Prepared by MERRILL CORPORATION

MEDICALOGIC/MEDSCAPE, INC.
(Exact name of registrant as specified in its charter)

OREGON (State or other jurisdiction of incorporation or organization)		93-0890696 (I.R.S. Employer Identification No.)

20500 NW EVERGREEN PARKWAY, HILLSBORO, OREGON (Address of principal executive offices)		97124 (Zip Code)

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for 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 this Form 10-K. / /

The aggregate market value of the registrant's common stock held by nonaffiliates as of October 23, 2001 was approximately $19,914,000

The number of shares outstanding of the registrant's common stock as of October 23, 2001 was 56,836,205.

		Page
Part I
Item 1.	Business	1
Item 2.	Properties	17
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 4A.	Executive Officers of the Registrant	19
Part II.
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	21
Item 6.	Selected Financial Data	22
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operation	23
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 8.	Financial Statements and Supplementary Data	45
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	79
Part III.
Item 10.	Directors and Executive Officers of the Registrant	80
Item 11.	Executive Compensation	82
Item 12.	Security Ownership of Certain Beneficial Owners and Management	86
Item 13.	Certain Relationships and Related Transactions	89
Part IV.
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	91
	Signatures	94

MedicaLogic/Medscape, Inc. d.b.a. Medscape (together with its subsidiaries "Medscape" or the "Company") is a leading provider of digital health record systems and information to the healthcare industry. Medscape develops digital health record applications that are designed to improve healthcare through the timely delivery of clinical data and information to healthcare professionals and consumers. The Company also provides online health information including medical news, articles, and conference coverage through its Internet portals, Medscape.com and Medscapehealth.com. Medscape's products and services are designed to enhance and improve the quality, cost, efficiency, safety and outcome of healthcare.

During the year ended December 31, 2000, the Company engaged in and derived substantially all of its revenues from three operating segments, Digital Health Record (DHR) applications, Internet Portals and Transcription Services. Selected financial information relating to the Company's operating segments is contained in the Management Discussion and Analysis and Note 10 of the Notes to Consolidated Financial Statements. On August 17, 2001, the Company completed the sale of its transcription services segment to TEM Holdings, LLC, a newly formed limited liability company funded by Parthenon Capital, LLC ("Parthenon"), a Boston based private equity firm, for approximately $6.0 million in cash. The transaction was structured as a sale by Medscape Enterprises, Inc., a wholly owned subsidiary of MedicaLogic/Medscape, Inc., of all of the outstanding shares of Total eMed, Inc. pursuant to a stock purchase agreement dated as of July 31, 2001 and amended as of August 16, 2001. The sale also included the three subsidiaries of Total eMed, Inc., consisting of Total eMed of Tennessee, Inc., Total eMed Finance Co., Inc. and Total eMed Leasing Co., LLC. Medscape received initial purchase price proceeds of $5.0 million from Parthenon on August 17, 2001. The remaining purchase price of $1.0 million will be held in an escrow account for up to one year pursuant to the terms of an Escrow Agreement dated August 17, 2001. As a result, the Company's transcription services have been classified as discontinued operations in the accompanying Annual Report on Form 10-K.

Medscape's DHR applications replace or augment the paper medical record, provide decision support and facilitate the flow of clinical information necessary for patient care, potentially increasing both efficiency and safety. As of December 31, 2000, Medscape DHR systems housed digital records for more than 13.4 million patients. The DHR application derives revenues from software licenses, monthly service subscriptions and support and consulting fees. DHR application customers include academic medical centers such as Baylor College of Medicine, healthcare delivery networks such as Providence Health System in Portland, Oregon (which provides regional healthcare to customers through a combination of hospitals, clinics, physician practices, and other healthcare facilities and services), and both the NASA space shuttle program and the International Space Station program.

Medscape's Internet portals include Medscape.com and Medscapehealth.com. Through Medscape.com, the Company provides up-to-date medical news, articles, and conference coverage as well as accredited continuing professional education programs. As of December 31, 2000, more than 560,000 physicians and 1.6 million non-physician healthcare professionals (such as nurses or physician assistants) worldwide had registered at Medscape.com, and during the year 2000 more than 100,000 hours of accredited continuing professional education were delivered via the site. Through Medscapehealth.com, the Company provides health information tailored to the healthcare consumer's perspective. The Internet portal line of business derives revenue primarily from advertising and sponsorship.

The Company is working to provide new offerings to customers that combine a number of the Company's products and services, and also to support the creation of reports and data produced from Medscape's DHR products and Internet portals. These reports will provide only aggregated, de-identified statistical information about substantial populations in order to protect the privacy of individuals' health information. These combined offerings will focus on the education of physicians and patients about new treatments, on improved safety and appropriateness of prescribing, on recruitment of patients for clinical research trials, or on other matters. The Company recently announced two transactions that represent these offerings. In our agreement with GlaxoSmithKline, the world's largest pharmaceutical company, we combined the sale of sponsorship and promotional services on our Internet portals with the sale of aggregated statistical data on disease management from our DHR systems. In our agreement with General Motors Corporation (GM), the nation's largest private purchaser of healthcare services, we combined GM sponsorship of sales of our DHR products and our new Medscape Mobile handheld software. These products will provide both a prescription writer and access to information from our Internet portals to physicians who treat GM patients. GM will also receive reports and other aggregated information intended to assist GM in managing the quality of healthcare for its employees, retirees, and their families. Revenues we may earn from GM depend on the combined effect of our offerings in helping GM achieve its healthcare objectives.

The Company's strategy is to provide a wide array of products and services that can be embraced by healthcare professionals and consumers at various levels of technical sophistication, and to encourage users who have experienced the benefits of Medscape's Internet portals to progressively adopt the Company's increasingly comprehensive clinical applications in manageable steps of complexity and functionality. The rapid post-launch adoption of the Company's Medscape Mobile product is a recent example of this strategy in practice. Another aspect of the Company's strategy is to integrate the information contained in and allow communication between our various products. For example, AboutMyHealth, a Web-based offering for consumers, allows patients to view their physician-created DHR online as well as to communicate with their doctor's office to request prescription refills, make appointments or ask questions. As another example, in certain portions of the Company's DHR applications, the user can, with a single click, jump from a patient's diagnosis or medication directly to current Medscape.com news and articles on that specific topic.

The Company was incorporated in Oregon in May 1985 as MedicaLogic, Inc. The Company's name was changed to MedicaLogic/Medscape, Inc. in May 2000. Since September 2000, the Company has done business under the trade name Medscape. The Company expanded its products and services in 2000 as a result of its strategic merger with Medscape, Inc. ("Medscape, Inc."), and the acquisitions of Total eMed, Inc. ("Total eMed") and AnywhereMD.com, Inc. ("AnywhereMD.com"). These strategic mergers and acquisitions added the following assets, respectively: Internet healthcare portals, Web-based transcription capability for the creation of digital health records, and wireless prescribing

technology for the Palm O/S^TM platform. On August 17, 2001, the Company completed the sale of Total eMed, Inc. to a new entity funded by Parthenon Capital, a Boston based private equity firm, for approximately $6.0 million in cash. As a result, the operations of the Company's transcription services segment have been classified as discontinued operations in the accompanying Annual Report on Form 10-K.

The primary target markets for the Company's DHR applications consist of healthcare providers and healthcare consumers. The Company's DHR applications include the Medscape Charts suite, Logician by Medscape, Medscape Mobile for healthcare providers and AboutMyHealth for healthcare consumers.

The Medscape Charts suite is comprised of low-cost, Web-enabled applications that work within existing paper-based clinical workflows to help manage costs and potentially improve the quality and efficiency of healthcare services. The Medscape Charts suite includes:

Medscape Encounter (formerly "Logician Internet") is a Web-enabled application that eliminates additional effort for the physician to create Health Care Finance Administration (HCFA) compliant chart notes of patient encounters as well as automatically maintaining a summary of key patient data to aid clinical decision making. Medscape Encounter enables physicians to:

Medscape Chart Room provides storage of patient charts utilizing technologies that are supportive of HIPAA regulations. The Chart Room allows physicians and authorized staff access to key clinical data from any Web browser, subject to correct user authentication. Compared to a paper-based system,

this improves the availability of data to support clinical decision-making and has the potential to reduce medical errors.

The Web-hosted chart room is a key aspect of Medscape Charts. With Medscape Encounter, charts and chart notes are created on the physician's computer and then can be printed for use in paper charts. At the physician's convenience, he or she then connects to the Internet to store the encrypted chart notes in a central database at Medscape's data center. To keep the information safe during transmission and in storage, Medscape uses technology similar to that used by banks and financial institutions to secure online financial transactions. This state-of-the-art technology provides strong levels of security during communications between the user's computer and the data center at Medscape. The data is backed up regularly to minimize the risk of loss in case of a computer system failure. Once stored, charts are accessible from any connection to the Internet with the authorized member name and password.

Medscape Practice Profiles is a series of tools for providing interactive analysis on a particular patient population to better understand care trends, analyze adherence to nationally approved care guidelines, and access authoritative content and medical literature relating to the problems being treated or medications being used. Practice Profiles provides a collection of automated, interactive reports to help improve patient management.

Practice Profiles enables physicians to assess their own clinical practices and has the potential to improve the overall quality and efficiency of the healthcare provided.

Currently, Medscape is developing future releases for applications within the Medscape Charts suite including electronic submission of laboratory orders and receipt of results, electronic receipt, signature, and filing of transcription and external documents, and facilitation of the private exchange of messages, documentation, and patient data among a team of healthcare providers in support of an episode of patient care.

Logician by Medscape is a client-server based electronic medical record application for healthcare practices. This application has the potential to allow healthcare practices to gain efficiencies in clinical care and practice improvement through automated workflows and online access to all clinical information. It is available under both perpetual license and subscription models, and may be deployed as a locally hosted application or under an application service provider (ASP) model. Due to the need for a significant investment in computer infrastructure and office re-engineering, adoption of Logician by Medscape has been largely focused among integrated healthcare delivery systems and large group practices having an existing Information Systems infrastructure.

From 1990 to 1995, the Company developed first-generation DHR applications for the PC-DOS environment. In 1996, the Company released Logician by Medscape for the Windows client-server environment and subsequently delivered several major upgrade releases including version 5.4, released in 2000, that incorporates enhancements related to clinical content, security data import/export,

encounter form editing and Web accessibility. The Company's current customers for this class of products include Baylor College of Medicine, Memorial-Hermann Hospital System, MeritCare Health System, the NASA Space Shuttle program and the International Space Station Program, Providence Health System, Riverside Health System, Texas Children's Hospital, Wake Forest University, Baptist Medical Center and more than 50 others.

Medscape continues to develop and deploy ambulatory electronic medical record applications and enhancements for group practices and integrated delivery networks. The Company believes the availability of an ASP model will encourage further adoption of Logician by Medscape by enabling healthcare organizations to reduce up front costs and ease reliance on their internal IT resources.

Looking forward, Medscape is currently developing Logician by Medscape 5.5. A key objective for this release is to enhance connectivity between Logician by Medscape and Medscape Charts by supporting the exchange of patient records between enterprises and referring physicians. Medscape plans to also make changes to assist physicians with adhering to the new HIPAA regulations designed to further protect patient privacy and confidentiality. It is Medscape's expectation that these efforts will significantly benefit both current and new Logician by Medscape customers, further driving adoption of Medscape's DHR applications.

In 2000, Medscape began offering an ASP model of Logician by Medscape to help physicians to:

Logician ASP by Medscape incorporates all the features of Logician by Medscape while reducing the initial capital for the necessary, but costly, server-side computer systems and associated network support staff.

Medscape introduced a suite of software applications known as Medscape Mobile for handheld (PDA) devices in September 2000. Medscape Mobile is a suite of applications designed for the Palm™ operating system. These applications give physicians access to patient-specific information and to relevant information for clinical decision-making on an industry leading platform. Medscape Mobile is already in use by over 43,000 physicians. In its initial phase, Medscape Mobile offers exclusive access to the Tarascon ePharmacopoeia™, the electronic version of Tarascon's portable drug reference, the Pocket Pharmacopoeia®. According to medical bookstore distribution figures, the printed Pocket Pharmacopoeia® is the market leader in the professional drug reference area. In a survey published in 1999, 97% of surveyed physicians and physicians in training rated it as the "most useful" or "essential" item in their white coat pockets.

The Company recently announced two transactions that represent the first step in presenting an integrated offering. In our agreement with GlaxoSmithKline, the world's largest pharmaceutical company, we combined the sale of sponsorship and promotional services on our Internet portals with the sale of aggregated statistical data on disease management from our DHR systems. In our agreement with General Motors Corporation (GM), the nation's largest private purchaser of healthcare services, we combined GM sponsorship of sales of our DHR products and our new Medscape Mobile handheld software. These products will provide both a prescription writer and access to information from our Internet portals to physicians who treat GM patients. GM will also receive reports and other aggregated information intended to assist GM in managing the quality of healthcare for its employees, retirees, and their families. Revenues we may earn from GM depend on the combined effect of our offerings in helping GM achieve its healthcare objectives. Medscape Mobile also offers the Medscape Reader for Palm-based access to Medscape.com articles and conference coverage and a Medical Calculator that includes over 50 dosing and clinical formulas.

We plan to enhance future releases of Medscape Mobile to include applications that help physicians work with patients and with the reimbursement system. Planned enhancements include a prescription writer with integral formulary management (the ability to display health plan coverage information about prescription drugs), additional reference material about possible drug-drug interactions, and a "charge capture" solution that enables physicians to enter codes that enable them to more easily get paid for their services when they are away from their office location.

Medscape released AboutMyHealth.com, the first-physician-patient communications tool powered by Medscape's DHR on December 5, 2000 in order to serve the needs of healthcare consumers concerned about their health, or the healthcare of their dependents. Upon mutual consent, AboutMyHealth.com allows patients and their physicians to share information about the patient's personal health and ongoing disease management by using information captured during office examinations or other physician/patient encounters. Patients can electronically contact their physician's office with requests to schedule appointments and refill medications through an encrypted Internet connection. Patients can also communicate with their clinic or physician both during and outside of regular office hours through AboutMyHealth.com's online messaging service. Unlike traditional email connections, AboutMyHealth.com includes authentication technology for both patients and physicians to protect confidentiality. Physicians can communicate with patients privately, provide patients with a summary view of their digital health record, provide contextual links to authoritative health information, news and educational materials through Medscapehealth.com. Patients can also use AboutMyHealth.com to store personal and family health information for ongoing health management or future reference.

Medscape.com is designed primarily for physicians and other healthcare providers. In December 2000, Medscape was recognized for its achievement and excellence at the 2000 eHealthcare World Awards Ceremony in New York. Medscape.com earned the Gold Awards for Best Healthcare Search Engine and Best Healthcare Portal. The eHealthcare World Awards are based on criteria such as content and design, structure and functionality, navigation, interactivity, customer service and creative use of advertising and marketing. Our site was also listed in Forbes magazine's "Top Ten" healthcare Web sites in February 2001. Through Medscape.com, users can access various subjects, based on their practice or needs from the latest medical news, to medical conference coverage, financial information, and medical texts. In addition, physicians can:

Medscape.com offers specialists, primary care physicians, and other health professionals a robust and integrated multi-specialty medical information and education tool. Medscape.com is built around practice-oriented content. Each specialty site pools, filters, and delivers pertinent, regularly updated content from tens of thousands of medical journal articles, expert-authored state-of-the-art surveys in disease management, conference coverage from major medical meetings, and more. All of Medscape.com's articles are Web-enhanced and cross linked for online browsing and smart information retrieval. All of the content can also be easily downloaded and printed for reading offline. Some of Medscape.com's key features include:

In addition to clinical information resources, Medscape.com offers a suite of professional and practice tools, including:

Based on the number of credits awarded in 2000, the Company believes that Medscape.com is one of the world's largest providers of online continuing medical education (CME) programs for healthcare professionals. The site offers a selection of free, regularly updated continuing education activities for physicians, registered nurses, pharmacists and other health professionals. The majority of CME activities have been planned and implemented in accordance with the Essential Areas and Policies of the Accreditation Council for Continuing Medical Education (ACCME), and have been produced in collaboration with ACCME-accredited CME providers. Medscape.com recently began providing instant CME (iCME™) Certificates. Selected Medscape.com CME activities offer instant, printable CME certificates online. In addition, there is now an Instant CME Tracker function. Activities tagged for iCME are automatically entered into the CME Tracker as they are completed for credit, and the certificates are available to be printed as needed from the Medscape.com site.

In September 1999, Medscape launched its first consumer Web site, CBSHealthWatch.com. CBSHealthWatch.com is designed to help families and individuals make better-informed healthcare decisions and to simplify management of their healthcare needs. The site provides personalized, authoritative medical content written for the consumer, access to professional content on Medscape.com and interactive personal health management tools, such as health diaries. On August 3, 1999, Medscape entered into a strategic relationship with CBS Corporation, (subsequently acquired by Viacom, Inc.) under which CBSHealthWatch.com is the exclusive Internet healthcare site integrated into CBS News programming and is promoted on CBS as well as certain other Viacom media properties. In December 2000, CBSHealthWatch.com was recognized for its achievement and excellence at the 2000 eHealthcare World Awards Ceremony held in New York. CBSHealthWatch.com by Medscape received the Bronze award for Best Healthcare Portal and during February 2001 was also named one of the Top 100 Internet sites by PC Magazine. On November 7, 2001, the Company and Viacom entered an agreement pursuant to which they terminated their relationship. The Company's consumer Web site has been renamed Medscape Health for Consumers and can be accessed via www.Medscapehealth.com.

Medscape Transcription Services is designed to allow physicians to document patient encounters and produce a DHR without manual entry of information into a computer, which allows access to and analysis of information that was previously unavailable due to the inefficiency of storing, in paper format, millions of individual health records.

Physicians' use of handheld, wireless or phone devices to dictate patient encounters is consistent with their current practice, thus, the adoption of Medscape Transcription Services does not require a change in behavior. The dictation and selected demographic data is downloaded to the Medscape Transcription national data center in Nashville, Tennessee through the use of a virtual private network (VPN). Once the voice and demographic information is compiled, the work is routed via the Internet to home-based medical transcriptionists (MTs) located across the country who are employed and trained by Medscape. After the patient encounter is transcribed, the physician or other healthcare provider can view, edit and electronically sign the record over the Internet in a protected environment with a standard Web browser. The final electronic document can then be e-mailed, faxed or printed onsite, or any combination of these formats, depending on the established workflow patterns of the clinic and physicians. Medscape Transcription Services provides the ability to maintain both digital and paper health records depending on the system used by the physician's practice.

On August 17, 2001, the Company completed the sale of its transcription services segment. As a result, the operations of Total eMed, Inc., the Company's transcription services segment, have been classified as discontinued operations in the accompanying Annual Report on Form 10-K.

The Company is currently developing integrated offerings which combine a number of the Company's products and services, and may also be augmented with reports and data produced from its DHR products and Internet portals. Potential integrated offerings include the following:

The Company is also developing applications to provide the ability to conduct clinical transactions from its DHR applications, including the following:

Medscape believes effective customer service is essential to attracting and retaining physician usage of the Company's electronic healthcare applications and consumer usage of the Company's Internet-based services. Medscape understands the demands of the healthcare community for person-to-person responsiveness. Medscape provides a wide range of customer support services through a staff of customer service personnel, multiple call centers and an e-mail help desk. The Company also offers Web-based support services that are available outside of normal business hours and are frequently updated to improve existing information and to support new services. The Company's ongoing telephone support is accessible by a toll-free telephone number and is available from either 5 a.m. to 6 p.m. Pacific time, Monday through Friday or, for an additional charge, outside of normal business hours. The Company's operators screen all requests for telephone support and direct the call to the appropriate customer service personnel. Technical support personnel are responsible for consulting with the Company's strategic partners about technical support issues and for resolving technical problems encountered by users, strategic partners or other parties. Medscape also employs technical support personnel who work closely with the Company's direct sales force, distribution partners and customers. Medscape provides its customers with the ability to purchase maintenance for the Company's applications and services, which includes technical support and upgrades. Medscape service and support professionals also provide training programs for the Company's customers.

In addition, the Company provides enterprise planning, site evaluation, work-flow preparation, interface development and installation and training of physicians and their staff in connection with the implementation of Medscape's Logician digital health record application. Enterprise and site evaluations allow Medscape to understand how best to implement the Company's Logician by Medscape application within the physician's enterprise and office work flow environment. The objective of the implementation process is to maximize the benefits of digital health records to the physician's enterprise and practice.

Medscape markets its products and services to an increasingly diversified network of physicians, pharmaceutical companies, large private healthcare consumers, and integrated healthcare delivery networks and healthcare consumers. In 1998, VHA, Inc. accounted for approximately 20% of total revenues. During 1999, Baylor College of Medicine accounted for approximately 16% of total revenues, and Texas Children's Hospital accounted for approximately 13% of total revenues. Due primarily to the expansion and diversification of the Company's customer base, no single customer comprised more than 10% of total revenues during 2000. The Company's current customers also include General Motors Corporation, one of the nation's largest private consumers of healthcare services and GlaxoSmithKline, one of the world's largest pharmaceutical companies. Other customers include academic medical centers such as Baylor College of Medicine, integrated healthcare delivery networks such as Providence Health System in Portland, Oregon, and the NASA space shuttle program and the International Space Station program.

The Company's sales and marketing programs are organized around the Company's main customer segments: pharmaceutical companies, integrated healthcare delivery systems, physicians in private practice, self-insured employers and personal healthcare consumers. The Company's products and services are distributed by a nationwide direct sales force, a complementary inside sales team, a select number of strategic distribution partners and directly through the Internet. Medscape also partners with national consulting firms and systems integrators to deliver complete information technology solutions for large system customers.

Pharmaceutical Companies. Medscape sells advertising and sponsorships, market research and other services to pharmaceutical companies. Medscape's Internet capabilities and informational resources offer advantages over traditional mail surveys and focus groups in terms of speed and cost savings.

Private Healthcare Consumers. Medscape recently began selling to private healthcare consumers. Medscape's technologies may help its partners to achieve improvement in the quality of patient care by reducing medical errors and may lead to reducing healthcare costs.

Integrated Healthcare Delivery Systems. Medscape approaches the integrated healthcare delivery system market primarily through direct sales and distribution partners. Medscape believes the Company's access to premier reference accounts plays an important role in the Company's sales process.

Physicians in Private Practice. Medscape promotes the Company's products and services to physicians in private practice with programs designed to take advantage of the value of peer-to-peer relationships in the physician community. In contrast to the national image-building campaign required for sales to large health systems, Medscape is building the Company's individual physician sales and marketing campaign around activities that will increase adoption of Medscape Charts. Sales will be offered primarily through online subscription capabilities supported by an inside telephone sales team.

Personal Healthcare Consumers. Medscape believes marketing programs for personal healthcare consumers are likely to be more successful when they are supported by the existing relationship between the physician or local health system and their patients. Medscape believes the Company's launch of AboutMyHealth.com will contribute to that relationship and related marketing efforts.

Medscape's sales, marketing and business development resources are located at the Company's facilities in Oregon and New York, while the Company's account representatives are deployed throughout the United States.

