SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)

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

For the fiscal year ended December 31, 1998

                                       OR

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



For the transition period from _______ to _______

                                 Commission file number      000-21295
                                                       ---------------------

                              THINKING TOOLS, INC.

--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

           Delaware                                    77-0436410
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
incorporation or organization)
200 Park Avenue  Ste 3900
New York,  New York                                      10166
--------------------------------------------------------------------------------
(Address of principal executive offices)               (Zip Code)

Issuer's telephone number      (212) 808-7474
                         ------------------------

Securities registered under Section 12(b) of the Exchange Act:

     Title of each class          Name of each exchange on which registered
     -------------------          -----------------------------------------

           None                                    None

Securities  registered pursuant to Section 12(g) of the Exchange Act:

                          Common Stock, $.001 par value
                          -----------------------------
                                (Title of Class)

Check 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 past 12
months (or for such shorter period that

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the Registrant  was required to file such reports),  and (2) has been subject to
such filing requirements for the past 90 days.   Yes [  ]  No  [X]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained herein and no disclosure will 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- KSB or any  amendment to
this Form 10-KSB.

|__|

The Registrant's revenues for its most recent fiscal year was $358,300.

As of September 1, 1999,  4,641,758  shares of common stock (the "Common Stock")
of the Registrant were outstanding.  The aggregate market value of the shares of
Common Stock held by non-affiliates  of the Registrant,  based on a closing sale
price of the Common Stock on the OTC Bulletin Board on September 1, 1999 of $.44
per share, was approximately $962,000.

Transitional Small Business Disclosure Format (Check one):   Yes ___  No  X


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                                     PART I
                                     ------

This  Annual  Report on Form 10-KSB  contains  forward-looking  statements  that
involve  certain risks and  uncertainties.  The Company's  actual  results could
differ materially from the results discussed in such forward-looking statements.
See "Description of  Business-Cautionary  Statements  Regarding  Forward-Looking
Statements."

Item 1.  DESCRIPTION OF BUSINESS
         -----------------------

History

         Thinking Tools,  Inc. (the  "Company") was  incorporated in Delaware on
August 8,  1996,  as a  wholly-owned  subsidiary  of  Thinking  Tools,  Inc.,  a
California  corporation  (the  "Predecessor  Company").  On August 28, 1996, the
Predecessor  Company was merged with and into the Company.  References herein to
the "Company" include the Predecessor Company.

         The  Predecessor  Company was formed on December 30, 1993,  to purchase
certain assets of the Business  Simulation  Division (the  "Division") of Maxis,
Inc.,  a leading  computer  game  company  and  creator of the  simulation  game
SimCityTM. Through the purchase agreement with Maxis, Inc., the Company acquired
the  Division's  equipment,  staff,  work-in-progress,   customers,   prospects,
software  tools,  libraries  and  processes.  The  Company's  products  included
SimRefinery,  a refinery  simulation  product,  SimHealth,  a health care reform
simulation product and TelSim, a local telephone exchange simulation product.

         The Company believes that its agent-based, adaptive simulation software
has a broad  range  of  potential  business  applications,  including  strategic
planning,  sales  and  marketing,  training,  competitive  positioning,  product
marketing, operational planning and logistics.

         The Company commenced operations in December 1993 to develop and market
business simulation  software.  From its inception until April 1999, the Company
was engaged in research and development  activities and organizational  efforts,
including the development of its initial  products,  recruiting  personnel,  and
establishing  marketing and manufacturing  capabilities and raising capital. The
Company  commenced  commercial  activities in January 1994,  but to date has not
generated substantial revenues from the sale of its products.

         In  September  1997,  the  Company  introduced  Think  2000,  the first
simulation  product which the Company internally funded and brought to a broader
market.  The  Company  made a  significant  investment  in the  development  and
commercialization  of Think 2000, but changes in market conditions for Year 2000
products and the Company's failure to successfully  commercialize Think 2000 had
a material adverse effect on the Company.

         On November 6, 1998, the Company approved a bridge financing offer from
Thinking  Technologies,  L.P.  ("Technologies"),  under which  Technologies  was
granted the right to

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<PAGE>



purchase up to 350 units for $1,000 per unit (the "1998 Bridge Financing"). Each
unit (a "Bridge Unit") consists of a Secured  Convertible Note, in the principal
amount of $1,000, payable at 10% interest per annum (each, a "Bridge Note"), and
a warrant to purchase 200 shares of common stock of the Company (each, a "Bridge
Warrant").  Each Bridge Note is  convertible  into 5,000 shares of Common Stock.
One Bridge Warrant shall be terminated upon each conversion of a Bridge Note. As
of April 1, 1999,  Technologies  had purchased  285 Bridge  Units.  Technologies
shall also be  reimbursed  with Bridge Units for expenses  incurred in obtaining
the 1998 Bridge Financing and for seeking a Target Business for the Company. The
proceeds of the 1998  Bridge  Financing  have been used for working  capital and
general corporate purposes.

         The Company received  notification  from The Nasdaq Stock Market,  Inc.
("Nasdaq"),  on May 5, 1998 that the Company was not in compliance  with certain
quantitative  requirements  for  continued  listing of its  Common  Stock on the
Nasdaq SmallCap Market. Nasdaq requires, among other things, companies listed on
the Nasdaq SmallCap Market maintain (i) net tangible assets of $2,000,000,  (ii)
a market capitalization of $35,000,000 or (iii) net income (in the latest fiscal
year or two of the last three fiscal years) of $500,000.  After a hearing before
Nasdaq on July 24,  1998,  Nasdaq  notified the Company on November 7, 1998 that
its stock has been delisted from the Nasdaq SmallCap Market due to the Company's
failure  to  maintain  compliance  with  these  quantitative  requirements.  The
Company's  Common Stock is currently  traded on the OTC Bulletin Board,  but the
Company  intends  to be listed on the Nasdaq  Small Cap Market  again when it is
able to comply with Nasdaq listing requirements.

Recent Developments

         In light of the changes in market  conditions and the Company's failure
to  commercialize  Think 2000, on April 23, 1999, the Company  announced that it
was eliminating substantially all of its operations and terminated all personnel
other than  those  required  to perform  certain  executive  and  administrative
functions.  It has since begun to search for candidates with which to enter into
transactions. The Company has retained the technology underlying the products it
discontinued.

         John Hiles,  the Founder and Chief  Technology  Officer of the Company,
separated from the Company as part of the operations elimination process.

         In July 1999, the Company completed a bridge financing in which it sold
150 units (the "Gem Units")  consisting of a 10% Unsecured  Convertible  Note in
the principal amount of $1,000 (each, a "Gem Note") and a Warrant to purchase 30
shares of the Company's  Common Stock (each,  a "Gem Warrant") to Gem Management
Limited (the "Gem  Financing") for $150,000.  Each Gem Note is convertible  into
5,000 shares of the Company's  Common Stock.  Upon  conversion of each Gem Note,
one Gem Warrant shall be terminated. The proceeds of this financing will be used
for working capital and general corporate purposes.


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<PAGE>



Plan of Business

         The  Company  intends to locate and enter  into a  transaction  with an
existing, public or privately-held company that in management's view, has growth
potential and may be involved in the software or technology  industry (a "Target
Business").  To that end, the Company is currently  engaged in negotiations with
several candidates. A combination may be structured as a merger,  consolidation,
exchange  of the  Company's  common  stock for stock or assets or any other form
which  will  result  in the  combined  enterprise's  remaining  a  publicly-held
corporation.

         Pending  negotiation  and  consummation  of a transaction,  the Company
anticipates  that  it  will  have,  aside  from  carrying  on its  search  for a
transaction  partner, no business  activities,  and, thus, no source of revenue.
Should the Company incur any significant liabilities prior to a combination with
a Target Business,  it may not be able to satisfy without  additional  financing
such  liabilities as are incurred.  If the Company's  management  pursues one or
more combination  opportunities  beyond the preliminary  negotiations  stage and
those  negotiations  are  subsequently  terminated,  it is foreseeable that such
efforts will exhaust the Company's  ability to continue to seek such combination
opportunities  before any successful  transaction  can be  consummated.  In that
event,  the  Company's  common  stock will become  worthless  and holders of the
Company's  common stock will receive a nominal  distribution,  if any,  upon the
Company's liquidation and dissolution.

Transaction Suitability Standards

         In its pursuit for a  transaction  partner,  the  Company's  management
intends to consider only transaction candidates which in management's view, have
growth  potential.  The Company will, if necessary  funds are available,  engage
attorneys  and/or  accountants  in its  efforts  to  investigate  a  transaction
candidate  and to  consummate  a business  transaction.  The Company may require
payment of fees by such Target Business to fund the investigation of such Target
Business.  In the event such a Target  Business is engaged in a high  technology
business, the Company may also obtain reports from independent  organizations of
recognized  standing  covering the technology being developed and/or used by the
Target  Business.  The  Company's  limited  financial  resources  may  make  the
acquisition  of such reports  difficult  or even  impossible  to obtain  without
additional financing.

Intellectual Property

         The Company  does not have any patents and to date has not filed patent
applications  on  its  products.  The  Company  believes  that  certain  of  its
technology may qualify for patent  protection but is not pursuing this course at
this  time.  However,  the  Company  also  recognizes  that  patents  are  often
insufficient to protect software.  The Company regards the software that it owns
or licenses as proprietary and relies primarily on a combination of trade secret
laws,  nondisclosure  agreements  and other  protection  methods to protect  its
rights to its products and proprietary rights.

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<PAGE>



         The Company  believes  that its  products do not infringe the rights of
third  parties.  However,  there can be no assurance  that third parties may not
assert  infringement  claims against the Company,  with such claims resulting in
the Company being required to enter into royalty arrangements, pay other damages
or defend against litigation, any of which could materially and adversely affect
the Company's business.

Government Regulation

         The Company is subject to regulation  under  various  federal and state
laws  regarding,   among  other  things,   occupational  safety,   environmental
protection,  hazardous  substance control and product advertising and promotion.
The Company believes that it has complied with these laws and regulations in all
material respects and it has not been required to take any action to correct any
material  noncompliance.  The Company  does not  currently  anticipate  that any
material capital  expenditures will be required in order to comply with federal,
state  and local  laws or that  compliance  with such laws will have a  material
effect on the financial condition or competitive position of the Company.

Employees

         The Company currently employs only Moshe Zarmi, its President and Chief
Executive Officer. In addition,  Fred Knoll, Patricia Kessler and Charles Isaacs
provide  services  to the  Company  on a  consulting  basis,  for which they may
receive equity-related compensation.

Cautionary Statements Regarding Forward-Looking Statements

         Statements  in this  Annual  Report on Form 10-KSB  under the  captions
"Description of Business" and  "Management's  Discussion and Analysis or Plan of
Operation,"  as well as statements  made in press  releases and oral  statements
that may be made by the Company or by  officers,  directors  or employees of the
Company  acting on the Company's  behalf,  that are not statements of historical
fact, constitute "forward-looking  statements" within the meaning of the Private
Securities  Litigation  Reform  Act of  1995.  Such  forward-looking  statements
involve  known and unknown  risks,  uncertainties  and other  factors that could
cause the actual  results of the  Company to be  materially  different  from the
historical  results  or from any  future  results  expressed  or implied by such
forward-looking  statements. In addition to statements which explicitly describe
such risks and uncertainties,  readers are urged to consider  statements labeled
with the terms  "believes,"  "belief,"  "expects,"  "plans,"  "anticipates,"  or
"intends" to be uncertain and forward-looking. All cautionary statements made in
this Annual  Report on Form  10-KSB  should be read as being  applicable  to all
related  forward-looking  statements  wherever  they  appear.  Investors  should
consider the following risk factors as well as the risks described  elsewhere in
this Annual Report on Form 10-KSB.


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<PAGE>



Limited Operating History;  Accumulated  Deficit;  History of Losses;  Uncertain
Future Profitability

         The Company  commenced  operations in December 1993 and has experienced
cumulative  losses of  $12,210,000  as of December 31, 1998. The Company has not
experienced any quarter of profitable operations. In September 1997, the Company
introduced  the prototype for a new product,  Think 2000, and made a significant
investment in the development and  commercialization  of Think 2000, a year 2000
contingency planning system. Think 2000 was released commercially in April 1998.
Through  1998 the Company did not realize the  anticipated  revenues  from Think
2000 or any other  sources.  Changes  in  market  conditions  and the  Company's
failure to  successfully  commercialize  Think  2000 has had a material  adverse
effect on the Company.

         The  Company's   long-term  viability  and  growth  depended  upon  the
successful commercialization and marketing of its proposed products. The Company
was unable to develop  adequate  revenue  sources to  successfully  complete the
commercialization and marketing of its proposed products.

Uncertainty as to Ability to Continue as a Going Concern

         The  report  of  the  Company's  independent  accountants  contains  an
explanatory  paragraph  that  describes an  uncertainty as to the ability of the
Company  to  continue  as a  going  concern.  Among  the  factors  cited  by the
independent accountants as raising doubt as to the Company's ability to continue
as a going  concern are the  Company's  need for  additional  financing  and the
Company's  recurring losses during the development stage, which have resulted in
a  working  capital  deficit  and  net  shareholders'  deficit.  See  Report  of
Independent Accountants.

NASDAQ Delisting; Low Stock Price

         On October 7, 1998, Nasdaq delisted the Company's stock from the Nasdaq
Small Cap  Market  due to the  Company's  failure to  maintain  compliance  with
certain  quantitative  requirements.  The effects of delisting include,  without
limitation,  the limited  release of market prices of the Company's  securities,
limited news coverage of the Company,  and restriction of investors' interest in
the Company,  and may adversely  materially affect the trading market and prices
for the Company's  securities,  thereby affecting the Company's ability to issue
additional securities or secure additional financing.

