IVI PUBLISHING INC, 10-K, 1998-04-15

IVI PUBLISHING INC
10-K, 1998-04-15
PREPACKAGED SOFTWARE

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997

Commission file number 0-22212

IVI PUBLISHING, INC.
(Exact name of registrant as specified in its charter)

Minnesota 41-1686038
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
808 Howell Street, Suite 400
Seattle, Washington 98101
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (206) 292-6247

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

Title of each class Name of each exchange on which registered
- ----------------------------- -----------------------------------------
Common Stock, $.01 Par Value N/A

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

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of April 8, 1998 was $74,113,657.

The number of shares outstanding of the issuer's classes of common stock as
of April 8, 1998: Common stock, $.01 Par Value: 10,135,201

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.

<PAGE>

PART I
ITEM 1. BUSINESS

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

GENERAL

IVI Publishing, Inc. (the "Company" or "IVI") intends to become the premier
network of health-related channels on the World Wide Web to help adults make
smarter, better-informed health decisions. IVI was incorporated in August 1990
in the State of Minnesota under the name Interactive Television, Inc. Its name
was subsequently changed to Interactive Ventures, Inc. in March 1991, and to IVI
Publishing, Inc. in August 1993. IVI has created interactive programs for some
of America's best-known content owners. The Company has also distributed content
in various forms of media and in partnership with some of America's most
prestigious media firms. Historically, IVI's attention and resources have been
directed to the cable television, CD-ROM and online interactive media markets.
The Company expects to leverage its years of experience in developing content
for interactive media, its skill in working with third-party medical content
providers, and its knowledge of consumers of medical information to develop the
leading online health information network.

The Company's flagship site, OnHealth, opened in July 1997 and is currently
being enhanced and redesigned. The Company intends to re-release OnHealth in the
third quarter of 1998. To reflect its new Web-oriented focus, the Company plans
to propose to shareholders at the 1998 Annual Meeting a corporate name change to
"OnHealth Network Company."

The Company's common stock is listed on the NASDAQ SmallCap Market under the
symbol "IVIP." Information contained on the Company's Web site is not deemed to
be a part of this Annual Report on Form 10-K.

The Company plans to distinguish itself in the market for consumer
health-related information and commerce by "cutting through the clutter" of the
Internet and locating and packaging the best informational, transactional and
archival content for its customers. By doing so, the Company will attain high
levels of targeted usage and an attractive editorial context, both of which are
necessary for creating an advertising-supported medium.

<PAGE>

IVI's first Web venture was the development, production, and hosting of Mayo
Health O@sis which was jointly owned with the Mayo Foundation and which went
live in July 1996. Under the initial intent of the venture, the Mayo Foundation
was to provide intellectual property and IVI Publishing was to provide
production, hosting and marketing services. Revenues were to be split between
the companies. IVI transferred full ownership of the Mayo O@sis website to Mayo
Foundation in September 1997. See "Mayo Relationship and Transfer of Ownership
of Mayo Health O@sis Web Site."

The Company's previous principal line of business consisted of CD-ROM
development, production, and distribution. IVI's best-known title has been Mayo
Clinic Ultimate Medical Guide. The Company has also produced numerous other
CD-ROM titles. IVI continues to distribute these products through retail
channels and computer OEM (bundling) channels.

IVI has had a significant venture with Time Life Books, including the production
of a CD-ROM, "Taking Control of Your Health" as well as other titles. The
Company is also a supplier of content to America's Health Network (AHN), a
health and medical cable TV network, which began with AHN's launch in March
1996. IVI also develops web sites for third parties. To date, web development
customers have been primarily from the medical field.

The Company's net revenues have declined 69% in the past two years to
approximately $3.8 million in 1997. This is largely attributable to the shift in
the Company's focus from CD-ROM publishing and marketing to online publishing.
Management anticipates that the shift in focus will result in growth in revenues
and in positive net income in future years. The Company has accumulated net
losses of approximately $78.6 million through December 31, 1997.

WEB ACTIVITIES: CURRENT

The Company believes that it will be able to create the best online resources
for equipping users to actively and successfully manage their health and
well-being. By doing so, management believes that it can create a large, loyal
and active user base, and, by extension, that it can create a significant hub
for online advertising and transactional commerce. The key attributes for
success in this venture include building deep, high-value editorial content
(proprietary, licensed, and linked); developing a friendly, accessible and
useful editorial character; creating an image of trust and credibility;
encouraging a sense of community among site users; and striving to develop the
OnHealth brand as the leading brand in its segment.

WEB ACTIVITIES: PROSPECTIVE

The Company intends to launch a family of Web sites that leverage the branding,
customer set, and market awareness created by the OnHealth site. The editorial
focus, business models, and revenue streams of these additional sites are still
under development. Collectively, IVI intends to call these sites and the
OnHealth flagship site the OnHealth Network.

OTHER IVI ACTIVITIES

Agreement With and Investment in America's Health Network ("AHN")

As part of its integrated publishing strategy, the Company has
developed a strategic relationship with AHN to provide health and medical
programming on cable television. AHN has developed a consumer health information
cable television network which features a physician and other health care
professionals responding to viewers' call-in questions interspersed with home
shopping segments featuring health related products. AHN began broadcasting on
March 25, 1996.

<PAGE>

The Company entered into an agreement with AHN dated May 25, 1995 (the
"Agreement") pursuant to which the Company agreed to provide health and medical
information for AHN's cable television programming. The Agreement provides that
the health and medical content produced by the Company for broadcast on AHN
shall remain the property of the Company but shall be licensed exclusively to
AHN for use in a televised program. AHN has agreed to pay the Company a fee for
the production of content used by AHN equal to the Company's cost of producing
or obtaining the requested content plus 15%. In addition, AHN has agreed to pay
the Company $11,000,000 in royalties over the life of the Agreement. The Company
recognized $493,000 in royalty revenue in 1997, and applied additional payments
made by AHN against previously reserved receivables. The Company expects to
receive $2,250,000 in cash during 1998 under this agreement. The first $715,000
will be applied against the previously reserved receivables. The Agreement
extends to five years beyond the date AHN began broadcasting. The amount of
future royalties is subject to reduction, however, in the event the Company
fails to deliver health and medical content in accordance with the terms of the
agreement. The royalties will also be reduced to 25% of their original amount in
the event the Company terminates the exclusivity provisions of the Agreement. In
the event AHN achieves its revenue forecasts for its first five years of
operations, the Company may earn additional royalties which are payable within
45 days after the end of the fifth year of AHN's operations.

The Company holds an equity position in AHN which it acquired in March
1994 in exchange for an investment of $2,000,000, which was expensed in 1994.
AHN subsequently has acquired additional financing from other investors. The
Company estimates that its percentage interest in the equity of AHN at December
31, 1997 is approximately 4%.

Over the past year, AHN has been unable to consistently make the
minimum payments under this agreement, due to its own lack of funding. In late
1997, however, AHN received new venture funding, became current on payments owed
to IVI, and its contractual relationship with IVI continues.

Time Life Relationship

The Company has established a strategic relationship with Time Life to
broaden its content base. In February 1994, the Company entered into a license
agreement (the "First Time Life Agreement") with Time Life for the exclusive
license to develop, manufacture and distribute to third party resellers
interactive multimedia versions of six Time Life books. In September 1994, the
Company and Time Life entered into a second license agreement (the "Second Time
Life Agreement") which grants the Company an exclusive right-of-first-offer for
the right to publish non-print versions for any and all health and/or medical
material and/or titles which Time Life intends to publish for commercial
purposes in print media.

Pursuant to the First Time Life Agreement, three titles for children
were released during 1994. In order to focus on its integrated publishing
strategy to distribute health and medical information primarily to adult
audiences, the Company has suspended efforts to produce any further children's
titles and is closing out remaining inventory of the titles.

Pursuant to the Second Time Life Agreement, the first title developed
by the Company was Taking Control Of Your Health. Released in September 1996,
this home medical guide on CD-ROM provides comprehensive information on
alternative and conventional medicine. Based on the book from Time Life entitled
The Medical Advisor - The Complete Guide to Alternative & Conventional
Treatments, released in September 1996, the content for this product was
developed by a team of over 60 physicians.

<PAGE>

As compensation for developing the Taking Control of Your Health
concept, the Company granted Time Life 60,000 restricted shares of its Common
Stock. Under the Second Time Life Agreement, the Company funded Time Life's
development of the print version of the series at an estimated cost of
approximately $2.2 million through September 1996. At December 31, 1996, the
Company recorded an asset of $1,778,000, which represented the Company's
payments to Time Life, net of royalty payments received from Time Life. The
Company's policy was to amortize this asset over the period that revenues were
recognized. During 1997, revenues from the print version were not as high as
anticipated, and management determined that the asset was not realizable.
Accordingly, the Company wrote-off the then remaining asset balance and expensed
$1,741,000 in general and administrative expenses. Time Life retains the right
for marketing and distributing the print version of each title while the Company
has the sole right for the marketing and distribution of the non-print versions
of the title. The Company has the right to receive a royalty from Time Life for
the sale of the print version of the title and has a royalty-free license for
the distribution of the electronic version of the title. The term of the license
is perpetual from the date the title was accepted by the Company. Time Life has
the right to approve the final versions of the title, which approval shall not
be unreasonably withheld, prior to distribution. To date, Time Life has not
refused approval for a title developed by the Company.

Massachusetts Medical Society License Agreement

In November 1994, the Company and Massachusetts Medical Society ("MMS")
entered into a license agreement pursuant to which the Company was granted an
exclusive license to develop and distribute to end users the digital format
versions of the monthly newsletter "Health News" currently published by MMS. In
exchange for these rights, the Company assisted MMS with the funding of the
newsletter at a rate of $250,000 per year for the three years ended November
1997. The Company will also pay MMS a royalty based on a percentage of the net
revenues earned by sale of the digital format versions of the newsletter.

The term of the license agreement is five years after the date on which
the design format was approved by MMS and the content was available to the
Company and will thereafter automatically renew for periods of one year each.
MMS has the sole right to and responsibility for the marketing and distribution
of the title in any non-digital format. MMS has the right to approve the final
form of each digital newsletter, which approval shall not be, and to date has
not been, unreasonably withheld or delayed, prior to distribution.

Web Site Production

The Company operates a New Media division whose goal is to build Web
sites for third parties. Third party customers currently include Searle, North
Memorial Hospital, MGI Pharma, and St. Jude Medical Center.

Mayo Relationship and Transfer of Ownership of Mayo Health O@sis Web Site

Until the third quarter of 1997, the Company's relationship with Mayo
had been one of the most significant elements in the Company's development. Mayo
Foundation, parent corporation for Mayo Foundation for Medical Education and
Research, is the legal entity under which Mayo Clinic Group Practices, Mayo
Medical School and certain other Mayo institutions operate. In September 1997,
the Company completed a transfer of control and ownership interest in the Mayo
Health O@sis Internet web site to Mayo. The principal terms of the transfer of
ownership included: 1) Mayo made a cash payment to the Company of $2.7 million;
2) Mayo returned 490,000 shares of the Company's common stock which Mayo had
received as partial payment in two previous license agreements with the Company;
3) Mayo agreed to make payments to the Company of certain royalties on all net
revenues received by Mayo in connection with O@sis and certain non-O@sis
Internet projects through the year 2001; 4) Mayo was released from the Company's
previously granted "right of first offer" on all Mayo products published in
electronic media; and 5) Mayo assumed all O@sis operational expenses retroactive
to January 1, 1997. In addition, the Company is no longer required to gain
Mayo's approval before entering into agreements concerning the health or medical
education materials of another entity.

<PAGE>

Current Mayo License Agreements

In April 1991, the Company entered into a License Agreement (the "1991
License Agreement") pursuant to which it obtained an exclusive five-year license
from Mayo and William Morrow Company to develop, manufacture and distribute
interactive multimedia versions of Mayo Clinic Family Health Book. William
Morrow receives a minimum annual royalty, or if greater, a percentage of net
sales of the title. In December 1995, the Company amended the agreement with
Mayo and William Morrow to include online distribution rights and to extend the
rights period until September 2000.

In April 1993, the Company and Mayo entered into a License Agreement
(the "1993 License Agreement") which granted the Company an exclusive license to
develop, produce and market up to ten title areas with specific content to be
determined jointly by Mayo and the Company, in all digital optical electronic
publishing formats. The licenses with respect to the ten title areas are
severable, so that if one is terminated the others are not affected. Mayo
retains the right to market the titles developed under the 1993 License
Agreement to end users or persons employing or educating end users. The term of
the license is ten years for each title from the date of first commercial sale.
The term as to any new edition of a title recommences when the new edition is
released. Mayo retains broad approval rights with respect to the substance of
each title, the marketing plan, the business plan and advertising and
distribution and also receives a royalty based on a percentage of net sales for
each title. All of the Company's CD-ROM titles produced in conjunction with
Mayo, excluding Mayo Clinic Family Health Book, were granted under the 1993
License Agreement.

In September 1994, the Company and Mayo entered into another License
Agreement (the "1994 License Agreement") which grants the Company, for a period
of five years, the right to produce up to five additional titles in various
interactive or multimedia formats. The licenses with respect to each other are
severable so that if one is terminated the others are not affected. The term of
the license is ten years from the date of first commercial sale and the term, as
to any new edition of a title, recommences when the new edition is released.
Mayo Health O@sis, which was sold back to Mayo in September 1997, is the only
title produced under the 1994 License Agreement.

Mayo CD-ROM Titles

Pursuant to its still existing license agreements with Mayo (see "Mayo
License Agreements"), the Company markets six consumer reference titles or
packages and one professional title, all on CD-ROM.

Consumer Reference CD-ROM Titles

Mayo Clinic Family Health. This title is a source of health care
information for family members of all ages, including information on nutrition,
wellness, first aid, the health care system and the symptoms, prognosis and
treatment for more than 1,000 diseases and disorders. In September 1997, the
Company introduced the updated version 4.0 of Mayo Clinic Family Health, adding
built-in Microsoft Internet Explorer browser support for linking to Mayo Health
O@sis web site, several new graphics and illustrations and a new Personal Food
Pyramid.

Mayo Clinic Family Pharmacist. Released in June 1994 and updated with a
new 1997 drug database, this title is a comprehensive home reference guide to
prescription and over-the-counter medications and therapeutic and diagnostic
procedures. The USP, DI Volume II, "Advice for The Patient" (The United States
Pharmacopeial Convention, Inc.) is the core database for the disc and has been
supplemented with information provided by pharmacists and physicians from Mayo.
The Company also added built-in Microsoft Internet Explorer browser support for
linking to Mayo Health O@sis on the Internet.

<PAGE>

Mayo Clinic Ultimate Medical Guide II. Released in September 1997, it
is a combination of the latest versions of both Mayo Clinic Family Health and
Mayo Clinic Family Pharmacist packaged together. This powerful combination of
two highly-acclaimed titles is packed with information essential to family
health. With Mayo Clinic Family Health, consumers can search for in-depth facts
about diseases, nutrition, anatomy, common symptoms, home safety and more. Mayo
Clinic Family Pharmacist offers details on thousands of drugs, early detection
and first aid.