Medscape forms strategic alliances where the relationship affords Medscape an opportunity to advance and accelerate the development of new markets, to develop new products and services, and to enhance existing products and services. The objectives and goals for a strategic alliance can also include technology exchange and joint sales and marketing. Certain of our strategic alliances are listed below:

General Motors Corporation. General Motors Corporation (GM), the world's largest vehicle manufacturer, designs, builds and markets cars and trucks worldwide. GM is also the United States' largest private purchaser of healthcare. In January 2001, GM and Medscape entered into an e-business healthcare alliance. In accordance with the agreement, GM will sponsor the use of certain of Medscape's computer-based technologies to facilitate improvement in the quality of patient care by reducing medical errors while lowering healthcare costs for GM. Under the alliance, GM and Medscape will cooperate on a three-year program to encourage U.S. physicians to use hand-held computer devices which use applications from the Medscape Mobile suite of products for prescriptions and to adopt Medscape's digital health record application Medscape Logician ASP. As part of the strategic alliance, GM received warrants for 5 million shares of Medscape common stock. GM and Medscape will also share in the cost savings realized by GM primarily from physician usage of Medscape Mobile applications.

VHA, Inc. A nationwide network of more than 1,750 leading community-owned healthcare organizations and their physicians, the VHA network comprises approximately 24% of U.S. community hospitals, with over 175,000 physicians. Logician by Medscape is a core application of VHA's Physician

Linkage strategy, developed by VHA Information Services to provide physician practices with electronic access to patient information and clinical decision-support tools.

High growth, intense competition, and technological change characterize the market for electronic healthcare information services and e-commerce. Medscape faces competition from many companies with significantly greater financial resources, well-established brand names and large installed customer bases. Medscape expects significant competition from:

Traditional Healthcare Information System Vendors. These vendors, including Cerner Corporation, Epic Systems Corporation, IDX Corporation, McKesson/HBOC, Medic, a division of Misys PLC, Shared Medical Systems Corporation, CyBear, Inc., Eclipsys Corp., QuadraMed Corp, and MedPlus, Inc. focus on providing information systems to large healthcare enterprises and physician practice groups. They have large installed bases of customers and generally offer solutions to a broad range of customer problems.

Vendors with PDA-based Solutions. The rapid adoption of PDA handheld devices (notably using the Palm operating system or the Pocket PC platforms) has given credence to a new generation of vendors providing applications that run on those platforms. While many of the proposed business models remain unproven, the high relative penetration of handheld devices suggests that any vendor who achieves success in this market has the opportunity to achieve a significant foothold. Potential competitors in this category include AllScripts, ePocrates, ePhysician, iScribe, Parkstone, and others.

Other Healthcare Information System Consolidators or Disintermediators. The availability of Web-based consolidators and the transition of the healthcare supply chain economics to the Internet have paved the way for other vendors to play the role of either strongly complementary partners or formidable competitors. These could include any of the service suppliers seeking to maintain control of the supply chain such as the national labs (LabCorp, Quest), the Pharmacy Benefit Management companies (Merck-Medco, ExpressScripts, AdvancePCS), business consolidators such as WebMD, Medem, or Healthvision or major players in the supply chain network such as NDC, Envoy, or others.

Also, Internet healthcare companies are focusing on a wide variety of areas including automating financial, administrative and clinical transactions, such as WebMD and Iscribe; attracting physicians and other health professionals with clinical content, tools and medical education, such as Mediconsult, Healthgate, theheart.org and Healthstream; targeting the consumer health area, including iVillage and HealthCentral for content as well as online pharmacies such as Drugstore.com, Inc.

Each of these companies can be expected to compete with the Company within segments of the evolving Internet healthcare market. Major Internet companies, including those not currently specializing in the healthcare industry, may also enter the Company's markets. Certain of these companies may have longer operating histories, larger customer bases, substantially greater financial, technical, sales and marketing resources and greater name recognition than Medscape does and the Company may not be able to compete successfully against these companies.

The Company faces competition both in attracting visitor traffic and in generating revenue across all its business lines. Medscape competes with numerous companies and organizations for the attention of medical professionals and consumers including traditional off-line media such as print journals, conferences, continuing medical education programs and symposia. Medscape also faces significant competition from online information resources. There are many healthcare-related Web sites available

on the Internet. Also, several large consumer sites offer specialized healthcare channels as part of their general services. In addition, there are many companies that provide non-Internet based marketing and advertising services to the healthcare industry. These competitors include advertising agencies, consulting firms, marketing and communications companies and contract sales and marketing organizations.

Some of the Company's current and potential competitors may have competitive advantages compared to Medscape, including:

The Company believes that the principal competitive factors in attracting and retaining members are the depth, breadth and timeliness of services and brand recognition. Other important factors in attracting and retaining members include ease of use, quality of service and cost. Medscape believes that the principal competitive factors that will continue to attract advertisers and sponsors to Medscape.com and its consumer sites include price, the number of medical professionals and consumers who use Medscape's Web sites, the demographics of its member base and the creative implementation of advertisement placements.

Competition is likely to increase as new companies enter the market and current competitors expand their services. There can be no assurance that Medscape will be able to compete successfully against current and future competitors or that the competitive pressures Medscape faces will not seriously harm its business.

The Company's DHR applications use a fault tolerant configuration of Web, application and database server computers interconnected through redundant, high speed network components at Medscape's third-party data center. The data center incorporates various technologies to protect the transmission of sensitive and confidential patient medical record data over the Internet. These include authentication, data encryption techniques, network firewalls, personnel policies, controlled physical access to the data centers and security audits of those sites. The Company's services are linked to systems that provide data protection through techniques such as replication. Medscape requires on-site backup power systems in the data center and intends to install similar facilities in any of the Company's back-up data centers. These safeguards are designed to provide a reliable and protected environment for the storage and exchange of confidential patient and customer data. Although Medscape believes the Company's facilities are resistant to systems failure and sabotage, Medscape is in the process of further developing and implementing disaster recovery and contingency operation plans.

The Company's Logician by Medscape product line runs on Oracle Corporation's database products. Medscape licenses these databases from Oracle under an Oracle alliance agreement. As an alliance member, Medscape has been given the right to sublicense the database software to the Company's customers.

Medscape's Internet portals are supported by reliable and expandable system platforms. Using a combination of proprietary online solutions and commercially available licensed technologies, the

Company has deployed systems for online content dissemination, site analysis, and web and email based member support.

The Company has developed a database management and online publication system to index, retrieve and display information. This system allows for rapid searching, viewing and distribution of content including text, photos, graphics and other images. The Company's hardware and software systems are based on a distributed processing model that allows applications to be distributed among multiple parallel servers. The Company's hardware servers, storage systems, Internet connections and networks are designed to allow its online systems to operate 24 hours a day and seven days a week.

The Company maintains offsite redundant systems and facilities and has outsourced its Web-hosting operations to a third party facility, Exodus Communications. The Company undertook this outsourcing to help provide faster and more reliable connections to the Internet and enhanced reliability and expandability.

The Company's transcription and voice capture applications use a fault tolerant configuration of Web, application and database servers interconnected through redundant, high speed network components at Medscape's data center in Nashville. The data center incorporates various technologies to protect the transmission of highly sensitive and confidential patient medical record data over the Internet. These include authentication, network firewalls, personnel policies, controlled physical access to the data center and security audits. All mission critical servers and their data are protected via both hardware and software backup. Medscape has installed onsite backup power systems in the data center. These safeguards are designed to provide a reliable and protected environment for the storage and exchange of confidential patient and customer data. Although Medscape believes its facilities are resistant to systems failure and sabotage, the Company is in the process of further developing and implementing disaster recovery and contingency operation plans.

Medscape believes the Company's future success will depend on its ability to continue to maintain and enhance the Company's Internet portals, DHR software applications and other services. Medscape has developed applications and services in-house and through acquisitions. Medscape intends to continue to work closely with other strategic partners in certain developmental efforts.

Medscape has several significant projects currently in development. These include the continued enhancement of Logician by Medscape and Medscape Charts product lines, its Internet portals Medscape.com, Medscapehealth.com and AboutMyHealth.com and the introduction of new product lines such as those within the Medscape Mobile suite. Medscape expects the Medscape.com project will be completed in late 2001 or early 2002 and the Medscape Mobile prescription writer will be available in late 2001. Completion dates are subject to uncertainty due to their technical complexity and the funding needs of the projects. Projects are expected to be funded from working capital.

Rapid technological developments and evolving industry standards characterize the emerging market for Internet-based business models, digital health records and associated transaction processing. The emerging nature of this market and its rapid evolution will require that Medscape continually improve the performance, features and reliability of its products and services in response to competing offerings.

Medscape seeks to use when possible the most effective and innovative technologies. The success of new product and service introductions is dependent on several factors, including: proper definition of new applications or services; appropriate staffing of expertise on the particular assignment; timely completion and introduction of new products and services; and differentiation of new products and services from those of Medscape's competitors.

The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of healthcare organizations. Proposals to reform the U.S. healthcare system have been and will continue to be considered by the U.S. Congress. These programs may contain proposals to increase or decrease government involvement in healthcare or change the operating environment for the Company's potential customers. Healthcare organizations may react to these proposals and the uncertainty surrounding these proposals by curtailing or deferring investments, including those for the Company's products and services. On the other hand, changes in the regulatory environment have in the past increased and may continue to increase the needs of healthcare organizations for cost-effective information management, which may enhance the marketability of the Company's applications and services. Medscape cannot predict with any certainty what impact, if any, these proposals or healthcare reforms might have on the Company's business, financial condition and results of operations.

A final rule promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") in December 2000 regulates the use and disclosure of individually identifiable information in any form, whether written, oral or electronic, by health plans, providers and clearinghouses. Under certain circumstances, HIPAA requires patient consent from health plans, health care providers, and clearing houses prior to the disclosure of protected identifiable health information. HIPAA also establishes rules about individuals' rights to access or amend their own or someone else's medical information, and to receive written notice of information practices, including uses of such information by health plans, providers and clearinghouses. Such organizations, as well as the associates they do business with, will need to establish procedures and systems that will help achieve this and to accommodate individuals' requests. HIPAA and various state laws, in relation to the concern about patient record confidentiality, require holders of medical records to implement security and other necessary measures, which may prove to be expensive and restrict health care providers from utilizing

our products for the transmission of medical records. Final HIPAA regulations on the topic of security for health information are expected in the near future.

Because of its relationships with organizations covered by the HIPAA privacy regulations, Medscape will need to provide contractual assurances to those organizations that Medscape's products and services are consistent with applicable requirements of the regulations. Although the regulations themselves will not become effective until early 2003, the Company is already receiving inquiries from customers about HIPAA compliance. Medscape's Digital Health Record products already contain many features that can assist customers in achieving HIPAA compliance. The Company intends for all its products and services to meet applicable HIPAA requirements by the time those regulations become effective.

The United States Food and Drug Administration is responsible for assuring the safety and effectiveness of medical devices under the federal Food, Drug and Cosmetic Act. Computer applications and software are considered medical devices and subject to regulation by the FDA when they are indicated, labeled or intended to be used in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. The Company does not believe that any of our current applications or services are subject to FDA jurisdiction or regulation; however, the Company plans to expand its application and service offerings into the areas that may subject the Company to FDA regulation. Any compliance with FDA regulations could prove to be time consuming, burdensome and expensive, which could have a material adverse effect on the Company's ability to introduce new applications or services in a timely manner.

The confidentiality of patient records and the circumstances under which records may be released for inclusion in Medscape's databases are subject to state and federal laws. These laws require holders of medical records to implement security measures that may require substantial expenditures by the Company or materially restrict the ability of healthcare providers to submit information from patient records using Medscape's applications.

In addition to existing state and federal laws and the HIPAA regulations, the United States or any state may adopt legislation to attempt to protect the privacy of medical records or healthcare information. Any legislation addressing these issues could affect the way in which Medscape is allowed to conduct business, especially those aspects that involve the collection or use of personal information, and could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, it may take years to determine the extent to which existing laws governing issues such as property ownership, libel, negligence and personal privacy are applicable to the Internet.

Outside the United States, regulations concerning the Internet, privacy and transborder data flows are considerably more developed than regulations in the U.S. Medscape has developed some applications and services to be used on a worldwide basis and, consequently, may be required to comply with international regulations concerning the Internet and e-commerce, as well as with U.S. regulations. Medscape is not certain of the immediate effect these regulations will have on the Company's business. These regulations also may have an adverse effect on Medscape's ability to compete internationally.

The tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals have been made at the federal, state and local level and by some foreign governments that could impose taxes on the sale of goods and services and some other Internet activities. A recently passed law places a temporary moratorium on specific types of taxation on e-commerce. Medscape cannot predict the effect of current attempts at taxing or regulating commerce over the Internet. Any legislation that substantially impairs the growth of e-commerce could have a material adverse effect on the Company's business, financial condition and results of operations.

Medscape protects its intellectual property rights through a combination of license agreements, trademark, service mark, trade secret and copyright law, and contractual restrictions. The Company has been issued a number of trademarks and service marks by U.S. and foreign governmental authorities. The Company has applied for the registration of other trademarks, service marks, and patents in the U.S. and internationally. Medscape also holds a number of domain names and has applications for numerous domain names pending. Medscape seeks to protect its source code for its software, documentation and other written materials under trade secret and copyright laws. Medscape licenses its software under signed license agreements, which impose restrictions on the licensee's ability to utilize the software. The Company also enters into confidentiality agreements with employees, consultants, and other third parties and generally seeks to control access to and distribution of technology, documentation and other proprietary information.

Medscape licenses from Oracle database software on which it depends to operate its business. This license is perpetual and is subject to termination only in the event of a breach of the license agreement. CBS has licensed to Medscape the right to use the the "CBS" trademark and the "Eye" design and selected health-related news content. This license expires in August 2006.

Medscape intends to remain dedicated to industry standards and to take steps to protect proprietary rights. Despite Medscape's efforts, there can be no assurance that intellectual property and other proprietary rights will be free from infringement by third parties. In addition, the global nature of the Internet makes it impossible to control the ultimate destination of services, and effective copyright and trademark protection may be unenforceable or limited in foreign countries.

As of December 31, 2000, Medscape employed approximately 1,030 persons, including employees of Total eMed, Inc., of whom there were approximately 430 in sales, general, and administrative services, 400 in medical transcription, and 200 in technical development and support. None of the Company's employees is a member of a labor union or is covered by a collective bargaining agreement and the Company has never experienced a work stoppage. The Company believes it has good relations with its employees.

The Company's principal corporate offices are located at sites in Hillsboro, Oregon and New York, New York. The Company's main headquarters are in Hillsboro, Oregon totaling approximately 121,000 square feet of space under leases that expire in December 2007. During October 2000, the Company's New York corporate office was relocated to a facility consisting of approximately 83,000 square feet under two separate leasing agreements. Both agreements are in effect through January 2005 with (5) year renewal options. The Company also leases space for offices in Houston, Texas.

Prior to the disposal of Total eMed, Inc., the Company leased space for its transcription services in Franklin, TN totaling approximately 26,000 square feet of space under a lease that expires in April 2005. For the transcription services, Medscape also leased a data center located in Nashville, TN totaling 13,729 square feet of space under a lease that expires in August 2003. In addition, Medscape leased space for a regional training center in Minot, North Dakota and a regional office in Altamont, New York.

The Company owns substantially all of the equipment used in its facilities, except a few items held under a capital lease arrangement. The Company believes that its existing properties are in good condition and suitable for the conduct of its business. The Company believes its facilities are adequate for its current operations and that additional leased space can be obtained if needed.

On August 20, 1999, Medquist MRC, Inc. filed a suit in the District Court for the Northern District of Ohio (Medquist MRC, Inc. v. John H. Dayani and Network Health Services, Inc.) against Network Health Services, Inc., predecessor to Total eMed, Inc. In November 1999, venue in the case was transferred to the United States District Court for the Middle District of Tennessee. The plaintiff alleged breach of fiduciary duty of loyalty, misappropriation of trade secrets, tortious interference with contract, and unjust enrichment. Specifically, Medquist MRC alleged that Mr. Dayani, who served on the Medquist MRC board of directors both prior to and after founding Network Health Services, misappropriated certain trade secrets from Medquist MRC and used those trade secrets to develop Network Health Services' business concepts and customer base. The complaint also alleged that Network Health Services committed other actionable offenses as described above. On March 14, 2001, the parties finalized a settlement of this lawsuit. None of the parties admitted to any wrongdoing in the settlement. Medscape's portion of the settlement of $2 million was paid during the quarter ended March 31, 2001 and entitled Medscape to an escrow of shares established in May 2000 when Medscape agreed to acquire Total eMed, Inc.

On August 2, 2001, the law firm of Bernstein, Liebhard & Lifshitz, LLP announced that the Company, a current director, a prior officer and four underwriters of the Company's initial public offering are defendants in a class action lawsuit filed in the United States District Court for the Southern District of New York. The class action is brought on behalf of purchasers of the Company's common stock between December 13, 1999 and December 6, 2000. The plaintiffs allege that the Company's prospectus was materially false and misleading because it failed to disclose, among other things, that the lead underwriter required several investors who wanted large allocations of initial public offering securities to pay undisclosed and excessive underwriters' compensation in the form of increased brokerage commissions and required investors to agree to buy shares after the initial public offering was completed at predetermined prices as a precondition to obtaining initial public offering allocations. The plaintiffs further allege that because of these purchases, the Company's post-initial public offering stock price was artificially inflated. As a result of the alleged omissions and the purported inflation of the Company's stock price, the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. The Company intends to vigorously defend the lawsuit.

On August 7, 2001, Dr. Mark Leavitt's ex-wife Sandra Leavitt filed a lawsuit against Dr. Leavitt "individually and in his capacity as Chairman of the Board of MedicaLogic/Medscape." The complaint, filed in Mulmomah County Circuit Court as Case No. 0108-08072, alleges that Dr. Leavitt and the Company defrauded Ms. Leavitt into signing a lock-up agreement with the underwriters of the Company's initial public offering. Subsequently, the case has been moved to Washington County Circuit Court. The lock-up agreement barred Ms. Leavitt, for a period of time, from selling her Company stock without written consent of the lead underwriter on the public offering. Ms. Leavitt alleges that, but for the lock-up agreement, she would have sold her stock in the public market at $50 per share and that, if she had done so, her return would have been $12,625,000. The Company intends to vigorously defend the lawsuit.

The Company cannot predict the outcome of the litigation matters described above or the extent to which the costs of defense and any settlement or award will be covered by our insurance policies. An adverse determination on one or more of these matters could result in a material adverse effect on our financial condition and results of operations.

No matters were submitted to a vote of security holders during the fourth quarter of Medscape's 2000 fiscal year.

Name	Age	Position
Mark K. Leavitt	50	Chairman
David C. Moffenbeier	49	Chief Executive Officer and President
Kevin D. Hutchinson	37	Chief Operating Officer
Donald A. Bloodworth	44	Executive Vice President and Chief Financial Officer
Mark E. Boulding	40	General Counsel and Executive Vice President, Government and Regulatory Affairs, Secretary
George D. Lundberg	67	Executive Vice President, Editor in Chief
Arthur N. Leibowitz	53	Executive Vice President, Digital Health Strategy and Business Development
Kelly Gill	46	Executive Vice President, Transcription Services
Thomas M. Watson	51	Executive Vice President, Application Sales

Mark K. Leavitt, MD, PhD has been Chairman of the Board of the Company since 1985. Dr. Leavitt founded MedicaLogic in 1985 and served as the Chief Executive Officer from 1985 until May 2000. From 1992 to 1996 he served as a faculty member for St. Vincent Internal Medicine Family Practice and concurrently served as Medical Director and Regional Information Systems Director for Sisters of Providence Health Care System from 1992 to 1994. From 1982 to 1992, Dr. Leavitt operated a private practice of internal medicine. From December 1997 to June 1998, he served on the Board of Directors of Physician Partners, Inc. He currently serves on the advisory boards of MGMA Services and WelchAllyn Protocol.

David C. Moffenbeier became President and Chief Executive Officer in May 2000. From 1994 until May 2000, he served as Chief Operating Officer of the Company. Mr. Moffenbeier has been a Director of the Company since 1994. From 1993 to 1994, Mr. Moffenbeier served as Chairman of the Board of Directors of Summit Design Inc., a supplier of software tools for integrated circuits. Previously, Mr. Moffenbeier co-founded Mentor Graphics Corp., a manufacturer of hardware and software for electronic design automation, where he served as a Director from 1981 to 1993 and as its Chief Financial Officer from 1981 to 1984, its Vice President of International Sales from 1985 to 1988 and its Vice President of Worldwide Sales from 1989 to 1993. He served on the Board of Directors of Providence Health Systems from 1985 to 1997 and Providence Good Health Plan, a health care management organization, from 1994 to 1997.

Kevin D. Hutchinson became the Chief Operating Officer in September 2000. On November 6, 2001, the Company announced the resignation of Mr. Hutchinson, effective December 31, 2001. Mr. Hutchinson is leaving the Company in order to pursue other career interests. Prior to joining the Company, he served as the Vice President of Business Operations of VHA, Inc. from January 2000 to September 2000 and as a participating member of the Senior Management Executive Committee.

Mr. Hutchinson held various other positions with VHA, Inc. from October 1995 to September 2000. Prior to October 1995, he held various positions in sales and sales management with International Business Machines Corporation and with Oracle Corporation.

Donald A. Bloodworth became the Chief Financial Officer in December 2000 and Chief Operating Officer in October 2001. Prior to joining the Company, Mr. Bloodworth served as Chief Financial Officer for GST Telecommunications from March 2000 to December 2000. From September 1999 to March 2000, he was the Vice President and Corporate Controller of 3Com Corporation. From October 1997 until September 1999, he was the Vice President of Business Systems Integration for PacifiCorp. From April 1997 until September 1997, Mr. Bloodworth was the Corporate Controller for AirTouch Communications. Prior to April of 1997, Mr. Bloodworth served for thirteen years in various finance capacities at PacifiCorp, including Corporate Controller.

Mark E. Boulding became the General Counsel and Executive Vice President of Government and Regulatory Affairs when Medscape, Inc. merged with the Company in May 2000. Prior to the merger, Mr. Boulding served as the General Counsel and Vice President of Regulatory Affairs of Medscape, Inc. from June 1999 to May 2000. Prior to joining Medscape, Mr. Boulding was a lawyer in private practice in Washington D.C. from 1991 to June 1999. Mr. Boulding is a co-founder and sits on the Board of Directors of the Internet Healthcare Coalition. He also participates as Medscape's representative on the Board of Directors of the Health Internet Ethics ("Hi-Ethics") self-regulatory association and the eHealth Initiative, a nonprofit association focused on the use of technology to improve health care.

George D. Lundberg, MD became the Executive Vice President and Editor in Chief when Medscape, Inc. merged with the Company in May 2000. Dr. Lundberg became a director of the Company in August 2000. Prior to the merger, he served as Editor in Chief of Medscape, Inc. from February 1999 to May 2000. Dr. Lundberg became a Director of the Company in August 2000. Prior to joining the Company, he served as Editor of the Journal of the American Medical Association and also served as the Editor in Chief of Scientific Information and Multimedia, a publication of the American Medical Association, for seventeen years.