         In  addition,  the  Company's  securities  are penny  stocks  under the
Securities  Enforcement Penny Stock Reform Act of 1990. Additional disclosure is
required in  connection  with  trading in the  Company's  securities,  including
determination of a purchaser's suitability and delivery of a disclosure schedule
explaining the nature and risk of the penny stock market. In addition,  a broker
or dealer  is  required  to send  monthly  statements  disclosing  recent  price
information  with  respect to the penny stock held in a  customer's  account and
information with

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<PAGE>


respect to the limited market in penny stocks.  Such requirements could severely
limit the liquidity of the Company's securities.  Although there is no assurance
it will become listed again on the Nasdaq Small Cap Market,  the Company intends
to reapply when it is able to comply with Nasdaq's listing requirements.

Failure to Consummate Certain Transactions

         The Company's ability to continue  operations depends entirely upon the
ability of management to locate and agree to work with a viable Target Business,
either  through a merger,  joint venture or strategic  alliance.  The failure to
locate such a Target Business may result in further losses by the Company.

Future Capital Needs; No Certainty of Additional Financing

         The Company may need to raise  additional  funds in the future in order
to fund the acquisition of other companies.  Any required  additional  financing
may be unavailable on terms favorable to the Company,  or at all. If the Company
raises additional funds by issuing equity securities,  existing shareholders may
experience significant dilution of their ownership interests and such securities
may have  rights  senior  to  those  of  existing  shareholders.  If  additional
financing is not  available  when  required or is not  available  on  acceptable
terms,  the  Company  may be unable to fund  transactions,  develop  products or
services,  take  advantage of business  opportunities  or respond to competitive
pressures, any of which could have a material adverse effect on the Company.

Possible Dilution of Shareholders upon Merger

         Should  the  Company  decide  to  pursue a stock  for  stock  merger or
acquisition, the number of shareholders of the Company could become considerably
greater. If this occurs, the Company's existing  shareholders'  voting power may
be substantially diluted.

Technological Change; Risk of Obsolescence; Industry Standards

         The software industry is characterized by rapid  technological  change,
frequent introductions of new products, changes in customer demands and evolving
industry standards. The introduction of products embodying new technology or the
adaptation of products to the market and the emergence of new industry standards
often render existing products obsolete and unmarketable.

         The Company  believes  that its  success  will depend on its ability to
find  transaction  candidates  and  fund  such  transactions.  There  can  be no
assurance  that the Company will be successful in this effort and if successful,
that its new  products  respond to  technological  changes or evolving  industry
standards in a timely manner, or at all. Additionally, there can be no assurance
that  technological  changes or evolving industry  standards will not render the
Company's products and technologies obsolete.

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Target Company Instability

         The Company may effect a transaction  with a Target  Business which may
be financially  unstable or in its early stages of development or growth. To the
extent the Company effects a transaction with a financially  unstable company or
an entity in its  early  stage of  development  or  growth  (including  entities
without  established  records of revenue or  income),  the  Company  will become
subject to numerous risks inherent in the business and operations of financially
unstable and early stage or potential emerging growth companies. In addition, to
the extent that the Company effects a transaction  with an entity in an industry
characterized  by a high level of risk,  the Company will become  subject to the
currently  unascertainable  risks of that  industry.  An extremely high level of
risk frequently  characterizes certain industries which experience rapid growth.
Although management will endeavor to evaluate the risks inherent in a particular
industry or Target  Business,  there can be no  assurance  that the Company will
properly ascertain or assess all risks.

Probable Lack of Business Diversification

         As a result of the limited  resources of the Company,  the Company,  in
all  likelihood,  will have the  ability  to effect  only a single  transaction.
Accordingly,  the prospects for the Company's success will be entirely dependent
upon the future  performance of a single business.  Unlike certain entities that
have the resources to consummate  several  transactions or entities operating in
multiple  industries  or multiple  segments of a single  industry,  it is highly
likely that the Company will not have the resources to diversify its  operations
or benefit from the possible  spreading of risks or  offsetting  of losses.  The
Company's probable lack of  diversification  may subject the Company to numerous
economic,  competitive and regulatory developments, any or all of which may have
a material adverse impact upon the particular  industry in which the Company may
operate  subsequent  to  consummation  of a  transaction.  The prospects for the
Company's success may become dependent upon the development or market acceptance
of single or limited  number of products,  processes  or services.  Accordingly,
notwithstanding   the  possibility  of  capital  investment  in  and  management
assistance to the Target Business by the Company, there can be no assurance that
the Target Business will prove to be commercially viable.

Taxation

         As a general rule,  Federal and state tax laws and  regulations  have a
significant  impact upon the  structuring  of  transactions.  The  Company  will
evaluate the possible tax  consequences of any prospective  transaction and will
endeavor to  structure a  transaction  so as to achieve the most  favorable  tax
treatment to the Company, the Target Business and their respective stockholders.
There can be no assurance  that the Internal  Revenue  Service or relevant state
tax  authorities  will  ultimately  assent to the  Company's  tax treatment of a
particular consummated  transaction.  To the extent the Internal Revenue Service
or any relevant state tax authorities ultimately prevail in recharacterizing the
tax treatment of a  transaction,  there may be adverse tax  consequences  to the
Company, the Target Business and their respective stockholders. Tax

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considerations   as  well  as  other  relevant  factors  will  be  evaluated  in
determining the precise  structure of a particular  transaction,  which could be
effected  through  various  forms of a merger,  consolidation  or stock or asset
acquisition.

Competition

         The  Company  expects  to  encounter  intense  competition  from  other
entities  having  business  objectives  similar to that of the Company.  Many of
these entities are well established and have extensive  experience in connection
with identifying and effecting transactions directly or through affiliates. Many
of these  competitors  possess  greater  financial,  technical,  human and other
resources  than the Company and there can be no assurance  that the Company will
have the ability to compete successfully. The Company's financial resources will
be limited  in  comparison  to those of any of its  competitors.  Further,  such
competitors  will  generally not be required to seek the prior approval of their
own stockholders, which may enable them to close a transaction more quickly than
the Company.  This  inherent  competitive  limitation  may compel the Company to
select certain less attractive transaction prospects.  There can be no assurance
that such  prospects  will  permit the  Company to satisfy  its stated  business
objectives.

Uncertainty of Competitive Environment of Target Business

         In the event that the Company succeeds in effecting a transaction,  the
Company will, in all  likelihood,  become  subject to intense  competition  from
competitors of the Target  Business.  In particular,  certain  industries  which
experience  rapid  growth  frequently  attract an  increasingly  large number of
competitors   including   competitors  with  increasingly   greater   financial,
marketing,  technical, human and other resources than the initial competitors in
the  industry.  The degree of  competition  characterizing  the  industry of any
prospective  Target  Business cannot  presently be ascertained.  There can be no
assurance that, subsequent to a transaction, the Company will have the resources
to compete effectively,  especially to the extent that the Target Business is in
a high-growth industry.

Uncertainties Regarding Intellectual Property

         The  Company  does  not  have  any  patents  and has not  filed  patent
applications  on its products.  The Company regards the software that it owns or
licenses as  proprietary  and relies  primarily on a combination of trade secret
laws, nondisclosure agreements and other technical copy protection methods (such
as  embedded  coding) to  protect  its rights to its  products  and  proprietary
rights. It is the Company's policy that all employees and third-party developers
sign  nondisclosure  agreements;  however,  this  may  not  afford  the  Company
sufficient protection for its know-how and its proprietary products.

         Other parties may develop similar know-how and products,  duplicate the
Company's  know-how and products or develop  patents that would  materially  and
adversely  affect the  Company's  business,  financial  condition and results of
operations.  Third parties may assert  infringement  claims against the Company,
and such claims may result in the Company being

                                       10

<PAGE>

required to enter into royalty  arrangements,  pay damages or defend litigation,
any of which could  materially  and  adversely  affect the  Company's  business,
financial condition and results of operations.

Dependence on Key Personnel and Board of Directors

         The Company is dependent  upon the  continued  efforts and abilities of
its senior  management,  particularly  those of Mr. Moshe Zarmi,  the  Company's
President  and  Chief  Executive  Officer  and Mr.  Fred  Knoll,  the  Company's
Chairman.  The  loss  or  unavailability  of Mr.  Zarmi  or Mr.  Knoll  for  any
significant  period  could  have a  material  adverse  effect  on the  Company's
business,  financial condition,  results of operations and ability to consummate
transactions.

Control by Management and Principal Shareholders

         Mr.  Fred  Knoll,  the  Company's  Chairman  of  the  Board,   controls
Technologies,  the principal  stockholder  of the Company,  which owns 1,955,081
shares  of  Common  Stock,  representing  approximately  42.1% of the  Company's
outstanding  Common Stock.  Mr. Knoll has the ability to control the election of
the  directors of the Company and the outcome of all issues  submitted to a vote
of the stockholders of the Company. Additionally, Mr. Knoll controls warrants to
purchase  468,242 shares of Common Stock at an exercise price of $1.07 per share
issued to  Technologies  (the  "Technologies  Warrants") in July 1996,  warrants
issued to  Technologies  to purchase  156,250  shares of Common Stock (the "1996
Bridge  Warrants"),  at an  exercise  price of $3.90  per  share,  issued by the
Company to  purchasers  of its 10% Senior  Secured  Promissory  Notes (the "1996
Bridge Notes") in connection  with a debt  financing  consummated in August 1996
(the "1996 Bridge  Financing") and the 1998 Bridge Notes,  which are convertible
into up to  1,425,000  shares of Common  Stock.  In  addition,  the  Company  is
considering  paying Mr. Knoll's salary as a consultant to the Company in options
to purchase  Common  Stock.  The  liability to Mr. Knoll as of the end of fiscal
1998 for outstanding salary and expenses is approximately $177,000.

Need For Additional Financing

         The  Company  does  not  expect  that it will be able to  continue  its
operations without additional  financing.  The Company needs to raise additional
debt or equity financing to fund its future operations and growth strategy.  The
Company anticipated that it would be required to seek additional funding through
public or private sales of debt or equity  securities.  On November 6, 1998, the
Board approved the 1998 Bridge Financing with approximate  proceeds of $285,000.
In July  1999,  the  Company  consummated  the GEM  Financing  with  approximate
proceeds of $150,000. The Company is currently evaluating its financing options;
however,  there can be no assurance that additional  financing  beyond the funds
previously  described  were  available  when needed on terms  acceptable  to the
Company or at all.


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Future Sales of Restricted Securities

         The Company had  4,641,758  shares of Common  Stock  outstanding  as of
December 31, 1998. Of these shares, all 1,610,000 shares of Common Stock sold in
the Company's  initial public  offering (the "IPO") are freely  transferable  by
persons other than  affiliates of the Company,  without  restriction  or further
registration  under the  Securities  Act of 1933,  as amended  (the  "Securities
Act"). The remaining 3,031,758 shares of Common Stock (the "Restricted  Shares")
outstanding  were  sold by the  Company  in  reliance  on  exemptions  from  the
registration  requirements of the Securities Act and are "restricted securities"
as  defined  in Rule 144 under the  Securities  Act.  The sale of a  substantial
number of shares of Common  Stock or the  availability  of Common Stock for sale
could adversely affect the market price of the Common Stock prevailing from time
to time.

Effect of Previously Issued Options, Warrants and Underwriter's Options on Stock
Price

         The Company reserved from the authorized,  but unissued,  Common Stock,
625,000  shares  of  Common  Stock  for  issuance  to key  employees,  officers,
directors,  and  consultants  and  pursuant  to stock  options  granted  to such
persons;  456,250  shares of Common Stock for issuance upon exercise of the 1996
Bridge  Warrants;  468,242  shares of Common Stock for issuance upon exercise of
the  Technologies  Warrants;  750,000  shares of Common Stock for issuance  upon
conversion of the Gem Notes;  and 1,425,000  shares of Common Stock for issuance
upon  conversion  of the 1998 Bridge  Notes.  In  connection  with the IPO,  the
Company also sold to Barington  Capital Group, L.P.  ("Barington"),  for nominal
consideration,  options to purchase  an  aggregate  of 140,000  shares of Common
Stock at a price per share  equal to $10.40  (160% of the IPO price per  share),
subject to adjustment as provided therein (the "Underwriter's Options").

         The existence of the  aforementioned  outstanding  options and warrants
may prove to be a  hindrance  to future  financing,  since the  holders  of such
warrants and options may be expected to exercise them at a time when the Company
would  otherwise  be able to obtain  additional  equity  capital  on terms  more
favorable  to the  Company.  In addition,  the holders of such  securities  have
certain  registration  rights, and the sale of the shares issuable upon exercise
of such  securities or the  availability of such shares for sale could adversely
affect the market price of the Common Stock. Additionally, if the holders of the
Underwriter's  Options were to exercise  their  registration  rights to effect a
distribution  of such  Underwriter's  Options  or  underlying  securities,  such
underwriter,  prior to and during such  distribution,  would be unable to make a
market in the  Company's  securities  and would be required to comply with other
limitations  on  trading  set  forth  in  Regulation  M  promulgated  under  the
Securities   Exchange  Act  of  1934,  as  amended.   Such  rules  restrict  the
solicitation  of  purchasers  of a security  when a person is  interested in the
distribution  of such  security and also limit market  making  activities  by an
interested person until the completion of the distribution.  If such underwriter
were  required to cease  making a market,  the market and market  price for such
securities  may be  adversely  affected  and holders of such  securities  may be
unable to sell such securities.


