HEURISTIC DEVELOPMENT GROUP INC, SB-2/A, 1997-02-07

HEURISTIC DEVELOPMENT GROUP INC
SB-2/A, 1997-02-07
COMPUTER PROGRAMMING SERVICES

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As filed with the Securities and Exchange Commission on February 7, 1997

Registration No. 333-17635

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

AMENDMENT No. 3
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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HEURISTIC DEVELOPMENT GROUP, INC.
(Exact name of Small Business Issuer as specified in its charter)

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

<TABLE>
<S> <C> <C>
Delaware 7371 95-4491750
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of incorporation) classification code number) identification number)
</TABLE>

17575 Pacific Coast Highway
Pacific Palisades, California 90272
(310) 230-3394
(Address and telephone number of principal executive offices
and principal place of business)

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Jonathan W. Seybold, Chairman of the Board
Heuristic Development Group, Inc.
17575 Pacific Coast Highway
Pacific Palisades, California 90272
(310) 230-3394
(Name, address and telephone number of agent for service)

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Copies to:
Fran M. Stoller, Esq. C. David Selengut, Esq.
Bachner, Tally, Polevoy & Misher LLP Singer Zamansky LLP
380 Madison Avenue 40 Exchange Place
New York, New York 10017 New York, New York 10005
(212) 687-7000 (212) 809-8550

Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, please check the following box. |X|

If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. | |

If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
registration statement for the same offering. | |

If the delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. | |

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<PAGE>

Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional shares of Common Stock as may become
issuable pursuant to anti-dilution provisions upon exercise of the Warrants and
the Unit Purchase Option.

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

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

EXPLANATORY NOTE

This Registration Statement covers the registration of (i) up to 1,380,000
units ("Units"), including Units to cover over-allotments, if any, each Unit
consisting of one share of Common Stock, $.01 par value ("Common Stock"), of
Heuristic Development Group, Inc., a Delaware corporation (the "Company"), one
redeemable Class A Warrant ("Class A Warrant") and one redeemable Class B
Warrant ("Class B Warrant"), for sale by the Company in an underwritten public
offering and (ii) an additional 500,000 Class A Warrants (the "Selling
Securityholder Warrants"), for sale by the holders thereof (the "Selling
Securityholders"), 500,000 Class B Warrants (the "Selling Securityholder Class B
Warrants") underlying the Selling Securityholder Warrants and 1,000,000 shares
of Common Stock (the "Selling Securityholder Stock") underlying the Selling
Securityholder Warrants and the Selling Securityholder Class B Warrants, all for
resale from time to time by the Selling Securityholders subject to the
contractual restriction that the Selling Securityholders may not sell the
Selling Securityholder Warrants for specified periods after the closing of the
underwritten offering. The Selling Securityholder Warrants, the Selling
Securityholder Class B Warrants and the Selling Securityholder Stock are
sometimes collectively referred to herein as the "Selling Securityholder
Securities."

The complete Prospectus relating to the underwritten offering follows
immediately after this Explanatory Note. Following the Prospectus for the
underwritten offering are pages of the Prospectus relating solely to the Selling
Securityholder Securities, including alternative front and back cover pages and
sections entitled "Concurrent Public Offering," "Plan of Distribution," and
"Selling Securityholders" to be used in lieu of the sections entitled
"Concurrent Offering" and "Underwriting" in the Prospectus relating to the
underwritten offering. The "Dilution" section of the Prospectus for the
underwritten offering will not be used in the Prospectus relating to the Selling
Securityholder Securities.

<PAGE>

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION -- DATED FEBRUARY 7, 1997

PROSPECTUS

HEURISTIC DEVELOPMENT GROUP, INC.
1,200,000 Units Consisting of 1,200,000 Shares of
Common Stock, 1,200,000 Redeemable Class A
Warrants and 1,200,000 Redeemable Class B Warrants

Each unit ("Unit") offered by Heuristic Development Group, Inc. (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"). The components of the Units will be
transferable separately immediately upon issuance. 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 the fifth
anniversary of the date of this Prospectus. 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 the fifth anniversary of the date of
this Prospectus. Commencing one year from the date hereof, 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 and $12.25 per share, respectively, for any 30 consecutive trading days
ending within 15 days of the notice of redemption. See "Description of
Securities."

The registration statement of which this Prospectus is a part also covers
the offering for resale by certain securityholders (the "Selling
Securityholders") of 500,000 Class A Warrants (the "Selling Securityholder
Warrants"), and the Common Stock and Class B Warrants underlying the Selling
Securityholder Warrants and the Common Stock issuable upon exercise of such
Class B Warrants. See "Concurrent Offering." The Selling Securityholder Warrants
and the securities underlying such Warrants are sometimes collectively referred
to as the "Selling Securityholder Securities." The Selling Securityholder
Warrants are issuable on the closing of the Offering to the Selling
Securityholders upon the automatic conversion of warrants (the "Bridge
Warrants") acquired by them in the Company's private placement in December 1996
(the "Bridge Financing"). The Selling Securityholders have agreed not to
exercise, sell, transfer, hypothecate, assign or otherwise dispose of the
Selling Securityholder Warrants for one year after the closing of the Offering.
Sales of the Selling Securityholder Warrants or the underlying securities, or
the potential of such sales, may have an adverse effect on the market price of
the securities offered hereby.

Prior to this offering (the "Offering"), there has been no public market
for the Units, Common Stock or Warrants and there can be no assurance that such
a market will develop. The Units, Common Stock, Class A Warrants and Class B
Warrants have been approved for listing on the Nasdaq SmallCap Market ("Nasdaq")
under the symbols IFITU, IFIT, IFITW and IFITZ, respectively. See "Underwriting"
for a discussion of factors considered in determining the initial public
offering price. For information concerning a Securities and Exchange Commission
investigation relating to the Underwriter, see "Risk Factors" and
"Underwriting."

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 6 AND "DILUTION."

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

===========================================================================================================================
Underwriting Discounts Proceeds to
Price to Public and Commissions (1) Company (2)
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<S> <C> <C> <C>
Per Unit ........................................... $5.00 $.50 $4.50
- ---------------------------------------------------------------------------------------------------------------------------
Total (3) .......................................... $6,000,000 $600,000 $5,400,000
===========================================================================================================================

</TABLE>

(1) Does not include additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $180,000, or $.15
per Unit ($207,000 if the over-allotment option is exercised in full); and
(ii) an option, exercisable over a period of three years commencing two
years from the date of this Prospectus, to purchase up to 108,000 Units at
$6.00 per Unit (the "Unit Purchase Option"). The Company has also agreed to
indemnify the Underwriter against certain liabilities under the Securities
Act of 1933, as amended. The Underwriter has agreed to pay Marc J. Gorlin,
as finder (the "Finder"), $10,000 and the Company has agreed to issue the
Finder an option, exercisable over a period of three years commencing two
years from the date of this Prospectus, to purchase up to 12,000 Units at
$6.00 per Unit (the "Finder's Unit Purchase Option"). See "Underwriting."