Arthur N. Leibowitz, MD became the Executive Vice President, Digital Health Strategy and Business Development and a Director in December 2000. As of July 2001, Dr. Leibowitz is no longer an employee of the Company. Currently, Dr. Leibowitz is working as Co-Founder and Executive Vice President of Program Development, Strategic Planning for Health Advocate, Inc., a start-up company which provides health support services to employees at small to medium-sized companies across the country. Prior to joining the Company, he served as the Chief Medical Officer for Aetna U.S. Healthcare from 1992 to December 2000 and held various other positions from 1987 to 1992. Prior to 1987, Dr. Leibowitz was in private practice.

Kelly Gill became the Executive Vice President, Transcription Services in May 2000 when Total eMed, Inc. was acquired by the Company. As a result of the sale of Total eMed, Inc. on August 17, 2001, Mr. Gill is no longer an employee of the Company. He had served as the Chief Operating Officer of Total eMed, Inc. since August 1999. Prior to joining Total eMed, Inc., he served as the President and Chief Executive Officer of Healthcare Innovations, Inc. from August 1997 to July 1999. From March 1995 to August 1997 he served as the President of American Rehability Services, Inc.

Thomas M. Watson became the Executive Vice President, Application Sales in May 2000, a position he held until July 2001. Mr. Watson is no longer an employee of the Company. Prior to May 2000, he served as Senior Vice President, Worldwide Sales and Professional Services of the Company since March 1999 and from 1997 to March 1999, Mr. Watson served as Vice President, Sales. Prior to joining the Company, Mr. Watson served as Vice President of Sales at PHAMIS Inc. from 1989 to 1997. Prior to 1989, he held senior sales and management positions at McDonnell Douglas Health Systems, Shared Medical Systems, and Mercy Catholic Medical Center.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

The Company's common stock has traded on the Nasdaq National Market under the symbol "MDLI" since December 10, 1999. Prior to that date, there was no public market for the Company's common stock and, therefore, no quoted market prices for the Company's common stock are available for the periods prior to December 10, 1999.

As of December 31, 2000, Medscape had 55,657,348 shares of common stock outstanding held by approximately 452 shareholders of record. Because many of such shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders.

The following table sets forth the high and low sales prices reported on the Nasdaq National Market for the Company's common stock for the periods indicated:

The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to invest cash generated from operations, if any, to support the development of its business and does not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results and current and anticipated cash needs.

In June 2000, Medscape issued 5,707 shares of Common Stock to Baylor College of Medicine pursuant to an agreement described in the Company's prospectus dated December 9, 1999 that provides for the issuance of shares of Common Stock to Baylor upon certain purchases of Logician licenses from the Company. The shares were issued to Baylor as a result of purchases of Logician licenses by institutions in Houston, Texas totaling approximately $90,000. The estimated value of the shares at the time of issuance was approximately $7.88 a share. The shares of Common Stock were offered and sold by Medscape in accordance with the exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated under the Securities Act of 1933.

On May 11, 2000 the Company issued approximately 7,450,000 shares of our common stock as consideration for the acquisition of Total eMed, Inc., valued at approximately $317.9 million. In addition to the issuance of the Company's common stock, the consideration included (i) approximately $4.7 million in cash paid for professional fees; (ii) the substitution of stock options to purchase approximately 550,000 shares of the Company's common stock in replacement of the Total eMed options held primarily by Total eMed's employees, who joined the Company after the closing of the acquisition, valued at approximately $21.2 million.

On May 19, 2000 the Company issued approximately 14,932,000 shares of our common stock as consideration for the merger with Medscape, Inc., valued at approximately $637.1 million. In addition to the issuance of the Company's common stock, the consideration included (i) approximately

$4.7 million in cash paid for professional fees; (ii) the substitution of stock options and warrants to purchase approximately 2,545,000 shares of our common stock valued at approximately $82.3 million in replacement of the Medscape, Inc., options held primarily by Medscape, Inc.'s employees, who joined the Company after the closing of the merger, and warrants held primarily by America Online, Inc.

The Company's registration statement (No. 333-87825) on Form S-1 for the initial public offering was declared effective by the Securities and Exchange Commission on December 9, 1999. In the initial public offering, which closed on December 15, 1999, the Company registered and issued 5,900,000 shares of Common Stock. In addition, the Company registered and issued 885,000 shares upon exercise of an overallotment option granted to the underwriters which closed on December 20, 1999. The managing underwriters for the initial public offering were Donaldson, Lufkin & Jenrette Securities Corporation. BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and DLJDIRECT Inc. The initial public offering price was $17 per share, or an aggregate of approximately $115.3 million, including the overallotment option. Underwriter discounts and commissions totaled approximately $8.1. The Company paid an estimated total of approximately $3.0 million for other expenses in connection with the initial public offering. Proceeds to the Company, net of underwriting discounts, commissions and other expenses, were approximately $104.3 million. Through December 31, 2000, net proceeds from the initial public offering of approximately $16.8 million were used to complete mergers and acquisitions, approximately $80.0 million were used for general operating expense for the year ended December 31, 2000 and a net balance of approximately $9.9 million was invested in short-term investments at December 31, 2000.

This summary should be read together with the consolidated financial statements, notes to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this annual report on Form 10-K. Historical results of operations are not necessarily indicative of future results. On August 17, 2001, the Company completed the sale of its transcription services segment to TEM Holdings, LLC, a new entity funded by Parthenon Capital, a Boston based private equity firm, for approximately $6.0 million in cash. As a result, the operations of the Company's transcription services segment have been classified as discontinued operations in the accompanying Annual Report on Form 10-K.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Except for historical information, this report contains, including the following discussions, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, among others, those statements using terminology such as "may", "will", "expects", "plans", "estimates", "anticipates", "potential", "believes", "intends" or the negative thereof or other comparable terminology regarding beliefs, plans, expectations, or intentions regarding the future. Forward-looking statements include statements regarding the rate of growth and acceptance of Medscape's Internet and wireless products and services, new products, web sites and services, expected revenues from advertising, sponsored programs, sponsored content, eCommerce, transcription services, license and subscription fees and the relative mix between revenue sources, the level of research and development, sales and marketing, administrative and other operating costs, additional investment in staff and infrastructure and additional capital needs. Medscape wishes to caution the reader that these forward-looking statements involve risks and uncertainties and the factors described under "Risk Factors" may cause Medscape's results to differ materially from those stated in the forward-looking statements. The following discussions also should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2000 included herein.

Medscape was founded in 1985 as MedicaLogic, Inc., and until 2000 was solely focused on the development, marketing and support of digital health record systems. The Company expanded its products and services during 2000 as a result of its merger with Medscape, Inc., and the acquisitions of Total eMed, Inc. and AnywhereMD, Inc. These transactions added the following assets, respectively: Internet healthcare portals, Web-based transcription capability for the creation of digital health records, and wireless prescribing technology for the Palm O/S^TM platform. Since September 2000, the Company has done business under the name Medscape. On August 17, 2001, the Company completed the sale of Total eMed, Inc., its transcription services segment. As a result, the operations of the Company's transcription services segment have been classified as discontinued operations in the accompanying Annual Report on Form 10-K.

Medscape is a leading provider of digital health record systems for the healthcare industry. The DHR replaces or augments the paper medical record, provides decision support, and facilitates the flow of clinical information necessary for patient care, potentially increasing both efficiency and safety. As of December 31, 2000, Medscape DHR systems housed digital records for more than 13.4 million patients. The DHR line of business derives revenues from software licenses, monthly service subscriptions, and support and consulting fees. Customers for this product line include academic medical centers such as Baylor College of Medicine, healthcare delivery networks such as Providence Health System in Portland, Oregon (which provides regional healthcare to customers through a combination of hospitals, clinics, physician practices, and other healthcare facilities and services), and both the NASA space shuttle program and the International Space Station program.

The Company's Internet portals are Medscape.com for physicians and other healthcare professionals, and Medscapehealth.com for consumers. Through Medscape.com, the Company provides medical news, articles, and conference coverage as well as accredited continuing medical education programs. As of December 31, 2000, more than 560,000 physicians and 1.6 million non-physician healthcare professionals (such as nurses or physician assistants) worldwide had registered at Medscape.com, and during the year 2000 more than 100,000 hours of accredited continuing medical education were delivered via the site. Through Medscapehealth.com, the Company provides health

information tailored to the healthcare consumer's perspective. The Internet portal line of business derives revenue from advertising and sponsorship. Customers for this line of business include leading pharmaceutical manufacturing companies such as GlaxoSmithKline, Merck and Pfizer.

Medscape's transcription services is a Web-based medical transcription system that digitizes and transports voice across electronic networks and the Internet, and connects physicians with their medical records stored in Medscape's clinical database. The transcription services segment derives revenues from monthly subscription service fees. On August 17, 2001, the Company completed the sale of Total eMed, Inc., and as a result, the operations of the transcription services segment have been classified as discontinued operations.

Selected financial information relating to the Company's operating segments is contained later in this section and in Note 10 of the Notes to Consolidated Financial Statements.

The Company is working to provide new offerings to customers that combine a number of the Company's products and services, and is also supporting the creation of reports and data produced from its DHR products and Internet portals. To protect the privacy of individual, identifiable health information, these reports provide only aggregated, statistical information about substantial populations. These combined offerings will focus on the education of physicians and patients about new treatments, on improved safety and appropriateness of prescribing, on recruitment of patients for clinical research trials, or on other matters. The Company recently announced two transactions that represent these offerings. In our agreement with GlaxoSmithKline, the world's largest pharmaceutical company, we combined the sale of sponsorship and promotional services on our Internet portals with the sale of aggregated statistical data on disease management from our DHR systems. In our agreement with General Motors Corporation (GM), the nation's largest private purchaser of healthcare services, we combined GM sponsorship of sales of our DHR products and our new Medscape Mobile handheld software. These products will provide both a prescription writer and access to information from our Internet portals to physicians who treat GM patients. GM will also receive reports and other aggregated information intended to assist GM in managing the quality of healthcare for its employees, retirees, and their families. Revenues we may earn from GM depend on the combined effect of our offerings in helping GM achieve its healthcare objectives.

The Company completed its merger with Medscape, Inc. and its acquisition of Total eMed, Inc. during May 2000 by acquiring all the outstanding capital stock of Medscape, Inc. and Total eMed, Inc. in transactions accounted for using the purchase method of accounting for acquisitions. The Company issued approximately 14,932,000 and 7,450,000 shares, respectively, of the Company's common stock in the transactions. The total purchase price, including acquisition expenses and the estimated fair value of converted warrants and options, was approximately $1,068 million, and resulted in goodwill of approximately $924 million, which is being amortized over approximately 3 to 4 years. On August 17, 2001, the Company completed the sale of Total eMed, Inc.

In April 2000, the Company acquired AnywhereMD.com, Inc., a company specializing in developing wireless Palm™-based handheld devices, offering increased mobility to physicians in treating patients. The Company purchased all of the outstanding capital stock of AnywhereMD.com, Inc. for approximately $7.8 million in cash, professional fees and assumed liabilities. The acquisition was accounted for using the purchase method of accounting for acquisitions and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their fair values at the acquisition date. Goodwill recorded in connection with the purchase was approximately $7.7 million and is being amortized over 3 years. During the three months ended June 30, 2001, the Company adopted a plan to transfer the operations and certain assets of AnywhereMD, Inc. to an employee of the Company. Accordingly, the operations of AnywhereMD, Inc.

have been classified as discontinued operations in the accompanying Consolidated Financial Statements and related Notes.

The Company has integrated both Medscape, Inc.'s and Total eMed, Inc.'s products into its suite of offerings, including the DHR, creating one of the most comprehensive offerings of healthcare information solutions anywhere. Accordingly, the Company embarked on a plan to properly size the business and focus our attention and efforts on key success factors. This led to the consolidation of duplicate functions and activities, resulting in a reduction of the Company's workforce, a reduction in total facilities, and the impairment of certain assets. Medscape expects full implementation of the workforce reductions during the first quarter of 2001, with the realization of the cost benefits throughout 2001.

The results of operations and cash flows of all acquisitions during the period have been included in the Company's consolidated financial statements from the respective date of acquisition forward.

Since the date of the merger and acquisitions, there has been a substantial decline in the market value of these types of companies. While operating results of these entities are consistent with original projections, the changed market conditions could result in an impairment of goodwill and other long lived assets if they are disposed of near-term. Competition, worsening economic conditions or other factors could also contribute to an impairment of these assets if undiscounted cash flows do not continue to improve.

During June 2000, the Company acquired an approximate 10% interest in Lifechart.com, Inc. for approximately $8.3 million in cash, which is accounted for using the cost method. The Company also entered into a joint development, sales and marketing agreement with Lifechart.com. By making this investment and entering into an agreement with Lifechart.com, the Company planned to use Lifechart.com's disease management systems and medical devices to supply clinical information to Medscape's digital health record systems using sponsorship dollars from interested parties in the healthcare system. By late 2000, however, the Company became concerned about Lifechart.com's ability to continue to fund its operations. In addition, Lifechart.com failed to make a payment to the Company that was required under the agreement. Based on these events, in December 2000, the Company recorded a loss on its investment in Lifechart.com of approximately $8.3 million to reduce the carrying amount of the investment to its estimated fair value at December 31, 2000.

In January 2001, the Company announced an e-business healthcare alliance with General Motors Corporation ("GM") whereby GM and Medscape will cooperate on a three-year program to encourage U.S. physicians to use hand-held computer devices for prescribing drugs and accessing DHRs. GM will sponsor Medscape's distribution of hand-held Palm OS devices pre-installed with Medscape's prescription software, Medscape Mobile, to a limited number of physicians who treat GM enrollees across the country. The devices will have the ability to prompt doctors to consider medically equivalent, lower cost and/or generic drug alternatives, and allow for easier compliance with health plan formulary requirements. They will also include drug reference tools containing drug-drug interaction data. As part of the strategic alliance, GM will receive warrants for 5 million shares of the Company's common stock, and GM and Medscape will share in any savings from prescription drug claims realized directly from usage of Medscape Mobile.

In January 2001, Medscape closed a $17.8 million capital financing arrangement of which $15.8 million was received prior to December 31, 2000 and has been recorded as convertible redeemable preferred stock subscribed. The financing involves the issuance of 5,933,332 shares of convertible preferred stock at $3 per share, with associated warrants to purchase 4,537,254 shares of common stock at an exercise price of $.01 per share. The preferred stock carries a cumulative annual dividend of $0.27 per share, is convertible into common stock on a share for share basis at the option

of the investors or automatically if certain conditions are met, is redeemable under certain circumstances, is entitled to appoint a director to the Company's board of directors, and contains approval rights over certain corporate actions. As a result of the closing of the financing, Soros Fund Management LLC and its affiliates own approximately 13.6% of the Company's issued and outstanding common stock (on an as if converted basis). Entities affiliated with Soros have been involved in previous rounds of financing for Medscape prior to the Company's initial public offering in December 1999.

On August 17, 2001, the Company completed the sale of its transcription services segment to TEM Holdings, LLC, a newly formed limited liability company funded by Parthenon Capital, LLC ("Parthenon"), a Boston based private equity firm, for approximately $6.0 million in cash. The transaction was structured as a sale by Medscape Enterprises, Inc., a wholly owned subsidiary of MedicaLogic/Medscape, Inc., of all of the outstanding shares of Total eMed, Inc. pursuant to a stock purchase agreement dated as of July 31, 2001 and amended as of August 16, 2001. In the accompanying financial information, the operations of the Company's transcription services segment have been classified as discontinued operations. Metric data herein excludes the transcription services segment.

On November 7, 2001, the Company executed a Restructuring Agreement with Viacom in which the parties terminated their relationship. In exchange for cancellation of all agreements between the Company and Viacom, Viacom paid the Company $10 million in cash and transferred to the Company the 4,695,892 shares of Company common stock that were originally issued at the onset of the relationship. The Company returned to Viacom the approximately $111.3 million outstanding balance of CBS advertising inventory which had a net carrying value of approximately $56.6 million on November 7, 2001. The agreement required the Company to cease all uses of the CBS logo and trademark and the "healthwatch" trademark. The Company's consumer Web site has been renamed Medscape Health for Consumers and can be accessed via www.Medscapehealth.com.

The following table sets forth the Company's revenues, operating expenses, other income and expense and net loss as a percentage of total revenues for the years ended December 31, 2000, 1999 and 1998.

The following table highlights the key metrics the Company uses to measure adoption of its products and services (in thousands). Metric data presented herein excludes contributions from the transcription services segment and referenced prior period data has been restated on a pro forma basis for comparability with the current presentation.

Clinician users of Logician by Medscape, the Company's most advanced DHR application, increased approximately 37.5% and 60.0% during each of the years ended December 31, 2000 and 1999, respectively, due to the continued adoption of Medscape's DHR applications. Medscape Mobile was launched on September 21, 2000 and at December 31, 2000, the Company had approximately 43,000 physician and other healthcare professional users of Medscape Mobile. Clinician users of the Company's other Internet-based and handheld products, including other clinical documentation applications, totaled approximately 11,000 at December 31, 2000.

The total number of DHRs in the Company's systems at December 31, 2000, 1999, and 1998 increased approximately 65.4% and 39.7% during each of the years ended December 31, 2000 and 1999, respectively.

Total registered users of Medscape's Internet portals was approximately 3.3 million as of December 31, 2000 and was comprised of approximately 560,000 registered physician, 1.6 million registered allied healthcare professional and 1.1 million registered consumer users.

The following table presents total revenues of the Company for each of the three years ended December 31, 2000, 1999 and 1998 (in thousands, except percentages).

Application license revenues consist of revenues from software license sales of Logician by Medscape, the Company's server-based application.

For the year ended December 31, 2000, total application license revenues decreased from $12.3 million to $10.5 million, or approximately 14.6% compared to the year ended December 31, 1999. The decrease resulted primarily from seasonal fluctuations in our customers' purchasing cycles, general uncertainty in the U.S. economy, and expansion into subscription-based models for certain product offerings.

During the fourth quarter of 2000, the Company amended its agreement with a customer that allowed Medscape to use this customer as a reference site in exchange for shares of the Company's common stock. Under the terms of the agreement, the issuance of Medscape's common stock is contingent upon sales by the Company of additional licenses to the customer or to third parties in the customer's geographic area. The amendment reduced the customer's eligibility to receive common stock by 50% and extended the agreement through December 31, 2004. The amendment resulted in the recognition of approximately $800,000 that had been included in non-current deferred revenue. As of December 31, 2000, the remaining balance in long-term deferred revenue was approximately $814,000.

For the year ended December 31, 1999, total application license revenues increased from $10.4 million to $12.3 million, or approximately 18.3% compared to the year ended December 31, 1998. The Company believes this increase resulted primarily from an increase in the average selling price of the Company's licensed products, as well as revenues from companies acquired during 1999.

Subscriptions and support services revenues are comprised of recurring charges primarily from users of Medscape's Internet-based, wireless and hand-held applications (including applications in the Medscape Mobile Suite), Logician ASP products, and installation services and support fees for DHR applications.

For the year ended December 31, 2000, subscriptions and support services revenues increased from $7.5 million to $9.8 million, or approximately 30.7% over the year ended December 31, 1999. The increase resulted primarily from the introduction of new product offerings and businesses acquired during 2000, as well as the Company's expansion into subscription-based models for certain product offerings.

For the year ended December 31, 1999, subscriptions and support services revenues increased from $5.8 million to $7.5 million, or approximately 29.3% over the year ended December 31, 1998. The increase resulted primarily from the introduction of new product offerings and businesses acquired during 1999, as well as the Company's expansion into subscription-based models for certain product offerings.

Sponsorship and advertising revenues consist of revenues, primarily from pharmaceutical companies, which sponsor certain activity and purchase advertising services on Medscape's Internet portals including:

For the year ended December 31, 2000, sponsorship and advertising revenues were approximately $20.5 million, and were a new source of revenue for the Company resulting primarily from the merger with Medscape, Inc. completed in May 2000.

The following table and related discussion highlights the operating expenses of the Company for the years ended December 31, 2000, 1999, and 1998 (in thousands, except percentages).

Cost of revenues includes costs associated with building, maintaining, and upgrading the Company's DHR applications and data centers, certain licensing, editorial and content development costs, and cost of transcriptionists.

Application Licenses. For the year ended December 31, 2000, costs of application licenses increased from $1.1 million to $1.2 million, or approximately 9.1% compared to the year ended December 31, 1999, primarily from increases in additonal resources required to support new product offerings. As a percentage of application license revenues, cost of application licenses increased from 8.7% to approximately 11.6%, primarily from decreased revenues from seasonal fluctuations in our customers' purchasing cycles and the Company's expansion into subscription-based models for certain product offerings.

For the year ended December 31, 1999, costs of application licenses increased from $0.9 million to $1.1 million, or approximately 22.2% compared to the year ended December 31, 1998, primarily from increases in additonal resources required to support additional revenue growth. As a percentage of application license revenues, cost of application licenses increased slightly from 8.4% to approximately 8.7%.

Subscriptions and Support Services. For the year ended December 31, 2000, costs of subscription and support services increased from $6.6 million to $16.6 million, or approximately 151.5% compared to the year ended December 31, 1999, primarily from additional resources required to support new product offerings. As a percentage of subscriptions and support services revenues, costs of subscription and support services inreased from 88.1% to approximately 168.5% resulting primarily from additional resources required to support the Company's new product offerings and expanded user base. During future periods, the Company expects the margins associated with subscriptions and support services to improve with revenue growth as the Company becomes more effective in utilizing the full capacity of its infrastructure through increasing adoption of Medscape's DHR products and services. The Company will continue to consume working capital to fund its operating losses until operating margins become positive.

For the year ended December 31, 1999, costs of subscription and support services increased from $5.4 million to $6.6 million, or approximately 22.2% compared to the year ended December 31, 1998, primarily from additional resources required to support new product offerings. As a percentage of subscriptions and support revenues, costs of subscription and support services decreased slightly from 94.6% to approximately 88.1%, resulting primarily from increasing revenues.

Sponsorship and Advertising. For the year ended December 31, 2000, costs of sponsorship and advertising were $8.6 million, or approximately 42.2% of sponsorship and advertising revenues and were new costs of revenue for the Company resulting primarily from the merger with Medscape, Inc. completed during May 2000.

Sales and marketing expenses include costs to acquire and retain registered users of the Company's products, the operating expenses associated with ongoing sales and marketing efforts throughout the Company, and other general marketing costs to support the Company's multiple products and services.

For the year ended December 31, 2000, sales and marketing expenses increased from $19.9 million to $53.0 million, or approximately 166.3% over the year ended December 31, 1999, and increased slightly as a percentage of total revenues from 101.1% to approximately 129.8%. The increase in sales and marketing expenses for the year ended December 31, 2000 was primarily due to the addition of costs resulting from the merger with Medscape, Inc. during 2000, including non-cash expenses related primarily to the CBS advertising and promotion agreement of approximately $5.1 million. The increase in sales and marketing expenses for the year ended December 31, 2000 was also due to the costs associated with the promotion and launch of new products, including the costs related to trade shows, public relations and advertising. In addition, the increase can be attributed to costs related to advertising and promotion for the Company's brand-building strategy, including the renaming of the Company to Medscape.