                                       12



<PAGE>



Share Price May Be Highly Volatile

         The market  prices of equity  securities  of  computer  technology  and
software companies have experienced extreme price volatility in recent years for
reasons  not  necessarily  related to the  individual  performance  of  specific
companies.  Accordingly,  the  market  price of the  Common  Stock may be highly
volatile.  Factors  such as  announcements  by the  Company  or its  competitors
concerning products, patents, technology, governmental regulatory actions, other
events affecting computer technology and software companies generally as well as
general market  conditions may have a significant  impact on the market price of
the Common Stock and could cause it to fluctuate substantially.

Lack of Dividends

         The Company has not paid any  dividends  on the Common  Stock since its
inception  and does not intend to pay any dividends to its  stockholders  in the
foreseeable future. The Company currently intends to reinvest earnings,  if any,
in the development and expansion of its business.

Anti-Takeover  Effects of Certain Provisions of Certificate of Incorporation and
Delaware Law

         The Company's  Certificate of Incorporation  authorizes the issuance of
3,000,000 shares of undesignated preferred stock with such designations,  rights
and  preferences  as may be  determined  from  time  to  time  by the  board  of
directors.  Accordingly,  the board of directors is empowered, without obtaining
stockholder approval, to issue such preferred stock with dividend,  liquidation,
conversion,  voting or other rights that could adversely affect the voting power
or other  rights of the holders of the Common  Stock.  In the event of issuance,
the preferred stock could be utilized, under certain circumstances,  as a method
of discouraging,  delaying or preventing a change in the control of the Company.
Certain  provisions of Delaware law may also discourage  third party attempts to
acquire control of the Company.

Item 2.  DESCRIPTION OF PROPERTY

         The Company's  principal  offices  located at One Lower Ragsdale Drive,
1-250  Monterey,  California  93940 were vacated on May 1, 1999. The Company had
leased approximately 5,046 square feet of office space at this location pursuant
to a lease dated  August 19,  1994.  Annual  lease  payments for the year ending
December  31,  1998,  were  $98,000  plus common area  charges of  approximately
$11,000. Lease payments for the year ending December 31, 1999 are expected to be
$99,000 including common area charges. This lease expires in September 1999.

         In December 1997, the Company's  management  decided to restructure and
consolidate the Company's  facilities in order to reduce operating  expenses and
concentrate  its  resources on Think 2000.  Accordingly,  the  Company's  office
located at 6541 Via Del Oro, San Jose,

                                       13



<PAGE>



California 95119 was closed,  and the Company  recognized an anticipated loss on
lease cost of $24,000.  Annual lease  payments  for the year ended  December 31,
1998 for the San Jose facility were $16,500. The Company subleased this space on
April 1, 1998.  The sublessor is currently  paying all lease  payments,  but the
responsibilities of the lease remain with the Company.  The lease ends April 30,
2001.  There are no estimated  annual lease payments for the year ended December
31, 1999.

Item 3.  LEGAL PROCEEDINGS

         There are no legal proceedings pending against the Company.

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

         No Annual Meeting of Stockholders was held during 1998.


                                     PART II

Item 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

         The  Company's  Common Stock is quoted on the OTC Bulletin  Board under
the symbol  "TSIM." The Common Stock traded on the Nasdaq  SmallCap  Market from
October 25, 1996 until October 7, 1998.

         The following table sets forth the quarterly high and low bid prices of
a share of Common  Stock as reported by the Nasdaq  SmallCap  Market and the OTC
Bulletin Board for the period commencing January 1, 1997, and ending on December
31, 1998.


Period                               High                Low
------                               ----                ---

Fiscal 1998
   First Quarter                     6 3/8             2 1/2
   Second Quarter                    4 1/2             1 5/16
   Third Quarter                     3 9/16              7/16
   Fourth Quarter                      1/2               3/32
Fiscal 1997
   First Quarter                    10 1/2             8 1/4
   Second Quarter                   10 3/8             8 3/4
   Third Quarter                    13 1/8             8 1/2
   Fourth Quarter                   19                 3 1/2


                                       14

<PAGE>


         The number of holders of record for the  Company's  Common  Stock as of
December  31, 1998,  was  approximately  ten.  This number  excludes  individual
stockholders holding stock under nominee security position listings.

         The Company has not paid any  dividends  on the Common  Stock since its
inception and does not intend to pay any cash dividends to its  stockholders  in
the foreseeable  future. The Company currently intends to reinvest earnings,  if
any, in the development and expansion of its business.

         In the past three years,  the Company has made the  following  sales of
unregistered  securities,  all of which sales were exempt from the  registration
requirements  of the  Securities  Act  pursuant to Section  4(2)  thereof and as
otherwise indicated herein.

         In August 1996,  the Company,  through  Barington,  acting as placement
agent,  issued and sold 18.25 units of its securities (the "Barrington  Units"),
each  Barrington  Unit  consisting of one $100,000  principal  amount 10% senior
notes and  warrants to  purchase  25,000  shares of Common  Stock at an exercise
price of $3.90 per  share  (60% of the IPO price per  share),  at  $100,000  per
Barrington Unit solely to accredited  investors.  The Company believes that each
issuance and sale of such  securities was exempt from  registration  pursuant to
Section  4(2) of the  Securities  Act and/or  Rule 506  promulgated  thereunder.
Barington  received,  for its  services,  a  placement  fee of 10% of the  gross
proceeds  from the sale of the  Barrington  Units,  warrants to purchase  45,625
shares of Common  Stock at $3.90 per share  (which were  canceled in  connection
with the IPO) and reimbursement of certain expenses.

         In September  1994,  pursuant to a stock  purchase and loan  agreement,
dated  September 28, 1994, by and between  Technologies  and the Company,  which
proceeds were used in  connection  with the purchase of the Division from Maxis,
Inc.  (the  "Technologies  Agreement").  Technologies  purchased  61.11 % of the
Company's authorized and issued Common Stock for the purchase price of $100,000,
and loaned to the  Company  $1,200,000.  In August  1996,  such loan,  including
accrued  interest  thereon,  was converted to 263,158 shares of Common Stock. In
July 1996,  Technologies  made  additional  loans to the Company in an aggregate
principal amount of $502,000 and received the Technologies  Warrants to purchase
468,242  shares of Commons  Stock at an  exercise  price of $1.07 per share.  In
August 1996, upon the repayment by the Company of such loan,  including  accrued
interest thereon, Technologies purchased 6.25 units in the Bridge Financing. The
Company  believed  that each  such  transaction  was  exempt  from  registration
pursuant  to Section  4(2) of the  Securities  Act and/or  rule 506  promulgated
thereunder.

         Under  the  Company's  1996  Stock  Option  Plan and 1997  Option  Plan
(together, the "Plan"), options to purchase up to 976,000 shares of Common Stock
may be granted to officers,  directors,  employees or consultants.  As of August
1998, the Company had granted 639,500 of


                                       15

<PAGE>

these shares. The Company believes that the issuance of these options was exempt
from  registration  pursuant to Sections 3(b) and 4(2) of the Securities Act and
Rule 701  promulgated  thereunder.  Options to purchase  114,500  shares granted
pursuant  to the  Plan  were  terminated  as of  April  1999  and are no  longer
outstanding.   Options  to  purchase  425,000  shares  of  Common  Stock  remain
outstanding under the Plan.

         In December 1998, the Company  consummated  the 1998 Bridge  Financing.
See Item 1 - History.

         In July 1999, the Company  consummated the Gem Financing.  See Item 1 -
Recent Developments.

         The Company is considering compensating Mr. Fred Knoll, Chairman of the
Board of  Directors,  salary due to him for  consulting  services  in options to
purchase  Common  Stock.  The number of  options to be granted  has not yet been
determined, but the amounts outstanding as of December 31, 1998 are $177,000.

Item 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The  following  discussion  should  be read  in  conjunction  with  the
accompanying  financial statements and notes thereto appearing elsewhere in this
Annual Report on Form 10- KSB.

Overview

         The Company commenced operations in December 1993 to develop and market
business  simulation  software.  Until  April  1999,  the Company was engaged in
research and development  activities and organizational  efforts,  including the
development  of  its  initial  products,   recruiting  personnel,   establishing
marketing and manufacturing capabilities and raising capital.

         The Company  commenced  commercial  activities in January 1994,  but to
date has not  generated  substantial  revenues  from  the sale of its  products.
Revenues generated through October 30, 1997 were primarily derived from software
development projects completed under contracts with customers.  Historically,  a
significant  portion of such  revenues  were  derived  from a limited  number of
relatively  large  development  projects  contracted  for by a small  number  of
customers.  Such customers are not affiliated with the Company. The Company does
not  believe  that it is  materially  dependent  upon sales to these  customers.
Contracts with such customers have been fully completed as of December 31, 1997.
The Company  historically  has not had, and at December 31, 1998,  did not have,
any firm  order  backlog.  During  1998  the  Company  sought  to  continue  its
previously  announced strategy to change its focus from custom projects to self-
funded development of simulations for broader markets. As part of this strategy,
the Company sought to leverage its existing products and technology  platform to
become a product-oriented,

                                       16


<PAGE>

sales-driven company.  During this transition period, revenues were not expected
to be material,  as the Company was  focusing on  developing  new product  sales
channels.

         As of December 31, 1998, the Company had experienced  cumulative losses
of $12,210,000 and has not experienced any quarter of profitable operations. The
Company's operations to date have been funded primarily through private sales of
debt and equity securities and the IPO.

         During  1998,   the  Company   focused   primarily  on  the  commercial
introduction of Think 2000, a Year 2000 risk simulation software program,  which
was introduced in September 1997.  Think 2000 was the first  simulation  product
the Company  internally funded and brought to a broader market. The Company made
a significant investment in the development and commercialization of Think 2000.
A change in market  conditions  and the failure of the  Company to  successfully
commercialize  Think 2000 has had a  material  adverse  effect on the  Company's
business, operating results and financial condition.

         In light of the changes in market conditions, and the Company's failure
to  commercialize  Think 2000, on April 23, 1999, the Company  announced that it
was eliminating substantially all of its operations and terminated all personnel
other than  those  required  to perform  certain  executive  and  administrative
functions.  It has since begun to search for candidates with which to enter into
transactions. The Company has retained the technology underlying the products it
discontinued.

         Comparison of years ended December 31, 1998 and 1997

         Revenues.  Revenues for the year ended  December 31, 1998  increased by
$221,300 or 161% to $358,300 from $137,000 for the year ended December 31, 1997.
During  the  first 10  months  of 1997,  the  Company's  revenues  were  derived
primarily  from a relatively  small  number of  contracts.  During  November and
December of 1997, and during 1998, the Company's  revenues were primarily  sales
of the Company's software products.

         Gross  Margin.  Gross  margin for the year ended  December 31, 1998 was
100% of revenues as compared with 5% of revenues for the year ended December 31,
1997.  Gross margin for 1997  included  contract  costs  approximating  contract
revenues.  Gross  margin for 1998 did not  include  any  contract  revenues  and
related contract costs. All costs of software products during 1998 were absorbed
directly to operating expense.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses  decreased  by  $947,000,  or 30%,  for the year  ended
December 31, 1998, to $2,215,000,  from $3,162,000,  for the year ended December
31, 1997.  Selling,  general and administrative  expenses consisted primarily of
wages and benefits,  legal, accounting,  and consulting expenses,  insurance and
rents. The decrease in selling,  general and  administrative  and sales expenses
was  due  mainly  to  the  Company   reducing  certain  costs  as  part  of  the
restructuring plan launched in

                                       17


<PAGE>

January, 1998. This plan included closing the San Jose facility. A sub lease was
entered into with an unrelated party in March, 1998.

         Research and  Development.  Research and  development  expenses for the
year ended December 31, 1998 decreased by $235,000,  or 14%, to $1,427,100  from
$1,662,000 for the year ended December 31, 1997.  Research and development costs
consisted  primarily  of wages  and  benefits.  The  decrease  in  research  and
development  was  primarily  due to the  shifting of  development  efforts  from
software development  contracts to internal development of new software products
and further reducing certain costs as part of the restructuring plan launched in
January, 1998.

         Interest  Income.  Interest income for the year ended December 31, 1998
decreased  by $198,000 or 80%,  from  $246,000,  to $48,000  from the year ended
December 31, 1997 to December 31, 1998. The interest earned decreased  primarily
due to the 1998 reduced balance of proceeds raised from the IPO.

         Interest Expense. Interest expense for the year ended December 31, 1998
decreased by $8,800,  or 98%, to $200,  from $9,000 for the year ended  December
31, 1997.  The decrease was due to the  repayment of the small debt balance held
at the fiscal year ended 1997.

         Other  Expenses,  net.  Other  expenses for the year ended December 31,
1998 was $248,000.  There were no other expenses for the year ended December 31,
1997.  Expenses  were  primarily  as follows:  $18,550 due to losses on sales of
certain fixed assets;  $31,500 resulting from revaluation of assets (impairment)
remaining on records after subsequent  event;  sale of assets on April 29, 1999;
and  $198,375   recorded  as  deferred  earnings  for  1997  for  stock  options
requirements resulting from option grants offered to employees.

         Net Loss.  As a result of the  foregoing,  net loss for the year  ended
December 31, 1998 decreased by $1,078,000, or 24%, to $3,484,000 from $4,562,000
for the year ended December 31, 1997.

