<PAGE>

                                 Form 10KSB for

                         HEURISTIC DEVELOPMENT GROUP INC

                             filed on March 23, 1999

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

FORM 10-KSB(Mark One)

[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1998

[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _________ to

                         COMMISSION FILE NUMBER: 0-29044

                        HEURISTIC DEVELOPMENT GROUP, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

               Delaware 95-4491750 (State or other jurisdiction of
       (I.R.S. Employer Identification No.) incorporation or organization)

                        1219 Morningside Drive Suite 102,
                            Manhattan Beach, CA 90266
                    (Address of principal executive offices)

                    Issuer's telephone number: (310) 546-1065

Securities to be registered pursuant to Section 12(b) of the Act: None

Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value

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

Yes   X    No
     ---      ---

     Check if no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is contained in this form, and no disclosure will be
      contained, to the best of registrant's 


<PAGE>


      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 issuer's revenues for the fiscal year ended December 31, 1998 were
      $0.00.

     The aggregate market value of the voting stock held by non-affiliates of
      the registrant as of March 23, 1999 (based upon the average bid and asked
      prices) was $1,200,000.

     The number of shares of the registrant's Common Stock, $.01 par value,
      outstanding as of March 23, 1999 was 1,951,100.

     Documents incorporated by reference:  None.

     Transitional Small Business Issuer Format (check one):
      Yes        No  X
           ---      ---


<PAGE>


PART I

      Item 1.   Description of Business

      Item 2.   Properties

      Item 3.   Legal Proceedings

      Item 4.   Submission of Matters to a Vote of Security Holders

PART II

      Item 5.   Market for Common Equity and Related Shareholder Matters

      Item 6.   Management's Discussion and Analysis or Plan of Operations

      Item 7.   Financial Statements

      Item 8.   Changes In and Disagreements With Accountants on Accounting and 
                Financial Disclosure

PART III

      Item 9.   Directors, Executive Officers, Promoters and Control Persons; 
                Compliance with Section 16(a) of the Exchange Act

      Item 10.  Executive Compensation

      Item 11.  Security Ownership of Certain Beneficial Owners and Management

      Item 12.  Certain Relationships and Related Transactions

      Item 13.  Exhibits and Reports on Form 8-K


<PAGE>


PART I

ITEM 1. GENERAL DEVELOPMENT AND DESCRIPTION OF BUSINESS

     Based on feedback from test sites and beta customers, and the disappointing
acceptance of the Intellifit product, the Company has revamped its going forward
business model. The Company no longer believes that it can be successful in
selling the Intellifit system to customers and supporting the systems in the
field. It still believes that the Intellifit software may be a viable product
for a company which has complementary products and which has an existing field
sales organization. The Company had opened discussions with regard to selling or
licensing the Intellifit software to customers who would likely incorporate the
Intellifit product into their existing product lines. The result of these
discussions is unknown at this time. Additionally, the Company believes that the
Intellifit product has no exposure to the year 2K problem that may result from
the date change at the end of 1999.

     In parallel, the Company has decided to pursue a strategy of an investment
in, merger with or acquisition of, an existing company. Management and the board
of directors have been investigating various investment and acquisition
possibilities. There can be no assurances that the Company will identify and
complete such an investment or acquisition.

ITEM 2 DESCRIPTION OF PROPERTY

     The Company is currently located at 1219 Morningside Drive, Suite 102,
Manhattan Beach, CA, 90266. The Company rents the space in a shared-tenant
office and is currently under a month to month agreement.

ITEM 3 LEGAL PROCEEDINGS

     The Company is not a party to (nor is any of its property subject to) any
pending legal proceedings. The Company is not aware of any proceedings
contemplated by governmental authorities.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the twelve
months ended December 31, 1998.


<PAGE>


PART II

ITEM 5

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) MARKET INFORMATION

     The Company's Common Stock has been quoted under the Symbol IFIT since
February 11, 1997 on the Nasdaq SmallCap Stock Market. The following is a list
of the low and high bid quotations by fiscal quarters for 1998 as reported by
Nasdaq:

<TABLE>
<CAPTION>

                                                                               1998

                                                                        Low            High
                                                                        ---            ----
<S>                                                                   <C>             <C>
Quarter ended March 31, 1998                                          $ .875          $ 2.25
Quarter ended June 30, 1998                                             .563             .87
Quarter ended Sept. 30, 1998                                            .50             1.12
Quarter ended Dec. 31, 1998                                             .281            1.50

</TABLE>

The quotations reflect inter-dealer prices, without retail mark-up, markdown or
commissions and may not represent actual transactions.

(b) Holders of Record

         As of February 17, 1999 there were 24 holders of record of the
Company's Common Stock. As of February 17, 1999 there were approximately 300
beneficial owners of the Company's Common Stock.

(c) Dividends

         The Company declared no dividends during 1998.

ITEM 6

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

RESULTS OF OPERATIONS

         During late 1997, the Company sold all excess computer hardware, office
furniture and equipment. Concurrent with the sales, the Company revalued the
remaining inventory of Intellifit System components and shortened their
estimated useful lives to one year, and suffered a loss on the sale and write
down of the remaining assets. The Company recognized losses from the sale 


<PAGE>


and write down of $7,000 in 1998 and $178,000 during 1997. Additionally, the 
Company has relocated the corporate office to much smaller, less expensive 
space, eliminated all personnel with the exception of the President/CEO, 
Chief Financial Officer and Controller, and liquidated all unnecessary fixed 
assets.

         From its inception in 1994 through the second quarter of 1997, the
Company's efforts had been principally devoted to research, development and
design of products, marketing activities and raising capital. The Company has
generated only nominal revenues to date from the placement of test products and
has incurred substantial operating losses. From inception through December 31,
1998, the Company sustained cumulative net losses of approximately $4,982,000
primarily as a result of general and administrative expenses, including
salaries, marketing, and professional fees which have aggregated $3,399,000
since inception.

         During the years ended December 31, 1998 and 1997, the Company incurred
operating losses of $1,028,000 and, $ 1,441,000 respectively. The decrease in
operating losses during 1998 reflects reduced staff and overhead. During 1998,
the Company wrote down the capitalized value of the Intellifit software to
$50,000 it's estimated net realizable value, and incurred an acquisition breakup
fee of $100,000 when an attempted acquisition failed.

         The Company has reduced current cash use to approximately $40,000 per
month, excluding legal fees. The Company has interest income of approximately
$12,000 per month. The ongoing expenses are expected to remain at current levels
although the Company continues to identify potential additional areas of cost
reduction.

         During 1998 and 1997, the Company recognized interest income of
$175,000 and $193,000, respectively. The reduction in 1998 interest income is as
a result of use of the Company's working capital and lower interest rates.
During 1998 and 1997, the Company incurred interest expense of $2,000 and
$406,000, respectively.