For the year ended December 31, 1999, sales and marketing expenses increased from $7.4 million to $19.9 million, or approximately 168.9% over the year ended 1998, and increased as a percentage of total revenues from 45.6% to 101.1%. Sales and marketing expenses for the year ended December 31, 1999 increased primarily from costs related to additional direct and indirect workforce requirement to promote and launch new products and an increase in trade shows appearances and public relations and advertising efforts in support of these product launches.

Research and development costs consist primarily of expenses incurred for new application development, software application upgrades, and for enhancements to and maintenance of the Company's media offerings.

For the year ended December 31, 2000, research and development expenses increased from approximately $12.2 million to $18.6 million, a 52.5% increase over the year ended December 31, 1999. The increase in research and development costs was primarily due to an increase in the number of technical employees required to support additional growth of the Company's products and services.

For the year ended December 31, 1999, research and development expenses increased from $7.6 million to $12.2 million, or approximately 60.5% over the year ended December 31, 1998. The increases in research and development expense for the year ended 1999 resulted primarily from the inclusion of related costs resulting from the merger with Medscape, Inc. and the additional development staff and contractors required to develop new products and product upgrades, and related equipment and facilities costs totaling approximately $4.9 million.

General and administrative expenses consist primarily of costs related to the finance, administrative, and legal functions necessary to support the Company's strategic initiatives.

For the year ended December 31, 2000, general and administrative expenses increased from $5.0 million to $16.4 million, or approximately 228.0% over the year ended December 31, 1999. The increase in general and administrative costs primarily resulted from the addition of expenses resulting from the merger during 2000 and increases in fees for professional accounting, finance, and legal services associated with compliance with public reporting requirements.

For the year ended December 31, 1999, general and administrative expenses increased from $1.1 million to $5.0 million, or approximately 354.5% over the year ended December 31, 1998. The increase in general and administrative costs for the year ended December 31, 1999 resulted from the addition of administrative personnel and the use of contractors to support the growth of the Company's business and certain other expenses from companies acquired during 1999.

Depreciation and amortization expense increased to $165.2 million for the year ended December 31, 2000 compared to $4.1 million for the year ended December 31, 1999 and $1.5 million for the year ended December 31, 1998. The increase during 2000 resulted primarily of goodwill amortization from the merger with Medscape, Inc. completed in May 2000. The increase in 1999 resulted from the amortization of goodwill from the acquisition of PrimaCis Health Information Technology, Inc.

During the year ended December 31, 2000, the Company's management approved certain restructuring plans intended to realign Medscape's organization in accordance with its major product

lines, reduce infrastructure and overhead costs, and eliminate duplicative functions. Restructuring and related charges of approximately $16.3 million were expensed during the year, including non-cash charges of approximately $5.1 million to increase the reserve against shareholders' notes receivable. These charges were comprised of accrued restructuring costs, which resulted from an anticipated reduction of approximately 300 employees, or approximately 28% of the workforce, across essentially all of the Company's functions and locations, facility closure costs, including the closing of the San Francisco office, impairments of certain assets, and certain contract cancellation expenses. At December 31, 2000, approximately 240 of the estimated 300 positions have been eliminated. Approximately $1.8 million relating to these programs was included in current liabilities at December 31, 2000. The Company expects to substantially complete the initiatives contemplated in its restructuring plans during the first half of 2001. All severance payments and related charges, which consist primarily of expected payroll and related taxes, are expected to be paid by June 30, 2001. Medscape believes that, upon conclusion of its restructuring initiatives, its cost structure will be significantly reduced. However, there can be no assurance that such cost reductions can be sustained or that the estimated costs of such actions will not change.

In accordance with the Company's policy to periodically review its long-lived assets for potential impairments, Medscape recorded an $8.3 million charge during the fourth quarter of 2000 resulting from the write-down to fair value of its investment in Lifechart.com, Inc.

For the year ended December 31, 2000, other income increased from $1.1 million to $5.7 million, approximately 418.2% over the year ended December 31, 1999 primarily from the increase in investment income from cash equivalents and short-term investments generated from the initial public offering. Other income increased from $0.5 million in 1998 to $1.1 million in 1999. The increase from 1998 to 1999 in other income is primarily attributable to an increase in interest earned on cash and cash equivalents and short-term investments from issuance of preferred stock and the Company's initial public offering.

As a result of net operating losses in 2000 and prior years, the Company made no provision or benefit for federal or state income taxes. As of December 31, 2000, the Company had net operating loss carryforwards for tax reporting purposes of approximately $259.8 million and research and experimentation credits of approximately $2.5 million which expire through 2020. Approximately $101.8 million of the net operating loss carryforwards are subject to an annual utilization limitation due to ownership changes in prior years.

Transcription services revenues consist of subscription fees charged for the provision of Medscape Transcription services provided to physicians and other outpatient healthcare delivery systems.

On August 17, 2001, the Company completed the sale of its transcription services segment. In the accompanying financial statements, the operations of the transcription services segment have been classified as discontinued operations.

For the year ended December 31, 2000, transcription services revenues were approximately $6.6 million, and were a new source of revenue for Medscape resulting from the acquisition of Total eMed, Inc. during May 2000. For the year ended December 31, 2000, costs of transcription services was approximately $10.0 million, or approximately 152.7% of transcription services revenues.

The Company's loss from the operations of Total eMed, Inc. and AnywhereMD, Inc. was $63,634 for the year ended December 31, 2000, which consists primarily of amortization of goodwill and intangibles of $55,290 and operating losses of $9,368.

The Company currently has two reportable operating segments. For further information regarding segments please refer to Note 10—Segment Information contained in the Notes to the Consolidated Financial Statements.

Digital Health Record application segment revenues include both application license revenues and subscription and support service revenues. Internet portal segment revenues consist of sponsorship and advertising revenues. For an overview of the segment revenues, please refer to the consolidated results of operations discussed earlier in this section.

For the year ended December 31, 2000, loss from operations for the Digital Health Record application segment increased from approximately $20.0 million to $20.9 million, a 4.5% increase over the year ended December 31, 1999. The slight increase was primarily the result of increases in application revenues, which continued to operate at a negative operating margin during 2000.

For the year ended December 31, 1999, loss from operations for the DHR application segment increased from approximately $5.1 million to $20.0 million, a 292.2% increase over the year ended December 31, 1998. The increase was primarily the result of additional personnel and other costs required to develop and support the Company's new product offerings.

For the year ended December 31, 2000, loss from operations for the Internet portal segment was approximately $9.6 million and represented a new reportable segment for the Company resulting primarily from the merger with Medscape, Inc. completed in May 2000. The Internet portal segment has a higher gross margin than either of the Company's other two segments, therefore the Company expects revenue growth in the Internet portal segment to have a positive effect on consolidated operating margins.

The following table calculates the net operating loss before depreciation, amortization, restructuring and other charges (in thousands):

As of December 31, 2000, the Company's cash and cash equivalents balance totaled $41.6 million and short-term investments totaled $9.9 million, a decrease in total of $87.3 million from the December 31, 1999 balances of $110.3 million and $28.5 million, respectively.

The Company's operating activities resulted in net cash outflows of $75.3 million, $12.7 million, and $6.8 million for the years ended December 31, 2000, 1999 and 1998. Cash outflows in 2000, 1999 and 1998 resulted from the Company's expenditures in sales and marketing of $53.0 million, $19.9 million and $7.4 million, and research and development of $18.6 million, $12.2 million and $7.6 million, respectively, which contributed to operating losses of $263.5 million, $29.1 million and $7.7 million, respectively. Also contributing to cash outflows in 2000 were decreases in accounts payable of $5.3 million, resulting from the consolidation of accounting functions during 2000. These costs were partially offset by increases in prepaid assets of $2.4 million for purchases of prepaid maintenance contracts, prepaid insurance and prepaid royalties, and an increase of $0.6 million in deferred revenue due to the Company's increasing base of DHR application licenses.

Investing activities resulted in net cash outflows of $4.0 million, $36.6 million and $1.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. Cash outflows in 2000 resulted from fixed asset purchases, comprised of computer hardware and software as well as leasehold improvements related to leased facilities, of approximately $17.6 million and payments related to business acquisitions of approximately $18.6 million. These costs were offset by proceeds from short-term investments of $32.2 million. Cash outflows in 1999 resulted from net purchases of investments of $22.0 million in short-term instruments, $12.5 million related to the purchase of fixed assets and $2.1 million for the acquisition of PrimaCis Health Information Technology, Inc. Cash outflows in 1998 resulted primarily from $1.3 million related to purchases of fixed assets.

Financing activities provided cash of $10.6 million, $154.9 million and $7.8 million for the years ended December 31, 2000, 1999 and 1998, respectively. Cash flows in 2000 resulted primarily from the preferred stock subscription received in the amount of $15.8 million and the issuance of $2.6 million of common stock, offset by payments of long-term liabilities of $7.9 million. In January 2001, the Company closed a $17.8 million capital financing arrangement, of which $15.8 million had been received and recorded as preferred stock subscription received at December 31, 2000. The financing involved the issuance of 5,933,332 shares of convertible preferred stock at $3 per share. The preferred stock is convertible into common stock on a share for share basis at the option of the investors, or automatically if certain conditions are met, and is redeemable under certain circumstances. The preferred stock carries a cumulative annual dividend of $0.27 per share, and holders of the preferred stock will have a priority in bankruptcy or liquidation over all other equity holders. In connection with this financing, the Company issued warrants to purchase 4,537,254 shares of common stock at an exercise price of $.01 per share. The proceeds from the financing were allocated between the convertible preferred stock and the associated warrants at the estimated fair value. Net proceeds from

this financing will be used to fund future operations. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results and current anticipated cash needs.

Cash flows in 1999 resulted primarily from the Company's initial public offering of $105.2 million, the issuance of preferred stock in the amount of $47.8 million, and proceeds of $1.9 million for obligations under capital lease agreements and notes payable, net of payments made. Cash flows in 1998 resulted primarily from the issuance of preferred stock of $6.8 million. During the year ended December 31, 2000, the Company reached agreement with America Online, Inc. (AOL) to extend the due dates of certain cash payments previously required to have been made by the Company during the year. In May 2001, the Company and AOL amended the terms of their Interactive Services agreement with respect to the remaining payments under this agreement. In accordance with the amendment, the Company paid AOL $1 million in June 2001 and the remaining balance was reduced to $333,000, due in four equal monthly payments beginning May 2002 through August 2002. The amendment also requires Medscape to provide certain advertising and promotional services to AOL valued at approximately $1.3 million through August 2002. As a result of the amendment, the Company recorded a net gain of $8.5 million during the three months ended June 30, 2001, reflected as a non-recurring gain.

In December 1999, the Company completed its initial public offering and issued 6,785,000 shares of its common stock. The net proceeds from the issuance of the common stock in the initial public offering were approximately $105.2 million. In addition, the Company closed a round of private funding in May 1999, raising approximately $34.8 million.

Medscape currently anticipates that it will continue to experience modest growth in its operating expenses as it enters new markets for its products and services, increases marketing activities, increases research and development spending, develops new distribution channels, expands its infrastructure, and improves its operational and financial systems. These operating expenses will consume a significant amount of the Company's cash resources. Management believes that the Company's current cash balances, its net proceeds from financing activities during 2000 and 2001 and its anticipated revenue growth will be sufficient to meet its anticipated cash needs for working capital and capital expenditures throughout 2001. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. If current cash and cash that may be generated from future operations are insufficient to satisfy the liquidity requirements, the Company may seek additional funds through public or private equity financing or from other sources, including the sale of certain of the Company's assets. However, there is no certainty that Medscape may be able to obtain adequate or favorable financing and any financing the Company obtains may dilute the ownership interest of its shareholders prior to the financing. In addition, it is possible that at the time of the sale of certain of the Company's assets, an impairment charge may be incurred for property, plant, and equipment, identifiable intangible assets or goodwill, if the proceeds do not exceed the carrying amounts of such assets. Additionally, the Company may, from time to time, consider the acquisition of or investment in complementary businesses, products, services and technologies, which might impact its liquidity requirements or cause the Company to issue additional equity or debt securities.

If we do not achieve or maintain broad acceptance of our products and services by medical professionals, patients and other healthcare providers, our business will be harmed.

Our health information systems technology business model depends on our ability both to sell our products and services to medical professionals and other healthcare providers and to generate usage by a large number of medical professionals and consumers. Failure to achieve broad acceptance of our

products and services by physicians and other healthcare providers would severely limit our ability to implement our business model.

Likewise, failure to achieve or maintain market acceptance of our web sites would result in a loss of revenue. Market acceptance of our web sites depends upon continued growth in the use of the Internet generally and, in particular, as a source of healthcare information services for medical professionals and consumers.

Achieving market acceptance for our products and services will require substantial marketing efforts and the expenditure of significant financial and other resources. Use of our products and services requires medical professionals to integrate our products and services into their office work flow and to adopt different behavior patterns and new methods of conducting business and exchanging information. Medical professionals may not choose to use our products and services.

We have a history of net operating losses and may not be profitable in the future.

Failure to achieve or maintain positive cash flows from operations could materially and adversely affect the market price of our common stock. We have incurred significant losses since we began doing business. As of September 30, 2001, the Company accumulated losses of approximately $1.2 billion. Further, we reported a net loss of $829.4 million, which included impairment charges of $323.9 million and losses from discontinued operations of $294.2 million, or 14.79 per share for the nine months ended September 30, 2001. We believe that additional impairment charges may be recorded in the future depending on the outcome of the strategic options process in which we are engaged, which includes the possible sale of all or parts of the Company. We may not achieve favorable operating results or profitability in the foreseeable future.

To remain competitive, we will need additional financing, which may not be available on satisfactory terms or at all.

We expect our existing cash will be sufficient for us to meet our working capital and capital expenditure requirements for 2001. We will, however, need additional financing sooner if we:

If we raise additional funds through the sale of equity or convertible debt securities, the percentage ownership of existing shareholders will be reduced. In addition, these transactions may dilute the value of our common stock. We may issue securities with rights, preferences and privileges senior to our common stock. We may not be able to raise additional funds on terms satisfactory to us or at all.

In July 2001 we engaged Lazard Freres & Co. LLC as our financial advisor to explore strategic alternatives, including the possible sale of the company or one or more of our lines of business. We cannot assure you that we will be able to complete a transaction on terms satisfactory to us or at all. If we do not complete a transaction, and we are unable to obtain additional financing, our business may fail.

We have depended, and will depend, on the healthcare industry for a significant portion of our revenues.

Our revenues could seriously decrease if there were adverse developments in the healthcare industry. Our near-term and long-term prospects depend upon selling our services to both pharmaceutical companies and healthcare providers such as IDNs, hospitals, clinics, and physician practices. Accordingly, our success is highly dependent on the sales and marketing expenditures of pharmaceutical companies, the technology expenditures of healthcare providers, and our ability to attract these expenditures. Some of the adverse developments in the healthcare industry that could affect our revenues would be:

Our failure to successfully introduce new products and services in a timely manner could adversely affect our business model and revenues.

Any failure by us to introduce or enhance planned products or to introduce these products on schedule could make it difficult for us to implement our business model. Moreover, even if Medscape were able to release a new or enhanced product or service when expected, initial releases of software often contain errors or defects. For example, past releases of Medscape Logician have contained errors and defects that required us to provide corrections and other upgrades. Developing, integrating, enhancing and customizing such products and services could be expensive and time consuming.

Intense competition may lead to reduced sales of our products and services and impede our ability to achieve a significant market share.

The health information systems technology sector in which we compete is intensely competitive and subject to fragmentation, high growth and rapid technological change. In both segments of our business, Digital Health Record applications and Internet Portals, we face significant competition from traditional healthcare information system vendors and Internet healthcare companies as they expand their product offerings. We also currently compete or potentially compete for audience attention and advertising and sponsorship expenditures with many providers of web content, information services and products, as well as traditional media and promotional efforts. Many of these companies have significantly greater financial resources than we have, as well as well-established brand names and large installed customer bases. We may be unable to compete successfully against these organizations or establish significant market share.

If we are unable to protect our intellectual property rights, our competitive position may be adversely affected.

Our ability to compete depends upon our proprietary systems and technology. The steps we currently take to protect our intellectual property rights may prove to be inadequate, time consuming and expensive. Misappropriation of our intellectual property may make us less competitive and require us to engage in expensive litigation to enforce or protect our intellectual property rights or to defend against claims of invalidity.

We could be subject to intellectual property infringement claims as the number of our competitors grows and the functionality of our products and services overlaps with competing products. We could incur substantial costs and diversion of management resources defending any infringement claims. In addition, a party making a claim against us could secure a judgement awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. Licenses for intellectual property of third parties that might be required for our products or services may not be available on commercially reasonable terms, or at all.

Our systems may experience failures which could cause our revenues to decline.

Any significant interruption in our operations would cause our revenues to decline. We have experienced periodic system interruptions in the past, which may occur again. Any significant interruptions in our services or an increase in response time could result in a loss of potential or existing users and members, strategic partners or advertisers and sponsors and, if sustained or repeated, these interruptions could reduce the attractiveness of our web sites to these parties in the future. Our insurance policies have coverage limits that may not be adequate to compensate us for any material losses that may occur due to disruptions in our service. For the nine months ended September 30, 2001, approximately $16.9 million of our gross revenue of approximately $29.1 million was derived from our Web site operations.

Our Web sites may be required to accommodate a high volume of traffic and deliver frequently updated information. Users may experience slower response times or system failures due to increased traffic on these web sites or for a variety of other reasons. We depend on content providers to provide information and data feeds on a timely basis. These web sites could experience disruptions or interruptions in service due to the failure or delay in the transmission or receipt of this information.

Our security measures may not prevent security breaches. Substantial or ongoing security breaches on our system or other Internet-based systems could reduce user confidence in our web sites and other Internet-based products and services, leading to reduced usage and lower revenues. The secure transmission of confidential information over the Internet is essential in maintaining confidence in our web sites and will be increasingly important as we expand our consumer-oriented and Internet-based offerings. Consumers generally are concerned with security and privacy on the Internet and any publicized security problems could inhibit the growth of the Internet and, therefore, our products and services. We will need to incur significant expense to protect and remedy against security breaches.

A party that is able to circumvent our security systems could steal proprietary information or cause interruptions in our operations. Employees who handle proprietary information may also misappropriate that information. Security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties conducting business over the Internet.

Our common stock has been trading below $1.00 per share. Under the Nasdaq Rules, if our stock trades below $1.00 per share for more than thirty consecutive days, our common stock may be delisted. We are not currently in compliance with the $1.00 minimum bid price requirement, and there can be no assurance that we will ever be able to comply with this requirement. If a delisting were to occur, our common stock would trade on the OTC Bulletin Board or in the "pink sheets" maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result.

On August 2, 2001, the company received notice from Nasdaq that the Company's common stock had failed to maintain a minimum bid price of $1.00 over the prior thirty (30) consecutive trading days as required by the Nasdaq Rules. The Company had until October 31, 2001 to regain compliance with the Rules or the Company's common stock would be subject to possible delistment from the exchange. Regaining compliance required, in part, that the Company's bid price for shares of its common stock trade at or above $1.00 for a minimum of 10 consecutive trading days before October 31, 2001. On September 27, 2001, Nasdaq implemented a moratorium on the minimum bid price and market value of public float requirements for continued listing and suspension of these rules until January 2, 2002. On October 10, 2001, the Company received formal confirmation from Nasdaq that the former matter initiated with the August 2, 2001 letter had been closed.

The Internet is subject to many legal uncertainties and potential government regulations that may decrease demand for our services, increase our cost of doing business or otherwise have an adverse effect on our financial results or prospects.

Laws and regulations may be adopted in the future that address Internet-related issues, including online content, user privacy, pricing and quality of products and services. We believe there is a risk that these laws will disproportionately burden companies that do business on the Internet, which could decrease demand for our services, increase our cost of doing business or otherwise have a material adverse effect on our financial results and prospects.

For example, the Federal Trade Commission began enforcing requirements under the Children's Online Privacy Protection Act in April 2000. The act applies to the online collection of personal information from children under 13, and imposes significant compliance burdens and potential penalties on operators of web sites that collect covered information. Because it does not apply to collection of information other than in an online context, this act disproportionately burdens companies that do business online. In addition to new laws, courts are struggling with the application of existing laws to the Internet. This legal uncertainty makes it harder for us to operate our business, because we are not able to predict legal risks to the same degree that we would if we were not doing business on the Internet.

State and Federal laws that protect individual health information may limit our plans to collect and use that information.

If we fail to comply with laws or regulations governing our use of personally identifiable health information, including medical records, this failure could have a material adverse effect on our business, operating results and financial condition.

Consumers sometimes enter private health information about themselves or their family members when using our services. Physicians or other health care professionals who use our products will directly enter health information about their patients, including information that constitutes a medical record under applicable law, that we will store on our computer systems. Also, our systems record use patterns when consumers access our databases that may reveal health-related information or other private information about the user. Numerous federal and state laws and regulations, the common law, and contractual obligations govern collection, dissemination, use and confidentiality of patient-identifiable health information, including:

Meeting these requirements could result in significant costs, as well as result in the delay or abandonment of some products or services, which could negatively affect our business. Although we have systems in place for safeguarding patient health information from unauthorized disclosure, these systems may not preclude successful claims against us for violation of applicable law or other requirements. In some cases, we may place our content on computers that are under the physical control of others, which may increase the risk of an inappropriate disclosure of health information. For example, we currently contract out the hosting of some of our Web sites to third parties. Any failure by us or our partners to comply with the legal or other requirements concerning personally identifiable health information could result in material liability.

Restrictions on disclosure of health information we collect may prevent us from earning any revenues by marketing and selling that information to others or subject us to legal liability.

We intend to develop, market and sell to third parties medical information from our systems and from the systems of our partners that involves the collection, analysis and reporting of medical data and medical records, medical research, market research, outcomes and financial data pertaining to items such as prescribing patterns and usage habits. In most cases, we will remove identifying information from the data we sell, and will sell the data only in aggregate form. Some states have enacted legislation regulating the aggregation of health information and the manipulation, use and ownership of that aggregated data, even when this data does not reveal the patient's identity. Because this area of the law is rapidly changing, our collection, analysis and reporting of aggregate healthcare data maintained in our database may not at all times and in all respects comply with laws or regulations governing the ownership, collection and use of this data. Future laws or changes in current laws governing the ownership, collection and use of aggregate healthcare data may necessitate costly adaptations to our systems or limit our ability to use this data.

In addition, with appropriate authorization from consumers and healthcare professionals, we intend in some cases to market results of research or other data that does contain identifiable health information. Examples include market research on healthcare products and recruitment for clinical trials. Regulations under HIPAA or similar other laws and regulations may prevent us from using identifiable information entirely, or may impose significant administrative costs on us (for example, by requiring specific forms of consent or detailed record-keeping). These regulatory and legal restrictions

might limit or even preclude our ability to earn revenues from use of identifiable health information to which we have access.

New rules or legislation concerning privacy of Internet users could adversely affect our business.