Liquidity and Capital Resources

         Since its  inception  and through  December 31,  1998,  the Company has
incurred cumulative losses aggregating  approximately  $12,210,000,  and has not
experienced  any  quarter  of  profitable  operations.  The  Company  expects to
continue to incur operating losses for the foreseeable future,  principally as a
result of expenses  associated with the Company's efforts to fund  transactions.
During  the  past  two  fiscal  years,   the  Company  has  satisfied  its  cash
requirements  principally  from advances from  stockholders,  private and public
sales of equity  securities  and,  to a limited  extent,  from cash  flows  from
operations.  The primary uses of cash have been to fund research and development
and for sales, general and administrative expenses.

         At December  31,  1998,  the Company had cash and cash  equivalents  of
approximately $2,000, a negative working capital of approximately $975,000 and a
negative stockholder's

                                       18

<PAGE>

equity of  approximately  $917,000.  At  December  31,  1998,  the  Company  had
long-term liabilities of approximately $10,000 outstanding.

         The  Company's  operating   activities  used  cash  of  $2,585,000  and
$3,884,000 in 1998 and 1997, respectively. The funds were used for the Company's
product development and to fulfill general operating expenses.

         The Company's  financing  activities used cash of $3,000 for the fiscal
year ending  December  31,1998,  and used cash of  $167,000  for the fiscal year
ending  December 31, 1997.  The decrease in the cash balance for the fiscal year
ended  December  31, 1998 is  primarily  due to the  operating  losses  incurred
through 1998.

Impact of Year 2000 Issue

         An issue  exists for all  companies  that rely on computers as the year
2000  approaches.  The "Year 2000" problem is the result of the past practice in
the  computer  industry of using two digits  rather  than four to  identify  the
applicable  year. This practice will result in incorrect  results when computers
perform arithmetic operations, comparisons or data field sorting involving years
later than 1999.  Currently,  the Company has no active  operations and will not
have  active  operations  until and unless it enters into a  transaction  with a
Target Business.  As part of its  consideration of the merits of entering into a
transaction with a Target Business, the Company will consider the effects of the
Year 2000 problem on such Target  Business and the actions  taken by such Target
Business to be ready for Year 2000.  In assessing  the level of readiness of any
Target  Business,  the Company  considers the following to be the most important
factors:  (i) the level of compliance of such Target Business'  central computer
systems;  (ii) the  level of  compliance  of the  software  used in such  Target
Business'  ongoing  operations;  and (iii) the level of readiness of such Target
Business' largest vendors.

         There  can be no  assurances  that  either  a  Target  Business  or any
customers and suppliers of such Target Business, will be Year 2000 compliant. In
the event that any Target Business or any of such Target Business'  customers or
suppliers do not install Year 2000 compliant systems, following such transaction
the Company may need additional clerical staff to perform certain tasks, such as
order entry and cash posting, and to provide the information  currently provided
to customers electronically. There can be no assurance that the Company will not
have to bear  additional  costs and  expenses in the future  related to the Year
2000 problem.


                                       19

<PAGE>

Significant Financial and Business Developments

         On February 12, 1998, Thinking Tools, Inc. announced the appointment of
Moshe Zarmi as President and Chief Executive Officer. Mr. Zarmi replaced Phillip
F. Whalen, Jr. who resigned to pursue other interests.

         On  December  19,  1997,  due to slower than  anticipated  sales of the
Company's  new  product,   management   decided  to  restructure  the  Company's
operations  by closing its San Jose  office and  temporarily  reducing  its work
force.  As a result  of the  restructuring,  the  Company  recorded  a charge of
$149,000 (this includes $24,000 lease costs,  $60,000 wages and compensation pay
and the  balance  to the  other  costs as they  relate to  closing  the San Jose
Office) for the year ended  December 31, 1997.  During the fiscal year 1998, the
Company recognized that the estimates of reorganization  were higher than actual
and recorded an estimated $24,900 credit to the 1998 general and  administrative
expense area.

         In August 1996,  Technologies  converted $1,200,000 aggregate principal
amount of outstanding indebtedness, plus an aggregate of approximately, $120,000
of accrued  interest,  into an aggregate of 263,158  shares of Common Stock.  On
August 28, 1996,  the Company closed the 1996 Bridge  Financing,  which provided
gross  proceeds of  $1,825,000  to the Company from the  issuance of  promissory
notes and  warrants  to purchase  456,250  shares of common  stock.  The Company
repaid $502,000  principal  amount plus $123,000 of accrued  interest related to
loans from Technologies from a portion of such proceeds.  Technologies purchased
$625,000  aggregate  principal  amount of promissory  notes pursuant to the 1996
Bridge Financing.

         On October 30, 1996,  the Company  received net proceeds of  $7,860,347
(net of underwriting discounts, commissions and expenses of $1,239,663) from the
issuance of 1,400,000 shares of Common Stock at $6.50 per share, pursuant to the
IPO. On November  20,  1996,  the Company  received  additional  net proceeds of
approximately  $1,187,550  net  of  underwriting  discounts,   commissions,  and
expenses  of  $177,450  from the  issuance  of 210,000  shares of Common  Stock,
pursuant to the  exercise  in full of the  underwriter's  over-allotment  option
granted as part of the IPO. Approximately, $1,856,500 of the net proceeds of the
IPO were used to retire outstanding  indebtedness and accrued interest under the
promissory notes issued in the 1996 Bridge  Financing.  The remainder of the net
proceeds  of the IPO were used to fund the  Company's  sales and  marketing  and
product  development  efforts,  and for working  capital  and general  corporate
purposes.

         In December 1998, the Company  entered into the 1998 Bridge  Financing.
See Item 1--History. From December 10, 1998 through March 15, 1999, Technologies
loaned the  Company a total of  approximately  $285,000,  evidenced  by the 1998
Bridge Notes.

         In  April  1999,  the  Company   announced  that  it  was   eliminating
substantially  all of its  operations  and  closed  the  Monterey  facility  and
terminated all personnel  other than those needed  to perform certain  executive
and administrative functions. The Company is searching for


                                       20

<PAGE>

candidates with which to enter into  transactions.  The Company has retained the
technology underlying the products it discontinued.

         In July 1999, the Company  consummated the Gem Financing.  See Item 1 -
Recent Developments.


Item 7.  FINANCIAL STATEMENTS

         The Financial  Statements  and Notes thereto can be found  beginning on
page F-1, "Index to Financial Statements," at the end of this Form 10-KSB.


Item 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

         The  Company  filed  a  Form  8-K  with  the  Securities  and  Exchange
Commission  with a  Report  Date  of July  23,  1998,  in  connection  with  the
resignation of Deloitte & Touche LLP  ("Deloitte") as the Company's  independent
accountants,  effective as of the close of business  July 16,  1999.  Deloitte's
report on the Company's financial statements during the past two years contained
no adverse  opinion or disclaimer of opinion,  and was not qualified or modified
as to audit scope or accounting principles.  Deloitte had not issued a report on
the Company's financial statements for the year ended December 31, 1998. For the
year ended  December  31, 1997,  Deloitte's  report on the  Company's  financial
statements  was  unqualified  and included an explanatory  paragraph  concerning
certain  factors which raise  substantial  doubt about the Company's  ability to
continue as a going  concern.  During the Company's two most recent fiscal years
and subsequent interim period through the date of Deloitte's resignation,  there
had been no disagreements  with Deloitte on any matter of accounting  principles
or practices,  financial statement  disclosure,  or auditing scope or procedure.
During the two most recent fiscal years and through July 16, 1999, there were no
reportable  events as that term is defined in Item  304(a)(1)(v)  of  Regulation
S-K.

         A Form  8-K was  filed  on  August  17,  1999 in  connection  with  the
engagement of Druker, Rahl & Fein as the Company's independent accountants.


                                    PART III

Item 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
         PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The  executive  officers,  directors  and key  employees  of the  Company  as of
September 1, 1999 are as follows:

Name                     Age     Position
----                     ---     --------
Mr. Fred Knoll            44      Chairman of the Board, Director
Mr. Moshe Zarmi           61      President, Chief Executive Officer, Director
Mr. John Hiles            51      Director
Mr. Marc Cooper           37      Director
Ms. Esther Dyson          48      Director
Mr. Frederick Gluck       64      Director
Dr. Ted Prince            52      Director
Mr. Fran Saldutti         51      Director
Mr. Mort Meyerson         61      Advisory Committee Member


                                       21



<PAGE>


         Fred Knoll has been  Chairman of the Board and a member of the board of
directors since September 1994. From 1987 to the present, Mr. Knoll has been the
principal of Knoll Capital Management, L.P., a venture capital firm specializing
in the  information  technology  industry.  From 1985 to 1987,  Mr. Knoll was an
investment  manager  for  General  American   Investors,   responsible  for  the
technology  portfolio,  and  served  as  the  United  States  representative  on
investments in leveraged buy-outs and venture capital for Murray Johnstone, Ltd.
of Glasgow,  Scotland. From 1983 to 1985, Mr. Knoll served as manager of venture
investments for Robert Fleming,  Inc., a U.K.  merchant bank in New York and was
responsible for managing a venture capital fund as well as managing a team whose
responsibility was to identify public investment  opportunities.  Mr. Knoll also
held  investment  positions  with the Capital  Group  (Capital  Research/Capital
Guardian) from 1982 to 1983 and General American  Investors.  During the 1970's,
Mr. Knoll  worked in sales and  marketing  management  for Data General and Wang
Laboratories,  Inc.  Mr.  Knoll is a director of numerous  companies,  including
Arthur  Treachers,  Inc.,  a  company  in the fast  service  seafood  restaurant
business and ISurfTV  Corporation,  an internet  company,  and is a principal of
Valor International Management,  L.P., a private investment limited partnership.
Mr.  Knoll holds a B.S.  in Computer  Science  from  M.I.T.  and an M.B.A.  from
Columbia University in Finance and International Business.

         Moshe Zarmi has been President, Chief Executive Officer, and a director
of Thinking  Tools,  Inc.  since  February 12, 1998.  From July 1997 to December
1997,  Mr.  Zarmi  was a  consultant  to the  Company.  Mr.  Zarmi  has 30 years
experience,  primarily in high technology  industries.  February 1993 to January
1997, Mr. Zarmi was CEO of Geotest,  a leading  Automated Test Equipment company
based in Southern  California.  His  extensive  business  experience  includes a
tenure at Israel Aircraft  Industries (IAI),  where he held various positions in
finance and administration, as well as head of US marketing and sales. Mr. Zarmi
also served as President of ATG, the Canadian  subsidiary of IAI.  Additionally,
Mr. Zarmi headed his own company which  specialized  in technology  transfer and
worked  mainly with  Israeli high  technology  companies  doing  business in the
United  States.  Mr.  Zarmi  attended Tel Aviv  University  and holds a MBA from
Columbia University.

         John Hiles, the Founder of the Company,  has been a member of its board
of directors,  since its inception.  Mr. Hiles served as the Company's President
from its inception  until November 30, 1996 (except during the period from March
to  August  1996)  and its  Secretary  and Chief  Technology  Officer  until his
separation from the Company on April 15, 1999. Mr.

                                       22

<PAGE>

Hiles'  career spans 24 years in the software  industry.  From 1992 to 1993,  he
served in various positions with Maxis Business  Simulations,  including that of
General Manager.  While with Maxis,  Inc., Mr. Hiles directed the development of
SimHealth  and  developed  a  means  of  transferring  the key  human  interface
properties of entertainment games to business and government  simulations.  From
1986 to 1992, Mr. Hiles was President and  co-founder of Delta Logic,  Inc. From
1984 to 1986, Mr. Hiles served as Senior Vice  President of product  development
at Digital  Research.  From 1976 to 1983, Mr. Hiles was employed by Amdahl where
he led the development of software products. In 1984, Mr. Hiles was in charge of
leading software development at Mead Data Central. Two of the many products that
have been produced by organizations  that he directed were GEM, one of the first
graphical  user  interfaces  for the PC,  and UTS,  Amdahl's  highly  successful
mainframe-compatible  UNIX operating system which  foreshadowed the open systems
movement by several  years.  Mr.  Hiles  holds an A.B.  from the  University  of
California at Santa Barbara.

         Marc S.  Cooper  has been a member  of the  board  of  directors  since
January  1997.  Mr.  Cooper has been a  Managing  Director  of Peter J.  Solomon
Company since June 1999.  Prior to that, he served as Vice Chairman of Barington
Capital  Group,  L.P. from January 1998 to June 1999 and as the  Executive  Vice
President - Director of Investment  Banking and Research for  Barington  Capital
Group,  L.P. from March 1992 until January 1998.  From April 1989 to March 1992,
Mr. Cooper was a partner of Scharf Brothers, a private merchant bank involved in
acquisitions of domestic and international  industrial and technology companies.
From April 1987 to April 1989,  Mr. Cooper was a Vice President in the corporate
finance  department  of Kidder  Peabody & Co.,  Inc.,  where he was  involved in
structuring  and  negotiating a wide variety of merchant  banking and merger and
acquisition  transactions.  From 1982 to 1987,  Mr.  Cooper was an  associate in
investment  banking at Dean Witter Reynolds,  Inc. Mr. Cooper received an M.B.A.
from the New York University Graduate School of Business  Administration,  and a
B.S. in Management and Economics from New York University.