Mayo Clinic - The Total Heart. This title is a comprehensive source of
information concerning the heart, cardiovascular disease, diet plans and
exercise programs to promote a healthy heart. The print version of the title,
entitled Mayo Clinic Heart Book, was released by Mayo in August 1993, and the
Company released the interactive multimedia version in October 1993.

Mayo Clinic Sports, Health & Fitness. Released in November 1994, this
title was developed in cooperation with the Mayo sports medicine department and
in collaboration with ESPN. It is an individualized interactive fitness,
nutrition, and sports physiology guide.

Mayo Clinic Health Encyclopedia. First released in 1994 and updated in
1995, this product combines all four Mayo Clinic CD-ROM titles into a single
package.

Professional CD-ROM Title

PrimePractice. This title is a comprehensive resource developed to meet
the ongoing education needs of primary care physicians. PrimePractice is a
CD-ROM series marketed to physicians in North America specializing in internal
medicine, general practice or family practice. The first issue of this series
was completed in July 1994 and the last in December 1996. Subscribers to
PrimePractice receive a CD-ROM series covering current topics of interest to
primary care physicians including the latest developments in cardiovascular
disease, endocrinology, gastroenterology, hematology, pulmonary medicine and
other areas. Each issue of the series provides the physician with ten hours of
continuing medical education credits (CME). By subscribing to the series, a
physician can obtain up to 40 hours of CME on an annual basis. Although
requirements for annual CME vary from state to state, most primary care
physicians are required to obtain 50 hours of CME per year.

In December 1995, the Company entered into a Distribution Agreement
with Churchill Livingstone whereby Churchill Livingstone agreed to market
PrimePractice to physicians and others with influence over physicians'
continuing education. Before entering into this agreement, the Company marketed
PrimePractice through its own sales staff, catalogs and health sciences
bookstores. Churchill Livingstone was acquired by Harcourt Brace, Inc. in
September 1997 and the Company and representatives of Harcourt Brace, Inc. are
currently discussing a termination and settlement related to the Distribution
Agreement.

Agreement With Davidson & Associates, Inc. for CD-ROM Distribution

In late 1995, the Company entered into an agreement with Davidson &
Associates, Inc. to strengthen distribution capabilities. Under the agreement,
Davidson handles the sales and marketing of the Company's consumer oriented
family health reference CD-ROM titles. Davidson is a leading publisher and
distributor of multimedia educational and entertainment software for both the
home and school markets. As such, the Company believes that this agreement has
provided greater access to consumer channels while enabling the Company to focus
its marketing and sales staff on the Company's online business.

<PAGE>

Marketing, Distribution and Manufacturing of CD-ROMs

The Company's non-retail distribution is done outside of the Davidson
agreement. This includes arrangements and sales to original equipment
manufacturers ("OEM") for bundling with the OEM's hardware. Bundling consists of
selling software titles to computer hardware vendors and computer and peripheral
manufacturers for inclusion with their products. In addition to revenue,
bundling creates positive word-of-mouth endorsements from consumers of the
Company's titles which could ultimately lead to greater sales at the retail
level.

The number of CD-ROM titles competing for retail shelf space has
increased substantially in recent years. In addition, the distribution channels
through which the Company sells its products are known for rapid change.
Mergers, consolidations and financial difficulties of both distributors and
retailers are typical as is the emergence of new retailers. This environment
breeds an intense competition among software products for shelf space and
retailer support. In order to remain competitive and maintain distributor
relationships, the Company's policy is to accept product returns from its
distributors.

All of the Company's CD-ROM titles are currently replicated by Sony
Disc Manufacturing ("Sony"), a division of Sony Electronic Publishing Company.
Sony also warehouses the Company's finished goods inventory and handles order
fulfillment. Although the Company anticipates that its relationship with Sony
will continue, the Company believes that other manufacturers are available to
replicate its titles and handle its order fulfillment.

MARKETING AND PROMOTION

The Company's strategy is designed to strengthen the OnHealth brand name, drive
traffic to the network of OnHealth Network sites, build the duration and
frequency of visitor usage, encourage user loyalty and develop incremental
revenue opportunities. Some of the specific strategies that are, or will be,
employed to do so include:

Advertising: Raising awareness of the OnHealth brand through banner advertising
campaigns in relevant high-traffic sites. Online advertising may also be
supplemented through brand based media outside the web.

Public relations: An active campaign by which the OnHealth brand and its
products are highlighted in news, features and related editorial contexts to
increase consumer and trade awareness.

Promotion: Traffic building programs with publicity value will be implemented
quarterly. Relevant and preferred listings in directories, databases and search
engines will also be pursued.

Cooperative Marketing: Co-promotion through compatible editorial sites and media
partners.

Syndication: OnHealth editorial content will appear on other sites, in exchange
for payment or for promotional consideration.

CONTENT STRATEGY

The Company's goals for its editorial content are to create high-value, useful,
accessible, and trustworthy editorial elements for its users. These elements may
be:

Proprietary: Created exclusively for OnHealth by Company employees or
contractors.

Syndicated: Licensed for distribution via OnHealth, on an exclusive or
non-exclusive basis.

Linked: OnHealth may "point" to other content elsewhere on the World Wide Web.
Although this content is not exclusive to OnHealth, the Company adds value by
finding and pre-qualifying the best health-related content on the Internet.

Additional content to be added to the Network in the future may include
high-value content, which may be licensed in context of user models that go
beyond advertising support.

<PAGE>

Management believes that through a combination of these content strategies, the
OnHealth brand can create a unique product that will have more user value and
will have a potential for greater levels of usage than any health-related
content now on the World Wide Web.

TECHNOLOGY

The Company has implemented, and intends to continue to implement, a combination
of proprietary technologies developed in-house by the Company and commercially
obtained, licensed technologies. These technologies are employed in hosting the
Company's Web sites, delivering licensed and original content and advertising,
supporting content development and maintenance, transaction processing,
security, and back-end functions.

COMPETITION

The editorial environment in interactive media is new, highly competitive and
rapidly evolving. The competitive frame varies depending upon the area of the
company.

Online Competitors

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

The key operators of health-related sites on the Internet today include:

Divisions or affiliates of print publishers, including Healthy Ideas (Rodale
Press), Phys (Conde Nast), and Thrive (jointly owned by Time Inc. and America
Online).

Ventures of online service firms, including Better Health (iVillage) and Thrive
(partly owned by America Online and Time Inc.).

Public Sector and institutional sites, including the National Institute of
Health and university sites. While these sites compete for viewer time and
attention, they do not typically compete for advertising or transactional
revenues.

Commercial online services, principally the proprietary health-related content
presented to subscribers to America Online and Microsoft Network.

Internet sites other than health-related sites, including general interest
sites, such as news sites and search engines, which often host some
health-related content in context of other editorial materials.

In addition, the online sites compete to some extent with other media, including
print and television. The Company believes that the principal competitive
factors which differentiate OnHealth from competing brands and sites include
timeliness of content, the users' perception of content interactivity, content
reliability and trustworthiness, design and usability factors, comprehensiveness
and level of promotion.

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

<PAGE>

Web Site Production Competitors

The Company's web site production business competes with development resources
in independent production shops, advertising agencies and client companies'
in-house production resources. The Company believes that competitive factors
that favor IVI's Web site production business include better knowledge of the
health marketplace, Company relationships acquired through the OnHealth Network
and an established base of talented professionals.

CD-ROM Competitors

INTELLECTUAL PROPERTY

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

EMPLOYEES

As of March 31, 1998, the Company employed 25 people on a full-time basis. As
the situation arises, the Company also uses part-time employees. None of the
Company's employees are represented by a labor union and the Company considers
its relationship with its employees to be good. The Company believes that some
measure of its future success is dependent upon attracting and retaining
qualified employees, and competition for hiring such employees is intense.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Limited Operating History and Accumulated Deficit

The Company was incorporated in 1990 and has been operating continuously since
1991. However, it has only been active online since 1996. The Company,
therefore, has a limited history of operation on which to base analysis of
financial results.

Since its founding in 1990, the Company has generated an accumulated deficit of
approximately $78.6 million. The Company's ability to return profits to its
investors will be dependent upon creating services with high degrees of
leverage. In turn, that will require creation of significant revenue streams
from its online properties, earning substantial gross margins on those revenue
streams and controlling its costs of operation.

<PAGE>

The Company anticipates continued operating losses in the near future, as the
OnHealth flagship site is redesigned and the OnHealth Network is enhanced. There
is no assurance that the Company will ever attain profitability.

Unpredictability of Future Revenue Streams

Since the Company's online operating history is very limited and the economics
of the Internet are still evolving, it is difficult to forecast future revenues
with a high degree of accuracy. While the investments that the Company plans in
personnel, product and development are largely fixed and are committed to in the
near term, the expected operating profits are highly variable with respect to
consumer demand over the longer term. For this reason, shortfalls in consumer
demand will have a significant negative impact on Company profitability.

Results are expected to vary to some extent on a quarterly basis. The
advertising and retail industries typically experience their best quarter in the
fourth quarter of each year, and to the extent that the Company relies upon
advertising and transactional revenues, its revenues will be similarly variable.
Due to the health related nature of editorial content, management believes that
OnHealth revenues will not be as seasonal as the remainder of the advertising
and retail industries.

The Company expects that its CD-ROM sales will be subject to the seasonality
that generally affects the computer software business. Typically net revenues,
gross margins and operating income are fairly constant in the first, second and
third quarters and are highest during the fourth quarter. This seasonality is
due principally to the increased demand for the Company's CD-ROM products during
the holiday season. Because revenues from other segments of the Company's
integrated publishing strategy are not subject to the same seasonality, the
development of these aspects of the Company's business in 1997 did reduce the
impact the seasonality in the CD-ROM segment of the Company's business has on
the Company's operations.

Competition

There are a number of competitors currently delivering online health content,
and it is likely that more competitors will emerge in the near future. Many of
today's competitors are better financed, have longer operating histories and
better brand recognition than the Company, and some have internal distribution
or cross-promotional opportunities to support their online ventures that the
Company does not have and can not replicate for a reasonable investment. It is
possible that existing or emerging competitors may be able to secure critical
editorial content or distribution relationships on an exclusive basis, or may
raise a provider's expectation about the value of such assets. For these
reasons, increased competition may result in diminished profit margins, market
share or brand value.

The Company expects that competition will increase online in the future, due to
more entrants introducing competitive products, and due to industry
consolidation, which can result in better-financed competitors.

The intense competition in the consumer software business continues to
accelerate as an increasing number of companies, many of which have financial,
managerial, technical and intellectual property resources greater than those of
the Company, offer products that compete directly with one or more of the
Company's products. Sales of products on older platforms have declined, and
there can be no assurance that sales of these products will not decline further
or experience lower than expected sales levels. There can be no assurance that
sales of the Company's existing products will continue to sustain market
acceptance and to generate significant levels of revenue in subsequent quarters.
In addition, retailers of the Company's products typically have a limited amount
of shelf space and promotional resources for which there is intense competition.
There can be no assurance that retailers will continue to purchase all of these
products or provide these products with adequate levels of shelf space and
promotional support.

<PAGE>

Risks Related To System Development and Operation

The enhancement of onhealth.com as part of the OnHealth Network is dependent
upon various development efforts which will be performed by in-house Company
employees and by contractors. There can be no assurance that this development
effort will be completed in a timely fashion. To the extent that development is
incomplete or delayed, the Company will incur additional development expense and
may lose a portion of its advantage to competitors.

All companies that rely on the Web are dependent upon the continuous, reliable
and secure operation of Web servers and related hardware and software. To the
extent that service is interrupted, consumers will be inconvenienced and
commercial clients will suffer from a loss in advertising or transaction
delivery. These shortfalls will directly result in a revenue loss to the
Company.

The Company's computer and communications hardware are protected through
physical and software safeguards. However, they are still vulnerable to fire,
earthquake, flood, power loss, telecommunications failures, physical or software
break-ins and similar events. The Company does not have full redundancy for all
of its computer and telecommunications facilities and it does not carry business
interruption insurance to protect it in the event of a catastrophe. Such an
event could lead to significant negative impacts on the Company's operating
results and financial condition.

Management of Potential Growth

To accommodate the demand of additional editorial content and distribution
channels for the OnHealth Network, the employee base could grow significantly
from the March 31, 1998 level of 25 employees. The expansion of the Company's
workforce could place a significant strain on the Company's management,
financial resources and infrastructure. There is no assurance that the Company
will be able to attract and retain employees with the appropriate skill sets, or
that the Company will be able to manage growth effectively. If the Company is
unable to manage growth in the coming years, there could be an adverse affect on
the Company's operations.

Risks of New Business Areas

Some of the incremental opportunities that will comprise the OnHealth Network
may follow business models that are unfamiliar to the Company today, or that are
completely without precedent. These expansions will require significant
commitment of resources and time, and there is no assurance that the Company
will benefit from being the first entrant in a new business or economic model,
or that such business or economic model will be viable. It is also possible that
new businesses or economic models will impair the Company's ability or
reputation with respect to existing customers or suppliers, to the detriment of
the OnHealth brand. A lack of market response or the failure of an economic
model could have detrimental effects on the Company's results.

Risks Associated With Strategic Alliances

The Company may elect to enter into strategic alliances with respect to content
provision, promotion, distribution or technology, among other areas. Such
alliances carry risks that are associated with any alliance. These risks may
include difficulty in coordinating the roles of strategic allies, the
possibility of disruption of the Company's core business, maintenance of
editorial or quality standards and the potential to damage relationships with
current Company employees. There is no assurance that the Company's alliances
will avoid these and similar risks.

<PAGE>

Rapid Technological Change

The Internet's technology is changing at a rapid pace. In order to remain
competitive, the Company must remain at the forefront of the new features and
capabilities that are being and that will be introduced. This may entail a
continuous level of development and capital spending. If the Company is unable
to make these changes, for financial, operational, legal, or any other reason,
it risks a loss of market share and some portion of its brand identity.

Reliance On External Content

The Company intends to produce only a portion of the editorial content that will
be found on the OnHealth Network, and none of the content utilized by CD-ROM or
cable television distribution media. It will be reliant on third-party firms
that have the expertise, technical capability, name recognition, and willingness
to syndicate product content for branding and distribution by others. As
health-related content grows on the Web, there may be increasing competition for
the best product suppliers, which may result in a competitor to the Company
acquiring a key supplier on an exclusive basis, or in significantly higher
content prices. Such an outcome could make the OnHealth Network less attractive
or useful for an end user, or could reduce the profitability of IVI. Either
event would have a materially adverse impact on the Company's results.