PLAN OF OPERATION

         Based on feedback from test sites and beta customers, and the 
disappointing acceptance of the Intellifit product, the Company has revamped 
its going forward business model. The Company no longer believes that it can 
be successful in selling the Intellifit system to customers and supporting 
the systems in the field. It still believes that the Intellifit software may 
be a viable product for a company which has complementary products and which 
has an existing field sales organization. The Company had opened discussions 
with regard to selling or licensing the Intellifit software to customers who 
would likely incorporate the Intellifit product into their existing product 
lines. The result of these discussions is unknown at this time. Additionally, 
the Company believes that the Intellifit product has no exposure to the year 
2K problem that may result from the date change at the end of 1999.

         In parallel, the Company has decided to pursue a strategy of an 
investment in, or acquisition of, an existing company. Management and the 
board of directors have been investigating various investment and acquisition 
possibilities. Amongst other sources, the 


<PAGE>


Company has hired an investment banker to help in the acquisition search. 
There can be no assurances that the Company will identify and complete such 
an investment or acquisition.

      Until the licensing of the Intellifit software or, an acquisition or 
investment, the Company does not expect to generate any significant revenues 
and there can be no assurance that efforts to market the existing product 
will be successful. Accordingly, the Company expects to continue to incur 
losses for the foreseeable future.

LIQUIDITY AND CAPITAL RESOURCES

      At December 31, 1998, the Company had working capital of $ 3,142,000.
During 1998, the Board of Directors authorized a stock buyback plan which was
executed at various times during the year. The Company completed it's stock
buyback program by purchasing 149,900 shares of common stock at an average price
of approximately $1.00. Based on the Company's anticipated working capital
needs, the Company believes that the working capital will be sufficient to
sustain planned operations for at least the next 12 months. During such period,
the Company intends to focus its efforts on maintaining the reduced cash usage,
making an acquisition, merger or investment in another company, and licensing
the Intellifit software. There can be no assurances that the Company's efforts
will be successful.

ITEM 7

FINANCIAL STATEMENTS

The financial statements of the company are included herein, commencing on page
F-1 hereof.

ITEM 8

CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL 
DISCLOSURES

None.


<PAGE>


PART III

ITEM 9

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

(a) The Company's executive officers and directors are as follows:

<TABLE>
<CAPTION>

Name                       Age         Position
<S>                        <C>         <C>
Jonathan W. Seybold        56          Chairman of the Board of Directors
Gregory L. Zink            42          President, Acting CEO and Director
Theodore Lanes             35          Chief Financial Officer and Director
Brian Wasserman            33          Director
William Blase              47          Director
Kenneth W. Krugler         37          Director
M. Caroline Martin         58          Director
Allan Dalfen               55          Director

</TABLE>

     JONATHAN W. SEYBOLD has served as a director of the Company since its
inception in July, 1994. Mr. Seybold has served as Chairman of the Board since
July, 1994. Mr. Seybold also founded Seybold Seminars, Inc. ("Seybold
Seminars"), a company which conducts large scale, technology-based trade shows
and conferences and Seybold Publications ("Seybold Publications"), a company
which publishes reports on publishing systems, desktop publishing and digital
data applications. Mr. Seybold served as President of Seybold Seminars and
Seybold Publications from 1981 to 1993.

     GREGORY L. ZINK has served as the Company's President since July 1994 and a
director of the Company since July 1994. In June, 1997 Mr. Zink assumed the
title of Acting CEO and agreed to devote a portion of his consulting time to the
Company. Mr. Zink has served as Chief Operating Officer and Chief Financial
Officer of Nautilus Group Japan Ltd. since April 1988. Mr. Zink has also been
Vice President of Clark Management Co. Inc., an investment advisory company,
since January 1989. Mr. Zink holds an M.B.A. from the Wharton Business School.

     THEODORE LANES has served as the Company's Chief Financial Officer since
February 1997 and was appointed to the Board in February, 1998. Previously, Mr.
Lanes was Vice President of Technology MarketForce, Inc., a Los Angeles based
consulting firm. From 1993 to 1995, Mr. Lanes owned and operated a software
development firm, which he sold in a private transaction. Mr. Lanes has a B.S.
in Finance from California State University, Long Beach, and an M.B.A. from
University of Southern California.

     BRIAN WASSERMAN was appointed to the Board in December of 1997. Mr.
Wasserman owns and operates a New York based consulting firm and for at least 5
years prior to 


<PAGE>



that, Mr. Wasserman served as a manager of Coopers & Lybrand and Senior Vice 
President and Chief Financial Officer of D.H. Blair Investment Banking in New 
York.

     WILLIAM BLASE has been a director of the Company since August 1995. Since
1985, Dr. Blase has served a director of California Eye Care, an ophthalmology
practice. Since November 1992, Dr. Blase has been a director of Valley Health
Systems California District Hospital. Dr. Blase has an M.D. from the University
of Virginia School of Medicine and a M.S. from Oxford University in England.

     KENNETH W. KRUGLER has served as a director of the Company since July 1994.
Mr. Krugler has served as President of TransPac Software Inc. since founding it
in January 1987. From 1983 to 1987, Mr. Krugler was a software architect at
Apple Computer, Inc. Mr. Krugler has a B.S. in Computer Science and Engineering
from the Massachusetts Institute of Technology.

     M. CAROLINE MARTIN has served as a director of the Company since December
1996. Since January 1986, Ms. Martin has served as Executive Vice President of
Riverside Health System; a multi-facility integrated healthcare system. She is
currently a member of the board of directors of Signet Bank.

     ALLAN DALFEN has served as a director of the Company since December 1996.
Mr. Dalfen currently serves as President of Kent Spiegel Direct Inc., the
sporting goods and fitness division of Kent & Spiegel. Since January 1995, Mr.
Dalfen has also served as President of Dalfen Corporation, an investment
corporation. From October 1992 to December 1994, Mr. Dalfen served as President
and Chief Executive Officer of Vestro Foods, Inc. and from 1979 to 1992, Mr.
Dalfen served as President and Chief Executive Officer of Weider Health and
Fitness. Mr. Dalfen is currently a director of Vestro Foods, Inc.

     Directors serve until the next annual meeting of shareholders or until
their successors are elected and qualified. Officers serve at the discretion of
the Board of Directors.

(b) Section 16(a) Beneficial Ownership Reporting Compliance

     Based solely upon a review Forms 3,4 and 5 furnished to the Company, The
Company does not believe that any director, officer or beneficial owner of more
than 10% of any class of the Company's equity securities failed to file on a
timely basis, reports required by Section 16(a) of the Securities Exchange Act
of 1934 during the last fiscal year.