(2) Before deducting estimated expenses of $625,000 payable by the Company,
including the Underwriter' s non-accountable expense allowance.

(3) The Company has granted to the Underwriter a 30-day option to purchase up
to 180,000 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If the over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $6,900,000,
$690,000 and $6,210,000, respectively. See "Underwriting."

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The Units are being offered on a "firm commitment" basis by the Underwriter
when, as and if delivered to and accepted by the Underwriter, subject to its
right to reject orders in whole or in part and subject to certain other
conditions. It is expected that the delivery of the certificates representing
the Units will be made against payment at the offices of D.H. Blair Investment
Banking Corp., 44 Wall Street, New York, New York on or about February , 1997.

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D.H. BLAIR INVESTMENT BANKING CORP.

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The date of this Prospectus is February , 1997

<PAGE>

[Pictures]

Series of pictures depicting usage of the IntelliFit Personal Trainer; the
workout form and a sketch of a kiosk along with a narrative description of the
software.

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors.

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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, COMMON
STOCK AND/OR THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.

<PAGE>

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Except as otherwise noted, all information in this Prospectus (i) reflects a
1,339.4362-for-one stock split effected in October 1996; (ii) assumes no
exercise of (a) the Underwriter's over-allotment option; (b) the Warrants; (c)
the Selling Securityholder Warrants; (d) the Unit Purchase Option or the
Finder's Unit Purchase Option; (e) options granted or available for grant under
the Company's stock option plan; or (f) options granted outside of the Company's
stock option plan; and (iii) gives effect to the conversion, on completion of
the Offering, of (a) the Bridge Warrants into the Selling Securityholder
Warrants; (b) all outstanding shares of the Company's Series A preferred stock,
$.01 par value ("Series A Preferred Stock"), into Common Stock; and (c) certain
outstanding indebtedness into equity of the Company. See "Management -- Stock
Option Plan," "Certain Transactions" and "Description of Securities."

The Company

The Company is engaged in the development, marketing and sale of the
IntelliFit System, a computerized system which generates personalized exercise
prescriptions based on, among other things, an individual's weight, ability,
medical history, goals, fitness level and exercise preferences and tracks and
records fitness progress. The IntelliFit System interacts with a user by
applying algorithms to an individual's personal profile and adjusting a user's
exercise prescription based on progress, frequency of workouts and other
variables. The Company believes that this interactive feature helps motivate
users to continue exercising, and allows users to reach their goals more
quickly.

The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf computer hardware purchased from major equipment manufacturers,
including a computer with a touch screen display, a modem used to communicate
with a central database, a motorized smart card reader, a scanner and a printer.
The IntelliFit System is accessed by a smart card, similar in size to a credit
card, which contains a microprocessor chip which is able to store information in
memory (the "IntelliCard").

The Company's strategy is to market and sell the IntelliFit System
initially in selected United States markets. The Company's first target markets
are military facilities, commercial clubs, hospital facilities, corporate
facilities, insurance companies and health maintenance organizations. The
Company believes that these markets have the greater user concentration and that
penetration of these markets would help establish the Company's credibility in
other markets. Subsequent target markets include universities, schools,
government facilities and resorts. The Company expects to add enhancements to
the IntelliFit System to enable the System to serve the rehabilitation market.
This will enable patients who exercise as part of their rehabilitation program
to use the System to follow their exercise program in a local fitness center. In
addition, the Company intends to explore other markets for the IntelliFit
software, including selling the software as an individually packaged product for
use on personal computers and providing the software to Internet users.

To date, the Company has been engaged primarily in research and development
activities relating to the IntelliFit System and has conducted only limited
marketing activities. The Company believes that product development necessary to
initiate commercial sales has been substantially completed alhough development
efforts aimed at enhancements and upgrades will be ongoing. The Company has
generated only nominal revenues from product sales and there can be no assurance
that the Company will successfully commercialize the IntelliFit System, generate
any significant revenues or ever achieve profitable operations.

The Company was incorporated in Delaware in July 1994. The Company's
executive offices are located at 17575 Pacific Coast Highway, Pacific Palisades,
California 90272 and its telephone number is (310) 230-3394.

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<PAGE>

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The Offering

Securities Offered................... 1,200,000 Units, each Unit consisting of
one share of Common Stock, one Class A
Warrant and one Class B Warrant. 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 the fifth anniversary of the
date of this Prospectus. 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 the fifth anniversary
of the date of this Prospectus. The
Warrants are subject to redemption in
certain circumstances. See "Description
of Securities."
Securities Offered Concurrently by
Selling Securityholders............ 500,000 Class A Warrants; 500,000 Class
B Warrants issuable upon exercise of
these Class A Warrants and 1,000,000
shares of Common Stock issuable upon
exercise of these Class A Warrants and
Class B Warrants. See "Concurrent
Offering."

Common Stock Outstanding Before
Offering........................... 800,000 shares (1)

Common Stock Outstanding After
Offering.......................... 2,000,000 shares (1)

Use of Proceeds and Plan of
Operations........................ To repay $1,000,000 principal amount of
10% promissory notes (the "Bridge
Notes") issued in the Bridge Financing;
to repay approximately $170,000
principal amount of working capital
advances from stockholders of the
Company, including executive officers
and directors of the Company, (the
"Stockholder Advances"); for capital
expenditures; for research and
development; for sales and marketing;
and for working capital. See "Use of
Proceeds and Plan of Operations."

Nasdaq Symbols (2)

Units .............................. IFITU

Common Stock: ...................... IFIT

Class A Warrants: .................. IFITW

Class B Warrants: .................. IFITZ

Risk Factors........................ The Offering involves a high degree of
risk and immediate substantial dilution.
See "Risk Factors" and "Dilution."

- --------
(1) Includes 349,370 shares of Common Stock (the "Escrow Shares") and options
to purchase 78,674 shares of Common Stock at $.50 per share, of which
options to purchase 50,630 shares (the "Escrow Options") have been
deposited into escrow by the holders thereof. The Escrow Shares and Escrow
Options are subject to cancellation and will be contributed to the capital
of the Company if the Company does not attain certain earnings levels or
the market price of the Company's Common Stock does not achieve certain
levels. If such earnings or market price levels are met, the Company will
record a substantial non-cash charge to earnings, for financial reporting
purposes, as compensation expense relating to the value of the Escrow
Shares and Escrow Options released to Company officers and employees. See
"Risk Factors-Charge to Income in the Event of Release of Escrowed Shares
and Options and as a Result of Issuance of Options," "Capitalization" and
"Principal Stockholders."

(2) Notwithstanding quotation on Nasdaq, there can be no assurance that an
active trading market for the Company's securities will develop or, if
developed, that it will be sustained. See "Risk Factors -- No Public Market
for Securities; Possible Volatility of Market Price; Arbitrary
Determination of Offering Price."