Dependence On Key Personnel

The Company is critically dependent upon its senior management team and some
other key employees to create and maintain the OnHealth Network. See "Executive
Officers and Key Employees of the Registrant." The Company does not carry "key
person" insurance on any employee. If the Company were to lose any key employee,
its financial and operational results would suffer.

Reliance On External Financing

The Company's operations generated a negative cash flow during 1997. The degree
to which the Company is a net user of cash is likely to increase in 1998, as a
result of the expansion plans for the OnHealth Network and as a consequence of
focusing on a new business model. The Company will therefore depend upon
external financing for operations and liquidity. There can be no assurance that
additional capital, on a debt or equity basis, will be found, or if found that
it will be on economically viable terms.

On April 10, 1998, the Company closed $5 million of new financing through a
private placement transaction. The funds were invested by two institutional
investors and will be used primarily for marketing and distribution purposes in
association with the launch of the redesigned OnHealth.com Web site
(www.onhealth.com). The investment is in the form of a 5% Convertible Redeemable
Preferred Stock. The Company believes that the completion of this financing
transaction will allow the Company to continue to meet its ongoing financial
obligations and operate through, at least, December 31, 1998.

Governmental Regulation and Legal Issues

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

<PAGE>

OTHER

Product Development/Research and Development

In 1997, 1996 and 1995, product development expenses were $4,243,000, $5,651,000
and $7,494,000, respectively. In addition, in 1997, 1996 and 1995, product
development expenses paid for by third parties were $682,000, $1,204,000 and
$1,555,000, respectively.

Protection of Proprietary Rights

The Company regards the software it owns as proprietary and relies upon a
combination of copyrights, trade secret laws, employee and third-party
non-disclosure agreements and other methods to protect its products. The Company
believes that copyright protection for its titles is less significant to the
Company's success than factors such as the knowledge, ability and experience of
the Company's personnel, and the quality of its new product development and
distribution efforts.

Backlog

The Company had no significant backlog at fiscal year end of 1997, 1996, or
1995.

Customers

In 1997 and 1996, the Company recognized revenue of $493,000 and $1,972,000,
respectively, from the Company's content agreement with AHN. Net sales to an OEM
manufacturer in 1996 totaled $1,394,000. Also in 1996, $1,000,000 of revenue was
recognized from the Company's online content agreement with AT&T which was
terminated in that year. No individual customer accounted for 10% of the
Company's net revenues in 1995.

ITEM 2. PROPERTIES

During 1997, the Company's principal executive and administrative offices
consisted of approximately 40,000 square feet in an office building in Eden
Prairie, Minnesota, a suburb of Minneapolis. The lease also covered
approximately 2,000 square feet of storage space. The Company terminated the
Eden Prairie lease effective March 31, 1998.

Effective in the first quarter of 1998, the Company's principal executive and
administrative offices are located in Seattle, Washington. Starting in January
1998, the Company began subleasing approximately 1,500 square feet of office
space in Seattle, Washington on a month-to-month basis. The Company has entered
into a lease for approximately 7,000 square feet of space and anticipates moving
into the new building in May 1998. The lease expires approximately 62 months
from the move in date.

Effective March, 1998, the Company's sales personnel are located in an office
building in Edina, Minnesota, a suburb of Minneapolis. The lease is for
approximately 1,000 square feet and expires in September 1998.

The Company also leases space in the following locations: (1) 4,124 square feet
in an office building in Carlsbad, California ending in approximately June 1999
and (2) 790 square feet in an office building in Carlsbad, California ending in
May 1998. The Company does not currently intend to renew either of these leases.

<PAGE>

ITEM 3. LEGAL PROCEEDINGS

In February 1996, an action in the District Court of Hennepin County (Minnesota)
was brought by T. Randal Productions et al. against the Company and one current
and two former employees. The plaintiffs made various allegations, including
misappropriation of corporate opportunities and trade secrets by the Company and
its employees and sought award of monetary damages, exemplary damages and
royalties substantially in excess of $10.0 million. In November 1997, a jury
found that there was no joint venture between T. Randal and the Company and/or
any of its employees but awarded T. Randal $480,000 plus interest for damages
sustained to its business. The jury verdict and the resulting judgment entered
by the court on March 24, 1998 is subject to motions for a new trial, amended
findings and for judgment notwithstanding the verdict and to appeal to the Court
of Appeals. The plaintiffs also have an action pending against certain
affiliates of the Company on the same grounds on which the action against the
Company was based. The Company has indemnified these principles against any
damages arising out of these claims.

In 1996, Berkshire Multimedia Group, Inc. ("Berkshire") initiated mediation
regarding a dispute with the Company. Shortly after an unsuccessful mediation
conference was held in September 1996, Berkshire Multimedia Group filed a demand
for arbitration alleging that the Company breached its obligations under a
contract. An arbitration hearing was completed in January 1997, and in February
1997 the arbitration panel awarded Berkshire $300,000. Hennepin County
(Minnesota) District Court vacated that award on May 29, 1997, and Berkshire
appealed the case. The Court of Appeals heard the case in late 1997 and
reinstated the original decision of the arbitration panel in January 1998. On
February 25, 1998, the Hennepin County (Minnesota) District Court issued an
order directing that judgment be entered against the Company in the amount of
$300,000 plus interest.

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

There was no matter submitted to the vote of security holders during the fourth
quarter of 1997.

<PAGE>

EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT

Set forth, below, are the names of the executive officers and key employees of
the Company as of April 8, 1998, their ages and employment for the past five
years.
<TABLE>
<CAPTION>
Name Age Title
- ---------------------- ---- ----------------------------------------------------------
<S> <C> <C>
Robert N. Goodman 45 President and Chief Executive Officer of the Company
Charles A. Nickoloff 37 Vice President, Secretary, Acting Chief Financial Officer
Michael D. Conway 29 Controller, Vice President of Finance
Rebecca Farwell 36 Editor in Chief
Jim L. Dixon 32 Vice President of Development
Deborah K. Taylor 38 Vice President of Marketing
Miriam Adelman 26 Vice President of New Media
Timothy J. Walsh 36 Vice President of Sales
</TABLE>

Executive officers of the Company are elected at the discretion of the Board of
Directors with no fixed term. There are no family relationships between or among
any of the executive officers or directors of the Company.

ROBERT N. GOODMAN. Mr. Goodman joined the Company in November 1997 as president
and chief executive officer. From April 1997 to November 1997, he was the
director of business development for MSNBC Interactive News, LLC. From December
1995 to April 1997, Mr. Goodman was an independent consultant working for
Microsoft Corporation. Mr. Goodman was in the process of moving from San
Francisco, CA to Seattle, WA during October and November 1995. From November
1993 to October 1995, he was Assistant General Counsel for The 3DO Company. From
April 1993 to November 1993, Mr. Goodman was General Counsel for Asymetrix
Corporation.

CHARLES A. NICKOLOFF. Mr. Nickoloff is a founder of the Company and has been
Vice President and Secretary since operations began in February 1991. He also
was a director from February 1991 to February 1998. Mr. Nickoloff has also
served as Acting Chief Financial Officer since April 1996 and has held other
management positions in his seven years with the Company.

MICHAEL D. CONWAY. Mr. Conway joined the Company in early January 1998 as
controller and vice president of finance. From November 1997 to December 1997,
he worked as an independent contractor for PhotoDisc, Inc. - a developer of
high-resolution photographs on CD-ROM , and Sierra On-Line, Inc.- a leader in
entertainment software and a subsidiary of Cendant. From May 1996 to October
1997, Mr. Conway served as the Accounting Manager at Sierra On-Line, Inc. From
August 1994 to May 1996, Mr. Conway served as a Senior Accountant at Deloitte &
Touche LLP. From October 1992 to August 1994, he held various positions at KPMG
Peat Marwick including Senior Accountant. Mr. Conway received his B.A. in
Economics/Accounting from Claremont McKenna College, and his M.B.A. from the
Claremont Graduate School's Peter Drucker School of Management.

REBECCA FARWELL. Ms. Farwell joined the Company in early February 1998. Prior to
that, she was the editorial director for Discovery Channel Online (DCOL) and
Discovery Publishing. She began her career at the Discovery Channel in 1987 as
the managing editor of TDC Magazine.

<PAGE>

JIM L. DIXON. Mr. Dixon joined the Company in early January 1998 as Vice
President of Development. From October 1996 to December 1997, Jim was the
principal of his own business (The Voodoo Softworks), where he secured several
contracts with Microsoft and other companies as an independent software
development house. From March 1996 to October 1996, he was the lead developer
for Alpenglow, Inc., a small multimedia and web development house. From February
1994 to March 1996, he was the lead developer for Medio Multimedia, Inc.--a
producer of multimedia title and magazine CD-ROMs. And from September 1990 to
February 1994, Jim was a software test manager at Microsoft, in charge of the
Visual Basic products. In 1988, he graduated with a B.S. in Computer Science and
Minor in Business from the Evergreen State College in Olympia, WA.

DEBORAH K. TAYLOR. Ms. Taylor joined the Company in January 1998 as Vice
President of Marketing. From April 1994 to December 1997, she was employed as a
Senior Vice President, Management Supervisor for Elgin DDB, the Seattle office
of DDB, one of the world's largest advertising and communications agencies,
managing new business and the Nordstrom retail account. From January 1990 to
April 1994, Ms. Taylor was the Vice President, Account Director of McCann
Erickson in Seattle, another worldwide advertising agency. At McCann Erickson,
she ran the strategic communications efforts for several consumer products
acccounts. Ms. Taylor has a B.A. in American History from Mills College in
California.

MIRIAM ADELMAN. Ms. Adelman joined the Company in March 1998 as vice president
of new media. From November 1996 to March 1998, she ran Adelwave Productions--a
sole proprietorship that produced websites for Microsoft. From June 1994 to
November 1996, Miriam worked as an interactive media producer and marketing
consultant for Microsoft. From September 1993 to June 1994, Miriam was a
freelance illustrator for print magazines. Miriam received her BA in studio art
from Carleton College.

TIMOTHY J. WALSH. Mr. Walsh has been Vice President of Sales and Marketing since
October 1996. Prior thereto, Mr. Walsh was the Vice President of International
Operations at TRO Learning, Inc. from October 1995 to September 1996. Mr. Walsh
held various other management positions during his 10 years at that company.

BOARD OF DIRECTORS AT APRIL 8, 1998
<TABLE>
<CAPTION>
Name Age Title
- ----------------------- ---- -------------------------------------------------------
<S> <C> <C>
Michael A. Brochu 44 President and Chief Executive Officer of Primus
Robert N. Goodman 45 President and Chief Executive Officer of the Company
Ronald E. Eibensteiner 47 President of Wyncrest Capital
Alan D. Frazier 46 Managing Partner of Frazier and Company
Timothy I. Maudlin 47 Managing Partner of Medical Innovation Partners
Ann Kirschner 47 Vice President of NFL Interactive for NFL Enterprises
Ram Shriram 41 Vice President of Netscape Communications
Rick Thompson 38 Vice President Hardware Group, Microsoft Corp.

</TABLE>

<PAGE>

PART II

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

The Company's Common Stock, initially offered to the public on October 6, 1993,
is quoted on the NASDAQ SmallCap Market system under the symbol "IVIP."

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

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

1996
- -----
Fourth Quarter $ 3 7/8 $ 2 15/16
Third Quarter 7 3/8 1 1/8
Second Quarter 14 3/8 5 7/8
First Quarter 14 1/2 11 1/4

At April 8, 1998 there were approximately 125 record holders of the Company's
Common Stock, excluding shareholders whose stock is held either in nominee name
and/or street name brokerage accounts. Based on information which the Company
obtained from its transfer agent, there are approximately 3,175 shareholders of
the Company's Common Stock, including shareholders whose stock is held either in
nominee name and/or street name brokerage accounts.

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

Recent Sales of Unregistered Securities.

In November 1996, the Company issued $3,500,000 of 9% Convertible Subordinated
Debentures. These debentures were converted into Common Stock on October 28,
1997 at a rate of $2.00 per share, resulting in the issuance of 1,750,000
unregistered shares of Common Stock. Because the offering involved only 16
debenture holders and no general solicitation occurred, in addition to other
factors, the issuance did not involve a public offering and therefore the
Company relied upon Section 4(2) of the Security Act of 1933 for such issuance.

In November 1995, the Company issued 2,000 shares of 6% Series A Convertible
Redeemable Preferred Stock for $2,000,000 to Davidson & Associates, Inc., in
connection with entering into a distribution agreement. The Preferred Stock was
converted into Common Stock on October 30, 1997 at a rate of $2.00 per share,
resulting in the issuance of 1,000,000 unregistered shares of Common Stock. The
Company relied on Section 3(a)(9) of the Securities Act of 1933 on the ground
that the issuance was pursuant to conversion of convertible securities.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

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

(In Thousands, Except Per Share Data)
Statement of
Operations Data: Year Ended December 31
1997 1996 1995 1994 1993
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net revenue $ 3,761 $ 9,470 $ 11,970 $ 7,013 $ 2,264
Cost of revenues 2,541 5,076 6,231 2,402 580
-------- -------- -------- ------- --------
Gross margin 1,220 4,394 5,739 4,611 1,684

Cost and expenses:
Product development 4,243 5,651 7,494 19,503 6,614
Sales and marketing 1,347 2,705 7,473 9,694 2,586
General and administrative 6,892 6,364 5,647 5,585 1,495
Investment in affiliate 2,263
-------- -------- -------- ------- --------

Loss from operations (11,262) (10,326) (14,875) (32,434) (9,011)

Other income, net 315 169 641 1,177 184
-------- -------- -------- ------- --------

Net loss (10,947) (10,157) (14,234) (31,257) (8,827)

Preferred stock dividends (100) (119) (20)
Preferred stock accretion (43) (60)
Preferred stock deemed dividend (2,875)
-------- -------- -------- ------- --------
Net loss applicable to common stock
($13,965) ($10,336) ($14,254) ($31,257) ($8,827)
======== ======== ======== ======= ========

Net loss per common share
Basic and diluted ($1.73) ($1.36) ($1.90) ($4.75) ($5.11)
======== ======== ======== ======= ========

Balance Sheet Data: December 31
1997 1996 1995 1994 1993
-------- -------- -------- ------- --------
Cash, cash equivalents and
short-term investments $ 2,488 $ 3,462 $ 7,759 $20,653 $19,835
Working capital (deficiency) (1,252) 3,230 8,607 20,735 19,622
Total assets 4,577 13,411 18,352 32,101 22,561
Convertible
subordinated debentures 3,500
Total liabilities 4,559 8,606 3,627 5,133 1,556
Convertible redeemable preferred
stock 1,905 1,845
Shareholders' equity 18 2,900 12,880 26,968 21,005

</TABLE>

<PAGE>

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

Overview

Since its inception, the Company's strategy has been to develop online and cable
television platforms, as well as maintain its staple platform, CD-ROMs, in order
to enhance an integrated approach to publishing electronic health and medical
information. In 1997 the Company was distributing its health and medical
information to end users via all three platforms. Under this strategy, the
Company was never able to attain profitability, and, at December 31, 1997, had
an accumulated deficit of $78,576,000. In 1997, the Company's Board of Directors
revised its business strategy and brought in an entirely new management team and
other key employees skilled in the development of internet websites. The
Company's current strategy is to focus its resources on the development of an
internet-delivered, consumer-oriented network of health and wellness sites.