In addition to specific laws that relate to medical records or personally identifiable healthcare information, we believe government is likely to create new rules or laws that address the privacy of Internet users generally. Examples of these types of regulation already exist outside the U.S. For example, nations in the European Union are currently implementing a Data Privacy Directive regulating the transmission and storage of personal information and data. Because both our web sites and our digital health record applications collect extensive information about users, complying with new regulatory requirements could significantly increase our cost of operations, delay the introduction of new products and services, require the redesign of existing products, or limit our ability to use information for our own marketing and research purposes.

Government regulation of advertising and promotional activities may be burdensome and negatively affect our ability to provide some applications or services, which could lead to higher than anticipated costs or lower than anticipated revenues.

Because our portal business involves advertising and promotion of prescription and over-the-counter drugs and medical devices, any increase in regulation of these areas by the Federal Drug Administration or the Federal Trade Commission could make it more difficult for us to provide existing or future applications or services to our audience or obtain the necessary corporate sponsorship to do so. In addition, a federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state laws, prohibit payments that are intended to induce physicians or others to acquire, arrange for or recommend the acquisition of healthcare products or services. These laws have been used to restrict promotional activities by pharmaceutical and medical device companies, and might limit the ability of our customers to undertake sponsorship programs with us.

Any current or future government regulatory requirements imposed on us or our advertisers and sponsors could harm us by:

As a consequence of these harms, we might lose advertising or sponsorship revenue, spend significant amounts of our limited resources on regulatory experts in the area of healthcare compliance, or receive adverse publicity that negatively affects share value.

The FDA may regulate some of our products as medical devices, increasing our cost of doing business and affecting our ability to launch new products.

As we add functionality to our Web sites and clinical applications, we face potential FDA regulation of software. Some computer applications and software are considered medical devices and are subject to regulation by the FDA, including pre-marketing clearance or approval and post-

marketing controls. The FDA's regulatory authority over medical devices is very broad, and in the past the FDA has expanded its regulation into new areas without any advance notice or rulemaking. If FDA regulations were directly applicable to any of our products and services, complying with those regulations would be time consuming, burdensome and expensive and could delay or prevent introduction of new products or services. In addition, we do not have any experience in preparing the required documentation for FDA clearance or approval of a medical device, including the conduct of supporting clinical trials or other studies, or complying with other FDA regulations that would apply both before and after clearance or approval. If the FDA required us to meet regulatory requirements for medical devices for some of our products (including our Web sites and clinical applications), we would face increased compliance costs and delays in bringing products to market. Because the FDA has the discretion to not approve products, we might even be completely prevented from bringing any regulated products to market, losing both the development costs we put in to the product and any potential revenues from it.

The Company's exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income Medscape can earn on the Company's investment portfolio and on the increase or decrease in the amount of any interest expense Medscape must pay with respect to outstanding debt instruments. The risk associated with fluctuating interest expense is limited, however, to the exposure related to those debt instruments and credit facilities that are tied to market rates. The Company does not plan to use derivative financial instruments in its investment portfolio. The Company plans to ensure the safety and preservation of its invested principal funds by limiting default risk, market risk and investment risk. The Company plans to mitigate default risk by investing in low-risk securities. At December 31, 2000, the Company had an investment portfolio of money market funds, commercial securities and U.S. Government securities, including those classified as short-term investments, of approximately $9.9 million with an average interest rate of 6.4%. Medscape had outstanding notes payable and capital equipment leases of $2.5 million at December 31, 2000 carrying an average interest rate of approximately 11.6%. If market interest rates were to increase immediately and uniformly by 10% from levels as of December 31, 2000, the decline of the fair market value of the fixed income portfolio and loans outstanding would not be material.

We have audited the accompanying consolidated balance sheets of MedicaLogic/Medscape, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the MedicaLogic/Medscape, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of MedicaLogic/Medscape, Inc. and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.

Portland, Oregon
February 26, 2001, except for Note 1(c) as to which the date is November 27, 2001

MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

(in thousands, except share data)

MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

MEDICALOGIC/MEDSCAPE, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

MedicaLogic/Medscape, Inc. d.b.a. Medscape (together with its subsidiaries "Medscape" or the "Company") is a leading provider of digital health record systems and information to the healthcare industry. Medscape develops digital health record applications that are designed to improve healthcare through the timely delivery of clinical data and information to healthcare professionals and consumers. The Company also provides online health information including medical news, articles, and conference coverage through its Internet portals, Medscape.com and CBSHealthWatch.com. Medscape's products and services are designed to enhance and improve the quality, cost, efficiency, safety and outcome of healthcare.

The Company was incorporated in Oregon in May 1985 as MedicaLogic, Inc. The Company's name was changed to MedicaLogic/Medscape, Inc. in May 2000. Since September 2000, the Company has done business under the trade name Medscape. The Company expanded its products and services in 2000 as a result of its strategic merger with Medscape, Inc. ("Medscape, Inc."), and the acquisitions of Total eMed, Inc. ("Total eMed") and AnywhereMD.com, Inc. ("AnywhereMD.com"). These strategic mergers and acquisitions added the following assets, respectively: leading Internet healthcare portals, Web-based transcription capability for the creation of digital health records, and wireless prescribing technology for the Palm O/S^TM platform.

The accompanying consolidated financial statements include the accounts of MedicaLogic/Medscape, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Operations of businesses acquired and accounted for as purchases are consolidated from the date of acquisition or merger forward.

On August 17, 2001, the Company completed the sale of its transcription services segment to TEM Holdings, LLC, a newly formed limited liability company funded by Parthenon Capital, a Boston based private equity firm, for approximately $6.0 million in cash. As a result, the operations of Total eMed, Inc., the Company's transcription services segment, have been classified as discontinued operations in the accompanying Consolidated Financial Statements and related Notes. Revenues for Total eMed, Inc. were approximately $6.6 million for the year ended December 31, 2000.

During the three months ended June 30, 2001, the Company adopted a plan to transfer the operations and certain assets of AnywhereMD, Inc. to an employee of the Company. Accordingly, the operations of AnywhereMD, Inc. have been classified as discontinued operations in the accompanying Consolidated Financial Statements and related Notes. Revenues for AnywhereMD, Inc. were approximately $0.8 million for the year ended December 31, 2000.

Accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect the reported amount of assets, liabilities and contingencies

at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The Company considers all highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash equivalents. At December 31, 2000, cash equivalents consisted of commercial paper and a certificate of deposit.

Short-term investments include various corporate debt instruments and have been classified as available-for-sale securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. At December 31, 2000 short-term investments consisted entirely of commercial paper and are carried at amortized cost, which approximates market. Contractual maturities of these investments ranged from approximately 100 to 120 days.

(g) Concentrations of Credit Risk and Other Factors That Could Affect Future Results

The Company invests its cash, and cash equivalents and short-term investments with financial institutions with high credit standing and, by policy, limits the amounts invested with any one institution, type of security and issuer.

The Company sells its products to customers, ranging from individual doctors, small to large medical groups, and medical institutions. The Company performs ongoing credit evaluations of its customers' financial condition and limits the amount of credit extended as deemed appropriate, but generally requires no collateral. The Company maintains reserves for estimated credit losses and, to date, such losses have been within management's expectations.

A substantial portion of the Company's revenue is generated from the pharmaceutical industry. Accordingly, Medscape's near-term and long-term prospects depend upon the Company's ability to attract the sales and marketing expenditures of these companies. The pharmaceutical industry is a highly competitive and closely regulated business. The Company's financial condition, results of operations and liquidity could be materially affected if adverse conditions in the industry developed, such as a reduction in sales and marketing expenditures, a decrease in the number of new drugs being developed, the passage of public or private market initiatives or reforms designed to regulate the manner in which pharmaceutical companies promote their products, or the adoption of current legislative and regulatory proposals to control drug costs for Medicare and Medicaid patients.

The market for the Company's products is characterized by rapidly changing technology, evolving industry and regulatory standards and changing customer needs. The Company believes that its future success will depend, in part, upon its ability to enhance its current products and develop new products and services on a timely and cost-effective basis, and to respond to changing customers needs, new regulations and technological developments. An inability of the Company to generate demand for its product, whether as a result of competition, technological change, economic, regulatory or other

factors, could have a material adverse result on the Company's financial condition, results of operations and liquidity.

The Company's future results could also be affected if economic conditions worsen in the U.S. A downturn in the economy could have an adverse impact on demand for Medscape's products and services, and could also contribute to the impairment of the Company's investment and financing portfolios.

The value ascribed to acquired intangible assets, including customer lists, trade names, and the workforces-in-place is the estimated fair value at the acquisition date. Intangible assets are amortized on a straight-line basis, over periods ranging from 2 to 5 years, which represent the estimated remaining economic lives.

Property and equipment are recorded at cost. Property and equipment under capital leases are recorded at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the leased assets at the inception of the lease. Repairs and maintenance costs are expensed as incurred.

Depreciation on furniture, equipment and leasehold improvements is calculated on a straight-line basis over the estimated useful lives of the assets, five years for furniture and two to five years for equipment. Property and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Amortization of leasehold improvements is recognized over the shorter of the life of the improvement or the remaining life of the lease using the straight-line method.

Goodwill represents the excess of the aggregate purchase price over the fair value of the tangible and intangible assets acquired in various acquisitions. Goodwill is amortized on a straight-line basis, over periods ranging from two to four years. The Company assesses goodwill impairment under Accounting Principles Board ("APB") Opinion No. 17, Intangible Assets, based on an undiscounted cash flows approach. Whenever events occur or circumstances change that indicate an impairment may have occurred, such as the failure of certain technology to demonstrate promise that it may gain commercial acceptance or the failure of a business segment to achieve certain performance objectives, the Company estimates the future undiscounted cash flows of the business segment to which goodwill relates. When such estimate of the future undiscounted cash flows, net of the carrying value of the net tangible and identified intangible assets, is less than the carrying amount of goodwill, the difference will be charged to operations as an impairment loss. For purposes of determining future undiscounted cash flows of the business segments to which goodwill relates, the Company, based upon historical results, current projections and internal earnings targets, determines the projected operating cash flows, net of income taxes, of the individual business segment. Through December 31, 2000, no events or circumstances

occurred which resulted in an impairment or resulted in a reduction in the useful life or carrying value of goodwill.

The Company periodically reviews the carrying amounts of property, plant and equipment, identifiable intangible assets and goodwill both purchased in the normal course of business and acquired through acquisition to determine whether current events or circumstances, as defined in Financial Accounting Standards Board ("FASB") Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, warrant adjustments to such carrying amounts. This review considers, among other things, the future cash inflows expected to result from the use of the asset and its eventual disposition less the future cash outflows expected to be necessary to obtain those inflows. An impairment loss would be measured by comparing the fair value of the asset with its carrying amount. Any write-down is treated as a permanent reduction in the carrying amount of the assets. Through December 31, 2000, no events or circumstances have occurred triggering an impairment analysis that resulted in a write-down of carrying value of long-lived assets.

Software development costs are accounted for in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Under this standard, capitalization of software development costs generally begins upon the establishment of technological feasibility, subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of the software has been short; therefore, software development costs qualifying for capitalization have been immaterial. Through December 31, 2000, the Company has not capitalized any software development costs and charged all costs to research and development expense.

Internal use software development costs are accounted for in accordance with AICPA Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Costs incurred in the preliminary project stage are expensed as incurred and costs incurred in the application development stage, which meet the capitalization criteria, are capitalized and amortized on a straight-line basis over the estimated useful life of the asset, generally five years.

Website development costs are accounted for in accordance with Emerging Issues Task Force (EITF) 00-2, Accounting for Website Development Costs. Costs incurred in the planning stage are expensed as incurred and costs incurred in the website application and infrastructure development and operating stages, which meet the capitalization criteria, are capitalized and amortized on a straight-line basis over the estimated useful life of the asset, generally three years.

Beginning January 1, 1998, the Company adopted SOP 97-2, as amended by SOP 98-4 and SOP 98-9. The Company's revenue policy before December 31, 1997 was in compliance with the preceding authoritative guidance provided by SOP 91-1, Software Revenue Recognition.

SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on vendor specific objective evidence ("VSOE") of the relative fair values of each element in the arrangement. The Company has established sufficient VSOE to ascribe a value to consulting services and post-contract customer support based on the price charged when these elements are sold separately. Accordingly, license revenue is recorded under the residual method. Under the residual method, revenue is recognized as follows:

Application license, subscriptions and support services, or Digital Health Record (DHR) revenues consists primarily of revenue from Web-based and client server applications related support services, eCommerce and data. Medscape recognizes DHR revenue from application license fees generally when a signed agreement has been obtained, the delivery of the product has occurred, the fee is fixed and determinable and collectibility of the license fee is probable. Medscape's term based Logician licenses, including the subscription-based version of Logician and Medscape Encounter (formerly Logician Internet), are recognized on a subscription basis. The arrangements do not grant the customer a license right to the software and do not provide an option to take delivery of the software. Rather, the customer pays a periodic subscription fee over a specified period of time. All subscription revenue, which is billed in advance, is recognized over the period earned, generally monthly. Support services consist of fees for maintenance and customer support services and consulting, training and integration fees which are recognized at the time the related services are performed. Fees for maintenance and customer support service, conveying the right to obtain upgrades, when and if available, are generally paid in advance and revenue is recognized ratably over the term of the agreement.

Also included in DHR revenue are revenues earned from certain web-based applications, primarily our ASP model. These hosting arrangements are accounted for under EITF 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware. Our ASP hosting application resides on a third party's hardware and the customer accesses and uses the software on an as-needed basis over a dedicated line. The arrangement does not grant the customer a license right to the software and does not provide an option to take delivery of the software. As such, revenues are treated as service contracts and the portion of the fee allocated to the hosting element is recognized as the service is provided.

Sponsorship and advertising, or Internet portal revenue, is derived from sources including advertising, sponsorship of online journals, medical conferences, market research and eCommerce. Revenues from advertising are recognized in the period in which the advertisement is displayed. Revenues from sponsored programs that offer continuing medical education credits, such as medical conferences, are recognized over the period that the minimum credit hours are delivered or the specified posting period is satisfied, providing that no significant Company obligations remain and collection of the resulting receivable is probable. Revenues from sponsored programs that do not include continuing medical education credits or specified minimum posting periods are recognized

when the content is published on the Company's Web site. Revenues from sponsored content, such as clinical modules, are recognized on a percentage of completion basis. Revenues from market research are recognized upon completion of the project.

Transcription services revenues consist of subscription fees charged for the provision of Medscape Transcription services provided to physicians and other outpatient healthcare delivery systems. Revenues from transcription services are recognized in the period in which the services are performed and when collection of the resulting receivable is probable. On August 17, 2001, the Company completed the sale of its transcription services segment. In the accompanying financial statements, the operations of the transcription services segment have been classified as discontinued operations.

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce tax assets to the amount more likely than not to be realized.

The Company accounts for its employee stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, compensation expense related to employee stock options is recorded only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price. The Company adopted the disclosure-only requirements of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma net income and pro forma earnings per share disclosures for employee stock grants as if the fair-value based method of accounting had been applied to these transactions.

The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

The Company expenses costs of advertising when the costs are incurred. Advertising expense was approximately $5,648, $1,473 and $896 for the years ended December 31, 2000, 1999 and 1998.

In accordance with SFAS No. 128, Earnings Per Share, the Company has reported both basic and diluted net income per common share for each period presented. Basic income per share is computed on the basis of the weighted-average number of common shares outstanding for the year. Diluted income per share is computed on the basis of the weighted-average number of common shares plus dilutive potential common shares outstanding. Dilutive potential common shares are calculated under the treasury stock method. Securities that could potentially dilute basic income per share consist of outstanding stock options and warrants. As the Company had a net loss attributable to common shareholders in each of the periods presented, basic and diluted net loss per share are the same. The following potential common shares have been excluded from the computation of diluted net loss per share for all periods presented because the effect would have been anti-dilutive:

	Years Ended December 31,
	2000	1999	1998
Shares issuable under stock options and warrants	9,713,909	2,069,303	1,129,724
Shares of restricted stock subject to repurchase	250,976	1,211,328	75,945

As further discussed in Note 14 Subsequent Events, during January 2001, the Company issued warrants for 5 million shares of Medscape common stock, approximately 5.9 million shares of convertible redeemable preferred stock with warrants for approximately 4.5 million shares of Medscape common stock, and warrants for 300,000 shares of Medscape common stock.

The Company has adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in consolidated financial statements. The Statement requires only additional disclosures in the financial statements; it does not affect the Company's financial position or results of operations. The Company has no material components of other comprehensive loss.

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying amounts of capital leases and notes payable approximate fair value as the stated interest rates reflect current market rates. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument when available. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Certain reclassifications have been made to the prior year consolidated financial statements and notes to the consolidated financial statements to conform to the current year presentation, including discontinued operations.

In May 2000, the Company completed its merger with Medscape, Inc. ("Medscape, Inc.") a Delaware corporation, issuing approximately 14,932,000 shares of the Company's common stock and assuming approximately 2,545,000 options and warrants in a merger transaction valued at approximately $724.2 million.

The merger with Medscape, Inc. was accounted for using the purchase method of accounting with the purchase price allocated to assets acquired and liabilities assumed based on their fair values. The purchase price was comprised of Company common stock issued amounting to approximately $637.1 million valued at $42.6688 per share, option and warrant rights converted into option and warrant rights of the Company valued at approximately $82.3 million, and professional fees amounting to approximately $4.7 million. The value of option rights converted at the merger date was determined in accordance with the fair value method under SFAS No. 123 using the following weighted-average assumptions: exercise price of $12.38, volatility of 100%, expected life of 3 years, interest rate of 6.5%, and no dividends. The value of warrant rights converted at the merger date was determined using the Black-Scholes method with the following assumptions: exercise price of $30.96, volatility of 100%, expected life of 6 years, interest rate of 6.5%, and no dividends. Professional fees include banking fees, legal fees, accounting fees, and fees for other related professional services.

The excess of purchase price over the fair value of net tangible and intangible assets of Medscape, Inc. (goodwill), which amounted to approximately $597.2 million, will be amortized over three years. The results of operations and cash flows of Medscape, Inc. have been included in the Company's condensed consolidated financial statements from the date of acquisition forward.

In May 2000, the Company completed its acquisition of Total eMed, Inc. ("Total eMed") a Delaware corporation, issuing approximately 7,450,000 shares of the Company's common stock and assuming approximately 550,000 options in a transaction valued at approximately $343.8 million.

The acquisition of Total eMed was accounted for using the purchase method of accounting with the purchase price allocated to assets acquired and liabilities assumed based on their fair values. The purchase price was comprised of Company common stock issued amounting to approximately $317.9 million valued at $42.6688 per share, option rights converted into option rights of Company common stock valued at approximately $21.2 million, and professional fees amounting to approximately $4.7 million. The value of option rights converted at the acquisition date was determined in accordance with the fair value method under SFAS No. 123 using the following weighted-average assumptions:

exercise price of $6.45, volatility of 100%, expected life of 3 years, interest rate of 6.5%, and no dividends. Professional fees include banking fees, legal fees, accounting fees, and fees for other related professional services.

The purchase price over the fair value of net tangible and intangible assets of Total eMed (goodwill), which amounted to approximately $326.8 million, will be amortized over four years. The results of operations and cash flows of Total eMed have been included in the Company's condensed consolidated financial statements from the date of acquisition forward.

On August 17, 2001, the Company completed the sale of its transcription segment. As a result, the operations of Total eMed, Inc., the Company's transcription services segment, have been classified as discontinued operations in the accompanying Consolidated Financial Statements and related Notes.

In April 2000, the Company acquired AnywhereMD.com, Inc., a company specializing in developing wireless Palm™-based handheld devices, offering increased mobility to physicians in treating patients. The Company purchased all of the outstanding capital stock of AnywhereMD.com, Inc., a California corporation, for approximately $7.8 million in cash, professional fees and assumed liabilities. The acquisition was accounted for using the purchase method. The purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their fair values on the acquisition date. The total goodwill recorded in connection with the purchase was approximately $7.7 million and is being amortized over 3 years.

In January 1999, the Company acquired PrimaCis Health Information Technology, Inc., a Delaware corporation (PrimaCis). PrimaCis was subsequently renamed MedicaLogic of Texas, Inc. This acquisition was accounted for as a purchase and the results of operations for the acquired Company are included only from the date of acquisition forward. The total purchase price, including acquisition costs, was approximately $6.5 million and consisted of $2.1 million in cash, the assumption of $1.1 million in liabilities and the issuance of 750,000 shares of common stock at an estimated fair value of $4.40 per share.

In connection with the acquisition of PrimaCis, the Company entered into a separate agreement with a customer of PrimaCis under which the Company received a purchase order for 1,500 licenses. The Company delivered 500 licenses to this customer on March 31, 1999 and delivered 1,000 licenses to this customer on June 17, 1999 under a standard license agreement. An element of this agreement represents a discount on future sales. Therefore, approximately $1.9 million of the license revenue representing this element was deferred. Revenue from this element is being recognized as sales are completed in accordance with the terms of the separate agreement discussed below or, if earlier, on the expiration of the agreement. In addition, the Company is performing training and implementation services on a time and materials basis to the customer.

As part of a separate agreement, as amended in December 2000, if the customer or any third party in the Houston, Texas area purchases additional licenses from the Company, the Company is obligated to issue shares of common stock to this customer having a then fair market value of 25% of the price of the subsequent licenses, up to $6 million of stock. This agreement expires on December 31, 2004. The Company issued 5,707 and 172,763 shares of common stock in connection with sales to third parties in the Houston, Texas area and recorded commission expense of $45 and $1,987 during the years ended December 31, 2000 and 1999, respectively.

On January 5, 1998, the Company paid $12 in cash and issued 13,750 shares of common stock valued at $4.00 per share to acquire intangible assets of Health Outcome Technologies, Inc. This acquisition was accounted for as a purchase and results of operations for the acquired company are included only from the date of acquisition forward. In connection with this acquisition, the Company recorded goodwill of $67, which is being amortized over two years.

In June 2000, the Company acquired an approximate 10% interest in Lifechart.com, Inc. for approximately $8.3 million in cash, which is accounted for using the cost method. The Company also entered into a joint development, sales and marketing agreement with Lifechart.com. Subsequent to the investment, the Company became concerned about Lifechart.com's ability to continue to fund its operations. In addition, Lifechart.com failed to make a payment to the Company that was required under the agreement. Management determined that these events had led to a decline in the fair value of the investment, and the Company recorded a loss on its investment in Lifechart.com of approximately $8.3 million to reduce the carrying amount of the investment to its estimated fair value at December 31, 2000.

The following unaudited pro forma financial information combines the results of operations of the Company and Medscape, Inc. assuming the merger was consummated at the beginning of the periods presented. On August 17, 2001, the Company completed the sale of its transcription segment. As a result, the operations of the Company's transcription segment have been classified as discontinued operations and are not included in the pro forma results below. The other investment referred to above was not significant and is not included in the pro forma results below. The unaudited pro forma results are not necessarily indictative of what would have occurred if the merger had been in effect for the periods presented. In addition, they are not intended to be a projection and do not reflect any synergies that might be achieved from combined operations.

