private placement of common stock and realized net proceeds of
approximately $44.6 million. In addition, in connection with the conversion of
then outstanding preferred stock, the Company

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<PAGE>

paid cash for accrued dividends on Series E preferred stock totaling $0.5
million. A portion of the net proceeds was used to repay a $2.0 million
long-term note payable, which was secured by substantially all of the
Company's tangible and intangible assets. During 1999, HealthGate generally
financed computer and related hardware needs through equipment lease
financing arrangements, however, in the nine months ended September 30, 2000,
HealthGate has paid cash for most of its computer and hardware needs.
HealthGate entered into capital leases for computer equipment totaling
$88,000 and $523,000 during the nine months ended September 30, 2000 and
1999, respectively. As of September 30, 2000, HealthGate had approximately
$19.8 million in marketable securities and approximately $0.9 million of cash
and cash equivalents.

For the nine months ended September 30, 2000, the cash used in
operations was $17.1 million. Cash used during this period was primarily due
to the net loss of $33.4 million, offset partially by depreciation and
amortization of $13.3 million, non-cash stock-based compensation expense of
$0.3 million, write off of unamortized debt discount of $0.5 million related
to the repayment of a long-term note payable, charge for impaired investment
of $3.5 million, revenue associated with equity investments of $1.4 million,
an increase of $2.7 million in accounts receivable, an increase of $3.1
million in prepaid advertising, an increase of in $0.7 million in prepaid
expenses and other current assets, a decrease of $2.1 million in deferred
offering costs related to the initial public offering, an increase of $1.4
million in accounts payable, a decrease of $0.1 million in customer deposits
for CHOICE Web sites, an increase of $1.6 million in accrued payroll and
accrued expenses and an increase of $1.7 million in deferred revenue.

For the nine months ended September 30, 1999, the cash used in
operations was $5.4 million. Cash used during this period was primarily due
to the net loss of $10.5 million offset partially by depreciation and
amortization of $3.4 million, non-cash stock-based compensation expense of
$0.5 million, an increase of $0.3 million in accounts receivable, an increase
of $1.4 million in deferred offering cost related to the initial public
offering, an increase in other assets of $0.1 million, an increase of $1.4
million in accounts payable, an increase of $0.6 million in customer deposits
for CHOICE Web sites, an increase of $0.6 million in accrued payroll and
other expenses and an increase of $0.6 million in deferred revenue. Increases
in operating assets and liabilities were primarily due to the growth of
business and operations during the first nine months of 2000 and 1999.

Cash used for investing activities consisted primarily of marketable
securities of $49.3 million in the nine months ended September 30, 2000,
proceeds from sales and maturities of marketable securities of $29.5 million
in the nine months ended September 30, 2000, and property and equipment
purchases of $3.9 million and $0.4 million in the nine months ended September
30, 2000 and 1999, respectively. During the nine months ended September 30,
2000 and 1999, the Company also entered in to capital leases for computer
equipment totaling $88,000 and $520,000, respectively.

At September 30, 2000, HealthGate had outstanding commitments under
capital leases of $0.6 million and under operating leases for equipment and
office space of $4.5 million. In addition, future minimum payments under
content license agreements were approximately $2.7 million at September 30,
2000. HealthGate expects that its commitments under content licensing may
increase as the Company expands its content libraries.

In October 1999, HealthGate entered into a three-year strategic alliance
agreement with Snap! LLC and Xoom.com, Inc. The rights of Snap! LLC and
Xoom.com, Inc. were subsequently assigned to NBC Internet, Inc. ("NBCi").
Under the original agreement, NBCi was to provide various services to promote
HealthGate's name, the www.healthgate.com Web site, enterprise-based CHOICE
Web sites and the products and services HealthGate offers. In exchange for
the services provided to HealthGate by NBCi during the first year of the
agreement, HealthGate paid Snap a minimum cash fee of $10,000,000 plus a
$250,000 production and content integration fee, and in November 1999
HealthGate issued to Snap 500,000 shares of its common stock. The value of
these shares was $4,500,000 at the time of issuance, which was recorded as
prepaid advertising. The value of 250,000 shares is being amortized as sales
and marketing expense on a straight-line basis over the first year of the
agreement and the value of the other 250,000 shares is being recognized based
on the delivery of advertising impressions in the first year of the
agreement. In September 2000 HealthGate entered into the second amendment to
this agreement. Under the revised agreement, HealthGate has agreed to pay
NBCi minimum fees of $5,666,666 in cash in the second year and $5,500,000 in
cash in the third year of the agreement for services provided by NBCi in
those years. The revised agreement terminates HealthGate's previous
obligation to pay NBCi $7,500,000 in each of the second and third years of
the agreement for media fees. The revised agreement also no longer includes
contingent payments by HealthGate for more than a minimal number of
click-throughs to a co-branded NBCi/HealthGate Web site. HealthGate also
agreed to redirect its user traffic from www.healthgate.com to the Health
Channel section of NBCi's consumer Internal portal at www.nbci.com so that
NBCi could count all user traffic as part of its total user base. HealthGate
will continue to produce, maintain, update, and provide content for several
portions of NBCi's Health Channel section. NBCi will serve and sell all
banner advertisements for HealthGate's content within NBCi's Health Channel
and a portion of the advertising revenue will be shared with HealthGate.
Either NBCi or HealthGate may terminate this agreement if the other party
commits a material breach. If NBCi terminates the agreement based on material
breach by HealthGate, including, non-payment, insolvency, or failure to
deliver or timely update content, HealthGate has agreed to continue to pay
NBCi 55% of all fees payable by HealthGate under the remaining term of the
agreement. During the three months and nine months ended September 30, 2000,
the Company recorded expense totaling $4.4 million and $10.6 million,
respectively, related to this agreement, which includes $1.4 million and $3.4
million, respectively, of non-cash amortization expense related to the stock
issued.