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<PAGE>

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Summary Financial Information
<TABLE>
<CAPTION>
July 20, 1994
Nine Months (Commencement
Year Ended Ended of Operations) through
December 31, 1995 September 30, September 30, 1996
---------------- ------------------------ --------------------
1995 1996
--------- ---------
<S> <C> <C> <C> <C>
Statement of Operations Data:

Research and development expenses............. $397,000 $227,000 $ -- $ 475,000
General and administrative expenses........... 466,000 418,000 808,000 1,433,000
Net loss...................................... (876,000) (647,000) (850,000) (1,956,000)
Pro forma net loss per share(1)............... $ (2.31) $ (2.17)
Shares used in computing pro forma
net loss per share(1)......................... 371,956 371,956

At September 30, 1996
-------------------------------------------------
Actual Pro Forma(2) As Adjusted(3)
------------- ------------ ----------------
<S> <C> <C> <C>
Balance Sheet Data:

Working capital (deficit)..................... $ (413,000) $ 845,000 $4,492,000
Total assets.................................. 571,000 1,711,000 5,137,000
Total current liabilities..................... 436,000 158,000 158,000
Deficit accumulated
during development stage.................... (1,956,000) (2,078,000) (2,757,000)
Total stockholders' equity
(capital deficiency)........................ $ (701,000) $ 883,000 $4,979,000

</TABLE>

- --------

(1) The pro forma net loss per share computation gives retroactive effect to
the conversion on completion of the Offering of (i) $1,083,713 of
outstanding indebtedness at August 31, 1996, plus accrued interest thereon
(the "Stockholder Debt") into 263,921 shares of the Company's Common Stock
and (ii) the Series A Preferred Stock and accrued dividends thereon
aggregating $722,000 into 175,793 shares of Common Stock, and excludes the
Escrow Shares and Escrow Options. See "Certain Transactions" and Notes A,
B(4) and I of Notes to Financial Statements.

(2) Gives pro forma effect to (i) the issuance of the Bridge Notes and the
Bridge Warrants subsequent to September 30, 1996; (ii) working capital
advances from stockholders aggregating $140,000 subsequent to September 30,
1996; and (iii) the conversion of the Stockholder Debt and the Series A
Preferred Stock into Common Stock upon completion of the Offering. See
"Capitalization-Bridge Financing," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."

(3) Adjusted to give effect to the sale of the 1,200,000 Units offered hereby,
the receipt of the net proceeds therefrom and the use of a portion of the
net proceeds to repay the Stockholder Advances and the Bridge Notes and the
corresponding charge to operations through the date of repayment of
$660,000, representing debt discount and debt issuance costs associated
with the Bridge Financing. See "Use of Proceeds and Plan of Operations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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

5
<PAGE>

RISK FACTORS

The Units offered hereby are speculative in nature and an investment in the
Units offered hereby involves a high degree of risk. Prospective investors are
cautioned that the statements in this Prospectus that are not historical facts
may be forward-looking statements that are subject to risks and uncertainties,
including those set forth below. In addition to the other information contained
in this Prospectus, prospective investors should carefully consider the
following risk factors in evaluating whether to purchase the Units offered
hereby.

History of Operating Losses; Need for Additional Financing. The Company has
experienced significant operating losses since it commenced operations in July
1994. As of September 30, 1996, the Company's accumulated deficit was
$(1,956,000). The Company anticipates incurring substantial and increasing
operating losses over the near term and possibly over the next several years.
Such losses have been and will continue to be principally the result of the
various costs associated with the Company's research and development and sales
and marketing activities. In addition, the Company's business is very capital
intensive, requiring substantial outlays for the purchase of kiosks and
hardware. The Company believes that the net proceeds from the Offering, together
with its existing capital resources, will enable it to fund its operations for
approximately 18 months following completion of the Offering. The Company will
be required to seek additional financing to continue its research, development,
design, sales and marketing activities beyond such time and to commercialize the
IntelliFit System on a large scale. The Company has no commitments for any
future funding and there can be no assurance that the Company will be able to
obtain additional financing in the future from either debt or equity financings,
bank loans, collaborative arrangements or other sources on acceptable terms. If
the Company is unable to obtain the necessary financing, it will be required to
significantly curtail its activities or cease operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements.

Early Stage of Company. Although the Company was organized in July 1994,
management has focused on research and development activities and on limited
sales and marketing activities and has generated only nominal revenues to date
from product sales. The Company may experience many of the delays, uncertainties
and complications typically encountered by newly established businesses, many of
which may be beyond the Company's control. These include, but are not limited
to, unanticipated problems relating to product development, testing,
manufacturing, marketing and competition, and additional costs and expenses that
may exceed current estimates. There can be no assurance that the Company will
successfully commercialize its product, generate any significant revenues or
ever achieve profitable operations. See "Business -- General" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Dependence Upon One Product. The Company's business is currently dependent
upon sales of one product. Innovative products are often not successful and
successful products are often displaced by the introduction of competitive
products. To date, the IntelliFit System has been installed on a test basis in
only six sites. Although the preliminary response generally has indicated
satisfaction with the product, there can be no assurance that such tests will
result in significant purchase contracts. In the event that the Company is not
able to successfully market and sell the IntelliFit System, this would have a
material adverse effect on the Company. See "Business -- General."

Going Concern Qualification in Independent Auditors' Report. The Company
has received a report from its independent auditors that includes an explanatory
paragraph that describes the substantial doubt as to the ability of the Company
to continue as a going concern. See "Report of Independent Auditors" and Note A
to the Financial Statements.

Uncertainty of Market Acceptance of IntelliFit System. The success of the
Company's business is dependent upon acceptance of the IntelliFit System by both
the Company's potential customers and the actual users of the system. There can
be no assurance that acceptance by any of the Company's potential customers will
occur. In addition, even if the IntelliFit System is installed in a fitness
center, ultimate success for the Company depends on whether individuals actually
use the system on a regular basis. The Company does not market its product
directly to these users and has limited ability to monitor the manner and
frequency with which fitness center staff introduce the IntelliFit System to new
members or renewing members or stimulate current members' interest in using and
continuing to use the IntelliFit System. A number of companies that have
developed computer-based fitness systems which prescribe personalized exercise
programs have either had limited success or have failed. See "Business --
Marketing."

Potential Development Problems; Potential Hardware Problems. To date the
Company has installed kiosks in only six fitness centers on a test basis. There
can be no assurance that the IntelliFit System will perform as anticipated. In
addition, the software embodied in the IntelliFit System may contain errors
which only become apparent subsequent to widespread commercial use. The
IntelliFit System may require improvements and refinements.

<PAGE>

Difficulties in improving and refining the IntelliFit System could delay further
introductions and installations of the System and could cause the Company to
incur additional costs. In addition, the guidelines and parameters allowing safe
progression and improvement for users which form the basis for the IntelliFit
System may be changed or updated which would require a change in the software
embodied in the system. This could have a material adverse effect on the
Company. In addition, technical problems with computer hardware could cause
operation of the IntelliFit System at any location to be temporarily suspended.
See "Business-Marketing" and "Business -- Services."