         Esther Dyson has been a member of the board of directors  since October
1994. From 1983 to 1997 Ms. Dyson has served as president of EDventure Holdings,
and now is EDventure  Holdings  chairman.  EDventure  Holdings is a  diversified
company  focusing  on  emerging  information  technology  worldwide,  and on the
emerging  computer markets of Central and Eastern Europe.  Since 1997, Ms. Dyson
has been chairman of the Electronic Frontier  Foundation.  Ms. Dyson is a member
of the board of directors of the Global Business  Network,  ComputerLand  Poland
and  Cygnus  Solutions,  and she is a  member  of the  advisory  board  of Perot
Systems.  She is a limited partner in the Maryfield Software Fund. Ms. Dyson has
also written articles on industry topics for the Harvard  Business  Review,  The
New York Times, The New York Times Magazine, WIRED Magazine and Forbes Magazine,
among others.

         Frederick  W. Gluck has been a member of the board of  directors  since
October  1994.  He is currently  serving as a consultant  to McKinsey & Company,
Inc. Mr. Gluck served as vice-chairman and a director of Bechtel Group, Inc. and
as a member of the Board of Directors of Bechtel Enterprises,  Inc. from 1995 to
1998. He also served as a member of both companies' executive committees.  Prior
to joining Bechtel, Mr. Gluck spent more than 25 years with

                                       23

<PAGE>

McKinsey & Company, and was ultimately the managing director of the Company. Mr.
Gluck  serves  on  the  Harvard  Business  School  board  of  directors  of  the
Associates,  the Management  Education Council of the Wharton School,  the U.S./
Hong Kong Economic Cooperation  Committee,  the Council on Foreign Relations and
the Board of the  International  Executive  Service  Corps.  Mr. Gluck is also a
member of the  Board of  Directors  of  several  public  and  private  companies
including ACT Networks, Inc.

         Ted Prince has been a member of the board of  directors  since  October
1994. Since 1995, Dr. Prince has been the Chairman and CEO of INSCI Corporation.
Since 1992,  Dr. Prince has been the  President  and founder of Perth  Ventures,
Inc., an investment  banking and public relations firm which  specializes in the
emerging  information  technology area. Dr. Prince is also an author,  publisher
and speaker in the area of emerging information  technologies and market trends.
He is the author and  publisher  of The  Technology  Fundamentalist,  a national
newsletter  focusing on emerging  computer  technologies and market trends.  Dr.
Prince has started up several  information  technology  companies  including  CP
International,  a company  specializing in text retrieval software,  and Harwell
Computer  Power,  a startup in the same field.  From 1984 to 1992,  he served as
President and CEO of several companies, including the national computer services
company,  Computer  Power  Group.  From 1979 to 1984,  Dr.  Prince was the Chief
Information  Officer  of the  Australian  Social  Security  Agency  where he was
responsible for designing the new national social welfare system.

         Fran Saldutti has been a member of the board of directors since October
1994. Mr.  Saldutti has been,  since 1995, a managing  general partner of Ardent
Research  Partners,  L.P.,  a  limited  partnership  founded  in 1992 to  invest
exclusively in the information  technology  markets.  From 1990 through February
1995, Mr. Saldutti served as senior technology  analyst for Amerindo  Investment
Advisers. From 1984 through 1986 he served as Senior Vice President and Director
of  Research  for  Gartner  Securities  and  from  1986 to 1988 as  Director  of
Technology Research for L.F.  Rothschild.  Mr. Saldutti moved to the buy side in
1989 as senior technology analyst with Merrill Lynch Asset Management's Sci/Tech
Fund.  From  1975  to 1989  Mr.  Saldutti  either  produced,  sold  or  directed
technology research for several leading technology brokerage firms. Mr. Saldutti
maintains board  directorships  in other technology  companies,  including Kraft
Kennedy,  Lesser,  a LAN industry  systems  integrator  and Meta Group, a market
research firm specializing in information technology, on which he also serves on
the compensation committee. He is a member of the Software and Services Splinter
Group of the New York Society of Securities Analysts.

         Mort Meyerson, the Chairman of the Advisory Committee,  is Chairman and
CEO of 2M Companies,  Inc., a private investment firm. Mr. Meyerson was Chairman
of Perot Systems from 1992 to 1998. From 1979 to 1986 he was President and Chief
Executive  Officer of EDS  Information  Systems.  Mr. Meyerson has had extensive
experience in the software industry,  in running large technology  companies and
in investing in, growing and capitalizing emerging technology companies.


                                       24


<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

         Section  16(a) of the  Securities  Exchange  Act of 1934,  as  amended,
requires the Company's Directors,  executive officers,  and persons who own more
than 10% of a registered class of the Company's equity securities,  to file with
the Securities and Exchange  Commission initial reports of ownership and reports
of changes in ownership of Shares and other  equity  securities  of the Company.
Directors,  officers and greater than 10%  shareholders  are required to furnish
the Company with copies of all Section 16(a) forms they file.

         To the Company's  knowledge,  based solely on a review of the copies of
such reports furnished to the Company, during the fiscal year ended December 31,
1998,  Section  16(a) reports have not been filed by Gem  Management  Limited in
connection  with the Gem Financing or by Technologies or Mr. Knoll in connection
with the 1998 Bridge  Financing.  In addition,  Mr. Zarmi has not filed a Form 3
for the grant of  Options  to  purchase  Common  Stock he  received  in 1998 and
neither Mr. Hiles nor Gem  Management  Limited have filed Form 4s in  connection
with the sale of 500,377 shares of Common Stock from Mr. Hiles to Gem Management
Limited in June 1999.  Mr. Hiles has also not filed Form 4s in  connection  with
his sale of the Company's  securities during September through November of 1998.
Each of Gem  Management  Limited,  Mr. Knoll,  Mr. Zarmi and Mr. Hiles intend to
file such statements shortly after the filing of this Form 10-KSB.

Item 10. EXECUTIVE COMPENSATION

         The following table sets forth  compensation  paid for the fiscal years
ended  December 31, 1998,  and December 31, 1997 to those  persons who were,  at
December 31, 1998, (i) the chief  executive  officer and (ii) the one other most
highly  compensated  executive  officer of the  Company,  who was the only other
executive  officer of the Company who received over $100,000 in  compensation in
the form of salary and bonus (collectively, the "Named Executive Officers").

                           SUMMARY COMPENSATION TABLE




<TABLE>
<CAPTION>
                                                                         Long Term
                                         Annual Compensation            Compensation
                                                                           Awards
                                                                         Securities
Name and                                                 Other Annual    Underlying
Principal                                                Compensation     Options/      All Other
Position                Year    Salary ($)   Bonus ($)       ($)             SARs      Compensation


<S>                     <C>     <C>          <C>             <C>           <C>            <C>
Moshe Zarmi CEO(1)      1998    $157,500      -----          -----         420,000        -----
                        1997       (1)        -----          -----          -----         -----

John Hiles(2)           1998    $144,000      -----          -----          -----         -----
Founder, Chief          1997    $158,758      -----          -----          -----         -----
Technology Officer
</TABLE>

                                       25


<PAGE>


--------
(1)      Mr. Zarmi joined the Company on December 15, 1997. Mr. Zarmi's  options
         continue in effect as long as he is affiliated with the Company per the
         Option agreement.

(2)      Mr. Hiles was  President of the Company  until  November 30, 1996.  Mr.
         Hiles  separated  from the  Company as an officer  effective  April 15,
         1999. He remains a Director of the Company.


Stock Option Grants

         The  Company   strives  to  distribute   stock  option  awards  broadly
throughout the  organization.  Stock option awards are based on the individual's
position and  contribution to the Company.  The Company's long term  performance
ultimately determines compensation from stock options because stock option value
is entirely  dependent  on the long term growth of the  Company's  Common  Stock
price.

Compensation Committee

         The Compensation Committee of the Board of Directors is responsible for
determining  the  compensation  of  executive  officers  of the  Company  and to
administer  the  Company's   Plan.   Messrs.   Prince  and  Saldutti,   who  are
disinterested  directors,  comprise the  Compensation  Committee.  There were no
stock option grants during the 1998 year.

General Policies Regarding Compensation of Executive Officers

         The  Company's  executive  compensation  policies  are  intended (1) to
attract and retain high quality  managerial and executive talent and to motivate
these individuals to maximize  shareholder  returns,  (2) to afford  appropriate
incentives for executives to produce sustained superior performance,  and (3) to
reward  executives for superior  individual  contributions to the achievement of
the Company's business objectives. The Company's compensation structure consists
of  base  salary,  annual  cash  bonuses,  and  stock  options.  Together  these
components link each executive's compensation directly to individual and Company
performance.

         Salary.    Base   salary   levels   reflect    individual    positions,
responsibilities,  experience,  leadership,  and potential  contribution  to the
success  of  the  Company.  Actual  salaries  vary  based  on  the  Compensation
Committee's subjective assessment of the individual executive's  performance and
the Company's performance. Four officers of the Company did take 10% salary cuts
during the 1998 year to be repaid when finances  would allow.  The 10% reduction
has not been repaid.

         Bonuses.  Executive officers are eligible to receive cash bonuses based
on  the  Compensation   Committee's  subjective  assessment  of  the  respective
executive's  individual  performance and the performance of the Company.  In its
evaluation of executive officers and the determination of incentive bonuses, the
Compensation   Committee  does  not  assign  quantitative  relative  weights  to
different  factors or follow  mathematical  formulae.  Rather,  the Compensation
Committee makes its  determination in each case after considering the factors it
deems relevant,  which may include  consequences  for performance  that is below
expectations.

                                       26

<PAGE>


Bonuses for the Company's  officers  were accrued  during the 1998 year and have
not been distributed.

         Stock Options. Stock options are currently the Company's sole long term
compensation  vehicle.  The stock options are intended to provide employees with
sufficient  incentive to manage from the  perspective of an owner with an equity
stake in the business.

         As a result of the closing of the Company's  offices during April, 1999
all employees that left the Company forfeited their rights to the Stock Options.

         The Directors at the Company do not receive any cash  compensation  for
their  participation on the board. During 1998, there were no options granted to
directors  except for those  granted to Moshe Zarmi in his capacity as President
and CEO. The Company may grant additional  options to its independent  directors
in 1999.

         In determining the size of individual  option grants,  the Compensation
Committee  considers the  aggregate  number of shares  available for grant,  the
number of individuals  to be considered  for an award of stock options,  and the
range of potential  compensation  levels that the option  awards may yield.  The
number and timing of stock option  grants to  executive  officers are decided by
the Compensation Committee based on its subjective assessment of the performance
of each  grantee.  In  determining  the size and  timing of option  grants,  the
Compensation  Committee weighs any factors it considers  relevant and gives such
factors the relative  weight it considers  appropriate  under the  circumstances
then  prevailing.  While an  ancillary  goal of the  Compensation  Committee  in
awarding  stock  options is to increase  the stock  ownership  of the  Company's
management,  the Compensation Committee does not, when determining the amount of
stock  options  to  award,  consider  the  amount of stock  already  owned by an
officer. The Compensation Committee believes that to do so could have the effect
of inappropriately or inequitably  penalizing or rewarding executives based upon
their personal decisions as to stock ownership and option exercises.

         In  1993,   the  Internal   Revenue  Code  was  amended  to  limit  the
deductibility of certain  compensation  expenses in excess of $1 million.  These
changes  in the tax  laws  will  apply  to the  compensation  paid to  executive
officers  of  the  Company  in  fiscal  year  ending   December  31,  1998.  The
Compensation  Committee  believes that the  compensation  paid by the Company in
fiscal year ending  December 31, 1998,  will not result in any material  loss of
tax  deductions  for the Company.  The  Compensation  Committee will continue to
monitor the tax  regulations  as they are  finalized  to  determine  whether any
policy changes are appropriate.

Arrangements with Directors and Executive Officers

         Until 1999, Mr. Zarmi was paid an annual base salary of $175,000 plus a
discretionary  bonus  determined by the  Compensation  Committee of the Board of
Directors.  Mr. Zarmi took a 10% pay  reduction  during 1998.  Additionally,  in
connection with his employment by the Company,  Mr. Zarmi received (i) an option
under the 1996 Plan to purchase 230,000 shares of

                                       27



<PAGE>

Common  Stock  at  $2.50  per  share,   such  option  vesting  in  equal  annual
installments  over three years  commencing March 2, 1998 provided that Mr. Zarmi
remains  an  employee  of the  Company;  (ii) an  option  under the 1997 Plan to
purchase 190,000 shares of Common Stock at $4.50 per share, such options vesting
at such time the market  price of the Common Stock is $20.00 per share or higher
for 20 consecutive trading days, and provided that Mr. Zarmi remains an employee
of the  Company.  The vesting of all options  granted to Mr. Zarmi is subject to
acceleration  under certain  circumstances.  Mr. Zarmi has received no salary in
1999.  In lieu  thereof,  the Board of Directors is  considering  repricing  the
options previously granted to Mr. Zarmi.

         Fred Knoll, the Chairman of the Board of the Company, has provided, and
continues to provide certain  executive and related  consulting  services to the
Company as  requested  by the  Company,  including,  serving as  Chairman of the
Board,  consulting on various aspects of the Company's  business and negotiating
certain  contractual  and  employment  arrangements.  Since October 1, 1997, Mr.
Knoll has been  compensated for such services at the rate of $150,000 per annum.
Payment  of Mr.  Knoll's  compensation  will be  deferred  until  the  Board  of
Directors  determines  to make  payments  in  respect  thereof.  The  Company is
currently  considering paying Mr. Knoll in options to purchase Common Stock. Mr.
Knoll is also entitled to  reimbursement of any expenses he incurs in connection
with providing services to the Company.  Mr. Knoll,  through certain affiliates,
controls Technologies.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table  sets  forth as of  September  1,  1999,  certain
information known to the Company with respect to the beneficial ownership of the
Company's  voting  securities  by (i) each person who is known by the Company to
own of record or beneficially more than 5% of the outstanding Common Stock, (ii)
each of the Company's  directors  and Named  Executive  Officers,  and (iii) all
directors and executive officers of the Company as a group.  Except as otherwise
indicated,  the stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated.