Results of Operations

The following table sets forth selected income statement data of IVI Publishing,
Inc. and such data as a percentage of net revenues for the three years ended
December 31, 1997.
<TABLE>
<CAPTION>

Year ended December 31,
(Dollar amounts in thousands)
---------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----

<S> <C> <C> <C> <C> <C> <C>
Net Revenues $ 3,761 100% $ 9,470 100% $ 11,970 100%
Gross margin 1,220 32% 4,394 46% 5,739 48%
Operating expenses 12,482 332% 14,720 155% 20,614 172%
Operating loss (11,262) (299)% (10,326) (109)% (14,875) (124)%
Net loss ($10,947) (291)% ($10,157) (107)% ($14,234) (119)%
</TABLE>

Revenues
Revenues for 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>

1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Product sales and licensing revenue $ 1,990,000 $ 5,152,000 $ 8,333,000
Contract development revenue 1,220,000 1,346,000 1,637,000
Cable television licensing revenue 493,000 1,972,000 1,000,000
Online revenue 58,000 1,000,000 1,000,000
----------------- ----------------- -----------------

Net revenues $ 3,761,000 $ 9,470,000 $11,970,000
================= ================= =================
</TABLE>

Sales for 1997, 1996 and 1995 of $3,761,000, $9,470,000 and $11,970,000,
respectively, represent a decrease of 60% from 1996 to 1997 and 21% from 1995 to
1996. The 60% decrease in 1997 is due to a substantial reduction in product
sales and licensing revenue of $3,162,000, or 61%, a substantial reduction in
cable television licensing revenue of $1,479,000, or 75%, and a decrease in
online revenue from $1,000,000 to $58,000. The 21% decrease in 1996 is due
primarily to lower product sales and licensing revenue which declined
$3,181,000, or 38%, relative to the previous year. This was partially offset by
a $972,000 increase in cable television licensing revenue.

Product sales and licensing revenue
Product sales and licensing revenue has declined steadily from 1995 to 1997. The
decrease in revenue of $3,162,000 from 1996 to 1997 was a result of increased
competition and lower unit sales as the Company shifted its focus to its online
efforts and released fewer new CD-ROM products. In 1998, the Company expects a
continued shift in focus toward the online efforts, and anticipates intense
competition to continue in the CD-ROM business.

<PAGE>

In late 1995, the Company signed a new CD-ROM distribution agreement which
resulted in a lower net sales price to the Company on products sold and
contributed to the decrease of $3,181,000 in revenue from 1995 to 1996. Also
during this period, increased competition for shelf space led to further price
erosion in addition to a decrease in unit sales.

Contract development revenue
Contract development revenues decreased slightly from 1996 to 1997, and from
1995 to 1996. The decrease represents managements efforts to control costs and
focus on more profitable contracts.

Cable television licensing revenue
Cable television licensing revenue reflects revenue from the content and royalty
agreement with America's Health Network (AHN). Under the agreement, the Company
is licensing its multimedia content to AHN from May 1995 to March 25, 2001, and
is to receive a minimum of $11,000,000 in licensing royalties over the life of
the agreement. This revenue was being recognized evenly over the life of the
contract. Due to the gradual increase in actual payments versus the
straight-line revenue recognition policy, a receivable was recorded for the
difference between the revenue recognized and the cash received during the early
years of the contract. The $972,000 increase in revenue from 1995 to 1996 was a
result of a full year of revenue in 1996 compared to a partial year in 1995. The
$1,479,000 decrease in revenue from 1996 to 1997 was a result of AHN's inability
to make the required payment due to its financial difficulties. In June 1997, as
a result of the Company not receiving its quarterly payment, the outstanding AHN
receivable was fully reserved. As a result of the uncertainty of AHN's ability
to pay royalties under the agreement, the Company began recognizing royalty
revenue only on a cash basis. In December, AHN resumed payments and the Company
received a royalty payment of $1,313,000. This payment was applied against the
previously recorded receivable, and the related bad debt reserve of $1,313,000
was reversed. At December 31, 1997, the Company has a fully reserved receivable
of $715,000.

Online revenues
The online revenues recorded in 1995 and 1996 related to nonrefundable advances
payable to the Company under the exclusive agreement signed with AT&T in October
1995. Online revenues decreased $942,000 from 1996 to 1997 due the
discontinuance by AT&T of the AT&T Healthsite in August 1996. The $58,000 in
revenue in 1997 was generated through the sale of site sponsorships, advertising
and premium services on its OnHealth.com and former O@sis Web site. In September
1997, the Company entered into an agreement with Mayo Foundation which included
the full transfer to Mayo of the Company's ownership interest in the O@sis
Website (See Note 15 to the financial statements).

Gross Margin

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

Gross margin as a percentage of net revenues was 46% in 1996 compared to 48% in
1995. The slight reduction in gross margin percentage was due to lower gross
margins realized on CD-ROM retail sales due to decreased pricing as a result of
increased competition.

<PAGE>

Operating Expenses

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

Product development expenses decreased in 1996 to $5,651,000 from $7,494,000 in
1995, or 25% resulting from fewer CD-ROM titles being developed combined with
management's efforts to reduce costs.

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

Sales and marketing expenses were $2,705,000 in 1996, compared to $7,473,000 in
1995. The decrease of 64% is primarily a result of the delegation of retail
product distribution to Davidson in September of 1995. Additionally, there were
fewer CD-ROM titles in 1996 than in 1995, which contributed to reduced marketing
expenses.

General and Administrative

General and administrative expenses were $6,892,000 in 1997 compared to
$6,364,000 in 1996. The increase of 8% was due to extensive litigation and
special charges in 1997. The Company recorded $808,000 in expenses related to a
settlement of litigation with Viridis, Inc. and received an adverse jury award
of $480,000, plus interest from a dispute with T. Randal Productions, et al. in
1997 (See Note 17 to the financial statements). In the fourth quarter of 1997,
the Company recorded charges of $1,572,000 for the relocation of the Company's
headquarters from Minneapolis, Minnesota to Seattle, Washington. These charges
included $610,000 in severance to officers and employees and $973,000 for asset
dispositions and lease termination costs (See Note 17 to the financial
statements). Also in 1997, the Company wrote-off $1,741,000 in other assets
related to an agreement with Time Life, Inc. (See Note 4 to the financial
statements). Excluding the litigation and special charges, the Company's
reduction in general and administrative expenses was the result of the
downsizing of the facilities and personnel and management's efforts to
streamline operating costs.

General and administrative expenses were $6,364,000 in 1996 compared to
$5,647,000 in 1995. The overall increase of 13% was due to special charges
incurred in the third and fourth quarters of 1996. These charges included
$978,000 related to the downsizing of facilities and personnel. Additionally,
there was a write-off of an $836,000 receivable to bad debt expense. Finally, in
the fourth quarter, there was a special charge of $300,000 due to an adverse
arbitration award. Excluding these special charges, the resulting decrease in
general and administrative expenses was the result of management's efforts to
streamline operating costs.

Interest Income (Expense)

Interest income was $106,000 in 1997 and $203,000 in 1996. The decrease of 48%
was due to decreases in cash balances in 1997. Interest expense was $264,000 in
1997 compared to $34,000 in 1996. Interest expense increased in 1997 because the
Company's convertible subordinated debentures were issued in late 1996 and were
outstanding for most of 1997.

Interest income was $203,000 in 1996 compared to $641,000 in 1995. The decrease
was due to lower cash balances.

<PAGE>

Other Income, net

Other income was $473,000 in 1997 which included a $2,700,000 cash payment that
the Company received in connection with the transfer of ownership of the
Company's O@sis Web site to Mayo and an expense of $2,229,000 in connection with
the Company's conversion of its Convertible Subordinated Debentures in 1997. The
expense represents the excess of the fair market value of Common Stock issued
over the fair value of the Common Stock issuable pursuant to the original
conversion terms of the debentures. The Company did not have any other income in
1996 or 1995.

Limitation on Use of Net Operating Loss and Other Tax Credit Carryforwards

At December 31, 1997, the Company had available net operating loss carryforwards
of approximately $64,699,000 and available research and development credits of
approximately $326,000 for federal income tax purposes. The balance of the net
operating loss carryforwards of $64,699,000 and the credits expire at various
times through 2012. The research and development credits will also be subject to
limitations under the regulations. These carryforwards are subject to Internal
Revenue Code Section 382 which limits the availability of net operating losses
to offset current taxable income if significant ownership changes have occurred
for federal tax purposes. The Company incurred "ownership changes," pursuant to
regulations currently in effect under Internal Revenue Code Section 382, as a
result of sales of the Company's Preferred Stock in 1992 and 1993 and may have
incurred ownership changes since that time .

Liquidity and Capital Resources

The Company's cash and cash equivalents at December 31, 1997 were $2,488,000.
The Company used $909,000 of cash in operating activities in 1997, compared to
$8,256,000 in 1996. The decrease in cash used by operating activities in 1997
was a result of the Company carrying a larger receivable balance in 1996 and
incurring larger losses from operations, net of special charges in 1996. The
Company did not generate or use significant cash in 1997 in investing or
financing activities. In 1996, the Company generated $3,737,000 of cash
primarily from financing activities primarily from the issuance of $3,500,000 of
9% Convertible Subordinated Debentures.

The Company believes that its cash and cash equivalents, in addition to
$5,000,000 which the Company obtained in early April through a private equity
placement to certain institutional investors, will be sufficient to fund its
operations through December 31, 1998. (See Note 2 of the financial statements.)
However, the Company's projected costs in 1998 in connection with the redesign
and the launch of the onhealth.com website, and associated personnel, marketing
and distribution costs, will be substantial. Any material unforeseen increases
in expenses or reductions in projected revenues will likely require the Company
to seek additional debt or equity financing to be able to continue operations.
Because of the Company's financial history, there is no assurance that such
financing could be obtained, or, if obtained that the terms of the financing
would be acceptable.

Year 2000

The Company has determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company's Year 2000
initiative is being managed by internal staff. The activities are designed to
ensure that there is no adverse effect on the Company's core business operations
and that the transactions with customers, suppliers and financial institutions
are fully supported. The Company is well underway with these efforts, which are
scheduled to be completed by 1999. While the Company believes its planning
efforts are adequate to address its Year 2000 concerns, there can be no
guarantee that the systems of other companies on which the Company's systems and
operations rely will be converted on a timely basis and will not have a material
effect on the Company. The cost of the Year 2000 initiative in not expected to
be material to the Company's results of operations or financial position.

<PAGE>

Forward-Looking Statements

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

o The expectation that IVI will become the leading on-line health information
network depends on IVI's ability to obtain high quality editorial content,
its ability to implement effective traffic building programs, as well as
other general market conditions and competitive conditions within this
market, including the introduction and further development of competitive
web sites.
o The expectation that IVI will re-release its OnHealth.com web site in the
third quarter of 1998 and that it will launch a family of web sites to be
included in the OnHealth network depends upon successful development
efforts and meeting the currently scheduled timetable for such development,
as well as being able to obtain any necessary or desired licensing or other
content rights on a timely basis.
o The expectation that IVI will see a growth in revenues and positive net
income as a result of its shift in focus to its on-line health network
depends on customer interest, the ability to obtain successful revenue
sources from advertisers, as well as other general market and competitive
conditions within the on-line health network market.
o For additional information regarding forward looking statements, please
refer to the first paragraph in "ITEM 1. BUSINESS" and the "ADDITIONAL
FACTORS THAT MAY AFFECT FUTURE RESULTS" section later in "ITEM 1.
BUSINESS".

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company for the year ended
December 31, 1997, begin on page F-1 of this report.

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

None.

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

(a) Directors of the Registrant.

The information under the caption "Election of Directors" in the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders (the "1998
Proxy Statement") to be filed with the Securities and Exchange Commission within
120 days of the fiscal year covered by this Report is incorporated herein by
reference.

(b) Executive officers of the Registrant.

Information concerning Executive Officers of the Company is included in
this Report at the end of Part I, "Executive Officers and Key Employees of the
Registrant."

The information under the caption "Compliance with Sections 16(a) of
the Exchange Act" in the Company's 1998 Proxy Statement is incorporated herein
by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information under the caption "Executive Compensation" and
"Compensation of Directors" in the Company's 1998 Proxy Statement is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the caption "Security Ownership Of Certain
Beneficial Owners and Management" in the Company's 1998 Proxy Statement is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "Certain Relationships and Related
Transactions" in the Company's 1998 Proxy Statement is incorporated herein by
reference.

<PAGE>

PART IV

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

(a)(1) The following financial statements of IVI Publishing, Inc. are
included in this Report:
Page
Report of the Independent Auditors........................................F-1
Balance Sheets as of December 31, 1997 and 1996...........................F-2
Statements of Operations for the years ended December 31, 1997, 1996,
and 1995..............................................................F-3
Statements of Cash Flow for the years ended December 31, 1997, 1996,
and 1995..............................................................F-4
Statement of Shareholders' Equity for the years ended
December 31, 1997, 1996, and 1995.....................................F-5
Notes to the Financial Statements.........................................F-6

(a)(2) The following financial statement schedule of IVI Publishing,
Inc. required by Item 14(d) is included in a separate section of this Report
following the financial statements:

II. Valuation and Qualifying Accounts...........................S-1

All other schedules to the financial statements required by Article 7
of Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.

(a)(3) Listing of Exhibits

The Exhibits required to be a part of this Report are listed in the
Index to Exhibits which follows the Financial Statement Schedule.

(b) Reports on Form 8-K

A Form 8-K was filed on November 10, 1997 to report the jury verdict
rendered on the T. Randal Productions, Inc. lawsuit. (See notes to financial
statements). On November 12, 1997 an 8-K was filed to report the settlement of
the Viridis, Inc. lawsuit. (See notes to financial statements). The Company also
reported the conversion of its convertible subordinated debentures into
1,750,125 shares of common stock. As well as, the conversion of its preferred
stock into 1,000,000 shares of common stock. These conversions ocurred on
October 28 and October 30, respectively. On November 18, 1997 a Form 8-K was
filed which showed a pro forma capitalization table at September 30, 1997 to
reflect the conversions.

Included in Item 14(a)(3) above.

(d) Financial Statement Schedules

Included in Item 14(a)(2) above.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Minneapolis,
Minnesota, on the 14th day of April, 1998.
IVI PUBLISHING, INC.