Competition. The Company competes with companies that have developed
computer-based fitness systems which prescribe personalized exercise programs.
The Company will attempt to compete on the basis of cost, features offered, ease
of use, time spent at the kiosks and service; however, there is no assurance
that the Company will be able to compete successfully with its competitors.
Certain of the Company's competitors have substantially greater financial,
marketing, technical, distribution and other resources and greater name
recognition than the Company. In addition, unlike the Company, certain
competitors have a relationship with companies that manufacture exercise
equipment. The Company may also face competition from new companies that develop
similar products to the IntelliFit System. There can be no assurance that
enhancements to or future generations of competitive products will not be
developed which offer superior prices, more attractive features, easier use
and/or better service than the Company's products. See "Business-Competition."

Dependence on Sole or Limited Sources of Supply. The IntelliFit System
operates from a freestanding kiosk which houses off-the-shelf computer hardware
purchased from major equipment manufacturers. The Company does not intend to
manufacture the kiosks or any of the hardware components of the IntelliFit
System. The kiosks are off-the-shelf products with certain modifications and are
currently manufactured for the Company by one manufacturer. There can be no
assurance that future deliveries of kiosks will be completed on a timely basis.
Failure by the manufacturer to supply the Company with high quality finished
products on commercially reasonable terms, or at all, could have a material
adverse effect on the Company.

The Company purchases its hardware from several suppliers. The failure or
delay of current or alternate suppliers in supplying product to the Company
could result in delays in marketing or operation of the IntelliFit System, which
would have a material adverse effect on the Company. In addition, a change in
certain pieces of hardware could require revisions to the software which could
have a material adverse effect on the Company. The Company currently has only
one written contract with a software developer for the provision of future
development services. Currently, the Company has limited capability internally
to perform upgrades or modifications to the software and there can be no
assurance that any required upgrades or modifications to the software can be
successfully made. This could have a material adverse effect on the Company. See
"Business-Manufacturing and Development," "Principal Stockholders,"
"Management-Executive Officers and Directors."

Dependence on Key Personnel. The Company is highly dependent on the
principal members of its management, including Steven R. Gumins, the Chief
Executive Officer of the Company, and Deborah E. Griffin, the Chief Operating
Officer of the Company. The Company has an employment agreement with each of Mr.
Gumins and Ms. Griffin and has obtained a $2,000,000 key person life insurance
policy covering Mr. Gumins' life. The Company is the sole beneficiary of such
life insurance policy. The Company will not be able to obtain key person life
insurance on Deborah Griffin's life in view of health problems affecting Ms.
Griffin. Such health problems are not expected to affect her ability to carry
out her duties and responsibilities on a full-time basis. The future success of
the Company depends in large part upon its ability to attract and retain highly
qualified personnel. Competition for such personnel is intense and there can be
no assurance that the Company will be able to hire sufficient qualified
personnel on a timely basis or retain such personnel in the future. The loss of
such personnel or the failure to recruit additional key personnel by the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business-Employees" and "Management."

Potential Product Liability Claims; Insufficiency of Insurance. The
provision of personalized exercise programs may subject the Company to liability
claims of bodily injury and/or property damage to its customers and the ultimate
users of the IntelliFit System and there can be no assurance that the Company
will be able to maintain insurance sufficient to cover any or all claims against
the Company which may arise. If the Company's insurance is insufficient, this
could have a material adverse effect on the Company. See "Business --
Insurance."

Use of Proceeds to Benefit Insiders. An aggregate of approximately
$175,000(3.7%) of the net proceeds of the Offering will be used to repay
principal and accrued interest on the Stockholder Advances made by Steven R.
Gumins, Chief Executive Officer of the Company, Deborah E. Griffin, Chief
Operating Officer of the Company, Jonathan W. Seybold, Chairman of the Board of
the Company, NGJ, Ltd., a principal stockholder of the Company,

7
<PAGE>

and Dr. William Blase, a director of the Company. See "Use of Proceeds and Plan
of Operations," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Certain Transactions."

Charges Arising from Debt Issuance Costs. Upon completion of the Offering
and repayment of the Bridge Notes, a non-recurring charge representing the
unamortized debt discount and debt issuance costs incurred in connection with
the Bridge Financing will be charged to operations in the quarter in which the
Offering is completed. The aggregate debt discount and debt issue costs
associated with the Bridge Notes is $660,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Charge to Earnings in the Event of Release of Escrowed Shares and Options.
The Securities and Exchange Commission (the "Commission") has taken the position
with respect to escrow arrangements such as that entered into by the Company and
its stockholders that in the event any shares are released from escrow to the
holders who are officers, directors, employees or consultants of the Company, a
compensation expense will be recorded for financial reporting purposes.
Accordingly, in the event of the release of the Escrow Shares and Escrow
Options, the Company will recognize during the period in which the earnings
thresholds are probable of being met or such stock levels achieved, a
substantial noncash charge to earnings equal to the fair market value of such
shares on the date of their release, which would have the effect of
significantly increasing the Company's loss or reducing or eliminating earnings,
if any, at such time. The recognition of such compensation expense may have a
depressive effect on the market price of the Company's securities. Such charge
will not be deductible for income tax purposes. Notwithstanding the foregoing
discussion, there can be no assurance that the Company will attain the targets
which would enable the Escrow Shares and Escrow Options to be released from
escrow. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Management -- Stock Option Plan" and "Description of
Securities."

Immediate Dilution. The purchasers of the Units in the Offering will incur
an immediate dilution of approximately $2.56 or 51% in the pro forma per share
net tangible book value of their Common Stock ($2.39 or 48% if the Underwriter's
over-allotment option is exercised in full). Additional dilution to public
investors, if any, may result to the extent that the Warrants, the Underwriter's
Unit Purchase Option and the Finder's Unit Purchase Option and/or outstanding
options are exercised at a time when the net tangible book value per share of
Common Stock exceeds the exercise price of any such securities. See "Dilution."

Potential Adverse Effects of Preferred Stock. The Company's Certificate of
Incorporation authorizes the issuance of shares of "blank check" preferred
stock, which will have such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors will be empowered, without stockholder approval (but subject to
applicable government regulatory restrictions), to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Common Stock. In
the event of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of preferred stock, there can be no assurance that the Company will
not do so in the future. See "Description of Securities -- Preferred Stock."

No Dividends. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash or other dividends in the
foreseeable future. See "Dividend Policy."