     Name and Address           Amount and Nature of
   of Beneficial Owner          Beneficial Ownership    Percentage of Class(1)
   -------------------          --------------------    ---------------------
Thinking Technologies, L.P.(2)       4,004,573(12)               59.8%

Mr. Fred Knoll(3)                    4,004,573(13)               59.8%

Mr. Marc Cooper(4)                           0                      0

Ms. Esther Dyson(5)                     25,000(14)                  *



                                       28



<PAGE>


     Name and Address           Amount and Nature of
   of Beneficial Owner          Beneficial Ownership    Percentage of Class(1)
   -------------------          --------------------    ----------------------

Mr. Frederick Gluck(6)               25,000(14)                     *

Dr. Ted Prince(7)                    25,000(14)                     *

Mr. Fran Saldutti(8)                 25,000(14)                     *

Mr. Moshe Zarmi(9)                  105,000(15)                    2.2%

John Hiles(10)                            0                         .0

Gem Management Limited(11)        1,250,377(16)                   23.2%

All directors and
Executive officers as a group
(9 persons)                       5,281,250                       61.0%

-------
*  Less than one percent.

(1)      Percentage  of ownership  is based on 4,641,758  shares of Common Stock
         outstanding.  For each beneficial owner, shares of Common Stock subject
         to  convertible  securities  exercisable  within 60 days of the date of
         this Form 10-KSB are deemed outstanding for computing the percentage of
         such beneficial owner.

(2)      The address of Thinking  Technologies,  L.P. is 200 Park Avenue,  Suite
         3900, New York, New York 10166.

(3)      The  address of Mr.  Knoll is c/o Knoll  Capital  Management,  200 Park
         Avenue, Suite 3900, New York, New York 10166.

(4)      The address of Mr.  Cooper is c/o Peter J. Solomon  Company,  767 Fifth
         Avenue, New York, NY 10153.

(5)      The address of Ms. Dyson is c/o  EDventure  Holdings,  Inc.,  104 Fifth
         Avenue, 20th Floor, New York, New York 10011-6987.

(6)      The address of Mr.  Gluck is c/o McKinsey & Co., 400 South Hope Street,
         Los Angeles, California 90071.


                                       29

<PAGE>


(7)      The address of Dr. Prince is c/o Perth  Ventures,  10 West 74th Street,
         #2F, New York, New York 10023.

(8)      The address of Mr. Saldutti is c/o Ardent Research  Partners,  153 East
         53rd Street, Suite 4800, New York, New York 10022.

(9)      The address of Mr. Zarmi is 215 Frankel Blvd. Merrick, NY 11566

(10)     The address of Mr. Hiles is 22 Deer Stalker Path, Monterey, CA 93940.

(11)     The address of Gem Management  Limited is P.O. Box 860, 11 Bath Street,
         St. Hellar, Jersey, JE4 0YZ.

(12)     Includes  468,242  shares of Common Stock issuable upon the exercise of
         the Technologies Warrants, 156,250 shares of Common Stock issuable upon
         exercise of the 1996 Bridge  Warrants  and  1,425,000  shares of Common
         Stock  issuable  upon the  conversion  of the 1998  Bridge  Notes.

(13)     Includes  468,242  shares of Common Stock issuable upon the exercise of
         the Technologies Warrants, 156,250 shares of Common Stock issuable upon
         exercise of the 1996 Bridge  Warrants  and  1,425,000  shares of Common
         Stock  issuable  upon the  conversion  of the 1998  Bridge  Notes.

(14)     Includes an aggregate of 25,000 shares of Common Stock issuable to each
         non-affiliated director of the Company upon the exercise of outstanding
         options.

(15)     Includes  105,000 shares of Common Stock issuable to Mr. Zarmi upon the
         exercise of outstanding options.

(16)     Includes  750,000  shares of Common  Stock  issuable to Gem  Management
         Limited upon the conversion of the Gem Notes.


Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In connection with its purchase of certain assets from Maxis, Inc., and
in order to fund its  continuing  operations,  the Company  entered into a stock
purchase  and  loan  agreement,   dated  September  28,  1994,  by  and  between
Technologies and the Company (the  "Technologies  Agreement").  Technologies was
formed by Knoll Capital  Management,  L.P. in order to purchase  Common Stock of
the  Company  and to  advance  the funds  provided  for  under the  Technologies
Agreement.  The general  partner of  Technologies  is Knoll Capital  Management,
L.P., an affiliate of Mr. Fred Knoll,  the Company's  Chairman of the Board. Mr.
Mort Meyerson,  a member of the advisory committee of the Company,  is a limited
partner in Technologies.

         Pursuant to the Technologies  Agreement,  Technologies purchased 61.11%
of the Company's  authorized and issued Common Stock,  for the purchase price of
$100,000  and  loaned  to the  Company  $1,200,000  (the  "Loan").  The Loan was
evidenced  by a  promissory  note (the  "Technologies  Note") due and payable on
September 27, 1999. The Technologies  Note provides for the semi-annual  payment
of  interest at ten percent  (10%) per annum  beginning  when and if the Company
realized  $2,000,000 in gross income during any fiscal year. In connection  with
the Technologies Agreement,  Mr. Hiles executed an irrevocable proxy authorizing
Knoll Capital  Management,  L.P. to vote his shares of Common Stock, which proxy
was  effective  until  the  Company  (i)  was  acquired   through  a  merger  or
acquisition;  or (ii) effects an initial  public IPO in the aggregate  amount of
$2,500,000.  On and before July 29, 1996,  Technologies made additional loans to
the Company in an aggregate principal amount of $502,000, with interest at

                                       30

<PAGE>

a rate of 10% per annum,  which loans were due and payable on December  31, 1996
(the  "Additional  Loan"),  but were repaid in  connection  with the 1996 Bridge
Financing.  In  connection  with  the  Additional  Loan,  Technologies  received
warrants to purchase 468,242 shares of Company Common Stock at an exercise price
of $1.07 per share. The loan was paid in full on December 31, 1996.

         Pursuant to the Technologies  Agreement,  as long as Technologies owned
20% of the Company's  Common Stock,  the Company could not take certain  actions
without the approval of the Company's board of directors.  Technologies  entered
into a Consent,  Waiver and  Amendment  dated as of August 28, 1996,  as amended
(the "Consent & Waiver"),  with the Company in  connection  with the 1996 Bridge
Financing  pursuant to which such covenants  terminated upon consummation of the
IPO.

         In addition, in connection with the 1996 Bridge Financing,  pursuant to
the Consent and Waiver, the following transactions were consummated:

         The  Predecessor  Company  was merged  with and into the  Company,  its
wholly-owned  subsidiary.  Pursuant to the merger, each share of common stock of
the Predecessor  Company outstanding prior to the merger was exchanged for .7462
shares of Common Stock.

         Pursuant to a plan of  recapitalization  adopted by the Company's board
of directors,  Technologies  converted  $1,200,000 aggregate principal amount of
outstanding  indebtedness  and $120,310 of accrued interest into an aggregate of
263,158 shares of Common Stock issued to Technologies.

         Technologies  purchased $625,000  aggregate  principal amount of bridge
notes  in the 1996  Bridge  Financing  immediately  following  repayment  by the
Company of $502,000 aggregate  principal amount of outstanding  indebtedness and
$123,000 of accrued  interest due to Technologies  from the proceeds of the 1996
Bridge Financing.

         On  November  6,  1998,  the  Company  entered  into  the  1998  Bridge
Financing.  See Item 1 - History.

         The Company intends to issue  additional  options to purchase shares of
Common Stock to its independent directors during 1999.


Item 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this report:

     Exhibit
       No.        Description
     ------       -----------

      3.1          Certificate of Incorporation of Thinking Tools, Inc.(1)
      3.2          By-Laws of Thinking Tools, Inc.(1)
      4.1          Form of Underwriter's Option Agreement(1)
      4.2          1996 Stock Option Plan(1)


                                       31

<PAGE>


     Exhibit
       No.        Description
     ------       -----------

      4.3          Form of Stock Certificate(2)
      4.4          Form of Private Placement Investors' Warrant(1)
      4.5          Technologies Warrant(2)
      4.6          Form of Private Placement Note(1)
      4.7          Form of Lock-up Agreement(2)
      4.8          1997 Stock Option Plan(3)
     10.1          Form of Consulting Agreement(1)
     10.2          Technologies Agreement between the Company and
                   Technologies dated September 26, 1994(2)
     10.3          Consent, Waiver and Amendment between the Company and
                   Technologies dated August 31, 1996(2)
     10.4          Lease between the Company and KI Monterey Research, Inc.
                   dated August 19, 1994, as amended(2)
     16.1          Letter on change in  certifying accountant(4)
     16.2          Letter on change in certifying accountant.(5)
     16.3          Letter on change in certifying accountant.(6)
     27.1          Financial Data Schedule


----------------
(1)      Incorporated   herein  by  reference  to  the  Company's   Registration
         Statement on Form SB-2  (Registration No. 33-11321),  as filed with the
         Securities and Exchange  Commission (the  "Commission") on September 3,
         1996 (the "Registration Statement").
(2)      Incorporated herein by reference to Amendment No. 1 to the Registration
         Statement, as filed with the Commission on October 11, 1996.
(3)      Incorporated  herein by reference to Exhibit A of the  Company's  Proxy
         Statement, dated November 13, 1997.
(4)      Incorporated  herein by reference to the  Company's  Current  Report on
         Form 8-K, as filed with the  Commission on March 7, 1997, and Amendment
         No. 1 thereto on Form 8-K/4,  as filed with the Commission on March 14,
         1997.
(5)      Incorporated  herein by reference to the  Company's  Current  Report on
         Form 8-K, as filed with the  Commission on July 23, 1999, and Amendment
         No. 1 thereto on Form 8-K/A,  as filed with the  Commission on July 30,
         1999.
(6)      Incorporated  herein by reference to the  Company's  Current  Report on
         Form 8-K, as filed with the Commission on August 17, 1999.


(b)  Reports on Form 8-K
     -------------------

         The  Company  did not file any  Reports  on Form 8-K  during the fourth
quarter of Fiscal 1998. The Company did file four Reports on Form 8-K subsequent
to the  fourth  quarter  of  Fiscal  1998 and prior to  completion  of this Form
10-KSB.


                                       32


<PAGE>

                                   SIGNATURES
                                   ----------

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange  Act of 1934,  Company  has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated:  September 10, 1999
                                    THINKING TOOLS, INC.

                                    By:  /s/ Moshe Zarmi
                                         ---------------
                                         Moshe Zarmi
                                         President and Chief Executive Officer,
                                         Director

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this report has been signed below by the following  persons on behalf of Company
in the capacities and on the dates indicated.

Dated: September 10, 1999                /s/ Moshe Zarmi
                                         ---------------
                                         President and Chief Executive Officer,
                                         Director
                                         (Principal Executive Officer)


Dated: September 10, 1999                /s/ Marc Cooper
                                         ---------------
                                         Marc Cooper, Director


Dated: September 10, 1999                /s/ Esther Dyson
                                         ----------------
                                         Esther Dyson, Director


Dated: September 10, 1999                /s/ Frederick Gluck
                                         -------------------
                                         Frederick Gluck, Director


Dated: September 10, 1999                /s/ John Hiles
                                         --------------
                                         John Hiles, Director


Dated: September 10, 1999               /s/ Fred Knoll
                                        --------------
                                        Fred Knoll, Director


Dated: September 10, 1999               /s/ Ted Prince
                                        --------------
                                        Dr. Ted Prince, Director


Dated: September 10, 1999              /s/ Fran Saldutti
                                       -----------------
                                       Fran Saldutti, Director


<PAGE>


                              THINKING TOOLS, INC.

                          INDEX TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997



                                                                   Page
                                                                  Number
                                                                  ------

INDEPENDENT AUDITORS' REPORTS......................................F-2-3

FINANCIAL STATEMENTS

         Balance Sheets..............................................F-4

         Statements of Operations....................................F-5

         Statements of Shareholders' Equity (Deficiency).............F-6

         Statements of Cash Flows....................................F-7

         Notes to Financial Statements............................F-8-16


















                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of
   Thinking Tools, Inc.:

We have audited the  accompanying  balance sheet of Thinking  Tools,  Inc. as of
December 31,  1998,  and the related  statements  of  operations,  shareholders'
deficiency and cash flows for the year then ended.  These  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express  an  opinion  on these  financial  statements  based on our  audit.  The
financial  statements of Thinking  Tools,  Inc. for the year ended  December 31,
1997 were audited by other  auditors  whose report,  dated  February 2, 1998, on
those statements included an explanatory  paragraph that described the Company's
ability to continue as a going  concern as discussed in Note 1 to the  financial
statements.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects, the financial position of the Company as of December 31, 1998, and the
results  of its  operations  and its  cash  flows  for the  year  then  ended in
conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial statements, the Company's recurring losses from operations and lack of
revenues  raise  substantial  doubt  about its  ability to  continue  as a going
concern.  Management's plans  concerning  these  matters are  also  described in
Note 1.  The  financial  statements  do   not  include  any   adjustments   that
might result from the outcome of this uncertainty.