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

Pursuant to the requirement of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints
Robert Goodman and Michael Brochu as his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign any or all amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
Signature Title Date

<S> <C> <C>
/s/ Robert N. Goodman President, Chief Executive Officer and Director April 14, 1998
Robert N. Goodman (Principal Executive Officer)

/s/ Charles A. Nickoloff Vice President and Acting Chief Financial Officer April 14, 1998
Charles A. Nickoloff (Principal Financial and Accounting Officer)

Chairman of the Board
Michael A. Brochu

/s/ Alan D. Frazier Director April 14, 1998
Alan D. Frazier

/s/ Ronald E. Eibensteiner Director April 14, 1998
Ronald E. Eibensteiner

/s/ Timothy I. Maudlin Director April 14, 1998
Timothy I. Maudlin

/s/ Ann Kirschner Director April 12, 1998
Ann Kirschner

/s/ Ram Shriram Director April 9, 1998
Ram Shriram

/s/ Rick Thompson Director April 9, 1998
Rick Thompson

</TABLE>

<PAGE>

REPORT OF THE INDEPENDENT AUDITORS

The Board of Directors and Shareholders
IVI Publishing, Inc.

We have audited the accompanying balance sheets of IVI Publishing, Inc.
as of December 31, 1997 and 1996, and the related statements of operations, cash
flows and shareholders' equity for each of the three years in the period ended
December 31, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of IVI Publishing, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
February 12, 1998, except for Note 2 as
to which the date is April 13, 1998

<PAGE>
IVI PUBLISHING, INC.
BALANCE SHEETS
(In Thousands, Except Per Share Data)

December 31
---------------------------
1997 1996
----------- -------------
ASSETS

Current assets:
Cash and cash equivalents $2,488 $3,462
Accounts receivable, net of allowances
for returns and doubtful accounts of
$1,011 in 1997 and $277 in 1996 337 4,134
Inventories 150 155
Other current assets 332 585
----------- -------------
Total current assets 3,307 8,336

Furniture and equipment:
Computers and software 2,856 4,583
Office equipment 1,403 1,546
Leasehold improvements - 683
----------- -------------
4,259 6,812
Accumulated depreciation (2,989) (3,622)
----------- -------------
1,270 3,190

Long-term receivables and other assets - 1,885
----------- -------------

Total assets $4,577 $13,411
=========== =============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $1,919 $3,206
Other accrued expenses 2,640 1,900
----------- -------------
Total current liabilities 4,559 5,106

Convertible subordinated debentures - 3,500

Convertible redeemable preferred stock - 1,905
(redemption value of $2,000)

Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding shares -
10,106 and 7,612 at December 31,
1997 and 1996, respectively 101 76
Additional paid-in capital 78,493 70,453
Accumulated deficit (78,576) (67,629)
----------- -------------
Total shareholders' equity 18 2,900
----------- -------------

Total liabilities and shareholders' equity $4,577 $13,411
=========== =============

See accompanying notes.

<PAGE>
IVI PUBLISHING, INC.
STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)

Year Ended December 31
--------------------------------

1997 1996 1995
-------- -------- --------

Net revenues $ 3,761 $ 9,470 $ 11,970
Cost of revenues 2,541 5,076 6,231
-------- -------- --------
Gross margin 1,220 4,394 5,739

Operating expenses:
Product development 4,243 5,651 7,494
Sales and marketing 1,347 2,705 7,473
General and administrative 6,892 6,364 5,647
-------- -------- --------
Loss from operations (11,262) (10,326) (14,875)

Interest income 106 203 641
Interest expense (264) (34) --
Other income, net 473 -- --
-------- --------
Net loss (10,947) (10,157) (14,234)
======== ======== ========

Preferred stock dividends (100) (119) (20)
Preferred stock accretion (43) (60) --
Preferred stock deemed dividend (2,875) -- --
-------- -------- --------
Net loss applicable to
common shareholders ($13,965) ($10,336) ($14,254)
======== ======== ========

Net loss per common share --
basic and diluted ($ 1.73) ($ 1.36) ($ 1.90)
======== ======== ========

Weighted average number of
common shares outstanding 8,056 7,580 7,484
======== ======== ========

See accompanying notes.

<PAGE>
IVI PUBLISHING, INC.
STATEMENTS OF CASH FLOW
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net loss ($10,947) ($10,157) ($14,234)
Adjustments to reconcile net loss to
net cash used in operating activities:
Debenture conversion to equity 2,229
Depreciation 1,252 1,409 1,403
Loss (gain) on disposal of furniture and equipment 711 (3) (96)
Common stock issued as litigation settlement 433
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 3,797 (926) 240
Decrease in inventories 5 666 363
Decrease (increase) in other current assets 253 (139) 137
Decrease (increase) in other long-term assets 1,885 (585) (365)
(Decrease) increase in accounts payable (1,287) 843 (1,750)
Increase in other accrued expenses 760 636 224
-------- -------- --------
Net cash used in operating activities (909) (8,256) (14,078)

Investing activities:
Purchase of furniture and equipment (104) (288) (1,026)
Proceeds from disposal of furniture and equipment 61 510 199
Purchase of short-term investments (4,388)
Maturity of short-term investments 22,218
-------- -------- --------
Net cash (used in) provided by investing activities (43) 222 17,003

Financing activities:
Net proceeds from issuance of convertible
redeemable preferred stock 1,845
Preferred stock dividends paid (120) (119)
Proceeds from exercised stock options 98 356 166
Proceeds from issuance of convertible
subordinated debentures 3,500
-------- -------- --------
Net cash (used in) provided by financing activities (22) 3,737 2,011
-------- -------- --------

Net (decrease) increase in cash and cash equivalents (974) (4,297) 4,936
Cash and cash equivalents at beginning of year 3,462 7,759 2,823
-------- -------- --------
Cash and cash equivalents at end of year $ 2,488 $ 3,462 $ 7,759
======== ======== ========
</TABLE>

See accompanying notes.

<PAGE>
IVI PUBLISHING, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>

Common Additional Total
Shares Common Paid-In Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
------------------------ ------------- --------------- --------------

<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 7,478 $75 $70,131 ($43,238) $26,968

Issuance of common stock
through exercise of options 46 166 166

Dividends on convertible
redeemable preferred stock
($.01 per share) (20) (20)

Net loss (14,234) (14,234)
------------- ---------- ------------- --------------- --------------

Balance at December 31, 1995 7,524 75 70,277 (57,472) 12,880

Issuance of common stock
through exercise of options 88 1 355 356

Dividends on convertible
redeemable preferred stock
($.06 per share) (119) (119)

Preferred stock accretion (60) (60)

Net loss (10,157) (10,157)
------------- ---------- ------------- --------------- --------------

Balance at December 31, 1996 7,612 76 70,453 (67,629) 2,900

Issuance of common stock
through exercise of options 59 1 97 98

Dividends on convertible
redeemable preferred stock
($.06 per share) (100) (100)

Preferred stock accretion (43) (43)

Issuance of common stock
as lawsuit settlement 175 2 431 433

Return of common stock
per Mayo agreement (490) (5) 5 --

Debenture conversion 1,750 17 5,712 5,729

Preferred stock conversion 1,000 10 1,938 1,948

Net loss (10,947) (10,947)
------------- ---------- ------------- --------------- --------------

Balance at December 31, 1997 10,106 $101 $78,493 ($78,576) $18
============= ========== ============= =============== ==============
</TABLE>

See accompanying notes.

<PAGE>

IVI PUBLISHING, INC.
Notes to the Financial Statements
December 31, 1997

Note 1. Business Activity

Formation of the Business

IVI Publishing, Inc. (the "Company"), which was founded in 1990 and commenced
operations in early 1991, is engaged in a single business consisting of
electronic publishing of health and medical information in interactive
multimedia formats.

Note 2. Management's Plans Concerning Cash Flow and Ongoing Operations

The Company has experienced recurring losses from operations and has generated
an accumulated deficit from inception through December 31, 1997 of approximately
$78,576,000. These conditions give rise to the question about the Company's
ability to generate positive cash flow and fund operations. In April 1998, the
Company completed a $5,000,000 issuance of non-voting Convertible Redeemable
Preferred Stock (CPS) to two institutional investors. As part of the
transaction, the Company also granted to the investors warrants to purchase an
aggregate of 66,778 shares of the Company's common stock at $11.23125 per share.
The CPS provides for the payment of dividends at a rate of 5%. The CPS also
provides the investors with certain conversion rights into Common Stock of the
Company and allows for redemption of the CPS by the Company. Further, the CPS
holders could require the Company to repurchase the CPS upon the occurrence of
certain events, such as the absence of any bids for the Common Stock for five
consecutive trading days or failure of the Common Stock to be listed for trading
on the AMEX, NASDAQ SmallCap Market, NASDAQ National Market, or the NYSE. The
Company believes that the completion of this financing transaction and
anticipated operating cash flows will allow the Company to continue to meet its
ongoing financial obligations and operate through December 31, 1998.

Note 3. Summary of Significant Accounting Policies

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At December 31, 1997 and
1996, cash and cash equivalents consisted principally of United States
Government obligations for which the carrying amount approximates fair value.

Furniture and Equipment

Furniture and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful life of the assets ranging from 5
to 7 years.

Product Development Costs

Product development costs consist principally of compensation to Company
employees, interactive design costs paid to outside consultants, travel and
supplies. Product development also includes costs incurred related to the
acquisition of content under license and publishing agreements. Costs related to
research, design and development of products are charged to product development
expenses as incurred. Under Statement of Financial Accounting Standards No. 86
(SFAS No. 86), software development costs are capitalized beginning when a
product's technological feasibility has been established and ending when a
product is available for general release to customers. The Company has not
capitalized any software development costs since such costs meeting the
requirements of SFAS No. 86 have not been significant.

<PAGE>

Revenue Recognition

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

Product sales and licensing revenues are made up of retail distribution sales,
direct mail sales, and product sales and royalties on licenses to original
equipment manufacturers (OEM's). These revenues are recognized upon shipment of
the product or when the Company's obligations under the licensing agreements are
complete. Allowances for returns are recorded at the time revenue is recognized.

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

Revenues are generated through the licensing of the Company's health and medical
content for use on cable television channels. The Company recognized revenue
under its cable television agreement with America's Health Network ("AHN")
during 1997, 1996 and 1995. (See Note 12).

Revenues are generated through the sale of advertising and sponsorships of the
Company's Onhealth web site. These revenues are recognized as they are earned.

During 1996, the Company also generated revenue through the Company's online
agreement with American Telephone and Telegraph ("AT&T"). These revenues were
nonrefundable advances payable to the Company under the exclusive agreement
signed with AT&T. They were recognized as they were earned. (See Note 13).

Revenues for each of the three years ended December 31, 1997, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>

1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Product sales $ 1,990,000 $ 5,152,000 $ 8,333,000
Contract development 1,220,000 1,346,000 1,637,000
Cable television 493,000 1,972,000 1,000,000
Online 58,000 1,000,000 1,000,000
----------- ----------- -----------
Net revenues $ 3,761,000 $ 9,470,000 $11,970,000
=========== =========== ===========
</TABLE>

Net sales to one OEM manufacturer in 1996 totaled $1,394,000. Additionally, for
1997 and 1996 respectively, $439,000 and $1,972,000 of revenue was recognized
from the Company's content agreement with AHN, and $1,000,000 of revenue was
recognized from the Company's online content agreement with AT&T in 1996.

No individual customer accounted for more than 10% of total net revenues in
1995.

Inventories

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

<PAGE>

Advertising Costs

The Company's policy is to expense advertising costs as they are incurred.
Advertising costs were $190,000, $556,000, and $1,732,000 for 1997, 1996, and
1995, respectively.

Impairment of Long-Lived Assets

The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.

Income Taxes

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

Net Loss Per Share

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share (Statement 128). Statement 128 replaced the calculations of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous rules. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements. The effect of outstanding options, warrants and convertible
securities are excluded from the computation for all periods as their effect is
antidilutive.

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Stock Based Compensation

The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, but
applies Accounting Principles Board Opinion No. 25 Accounting for Stock Issued
to Employees (APB 25) and related interpretations in accounting for its employee
stock options. Under APB 25, when the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recorded.

Reclassifications

Certain amounts for 1996 and 1995 have been reclassified to conform to the 1997
financial statement presentation.

Note 4. Other Assets

In 1994, the Company entered into an agreement with Time Life, Inc. ("Time
Life") pursuant to which the Company agreed to pay Time Life for the development
of a comprehensive home health reference guide. In exchange, the Company
receives royalty payments in the amount of 5% of Time Life's net revenue from
the sale of the print versions of the product. At December 31, 1996, the Company
recorded an asset of $1,778,000, which represented the Company's payments to
Time Life, net of royalty payments received from Time Life. The Company's policy
was to amortize this asset over the period that revenues were recognized. During
1997, revenues from the print version were not as high as anticipated, and
management determined that the asset was not realizable. Accordingly, the
Company wrote-off the remaining asset balance and expensed $1,741,000 in general
and administrative operating expenses.

<PAGE>

Note 5. Other Accrued Expenses

Other accrued expenses consist of the following:
December 31
1997 1996
----------------- ----------------

Litigation loss $961,000 $300,000
Severance 610,000
-
Royalties 501,000 993,000
Rent obligation 252,000 429,000
Other 316,000 178,000
================= ================
Total $2,640,000 $1,900,000
================= ================

Note 6. Common Stock

As of December 31, 1997 and 1996, the Company had 30,000,000 shares of $.01 par
value capital stock authorized. As of December 31, 1996, the Company had
designated 2,000 of its shares to be 6% Series A Convertible Preferred Stock,
and such designation was canceled in December 1997.

Note 7. Convertible Subordinated Debentures

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

On December 31, 1996, the estimated fair value of the Convertible Subordinated
Debentures approximated the recorded amount.

Note 8. Convertible Redeemable Preferred Stock

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

<PAGE>

Note 9. Stock Options and Warrants

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

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

From time to time, the Company's Board of Director may grant stock options
outside of either of the existing stock option plans.

In December 1997, the Company's Board of Directors adopted the 1997 Stock Option
Plan for its employees and reserved 1,750,000 shares of the Company's Common
Stock for such plan. The 1997 Stock Option Plan is subject to shareholder
approval at the Company's 1998 Annual Meeting.

Activity in the plans is as follows:
<TABLE>
<CAPTION>
Option Weighted-
Shares Shares Average Price
Reserved Outstanding Per Share
---------------- ------------------ --------------------
<S> <C> <C> <C>
Total Outstanding at December 31, 1994 413,000 1,029,000 $15.72
Options Granted (467,000) 467,000 11.04
Options Exercised (46,000) 3.59
Options Canceled 543,000 (543,000) 19.72
---------------- ------------------
Total Outstanding at December 31, 1995 489,000 907,000 11.53
Options Reserved 200,000
Options Granted (582,000) 582,000 4.98
Options Exercised (88,000) 4.06
Options Canceled 461,000 (461,000) 13.24
---------------- ------------------
Total Outstanding at December 31, 1996 568,000 940,000 7.10
Options Reserved 1,750,000
Options Granted (684,000) 684,000 2.85
Options Exercised (59,000) 1.64
Options Canceled 474,000 (474,000) 9.86
---------------- ------------------
Total Outstanding at December 31, 1997 2,108,000 1,091,000 $ 3.53
================ ==================
</TABLE>

At December 31, 1997, 1996 and 1995, options to purchase 325,000, 602,000 and
557,000 shares were exercisable, respectively. Exercise prices for the options
outstanding as of December 31, 1997 range from $2.31 to $17.75.