	Years Ended December 31,
	2000			1999
Revenues	$	49,139		$	30,873
Net loss		(403,137	)		(309,782	)
Net loss per share—basic and diluted	$	(7.78	)	$	(12.88	)

The above pro forma net loss amounts for the years ended December 31, 2000 and 1999 have been adjusted to include the amortization of goodwill and other intangibles related to the Medscape, Inc. merger for each period.

Accounts receivable are shown net of allowance for doubtful accounts of $1,333, $529, and $1,360 at December 31, 2000, 1999, and 1998, respectively. The following table presents a roll forward of the allowance for doubtful accounts for the indicated periods:

	December 31,
	2000			1999			1998
Balance at beginning of period	$	529		$	1,360		$	852
Provision		1,458			505			756
Charge offs		(654	)		(284	)		(248	)
Recoveries		—			(1,052	)		—

Balance at end of period	$	1,333		$	529		$	1,360

Property and equipment, including equipment under capital leases, consist of the following:

	December 31,
	2000			1999
Furniture and equipment	$	31,219		$	16,576
Leasehold improvements		7,403			1,519
Website development costs		5,121

		43,743			18,095
Less accumulated depreciation and amortization		(17,474	)		(5,008	)

	$	26,269		$	13,087

Depreciation and amortization expense totaled approximately $14,275, $2,516 and $1,503 for the years ended December 31, 2000, 1999 and 1998, respectively.

Amortization expense totaled approximately $150,467, $1,561 and $34 at December 31, 2000, 1999 and 1998, respectively.

As a result of the Company's merger with Medscape, Inc. (Note 2), the Company acquired, among other intangible assets, certain assets related to Medscape, Inc.'s agreements with CBS Corporation ("CBS") which commenced on August 3, 1999. These assets primarily consist of the right to receive approximately $121.1 million of advertising and promotion from CBS. This prepaid advertising has a discounted, tax effected fair value of approximately $64.8 million, and is included in prepaid advertising and other assets. Over the remainder of the seven-year term of the Advertising and Promotion Agreement, CBS will arrange for the placement of the remaining balance of advertising and promotion in the United States for the Company's consumer and professional web sites and other products and services. Pursuant to the Trademark and Content Agreement, CBS granted the Company a license to use the "CBS" trademark and "Eye" design and to access health related news content for a seven-year period. Under the agreement CBS retains significant control over the use and presentation of the CBS health content and CBS trademarks. See update related to these agreements in note 14(e), Subsequent Events

Advertising services to be provided by CBS will be expensed as used over the life of the agreement. Included in sales and marketing during the year ended December 31, 2000 was approximately $4.5 million, of expense related to the utilization of advertising and promotion services under those agreements.

The Company leases its facilities under non-cancelable operating lease agreements.

Future minimum lease payments under non-cancelable operating leases are as follows for each of the years ending December 31:

Lease expense totaled approximately $4,957, $1,591 and $1,073, for the years ended December 31, 2000, 1999 and 1998, respectively.

In May 1999, the Company entered into a ten year operating lease agreement for office space which was subsequently terminated in 2000. In connection with this lease, the Company granted options to the lessor to purchase up to 25,000 shares of common stock, at a price of $6.50 per share. The lessor is required to exercise the option within three years of the effective date of the Company's initial public offering.

The fair value of the options to be issued to the lessor was determined by applying the Black-Scholes option pricing model using the commitment date of the lease for performance of the lessor as the measurement date. The per share weighted average fair market value was $4.79 on the date of grant, using the following weighted average assumptions: risk-free interest rate of 5.75%, zero expected dividend yield, a three year expected life, and volatility index of 100%. The fair value of $120 is being amortized over the lease period.

At December 31, 2000, the Internet portals segment had an outstanding contract payable due to America Online (AOL) in the amount of $14,276. In January 2001, Medscape received from the holder of the contract payable a notice of breach due to the fact that the Company was delinquent on its 2001 payment to the holder of approximately $3 million. See resolution in note 14(c), Subsequent Events.

The Company leases office furniture and equipment under long-term capital leases, which expire throughout the next year. At December 31, 2000 and 1999, the net book value of leased furniture and equipment included in property and equipment was approximately $1,072 and $1,368, respectively.

Future maturities of notes payable for each of the years ending December 31 are as follows:

In February 1993, the Company adopted a stock incentive plan that allowed for the issuance of 2,247,192 shares of common stock. Under the 1996 stock incentive plan, adopted in December 1996, together with the 1993 stock incentive plan, 500,000 shares of common stock were reserved for issuance. The Company's 1996 plan was amended in 1998 and 1999 to reserve an additional 350,000 and 1,900,000 shares of common stock for issuance, respectively, bringing the total under both plans to 4,997,192. In September 1999, the Company adopted the 1999 stock incentive plan, which authorized the issuance of 2,000,000 shares. An additional 3,507,967 shares reserved for issuance were assumed upon merger and acquisition during 2000. The 1999 plan was amended in May 2000 to reserve an additional 6,000,000 shares, bringing the total shares under all plans to 16,505,159 at December 31, 2000. Under the terms of the plans, the board of directors is authorized to grant incentive stock options, non-statutory stock options and to sell restricted stock to employees or others providing services or benefits to the Company. The plans also allow granting of stock bonuses, stock appreciation rights, and other forms of stock based incentives. The 1999 plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986 for the granting to employees and consultants of nonstatutory stock options and for the issuance of stock bonuses, restricted stock and stock appreciation rights. Unless terminated earlier, the 1999 plan will terminate automatically in September 2009.

The stock incentive plans are administered by the Company's board of directors. The board of directors has the power to determine the terms of the options or rights granted, including the exercise price, the number of shares subject to each option or right, the character of the grant, the exercisability of the grant and the form of consideration payable upon exercise of options. The board of directors may delegate administration of the stock incentive plans to a committee.

In March 1998, Medscape extended the term of all outstanding options from five years to ten years, which constituted a new measurement date. The fair value of the stock as determined by the board of directors on the date the change was effective was $4.00 per share. 121,025 of these options had exercise prices ranging from $1.60 to $2.00 per share and were fully vested. For these outstanding options, Medscape recorded a compensation charge of $110 in connection with this change in option terms. The compensation expense was calculated by taking the difference between the original grant price and the fair value on the new measurement date.

To qualify as incentive stock options (ISOs), the exercise price must not be less than the fair market value of the common stock at the date of the grant or, in the case of incentive stock options issued to holders of more than 10% of the outstanding common stock, 110% of the fair market value. The maximum term of incentive stock options is 10 years, or five years in the case of holders of more than 10% of the Company's outstanding common stock. For incentive stock options exerciseable for the first time by an employee, the aggregate fair market value of the common stock on the date of the grant may not exceed $100,000 during any calendar year.

Options granted under the stock incentive plans are generally nontransferable and, unless otherwise determined by the board of directors, must be exercised during the period of the option holder's employment or service with the Company or within 90 days of termination of employment or service.

The stock incentive plans provide that if the Company merges with or into another corporation, or the Company sells substantially all of the Company's assets, each outstanding option will be assumed by the successor corporation.

The per share weighted average fair market value, as determined by applying the Black-Scholes option pricing model to stock options granted under the plans during 2000, 1999 and 1998 was $6.22, $5.02 and $3.44, respectively, on the date of grant, with the following weighted average assumptions:

	Years Ended December 31,
	2000		1999		1998
Risk-free interest rate	5.10	%	5.875	%	6.0	%
Expected dividend yield	0	%	0	%	0	%
Years of expected life	7		7		7
Expected volatility	100	%	100	%	100	%

Medscape continues to apply APB Opinion No. 25 in accounting for the plans and compensation cost is generally not recognized for its stock options in the financial statements. The effect on the Company's net loss, had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123 is as follows:

	Years Ended December 31,
	2000			1999			1998
Pro forma net loss	$	(326,279	)	$	(30,895	)	$	(8,342	)
Pro forma net loss per share		(7.06	)		(3.39	)		(1.21	)

	Options Outstanding
	Options Outstanding				Options Exercisable
		Weighted Average Remaining Contractual Life			Options Exercisable
Range of Exercise Price	Number of Outstanding at December 31, 2000	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable at December 31, 2000	Weighted Average Exercise Price
$0.03 - 2.31	944,265	9.22	$	1.96	239,908	$	0.99
3.10 - 4.40	1,011,877	7.36		3.98	758,802		4.03
5.13 - 5.45	460,800	9.52		5.16	64,561		5.38
5.94 - 5.94	3,897,947	9.45		5.94	705,921		5.94
6.43 - 8.06	953,430	8.47		6.71	568,920		6.61
9.50 - 13.00	898,420	8.53		10.87	404,423		10.60
13.38 - 30.19	448,070	9.11		21.93	160,500		23.45
30.96 - 30.96	202,622	8.69		30.96	102,743		30.96
33.86 - 33.86	123,791	9.13		33.86	—		—
36.76 - 36.76	17,687	9.11		36.76	1,818		36.76

$0.03 - 36.76	8,958,909	8.96		7.65	3,007,596		7.61

The Company has deferred stock compensation of $741 at December 31, 2000. Deferred stock compensation is primarily based on the difference between the deemed fair market value of common stock and the exercise price of the option or stock on the grant date. Deferred compensation is being amortized over the vesting period of the options, which is generally three years. The Company

recognized expenses of $679 in the twelve-month period ended December 31, 2000 related to these grants.

As a result of the Company's merger with Medscape, Inc. in May 2000, outstanding warrants to purchase shares of Medscape, Inc. common stock were converted to warrants to purchase 0.323 shares of the Company's common stock. At March 31, 2001, warrants to purchase 436,747 shares of the Company's common stock were exerciseable at $30.96 per share and warrants to purchase 436,747 shares of the Company's common stock were exercisable at $10.84 per share. These warrants expire in 2006. The warrants were issued in connection with an agreement with America Online, Inc. ("AOL"), under which AOL has agreed to promote the Company's co-branded Websites, through contextual links and banners, on the following AOL properties: AOL, AOL.com, CompuServe Service, Netscape Netcenter and Digital Cities. The purchase price of the Company's merger with Medscape, Inc. included the value of these warrants, as discussed in Note 2. The agreement also requires cash payments of $33 million to be paid to AOL, of which, the Company has paid approximately $18 million through December 31, 2000. Approximately $3.7 million is included in long-term liabilities and the remaining $11.3 million is included in the current portion of long-term liabilities at December 31, 2000. See resolution in note 14(c), Subsequent Events.

As of the end of December 1999, the Company had sold 2,175,750 shares of common stock at prices ranging from $4.00 to $13.00 to senior management of the Company. These shares were sold under agreements, which allow the Company, at its option, to repurchase these shares at the original sale price. Under the repurchase agreements associated with 1,958,250 of these shares, the shares subject to repurchase are reduced in equal increments over 36 months from the original vesting dates which range from February 28, 1996 to December 6, 2002. At December 31, 1999 and 2000, there were approximately 1,211,328 and 250,976 shares, respectively, outstanding that were eligible for repurchase. The Company holds promissory notes totaling approximately $6.7 million of principal and interest, net of allowance of $5.1 million at December 31, 2000, from current and former senior management in consideration for the restricted stock discussed above. The notes are with recourse, not collateralized, accrue interest at 6% per year and are payable in full 10 years from the date of the loan. The Company has not waived its right to pursue collection of the amounts due under these notes, including any unpaid and accrued interest. However, based primarily on the decline in market value of the related restricted stock and the burdensome process of obtaining and enforcing judgments against our former employees to collect the notes, the Company has established an allowance for doubtful accounts in the amount of approximately $5.1 million as of December 31, 2000. In connection with these stock issuances, the Company recorded compensation expense of $398 and $986 for the years ended December 31, 2000 and 1999, respectively.

In August 2000, the Company granted 41,500 stock options valued at $181 in exchange for consulting services provided by third parties. The stock options were valued using the Black-Scholes option pricing model. The per share weighted average fair market value was $5.13 on the date of grant, with the following weighted average assumptions: risk-free interest rate of 6%, expected dividend yield of 0%, a 7-year term and an expected volatility index of 100%.

The Company's board of directors has adopted and the shareholders have approved an employee stock purchase plan (ESPP), for the benefit of its employees. A total of 2,500,000 shares are reserved for issuance under the ESPP.

Except as described below, all full-time employees of the Company and its designated subsidiaries are eligible to participate in the ESPP. Any employee who would, after a purchase of shares in an offering under the plan, own or be considered to own five percent or more of the voting power or value of all classes of stock of the Company, or any parent or subsidiary of the Company, is ineligible to participate in an offering under the ESPP.

Except for the first offering period, offering periods are two years long and are divided into four six-month purchase periods. The first offering period began on the effective date of the initial public offering and runs for approximately two years, divided into four purchase periods. On the first day of each offering period, the offering date, each participating employee is automatically granted an option to purchase shares of the Company's common stock. That option will be automatically exercised on the last day of each purchase period during the offering. The last day of a purchase period is known as a purchase date. No employee may purchase more than 10,000 shares in each offering period or accrue the right to purchase shares at a rate that exceeds $25 of fair market value, as determined on the offering date, for each calendar year that the option is outstanding. Each eligible employee may elect to participate in the ESPP by filing a subscription and payroll deduction authorization. Shares may be purchased under the ESPP only through payroll deductions of not more than 15 percent of an employee's gross base salary plus commissions. On each purchase date the Company will apply the amounts withheld to purchase shares for the employee. The purchase price will be the lesser of 85 percent of the fair market value of the Company's common stock on the offering date or on the purchase date.

The ESPP is administered by the Company's board of directors. The board of directors may adopt rules and regulations for the operation of the ESPP, adopt forms for use in connection with the ESPP, decide any question of interpretation of the ESPP or rights arising under the ESPP and generally supervise the administration of the ESPP. The Company pays all expenses of the ESPP other than commissions on sales of shares for employees' accounts by the custodian.

An independent custodian maintains the records under the ESPP. Shares purchased by employees under the ESPP are delivered to and held by the custodian on behalf of the employees. By appropriate instructions from an employee, all or part of the shares may be sold or transferred into the employee's own name and delivered to the employee.

The board of directors may amend the ESPP, except that increases in the number of reserved shares, other than adjustments authorized by the ESPP, or decreases in the purchase price of shares offered under the ESPP, require shareholder approval. The board of directors may terminate the ESPP at any time.

During 2000, the Company issued 212,156 shares of common stock valued at $1,026 under the employee stock purchase plan.

	Years Ended December 31,
	2000			1999			1998
Interest expense	$	(482	)	$	(292	)	$	(187	)
Interest income		6,132			1,876			707
Other, net		35			(487	)		(54	)

Total other income	$	5,685		$	1,097		$	466

The Company incurred a loss for both financial reporting and tax return purposes for the years ended December 31, 2000, 1999 and 1998. As such, there was no current or deferred tax provision for these periods.

The actual income tax expense differs from the expected tax expense, which is computed by applying the U.S. federal corporate income tax rate of 34% to net loss before income taxes, as follows:

		Years Ended December 31,
		2000		1999		1998
Computed expected income tax benefit		(34.0	)%	(34.0	)%	(34.0	)%
Increase (reduction) in income tax expense (benefit) resulting from:
	State income tax benefit	(1.7	)	(4.1	)	(4.3	)
	Increase in valuation allowance	16.1		37.8		44.7
	Research and development credits	(0.2	)	(2.2	)	(8.3	)
	Goodwill	19.7		—		—
	Other	0.1		2.5		1.9

	Income tax expense	—	%	—	%	—	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

		Years Ended December 31,
		2000			1999
Deferred tax assets:
	Deferred revenue	$	315		$	—
	Intangibles		1,864			—
	Furniture and equipment due to differences in depreciation		1,514			—
	Net operating loss and research and experimentation credit carryforwards		101,823			24,588
	Allowance for doubtful accounts and other accruals		818			690
	Other carryforwards		32			—

	Gross deferred tax assets		106,366			25,278
	Less valuation allowance		(106,366	)		(25,084	)

	Net deferred tax assets		—			194
Deferred tax liabilities:
	Change in method of accounting		—			(54	)
	Other		—			(140	)

	Net deferred tax liabilities		—			(194	)

	Net deferred tax assets and liabilities	$	—		$	—

Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. The valuation allowance for deferred tax assets as of December 31, 2000 was approximately $106,366. The net change in the total valuation allowance for the years ending December 31, 2000, 1999 and 1998 was an increase of approximately $81,282, $10,525 and $3,153 respectively.

Included in the valuation allowance at December 31, 2000 is $39,708 for deferred tax assets for which subsequently recognized tax benefits, if any, will be allocated to reduce goodwill of acquired enterprises.

At December 31, 2000, the Company has available federal and state net operating loss carryforwards for tax purposes of approximately $259,805 and research and experimentation credits of approximately $2,512, which expire through 2020. Approximately $101,719 of the net operating losses are subject to annual utilization limitation due to ownership changes in prior years.

Primarily as a result of the merger and acquisition described in Note 2, the Company adopted certain restructuring plans during the year ended December 31, 2000. The restructuring plans resulted in charges related to the consolidation of duplicate functions and activities. These actions resulted in a

reduction of approximately 250 employees, or approximately 44% of the workforce, across essentially all of the Company's functions and locations, a reduction in total facilities, including closing of the San Francisco office, and impairment of certain assets.

Restructuring charges are primarily comprised of costs associated with severance packages, cancellation of lease agreements, and impairments of abandoned technologies and property and equipment. These charges totaled approximately $16.4 million for the year ended December 31, 2000, including non-cash charges of approximately $5.1 million to increase the reserve against shareholders' notes receivable. At December 31, 2000, approximately 190 of the estimated 250 positions have been eliminated. Approximately $1.7 million relating to these programs was included in current liabilities at December 31, 2000. All severance payments and related charges, which consist primarily of expected payroll and related taxes, are expected to be paid by June 30, 2001.

The above provisions and related restructuring reserves are estimates based on the Company's current knowledge. Adjustments to the restructuring provisions may be necessary in the future based on further developments regarding restructuring related costs.

In September 1999, Medscape entered into a license agreement with L&H Applications USA, Inc. L&H has granted to the Company a non-exclusive, non-transferable license to incorporate L&H's product into the Company's Logician family of products. The Company may be required to make additional minimum payments in accordance with this agreement of up to $1,075 during 2001.

In February 1999, the Company entered into an agreement to issue common stock to a customer at the fair market value up to $6,000, in consideration for allowing the Company to use this customer as a reference site. Issuance of stock is contingent upon sales of additional licenses to the customer or to third parties in the customer's geographic area. Since the date of inception, the Company has issued 178,470 shares of common stock with an estimated fair value of $9.45 per share to this customer through December 31, 2000. The Company has recorded the expense associated with this grant as a component of marketing and sales expense. The stock agreement expires December 31, 2004.

The Company is involved in various claims and legal actions in the normal course of business. The most significant of these are described below. In the opinion of management, the ultimate disposition of outstanding claims and legal actions will not have a material effect on the Company's consolidated financial position, results of operations or liquidity.

On August 20, 1999, Medquist MRC, Inc. filed a suit in the District Court for the Northern District of Ohio, Medquist MRC, Inc. v. John H. Dayani and Network Health Services, Inc., against Network Health Services, Inc., predecessor to Total eMed, Inc. In November of 1999, venue in the case was transferred to the United States District Court for the Middle District of Tennessee. The plaintiff filed an amended complaint on June 1, 2000 that alleges breach of fiduciary duty of loyalty, misappropriation of trade secrets, tortious interference with contract, and unjust enrichment. Specifically, Medquist MRC alleges that Dayani, who served on the Medquist MRC board of directors both prior to and after founding Network Health Services, misappropriated certain trade secrets from Medquist MRC and used those trade secrets to develop Network Health Service's business concepts and customer base. The complaint also alleges that Network Health Services committed other actionable offenses as described above. On March 14, 2001, the parties finalized a settlement of this lawsuit. None of the parties admitted to any wrong doing in the settlement. Medscape's portion of the settlement of $2 million was paid during the quarter ended March 31, 2001 and entitled Medscape to an escrow of shares established in May 2000 when Medscape agreed to acquire Total eMed, Inc.

The Financial Accounting Standards Board (FASB) has issued an Exposure Draft ("Draft"), Business Combinations and Intangible Assets-Accounting for Goodwill, that proposes significant changes to the current accounting for goodwill and intangible assets. If adopted in its current form, the Company's financial results may be impacted in the future. Currently, the Draft would require companies to discontinue the current practice of amortizing goodwill over its useful life and instead require companies to perform impairment tests when certain events or circumstances indicate the fair value of goodwill may be less than the carrying amount.

During the fourth quarter of 2000, Medscape's operations and corresponding organizational structures were organized into three strategic business unit groups that offer products and services tailored for particular market segments. In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company is required to describe its reportable segments and provide data that is consistent with the data made available to the Company's management to allocate resources and assess performance. Information for prior periods has been reclassified to conform to the current year presentation.

Medscape's reported segments consist of Digital Health Record (DHR) applications (application licenses and support services) and Internet portals (sponsorship and advertising). The DHR applications segment develops and markets DHR applications for physicians, healthcare professionals, and patients by using advanced technologies to link healthcare professionals and consumers to physicians. Internet Portals provide healthcare professionals and consumers with timely, relevant, and authoritative professional and consumer healthcare information available through the Company's branded media properties, including Medscape.com and Medscapehealth.com.

The Company measures the performance of its operating segments based on segment operating income, which includes sales and marketing expenses, research and development costs, and other overhead charges directly attributable to the operating segment. Certain expenses that are managed outside of the operating segments are excluded from segment operating income. These consist primarily of corporate charges, including other income and expense items, unallocated shared expenses, taxes, and restructuring and merger charges. Gains and losses associated with the sale of business assets are also excluded from segment operating income. Asset information by operating segment is not reported since Medscape does not identify assets by segment. The accounting policies of the segments are the same as those used in the preparation of Medscape's consolidated financial statements.

The Company does not have material revenues or assets outside the United States. During 2000, no single customer accounted for more than 10% of total revenues. During 1999, one customer accounted for approximately 16% of the Company's total revenues, and another customer accounted for approximately 13%. During 1998, one customer accounted for approximately 20% of total revenues.

The following table reconciles consolidated segment operating loss to the Company's consolidated net loss.

The Company and its subsidiaries sponsor several 401(k) deferred savings plans, covering substantially all employees. Employees generally become eligible to participate in the plan upon employment. Employees may contribute up to 15% of their pay to the plan, subject to the limitation of $10.5 by the Internal Revenue Code. All employee contributions vest immediately. Medscape has not made any matching contributions, but does pay administrative costs for the plan. These costs were not significant for any period presented.

The Company has accepted promissory notes totaling $6,728 of principal and interest amount, net of the allowance, at December 31, 2000 from its officers and certain other employees in consideration for restricted stock issued. These notes accrue interest at 6% per year and are payable in full 10 years from the date of the underlying loan.

The Company also loaned an officer approximately $104 to help pay for relocation expenses, under an unsecured promissory note, which bears interest at 6% per year. The note is payable in full on the earlier to occur of the sale of his residence located in Portland, Oregon, the termination of his employment, or July 1, 2001. The note is prepayable in full without penalty and was paid in full plus accrued interest during 2000.