BOARD COMMITTEES

     The Board of Directors has a Compensation Committee, which makes
recommendations to the Board concerning salaries and incentive compensation for
officers and employees of the Company and may administer the Company's stock
option plan. The members of the Compensation committee are Jonathan Seybold,
Allan Dalfen and William Blase. The Board of Directors also has an Audit
Committee, which reviews the results, and scope of the audit and other
accounting related matters. The members of the Audit Committee are Jonathan
Seybold, M. Caroline Martin and Brian Wasserman.

<PAGE>


ITEM 10

EXECUTIVE COMPENSATION

Summary Compensation Table

<TABLE>
<CAPTION>

Name and                 year        Salary        Bonus        Options         Other
principal position                                                           Compensation
<S>                      <C>        <C>            <C>          <C>          <C>
Steven Gumins (1)        1997       $  68,750                                 $ 50,000(3)
CEO                      1996         133,436
                         1995         100,000      6,000

Deborah Griffin (2)      1997       $  64,516                                 $ 50,000(3)
COO                      1996         133,436
                         1995         100,000      6,000

Gregory Zink             1998       $  97,500
Acting CEO               1997          40,000(4)
                         1996          --
                         1995          --

Theodore Lanes           1998       $  86,250     10,000
CFO                      1997          82,500

</TABLE>

(1)  In December, 1996, the Company entered into a three-year employment
     agreement with Mr. Gumins. The agreement provided for a base annual salary
     of $150,000 and bonuses at the discretion of the Board. Mr. Gumins resigned
     as Chief Executive Officer in May, 1997.

(2)  In December, 1996, the Company entered into a three-year employment
     agreement with Ms. Griffin. The agreement provided for a base annual salary
     of $150,000 and bonuses at the discretion of the Board. Ms. Griffin
     resigned as Chief Operating Officer in May, 1997.

(3)  Represents severance payment.

(4)  Amounts paid for consulting services.

DIRECTORS COMPENSATION

     The Company does not pay fees to its directors. Directors are entitled to
receive options pursuant to the Company's 1996 Stock Option Plan. In April 1998,
the Company authorized to issue options to purchase 10,000 shares of Common
Stock to each of William Blase, M. Caroline Martin, Allan Dalfen, Brian
Wasserman and Kenneth W. Krugler. Such options are granted over a period of 3
years provided each member remains as an active director. Such options are
granted at the end of every calendar quarter at not less than current market
price, exerciseable 


<PAGE>


one year from the date of grant. In February, 1997, the Company entered into 
a consulting agreement with Mr. Seybold pursuant to which he received 
five-year options to purchase 5,000 shares of Common Stock. All of such 
options will be exercisable at $5.00 per share commencing one year from the 
date of grant. Under the same consulting agreement, Mr. Seybold received 
10,000 five year options exerciseable at not less than current market price, 
for remaining Chairman of the Board for 1998. Under the same consulting 
agreement, Mr. Seybold is entitled to received 10,000 five year options for 
each year exerciseable at not less than current market price, for remaining 
Chairman of the Board for the years 1998 and 1999.

ITEM 11

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth certain information as of March 23, 1999,
regarding the ownership of Common Stock by (i) each person known by the Company
to own beneficially more than 5% of each class of outstanding Common Stock, (ii)
each director of the Company, (iii) each executive officer of the Company named
in the Summary Compensation Table, and (iv) all executive officers and directors
of the Company as a group:

<TABLE>

                                                                                               % Of Shares
                                                                                        Beneficially Owned
                                                                 Shares                 -----------
Name and Address                                                 Beneficially                  Outstanding
of Beneficial Owner                                              Owned(1)                           Shares
------------------------------                                   -------------                 -----------
<S>                                                              <C>                           <C>
Nautilus Group Japan, Ltd.(2)                                       366,514                            17.4%
Seybold Family Trust (3)                                            141,464                             6.7
Jonathan W. Seybold (4)                                             141,464                             6.7
Gregory L. Zink (5)                                                 379,908                            18.1
William Blase (6)                                                     7,140                             *
Kenneth W. Krugler (7)                                                   --                            *
M. Caroline Martin (8)                                                   --                            *
Allan Dalfen (9)                                                         --                            *
Brian Wasserman (10)                                                     --                            *
Theodore Lanes (11)                                                      --                            *
All executive officers and directors as a group
(eight persons)                                                     535,650                            25.5

</TABLE>

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

(1) Includes such individuals' Escrow Shares and Escrow Options. See "Escrowed
Shares and Options" below. In computing the number of shares beneficially owned
by a person and the percentage ownership of a person, shares of Common Stock of
the Company, subject to options held by that person that are currently
exercisable or exercisable within 60 days are deemed 


<PAGE>


outstanding and owned by such person. Such shares, however, are not deemed 
outstanding for purposes of computing the percentage ownership of any other 
person. Except as indicated in the footnotes to this table and pursuant to 
applicable community property laws, the persons named in the table have sole 
voting and investment power with respect to all shares of Common Stock.

(2) The address of such company is c/o Clark Management Co. Inc., P.O. Box 3090,
Boynton Beach, Florida 33424.

(3) The address of such trust is P.O. Box 1315 East Sound, Washington 98245.

(4) Consists of 141,464 shares held by the Seybold Family Trust. Mr. Seybold is
a Trustee of such Trust. The address of such individual is c/o Heuristic
Development Group, Inc., 1219 Morningside Drive, Suite 102, Manhattan Beach, CA
90266.

(5) Includes 366,514 shares held by NGJ Ltd. Mr. Zink is the Chief Operating
Officer of NGJ Ltd. The address of such individual is c/o Clark Management Co.
Inc., P.O. Box 3090, Boynton Beach, Florida 33424. Mr. Zink disclaims beneficial
ownership of the shares owned by NGJ Ltd.

(6) Represents shares held by the Blase Family Trust, of which Dr. Blase is
Trustee. The address of such individual is c/o California Eye Care, 2390 East
Florida Avenue, Suite 207, Hemet, California 92544.

(7) The address of such company is c/o Transpac Software, 467 Saratoga Avenue,
#550 San Jose, CA 95129.

(8) The address of such individual is c/o Riverside Health System, 606 Denbigh
Boulevard, Suite 604, Newport News, Virginia 23608

(9) The address of such individual is c/o Kent Spiegel Direct, Inc., 6133
Bristol Parkway, Culver City, California 90230.

(10) The address of such individual is c/o The Whitestone Group, LLC, 1500
Hempstead Turnpike, East Meadow, NY, 11554.

(11) The address of such individual is c/o Heuristic Development Group, 1219
Morningside Drive, Suite 102, Manhattan Beach, CA. 90266.