<PAGE>

The following table summarizes information about the stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-Average
Remaining Weighted-Average
Range of Exercise Contractual Weighted-Average Number Exercise
Prices Number Outstanding Life Exercise Price Exercisable Price
- ------------------- ------------------- ------------------ ------------------ ----------------- ---------------
<S> <C> <C> <C> <C> <C>
$2.31 - 2.50 221,000 10 years $2.31 9,000 $2.31
2.51 - 3.00 346,000 9 years 2.78 121,000 2.81
3.01 - 3.50 398,000 9 years 3.22 86,000 3.00
3.51 - 17.75 126,000 7 years 8.75 109,000 8.81
------------------- ------------------ ------------------ ----------------- ---------------
$2.31 - 17.75 1,091,000 9 years $3.53 325,000 $4.86
</TABLE>

The Company reserved 547,260 and 559,760 shares of Common Stock for the issuance
of warrants at December 31, 1997 and 1996, respectively, and had warrants
outstanding at those dates to purchase 547,260 and 559,760 shares of Common
Stock at prices ranging from $3.25 per share to $30.94 per share. Warrants
outstanding at December 31, 1997 expire from 1998 through 2000. The warrants
were generally issued to underwriters and investment bankers for services
performed in connection with several of the Company's financing transactions.

In 1997, the Company granted non-qualified options outside any of the Company's
stock option plans to purchase 522,500 shares at prices ranging from $2.31 to
$2.50. These options expire in 2007. Of the options granted, one option to
purchase 60,000 shares becomes exercisable on October 8, 2002. This option
provides for earlier exercise in six 10,000-share tranches as the Company's
stock trades at various prices from $5.00 to $10.00 or more for 40 consecutive
trading days. The accounting for this option may result in the future
recognition of compensation expense.

Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995:

1997 1996 1995
-------- ------- --------
Risk-free interest rate 5.50% 6.21% 5.37%
Dividend yield 0% 0% 0%
Volatility factor .760 .726 .613
Weighted-average expected life 5 years 5 years 5 years

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

<PAGE>

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

1997 1996 1995
-------------- ---------------- ---------------

<S> <C> <C> <C>
Pro forma net loss applicable to common shareholders $14,294,000 $10,562,000 $14,378,000
Pro forma net loss per common share -
basic and diluted $1.77 $1.39 $1.92
Weighted average fair value of options
granted during year $1.74 $2.99 $6.15
</TABLE>

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

Note 10. Commitments

The Company leases office space under agreements accounted for as operating
leases. The agreements expire at various times through 1999. Gross rent expense,
including charges for monthly operating costs, was $881,000, $1,433,000, and
$1,287,000 for 1997, 1996 and 1995, respectively. The Company has subleased
certain facilities to various tenants in under non-cancelable operating leases
expiring in 1999. The Company also has several license agreements that require
minimum annual royalty payments. Scheduled minimum lease commitments and annual
royalty payments are as follows:

Royalty
Lease Payments
-------------------- ---------------------

1998 $1,191,000 $303,000
1999 496,000 212,000
-------------------------------------------
1,687,000 515,000
Less Sublease
Rental Income (577,000)
-------------------- ---------------------

Total $1,110,000 $515,000
==================== =====================

In 1998, the Company entered into a termination arrangement for its existing
lease in Minneapolis, Minnesota, effective March 31, 1998. As a result of the
arrangement, the Company paid $122,000 and contributed to the lessor $150,000 in
furniture and equipment for satisfaction of the above lease commitments. The
Company entered into new leases in Seattle, Washington and a substantially
smaller facility in Minneapolis, Minnesota. As a result, future minimum lease
commitments related to the new lease agreements would be $61,000 in 1998,
$128,000 in 1999, $134,000 in 2000, $142,000 in 2001, $151,000 in 2002, and
$52,000 thereafter.

Note 11. Income Taxes

At December 31, 1997, the Company has net operating loss carryforwards of
$64,699,000 for income tax purposes and unused research and development credits
of $326,000 that expire at various times through 2012. These carryforwards are
subject to the limitations of Internal Revenue Code Section 382. This section
provides limitations on the availability of net operating losses to offset
current taxable income if significant ownership changes have occurred for
federal tax purposes. For financial reporting purposes, a valuation allowance
has been recognized to completely reserve for the deferred tax assets related to
those carryforwards. The reserve has been established because of the uncertainty
of future taxable income, which is necessary to realize the benefits of the net
operating loss carryforwards.

<PAGE>

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

December 31
----------------------------
1997 1996
------------ ------------
Deferred tax assets:
Accrued expenses and allowances $ 2,788,000 $ 2,649,000
Stock issued for license agreements -- 1,351,000
Research and development credits 326,000 326,000
Net operating loss carryforwards 25,880,000 23,054,000
------------ ------------
28,994,000 27,380,000
Deferred tax liabilities:
Depreciation 16,000 186,000
------------ ------------
16,000 186,000
------------ ------------
Net deferred tax assets
before valuation allowance 28,978,000 27,194,000
Less valuation allowance (28,978,000) (27,194,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============

Note 12. Investment in America's Health Network

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

In the first quarter of 1994, the Company expensed its entire investment of
$2,000,000 along with the related investment banking fees of approximately
$263,000. This approach to the investment was made on the basis that the
invested amounts are not assured of recoverability through future revenue
streams. As of December 31, 1997 and 1996, the Company's underlying equity in
its investment in AHN was $500,000 and $650,000 based on 4% and 8% of AHN's net
assets, respectively. However, because the Company expensed its investment, its
equity in AHN's net assets is not recognized in the balance sheet.

In May 1995, the Company entered into a content and royalty agreement with AHN.
Under the agreement the Company is licensing its multimedia content to AHN from
the date of the agreement until March 25, 2001, five years from the date the
cable television network launched. The Company will receive a minimum of
$11,000,000 in licensing royalties over the life of the agreement. This revenue
was being recognized evenly over the life of the contract. Due to the gradual
increase in actual payments versus the straight-line revenue recognition policy,
a receivable was recorded for the difference between the revenue recognized and
the cash received during the early years of the contract. In June 1997, as a
result of the Company not receiving their quarterly payment, the outstanding AHN
receivable was fully reserved. As such, the revenue recognized is currently on a
cash basis for the AHN royalties. In December, AHN resumed payments but due to
the uncertainty of future payments, the Company continues to recognize revenue
on a cash basis. At December 31, 1997, the Company has a fully reserved
receivable of $715,000 with scheduled payments in 1998. The Company recorded
$493,000, $1,972,000 and $1,000,000 in license royalty revenue in 1997, 1996 and
1995, respectively.

Note 13. Agreement with AT&T

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

<PAGE>

Warrants held by AT&T to purchase up to 20% of the Company's common stock at a
price of $14.00 per share expired on March 31, 1997.

Note 14. Benefit Plan

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

Note 15. Mayo Agreement

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

Note 16. Related Party Transactions

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

The Company had a note receivable of approximately $88,000 and $229,000 from a
former officer of the Company at December 31, 1997 and 1996, respectively. This
note receivable, included in accounts receivable in the balance sheet, will be
used to offset future contract consulting fees.

During 1996, two officers of the Company participated in the Company's debt
offering. The total amount of debt issued by the Company to these individuals
was $120,000. Additionally, three directors of the Company participated in the
debt offering, either individually or through affiliated organizations. The
total amount of debt issued by the Company to these individuals and
organizations was $550,000. On October 28, 1997, this debt was converted into
common stock at a rate of $2.00 per share (See note 7).

Note 17. Legal Proceedings

In March 1996, the Company commenced an action seeking replevin of certain
computer equipment leased to a former contractor, Viridis, Inc. In May of 1996,
Viridis expanded the scope of the action by filing a cross-complaint against the
Company, alleging that the Company breached contractual obligations and
committed various torts by ending its business relationship with Viridis and
seeking $10,000,000. In October 1997, the Company and Viridis entered into a
settlement agreement resolving all disputes between them. Under the terms of
this agreement, the Company issued 175,000 shares of restricted common stock,
paid $225,000 and issued a $125,000 installment note payable in 15 monthly
installments ending December 1998. The estimated value of the shares issued,
$433,000, was recorded as a general and administrative expense at the date of
the settlement. The settlement agreement also called for an additional $25,000
to be paid by the Company when AHN resumed its quarterly payments. The Company
recorded total general and administrative expenses of $808,000 in connection
with the settlement. The outstanding obligations are secured by all of the
Company's assets except its interests in AHN.

<PAGE>

In February 1996, an action in the District Court of Hennepin County (Minnesota)
was brought by T. Randal Productions et al. against the Company and one current
and two former employees. The plaintiffs make various allegations, including
misappropriation of corporate opportunities and trade secrets by the Company and
its employees and sought award of monetary damages, exemplary damages and
royalties substantially in excess of $10,000,000. In November 1997, a jury found
that there was no joint venture between T. Randal and the Company and/or any of
its employees but awarded T. Randal $480,000 plus interest for damages sustained
to its business. The jury verdict is subject to motions for a new trial, amended
findings and for judgment notwithstanding the verdict and to appeal to the Court
of Appeals. The plaintiffs also have an action pending against certain
affiliates of the Company on the same grounds on which the action against the
Company was based. The Company has indemnified these principles against any
damages arising out of these claims. While the Company is unable to predict the
ultimate outcome of these legal actions, it is the opinion of management that
the disposition of these matters will not have a material adverse effect on the
Company's Financial Statements taken as a whole.

Note 18. Relocation of Operations

During 1997, the Company decided to move its primary operating facilities from
Minneapolis, Minnesota to Seattle, Washington in early 1998. As a result,
certain of the Company's leasehold improvements and computer and software
equipment having a carrying value of $721,000 is not transferable, or will not
be utilized in the Company's operations going forward in 1998. The Company plans
to sell salvageable assets in 1998 and has estimated the sale value, net of
related selling costs, to be immaterial. Accordingly, the Company has recorded
an impairment loss of $721,000 in 1997, which is included in general and
administrative expenses. In addition, the Company recorded $252,000 and $610,000
in general and administrative expenses related to lease termination costs and
severance for former officers and employees, respectively.

<PAGE>

IVI PUBLISHING, INC.

Schedule II - Valuation and Qualifying Accounts

Years ended December 31

(In Thousands)

<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Costs and End
of Period Expenses Deductions of Period
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for doubtful accounts
receivable, promotional allowances
and sales returns $ 277 $ 2,336 $(1,602)(1) $ 1,011
Allowance for obsolete inventory 485 200 (234)(2) 451
------- ------- ------- -------
$ 762 $ 2,536 $(1,836) $ 1,462
======= ======= ======= =======

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

Year Ended December 31, 1995
Allowance for doubtful accounts
receivable, promotional allowances
and sales returns $ 730 $ 1,659 $(1,636)(1) $ 753
Allowance for obsolete inventory 124 698 (140)(2) 682
------- ------- ------- -------
$ 854 $ 2,357 $(1,776) $ 1,435
======= ======= ======= =======
</TABLE>

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

(2) Write-offs of inventory

<PAGE>

IVI PUBLISHING, INC.
INDEX TO EXHIBITS TO ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997

EXHIBIT
NUMBER

3.1 Amended and restated Articles of Incorporation of the Company,
incorporated herein by reference to Exhibit No. 3.2 to the Company's
Registration Statement on Form S-1, No. 33-76496 (the 1994 S-1)

3.2 Bylaws of the Company, incorporated herein by reference to Exhibit No.
3.2 to the Company's Registration Statement on Form S-1, No. 33-67064
(the 1993 S-1)

4.1 Form of Stock Certificate, incorporated herein by reference to Exhibit
No. 4.1 to the 1993 S-1

4.2 Statement of Registration Rights - Preferred Stock, incorporated herein
by reference to Exhibit No. 4.2 to the 1993 S-1

4.3 Warrant Agreement, dated as of July 17, 1992, between the Company and
Medical Innovation Fund, incorporated herein by reference to Exhibit
No. 4.3 to the 1993 S-1

4.4 Warrant Agreement, dated as of November 30, 1992, between the Company
and Ronald Eibensteiner, incorporated herein by reference to Exhibit
No. 4.4 to the 1993 S-1

4.5 Warrant Agreement, dated as of December 20, 1992, between the Company
and Wayne Mills, incorporated herein by reference to Exhibit No. 4.5 to
the 1993 S-1

4.6 Warrant Agreement, dated as of June 4, 1993, between the Company and
Frazier Investment Securities, L.P., incorporated herein by reference
to Exhibit No. 4.6 to the 1993 S-1

10.1 License Agreement, dated April 24, 1991, among the Company, William
Morrow Company and Mayo Foundation for Medical Education and Research,
as amended, incorporated herein by reference to Exhibit No. 10.1 to the
1993 S-1

10.2 Electronic Publishing License, Development and Marketing Agreement,
dated April 28, 1993, between the Company and Mayo Foundation for
Medical Education and Research, incorporated herein by reference to
Exhibit No. 10.4 to the 1993 S-1

10.3 401(k) Savings and Investment Plan, incorporated herein by reference to
Exhibit No. 10.9 to Amendment No. 1 to the 1993 S-1

10.4 1991 Stock Option Plan, as amended, incorporated herein by reference to
Exhibit No. 10.11 to the 1994 S-1

10.5 IVI Publishing, Inc. Director Stock Option Plan, as amended,
incorporated herein by reference to Exhibit No. 10.12 to the 1994 S-1

10.6 License Agreement, dated February 9, 1994, between the Company and Time
Life, Inc. and First Amendment to Titles Development Agreement, dated
as of February 9, 1994 between the Company and Time Life, Inc.,
incorporated herein by reference to Exhibit No. 10.19 to the 1994 S-1

<PAGE>

10.7 Lease Agreement, dated March 30, 1994, between the Company and
Ryan/Wilson Limited Partnership, incorporated herein by reference to
Exhibit No. 10.25 to the 1994 S-1

10.8 License, Development and Marketing Agreement, dated September 28, 1994,
between the Company and Time Life, Inc., incorporated by reference to
Exhibit No. 10.25 to the Company's Form 10-K for the year ended
December 31, 1994*

10.9 1994 License, Development and Marketing Agreement, dated September 27,
1994, between the Company and Mayo Foundation for Medical Education and
Research, incorporated by reference to Exhibit No. 10.26 to the
Company's Form 10-K for the year ended December 31, 1994*