No Public Market for Securities; Possible Volatility of Market Price;
Arbitrary Determination of Offering Price. Prior to the Offering, there has not
been any market for any of the Company's securities, and there can be no
assurance that an active trading market will develop or be sustained after the
Offering. The initial public offering price of the Units and the exercise prices
and other terms of the Warrants have been determined by negotiation between the
Company and the Underwriter pursuant to Schedule E of the By-laws of the NASD
and are not necessarily related to the Company's asset value, net worth, results
of operations or any other criteria of value and may not be indicative of the
prices that may prevail in the public market. The market prices of the Units,
Common Stock and Warrants could also be subject to significant fluctuations in
response to variations in the Company's development efforts, intellectual
property position, government regulations, general trends in the industry and
other factors, including extreme price and volume fluctuations which have been
experienced by the securities markets from time to time. See "Underwriting."

Outstanding Warrants and Options; Exercise of Registration Rights. Upon
completion of the Offering, the Company will have outstanding (i) 1,200,000
Class A Warrants to purchase an aggregate of 1,200,000 shares of

8
<PAGE>

Common Stock and 1,200,000 Class B Warrants; (ii) 1,200,000 Class B Warrants to
purchase 1,200,000 shares of Common Stock; (iii) the Selling Securityholder
Warrants to purchase 500,000 shares of Common Stock and 500,000 Class B
Warrants; (iv) the Unit Purchase Option and Finder's Unit Purchase Option to
purchase an aggregate of 480,000 shares of Common Stock, assuming exercise of
the underlying Warrants; and (v) outstanding options (including the Escrow
Options) to purchase 78,674 shares of Common Stock granted outside of the
Company's 1996 Stock Option Plan. The Company also has 250,000 shares of Common
Stock reserved for issuance upon exercise of options under its 1996 Stock Option
Plan, 200,000 of which have been granted. Holders of such warrants and options
are likely to exercise them when, in all likelihood, the Company could obtain
additional capital on terms more favorable than those provided by warrants and
options. Further, while these warrants and options are outstanding, the
Company's ability to obtain additional financing on favorable terms may be
adversely affected. The holders of the Unit Purchase Option and Finder's Unit
Purchase Option have certain demand and/or "piggy-back" registration rights with
respect to their securities. Exercise of such rights could involve substantial
expense to the Company. See "Management-Stock Option Plan," "Principal
Stockholders," "Description of Securities" and "Underwriting."

Potential Adverse Effect of Redemption of Warrants. Commencing one year
from the date of this Prospectus, the Warrants may be redeemed by the Company at
a redemption price of $.05 per Warrant upon not less than 30 days' prior written
notice if, with respect to the Class A Warrants, the closing bid price of the
Common Stock shall have averaged in excess of $9.10 per share and, with respect
to the Class B Warrants, $12.25 per share, in each instance for 30 consecutive
trading days ending within 15 days of the notice. Redemption of the Warrants
could force the holders (i) to exercise the Warrants and pay the exercise price
therefor at a time when it may be disadvantageous for the holders to do so, (ii)
to sell the Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or (iii) to accept the nominal redemption price
which, at the time the Warrants are called for redemption, is likely to be
substantially less than the market value of the Warrants. See "Description of
Securities-Redeemable Warrants."

Current Prospectus and State Registration to Exercise Warrants. Holders of
Warrants will be able to exercise the Warrants only if (i) a current prospectus
under the Securities Act relating to the securities underlying the Warrants is
then in effect and (ii) such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. Although the Company has undertaken and
intends to use its best efforts to maintain a current prospectus covering the
securities underlying the Warrants following completion of the Offering to the
extent required by Federal securities laws, there can be no assurance that the
Company will be able to do so. The value of the Warrants may be greatly reduced
if a prospectus covering the securities issuable upon the exercise of the
Warrants is not kept current or if the securities are not qualified, or exempt
from qualification, in the states in which the holders of Warrants reside.
Persons holding Warrants who reside in jurisdictions in which such securities
are not qualified and in which there is no exemption will be unable to exercise
their Warrants and would either have to sell their Warrants in the open market
or allow them to expire unexercised. If and when the Warrants become redeemable
by the terms thereof, the Company may exercise its redemption right even if it
is unable to qualify the underlying securities for sale under all applicable
state securities laws. See "Description of Securities-Redeemable Warrants."

Possible Adverse Effect on Liquidity of the Company's Securities Due to the
Investigation of D.H. Blair Investment Banking Corp. and D.H. Blair & Co., Inc.
by the Securities and Exchange Commission. The Commission is conducting an
investigation concerning various business activities of the Underwriter and D.H.
Blair & Co., Inc. ("Blair & Co."), a selling group member which will distribute
substantially all of the Units offered hereby. The investigation appears to be
broad in scope, involving numerous aspects of the Underwriter's and Blair &
Co.'s compliance with the Federal securities laws and compliance with the
Federal securities laws by issuers whose securities were underwritten by the
Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and that
it is cooperating with the investigation. The Underwriter cannot predict whether
this investigation will ever result in any type of formal enforcement action
against the Underwriter or Blair & Co., or, if so, whether any such action might
have an adverse effect on the Underwriter or the securities offered hereby. The
Company has been advised that Blair & Co. intends to make a market in the
securities following the Offering. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to make a
market in the Company's securities, which could adversely affect the liquidity
or price of such securities. See "Underwriting."

9
<PAGE>

Possible Restrictions on Market-Making Activities in Company's Securities.
The Underwriter has advised the Company that Blair & Co. intends to make a
market in the Company's securities. Regulation M, which was recently adopted to
replace Rule 10b-6 and certain other rules promulgated under the Securities Act
of 1934, as amended (the "Exchange Act"), may prohibit Blair & Co. from engaging
in any market-making activities with regard to the Company's securities for the
period from five business days (or such other applicable period as Regulation M
may provide) prior to any solicitation by the Underwriter of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriter may have
to receive a fee for the exercise of Warrants following such solicitation. As a
result, Blair & Co. may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. In
addition, under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Selling Securityholder Warrants may
not simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable "cooling off" period prior to the
commencement of such distribution. Accordingly, in the event the Underwriter or
Blair & Co. is engaged in a distribution of the Selling Securityholder Warrants,
neither of such firms will be able to make a market in the Company's securities
during the applicable restrictive period. Any temporary cessation of such
market-making activities could have an adverse effect on the market price of the
Company's securities. See "Underwriting."

Possible Delisting of Securities from the Nasdaq Stock Market. While the
Company's Units, Common Stock, Class A Warrants and Class B Warrants meet the
current Nasdaq listing requirements and are expected to be initially included on
the Nasdaq SmallCap Market, there can be no assurance that the Company will meet
the criteria for continued listing. Continued inclusion on Nasdaq generally
requires that (i) the Company maintain at least $2,000,000 in total assets and
$1,000,000 in capital and surplus, (ii) the minimum bid price of the Common
Stock be $1.00 per share, (iii) there be at least 100,000 shares in the public
float valued at $200,000 or more, (iv) the Common Stock have at least two active
market makers, and (v) the Common Stock be held by at least 300 holders.