Escrowed Shares and Options

     In connection with the Company's initial public offering in February, 1997,
the holders of 349,370 shares of the Company's Common Stock (the "Escrow
Shares") and options to purchase 50,630 shares of the Company's Common Stock
(the "Escrow Options") have placed the Escrow Shares and Escrow Options into
escrow pursuant to an escrow agreement (the "Escrow Agreement") with American
Stock Transfer & Trust Company, as escrow agent. The Escrow Shares and Escrow
Options are not transferable or assignable, except upon death, by operation of
law, to family members of the holders or to any trust for the benefit of the
holders; provided that 


<PAGE>


any permitted transferees must agree to be bound by the provisions of the 
Escrow Agreement. The Escrow Shares may be voted by the persons putting such 
shares into escrow. Holders of Escrow Options may exercise their options 
prior to their release from escrow; however, the shares issuable upon such 
exercise will be held as Escrow Shares pursuant to the Escrow Agreement.

     The Escrow Shares and Escrow Options will be released from escrow if, and
only if, one or more of the following conditions is/are met:

(a) the Company's net income before provision for income taxes and exclusive of
any extraordinary earnings (all as audited by the Company's independent public
accountants) (the "Minimum Pretax Income") amounts to at least $3.3 million for
the fiscal year ending December 31, 1998;

(b) the Minimum Pretax Income amounts to at least $4.5 million for the fiscal
year ending December 31, 1999;

(c) the Minimum Pretax Income amounts to at least $5.7 million during the fiscal
year ending December 31, 2000;

(d) the Bid Price (as defined in the Escrow Agreement) of the Common Stock
averages in excess of $12.50 per share for 30 consecutive business days during
the 18-month period commencing on February 11, 1997; or

(e) the Bid Price of the Common Stock averages in excess of $16.75 per share for
30 consecutive business days during the 18-month period commencing with the
nineteenth month from February 11, 1997.

     The Minimum Pretax Income amounts set forth above shall (i) be calculated
exclusively of any extraordinary earnings, including any charge to income
resulting from release of the Escrow Shares and Escrow Options and (ii) be
increased proportionately, with certain limitations, in the event additional
shares of Common Stock or securities convertible into, exchangeable for or
exercisable into Common Stock are issued after completion of the Company's
initial public offering. The Bid Price amounts set forth above are subject to
adjustment in the event of any stock splits, reverse stock splits or other
similar events.

     Any money, securities, rights or property distributed in respect of the
Escrow Shares and Escrow Options, including any property distributed as
dividends or pursuant to any stock split, merger, recapitalization, dissolution,
or total or partial liquidation of the Company, shall be held in escrow until
release of the Escrow Shares and Escrow Options. If none of the applicable
Minimum Pretax Income or Bid Price levels set forth above have been met by March
31, 2001, the Escrow Shares and Escrow Options, as well as any dividends or
other distributions made with respect thereto, will be canceled and contributed
to the capital of the Company. The Company expects that if the Escrow Shares and
Escrow Options are released the release of the Escrow Shares and Escrow Options
to officers, directors, employees and consultants of the Company will be deemed
compensatory and, accordingly, will result in a substantial charge to 


<PAGE>


reportable earnings, which would equal the fair market value of such shares 
on the date of release. Such charge could substantially increase the loss or 
reduce or eliminate the Company's net income, if any, for financial reporting 
purposes for the period during which such shares and options are, or become 
probable of being, released from escrow. Although the amount of compensation 
expense recognized by the Company will not affect the Company's total 
stockholders' equity, it may have a negative effect on the market price of 
the Company's securities.

     The Minimum Pretax Income and Bid Price levels set forth above were
determined by negotiation between the Company and D.H. Blair Investment Banking
Corp. and should not be construed to imply or predict any future earnings by the
Company or any increase in the market price of its securities.

ITEM 12

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Kenneth W. Krugler, a director of the Company, is the President of Transpac
Software Inc. In August 1994, the Company and Transpac entered into a consulting
agreement. In 1997, Transpac Software, Inc. was paid $ 229,400 pursuant to such
agreement.


<PAGE>


                        HEURISTIC DEVELOPMENT GROUP, INC.
                          (a development stage company)
                                  Balance Sheet
                                December 31, 1998

<TABLE>

                         ASSETS
<S>                                                       <C>
Current assets:

Cash and cash equivalents                                               $ 3,140,000
Prepaid expenses and other current assets                                    32,000
                                                          --------------------------

Total current assets                                                      3,172,000
                                                          --------------------------

Capitalized software costs                                                   50,000
Furniture and equipment (net of accumulated depreciation)                    12,000
Organizational costs (net of accumulated amortization)                        4,000
                                                          --------------------------

TOTAL                                                                   $ 3,238,000
                                                          --------------------------
                                                          --------------------------

                       LIABILITIES

Current liabilities:

Accounts payable                                                        $    18,000
Accrued expenses                                                             12,000
                                                          --------------------------

Total current liabilities                                                    30,000

                                                          --------------------------

                  STOCKHOLDER'S EQUITY

Preferred stock - $ .01 par value, authorized 
  5,000,000 shares; issued and outstanding none

Common stock - $ .01 par value, authorized 
  20,000,000 shares; issued 
  2,101,326 shares (includes 349,370 shares
  held in escrow)                                                            21,000
Additional paid-in capital                                                8,441,000
Deficit accumulated during the development stage                         (5,104,000)
                                                          --------------------------
                                                                          3,358,000

Treasury stock at cost  (149,900 shares)                                   (150,000)
                                                          --------------------------

                      Total stockholders' equity                          3,208,000

                                                          --------------------------

                                           TOTAL                        $ 3,238,000
                                                          --------------------------
                                                          --------------------------
</TABLE>

   The accompanying notes to financial statements are an integral part hereof.

                                       F-3


<PAGE>


                        HEURISTIC DEVELOPMENT GROUP, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF OPERATIONS

<TABLE>

                                                                                                 July 20,
                                                                                                  1994
                                                         Year Ended         Year Ended         (Inception)
                                                        December 31,       December 31,          through
                                                    ---------------------------------------    December 31,
                                                           1997                1998               1998
                                                    -----------------------------------------------------------
<S>                                                 <C>                    <C>             <C>
 Costs and expenses:
   Research and development:
   Direct expenditures                                                                             $   338,000
   Payments under research
     services agreement                                                                                137,000
                                                                                           --------------------
 Total research and
   development                                                                                         475,000
   General and administrative                               $ 1,050,000        $   638,000           3,399,000
   Loss on sale and write down of equipment                     178,000              7,000             185,000
   Write down of capitalized software to
     estimated net realizable value                                                456,000             456,000
  Acquisition breakup fee                                                          100,000             100,000
                                                    -----------------------------------------------------------

 Total costs and expenses                                     1,228,000          1,201,000           4,615,000
                                                    -----------------------------------------------------------
 (Loss) from operations                                      (1,228,000)        (1,201,000)         (4,615,000)

 Interest expense and amortization
  of debt discount and expense                                 (406,000)            (2,000)           (748,000)

 Interest income                                                193,000            175,000             381,000
                                                    -----------------------------------------------------------
 Net (loss) / Comprehensive (loss)                          $(1,441,000)       $(1,028,000)        $(4,982,000)
                                                    -----------------------------------------------------------
                                                    -----------------------------------------------------------
 Net (loss) per share - Basic and Diluted                   $     (0.91)       $     (0.59)
                                                    ---------------------------------------
                                                    ---------------------------------------
 Weighted average shares outstanding                          1,581,160          1,728,114
                                                    ---------------------------------------
                                                    ---------------------------------------

</TABLE>

   The accompanying notes to financial statements are an integral part hereof.