General Motors Corporation (GM), the world's largest vehicle manufacturer, designs, builds and markets cars and trucks worldwide. GM is also the United States' largest private purchaser of healthcare. In January 2001, GM and Medscape entered into an e-business healthcare alliance. Under the alliance, GM and Medscape will cooperate on a three-year program to encourage U.S. physicians

to use hand-held computer devices which use applications from the Medscape Mobile suite of products for prescriptions and to adopt Medscape's DHR application Medscape Logician ASP. As part of the strategic alliance, GM received warrants for 5 million shares of common stock, valued at approximately $12.5 million. The warrants were valued using the Black-Scholes option pricing model using the following assumptions: exercise price of $2.31, volatility of 70%, contractual life of 5 years, risk-free interest rate of 5.0% and no dividends. Under the terms of the agreement, the warrants were non-forfeitable and fully vested at the date of grant. In addition, GM is restricted by certain sale lock-up periods, as specified in the agreement. The value of the warrants issued under this alliance will be amortized as a non-cash sales discount over the life of the agreement from approximately June 2001 through June 2004. GM and Medscape will also share in any cost savings realized by GM primarily from physician usage of Medscape Mobile applications.

The Company issued approximately 5.9 million shares of Series 1 convertible redeemable preferred stock pursuant to a financing round that closed on January 4, 2001. As of December 31, 2000, $15.8 million had been received, in advance of the closing, and is presented in the financial statements as preferred stock subscribed. The Company received an additional $2 million in January and, at closing, paid approximately $1 million and issued warrants for 300,000 shares of Medscape common stock in fees associated with the financing. The terms for the Series 1 preferred stock are summarized below.

Preferred shareholders are entitled to receive dividends when and if declared by the Company's board of directors at an annual rate of $0.27 per share. The right to receive dividends on preferred stock is cumulative and shall compound annually. Dividends are deemed to accrue on a daily basis, commencing on the date the Series 1 preferred stock is first issued. No dividends may be declared or paid on common stock until all declared dividends on preferred stock have been paid. As of December 31, 2000 no dividends had been declared or paid.

Upon dissolution, liquidation or winding up of the affairs of the Company, either voluntarily or involuntarily, the preferred shareholders receive preference in liquidation over the common shareholders of the Company. The liquidation value for each outstanding share is $3 per share, adjusted for any accrued and unpaid stock dividends.

The preferred stock is subject to mandatory redemption features under the following circumstances (a) a change in control or (b) a trigger event. A trigger event is defined as the Company failing to obtain the shareholder approval contemplated by the Preferred Stock and Warrant Purchase Agreement. In the occurrence of either event, each holder shall have the right to require the Corporation to purchase all or a portion of such preferred stock, for which funds are legally available

for redemption. The per share redemption price for each series of preferred stock is equal to its per share liquidation value, adjusted for any accrued and unpaid stock dividends.

The holder of each share of each series of preferred stock is entitled to the number of votes the holder would be entitled to if the shares of preferred stock were converted to common stock.

Each share of preferred stock is voluntarily convertible into common stock at any time after the date of issuance at a rate that equals the original issue price of $3 divided by the conversion price of $3 at the time of issuance, subject to anti-dilution or other adjustments specified in the purchase agreements. Such anti-dilution provisions include a weighted-average adjustment to the conversion price in the event the Company issues new equity or convertible securities at an issue price or conversion price below the then applicable conversion price or the then applicable fair market value of a share of Common Stock. Each share of the Series 1 preferred stock shall be automatically converted into the number of shares of common stock obtained by dividing the per share price by the conversion price, subject to adjustments in accordance with the anti-dilution provisions thereof, upon the earlier of: (i) the date, which shall be no sooner than January 4, 2002, on which the last sale price of the common stock on NASDAQ has been at least five times the conversion price for 30 consecutive trading days, with a minimum average trading volume per day of 2% of the number of issued and outstanding shares of common stock not held by affiliates of the Company and (ii) immediately prior to the closing of a merger, sale of all or substantially all of the Company's assets, or combination in which the Company's common shareholders receive cash or marketable securities with an aggregate value per share of at least five times the conversion price.

In addition to the shares of Series 1 preferred stock, the preferred shareholders were granted warrants for the purchase of approximately 4.5 million shares of the Company's common stock valued at approximately $7.6 million. The warrants are exercisable at the option of the holder for a period of five years, and were valued using the Black-Scholes option pricing model using the following assumptions: exercise price of $0.01, volatility of 70%, contractual life of 5 years, risk-free interest rate of 5.0% and no dividends.

Upon closing of the Series 1 preferred stock financing round, the Company paid approximately $1 million and issued additional warrants for 300,000 shares of the Company's common stock valued at approximately $275 to the Company's placement agent. The warrants are exercisable at the option of the holder for a period of five years, and were valued using the Black-Scholes option pricing model using the following assumptions: exercise price of $2.40, volatility of 70%, contractual life of 5 years, risk-free interest rate of 5.0% and no dividends. Total fees of approximately $1.3 million associated with the financing were netted against proceeds received.

The majority of the holders of the Series 1 Preferred Stock shall have the right to elect one member of the Company's board of directors.

In May 2001, the Company and AOL amended the terms of the agreement with respect to the remaining payments under this agreement. In accordance with the amendment, the Company paid AOL $1 million in June 2001 and the remaining balance was reduced to $333,000, due in four equal monthly payments beginning May 2002 through August 2002. The amendment also requires Medscape to provide certain advertising and promotional services to AOL valued at approximately $1.3 million through August 2002.

By late 2000 the Company became concerned about Lifechart.com's ability to continue to fund its operations. In addition, Lifechart.com failed to make a payment to the Company that was required under the agreement. Therefore, the Company recorded a loss on its investment in Lifechart.com of approximately $8.3 million to reduce the carrying amount of the investment to its estimated fair value at December 31, 2000.

On November 7, 2001, the Company executed a Restructuring Agreement with Viacom Inc. ("Viacom") in which the Company and Viacom terminated their relationship. In exchange for cancellation of all agreements between the Company and Viacom, Viacom paid the Company $10 million in cash and transferred to the Company the 4,695,892 shares of Company common stock that were originally issued at the onset of the relationship. Prior to this transaction, Viacom beneficially owned approximately 8.3% of the Company's outstanding common stock. The Company returned to Viacom the approximately $111.3 million outstanding balance of CBS advertising inventory which had a carrying value of approximately $56.6 million on November 7, 2001. The agreement requires the Company to cease all uses of the CBS logo and trademark and the "healthwatch" trademark. The Company's consumer Web site will be renamed Medscape Health for Consumers and can be accessed via www.Medscapehealth.com. The agreement also terminates Viacom's right to have a representative on the Company's Board of Directors. As a result, Andrew Heyward, Viacom's representative on the Company's Board of Directors, has resigned. As a result of the disposal of the advertising inventory, the Company will recognize a loss on the disposal of approximately $46.7 million during the quarter ended December 31, 2001.

Court. The lock-up agreement barred Ms. Leavitt, for a period of time, from selling her Company stock without written consent of the lead underwriter on the public offering. Ms. Leavitt alleges that, but for the lock-up agreement, she would have sold her stock in the public market at $50 per share and that, if she had done so, her return would have been $12,625,000. We intend to vigorously defend the lawsuit.

On August 2, 2001, the Company received notice from Nasdaq that the Company's common stock had failed to maintain a minimum bid price of $1.00 over the prior thirty (30) consecutive trading days as required by the Nasdaq Rules. The Company had until October 31, 2001 to regain compliance with the Rules or the Company's common stock would be subject to possible delistment from the exchange. Regaining compliance required, in part, that the Company's bid price for shares of its common stock trade at or above $1.00 for a minimum of 10 consecutive trading days before October 31, 2001. On September 27, 2001, Nasdaq implemented a moratorium on the minimum bid price and market value of public float requirements for continued listing and suspension of these rules until January 2, 2002. On October 10, 2001, the Company received formal confirmation from Nasdaq that the former matter initiated with the August 2nd letter had been closed.

On August 2, 2001, the law firm of Bernstein, Liebhard & Lifshitz, LLP announced that the Company, a current director, a prior officer and four underwriters of our initial public offering are defendants in a class action lawsuit filed in the United States District Court for the Southern District of New York. The class action is brought on behalf of purchasers of our common stock between December 13, 1999 and December 6, 2000. The plaintiffs allege that our prospectus was materially false and misleading because it failed to disclose, among other things, that our lead underwriter required several investors who wanted large allocations of initial public offering securities to pay undisclosed and excessive underwriters' compensation in the form of increased brokerage commissions and required investors to agree to buy shares after the initial public offering was completed at predetermined prices as a precondition to obtaining initial public offering allocations. The plaintiffs further allege that because of these purchases, the Company's post-initial public offering stock price was artificially inflated. As a result of the alleged omissions and the purported inflation of our stock price, the plaintiffs claim violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. We intend to vigorously defend the lawsuit.

In July 2001, the Company adopted a restructuring plan, which resulted in a reduction of approximately 100 employees or approximately 22% of the workforce, excluding Total eMed, Inc., targeted primarily to general and administrative functions of the Company which will result in the recognition of restructuring charges during the three months ended September 30, 2001.

In July 2001, the Company also announced that it had retained Lazard Freres & Co. LLC as its financial advisor. Medscape, in conjunction with Lazard Freres, is exploring a variety of strategic and funding options, including the possible sale of parts or all of the Company.

Item 9. Changes in and Disagreements with Accountants on Accounting Financial Disclosure

Certain information required by this item concerning executive officers is set forth in Part I of this Report under "ITEM 4A.—EXECUTIVE OFFICERS OF THE REGISTRANT."

Set forth below is information as of April 30, 2001 about each director of the Company, including his or her business experience during the past five years.

Name	Age	Position
Mark K. Leavitt	50	Chairman of the Board
David C. Moffenbeier	49	Director
George D. Lundberg, M.D.	67	Director
Arthur N. Leibowitz	53	Director
Thomas A. Croskey	45	Director
Bruce M. Fried	51	Director
C. Martin Harris	44	Director
Andrew Heyward	50	Director
Ronald H. Kase	42	Director
Neal Moszkowski	35	Director
Mark A. Stevens	41	Director

Mark K. Leavitt, Director. Dr. Leavitt has been Chairman of the Board of the Company since 1985. Dr. Leavitt founded MedicaLogic in 1985 and served as the Chief Executive Officer from 1985 until May 2000. From 1992 to 1996 he served as a faculty member for St. Vincent Internal Medicine Family Practice and concurrently served as Medical Director and Regional Information Systems Director for Sisters of Providence Health Care System from 1992 to 1994. From 1982 to 1992, Dr. Leavitt operated a private practice of internal medicine. From December 1997 to June 1998, he served on the Board of Directors of Physician Partners, Inc.

David C. Moffenbeier, Director. Mr. Moffenbeier has been a director of the Company since 1994. Mr. Moffenbeier became President and Chief Executive Officer in May 2000. From 1994 until May 2000, he served as Chief Operating Officer of the Company. From 1993 to 1994, Mr. Moffenbeier served as Chairman of the Board of Directors of Summit Design Inc., a supplier of software tools for integrated circuits. Previously, Mr. Moffenbeier co-founded Mentor Graphics Corp., a manufacturer of hardware and software for electronic design automation, where he served as a director from 1981 to 1993 and as its Chief Financial Officer from 1981 to 1984, its Vice President of International Sales from 1985 to 1988 and its Vice President of Worldwide Sales from 1989 to 1993. He currently serves on the Board of Directors of Providence Good Health Plan, a health care management organization.

George D. Lundberg, Director. Dr. Lundberg has been a director of the Company in August 2000. Dr. Lundberg became the Executive Vice President and Editor in Chief when Medscape, Inc. merged with the Company in May 2000. Prior to the merger, he served as Editor in Chief of Medscape, Inc. from February 1999 to May 2000. Prior to joining the Company, he served as Editor of the Journal of the American Medical Association and also served as the Editor in Chief of Scientific Information and Multimedia, a publication of the American Medical Association, for seventeen years.

Arthur N. Leibowitz, Director. Dr. Leibowitz has been a director of the Company since December 2000. At that time, he also became the Executive Vice President, Digital Health Strategy and Business Development. Prior to joining the Company, he served as the Chief Medical Officer for

Aetna U.S. Healthcare from 1992 to December 2000 and held various other positions from 1987 to 1992. Prior to 1987, Dr. Leibowitz was in private practice.

Thomas A. Croskey, Director. Mr. Croskey has been a director of the Company since February 2001. Mr. Croskey has served as the Director of Employment Cost Analysis (ECA) for the General Motors North American Finance Staff since 1996.

Bruce M. Fried, Director. Mr. Fried has been a director since 1998. Since 1998, Mr. Fried has been a partner and chair of the health law group at Shaw Pittman, an international law firm based in Washington, D.C. From 1995 to 1998, Mr. Fried served as the Health Care Financing Administration's director of the Center for Health Plans and Providers. From 1994 to 1995, Mr. Fried was vice president of federal affairs at FHP International Corporation, then one of the nation's largest managed care organizations.

C. Martin Harris, Director. Dr. Harris has been a director of the Company since May 2000. Since 1996, Dr. Harris has served as a staff physician at the Cleveland Clinic Hospital and at the Cleveland Clinic Foundation as well as the chief information officer and the chairman of the information technology division for the Cleveland Clinic Foundation. From 1987 to 1996, Dr. Harris served as attending physician for the Hospital of the University of Pennsylvania and as an assistant professor of Medicine at the University of Pennsylvania School of Medicine where he previously worked as an instructor of clinical medicine. From 1990 to 1993, Dr. Harris served as the associate vice-president of information systems and technology at the University of Pennsylvania Medical Center. Dr. Harris currently serves as a member of the board of directors for Care Management Sciences Corporation.

Andrew Heyward, Director. Mr. Heyward has been a director of the Company since February 2001. As a result of the Restructuring Agreement with Viacom which was executed on November 7, 2001, Mr. Heyward has resigned from the Company's Board of Directors. Mr. Heyward has served as President of CBS News since January 1996. From October 1994 until January 1996, he was Executive Producer of "CBS Evening News with Dan Rather" and Vice President of CBS News. From February 1993 until October 1994, Mr. Heyward served as Executive Producer of the CBS News Magazine "Eye to Eye with Connie Chung." Prior to that time, he was responsible for developing CBS's "48 Hours" series. Mr. Heyward serves on the board of directors of Marketwatch.com, Inc.

Ronald H. Kase, Director. Mr. Kase has been a director since July 1994. Mr. Kase joined New Enterprise Associates, a venture capital investment firm in 1990 and has been a general partner since May 1995. Mr. Kase serves on the boards of directors of Data Critical Corporation, a wireless healthcare data products company, and several privately held information technology and healthcare companies.

Neal Moszkowski, Director. Mr. Moszkowski has been a director since May 1999. Since 1998, Mr. Moszkowski has served as a partner of Soros Private Funds Management, LLC. From 1993 to 1998, Mr. Moszkowski was an executive director in the principal investment area of Goldman Sachs International and a vice president of Goldman Sachs & Co. Mr. Moszkowski serves on the board of directors of Integra Life Sciences Holdings Corporation, a developer and marketer of medical products, implants and biomaterials, Bluefly, Inc., an off-price apparel Internet retailer, and several private companies.

Mark A. Stevens, Director. Mr. Stevens has been a director since 1994. Mr. Stevens joined Sequoia Capital in 1989 and has been a general partner since 1993. Mr. Stevens serves on the boards of directors of MP3.com, Inc., an online music Internet company, NVidia Corp., a supplier of graphics processors and software, and Terayon Communication Systems, Inc., a cable modem system supplier, and several privately held Internet and semiconductor companies.

Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than 10 percent of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of the Company's common stock and other equity securities. Officers, directors and greater than 10 percent shareholders are required by the Securities and Exchange Commission regulations to furnish the Company with copies of all Section 16(a) reports filed.

Based solely upon a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that there was compliance for the fiscal year ended December 31, 2000 with all Section 16(a) filing requirements applicable to our executive officers, directors and greater than 10 percent beneficial owners, except that Dr. George Lundberg filed a late report with respect to a purchase of 4,036 shares.

The Company does not pay any cash fees to directors for attendance at meetings. The Company does reimburse its directors for out-of-pocket expenses related to attending meetings of the board of directors. Also, it has been the Company's policy to grant to newly-elected, non-employee directors at the time of election an option to purchase 30,000 shares of the Company's common stock, which options vest over a three-year period.

The table below shows the annual compensation of the Chief Executive Officer and the next six most highly compensated executive officers of the Company for the 1998, 1999 and 2000 fiscal year.

The following table shows grants of stock options to Company's Chief Executive Officer and to each of the named executive officers for the year ended December 31, 2000. Company has never granted any stock appreciation rights. The percentages in the table below are based on options to purchase an aggregate of 7,113,123 shares of common stock granted under Company's stock option plan in the year ended December 31, 2000 to our employees, consultants and directors. The exercise price per share of each option was equal to the fair market value of the common stock on the date of grant as determined by the board of directors. Potential realizable values are net of exercise price before taxes, and are based on the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the ten-year term. These numbers are calculated based on the requirements of the SEC and do not reflect our estimate of future stock price growth.

Individual Grants
		Number Of Securities Under- Lying Option/SARs Granted		Percent Of Total Options/SARs Granted To Employees In Fiscal Year					Potential Realizable Value At Assumed Annual Rates Of Stock Price Appreciation For Option Term
		Exercise Of Base Price ($/Sh)
Name		Expiration Date
	5% ($)		10% ($)
Mark K. Leavitt		200,000		2.8	%	$	5.9375	6/15/10		$	746,812	$	1,892,569
David C. Moffenbeier		200,000		2.8	%	$	5.9375	6/15/10		$	746,812	$	1,892,569
Thomas M. Watson		75,000		1.1	%	$	5.9375	6/15/10		$	280,055	$	709,713
George D. Lundberg, M.D.		32,300 200,000 90		.05 2.8 0.0	% % %	$	33.8622 5.9375 5.3750	2/18/10 6/15/10 8/17/10		$ $ $	687,853 746,812 304	$ $ $	1,743,154 1,892,569 771
Blackford F. Middleton		100,000		1.4	%	$	5.9375	6/15/10		$	373,406	$	946,285
Paul T. Sheils		—		—			—	—			—		—
Frank J. Spina		200,000		2.8	%	$	5.9375	6/15/10		$	746,812	$	1,892,569

The following table sets forth information concerning the number and value realized as to options exercised during 2000 and options held at December 31, 2000 by the individuals named in the Summary Compensation Table and the value of those options held at such date. The options exercised were not exercised as SARs and no SARs were held at year end.

AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES

Agreement with George D. Lundberg, M.D. Under a four-year employment agreement, dated February 15, 1999, George D. Lundberg became the Company's Editor in Chief at an annual base salary of $200,000. The employment agreement also provides for an annual cash bonus of at least $25,000

If Dr. Lundberg's employment is terminated for any reason other than his death, disability or serious misconduct, any incentive stock options that have not yet fully vested will vest upon termination. In addition, Dr. Lundberg will be entitled to a payment equal to his annual salary and annual bonus in effect at the time of termination. However, the incentive stock options are forfeited if Dr. Lundberg is terminated for serious misconduct. Also, if Dr. Lundberg's employment is terminated because of his death or disability, Dr. Lundberg or his estate may exercise any vested incentive stock options within 90 days after termination.

Under his employment agreement, Dr. Lundberg agreed not to compete with the Company and not to solicit the Company's customers or employees for one year after the termination of his employment, with limited exceptions. Dr. Lundberg may terminate his employment with the Company for any reason upon 60 days prior written notice.

The compensation committee of the board of directors during 2000 included C. Martin Harris, Ronald H. Kase and Mark A. Stevens, none of whom were employees of the Company. During 2000, no executive officer of the Company served as a member of the compensation committee (or other board committee performing equivalent functions) or as a director of another entity, one of whose executive officers served as a member of the compensation committee or as a director of the Company.

The following table sets forth certain information with respect to the beneficial ownership of Common Stock as of April 16, 2001 by the Company's directors, certain executive officers and directors and executive officers as a group, and each person known by the Company to beneficially own more than 5% of the outstanding shares of common stock. Beneficial ownership is determined under the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. Viacom Inc. returned all of its shares of Common Stock to the Company on November 7, 2001.

Unless indicated otherwise below, the address for each listed director and officer is MedicaLogic/Medscape, Inc., 20500 NW Evergreen Parkway, Hillsboro, Oregon 97124. Except as indicated by footnote, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares of common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying options or warrants held by that person that are exercisable within 60 days of April 16, 2001, but excludes shares of common stock underlying options held by any other person. Percentage of beneficial ownership is based on 56,203,054 shares of the Company's common stock outstanding as of April 16, 2001.

	Number of Shares Beneficially Owned
Beneficial Owner	Common Stock		Preferred Stock(1)	Total	Percentage of Shares
General Motors Corporation 300 Renaissance Center Detroit, MI 48265-3000	5,000,000	(2)	0	5,000,000	8.2	%
Viacom Inc. Attn: Law Department 1515 Broadway Ave New York, NY 10036-8901	4,695,892		0	4,695,892	8.4	%
Entities associated with Sequoia Funds(3) 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025	2,803,847	(4)	0	2,803,847	4.9	%
New Enterprise Associates(5) 2490 Sand Hill Road Menlo Park, CA 94025	2,353,596		0	2,353,596	4.2	%
Quantum Industrial Partners LDC(6) Kaya Flamboyan 9 Willemstad, Curacao Netherlands Antilles	2,842,930	(7)	1,666,666	4,509,596	7.8	%

Sequoia Capital Growth Fund		1,726,745
Sequoia Capital VI		400,914
Sequoia Technology Partners III		110,219
Sequoia Technology Partners VI		22,028
Sequoia Capital Franchise Fund		473,685
Sequoia Capital Franchise Partner		52,632
Sequoia 1995		17,624
Total		2,803,847

Relationship		Name of Sequoia Entity
General partner		Sequoia Capital VI
		Sequoia Technology Partners VI
Managing member		Sequoia Capital Franchise Fund
		Sequoia Capital Franchise Partners
Participates in voting control of shares		Sequoia Capital Growth Fund
of Medscape held of record by		Sequoia 1995
these entities:		Sequoia Technology Partners III

The share amount also includes 5,833 shares subject to an option held of record by Mr. Stevens that is exerciseable within 60 days of April 16, 2001.

Holder of Record		Securities
New Enterprise Associates VI, LP		2,353,596 shares of common stock
Ronald H. Kase		Option to purchase 30,000 shares of common stock

Mr. Kase disclaims beneficial ownership of the shares held of record by New Enterprise Associates. The option held of record by Mr. Kase is exercisable within 60 days of April 16, 2001.

Mr. Moszkowski is also a non-managing member of SFM Domestic Investments LLC. Mr. Moszkowski does not have voting or dispositive power over shares held of record by Quantum Industrial Partners LDC or SFM Domestic Investments LLC.

The share amount also includes 73,333 shares subject to an option held of record by Mr. Moffenbeier that is exerciseable within 60 days of April 16, 2001.

In connection with our series 1 preferred stock financing in January 2001, we sold an aggregate of 3,333,332 shares of series 1 preferred stock and warrants to purchase an aggregate of 2,549,018 shares

of common stock for an aggregate price of approximately $10 million to Quantum Industrial Partners LDC and SFM Domestic Investments LLC, both of which are affiliates of Neil Moszkowski, one of our directors.