At September 30, 2000, the Company has $20.7 million of cash and
marketable securities and $15.0 million of working capital. The Company has
incurred substantial losses and negative cash flows from operations in every
fiscal year since inception. For the year ended December 31, 1999, the
Company incurred a loss from operations of $16.3 million, and negative cash
flow from operations of $5.7 million. For the nine months ended September 30,
2000, the Company incurred a loss from operations of $30.3 million and
negative cash flows from operations of $17.1 million. As of December 31, 1999
and September 30, 2000, the Company had accumulated deficits of $35.9 million
and $69.4 million, respectively.

The Company's future liquidity and capital requirements will depend upon
numerous factors, including the success of the existing and new application and
service offerings, and reductions in

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discretionary spending. The Company currently anticipates its cash resources
will be sufficient to meet the presently anticipated working capital, capital
expenditures and business expansion requirements for at least the next twelve
months. However, the Company may need to raise additional funds to support
expansion, develop new or enhanced applications and services, respond to
competitive pressures, acquire complementary businesses or technologies, or
take advantage of unanticipated opportunities. The Company may be required to
raise additional funds through public or private financing, strategic
relationships or other arrangements. There can be no assurance that
additional funding, if needed, will be available on terms acceptable to the
Company, or at all.

YEAR 2000 COMPLIANCE READINESS DISCLOSURE

In late 1999, HealthGate completed its planning and testing of systems to
become Year 2000 ready. The Company has not experienced any significant
disruptions in critical information technology and non-information technology
systems or any significant Year 2000 related problems. To date, the Company has
not incurred any material costs in identifying or evaluating Year 2000
compliance issues, planning or testing. The Company presently does not
anticipate that future expenditures will be material. The Company is not aware
of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its products and systems and those of its
suppliers and vendors throughout the Year 2000 for any latent Year 2000 matters
that may arise.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133).
The new standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. HealthGate does not expect SFAS No. 133 to have a material
effect on its financial position or results of operations.

RISKS RELATED TO OUR BUSINESS

HealthGate operates in a highly competitive and rapidly evolving Internet
industry. The risks and uncertainties described below are some of those that
HealthGate currently believe may affect the Company.

FAILURE TO GENERATE SUFFICIENT REVENUES, RAISE ADDITIONAL CAPITAL OR
REDUCE CERTAIN DISCRETIONARY SPENDING WILL HAVE A MATERIAL ADVERSE EFFECT ON
HEALTHGATE'S ABILITY TO CONTINUE AS A GOING CONCERN AND TO ACHIEVE ITS
INTENDED BUSINESS OBJECTIVES. At September 30, 2000, the Company has $20.7
million of cash and marketable securities and $15.0 million of working
capital. The Company has incurred substantial losses and negative cash flows
from operations in every fiscal period since inception. For the year ended
December 1, 1999, the Company incurred a loss from operations of $16.3
million, and negative cash flow from operations of $5.7 million. For the nine
months ended September 30, 2000, the Company incurred a loss from operations
of $30.3 million and negative cash flows from operations of $17.1 million. As
of December 31, 1999 and September 30, 2000, the Company had accumulated
deficits of $35.9 million and $69.4 million, respectively.