                                       F-4


<PAGE>



                        HEURISTIC DEVELOPMENT GROUP, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS

<TABLE>

                                                                                       July 20,
                                                                                         1994
                                                                                     (Inception)
                                                          Year Ended December 31,         to
                                                        ---------------------------- December 31,
                                                            1997          1998           1998
                                                        -------------------------------------------
<S>                                                     <C>              <C>         <C>
Cash flows from operating activities:
    Net (loss)                                            $(1,441,000)   (1,028,000)    (4,982,000)
    Adjustments to reconcile net (loss) to net cash
     (used in) operating activities:
  Depreciation and amortization                                51,000        12,000        153,000
  Loss on sale and write down of equipment                    178,000         7,000        185,000
 Write down of capitalized software to estimated 
  net realizable value                                                      456,000        456,000
 Acquisition breakup fee                                                    100,000        100,000
  Value of preferred stock charged to research and 
   development                                                                              50,000
  Amortization of loan acquisition costs                       95,000                      160,000
  Amortization of debt discount                               297,000                      500,000
   Fair value of options granted                                                           236,000
  Accrued interest on notes payable - stockholders                                          64,000
Changes in operating assets and liabilities:
(Increase)/decrease in prepaid expenses and other             (68,000)       50,000        (71,000)
 current assets
(Decrease)/increase in accounts payable and accrued          (164,000)        4,000         24,000
 expenses
                                                        -------------------------------------------
    Net cash (used in) operating activities                (1,052,000)     (399,000)    (3,125,000)
                                                        -------------------------------------------
Cash flows from investing activities:

    Deposit for letter of intent                                           (100,000)      (100,000)
    Acquisition of fixed assets                               (59,000)       (7,000)      (337,000)
    Capitalized software costs                               (179,000)                    (506,000)
    Proceeds from sale of equipment                            13,000        11,000         24,000
                                                        -------------------------------------------
    Net cash (used in) investing activities                  (225,000)      (96,000)      (919,000)
                                                        -------------------------------------------
Cash flows from financing activities:
    Proceeds from sale of common stock and exercise of                                     419,000
     options                                                6,900,000
    Proceeds from the sale of preferred stock                                              550,000
    Proceeds from borrowings - notes payable - 
     stockholders                                                                        1,194,000
    Proceeds from Bridge notes                                                           1,000,000
    Repayment of Bridge notes                              (1,000,000)                  (1,000,000)
    Initial public offering expenses                       (1,201,000)                   5,501,000
    Repayment of notes payable - stockholders                (170,000)                    (170,000)
    Loan acquisition costs                                                                (160,000)
    Purchase of treasury stock                                             (150,000)      (150,000)
                                                        -------------------------------------------
    Net cash provided by (used in) financing activities     4,529,000      (150,000)     7,184,000
                                                        -------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS        3,252,000      (645,000)     3,140,000

Cash and cash equivalents - beginning of period               533,000     3,785,000
                                                        -------------------------------------------
                                                        -------------------------------------------
Cash and cash equivalents - end of period                 $ 3,785,000    $3,140,000      3,140,000
                                                        -------------------------------------------
                                                        -------------------------------------------
Supplemental and noncash disclosures:
    Warrants issued in connection with Bridge notes                                        500,000
    Common stock issued for conversion of debt, 
     accrued interest, preferred stock and 
     preferred dividends                                    1,084,000                    1,084,000

    Initial public offering expenses charged to               198,000
     additional paid-in capital

    Interest paid                                              14,000         2,000         16,000

</TABLE>

       The accompanying notes to financial statements are an part hereof.

                                      F-5


<PAGE>




                        HEURISTIC DEVELOPMENT GROUP, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                  STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>


                                          Preferred Stock     Common Stock
                                          Par Value $.01     Par Value $.01         Treasury Stock
                                          ------------------------------------------------------------
                                            Shares   Amt.   Shares    Amount      Shares     Amount
                                          ------------------------------------------------------------
<S>                                       <C>        <C>   <C>        <C>         <C>       <C>
Issuance of common stock for cash
in August 1994. . . . . . . . . . . .                        212,456    $ 2,000
Issuance of preferred stock for cash
in August 1994 . . . . . .                     550   $-
Issuance of preferred stock in
connection with obtaining assignment
rights to developed technology
in August 1994 . . . . . .                      50    -
Net (loss) for the period from July
20, 1994 (inception) to 
December 31, 1994
                                          ------------------------------------------------------------
Balance - December 31, 1994 . .                600    -      212,456      2,000
Surrender of common stock in
October 1995 . . . . . . . . . . . .                         (17,928)
Exercise of options in December 1995                          81,947      1,000
Net (loss) for the year ended
December 31, 1995 . . . . .
                                          ------------------------------------------------------------

Balance - December 31, 1995 . .                600    -      276,475      3,000
Exercise of options in March 1996 .                           30,733
Issuance of common stock for cash
in March 1996. . . . . . . . . . . .                           9,218
Surrender of common stock in March 1996                      (21,770)
Surrender of common stock in June 1996                       (15,239)
Exercise of options in August 1996                             5,358
Surrender of common stock in August 1996                      (3,163)
Compensation expense in connection
with grant of options in August 1996
Warrants issued in connection with
Bridge notes 
Net (loss) for the year
ended December 31, 1996 . . . . .
                                          ------------------------------------------------------------
Balance - December 31, 1996                    600    -      281,612      3,000
Proceeds of Initial Public
Offering, net of expenses, 
in February 1997 . . . .                                   1,380,000     14,000
Conversion of debt, accrued interest,
preferred stock, and preferred
dividends to common stock in 
February 1997                                 (600)   -      439,714      4,000
Net (loss) for the year ended
December 31,1997 . . . . . .
                                          ------------------------------------------------------------
Balance - December 31, 1997 . .                       -    2,101,326     21,000
Purchase of Treasury stock. . .                                                   (149,900)  $(150,000)
Net (loss) for the
year ended December 31, 1998 . .
                                          ------------------------------------------------------------