Bruce M. Fried, a member of the board of directors, is a partner in a law firm retained by us to provide legal counsel about government affairs and trademark issues.

Schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.

The Company filed a report on Form 8-K, dated December 22, 2000, announcing the execution of an agreement for the private placement of preferred stock and warrants.

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.

	Quarter Ended	Low		High
1999	December 31, 1999 (commencing December 10, 1999)	$	18.25	$	29.63
2000	March 31, 2000		13.13		54.00
	June 30, 2000		5.94		19.81
	September 30, 2000		3.50		9.25
	December 31, 2000		1.50		4.97

	Years Ended December 31,
	2000			1999			1998			1997			1996
	(in thousands, except per share data)
Selected Financial Data:
Revenues	$	40,805		$	19,717		$	16,160		$	12,807		$	9,664
Loss from continuing operations		(257,837	)		(27,987	)		(7,232	)		(10,819	)		(10,364	)
Net loss		(321,471	)		(27,987	)		(7,232	)		(10,819	)		(10,364	)
Basic and diluted loss from continuing operations per share		(5.58	)		(3.07	)		(1.06	)		(1.64	)		(1.64	)
Basic and diluted net loss per share		(6.96	)		(3.07	)		(1.06	)		(1.64	)		(1.64	)
Total assets		963,492			168,354			24,308			22,072			26,074
Long-term obligations, net of current portion		4,579			2,233			679			278			977
Convertible redeemable preferred stock subscribed or issued		15,800			—			49,782			42,791			35,867
Total shareholders' equity (deficit)		895,727			149,840			(32,439	)		(26,093	)		(15,317	)

			Years Ended December 31,
			2000		1999		1998
Revenues:
	Application license		25.7	%	62.2	%	64.4	%
	Subscriptions and support services		24.1		37.8		35.6
	Sponsorship and advertising		50.2		—		—

	Total revenues		100.0	%	100.0	%	100.0	%

Operating expenses:
	Cost of revenues:
		Application license	3.0		5.4		5.4
		Subscriptions and support services	40.6		33.3		33.7
		Sponsorship and advertising	21.2		—		—
	Marketing and sales		129.8		101.1		45.6
	Research and development		45.6		61.6		46.7
	General and administrative		40.2		25.4		6.7
	Depreciation and amortization		405.0		20.7		9.5
	Restructuring and other charges		60.4		—		—

	Total operating expenses		745.8		247.5		147.6

	Operating loss		(645.8	)	(147.5	)	(47.6	)

Other income, net			13.9		5.6		2.9

	Loss from continuing operations		(631.9	)	(141.9	)	(44.7	)
Discontinued operations:
	Loss from operations of discontinued operations		(155.9	)	(141.9	)	(44.7	)

Net loss			(787.8	)%	(141.9	)%	(44.7	)%

		Years ended December 31,
		2000				1999				1998
Revenues:
	Application license	$	10,494	25.7	%	$	12,261	62.2	%	$	10,410	64.4	%
	Subscriptions and support services		9,828	24.1			7,456	37.8			5,750	35.6
	Sponsorship and advertising		20,483	50.2			—	—			—	—

Total revenues		$	40,805	100.0	%	$	19,717	100.0	%	$	16,160	100.0	%

			Years ended December 31,
			2000				1999				1998
Revenues:
	Application license		$	10,494	25.7	%	$	12,261	62.2	%	$	10,410	64.4	%
	Subscriptions and support services			9,828	24.1			7,456	37.8			5,750	35.6
	Sponsorship and advertising			20,483	50.2			—	—			—	—

Total revenues			$	40,805	100.0	%	$	19,717	100.0	%	$	16,160	100.0	%

Operating expenses:
	Cost of revenues:
		Application license		1,219	3.0			1,066	5.4			879	5.4
		Subscriptions and support services		16,560	40.6			6,572	33.3			5,440	33.7
		Sponsorship and advertising		8,649	21.2			—	—			—	—
	Marketing and sales			52,974	129.8			19,924	101.1			7,374	45.6
	Research and development			18,608	45.6			12,152	61.6			7,551	46.7
	General and administrative			16,418	40.2			5,010	25.4			1,077	6.7
	Depreciation and amortization			165,238	405.0			4,077	20.7			1,537	9.5
	Restructuring and other charges			24,661	60.4			—	—			—	—

Total operating expenses			$	304,327	745.8	%	$	48,801	247.5	%	$	23,858	147.6	%

				December 31,
				2000			1999
ASSETS
Current assets:
	Cash and cash equivalents			$	41,644		$	110,320
	Short-term investments				9,857			28,536
	Accounts receivable, net				13,428			6,473
	Net assets of discontinued operations				293,855			—
	Prepaid expenses and other current assets				14,272			4,515

		Total current assets			373,056			149,844
Property and equipment, net					26,269			13,087
Goodwill and intangibles, net					509,274			4,988
Prepaid advertising and other assets, net					54,893			435

		Total assets		$	963,492		$	168,354

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	2,457		$	5,638
	Accrued and other liabilities				21,917			2,639
	Deferred revenue				10,098			3,269
	Long term liabilities, current portion				12,056			2,432

		Total current liabilities			46,528			13,978
Long term liabilities, net of current portion					4,579			2,233
Long term deferred revenue, net of current portion					814			1,627
Other long term liabilities					44			676

		Total liabilities			51,965			18,514

Convertible redeemable preferred stock subscribed					15,800			—

Commitments and contingencies
Shareholders' equity:
	Preferred stock, 50,000,000 authorized, no par value, no shares issued and outstanding at December 31, 2000 and 1999				—			—
	Common stock, no par value; authorized 100,000,000 shares; issued and outstanding 55,657,348 and 32,364,391 shares at December 31, 2000 and 1999				1,255,375			229,724
	Common stock notes receivable, net				(6,728	)		(11,788	)
	Warrants				32,818			—
	Deferred stock compensation				(741	)		(4,570	)
	Accumulated deficit				(384,997	)		(63,526	)

		Total shareholders' equity			895,727			149,840

			Total liabilities and shareholders' equity	$	963,492		$	168,354

	Common Stock					Common Stock Notes Receivable
	Common Stock										Deferred Compensation			Accumulated Deficit			Total Shareholders' Equity (Deficit)
	Shares		Amount						Warrants		Deferred Compensation			Accumulated Deficit			Total Shareholders' Equity (Deficit)
Balance at December 31, 1997	6,654,280		$	3,202		$	(988	)	$	—	$	—		$	(28,307	)	$	(26,093	)
Issuance of common stock for acquisition	13,750			55			—			—		—			—			55
Issuance of common stock for cash	175,000			700			—			—		—			—			700
Issuance of restricted common stock in exchange for promissory notes	250,000			1,000			(1,000	)		—		—			—			—
Non-cash stock compensation	—			110			—			—		—			—			110
Options exercised	34,526			72			—			—		—			—			72
Interest accrued on common stock notes receivable	—			—			(51	)		—		—			—			(51	)
Net loss	—			—			—			—		—			(7,232	)		(7,232	)

Balance at December 31, 1998	7,127,556			5,139			(2,039	)		—		—			(35,539	)		(32,439	)
Issuance of common stock for acquisition	750,000			3,300			—			—		—			—			3,300
Conversion of redeemable preferred stock to common stock	15,950,747			97,874			—			—		—			—			97,874
Issuance of restricted common stock in exchange for promissory notes	1,247,500			9,229			(9,229	)		—		—			—			—
Issuance of common stock in exchange for services	65,750			1,314			(195	)		—		(194	)		—			925
Issuance of common stock for commission	172,763			1,987			—			—		—			—			1,987
Warrants exercised	22,500			13			—			—		—			—			13
Options exercised	242,575			869			—			—		—			—			869
Stock compensation expense	—			986			—			—		—			—			986
Interest accrued on common stock notes receivable	—			—			(325	)		—		—			—			(325	)
Deferred compensation related to stock options	—			4,746			—			—		(4,746	)		—			—
Amortization of deferred compensation related to stock options	—			—			—			—		370			—			370
Issuance of common stock, net of offering costs	6,785,000			104,267			—			—		—			—			104,267
Net loss	—			—			—			—		—			(27,987	)		(27,987	)

Balance at December 31, 1999	32,364,391			229,724			(11,788	)		—		(4,570	)		(63,526	)		149,840
Issuance of common stock for acquisition	22,382,039			1,025,775			—			32,818		—			—			1,058,593
Issuance of common stock for employee stock purchase plan	212,156			1,026			—			—		—			—			1,026
Other repurchases	(35,536	)		(46	)		—			—		—			—			(46	)
Options exercised	734,298			1,648			—			—		—			—			1,648
Deferred compensation related to stock options forfeited	—			(2,752	)		—			—		2,752			—			—
Amortization of deferred compensation related to stock options	—			—			—			—		679			—			679
Stock compensation expense	—			—			—			—		398			—			398
Increase common stock notes receivable reserve	—			—			5,060			—		—			—			5,060
Net loss	—			—			—			—		—			(321,471	)		(321,471	)

Balance at December 31, 2000	55,657,348		$	1,255,375		$	(6,728	)	$	32,818	$	(741	)	$	(384,997	)	$	895,727

2001	$	3,468
2002		3,666
2003		3,885
2004		3,998
2005		1,708
Thereafter		3,417

Total minimum lease payments	$	20,142

	December 31,
	2000		1999
Notes payable, monthly principal and interest payments of $4; interest at 11% per year; final payment due December 31, 2008; uncollaterized	$	278	$	66
Notes payable under term facility, monthly principal and interest payments of $54; interest at two-year Treasury constant maturities plus 5% per year, ranging from 9.45% to 10.43% at December 31, 2000; maturing between September 2000 and January 2002; collateralized by equipment purchased		1,271		3,006
Note payable under term facility, quarterly principal and interest payments of $38; interest at 7.96% per year; final payment due April 2001; collateralized by equipment purchased		178		307
Capital equipment leases, payable in monthly installments of $50; including interest ranging from 6% to 17% per year; due through August 2001; collateralized by equipment purchased		632		1,286
Contract payable, net of discount of $800, payments due through August 2002		14,276		—

		16,635		4,665
Long-term liabilities current portion		12,056		2,432

Long-term liabilities net of current portion	$	4,579	$	2,233

2001		$	12,044
2002			4,373
2003			75
2004			31
2005			34
Thereafter			78

	Total	$	16,635

		Number of Shares		Weighted Average Exercise Price
Options outstanding, December 31, 1997		974,015		$	3.68
	Granted	480,493			4.10
	Exercised	(34,526	)		2.10
	Forfeited	(206,576	)		3.98

Options outstanding, December 31, 1998		1,213,406			3.80
	Granted	2,363,950			8.18
	Exercised	(242,575	)		3.61
	Forfeited	(80,905	)		4.51

Options outstanding, December 31, 1999		3,253,876			6.98
	Granted	6,718,761			7.35
	Assumed in merger and acquisition	2,189,770			11.15
	Exercised	(734,298	)		2.24
	Forfeited	(2,469,200	)		9.18

Options outstanding, December 31, 2000		8,958,909			7.65

	Employee severance and related expenses		Impairments of technology and intangible assets		Abandonment and impairment of facilities, property and equipment		Total
2000 restructuring charges	$	10,133	$	3,108	$	3,111	$	16,352
Write-offs/payments		8,388		3,108		3,111		14,607

Restructuring accrual balance at December 31, 2000	$	1,745	$	—	$	—	$	1,745

			December 31, 2000			September 30, 2000			June 30, 2000			March 31, 2000			December 31, 1999			September 30, 1999			June 30, 1999			March 31, 1999
Revenues:
	Application licenses		$	3,391		$	2,530		$	1,134		$	3,439		$	4,531		$	3,833		$	2,390		$	1,507
	Subscriptions and support services			2,387			3,429			1,843			2,169			2,084			2,184			1,698			1,490
	Sponsorship and advertising			8,025			6,145			6,313			—			—			—			—			—

		Total revenues:		13,803			12,104			9,290			5,608			6,615			6,017			4,088			2,997
Operating expenses				106,760			98,883			76,535			22,149			20,192			13,344			8,631			6,634
Loss from continuing operations				(92,120	)		(85,650	)		(65,341	)		(14,726	)		(13,137	)		(6,802	)		(4,337	)		(3,711	)
Net loss				(116,817	)		(111,058	)		(78,870	)		(14,726	)		(13,137	)		(6,802	)		(4,337	)		(3,711	)
Net loss from continuing operations per share				(1.67	)		(1.56	)		(1.53	)		(0.45	)		(0.96	)		(0.85	)		(0.54	)		(0.48	)
Net loss per share				(2.12	)		(2.02	)		(1.85	)		(0.45	)		(0.96	)		(0.85	)		(0.54	)		(0.48	)

						Long-term Compensation Awards
	Annual Compensation					Long-term Compensation Awards
	Annual Compensation					Restricted Stock Award(s) (1) ($)	Securities Underlying Option/SARs (#)
Name and Principal Position	Year	Salary ($)	Bonus ($)	Other $		Restricted Stock Award(s) (1) ($)	Securities Underlying Option/SARs (#)	Other Compensation ($)
Mark K. Leavitt Chairman of the Board	2000 1999 1998	243,000 210,000 208,333	— 100,000 —			— 66,000 60,000	200,000 — —	— — —
David C. Moffenbeier President and Chief Executive Officer	2000 1999 1998	240,000 190,000 238,333	— 100,000 50,000			— 66,000 60,000	200,000 — —	— — —
Thomas M. Watson Executive Vice President, Application Sales	2000 1999 1998	212,500 150,000 150,000	— 107,574 75,559	105,000	(2)	— — —	75,000 — —	— —
George D. Lundberg, M.D. Executive Vice President, Editorial and Editor-in-Chief	2000 1999 1998	150,250 — —	43,858 — —			— — —	232,390 — —	84,656 — —	(7)
Blackford F. Middleton Senior Vice President Clinical Informatics (3)	2000 1999 1998	193,333 160,000 158,333	15,000 15,000 15,000	58,498 125,516 53,621	(2) (2) (2)	— 33,000 30,000	100,000 — —
Paul T. Sheils Vice Chairman of MedicaLogic/Medscape and President of Medscape (4)	2000 1999 1998	47,500 — —	46,438 — —			— — —	— — —	376,500 — —	(5)
Frank J. Spina Chief Financial Officer (6)	2000 1999 1998	172,917 47,560 —	50,000 — —			— — —	200,000 — —	112,500 — —	(5)

				Number of Securities Underlying Unexercised Options/SARs At Fiscal Year-End
						Value of Unexercised In-The-Money Options/SARs At Fiscal Year-End($)
		Value Realized ($) (1)
Name	Shares Acquired On Exercise
Name	Shares Acquired On Exercise			Exercisable	Unexercisable	Exercisable	Unexercisable
Mark K. Leavitt	—		—	33,333	166,667	(2)	(2)
David C. Moffenbeier	—		—	33,333	166,667	(2)	(2)
Thomas M. Watson	—		—	12,500	62,500	(2)	(2)
George D. Lundberg, M.D	20,185	$	374,271	42,509	242,371	(2)	(2)
Blackford F. Middleton	—		—	16,667	83,333	(2)	(2)
Paul T. Sheils	288,346	$	1,694,349	58,879	—	(2)	(2)
Frank J. Spina	—		—	19,999	—	(2)	(2)

SFM Domestic Investment LLC(8) c/o Soros Fund Management LLC 888 Seventh Avenue NewYork,NY 10016	2,842,930	(9)	1,666,666	4,509,596	7.8	%
Mark A. Stevens 3000 Sand Hill Rd. Bldg. 4, Ste. 280 Menlo Park, CA 94025	2,809,680	(10)	0	2,809,680	4.9	%
Ronald H. Kase 2490 Sand Hill Road Menlo Park, CA 94025	2,383,596	(11)	0	2,383,596	4.2	%
Bruce M. Fried 2300 N. Street, NW Washington, DC 20037	26,250	(12)	0	26,250	*
Neal Moszkowski 888 Seventh Avenue Suite 3300 New York, NY 10106	30,000	(13)	0	30,000
C. Martin Harris, M.D. c/o Cleveland Clinic Foundation 9500 Euclid Foundation H18 Cleveland, OH 44195	0		0	0	*
Thomas A. Croskey General Motors 482-C30-D36 300 Renaissance Center Detroit, MI 48265-3000	0		0	0	*
Andrew Heyward CBS News 524 West 57 Street New York, NY 10019-2985	0		0	0	*
Mark K. Leavitt	1,155,550	(14)	0	1,155,550	2.1	%
David C. Moffenbeier	729,622	(15)	0	729,622	1.3	%
George D. Lundberg, M.D	122,382	(16)	0	122,382	*
Arthur N. Liebowitz, M.D.	66,668		0	66,668	*
All directors and executive officers as a group (17 persons):	7,708,927	(17)	0	7,708,927	13.7	%

		Page
MedicaLogic/Medscape, Inc.—Consolidated Financial Statements:
	Independent Auditors' Report	45
	Consolidated Balance Sheets	46
	Consolidated Statements of Operations	47
	Consolidated Statements of Shareholders' Equity	48
	Consolidated Statements of Cash Flows	49
	Notes to Consolidated Financial Statements	50

(a)
2.1(4)		Agreement of Reorganization and Merger dated as of February 21, 2000 among Medicalogic, Inc., Medscape, Inc., and Moneypenney Merger Corp.
2.2(4)		Agreement of Reorganization and Merger dated as of February 21, 2000 among Medicalogic, Inc., Total eMed Inc., and AQ Merger Corp.
3.1(7)		1999 Restated Articles of Incorporation.
3.1.1(6)		Articles of Amendment to the 1999 Restated Articles of Incorporation.
3.1.2(8)		Articles of Amendment to the 1999 Restated Articles of Incorporation
3.2(6)		Restated Bylaws.
10.1(8)		2001 Third Amended and Restated Investor Rights Agreement.
10.2(1)*		1993 Stock Incentive Plan.
10.3(1)*		1996 Stock Incentive Plan, as amended.
10.4(1)*		1999 Stock Incentive Plan.
10.5(3)*		Amendment to 1999 Stock Incentive Plan.
10.6(1)*		Form of Incentive Stock Option Agreement.
10.7(1)		Form of Restricted Stock Purchase Agreement (Performance).
10.8(1)		Form of Restricted Stock Purchase Agreement.
10.9(2)		Form of Warrant, dated March 5, 1999, entitling Credit Suisse First Boston Corporation to purchase up to 14,667.5 shares of Registrant's common stock.
10.10(2)		Warrant, dated September 3, 1999, entitling America Online, Inc. to purchase 1,352,158 shares of Registrant's Class A common stock.
10.11(2)		Performance Warrant, dated September 3, 1999, entitling America Online, Inc. to purchase 1,352,158 shares of Registrant's Class A common stock.

10.12(5)		Form of Warrant, dated February 15, 2000, entitling Lazard Freres & Co. LLC to purchase 100,000 shares of Registrant's Common Stock.
10.13(8)		Stock Purchase Agreement, dated April 17, 2000, between Medicalogic, Inc. and AnywhereMD.com, Bryan Hixson, and Harold Hartsell.
10.14(8)		Preferred Stock and Warrant Purchase Agreement, dated December 22, 2000, between Medicalogic/Medscape Inc., Quantum Industrial Partners LDC, SFM Domestic Investments LLC, and certain other Investors.
10.14.1(8)		Amendment to Preferred Stock and Warrant Purchase Agreement, dated December 22, 2000.
10.15(8)		Form of Warrants, dated January 4, 2001, issued to Quantum Industrial Partners LDC, SFM Domestic Investments LLC, and certain other Investors in connection with the Preferred Stock and Warrant Purchase Agreement.
10.16(8)		Form of Warrant, dated January 24, 2001, entitling General Motors Corporation to purchase 5,000,000 shares of Company's common stock.
10.17(2)		Common Stock Purchase Agreement between Medscape, Inc. and CBS Corporation, dated as of July 4, 1999.
10.18(2)		Form of Stockholders Agreement between Medscape, Inc. and CBS Corporation, dated July of 1999.
10.19(2)		Form of Advertising and Promotion Agreement between Medscape, Inc. and CBS Corporation, dated July of 1999.
10.20(2)		Form of Joinder Agreement among certain Medscape, Inc. shareholders, dated July of 1999, in connection with the Stockholders Agreement dated July of 1999.
10.21(2)		Form of Trademark and Content Agreement between Medscape, Inc. and CBS Corporation, dated July of 1999.
10.22(2)		Form of Subscription Agreement with CBS Corporation.
10.23(1)		Agreement to Issue Shares of common stock between Medicalogic, Inc. and Baylor College of Medicine, dated as of February 16, 1999.
10.23.1(8)		Amendment, dated December 27, 2000, to the Agreement to Issue Shares of common stock.
10.24(1)		Industrial Business Park Lease between Medicalogic, Inc. and Evergreen Corporate Center LLC dated January 15, 1997, as amended July 15, 1999.
10.24.1(8)		Amendment, dated November 24, 1999, to the Industrial Business Park Lease between Medicalogic, Inc. and Evergreen Corporate Center LLC.
10.25(8)		Agreement of Lease between Total eMed, Inc. and Highwoods/Tennessee Holdings, LP, dated November 22, 1999.
10.26(2)		Agreement of Lease between Medscape, Inc. and 224 W 30 LLC, dated May 26, 1999.
10.26.1(8)		Amendment, dated April 5, 2000 to the Agreement of Lease between Medscape, Inc. and 224 W 30 LLC.
10.26.2(8)		Second Amendment, dated April 5, 2000 to the Agreement of Lease between Medscape, Inc. and 224 W 30 LLC.
10.27.1(8)		Amendment, dated January 1, 2000, to the Oracle Alliance Agreement between Medicalogic, Inc. and Oracle Corporation.
10.28(2)*		Employment Agreement between Medscape, Inc. and George D. Lundberg, M.D., dated February 15, 1999.
10.29(2)*		Employment Agreement between Medscape, Inc. and Mark Boulding, dated June 28, 1999.
10.30(2)		Preferred Share Purchase Agreement among Softwatch Ltd., and Medscape, Inc.(as purchaser) and certain other purchasers, dated June 15, 1999.

10.31(2)		License and Web Site Development Agreement between Medscape, Inc. and Softwatch, Inc., dated June 15, 1999.
10.32(2)		Stock Purchase Agreement between Medscape, Inc. and National Data Corporation, dated July 7, 1999.
10.33(2)+		Form of License and Product Development Agreement between Medscape, Inc. and National Data Corporation, dated July of 1999.
10.34(2)+		Interactive Services Agreement between America Online, Inc. and Medscape, Inc., dated September 3, 1999.
10.35(2)		Side Letter between America Online, Inc. and Medscape, Inc. dated September 22, 1999 in connection with the Interactive Services Agreement.
21.1(8)		Subsidiaries of the Company.
23.1(9)		Consent of Independent Auditors.

	MEDICALOGIC/MEDSCAPE, INC.
Date: November 30, 2001	By:	/s/ DONALD A. BLOODWORTH
		Donald A. Bloodworth Chief Financial Officer