DRUKER, RAHL & FEIN



Princeton, New Jersey
August 6, 1999









                                      F-2
<PAGE>


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of
   Thinking Tools, Inc.:

We have audited the  accompanying  balance sheet of Thinking  Tools,  Inc. as of
December 31,  1997,  and the related  statements  of  operations,  shareholders'
equity and cash flows for the year then ended.  These  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the financial  position of the Company at December 31, 1997,  and the
results of its  operations  and its cash flows for the year ended  December  31,
1997 in conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial statements, the Company's recurring losses from operations and lack of
revenues  raise  substantial  doubt  about its  ability to  continue  as a going
concern.  Management's plans concerning these matters are also described in Note
1. The  financial  statements do not include any  adjustments  that might result
from the outcome of this uncertainty.

DELOITTE & TOUCHE LLP



San Jose, California
February 2, 1998













                                      F-3
<PAGE>
<TABLE>
<CAPTION>

                              THINKING TOOLS, INC.

                                 BALANCE SHEETS
                           December 31, 1998 and 1997
-------------------------------------------------------------------------------------------
(In thousands, except share and per share amounts)

ASSETS                                                               1998           1997
                                                                  ---------      ----------
<S>                                                                  <C>             <C>
CURRENT  ASSETS:
  Cash and equivalents                                            $       2       $   2,597
  Accounts receivable                                                    53               7
  Prepaid expenses and other current assets                               -             131
                                                                  ---------       ---------

           Total current assets                                          55           2,735

PROPERTY  AND  EQUIPMENT,  Net                                           56             265

OTHER  ASSETS                                                            12              29
                                                                  ---------       ---------
TOTAL ASSETS                                                      $     123       $   3,029
                                                                  =========       =========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)

CURRENT  LIABILITIES:
  Accounts payable                                                $     282       $     200
  Accrued expenses                                                      638             359
  Notes payable                                                          85              88
  Deferred revenues                                                      22               -
  Current portion of capital lease obligations                            3              13
                                                                  ---------       ---------
           Total current liabilities                                  1,030             660


LONG TERM DEPOSITS                                                       10               -
                                                                  ---------       ---------
           Total liabilities                                          1,040             660
                                                                  ---------       ---------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS'  EQUITY (DEFICIENCY)
  Preferred stock, $.001 par value: 3,000,000 shares authorized;
    no shares issued and outstanding                                      -               -
  Common stock, $.001 par value: 20,000,000 shares authorized;
    4,641,758 shares issued and outstanding                               5               5
  Additional paid-in capital                                         11,288          11,288
  Deferred stock compensation                                             -           (198)
  Accumulated deficit                                               (12,210)         (8,726)
                                                                  ---------       ---------

           Total shareholders' equity (deficiency)                     (917)          2,369
                                                                  ---------       ---------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)           $     123       $   3,029
                                                                  =========       =========
</TABLE>

                       See notes to financial statements.

                                      F-4

<PAGE>
<TABLE>
<CAPTION>

                                THINKING TOOLS, INC.

                              STATEMENTS OF OPERATIONS
                       YEARS ENDED DECEMBER 31, 1998 AND 1997

(In thousands, except per share amounts)
------------------------------------------------------------------------------

                                                        1998           1997
                                                    ----------      ----------

<S>                                                       <C>            <C>

REVENUES
  Product                                           $     358       $       21
  Contract                                                  -              116
                                                    ----------      ----------
           Total revenues                                 358              137

COST  OF  REVENUES                                          -              130
                                                    ----------      ----------
           Gross profit                                   358                7
                                                    ----------      ----------

OPERATING  EXPENSES
  Selling, general and administrative                   2,215            3,162
  Research and development                              1,427            1,662
                                                    ----------      ----------
           Total operating expenses                     3,642            4,824
                                                    ----------      ----------

LOSS  FROM  OPERATIONS                                 (3,284)          (4,817)
                                                    ----------      ----------

OTHER  INCOME  (EXPENSE)
  Interest income                                          48              264
  Other expense                                          (248)              (9)
                                                    ----------      ----------

           Total other income (expense)                  (200)             255
                                                    ----------      ----------

NET  LOSS                                           $  (3,484)      $   (4,562)
                                                    =========       ==========

BASIC AND DILUTED NET LOSS PER SHARE                $   (0.72)      $    (0.98)
                                                    =========       ==========

SHARES USED IN CALCULATION OF NET LOSS PER SHARE        4,642            4,642
                                                    =========       ==========

                         See notes to financial statements.
</TABLE>

                                      F-5
<PAGE>


                              THINKING TOOLS, INC.

                 STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>

(In thousands, except share amounts)
------------------------------------------------------------------------------------------------------------------------------------


                                                                                                                          Total
                                                         Common Stock        Additional    Deferred                    Shareholders'
                                                    ---------------------     Paid-in       Stock      Accumulated        Equity
                                                       Shares     Amount      Capital    Compensation    Deficit       (Deficiency)
                                                    -----------   ------    ----------  -------------  -----------    -------------
<S>                                                      <C>         <C>         <C>         <C>            <C>           <C>

BALANCES, January 1, 1997                             4,461,758   $    5     $ 11,288   $       (302)  $   (4,164)     $    6,827

Amortization of deferred stock compensation                   -        -            -            104            -             104
Net loss                                                      -        -            -              -       (4,562)         (4,562)
                                                    -----------    ------    --------   -------------  -----------     -----------

BALANCES, December 31, 1997                           4,641,758        5       11,288           (198)      (8,726)           2,369

Amortization of deferred stock compensation                   -        -            -            198            -              198
Net loss                                                      -        -            -              -       (3,484)          (3,484)
                                                    -----------    ------    --------    ------------  -----------   --------------
BALANCES, December 31, 1998                           4,641,758    $    5    $ 11,288    $         -   $  (12,210)   $        (917)
                                                    ===========    ======    ========    ============  ===========   ==============
</TABLE>


                       See notes to financial statements.


                                      F-6
<PAGE>

                              THINKING TOOLS, INC.
                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1998 AND 1997
                                 (In thousands)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------

                                                                    1998            1997
                                                                ----------       ----------
<S>                                                                  <C>             <C>
CASH  FLOWS  FROM  OPERATING  ACTIVITIES:
  Net loss                                                      $  (3,484)       $  (4,562)
  Adjustments to reconcile net loss to net cash used in
  operating activities:
    Depreciation and amortization                                      80              57
    Impairment of assets                                              113               -
    Loss on sales of fixed assets                                      26               -
    Stock compensation expense                                        198             104
    Changes in assets and liabilities:
       Accounts receivable                                            (45)            223
       Prepaid expenses and other assets                              150             109
       Accounts payable                                                82              19
       Accrued expenses                                               273             166
       Deferred revenues                                               22               -
                                                                ----------       ----------
           Net cash used in operating activities                   (2,585)          (3,884)
                                                                ----------       ----------

CASH  FLOWS  USED IN  INVESTING  ACTIVITIES:
  Purchases of property and equipment                                  (7)            (221)
                                                                ----------       ----------

CASH  FLOWS  FROM  FINANCING  ACTIVITIES:
  Principal payments on notes payable                                 (88)            (151)
  Proceeds from issuance of notes payable                              85                -
     Principal payments on capital lease obligations                  (10)             (16)
     Proceeds from long term deposits                                  10                -
                                                                ----------       ----------
           Net cash used in financing activities                       (3)            (167)
                                                                ----------       ----------

NET (DECREASE) IN CASH AND EQUIVALENTS                             (2,595)          (4,272)

CASH  AND  EQUIVALENTS, Beginning of year                           2,597            6,869
                                                                ----------       ----------
CASH  AND  EQUIVALENTS, End of year                             $       2        $   2,597
                                                                =========        =========


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for interest                        $       -        $       9
                                                                =========        =========

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY:
  Liability insurance financed under a note payable             $       -        $     112
                                                                =========        =========
</TABLE>

                       See notes to financial statements.


                                      F-7
<PAGE>


                              THINKING TOOLS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     Years Ended December 31, 1998 and 1997


1.  BUSINESS AND BASIS OF PRESENTATION

Business - Thinking Tools,  Inc. (the "Company") was incorporated in Delaware on
August 8,  1996,  as a  wholly-owned  subsidiary  of  Thinking  Tools,  Inc.,  a
California  corporation  (the  "Predecessor  Company").  On August 28, 1996, the
Predecessor  Company was merged with and into the Company.  References herein to
the "Company" include the Predecessor Company.

The  Predecessor  Company was formed on December 30, 1993,  to purchase  certain
assets of the Business  Simulation  Division (the "Division") of Maxis,  Inc., a
leading  computer  game company and creator of the  simulation  game  SimCityTM.
Through the  purchase  agreement  with Maxis,  Inc.,  the Company  acquired  the
Division's equipment, staff,  work-in-progress,  customers,  prospects, software
tools, libraries and processes.  The Company's products included SimRefinery,  a
refinery simulation product,  SimHealth, a health care reform simulation product
and TelSim, a local telephone exchange simulation product.

The Company commenced operations in December 1993 to develop and market business
simulation  software.  From its  inception  until  April  1999,  the Company was
engaged in research  and  development  activities  and  organizational  efforts,
including the development of its initial  products,  recruiting  personnel,  and
establishing  marketing and manufacturing  capabilities and raising capital. The
Company  commenced  commercial  activities in January 1994,  but to date has not
generated substantial revenues from the sale of its products.

In September  1997,  the Company  introduced  Think 2000,  the first  simulation
product which the Company internally funded and brought to a broader market. The
Company made a significant  investment in the development and  commercialization
of Think 2000,  but changes in market  conditions for Year 2000 products and the
Company's  failure  to  successfully  commercialize  Think  2000 had a  material
adverse effect on the Company.

From  November  1998  through  July 1999,  the  Company  received  approximately
$285,000 of proceeds of a secured  convertible note from Thinking  Technologies,
L.P. and approximately  $150,000 of proceeds from an unsecured  convertible note
with Gem Management  Ltd.  These amounts have been used for working  capital and
general corporate purposes.

Basis of Presentation - The Company's financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates the
continuation  of the  Company as a going  concern.  The  Company  lacks  product
revenues and has  sustained  substantial  operating  losses.  In  addition,  the
Company  has used  substantial  amounts  of working  capital in its  operations.
Further, at December 31, 1998, its current liabilities exceed its current assets
by $975,000.

As shown in the accompanying  financial  statements,  the Company incurred a net
loss of $3,484,000  for the year ended December 31, 1998, and as of December 31,
1998, had an accumulated  deficit of $12,210,000.  The Company intends to locate
and enter into a transaction


                                      F-8
<PAGE>

                              THINKING TOOLS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     Years Ended December 31, 1998 and 1997


1.  BUSINESS AND BASIS OF PRESENTATION (CONTINUED)

Basis of Presentation  (Continued) - with an existing,  public or privately-held
company which in management's  view, has growth potential and may be involved in
the  software or  technology  industry.  To that end,  the Company is  currently
engaged  in  negotiations  with  several  candidates.  The  Company's  continued
existence is dependent on its ability to negotiate  such a  transaction  and its
ability to raise additional  financing.  The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Contract and Product  Revenues - The Company  generally  recognizes  revenue for
software  product  sales upon  delivery of the software and at the time at which
all criteria for revenue  recognition  have been met in accordance with American
Institute of Certified Public  Accountants  Statement of Position 97-2 "Software
Revenue  Recognition."  For  multiple-element   arrangements   involving  either
licensing  of a product  or  post-delivery  customer  support,  a portion of the
revenue  based upon the fair value of the  respective  element is  deferred  and
recognized ratably over the life of the license or technical support period.

The  Company  follows  the  percentage-of-completion  method of  accounting  for
revenues   related  to  fixed-price   contracts.   Percentage-of-completion   is
determined  using  certain  measures  of  input.  Adjustments  to cost and other
contract-related  estimates  are made  periodically,  and losses  expected to be
incurred on contracts in progress are charged to  operations  in the period such
losses are determined. Costs related to these contracts consist mainly of direct
labor and related costs.

Cash  Equivalents - The Company  considers  all highly  liquid debt  instruments
purchased  with an  original  maturity  date of three  months or less to be cash
equivalents.

Concentration of Credit Risk - Financial  instruments  that potentially  subject
the  Company  to  concentration  of  credit  risk are cash and  equivalents  and
accounts receivable. Risks associated with cash and equivalents are mitigated by
banking  with  credit-worthy  institutions.  The  Company  performs  an  ongoing
evaluation  of  its  customers'   creditworthiness  and  generally  requires  no
collateral.

                                      F-9
<PAGE>

                              THINKING TOOLS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     Years Ended December 31, 1998 and 1997


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property and  Equipment - Property and equipment are stated at the lower of cost
or fair value.  Depreciation is provided using the straight-line method over the
estimated  useful  lives  of the  assets  of three  to  seven  years.  Leasehold
improvements are amortized over the shorter of the estimated useful lives or the
underlying lease term. The Company  evaluates the  recoverability  of long-lived
assets on an on-going basis.

As of  December  31,  1998  certain  property  and  equipment  were deemed to be
impaired  and were  written  down to their fair  value.  An  impairment  loss of
approximately $113,000 has been charged to research and development expenses and
other expenses in 1998.

Research and Development - Research and development costs are charged to expense
as incurred, while software development costs incurred between the establishment
of  technological  feasibility and general  production  release are capitalized.
Since the Company's  development  process generally results in the establishment
of technological  feasibility  concurrent with general  production  release,  no
software development costs were capitalized in 1998 or 1997.

Income Taxes - The Company  records  income taxes using the asset and  liability
approach,  whereby  deferred  tax  assets  and  liabilities,  net  of  valuation
allowances,   are  recorded  for  the  future  tax   consequences  of  temporary
differences  between financial statement and tax bases of assets and liabilities
and for the benefit of net operating loss carryforwards.