The Company's future liquidity and capital requirements will depend upon
numerous factors, including the success of the existing and new application
and service offerings, and reductions in discretionary spending. The Company
currently anticipates its cash resources will be sufficient to meet the
presently anticipated working capital, capital expenditures and business
expansion requirements for at least the next twelve months. However, the
Company may need to raise additional funds to support expansion, develop new
or enhanced applications and services, respond to competitive pressures,
acquire complementary businesses or technologies, or take advantage of
unanticipated opportunities. The Company may be required to raise additional
funds through public or private financing, strategic relationships or other
arrangements. There can be no assurance that additional funding, if needed,
will be available on terms acceptable to the Company, or at all.

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THE QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY
AFFECT THE MARKET PRICE OF HEALTHGATE'S COMMON STOCK IN A MANNER UNRELATED TO
THE COMPANY'S LONG-TERM PERFORMANCE. The Company expects quarterly revenue,
expenses and operating results to fluctuate significantly in the future, which
could affect the market price of the common stock in a manner unrelated to the
Company's long-term operating performance. Quarterly fluctuations could result
from a number of factors, including:

o The amount and timing reductions of discretionary spending
reductions;

o Addition of new content providers or changes in the Company's
relationships with its most important content providers, which may
require more expenditures in the early stages of these relationships;

o The amount and timing of expenses required to integrate operations and
technologies from acquisitions, joint ventures or other business
combinations or investments.

Although HealthGate does not plan a major increase in spending related
to operations, the expense levels in part are based upon the Company's
expectations concerning future revenue and these expense levels are
predominantly fixed in the short-term. If the Company has lower revenue than
expected, HealthGate may not be able to reduce spending in the short-term in
response. Any shortfall in revenue would have a direct impact on HealthGate's
results of operations. In this event, the price of the Company's common stock
may fall.

THE SUCCESS OF THE COMPANY'S BUSINESS WILL DEPEND ON HEALTHGATE'S ABILITY
TO SELL A SUBSTANTIAL NUMBER OF CHOICE WEB SITES. A key element of the Company's
strategy is to expand the HealthGate Network by establishing co-branded CHOICE
Web sites. HealthGate commercially introduced the CHOICE Web site product in
early 1999 and as of September 30, 2000 had delivered 310 CHOICE Web sites to
hospitals and other enterprise clients, including 191 to HCA. The Company cannot
guarantee that it will be successful in selling advertising or sponsorship on
these or additional sites in the future.

HealthGate's CHOICE product is relatively new and unproven and
HealthGate cannot assure the investor that HealthGate will be able to sell
additional CHOICE products without lowering the price of the product.
HealthGate's CHOICE product is an important part of the Company's business
model and if HealthGate is unable to sell a substantial number of CHOICE Web
sites, HealthGate's business prospects, results of operations and the market
price of the Company's common stock could be materially adversely affected.

HEALTHGATE FACES INTENSE COMPETITION IN PROVIDING THE COMPANY'S
INTERNET-BASED HEALTHCARE INFORMATION PRODUCTS AND SERVICES AND MAY NOT BE
ABLE TO COMPETE EFFECTIVELY. The market for Internet services and products is
relatively new, intensely competitive and rapidly changing. Since the
Internet's commercialization in the early 1990s, the number of Web sites on
the Internet competing for users' attention has proliferated with no
substantial barriers to entry. There are more than 15,000 Web sites offering
users healthcare content, products and services, and HealthGate expects that
competition will continue to grow. With low barriers to entry in a relatively
new and rapidly evolving industry, the types of entities against which
HealthGate competes, directly and indirectly, for subscribers, consumers,
content and service providers, advertisers, sponsors and acquisition
candidates ranges from traditional healthcare print publishers and
distributors, to health focused and general Web sites, to large healthcare
information companies.

Many of the Company's competitors enjoy significant competitive advantages
including: greater resources that can be devoted to the development, promotion
and sale of their products and services, longer operating histories, greater
brand recognition, and larger customer bases.

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HealthGate also competes with other Web sites, traditional print media and
other sources of healthcare information for a share of total advertising
budgets. If advertisers perceive the Internet or the HealthGate Network to be
limited or ineffective advertising media, they may be reluctant to devote a
portion of their advertising budget to Internet advertising or to advertising on
the HealthGate Network.