10.10 License Agreement, dated November 10, 1994, between the Company and
Massachusetts Medical Society, incorporated by reference to Exhibit No.
10.27 to the Company's Form 10-K for the year ended December 31, 1994*

10.11 Sublicense Agreement, dated December 31, 1994, between the Company and
Georg von Holtzbrinck GmbH & Co., incorporated by reference to Exhibit
No. 10.28 to the Company's Form 10-K for the year ended December 31,
1994*

10.12 Agreement between America's Health Network, Inc. and the Company, dated
May 25, 1995, incorporated by reference to Exhibit 10.14 to the
Company's Form 10-K for the year ended December 31, 1995*

10.13 Amendment No. 2 to License Agreement among William Morrow Company, Mayo
Foundation for Medical Education and Research and the Company, dated
December 29, 1995, incorporated by reference to Exhibit 10.18 to the
Company's Form 10-K for the year ended December 31, 1995*

10.14 Financial Advisor and Consulting Agreement with Frazier & Company LP,
dated July 14, 1994, as amended by a letter agreement, dated June 28,
1995, incorporated by reference to Exhibit 10.19 to the Company's Form
10-K for the year ended December 31, 1995**

10.15 First Amendment dated June, 27, 1994 and Second Amendment dated October
10, 1995 to Lease Agreement between the Company and Ryan/Wilson Limited
Partnership, incorporated by reference to Exhibit 10.20 to the
Company's Form 10-K for the year ended December 31, 1995

10.16 Agreement dated April 1995 among Ryan/Wilson Limited Partnership,
Wilson Learning Corporation the Company regarding a certain lease,
incorporated by reference to Exhibit 10.21 to the Company's Form 10-K
for the year ended December 31, 1995

10.17 Distribution on Consignment Agreement, dated February 29, 1996 between
the Company and Davidson & Associates, Inc. , incorporated by reference
to Exhibit 10.22 to the Company's Form 10-K for the year ended December
31, 1995*

10.18 Sublease Agreement, dated January 31, 1996, between the Company and The
McGraw-Hill Companies, Inc. related to a property leased by Woodland
Hills Property-W, Inc. pursuant to a May 23, 1993 lease with the
Company, incorporated by reference to Exhibit 10.23 to the Company's
Form 10-K for the year ended December 31, 1995

10.19 Employment Agreement between the Company and Joy A. Solomon, dated
August 7, 1996, incorporated herein by reference to Exhibit 10.24 to
the Company's Form 10-K for the year ended December 31, 1996**

<PAGE>

10.20 Separation Agreement between the Company and Ronald G. Buck, dated
August 1, 1996, incorporated herein by reference to Exhibit 10.25 to
the Company's Form 10-K for the year ended December 31, 1996**

10.21 Notice of Lease Term to Sublease Agreement, dated April 1, 1996,
between the Company and The McGraw-Hill Companies, Inc. related to a
property leased by Woodland Hills Property-W, Inc. pursuant to a May
23, 1993 lease and January 31, 1996, Sublease with the Company,
incorporated herein by reference to Exhibit 10.26 to the Company's Form
10-K for the year ended December 31, 1996

10.22 Sublease Agreement, dated September 17, 1996, between the Company and
Reality Interactive, Inc. for the fourth floor portion of the Main
Lease between the Company and Ryan/Wilson Limited Partnership, Wilson
Learning Corporation, incorporated herein by reference to Exhibit 10.27
to the Company's Form 10-K for the year ended December 31, 1996

10.23 Letter of Employment to Tim Walsh, dated September 19, 1996, for the
position of Vice President of Sales and Marketing for the Company,
incorporated herein by reference to Exhibit 10.28 to the Company's Form
10-K for the year ended December 31, 1996**

10.24 Settlement Agreement and Mutual Release dated September 12, 1997
between the Company and Mayo Foundation for Medical Education and
Research, incorporated herein by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 1997

10.25 Sublicense Agreement dated September 12, 1997 between the Company and
Mayo Foundation for Medical Education and Research, incorporated herein
by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter
ended September 30, 1997

10.26 Separation Agreement and Release of Claims dated January 26, 1998
between the Company and Joy A. Solomon**

10.27 Letter Agreement dated November 9, 1997 between the Company and Robert
Goodman**

11 Statement Re: Computation of Per Share Loss

21 Subsidiaries of the Company, incorporated herein by reference to
Exhibit 21 to the Company's Form 10-K for the year ended December 31,
1996

23.1 Consent of Ernst & Young LLP

24 Power of Attorney of certain directors (included in signature page)

27 Financial Data Schedule (filed with electronic version only)

* Portions of the Exhibit have been deleted pursuant to the Company's
request for confidential treatment pursuant to Rule 24b-2 promulgated
under the Securities Act of 1933, as amended

** Management Agreement or Compensatory Plan or Arrangement

SEPARATION AGREEMENT AND RELEASE OF CLAIMS

It is hereby agreed by and between IVI Publishing, Inc. ("IVI
Publishing") and Joy A. Solomon ("Solomon") as follows:

WHEREAS, Solomon is currently the President and CEO of IVI Publishing,
and has voluntarily resigned from her position;

WHEREAS, Solomon wishes to receive certain payments and other valuable
consideration to which she would not otherwise be entitled; and

WHEREAS, the parties wish to set forth the terms of their agreement in
writing.

NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants contained herein, and for other good and valuable
consideration the receipt and sufficiency of which is specifically acknowledged
by the parties, IVI Publishing and Solomon agree as follows:

1. Last Date of Employment. IVI Publishing and Solomon agree that
Solomon has resigned from her position as President and CEO effective October 8,
1997 but has remained and will remain an employee of IVI Publishing through
December 31, 1997. During the period from October 31, 1997 through December 31,
1997, Solomon has and will assist the interim CEO as needed in the transition.
IVI Publishing will, upon the signing of this Separation Agreement and Release,
and the expiration of the 15 and 21-day periods as set forth in Paragraphs 12
and 14 without rescission, pay Solomon severance in an amount equivalent to her
last salary excluding any bonuses or other payments, less appropriate
deductions, to be paid according to the normal payroll schedule, for the period
January 1, 1998 through June 30, 1999. Solomon's severance payments shall not be
reduced by compensation from any other source.

2. Stock Options. Solomon has been granted incentive stock options to
purchase Common Stock of the Company as set forth on Exhibit B hereto (the
"Options"). The Options are hereby amended to provide that (i) the Options shall
continue to vest according to their respective vesting schedules set forth on
Exhibit B until June 30, 1999; (ii) each such Option shall be exercisable at any
time on or before the expiration date for such Option as reflected on Exhibit B,
to the extent such Option has vested; (iii) each such Option shall terminate at
the close of business on the expiration date for such Option as reflected on
Exhibit B and all rights of Solomon under the Option shall be forfeited as of
that date; and (iv) if any of the Options are not exercised on or before the
date necessary to obtain incentive stock option treatment, such Option shall be
deemed to be a nonqualified stock option and will not be treated as an incentive
stock option, as defined under Section 422, or any successor provision, of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder.

3. Return of Property. Solomon shall, upon the completion of her duties
on January 1, 1998, return to IVI Publishing all equipment, and all documents or
other items, whether on computer disk or otherwise, and all copies thereof,
within her possession or control belonging to IVI Publishing or in any manner
relating to the business of, or the services provided by IVI Publishing, or the
duties and services performed by Solomon on behalf of IVI Publishing. Solomon
acknowledges, by her signature to this Separation Agreement and Release, that
she has returned all such documents and materials, and has not retained any
copies of such documents and materials.

4. Employment Agreement. Solomon acknowledges and agrees that she will
continue to be bound by Articles 5, 6, and 8 of the Employment Agreement dated
August 7, 1996, except that the Noncompetition Covenants are extended from one
(1) year from the termination of employment to eighteen (18) months from the
termination of employment and thus are extended through June 30, 1999.

5. Public Statements. IVI Publishing and Solomon acknowledge and agree
that IVI Publishing will not, in any public statements, indicate that Solomon
resigned due to any performance concerns, and shall provide the information
reflected in Exhibit A.

<PAGE>

6. Communications with Prospective Employers. IVI Publishing and
Solomon agree that all inquiries from prospective employers of Solomon should be
directed to Robert Goodman, IVI Publishing, Inc., 7500 Flying Cloud Drive,
Minneapolis, MN 55344-3739 (tel: 996-6130), and that Mr. Goodman will inform the
individual inquiring that it is the policy of IVI Publishing to confirm only
dates of employment and positions held of former employees. Mr. Goodman will
refer the prospective employers, however, to the reference letter which will be
issued in the form set forth on Exhibit A upon receipt by IVI Publishing of the
signed original Separation Agreement and Release without rescission. IVI
Publishing Board members, if contacted, will similarly inform the individual
inquiring that it is the policy of IVI Publishing to confirm only dates of
employment and positions held of former employees but will refer the prospective
employers to the reference letter in the form set forth on Exhibit A. Solomon
understands and agrees that she will inform prospective employers that they
should contact Mr. Goodman in relation to any inquiry regarding Solomon's
employment.

7. Board of Directors. IVI Publishing and Solomon acknowledge and agree
that Solomon has resigned from the Board of Directors effective as of December
31, 1997.

8. Release of Claims by Solomon. In consideration of the severance pay
and other benefits set forth in this Separation Agreement and Release, to which
Solomon would not otherwise be entitled, Solomon, for herself, her heirs,
representatives, agents, successors and assigns, hereby releases and forever
discharges IVI Publishing and any parent, subsidiary, and related entity, and
all present and past officers, directors, shareholders, employees, agents and
representatives of IVI Publishing, or of any parent, subsidiary, or related
entity and the successors and assigns of each, from any and all manner of
claims, demands, actions, causes of action, administrative claims, liability,
damages, claims for punitive or liquidated damages, claims for attorney's fees,
costs and disbursements, individual or class action claims, or demands of any
kind whatsoever, including but not limited to any claims for wages, vacation,
severance, benefits, any claims arising by statute, in tort or contract, any
claims arising under Title VII of the Civil Rights Act, 42 U.S.C. ss. 2000e et
seq., the Age Discrimination in Employment Act, 29 U.S.C. ss. 621 et seq., the
Americans with Disabilities Act, 42 U.S.C. ss. 12101, et seq., the Employee
Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. ss. 1001, et seq., the
Family and Medical Leave Act, 29 U.S.C. ss. 2601, et seq., the Minnesota Human
Rights Act, Minn. Stat. Ch. 363, the Minneapolis Civil Rights Ordinance, any
claims under her Employment Agreement dated August 7, 1996, any other claims
arising under federal, any state or local law, or any claims in any manner
relating to Solomon's employment or Solomon's association with or separation
from IVI Publishing, arising in law or equity, whether known, suspected or
unknown, and however originating or existing, from the beginning of time to the
date of the signing of this Separation Agreement and Release.

Solomon agrees to and hereby does release and discharge IVI Publishing,
and any parent, subsidiary, and any related entity, and all present and past
officers, directors, shareholders, employees, agents and representatives of IVI
Publishing, any parent, subsidiary, or related entity, and the successors and
assigns of each, not only from any and all claims that Solomon could make on
Solomon's own behalf, but also those that may or could be brought by any other
person, entity or organization on Solomon's behalf, and Solomon specifically
waives any right to become, and agrees not be become, a member of any class in
any proceeding or case in which a claim or claims against IVI Publishing, or any
parent, subsidiary, or any related entity, or any present or past officers,
directors, shareholders, employees, agents or representatives of IVI Publishing,
or of any parent, subsidiary, or related entity, and the successors and assigns
of each, arise, in whole or in part, from any event which occurred from the
beginning of time to the date of this Separation Agreement and Release.

<PAGE>

Solomon further agrees that she will not institute any civil action,
administrative proceeding or other legal proceeding of any nature against IVI
Publishing, or any parent, subsidiary, or any related company or any present or
past officers, directors, shareholders, employees, agents or representatives of
IVI Publishing, or of any parent, subsidiary, or any related company, or the
successors and assigns of each, including but not limited to any action or
proceeding raising claims for wages, vacation, severance, benefits, any claims
arising by statute, in tort or contract, any claims arising under Title VII of
the Civil Rights Act, 42 U.S.C. ss. 2000e et seq., the Age Discrimination in
Employment Act, 29 U.S.C. ss. 621 et seq., the Americans with Disabilities Act,
42 U.S.C. ss. 12101, et seq., the Employee Retirement Income Security Act of
1974 (ERISA), 29 U.S.C. ss. 1001, et seq., the Family and Medical Leave Act, 29
U.S.C. ss. 2601, et seq., the Minnesota Human Rights Act, Minn. Stat. Ch. 363,
the Minneapolis Civil Rights Ordinance, any claims under her Employment
Agreement dated August 7, 1996, any other claims arising under federal, any
state or local law, or any claims in any manner relating to Solomon's employment
or Solomon's association with or separation from IVI Publishing, arising in law
or equity, whether known, suspected or unknown, and however originating or
existing, from the beginning of time to the date of the signing of this
Separation Agreement and Release. If, for any reason, an administrative or other
legal proceeding results in any relief to Solomon based on any claims or demands
noted in this Separation Agreement and Release, Solomon further agrees that the
consideration provided to Solomon under this Separation Agreement and Release
shall be in full satisfaction of any such claims or demands, and that Solomon
will not be entitled to any further relief of any kind.

Nothing in this Release of Claims would affect any claim by Solomon
against any individual Board member which is a claim based on a commercial
transaction unrelated to IVI Publishing, or Solomon's employment or separation
from IVI Publishing, or the individual's capacity as a Board member of IVI
Publishing.

9. Release of Claims by IVI Publishing. IVI Publishing, any parent,
subsidiary, and related entity, and all present and past officers, directors,
shareholders, employees, agents and representatives of IVI Publishing, all in
their capacity as such, and the successors and assigns of each, hereby release
and forever discharge Solomon, her heirs, representatives, agents, successors
and assigns, from any and all manner of demands, actions, causes of action,
administrative claims, liability, damages, claims for punitive or liquidated
damages, claims for attorney's fees, costs and disbursements, individual or
class action claims, or demands of any kind whatsoever, any claims arising under
federal, any state or local law, or any claims in any manner relating to
Solomon's employment or her association with or separation from IVI Publishing,
arising in law or equity, whether known, suspected or unknown, and however
originating or existing, from the beginning of time to the date of the signing
of this Separation Agreement and Release.

IVI Publishing agrees to and hereby does release and discharge Solomon,
her heirs, representatives, agents, successors and assigns, not only from any
and all claims that it could make on its own behalf, but also those that may or
could be brought by any other person, entity or organization on his behalf or
for his benefit, and IVI Publishing specifically waives any right to become, and
agrees not to become, a member of any class in any proceeding or case in which a
claim or claims against Solomon, her heirs, representatives, agents, successors
and assigns, arise, in whole or in part, from any event which occurred from the
beginning of time to the date of this Separation Agreement and Release.