  Balance - December 31, 1998                    -   $-    2,101,326    $21,000   (149,900)  $(150,000)
                                          ============================================================

</TABLE>

<TABLE>

                                                                                                                 Deficit
                                                              Accumulated
                                          Additional           During the
                                           Paid-in            Development
                                           Capital        Stage         Total
                                          --------------------------------------
<S>                                       <C>          <C>            <C>
Issuance of common stock for cash
in August 1994. . . . . . . . . . . .        $68,000                     $70,000
Issuance of preferred stock for cash
in August 1994 . . . . . .                   550,000                     550,000
Issuance of preferred stock in
connection with obtaining assignment
rights to developed technology
in August 1994 . . . . . .                    50,000                      50,000
Net (loss) for the period from July
20, 1994 (inception) to 
December 31, 1994                                        $(230,000)     (230,000)
                                          --------------------------------------
Balance - December 31, 1994 . .              668,000      (230,000)      440,000
Surrender of common stock in
October 1995 . . . . . . . . . . . .
Exercise of options in December 1995         299,000                     300,000
Net (loss) for the year ended
December 31, 1995 . . . . .                               (876,000)     (876,000)
                                          --------------------------------------

Balance - December 31, 1995 . .              967,000    (1,106,000)     (136,000)
Exercise of options in March 1996 .           10,000                      10,000
Issuance of common stock for cash
in March 1996. . . . . . . . . . . .          37,000                      37,000
Surrender of common stock in March 1996
Surrender of common stock in June 1996
Exercise of options in August 1996             2,000                       2,000
Surrender of common stock in August 1996
Compensation expense in connection
with grant of options in August 1996         236,000                     236,000
Warrants issued in connection with           500,000                     500,000
Bridge notes 
Net (loss) for the year
ended December 31, 1996 . . . . .                       (1,407,000)   (1,407,000)
                                          --------------------------------------

Balance - December 31, 1996                1,752,000    (2,513,000)     (758,000)
Proceeds of Initial Public
Offering, net of expenses, 
in February 1997 . . . .                   5,487,000                   5,501,000
Conversion of debt, accrued interest,
preferred stock, and preferred
dividends to common stock in 
February 1997                              1,202,000      (122,000)    1,084,000
Net (loss) for the year ended
December 31,1997 . . . . . .                            (1,441,000)   (1,441,000)
                                          --------------------------------------
Balance - December 31, 1997 . .           $8,441,000   $(4,076,000)   $4,386,000
Purchase of Treasury stock. . .                                         (150,000)
Net (loss) for the
year ended December 31, 1998 . .                        (1,028,000)   (1,028,000)
                                          --------------------------------------

  Balance - December 31, 1998             $8,441,000    (5,104,000)   $3,208,000
                                          ======================================

</TABLE>

   The accompanying notes to financial statements are an integral part hereof.

                                       F-6


<PAGE>


                        HEURISTIC DEVELOPMENT GROUP, INC.
                          (a development stage company)

                         NOTES TO FINANCIAL STATEMENTS

(NOTE A) - The Company and Basis of Presentation:

     Heuristic Development Group (the "Company") is a development stage company
which was formed to develop and market Intellifit software, a product which
generates personalized exercise prescriptions. The Company no longer believes it
can be successful in marketing the Intellifit software. Accordingly, the Company
has written down capitalized software to its estimated net realizable value at
December 31, 1998. The Company believes that the Intellifit software is a viable
product for a company which has complementary products and which has an existing
field sales and support division. The Company is pursuing licensing or sales
agreements for the Intellifit software.

     The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As reflected in the accompanying
financial statements, the Company has incurred substantial losses since
inception. The Company has decided to purse a strategy of an investment in, or
acquisition of, an existing company. There can be no assurances that the Company
will identify and complete such an investment or an acquisition.

     In February 1997, the Company successfully completed its initial public
offering ("IPO") and received net proceeds of $5.5 million. In connection with
the IPO (i) all of the Series A preferred stock ($600,000) together with accrued
dividends of $122,000 through August 31, 1996 were converted into 175,793 shares
of common stock and (ii) notes payable - stockholders and accrued interest
aggregating $1,084,000 were converted into 263,921 shares of common stock.

(NOTE B)  - Summary of Significant Accounting Policies

     [1] CAPITALIZED SOFTWARE COSTS:

     In accordance with Statement of Financial Accounting Standards No. 86, the
Company capitalizes certain costs associated with the development of computer
software. A portion of such cost has been written down as described in Note (A).

     [2] FURNITURE AND EQUIPMENT:

     Furniture and equipment are carried at cost. Depreciation is provided using
the straight-line method over the useful lives of the assets which range from
three to seven years.

<PAGE>

     [3] INCOME TAXES:

     The Company has applied to the accompanying financial statements provisions
required by accounting standards which require the use of the liability method
of accounting for income taxes. Deferred taxes are recognized for temporary
differences in the recognition of income and expenses for financial reporting
and income tax purposes, principally due to capitalized start up costs and
compensation expense in connection with the grant of options.

     [4] CASH EQUIVALENTS:

     The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents. Cash and cash equivalents are held
at a national bank which is highly capitalized.

     [5] NET LOSS PER SHARE COMMON STOCK:

     Statement of Financial Accounting Standards No. 128, "Earnings Per Share "
("SFAS No. 128") requires the reporting of earnings per basic share and earnings
per diluted share. Earnings per basic share are calculated by dividing net
income (loss) by the weighted average outstanding shares during the period.
Earnings per diluted share are calculated by dividing net income (loss) by the
basic shares and all dilutive securities including options. The Company has not
included potential common shares in the diluted loss per share computation
representing options issued either under the stock option plans or otherwise,
escrow shares and warrants as described in Note (F), as the result would be
antidilutive. As described in Note E (3), the stockholders have agreed to place
349,370 shares in escrow and accordingly, such shares have been excluded from
the computation.

     [6] 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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.

     [7] STOCK BASED COMPENSATION:

     Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" permits companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25") but disclose the pro forma effects on net income (loss)
had the fair value of the options been expensed. The Company has elected to
continue to apply APB 25 in accounting for its stock option incentive plans
(Note E [2]).

<PAGE>

     [8] ORGANIZATIONAL COSTS:

     Organizational costs incurred by the Company are being amortized over five
years.

     [9] FAIR VALUE OF FINANCIAL INSTRUMENTS:

     The carrying value of cash and cash equivalents and accounts payable
approximates fair value because of the short-term maturity of those instruments.