HEALTHGATE'S BUSINESS IS EXPANDING AND THE COMPANY'S BUSINESS PROSPECTS
MAY SUFFER IF IT IS NOT ABLE TO EFFECTIVELY MANAGE THE GROWTH OF OUR
OPERATIONS AND SUCCESSFULLY ATTRACT AND RETAIN KEY PERSONNEL. Since
HealthGate began its business in 1994, the Company has significantly expanded
its operations over a short period of time. HealthGate has grown from 3
employees at the end of 1994 to 104 full-time employees as of September 30,
2000. During the third quarter of 2000, Veronica Zsolcsak joined HealthGate's
management as Chief Financial Officer. Gerald E. Bisbee, Jr., Ph.D. and
William G. Nelson, Ph.D. have also been recently elected to HealthGate's
Board of Directors. HealthGate's growth has placed a substantial strain on
its management, operational and financial resources and systems. HealthGate's
future success will depend in large part on HealthGate's ability to
implement, improve and effectively utilize its operational, management,
marketing and financial resources and systems and train and manage its
employees. HealthGate cannot guarantee that its management team will be able
to effectively manage the growth of the Company's operations or that its
systems, procedures and controls will be adequate to support its expanding
operations.

HealthGate's future success also depends on the Company's ability to
identify, attract, hire, train, retain and motivate highly skilled technical,
managerial, editorial, marketing and customer service personnel. Competition for
highly skilled personnel is intense. In particular, skilled technical employees
are highly sought after in the Boston area, and the Company cannot guarantee
that it will be able to attract or retain these employees.

HEALTHGATE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT THE COMPANY'S
GROWTH AND ACQUISITION STRATEGY. Key elements of HealthGate's growth strategy
include making acquisitions of, or significant investments in, complementary
companies, products or technologies to increase the Company's content
libraries, technological capabilities and customer base and entering into
other strategic affiliations. To date, HealthGate has not made any major
acquisitions or investments. For the Company's acquisition strategy to be
successful, HealthGate will need to identify content sources, technologies
and businesses that are complementary to the Company's, integrate disparate
technologies and corporate cultures and possibly manage a geographically
dispersed company. HealthGate may also lose key employees while integrating
any new companies. For these reasons, the Company may not be successful in
integrating any acquired businesses or technologies and may not achieve
anticipated revenue and cost benefits. Simultaneously pursuing acquisitions,
strategic affiliations and other elements of HealthGate's growth strategy
could be expensive, time consuming and may strain the Company's resources. If
HealthGate is not successful in implementing its growth and acquisition
strategy, the Company's business, results of operations and the market price
of the Company's common stock could be adversely affected.

In addition, the Company may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which could adversely affect its results of operations and the market price of
the Company's common stock.

THE PERFORMANCE OF HEALTHGATE'S WEB SITES AND COMPUTER SYSTEMS IS CRITICAL
TO ITS BUSINESS AND THE BUSINESS WILL SUFFER IF THE COMPANY EXPERIENCES SYSTEM
FAILURES. The performance of HealthGate's Web sites and computer systems is
critical to the Company's reputation and ability to attract and retain users,
customers, advertisers and subscribers. HealthGate provides products and
services based on sophisticated computer and telecommunications software and
systems, which often experience development delays and may contain undetected
errors or failures when introduced into the Company's existing systems. Although
HealthGate has only experienced one minor unscheduled service interruption of
approximately four hours since the beginning of 1998, the Company cannot
guarantee that it will not experience more significant

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service interruptions in the future. The Company is also dependent upon Web
browsers and Internet service providers to provide Internet users access to its
Web sites. Many of them have experienced significant outages in the past and
could experience outages, delays and other difficulties in the future due to
system failures. The Company also depends on certain information providers to
deliver information and data feeds to it on a timely basis. HealthGate Web sites
could experience disruptions or interruptions in service due to the failure or
delay in the transmission or receipt of this information. System errors or
failures that cause a significant interruption in the availability of the
Company's content or an increase in response time on the Company's Web sites
could cause it to lose potential or existing users, customers, advertisers or
subscribers and could result in damage to its reputation and brand name or a
decline in the Company's stock price.

In March 1999, HealthGate entered into an Internet Data Center Services
Agreement with Exodus Communications, Inc. to house all of the Company's central
computer facility servers at Exodus's Internet Data Center in Waltham,
Massachusetts. HealthGate does not presently maintain fully redundant systems at
separate locations, so the Company's operations depend on Exodus's ability to
protect the systems in its data center against damage from fire, power loss,
water damage, telecommunications failure, vandalism and similar events. Although
Exodus provides comprehensive facilities management services, including human
and technical monitoring of all production servers, Exodus does not guarantee
that HealthGate's Internet access will be uninterrupted, error-free or secure.
HealthGate has also developed a disaster recovery plan to respond to system
failures. HealthGate cannot guarantee that its disaster recovery plan is capable
of being implemented successfully. HealthGate cannot guarantee that the
Company's insurance will be adequate to compensate it for all losses that may
occur as a result of any system failure.