Stock  Compensation  - The Company  accounts for  stock-based  awards granted to
employees  based on the  intrinsic  value method in accordance  with  Accounting
Principles  Board  (APB)  Opinion  No.  25,  "Accounting  for  Stock  Issued  to
Employees."  Due to subsequent  events in April,  1999, with the exception of an
officer and two consultants, there are no other employees after April 1999. As a
result those  employees who have separated from the Company have forfeited their
stock options.

Net Loss Per Share - The  Company  follows  Statement  of  Financial  Accounting
Standards  (SFAS) No. 128  "Earnings  Per Share." Due to the Company's net loss,
all convertible  securities,  options and warrants are antidilutive;  hence both
basic and diluted  loss per share are  computed  based on the  weighted  average
number of shares of common stock outstanding during the period.

                                      F-10
<PAGE>


                              THINKING TOOLS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     Years Ended December 31, 1998 and 1997


3. PROPERTY AND EQUIPMENT

Property and  equipment  at December 31, 1998 and 1997 are  comprised as follows
(in thousands):

                                                  1998            1997
                                                -------         --------
   Equipment                                    $    71         $    296
   Furniture and fixtures                             3               73
   Leasehold improvements                             -               10
                                                -------         --------
       Total property and equipment                  74              379
   Accumulated depreciation and amortization        (18)            (114)
                                                --------        ---------
       Property and equipment, net              $    56         $    265
                                                ========        =========

At December 31, 1998 and 1997,  property and  equipment  included  assets leased
under capital  leases of  approximately  $3,000 and $20,000,  net of accumulated
amortization of $4,000 and $32,000, respectively.


4.  ACCRUED EXPENSES

Accrued  expenses at December  31,  1998 and 1997 are  comprised  as follows (in
thousands):

                                                1998           1997
                                              ---------     ---------
   Lease abandonment costs                    $      75     $     149
   Legal and professional fees                       79           112
   Payroll and related benefits                     292            72
   Accrued severance costs                            -            19
   Consulting expense due to related party          177             -
   Other                                             15             7
                                               --------      --------
      Total                                    $    638      $    359
                                               ========      ========


5. LEASES

The Company leases its office space under two  noncancelable  operating  leases,
one (San Jose Office) expiring in 2001 and a second  (Monterey  office) expiring
September  1999. The Company  consolidated  its locations prior to expiration of
one of its  leases in March of 1998 and  sub-leased  the San Jose  office.  This
resulted  in a lease  abandonment  accrual of $149,000  at  December  31,  1997.
Closure of the  Monterey  office in April 1999  resulted in a lease  abandonment
accrual of approximately $75,000 at December 31, 1998.


                                      F-11
<PAGE>


                              THINKING TOOLS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     Years Ended December 31, 1998 and 1997


5.  LEASES (CONTINUED)

Future  minimum rental  commitments  under the above leases at December 31, 1998
are as follows (in thousands):

           Years Ending December 31,
                          1999                 $   170
                          2000                      71
                          2001                      30
                                               -------
                                               $   271
                                               =======

The  minimum  future  rental  commitments  have not been  reduced by $172,000 of
sublease rentals to be received in the future under non-cancelable subleases.

The Company leases certain office  equipment under  noncancelable  capital lease
obligations.  At December  31,  1998,  future  payments  under such leases total
$3,000.

Total rent  expense was  approximately  $184,000  and  $277,000,  including  the
abandonment  accruals,   for  the  years  ended  December  31,  1998  and  1997,
respectively.


6.  INCOME TAXES

Due to the Company's  history of net losses,  the Company has fully reserved its
net  deferred  tax  benefits   (including   its  net   operating   losses)  and,
consequently, its tax provision (benefit) is nil.

Calculations  for  deferred  tax  assets  and  liabilities  are as  follows  (in
thousands):

     Deferred tax assets:                                     1988       1997
                                                           --------    --------
     Net operating loss carryforwards                      $  3,453    $  2,775
     Accruals and reserves not currently deductible             377         294
                                                           --------    --------

     Total gross deferred tax assets                          3,830       3,069
     Total gross deferred tax liabilities - depreciation          -         (14)
     Less valuation allowance                                (3,830)     (3,055)
                                                           --------    --------

     Net deferred tax assets                               $      -    $      -
                                                           ========    =========



                                      F-12
<PAGE>

                              THINKING TOOLS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     Years Ended December 31, 1998 and 1997


6.  INCOME TAXES (CONTINUED)

As of December 31, 1998,  the Company has net operating  loss  carryforwards  of
$10,155,000 and $6,964,000 for federal and state purposes,  respectively.  As of
December 31, 1998, the Company also has tax credit  carryforwards of $32,000 and
$25,000 for federal and state purposes.  The losses expire beginning in 2009 and
2002, respectively.  Federal and State of California tax laws impose significant
restrictions on the utilization of net operating loss carryforwards in the event
of a change in ownership as defined by the Internal Revenue Service Code Section
382.


7.  NOTES PAYABLE

The note payable at December 31, 1997  relating to the  Company's  directors and
officers insurance policy was approximately  $88,000. This note was paid in full
in September 1998. The policy was not renewed.

In November 1998, the Company  approved a bridge  financing  offer from Thinking
Technologies,  L.P  ("Technologies"),  under which  Technologies was granted the
right to purchase up to $350,000 of Senior Secured  Convertible Notes due within
90 days at 10%  interest per annum,  and  warrants to purchase  shares of common
stock of the  Company.  Each $1,000  note is  convertible  into 5,000  shares of
Common Stock. If the notes are converted,  the warrants  expire.  As of December
31, 1998, $85,000 was outstanding.  Subsequent cash advances through March 1999,
resulted  in  borrowings  under  this  arrangement  amounting  to  approximately
$285,000.

In July  1999,  an  additional  unsecured  convertible  note of  $150,000,  with
interest  of 10% per annum and with  warrants  to  purchase  common  stock,  was
entered into with Gem  Management  Ltd. The note is  convertible  into shares of
Common Stock at $.20 per share. If the note is converted, the warrants expire.

Interest expense was approximately  $200 and $9,000 for the years ended December
31, 1998 and 1997, respectively.


8.  SHAREHOLDERS' EQUITY (DEFICIENCY)

Warrants

The Company consumated a series of financing transactions in 1996. Warrants were
issued to Thinking Technologies, L.P. to purchase 468,242 shares of common stock
at an exercise price of $1.07 per share,  expiring  December  2006.  Warrants to
purchase  456,250  shares of the  Company's  common  stock at $3.90  per  share,
expiring  August 2001,  were also issued.  In addition,  in October and November
1996, the Company completed its IPO (including the exercise of the underwriter's
over-allotment  option) and issued 1,610,000 shares of common stock at $6.50 per
share for net  proceeds of  approximately  $8,470,000.  In  connection  with its
initial public offering, the Company sold to its underwriter options to purchase
140,000 common shares for $.001 per option.  These options are exercisable for a
period of five years at an exercise  price  equal to 160% of the initial  public
offering price ($10.40 per share).

                                      F-13
<PAGE>


                              THINKING TOOLS, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                     Years Ended December 31, 1998 and 1997


8.  SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)

Warrants (Continued)

As discussed in Note 7, the Company has issued 1,420,000 warrants under a bridge
financing  offer to Thinking  Technologies,  L.P.  and  750,000  warrants to Gem
Management, Ltd.

Stock Option Plans

Under the Company's 1996 and 1997 Stock Option Plans (the  "Plans"),  options to
purchase up to an aggregate of 976,000  shares of common stock may be granted to
officers,  directors,  employees or  consultants.  The Plans provide for issuing
both incentive stock options,  which must be granted at fair market value at the
date of grant, as determined by the Plan  administrator,  and nonqualified stock
options. Options granted under the Plans become exercisable as determined by the
Board of Directors and must be exercised  within ten years.  Options granted are
forfeited after 90 days of an employee's separation from the Company.

A summary of the status of the  Company's  stock option plans as of December 31,
1998 and 1997,  and the  changes  during the years ended  December  31, 1998 and
1997, is presented below:

                                                  Number of         Range of
                                                    Shares      Exercise Prices
                                                 ----------     ---------------

   Outstanding at January 1, 1997                   534,000     $  .794 - 5.000
   Granted                                                -     $             -
   Exercised                                              -     $             -
   Forfeited                                              -     $             -
                                                 ----------     ----------------
   Outstanding at December 31, 1997                 534,000     $  .794 - 5.000
   Granted                                          535,500     $ 2.500 - 5.000
   Exercised                                              -     $             -
   Forfeited                                       (461,000)    $         0.794
                                                 ----------     ----------------
  Outstanding at December 31, 1998                  608,500     $  .794 - 5.000
                                                 ==========     ================
  Exercisable at December 31, 1998                   24,333     $  .794 - 5.000
                                                 ==========

   Weighted-average fair value of options
     granted during the year ended
     December 31, 1998                           $     1.43
                                                 ==========
   Weighted-average fair value of options
     granted during the year ended
     December 31, 1997                           $        -
                                                 ==========




                                       F-14
<PAGE>


                              THINKING TOOLS, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                     Years Ended December 31, 1998 and 1997


8.   SHAREHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)

The following table summarizes information about fixed stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>

                                          Outstanding Options                         Exercisable Options
                            ----------------------------------------------      ------------------------------
<S>                                <C>               <C>           <C>               <C>                <C>
                                                  Weighted-
                                  Number           average      Weighted-           Number          Weighted-
                              Outstanding at      Remaining      average        Outstanding at        average
  Range of Exercise            December 31,      Contractual    Exercise         December 31,        Exercise
       Prices                      1998             Life          Price             1998               Price
-------------------         ----------------    -------------  -----------      --------------     -----------
$             0.794                  39,000       8.6 years    $     0.794              13,000     $    0.794
$             5.000                  34,000       8.6 years    $     5.000              11,333     $    5.000
$             2.500                 345,500       9.2 years    $     2.500                   -     $    2.500
$             4.500                 190,000       9.2 years    $     5.000                   -     $    5.000
                            ---------------                                     --------------
                                    608,500                                             24,333
                            ===============                                     ==============
</TABLE>

As discussed in Note 2, the Company  accounts for its  stock-based  awards using
the intrinsic  value method in accordance  with APB Opinion No. 25,  "Accounting
for Stock Issued to Employees," and its related interpretations.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"),  requires the disclosure of pro forma net income and
earnings  per share had the  Company  adopted  the fair  value  method as of the
beginning of fiscal 1995.  Under SFAS 123, the fair value of stock-based  awards
to employees is  calculated  through the use of the minimum value method for all
periods prior to the initial public offering,  and subsequently  through the use
of option pricing models, even though such models were developed to estimate the
fair  value of freely  tradable,  fully  transferable  options  without  vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions,  including future stock option
price  volatility  and  expected  time to  exercise,  which  greatly  affect the
calculated  values.  The Company's  calculations were made using the minimum and
Black-Scholes   option  pricing  models  with  the  following  weighted  average
assumptions:  expected life of 30 to 40 months; stock volatility, 61% subsequent
to the initial public offering in 1996; risk-free interest rates,  approximately
6.0%; and no dividends during the expected term. The Company's  calculations are
based on a multiple option valuation  approach and forfeitures are recognized as
they  occur.  If the  computed  fair values of the 1998 and 1997 awards had been
amortized to expense over the vesting  period of the awards,  pro forma net loss
would have been  $3,705,000  ($.80 per share) in 1998 and $5,524,000  ($1.19 per
share) in 1997.

                                      F-15
<PAGE>


                              THINKING TOOLS, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                     Years Ended December 31, 1998 and 1997


9.  MAJOR CUSTOMERS

Three customers accounted for 15%, 13% and 10% each of software revenues for the
year ended December 31, 1998. One of these  customers  accounted for 50% and one
other  customer  accounted  for 47% of the accounts  receivable  at December 31,
1998.

Three  customers  accounted for 68%, 16%, and 11% each of contract  revenues for
the year ended  December  31, 1997.  One other  customer  accounted  for 100% of
accounts receivable at December 31, 1997.


10.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying  amounts  reflected in the financial  statements as of December 31,
1998 and 1997 for cash and  equivalents  and  notes  payable  approximate  their
respective fair values due to the short maturities of those instruments.


11.  ADVERTISING COSTS

Advertising costs, except for costs associated with direct-response advertising,
are  charged  to  operations  when  incurred.   The  costs  of   direct-response
advertising  are  capitalized  and amortized over the period during which future
benefits  are  expected to be  received.  Advertising  expense was  $428,000 and
$128,000 for the years ended December 31, 1998 and 1997, respectively.


12.  RELATED PARTY TRANSACTIONS

The Company's Chairman of the Board controls Thinking Technologies,  L.P., which
owns approximately 42% of the Company's  outstanding common stock, owns warrants
to purchase additional shares of common stock, and has made a Bridge Loan to the
Company, as discussed in Notes 7 and 8. Included in accrued expenses at December
31, 1998, is $177,000 due to the Company's  Chairman of the Board for consulting
services as  approved by the Board of  Directors.  This  obligation  may, at the
Company's  election,  be  paid  in  options  to  purchase  common  stock.  These
consulting  services  commenced  October 1997 for $150,000 per year less certain
related expenses.


13.  SUBSEQUENT EVENTS

In April  1999,  the  Company  closed its  Monterey  office and sold most of its
property  and  equipment  as  discussed  in Notes 1, 2 and 5. In  addition,  the
Company has received proceeds of approximately  $350,000 in 1999 under financing
arrangements as discussed in Notes 1 and 7.


                                      F-16