(NOTE C) - FURNITURE AND EQUIPMENT:

         Furniture and equipment are summarized as follows:

<TABLE>
         <S>                                      <C>
         Computer software                        $   1,000
         Furniture and Fixtures                      11,000
         Office equipment                            11,000
                                                  ---------
                                                     23,000

         Less accumulated depreciation               11,000
                                                  ---------
                               Balance            $  12,000
                                                  ---------
                                                  ---------

</TABLE>

     During 1997, management decided to sell excess office equipment and
selected components of the IntelliFit System. As a result of such sales, the
Company decided to write down the remaining physical components and housings of
the IntelliFit System and shorten their estimated useful lives to one year. The
loss of $178,000 on the sale and write down of this equipment was recorded in
1997. During 1998 management continued to sell excess office equipment and
selected components of the IntelliFit System and write down some of the
remaining physical components. The loss of $7,000 on the sale and write down of
this equipment was recorded in 1998.

(NOTE D) - REPAYMENT OF NOTES PAYABLE - STOCKHOLDERS AND BRIDGE LOAN

     In February 1997, the company repaid $170,000 of notes payable -
stockholders and approximately $1,084,000 of notes payable - stockholders,
including accrued interest, was converted to 263,921 shares of common stock.

     Additionally, Bridge notes of $1,000,000 and related interest were repaid.

(NOTE E) - STOCKHOLDERS' EQUITY:

     [1] PREFERRED STOCK:

     In August 1994, the Company authorized and issued 600 shares of its $.01
par value Series A preferred stock the "Series A Preferred". The authorized
capital for the preferred stock 


<PAGE>


was increased to 5,000,000 shares with a par value of $.01 per share. In 
conjunction with the IPO all of the Series A preferred stock ($600,000) 
together with accrued dividends of $122,000 were converted into 175,793 
shares of common stock.

     [2] STOCK OPTION PLANS:

     The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. Under APB 25, where the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation is recognized.

     Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. Such information has been determined as if the Company
had accounted for its employee stock options under the fair value method of that
statement. The effect of applying SFAS No. 123 on 1997 and 1998 pro forma net
income is not necessarily representative of the effects on reported net income
for future years due to, among other things: (1) the vesting period of the stock
options and the (2) fair value of additional stock options in future years. The
weighted average fair value of the options granted during 1997 and 1998 are
estimated as $1.91 and $0.28, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:

<TABLE>
<CAPTION>

                                       1997                       1998
                                       ----                       ----
     <S>                               <C>                        <C>
     Dividend yield                    0.0%                       0.0%
     Expected volatility               0.30                       0.30
     Risk-free interest rate           6.14%                      5.50%
     Expected life in years            5.0                        5.0

</TABLE>

     Had compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under the plans
consistent with the methodology prescribed under SFAS No.123, the Company's net
loss and net loss per share including pro forma amounts would have been as
follows:

<TABLE>
<CAPTION>

                                                                    1997              1998
                                                                    ----              ----
     <S>                                                        <C>               <C>
     Net Loss As Reported                                       $ (1,441,000)     $ (1,028,000)
     Pro forma                                                    (1,451,000)       (1,029,000)
     Basic & Diluted Net Loss per share As Reported                   $(0.91)          $ (0.59)
     Pro forma                                                         (0.92)            (0.60)

</TABLE>

     The Company's Stock Option Plan (the "Plan") adopted in October 1996,
provides for issuance of 250,000 shares of the Company's common stock. In
October 1996, options to purchase 200,000 shares of common stock at $5.00 per
share were granted to officers/stockholders exercisable in four equal annual
installments commencing one year from the date of grant. None of these options
were exercised and all 200,000 of these options were rescinded upon the
resignation of these officers/stockholders from the Company during 1997.

<PAGE>

     The Plan provides for grant of options to employees, officers, directors
and consultants of the Company. Options may be either "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended or nonqualified options. The Plan expires in October 2006. Incentive
options granted under the Plan are exercisable for a period of up to 10 years
from the date of grant at an exercise price which is not less than the fair
market value of the common stock on the date of the grant, except that the term
of an incentive option granted under the Plan to a stockholder owning more than
10% of the outstanding voting power may not exceed five years and its exercise
price may not be less than 110% of the fair market value of the common stock on
the date of the grant.

     During 1998, the Company granted options to purchase 34,043 shares of
common stock to directors at an exercise price ranging from $0.875 to $5.00 per
share expiring in 5 years.

     Additional information with respect to stock option activity is summarized
as follows:

<TABLE>
<CAPTION>

                                                                     Weighted
                                                                     Average
                                                 Shares                Price             Expiration Date
                                                 ------              --------            ---------------
<S>                                              <C>                 <C>                 <C>
Granted - year ended
  December 31, 1994                                 115,359            $ 2.70                  December 1995-
                                                                                                  August 1996
Granted - year ended
  December 31, 1995                                   2,679            $  .33                    August 1997-
                                                                                                  August 1999
Exercised - year ended
  December 31, 1995                                 (81,947)           $ 3.67
                                                   --------
Balance at  December 31, 1995                        36,091            $  .33                       May 1996-
                                                                                                  August 1999

Granted - August 1996                                78,674            $  .50                     August 2006

Granted - October 1996                              200,000            $ 5.00                   October 1997-
                                                                                                 October 2000
Exercised - year ended
 December 31, 1996                                  (36,091)           $  .33
                                                   --------
Balance at December 31, 1996                        278,674            $ 3.73                   October 1997-
                                                                                                  August 2001

Granted - February 1997                              10,500            $ 5.00                   February 2002

Rescinded - year ended
 December 31, 1997                                 (200,000)           $ 5.00
                                                   --------
Balance at December 31,1997                          89,174            $ 1.03


<PAGE>


Granted - February 1998                              10,000            $ 1.00                   February 2003
Granted - March 1998                                  1,542            $ 5.00                      March 2003
Granted - April 1998                                 10,000            $0.875                      April 2003
Granted - June 1998                                   4,167            $ 1.00                       June 2003
Granted - September 1998                              4,167            $ 1.00                  September 2003
Granted - December 1998                               4,167            $ 1.00                   December 2003
                                                    -------            ------
Balance at December 31,1998                         123,217            $ 1.06
                                                    -------            ------

</TABLE>

     In February 1997, the Company also issued to the underwriter and the finder
the Unit Purchase Option and the Finder's Purchase Option to purchase up to an
aggregate of 120,000 units at $6.00 per unit or equivalent of 480,000 shares of
common stock assuming exercise of the underlying warrants (see note F).