Nasdaq has recently proposed more stringent financial requirements for
listing on Nasdaq. With respect to continued listing, such new requirements are
(i) either at least $2,000,000 in tangible assets, a $35,000,000 market
capitalization or net income of at least $500,000 in two of the three prior
years, (ii) at least 500,000 shares in the public float valued at $1,000,000 or
more, (iii) a minimum Common Stock bid price of $1.00, (iv) at least two active
market makers, and (v) at least 300 holders of the Common Stock. If adopted, the
Company will have to meet and maintain such new requirements. If the Company is
unable to satisfy Nasdaq's maintenance requirements, its securities may be
delisted from Nasdaq. In such event, trading, if any, in the Units, Common Stock
and Warrants would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or the NASD's "Electronic Bulletin Board." Consequently,
the liquidity of the Company's securities could be impaired, not only in the
number of securities which could be bought and sold, but also through delays in
the timing of transactions, reduction in security analysts' and the news media's
coverage of the Company and lower prices for the Company's securities than might
otherwise be attained.

Risks of Low-Priced Stock. If the Company's securities were delisted from
Nasdaq (See "Possible Delisting of Securities from the Nasdaq Stock Market"),
they could become subject to Rule 15g-9 under the Exchange Act, which imposes
additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with net worths in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Company's securities
and may adversely affect the ability of purchasers in the Offering to sell in
the secondary market any of the securities acquired hereby.

Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.

10
<PAGE>

The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of a penny
stock from associating with a broker-dealer or participating in a distribution
of a penny stock, if the Commission finds that such a restriction would be in
the public interest. If the Company's securities were subject to the rules on
penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.

Shares Eligible for Future Sale. Future sales of Common Stock by existing
stockholders pursuant to Rule 144 under the Securities Act, pursuant to the
Concurrent Offering or otherwise, could have an adverse effect on the price of
the Company's securities. Pursuant to the Concurrent Offering, 500,000 Selling
Securityholder Warrants and the underlying securities have been registered for
resale concurrently with the Offering, subject to a contractual restriction that
the Selling Securityholders not sell any of the Selling Securityholder Warrants
for one year from the closing of the Offering. The shares outstanding prior to
the Offering will be eligible for sale under Rule 144 at various times beginning
90 days after the date of this Prospectus. An additional 78,674 shares of Common
Stock underlying vested options issued outside of the Company's stock option
plan will be eligible for resale pursuant to Rules 144 and/or 701 under the
Securities Act (subject to the restrictions on transfer applicable to the Escrow
Shares and Escrow Options) beginning 90 days after the date of this Prospectus.
However, holders of all of the outstanding shares of Common Stock and
outstanding options prior to the Offering have agreed not to sell any shares of
Common Stock for a period of 13 months from the date of this Prospectus without
the prior written consent of the Underwriter. The Underwriter has registration
rights covering its securities. Sales of Common Stock, or the possibility of
such sales, in the public market may adversely affect the market price of the
securities offered hereby. See "Concurrent Offering," "Description of
Securities" and "Shares Eligible for Future Sale."

Possible Conflicts of Interest; Lack of Independent Appraisals for Related
Transactions. Gregory L. Zink, President and a director of the Company, serves
as Chief Operating Officer of NGJ, Ltd., the licensor of the Company's
technology and a principal stockholder of the Company. Kenneth W. Krugler, a
director of the Company, is the President of TransPac Software Inc.
("TransPac"), one of the developers of the software embodied in the Intellifit
System. The Company has entered into agreements with each of NGJ Ltd. and
TransPac. See "Business." The Company did not obtain independent appraisals with
respect to the terms of such arrangements. Actual or potential conflicts of
interest between the Company and its officers and directors may arise with
respect to such business arrangements.

11
<PAGE>

USE OF PROCEEDS AND PLAN OF OPERATIONS

The net proceeds to the Company from the sale of the 1,200,000 Units
offered in the Offering, after deducting underwriting discounts and commissions
and other expenses of the Offering, are estimated to be approximately $4,775,000
($5,558,000 if the Underwriter's over-allotment option is exercised in full).
The Company expects the net proceeds to be utilized approximately as follows:
<TABLE>
<CAPTION>
Approximate Amount Approximate Percent
Application of Net Proceeds of Net Proceeds
----------- --------------- ---------------
<S> <C> <C>
Repayment of Bridge Notes (1) .................... $1,016,500 21.3%
Repayment of Stockholder Advances(2) ............. 175,000 3.7
Capital Expenditures(3) .......................... 755,000 15.8
Research and Development(4) ...................... 875,000 18.3
Sales and Marketing (5) .......................... 725,000 15.2
Working Capital(6) ............................... 1,228,500 25.7
---------- -------
Total ............................................ $4,775,000 100.0%
========== =======
</TABLE>

- --------

(1) Represents the principal amount and accrued interest at the rate of
10% per annum (estimated at approximately $ 16,500 through January 31,
1997) of Bridge Notes issued in the Bridge Financing in December,
1996. The proceeds of the Bridge Financing were and are being used
primarily for working capital purposes. See "Capitalization -- Bridge
Financing" and "Certain Transactions."

(2) Represents the principal amount and accrued interest at the rate of
10% per annum of notes issued to executive officers, directors and a
principal stockholder of the Company between September and December 3,
1996. The proceeds of the Stockholder Advances were and are being used
primarily for working capital purposes. See "Certain Transactions."

(3) Includes costs associated with hardware and purchasing office
equipment.

(4) Includes costs associated with modifications of IntelliFit System for
new markets and the hiring of product development pesonnel.

(5) Includes costs associated with the hiring of additional personnel, the
creation and updating of customer lists, advertising and attendance at
trade shows and other advertising expenses.

(6) Includes general and administrative expenses, including approximately
$450,000 for salaries of the current executive officers during the
next 18 months. See "Management -- Employment Agreements."

The foregoing represents the Company's best estimate of its allocation of the
net proceeds of the Offering during the next 18 months. This estimate is based
on certain assumptions, including that no events occur which would cause the
Company to abandon any particular efforts, that competitive conditions remain
stable, that the success of the Company's research and development and sales and
marketing activities will occur as projected, that the Company does not enter
into collaborations to fund a project separately and that the Company will be
able to obtain equipment financing to fund the purchase of kiosks. Kiosks are
expected to cost approximately $9,000 a piece and the Company does not plan to
maintain an inventory of such products. The amounts actually expended for each
purpose may vary significantly in the event any of these assumptions prove
inaccurate. The Company reserves the right to change its use of proceeds as
unanticipated events may cause the Company to redirect its priorities and
reallocate the proceeds accordingly.

Any additional proceeds received upon exercise of the over-allotment
option, the Warrants or the Selling Securityholder Warrants will be added to
working capital. Pending utilization, the net proceeds of the Offering will be
invested in high-quality short-term, interest-bearing investments.

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for use in the expansion of
the Company's business. The declaration and payment of future dividends, if any,
will be at the sole discretion of the Board of Directors and will depend upon
the Company's profitability, financial condition, cash requirements, future
prospects and other factors deemed relevant by the Board of Directors.