HEALTHGATE RETAINS CONFIDENTIAL CUSTOMER INFORMATION IN THE COMPANY'S
DATABASE AND IF IT FAILS TO PROTECT THIS INFORMATION AGAINST SECURITY
BREACHES HEALTHGATE MAY LOSE CUSTOMERS. HealthGate retains confidential
customer information in its database. Therefore, it is critical that the
Company's facilities and infrastructure remain secure and that they are
perceived by consumers to be secure. Despite the implementation of security
measures, the Company's infrastructure may be vulnerable to physical
break-ins, computer viruses, programming errors or similar disruptive
problems. A material security breach could damage HealthGate's reputation or
result in liability to the Company. HealthGate believes that maintaining the
trust of its customers is important for it to be able to grow the Company's
business and, therefore, HealthGate believes that any damage to its
reputation or liability arising from one or more security breaches could
adversely affect the Company's business, results of operations and the market
price of the Company's common stock.

HEALTHGATE'S BUSINESS PROSPECTS MAY SUFFER IF THE COMPANY IS NOT ABLE TO
KEEP UP WITH THE RAPID TECHNOLOGICAL DEVELOPMENTS IN THE INTERNET INDUSTRY.
The Internet industry is characterized by rapid technological developments,
evolving industry standards, changes in user and customer requirements and
frequent new service and product introductions and enhancements. The
introduction of new technology or the emergence of new industry standards and
practices could render the Company's systems and, in turn, its products and
services, obsolete and unmarketable or require the Company to make
significant unanticipated investments in research and development to upgrade
its systems in order to maintain the marketability of its products. To be
successful, the Company must continue to license or develop leading
technology, enhance its existing products and services and respond to
emerging industry standards and practices on a timely and cost-effective
basis. If the Company is unable to successfully respond to these
developments, particularly in light of the rapid technological changes in the
Internet industry generally and the highly competitive market in which it
operates, the Company's business, results of operations and the market price
of the Company's common stock could be adversely affected.

HEALTHGATE MAY BE SUBJECT TO LIABILITY FOR INFORMATION RETRIEVED FROM
THE HEALTHGATE NETWORK. As a publisher and distributor of online information,
HealthGate may be subject to third party claims for defamation, negligence,
copyright or trademark infringement or other theories based on the nature and

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content of information supplied by the Company. HealthGate could also become
liable if confidential information is disclosed inappropriately. These types
of claims have been brought, sometimes successfully, against online service
providers in the past. HealthGate could be subject to liability with respect
to content that may be accessible through the Company's Web site or third
party Web sites in the HealthGate Network. For example, claims could be made
against HealthGate if material deemed inappropriate for viewing by children
could be accessed through the Company's Web sites or if a professional,
patient or consumer relies on healthcare information accessed through the
HealthGate Network to their detriment. Even if any of the kinds of claims
described above do not result in liability to the Company, HealthGate could
incur significant costs in investigating and defending against them and in
implementing measures to reduce its exposure to this kind of liability. The
Company's insurance may not cover potential claims of this type or may not be
adequate to cover all costs incurred in defense of potential claims or to
indemnify HealthGate for all liability that may be imposed.

HEALTHGATE DEPENDS ON THE COMPANY'S CONTENT PROVIDERS, AS THE SUCCESS OF
HEALTHGATE'S BUSINESS DEPENDS ON ITS ABILITY TO PROVIDE A COMPREHENSIVE
LIBRARY OF HEALTHCARE INFORMATION. With the exception of the Company's
Healthy Living series of Webzines, HealthGate licenses all of its content
from third parties. With a few exceptions, these licenses are generally
non-exclusive, have an initial term of one year and are renewable. In
addition, a significant number of these licenses permit cancellation by the
content provider upon 30 to 90 days notice. HealthGate cannot guarantee that
it will be able to continue to license its present content or sufficient
additional content to provide a diverse and comprehensive library. In the
future, HealthGate may not be able to license content at reasonable cost. In
addition, one or more of the Company's publishers or other content providers
may grant one of the its competitors an exclusive arrangement with respect to
a significant database or periodical, or elect to compete directly against
HealthGate by making its content exclusively available through its own Web
site. Presently, HealthGate believes it would be difficult to replace the
Weekly Briefings from the New England Journal of Medicine(TM) and the
journals made available by Blackwell Science with other journals of the same
reputation. These sources are committed to HealthGate through April 2002 and
December 2001, respectively, but if either of them chooses not to renew the
agreements they have with the Company, HealthGate's business could be
adversely affected because the quality of the Company's content is important
in attracting online users, sponsors, advertisers and CHOICE customers.