     [3] ESCROW SHARES/OPTIONS:

     In connection with the public offering, the underwriter had required, as a
condition of the offering, that an aggregate of 349,370 shares of the Company's
common stock and outstanding options to purchase 50,630 shares be placed in
escrow until certain pretax income levels or market value targets are met. The
escrow shares and escrow options will be released from escrow upon the Company
meeting a minimum pretax income as defined, ranging from $3.3 million to $5.7
million for the years ending December 31, 1998 to December 31, 2000 or if the
bid price of the Company's common stock averages in excess of $12.50 per share
for 30 consecutive business days during the first period ended August 11, 1998
and $16.75 per share during the period ended February 11, 2001. If the
conditions are not met by March 31, 2001, all shares remaining in escrow will be
returned to the Company as treasury shares for cancellation. There will be a
nondeductible charge to earnings for the fair value of these shares and options
upon their release.

     [4] WARRANTS:

     In connection with the sale of bridge notes in December 1996, the Company
issued warrants for the purchase of 500,000 shares of common stock. Upon
completion of the IPO, the warrants were converted into Class A Warrants as
described in Note F.

(NOTE F) - SALE OF COMMON STOCK:

     In February and March 1997, the Company sold 1,380,000 units, resulting in
net proceeds to the Company of $5.5 million. Each unit ("unit") offered by the
Company consists of one share of common stock, $.01 par value ("Common Stock"),
one redeemable Class A warrant ("Class A Warrants") and one redeemable Class B
warrant ("Class B Warrants"). Each Class A Warrant entitles the holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $6.50, subject to adjustment, at any time until February 14, 2002. Each Class
B Warrant entitles the holder to purchase one share of Common Stock at an
exercise price of $8.75, subject to adjustment, at any time until February 14,
2002. Commencing one year from 


<PAGE>


the date of issuance the Class A Warrants and Class B Warrants (collectively, 
the "Warrants") are subject to redemption by the Company at a redemption 
price of $.05 per Warrant on 30 days written notice, provided the closing bid 
price of the Common Stock averages in excess of $9.10 per share in the case 
of Class A Warrants and $12.25 per share in the case of Class B Warrants for 
any 30 consecutive trading days ending within 15 days of the notice of 
redemption.

(NOTE G) - COMMITMENTS AND OTHER MATTERS:

     RESEARCH SERVICES AGREEMENT:

     Pursuant to an agreement, expiring on December 31, 1998, to assist the
Company in updating, designing, developing and implementing the software system
used in the IntelliFit System, the Company paid the following amounts to a
related party:

<TABLE>
<CAPTION>

         Period/Year Ended                           Amount
         -----------------                           ------
         <S>                                         <C>
         December 31, 1994                           $20,000
         December 31, 1995                           110,000
         December 31, 1996                           244,000
         December 31, 1997                           179,000
         December 31, 1998                           0

</TABLE>

     EMPLOYMENT AGREEMENT:

     The Company has a three year employment agreement with an officer providing
for an annual base salary of $90,000 commencing February 1, 1997. The agreement
provides for a bonus at the discretion of the Board of Directors and severance
salary.

     RELATED PARTY TRANSACTIONS:

     The Company paid $40,000 and $97,500 to the President and stockholder of
the Company for consulting services performed during 1997 and 1998,
respectively.

(NOTE H) - INCOME TAXES:

     At December 31, 1997 and December 31, 1998, the Company had available net
operating loss carryforwards to reduce future taxable income of approximately
$3,309,000 and $4,226,000, respectively. The net operating loss carryforwards
expire in various amounts through 2018. The Company's ability to utilize its net
operating loss carryforwards is subject to annual limitations as required under
Section 382 of the Internal Revenue Code pursuant to an ownership change
occuring during 1997 from the IPO and conversion of preferred stock and notes
payable into common stock.

<PAGE>

     At December 31, 1997 and December 31, 1998, the Company has deferred tax
assets of approximately $1,497,000 and $ 1,877,000 respectively, representing
the benefits of its net operating loss carryforwards and deferred taxes
resulting from capitalized start-up costs and compensation expense in connection
with the grant of options. The Company has provided a 100% valuation allowance
for such assets since the likelihood of realization cannot be determined.

ITEM 13

EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1 Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form SB-2 (No. 333-17635))

3.2 By-laws of the Registrant (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))

4.1 Bridge Note Agreement (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))

4.2 Bridge Warrant Agreement (Incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))

4.3 Warrant Agreement (Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form SB-2 (No. 333-17635))

10.1 1996 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form SB-2 (No. 333-17635))

10.2 Form of Escrow Agreement by and between the Registrant, American Stock
Transfer & Trust Company and certain security holders of the Registrant.
(Incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form SB-2 (No. 333-17635))

10.3 Assignment dated August 22, 1994 between Nautilus Group Japan, Ltd. and the
Company. (Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form SB-2 (No. 333-17635))

10.4 Exclusive Distribution License Agreement dated June 1995 between Nautilus
Group Japan, Ltd. and the Company. (Incorporated by reference to Exhibit 10.5 to
the Company's Registration Statement on Form SB-2 (No. 333-17635))


<PAGE>


10.5 Letter Agreement dated November 27, 1996 between Nautilus Group Japan, Ltd.
and the Company. (Incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form SB-2 (No. 333-17635))

10.6 Retainer Agreement dated August 16, 1994 between TransPac Software Inc. and
the Company. (Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form SB-2 (No. 333-17635))

10.7 Conversion Agreement between the Company and Nautilus Group Japan, Ltd.
(Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form SB-2 (No. 333-17635))

11.1 Statement re: computation of earnings per share.

23.1 Consent of Richard A. Eisner & Company, LLP

27.0 Financial Data Schedule

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter ended December 31,
1998.

Signatures

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

HEURISTIC DEVELOPMENT GROUP, INC.
---------------------------------                     (Registrant)

/s/ Gregory L. Zink                     ---------------------------------
Gregory L. Zink                          Chief Executive Officer (Acting)

Dated: March 23, 1999

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

 NAME                        TITLE                                    DATE

 /s/ JONATHAN SEYBOLD        Chairman of the Board and Director   March 23 1999
-----------------------
Jonathan Seybold


<PAGE>


 /s/ GREGORY L. ZINK         President and Director               March 23 1999
-----------------------
Gregory L. Zink

 /s/ THEODORE LANES          Chief Financial Officer and          March 23 1999
-----------------------      Director
Theodore Lanes

 /s/ BRIAN WASSERMAN         Director                             March 23 1999
-----------------------
Brian Wasserman

 /s/ WILLIAM BLASE           Director                             March 23 1999
-----------------------
William Blase

 /s/ KENNETH W. KRUGLER      Director                             March 23 1999
-----------------------
Kenneth W. Krugler

 /s/ M. CAROLINE MARTIN      Director                             March 23 1999
-----------------------
M. Caroline Martin

 /s/ ALLAN DALFEN            Director                             March 23 1999
-----------------------
Allan Dalfen