12
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company (i) as of
September 30, 1996 (after giving retroactive effect to a 1,339.4362-for-one
stock split effected in October 1996); (ii) pro forma as of September 30, 1996
to reflect (a) the sale of the Bridge Notes and Bridge Warrants subsequent to
such date, (b) receipt of a portion of the Stockholder Advances subsequent to
such date and (c) the conversion of the Stockholder Debt into equity and
outstanding Series A Preferred Stock into Common Stock upon completion of the
Offering; and (iii) as adjusted to reflect the sale of the Units offered hereby
and the application of the net proceeds therefrom to repay the Bridge Notes and
the Stockholder Advances. This table should be read in conjunction with the
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------
Actual Pro Forma As Adjusted
---------- ---------- -----------

Bridge Notes, net of discount(1) ............. $ -- $ 500,000 $ --
Notes payable and accrued interest
stockholders, non-current .................. 836,000 170,000 --

Stockholders' Equity(2):

Preferred Stock, $.01 par value;
5,000,000 shares authorized; 600 shares
of Series A Preferred Stock issued and
outstanding actual; no shares issued and
outstanding pro forma and as adjusted .... -- -- --

Common Stock, $.01 par value;
20,000,000 shares authorized 281,612
shares issued and outstanding actual;
721,326 shares issued and outstanding
pro forma; 1,921,326 shares issued and
outstanding as adjusted (3)(4) ............ 3,000 7,000 19,000

Additional paid-in capital .................... 1,252,000 2,954,000 7,717,000

Deficit accumulated during
development stage(5) .......................... (1,956,000) (2,078,000) (2,757,000)
----------- ----------- -----------
Total stockholders' equity
(capital deficiency) .................... (701,000) 883,000 4,979,000
----------- ----------- -----------
Total capitalization .................. $ 135,000 $ 1,553,000 $ 4,979,000
=========== =========== ===========
</TABLE>
- --------

(1) The Bridge Notes are payable on the earlier of December 2, 1997 or the
completion of the Offering. See "Use of Proceeds and Plan of Operations."

(2) Authorized amounts give effect to an amendment to the Company's Certificate
of Incorporation.

(3) Excludes (i) up to 720,000 shares of Common Stock issuable upon exercise of
the Underwriter's over-allotment option and the underlying Warrants; (ii)
3,600,000 shares of Common Stock issuable upon exercise of the Warrants
included in or underlying the Units offered hereby; (iii) 1,000,000 shares
of Common Stock issuable upon exercise of the Selling Securityholder
Warrants and the underlying Warrants; (iv) 480,000 shares of Common Stock
issuable upon exercise of the Unit Purchase Option and the Finder's Unit
Purchase Option and the Warrants included in or underlying such options;
(v) 250,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Option Plan, of which 200,000 have been granted and
(vi) 78,674 shares of Common Stock issuable upon exercise of outstanding
options granted outside of the Company's 1996 Stock Option Plan. See
"Management-Stock Option Plan," "Certain Transactions," "Description of
Capital Stock" and "Concurrent Offering."

(4) Includes the 349,370 Escrow Shares. See "Principal Stockholders-Escrowed
Shares and Options."

(5) Gives effect to recognition of $660,000 of expense upon the closing of the
Offering representing debt discount and debt issuance costs relating to the
Bridge Financing and repayment of the Bridge Notes. See "Use of Proceeds
and Plan of Operations" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

13
<PAGE>

Bridge Financing

In December 1996, the Company completed the Bridge Financing of an
aggregate of $1,000,000 principal amount of Bridge Notes and 500,000 Bridge
Warrants in which it received net proceeds of approximately $840,000, (after
expenses of the offering). The Bridge Notes are payable, together with interest
at the rate of 10% per annum, on the earlier of December 2, 1997 or the closing
of the Offering. See "Use of Proceeds and Plan of Operations." The Bridge
Warrants entitled the holders thereof to purchase one share of Common Stock
commencing December 2, 1997 but will be exchanged automatically on the closing
of the Offering for the Selling Securityholder Warrants, each of which will be
identical to the Class A Warrants included in the Units offered hereby. The
Selling Securityholder Securities have been registered for resale in the
Registration Statement of which this Prospectus forms a part, subject to the
contractual restriction that the Selling Securityholders have agreed not to
exercise, sell, transfer, hypothecate, assign or otherwise dispose of the
Selling Securityholder Warrants for a period of one year from the closing of the
Offering. See "Concurrent Offering."

Upon repayment of the Bridge Notes, the unamortized balance of the $500,000
debt discount attributable to the Bridge Warrants as well as other debt issuance
costs will be charged to the Company's operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

14
<PAGE>

DILUTION

The following discussion and tables allocate no value to the Warrants
contained in the Units.

Dilution represents the difference between the initial public offering
price paid by the purchasers in the Offering and the net tangible book value per
share immediately after completion of the Offering. Net tangible book value per
share represents the amount of the Company's total assets minus the amount of
its intangible assets and liabilities, divided by the number of shares of Common
Stock outstanding. The pro forma adjustment to the historical net tangible book
value gives effect to the issuance in December 1996 of the Bridge Notes, net of
debt issue costs and debt discount, and the conversion on the closing of the
Offering of the Stockholder Debt into equity and the outstanding shares of
Series A Preferred Stock to Common Stock. At September 30, 1996, the Company had
a negative pro forma net tangible book value of $(126,000) or $(.17) per share
($(.34) per share if the Escrow Shares were excluded). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Concurrent Offering," "Certain Transactions" and Notes A, F and I of Notes to
Financial Statements. After giving retroactive effect to the sale of 1,200,000
Units offered hereby, and the Company's receipt of the net proceeds therefrom
less underwriting discounts, commissions and other estimated offering expenses
(anticipated to aggregate $1,225,000), the net tangible book value of the
Company, as adjusted, at September 30, 1996 would have been $4,691,000 or $2.44
per share. This would result in an immediate dilution to the public investors of
$2.56 per share and the aggregate increase in the pro forma net tangible book
value to present stockholders would be $2.61 per share ($3.15 per share if the
Escrow Shares were excluded).

The following table illustrates the pro forma information with respect to
dilution to new investors on a per share basis:

Public offering price per share ........................ $5.00
Pro forma negative net tangible book
value per share before Offering ...................... $(.17)
Increase per share attributable to new investors ....... $2.61
-----
Net tangible book value per share after Offering ....... $2.44
-----
Dilution to new investors(1) ........................... $2.56
=====

- --------

(1) If the over-allotment option is exercised in full, the net tangible book
value after the Offering would be approximately $2.61 per share, resulting
in dilution to new investors in the Offering of $2.39 per share.