THE MAJORITY OF HEALTHGATE'S REVENUE HAS HISTORICALLY BEEN DERIVED FROM
A FEW CUSTOMERS AND THE LOSS OF ANY OF THESE CUSTOMERS COULD ADVERSELY AFFECT
THE COMPANY'S BUSINESS. Historically, HealthGate has generated a substantial
portion of its revenue from a few customers. For the nine months ended
September 30, 2000, three customers, HCA (a HealthGate warrant holder),
SelfCare, and Blackwell Science (also a stockholder), accounted for 32%, 20%,
and 7%, respectively, of the Company's total revenue. HealthGate expects to
continue to generate a substantial portion of its revenue in the near future
from HCA and Blackwell Science and the loss of either of them could adversely
affect the Company's business. All of the revenue from SelfCare was
recognized in the first six months of 2000 for services provided by
HealthGate under the e-commerce/ sponsorship agreement with SelfCare.
HealthGate provided SelfCare notice of termination of the agreement based
upon SelfCare's failure to pay fees under the agreement. Subsequently,
litigation has been commenced concerning the agreement. See "Legal
Proceedings," below. The failure to continue to receive revenues from
SelfCare resulted in slower revenue growth for HealthGate in the three months
ended September 30, 2000.

HEALTHGATE'S BUSINESS MAY BE ADVERSELY AFFECTED IF THE COMPANY IS NOT ABLE
TO EFFECTIVELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS. HealthGate regards its
trademarks, service marks, copyrights, trade secrets and similar intellectual
property as important to its business, and the Company relies upon trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, strategic partners and others to
protect its rights in this property. HealthGate has registered the Company's
"HealthGate," "HealthGate Data," "CHOICE," "MedGate," "ReADER" and its
HealthGate logo trademarks in the U.S. and the Company has pending a U.S.
application for its "activePress"

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trademark. Effective trademark, copyright and trade secret protection may not be
available in every country in which HealthGate products and services are
distributed or made available through the Internet. Therefore, HealthGate cannot
guarantee that the steps it has taken to protect its proprietary rights will be
adequate to prevent infringement or misappropriation by third parties or will be
adequate under the laws of some foreign countries, which may not protect
HealthGate's proprietary rights to the same extent, as do the laws of the United
States.

Although HealthGate believes that its proprietary rights do not infringe
on the intellectual property rights of others, other parties may assert
infringement claims against the Company or claim that the Company has
violated a patent or infringed a copyright, trademark or other proprietary
rights belonging to them. These claims, even if they are without merit, could
result in HealthGate spending a significant amount of time and money to
dispose of them. In July 1999, HealthGate received a letter from a company
(the "Holder") claiming ownership of a patent that claims exclusive rights to
all electronic methods of on-demand remote retrieval of graphic and
audiovisual information. The letter asserted that the use of HealthGate's Web
site, www.healthgate.com, induces users to infringe the patent. In the
letter, the Holder offered to license the patent perpetually and
retroactively to HealthGate for a one-time fee of between $50,000 and
$150,000 depending upon the number of "hits" per day on the Company's web
site. There has been no recent activity on this matter and at this time,
HealthGate is unable to predict its outcome.

HEALTHGATE'S BUSINESS MAY BE ADVERSELY AFFECTED IF THE COMPANY IS UNABLE TO
CONTINUE TO LICENSE SOFTWARE THAT IS NECESSARY FOR THE DEVELOPMENT OF PRODUCT
AND SERVICE ENHANCEMENTS. HealthGate relies on a variety of technologies that
are licensed from third parties, including the Company's database software and
Internet server software, which is used in HealthGate's Web sites to perform key
functions. These third party licenses may not be available to HealthGate on
commercially reasonable terms in the future. The loss of or inability to
maintain any of these licenses could delay the introduction of software
enhancements, interactive tools and other features until equivalent technology
could be licensed or developed.

THE SUCCESS OF HEALTHGATE'S BUSINESS WILL DEPEND ON THE COMPANY'S
ABILITY TO SELL SPONSORSHIP ON CHOICE WEB SITES AND GENERATE ADVERTISING
INCOME FROM NBCi. HealthGate derived approximately 33% of its revenue in the
nine months ended September 30, 2000 from the sale of general and targeted
banner advertising and sponsorships of discrete topic areas on the HealthGate
Network. Under the Company's sponsorship arrangements, a sponsor's name or a
message selected by the sponsor is included on each page of the topic area
together with a click-through link to the sponsor's Web site. Additionally,
HealthGate receives a share of the advertising revenue sold by NBCi and
appearing with the content HealthGate provides to portions of the Health
Channel section of NBCi's portal Web site.