IVI Publishing further agrees that it will not, directly or indirectly,
institute any civil action, administrative proceeding or other legal proceeding
of any nature against Solomon, her heirs, representatives, agents, successors
and assigns, arising in law or equity, whether known, suspected or unknown, and
however originating or existing, from the beginning of time to the date of the
signing of this Separation Agreement and Release of Claims. If, for any reason,
an administrative or other legal proceeding results in any relief to IVI
Publishing based on any claims or demands noted in this Separation Agreement and
Release of Claims, IVI Publishing further agrees that the consideration provided
under this Separation Agreement and Release of Claims, shall be in full
satisfaction of any such claims or demands, and that it will not be entitled to
any further relief of any kind.

Nothing in this Release of Claims would affect any claim by IVI
Publishing or any Board member of IVI Publishing against Solomon which is a
claim based on a commercial transaction unrelated to IVI Publishing, or
Solomon's employment or separation from IVI Publishing, or the individual's
capacity as a Board member of IVI Publishing.

<PAGE>

10. Affirmation Regarding Pending Matters. Solomon affirms that she has
not filed or instituted any charge, complaint, or action against IVI Publishing,
or any parent, subsidiary, or any related company or any present or past
officers, directors, shareholders, employees, agents and representatives of IVI
Publishing, or of any parent, subsidiary, or any related company, or the
successors and assigns of each. If there is outstanding any such charge,
complaint, or action, Solomon agrees to seek its immediate withdrawal and
dismissal with prejudice. If for any reason the charge, complaint, or action is
not dismissed, Solomon agrees not to voluntarily testify, provide documents, or
otherwise participate, or to permit others to voluntarily participate on
Solomon's behalf, in any further proceeding arising therefrom or associated
therewith and to execute such other papers or documents as may be necessary to
have the charge dismissed with prejudice.

11. Notification of Rights under the Minnesota Human Rights Act (Minn.
Stat. ch. 363) and Federal Age Discrimination in Employment Act (29 U.S.C. ss.
621 et seq. ). Solomon is hereby notified of her right to rescind the release of
claims in regard to claims arising under the Minnesota Human Rights Act, Minn.
Stat. ch. 363, within (15) calendar days, and in regard to claims arising under
the Federal Age Discrimination in Employment Act, 29 U.S.C. ss. 621, et seq.,
within seven (7) calendar days, of her signing of this Separation Agreement and
Release, rescission periods to run concurrently. The rescission must be in
writing and delivered or mailed to: Robert Goodman, IVI Publishing, Inc., 7500
Flying Cloud Drive, Minneapolis, MN 55344-3739. If delivered by mail, the
rescission must be post-marked within the required period, properly addressed to
the individual noted above at the above address, and sent by certified mail,
return receipt requested. It is further understood that, if Solomon rescinds the
release of claims in accordance with this Paragraph 11, that Solomon will not be
entitled to the payments as set forth in Paragraph 1 (apart from her salary
through her last date of employment), and Solomon will immediately reimburse IVI
Publishing for any such payments, nor shall she be entitled to the benefit of
the amendment to her stock option agreements as set forth in Paragraph 2. This
Separation Agreement and Release will be effective upon the expiration of the
15-day period noted in this Paragraph 11 without rescission.

12. Acknowledgment of Reading and Understanding/Consultation with
Counsel. By Solomon's signature to this Separation Agreement and Release,
Solomon acknowledges and agrees that she has carefully read and understood all
provisions of this Separation Agreement and Release, and that she has entered
into this Separation Agreement and Release knowingly and voluntarily. Solomon
further acknowledges that IVI Publishing has advised her to consult with counsel
prior to signing this Separation Agreement and Release, and that Solomon has in
fact been represented by counsel throughout the negotiations for and signing of
this Separation Agreement and Release.

13. Period for Consideration. By her signature to this Separation
Agreement and Release, Solomon acknowledges that IVI Publishing has informed her
that she has 21 days from the date of receipt of this Separation Agreement and
Release to consider whether its terms are acceptable to her, and that she has
had the benefit of the 21-day period, or has chosen, of her own volition and on
advice of counsel, to waive the 21-day period.

<PAGE>

14. Nonadmission. It is expressly understood and agreed that this
Separation Agreement and Release does not constitute, nor shall either be
construed as an adjudication or finding on the merits of any potential claim by
Solomon or IVI Publishing, nor does this Separation Agreement and Release
constitute, nor shall either be in any manner construed, as an admission of any
wrongful conduct or liability on the part of Solomon or of IVI Publishing, or
any parent, subsidiary, or any related company of IVI Publishing or any present
or past officers, directors, shareholders, employees, agents or representatives
of IVI Publishing, or of any parent, subsidiary, or any related company, or the
successors and assigns of each, by all of whom any such liability is expressly
denied.

15. Nondisparagement. Solomon and IVI Publishing agree that neither
will make any disparaging or negative remarks, whether written or oral,
regarding the other.

16. Indemnification. IVI Publishing will indemnify Solomon as a former
officer, director and employee in accordance with applicable Minnesota law.

17. Confidentiality. Solomon understands and agrees that the fact of,
terms of, and any negotiations relating to this Separation Agreement and Release
shall remain confidential, and that she shall not disclose any such information
to any person or entity, other than counsel, her accountant or tax advisor, her
spouse, unless specifically compelled by subpoena, summons or court order, or by
taxing authorities, without the express written consent of IVI Publishing.
Solomon specifically acknowledges and agrees that this Paragraph 17 prevents
her, among other matters, from sharing any information relating to this
Separation Agreement and Release with any current or past employee of IVI
Publishing. Solomon further understands and agrees that any individual to whom
information is disclosed in accordance with this Paragraph 17 shall be informed
of these confidentiality obligations. Solomon specifically warrants, by her
signature to this Separation Agreement and Release, that she has not made any
disclosures beyond those authorized by this Paragraph 17. IVI Publishing
understands and agrees that the fact of, terms of, and any negotiations relating
to this Separation Agreement and Release shall remain confidential and that it
shall not disclose any such information to any person or entity, other than
those within IVI Publishing that need to know such information, counsel,
accountants or tax advisors, except as specifically compelled by subpoena,
summons, or court order, or by taxing authorities. IVI Publishing further
understands and agrees that any individual to whom information is disclosed in
accordance with this Paragraph 17 shall be informed of the confidentiality
obligations. IVI Publishing specifically warrants that it has not made any
disclosures beyond those authorized by this Paragraph 17.

18. Successors and Assigns. This Agreement shall inure to the benefit
of the successors and assigns of IVI Publishing, and the heirs and estate of
Solomon.

19. Arbitration. Solomon and IVI Publishing agree to submit to final
and binding arbitration any and all disputes, claims or controversies for breach
of this Separation Agreement and Release, except for any disputes, claims or
controversies arising out of a violation of those provisions noted in Paragraph
4 of this Separation Agreement and Release. The Rules of the American
Arbitration Association ("AAA") shall apply to such arbitration. Either party
may initiate an arbitration proceeding under this Separation Agreement and
Release by giving the other party written notice specifying the issues to be
resolved in arbitration. A single arbitrator shall be selected by agreement
between Solomon and IVI Publishing from a list of 12 or more arbitrators
proposed by the AAA, or Solomon and IVI Publishing may agree to a person not on
the list. If IVI Publishing and Solomon fail to agree on a person to serve as
arbitrator within 30 days of delivery of the list of the proposed arbitrators by
the AAA, then IVI Publishing and Solomon may ask the AAA to designate an
arbitrator. In addition to any other procedures provided for under AAA rules,
upon written request, each party shall, at least 14 days before the date of any
hearing, provide the other party with copies of all documents the party believes
to be relevant to the issues raised and a list of all witnesses the party
expects to call at the hearing and all exhibits the party expects to present at
the hearing. Each party shall be responsible for its/her own attorneys' fees and
costs, and shall each share one half of the cost of the arbitrator and the
arbitration proceeding. The parties agree that any arbitration will take place
in Hennepin County, Minnesota.

<PAGE>

20. Entire Agreement. This Separation Agreement and Release supersedes
any prior agreement, oral or written, and contains all of the terms and
conditions agreed upon by IVI Publishing and Solomon with respect to the subject
matter hereof. No other agreements, whether oral or written, not specifically
referred to or included herein, shall be deemed to exist or modify this
Separation Agreement and Release or bind IVI Publishing and Solomon. No
modification, release, discharge or waiver of any provision of this Separation
Agreement and Release shall be of any force or effect unless made in writing and
signed by the parties hereto, and specifically identified as a modification,
release or discharge of this Separation Agreement and Release. If any term,
clause or provision of this Separation Agreement and Release shall for any
reason be adjudged invalid, unenforceable or void, the same shall not impair or
invalidate any of the other provisions of the Separation Agreement and Release,
all of which shall be performed in accordance with their respective terms.
Solomon acknowledges, by her signature to this Separation Agreement and Release,
that she has not relied on any representations or statements, whether oral or
written, other than the express statements of this Separation Agreement and
Release, in signing this Separation Agreement and Release.

Dated: 1/26/98 /s/ Joy A. Solomon
Joy A. Solomon

IVI PUBLISHING, INC.

Dated: 1/30/98 By /s/ Charles Nickoloff
Its Vice President and
Acting Chief Financial Officer

IVI PUBLISHING, INC.

7500 Flying Cloud Drive
Minneapolis, MN 55344-3739

November 9, 1997

Mr. Robert N. Goodman
1526 37th Avenue East
Seattle, WA 98112-3844

Dear Robert:

On behalf of Mike Brochu, Chairman, and the other members of the Board of
Directors of IVI Publishing, Inc., we are enthusiastic in extending you a formal
offer of employment to join our team as President and Chief Executive Officer.
Your work experience, personality, management style and knowledge of the
industry are ideal characteristics for this key leadership role. It is our
belief that IVI will offer you a challenging opportunity to grow a significant
enterprise and to build significant personal wealth.

Position: President, Chief Executive Officer and Member of the Board of
Directors

Full time
Effective Date: November 24, 1997

Company Locations: Corporate Headquarters in Seattle; the Company maintains a
commitment to its core group of employees in Eden Prairie,
Minnesota.

Possible Name
Change: The Board is supportive of a name change as soon as possible.
The Board would entertain your ideas about a possible change
in the Company's name.

Equity Incentives:

Common Stock
Options: Options to purchase Common Stock--Options to purchase 450,000
shares of the Company's common stock with an exercise price
per share equal to the Company's closing price no later than
the full-time effective day of your employment with the
Company. The term of the options will be ten years.
The Company could fix the stock exercise price earlier if you
become a part-time employee of the Company while you
concurrently complete your current employment commitment.
Assuming you agree to become a part-time employee effective
immediately, the Company would establish the exercise price
per share of the options in accordance with the effective
date of your part-time employment.

The vesting of a total of 150,000 shares would be as follows:

o 37,500 after completion of one year of employment

o Thereafter, the remaining 112,500 shares will vest on
a continuous basis over the subsequent three years at
a rate of 3,125 shares per month.

Subject to your continued employment and in the event of a
"change in control," all of these unvested options would
accelerate and immediately vest.

<PAGE>
The remaining 300,000 shares will vest after five years
assuming that you continue to serve as President and Chief
Executive Officer of the Company. In addition, the exercise
date would be accelerated under the following circumstances:

1) The Effective Price in a
"Change of Control" Event or
2) the Close Price
of the Company Common Stock for 40
Additional Number of Consecutive Trading Days Equals or
Shares Subject to Exceeds
Exercise Acceleration

25,000 $5.00
25,000 $6.00
25,000 $7.00
25,000 $8.00
25,000 $9.00
25,000 $10.00
30,000 $11.00
30,000 $12.00
30,000 $13.00
30,000 $14.00
30,000 $15.00

The options will be exercisable only if you continue to be an
employee of the Company on the date of exercise, or 90 days
after your termination as an employee of the Company.

Cash Compensation: Base Salary--$180,000 annually, subject to annual
adjustments, as appropriate, in accordance with performance
reviews (no downward adjustments).

Cash Incentives
Tied to Performance: Annual cash bonuses of up to 50% of annual base salary
tied to achievement of milestones and financial
objectives as mutually agreed to between the Company's
Board of Directors and you.

Within 60 days of your employment and with input from the
other members of the Board of Directors, we will agree on
specific milestones to be accomplished within 1998. We look
forward to recommendations and significant input from you as
to the structure and content of these objectives.

$35,000 of the potential annual cash bonus for 1998 will be
guaranteed and paid to you on your first full-time day of
employment with the Company.

Vacation and
Fringe Benefits: In accordance with Company policies.

Employment: We will develop an employment agreement as soon as possible
including definitions of termination "with cause," a
non-compete provision, a nonsolicitations provision, and
other details typical of employment agreements.

In conclusion, I would be pleased to answer any questions which you may have
about this offer and/or any Company matter.

Please evidence your acceptance of this offer by signing each of the two offer
letters and then returning one to me in the next few days.

The Board members of IVIP look forward to working with you to realize the
exciting current and potential future opportunities of the Company.

Regards,

/s/ Timothy I. Maudlin
Timothy I. Maudlin
Acting President and
Chief Executive Officer
I accept this offer.

/s/ Robert N. Goodman

Acceptance Date: November 9, 1997

EXHIBIT 11

IVI PUBLISHING, INC.
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Year Ended December 31
1997 1996 1995
-------- -------- --------
PRIMARY AND FULLY DILUTED
Average common shares outstanding 8,056 7,580 7,484
-------- -------- --------

Total 8,056 7,580 7,484
======== ======== ========

Net loss applicable to common
shareholders $(13,965) $(10,336) $(14,254)
======== ======== ========

Net loss per common share $ (1.73) $ (1.36) $ (1.90)
======== ======== ========

Exhibit 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-76498) pertaining to the 1991 Stock Option Plan and Director Stock
Option Plan of IVI Publishing, Inc. of our report dated February 12, 1998,
except for Note 2 as to which the date is April 13, 1998, with respect to the
financial statements and schedule of IVI Publishing, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1997.

/s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
April 13, 1998

<ARTICLE> 5

<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,488
<SECURITIES> 0
<RECEIVABLES> 337
<ALLOWANCES> 0
<INVENTORY> 150
<CURRENT-ASSETS> 332
<PP&E> 4,259
<DEPRECIATION> 2,989
<TOTAL-ASSETS> 4,577
<CURRENT-LIABILITIES> 4,559
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> (83)
<TOTAL-LIABILITY-AND-EQUITY> 4,577
<SALES> 3,761
<TOTAL-REVENUES> 3,761
<CGS> 2,541
<TOTAL-COSTS> 2,541
<OTHER-EXPENSES> 12,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,947)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,947)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,947)
<EPS-PRIMARY> (1.73)
<EPS-DILUTED> (1.73)

</TABLE>