HealthGate's future success depends on the Company's ability to generate and
increase revenue from advertising and sponsorship, which will depend on a number
of factors, including:

o The development of the Internet as an advertising medium;

o The amount of traffic on the HealthGate Network and the number of
registered and unique users of the Company's content; and

o HealthGate's ability to achieve and demonstrate registered and
unique user demographic characteristics that are attractive to
sponsors and advertisers.

HEALTHGATE'S BUSINESS PROSPECTS DEPEND ON THE USE OF THE INTERNET AS AN
ADVERTISING MEDIUM. Most potential advertisers and their advertising agencies
have only limited experience with the Internet as an advertising medium and have
not devoted a significant portion of their advertising expenditures to
Internet-based advertising. Therefore, it is too early to know whether
advertisers or advertising agencies

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<PAGE>

will be persuaded to allocate portions of their budgets to Internet-based
advertising or, if so persuaded, whether they will find Internet-based
advertising to be an effective means of promoting their products and services
relative to traditional print and broadcast media. Acceptance of the Internet
among advertisers and advertising agencies will depend, to a large extent, on
the level of use of the Internet by consumers and upon growth in the commercial
use of the Internet, neither of which has yet been proven. Additionally, there
is intense competition for advertising revenue on high-traffic Web sites, which
has resulted in significant price competition.

GOVERNMENT REGULATION OF THE INTERNET MAY RESULT IN INCREASED COSTS OF
USING THE INTERNET, WHICH COULD ADVERSELY AFFECT HEALTHGATE'S BUSINESS.
Currently, there are a number of laws that regulate communications or
commerce on the Internet. Several telecommunications carriers have petitioned
the Federal Communications Commission to regulate Internet service providers
and online service providers in a manner similar to long distance telephone
carriers and to impose access fees on these providers. Regulation of this
type, if imposed, could substantially increase the cost of communicating on
the Internet and adversely affect the Company's business, results of
operations and the market price of our common stock.

PRIVACY-RELATED REGULATION OF THE INTERNET COULD ADVERSELY AFFECT
HEALTHGATE'S BUSINESS. Internet user privacy has become an issue both in the
United States and abroad. The Federal Trade Commission, Department of Health
and Human Services and government agencies in some states and countries have
been investigating certain Internet companies regarding their use of personal
information. Any regulations imposed to protect the privacy of Internet users
may affect the way in which HealthGate currently collects and use personal
information.

The European Union (EU) has adopted a directive that imposes
restrictions on the collection and use of personal data, guaranteeing
citizens of EU member states certain rights, including the right of access to
their data, the right to know where the data originated and the right to
recourse in the event of unlawful processing. HealthGate cannot assure the
investor that this directive will not adversely affect the Company's
activities in EU member states.

As is typical with most Web sites, HealthGate's Web sites place certain
information (cookies) on a user's hard drive without the user's knowledge or
consent. Although HealthGate does not currently do so, this technology enables
Web site operators to target specific users with a particular advertisement and
to limit the frequency with which a user is shown a particular advertisement.
Some currently available Internet browsers allow users to modify their browser
settings to remove cookies at any time or to prevent cookies from being stored
on their hard drives. In addition, some Internet commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of
cookies. If this technology is reduced or limited, the Internet may become less
attractive to advertisers and sponsors.

A feature of HealthGate's Web sites includes the retention of personal
information about its users. HealthGate has a stringent privacy policy
covering this information. However, if third parties were able to penetrate
HealthGate's network security and gain access to, or otherwise
misappropriate, its users' personal information, HealthGate could be subject
to liability. Such liability could include claims for misuses of personal
information, such as for unauthorized marketing purposes or unauthorized use
of credit cards. These claims could result in litigation, HealthGate's
involvement in which, regardless of the outcome, could require HealthGate to
expend significant financial resources. HealthGate could incur additional
expenses if new regulations regarding the use of personal information are
introduced or if any regulator chooses to investigate HealthGate's privacy
practices.

TAX TREATMENT OF COMPANIES ENGAGED IN INTERNET COMMERCE MAY ADVERSELY
AFFECT THE INTERNET INDUSTRY AND THE COMPANY. Tax authorities on the federal,
state, and local levels are currently reviewing the appropriate tax treatment of
companies engaged in Internet commerce. New state tax regulations may subject us
to additional state sales, income and other taxes. A federal law passed in
October 1998 places a

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<PAGE>

temporary moratorium on certain types of taxation on Internet commerce.
HealthGate cannot predict the effect of current attempts at taxing or
regulating commerce over the Internet. It is also possible that the
governments of other states and foreign countries also might attempt to
regulate HealthGate's transmission of content on its Web sites and throughout
the rest of the HealthGate Network. Any new legislation, regulation or
application or interpretation of existing laws would likely increase
HealthGate's cost of doing business and may adversely affect its results of
operations and the market price of the Company's common stock.

HEATHLGATE MAY BE SUBJECT TO LIABILITY FOR CLAIMS THAT THE DISTRIBUTION OF
MEDICAL INFORMATION TO CONSUMERS CONSTITUTES PRACTICING MEDICINE OVER THE
INTERNET. States and other licensing and accrediting authorities prohibit the
unlicensed practice of medicine. HealthGate does not believe that its
publication and distribution of healthcare information online constitutes
practicing medicine. However, HealthGate cannot guarantee that one or more
states or other governmental bodies will not assert claims contrary to its
belief. Any claims of this nature could result in HealthGate spending a
significant amount of time and money to defend and dispose of them.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

HealthGate is not subject to any meaningful market risks related to
currency, commodity prices or similar matters. HealthGate is sensitive to
short-term interest rate fluctuations to the extent that such fluctuations
impact the interest income HealthGate receives from its investments. To
minimize this risk, HealthGate maintains its portfolio of cash equivalents
and short-term investments in a variety of securities, including commercial
paper, other short-term debt securities and money market funds. In general,
money market funds are not subject to market-risk because the interest paid
on such funds fluctuates with the prevailing interest rate. In addition,
HealthGate invests in relatively short-term securities. HealthGate does not
use derivative financial instruments in its investment portfolio. HealthGate
limits its default risk by purchasing only investment grade securities. As of
September 30, 2000, all of HealthGate's investments were in money market
funds and interest bearing investment grade securities with an average
maturity of less than 6 months. Cash, cash equivalents, and marketable
securities were approximately $20.7 million at September 30, 2000.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 23, 2000, HealthGate filed suit against Medical Self Care,
Inc. ("SelfCare") in U.S. District Court for the District of Massachusetts
seeking damages due to SelfCare's breaches of the e-commerce/sponsorship
agreement dated as of December 14, 1999 between HealthGate and SelfCare. This
litigation followed HealthGate's notice of termination of the agreement based
on SelfCare's failure to pay fees due under the agreement, and the August 22,
2000 filing of an action by SelfCare against HealthGate in Superior Court of
the State of California, City and County of San Francisco, seeking a
declaratory judgment that SelfCare is entitled to rescind the agreement and
that HealthGate is not entitled to terminate the agreement and is not
entitled to post-contract remedies. HealthGate has removed the California
state action to U.S. District Court for the Northern District of California,
San Francisco Division, and has moved to dismiss, stay or transfer the action
to the U.S. District Court for the District of Massachusetts. SelfCare has
filed a motion with the U.S. District Court for the District of Massachusetts
to dismiss, stay or transfer that action to the U.S. District Court, Northern
District of California.

HealthGate intends to vigorously assert its rights in this matter.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On January 31, 2000, HealthGate closed its initial public offering of
3,750,000 shares of its common stock. The initial public offering price was
$11.00 per share and the aggregate initial public offering proceeds were
$41.2 million. After deducting the underwriting discounts and commissions and
the offering expenses, the net proceeds to HealthGate from the initial public
offering were approximately $35.8 million.

The funds from the initial public offering have been the principal
source of liquidity for HealthGate during the nine months ended September 30,
2000 and were used to fund operating losses and make capital expenditures as
described in the financial statements included with this report. Other
proceeds from the offering have been invested in interest bearing, investment
grade securities.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

The following exhibits are included:

10.40 Second Amendment to Snap Strategic Alliance
Agreement dated as of September 1, 2000 by and
Among Snap! LLC, Xoom.com, Inc., NBC Internet, Inc.
and the Registrant (excluding Exhibits) Filed Herewith
10.41 Amendment to Registrant's 1994 Stock Option Plan
(filed as Exhibit 4.3 to Registrant's Registration
statement on Form S-8 filed on November 1, 2000)
11.1 Loss per share Filed Herewith
27.1 Financial Data Schedule Filed Herewith

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(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed by HealthGate during the
three months ended September 30, 2000.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

HEALTHGATE DATA CORP.

Dated: November 13, 2000 By: /s/ William S. Reece
------------------------------
William S. Reece
Chairman of the Board of Directors and
Chief Executive Officer

Dated: November 13, 2000 By: /s/ Veronica Zsolcsak
------------------------------
Veronica Zsolcsak
Chief Financial Officer
(Principal Financial and Accounting Officer)