The following table summarizes the differences between existing
stockholders and new investors with respect to the number of shares of Common
Stock purchased from the Company, the total consideration paid to the Company
and the average price per share paid by existing stockholders and by new
investors:

<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Paid
-------------------- ------------------- Average Price
Number Percent Amount(1) Percent Per Share
-------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders ................ 721,326(2) 37.5% $2,174,440 27.0% $2.72
New Investors ........................ 1,200,000 60.5% $6,000,000 73.0% $5.00
--------- ------ ---------- ------
Total ................................ 1,921,326(2) 100.0% $8,174,440 100.0%
========= ====== ========== ======
</TABLE>
- --------

(1) Prior to deduction of costs of issuance.

(2) Includes the 349,370 Escrow Shares. See "Principal Stockholders-- Escrowed
Shares and Options."

The foregoing table does not give effect to exercise of any outstanding
options or warrants. To the extent such options or warrants are exercised there
will be further dilution to new investors. See "Capitalization-Bridge
Financing," "Management-Stock Option Plan" and "Description of Securities."

15
<PAGE>

SELECTED FINANCIAL DATA

The selected financial data presented below for the period from July 20,
1994 (commencement of operations) through December 31, 1994, the year ended
December 31, 1995, the nine month periods ended September 30, 1995 and September
30, 1996 and the period from July 20, 1994 (commencement of operations ) through
September 30, 1996, respectively and the balance sheet data at September 30,
1996 have been derived from the Financial Statements of the Company. The data
for the nine month periods ended September 30, 1995 and September 30, 1996
include all adjustments consisting of only normal recurring adjustments that
management considers necessary to fairly present such data. The results for the
nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1996. The Financial
Statements of the Company, together with the notes thereto and the report of
Richard A. Eisner & Company, LLP, independent auditors, are included elsewhere
in this Prospectus. The selected financial data set forth below should be read
in conjunction with the Financial Statements and Notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
July 20, 1994 July 20, 1994
(Commencement Nine Months (Commencement
of Operations) Ended of Operations)
through Year Ended September 30, through
December 31, December 31, ------------------------- September 30,
1994 1995 1995 1996 1996
---------- ---------- --------- -------- ----------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Research and development expenses . $ 78,000 $ 397,000 $ 227,000 $ -- $ 475,000
General and administrative expenses 159,000 466,000 418,000 808,000 1,433,000
Net loss .......................... (230,000) (876,000) (647,000) (850,000) (1,956,000)
Pro forma net loss per share(1) ... $ (2.31) $ (2.17)
Shares used in computing pro forma
net loss per share(1) ........... 371,956 371,956
</TABLE>

At September 30, 1996
---------------------------
Actual Pro Forma(2)
---------- ----------
Balance Sheet Data:
Working capital (deficit) ..................... $ (413,000) $ 845,000
Total assets .................................. 571,000 1,711,000
Total current liabilities ..................... 436,000 158,000
Deficit accumulated during development stage .. (1,956,000) (2,078,000)
Total stockholders' equity (capital deficiency) (701,000) 883,000
- --------

(1) The pro forma net loss per share computation gives retroactive effect to
the conversion on completion of the Offering of (i) $1,083,713 of
outstanding indebtedness at August 31, 1996, plus accrued interest thereon
(the "Stockholder Debt") into 263,921 shares of the Company's Common Stock
and (ii) the Series A Preferred Stock and accrued dividends thereon
aggregating $722,000 into 175,793 shares of Common Stock, excludes the
Escrow Shares and Escrow Options. See "Certain Transactions" and Notes A,
B(4) and I of Notes to Financial Statements.

16
<PAGE>

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

The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus.

Results of Operations

The Company is in the development stage. Since its inception in July 1994,
the Company's efforts have been principally devoted to research, development and
design of products, marketing activities and raising capital. The Company has
generated only nominal revenues from the placement of test products and has
incurred substantial operating losses to date, which losses are continuing.

Since inception, the Company has sustained cumulative losses of
$(1,956,000). These losses have resulted primarily from expenditures for general
and administrative activities, including salaries, marketing and professional
fees which have aggregated $1,433,000 since inception. General and
administrative expenses increased from $418,000 during the nine months ended
September 30, 1995 to $808,000 during the nine months ended September 30, 1996,
an increase of 93%. This increase reflects (i) the Company's shift after
December 31, 1995 from research and development activities to the initiation of
sales and marketing efforts aimed at commercializing the IntelliFit System and
(ii) a $236,000 compensation charge relating to the issuance of options to
executive officers in August 1996. From inception through December 31, 1995, the
Company incurred aggregate research and development expenses of $475,000. All
development costs relating to the IntelliFit System incurred prior to December
31, 1995 were expensed. See Note B(1) of Notes to Financial Statements. The
Company did not have any expenditures for research and development during the
nine months ended September 30, 1996.

Liquidity and Capital Resources

The Company has funded its activities to date through loans from principal
stockholders and private placements of equity and debt securities. As of
September 30, 1996, the Company had a working capital deficit of $(413,000).

In December 1996, the Company completed the Bridge Financing which
consisted of $1,000,000 principal amount of Bridge Notes bearing interest at an
annual rate of 10% and warrants to purchase an aggregate of 500,000 shares of
Common Stock. See "Capitalization-Bridge Financing." The proceeds of the Bridge
Financing, which were approximately $840,000 (net of $100,000 in commissions and
a $30,000 expense allowance paid to the Underwriter which acted as placement
agent and other expenses of the private placement) have been utilized by the
Company for working capital purposes including general and administrative
expenses and expenses of the Offering. The Company intends to repay the
principal and accrued interest on the Bridge Notes with a portion of the
proceeds of the Offering. See "Use of Proceeds and Plan of Operations" and
"Certain Transactions." The Company will recognize a non-recurring charge of
$660,000 representing the aggregate debt discount and debt issuance costs
associated with the Bridge Financing at the time of repayment. See Note I of
Notes to Financial Statements.

From time to time, the Company's stockholders, including Steven R. Gumins,
Chief Executive Officer of the Company, Deborah E. Griffin, Chief Operating
Officer, and Jonathan W. Seybold, Chairman of the Board of the Company, have
funded the Company's working capital requirements. All amounts advanced prior to
August 31, 1996 were contributed to the capital of the Company. Between
September 1996 and December 3, 1996, working capital advances in the aggregate
principal amount of $170,000 were made to the Company. The Stockholder Advances
bear interest at the rate of 10% per annum and will be repaid from the proceeds
of the Offering. See "Use of Proceeds and Plan of Operations" and "Certain
Transactions."

During the 12-month period following the Offering, the Company is committed
to pay approximately $300,000 in compensation to its current executive officers.
See "Management Employment Agreements" and "Certain Transactions."

At December 31, 1995 and September 30, 1996, the Company had available net
operating loss carryforwards to reduce future taxable income of approximately
$456,000 and $710,000, respectively. The net operating loss carryforwards expire
in various amounts through 2011. The Company's ability to utilize its net
operating loss carryforwards will be subject to annual limitations pursuant to
Section 382 of the Internal Revenue Code if future changes in ownership occur,
including an annual limitation of not less than approximately $210,000 resulting
from the change in ownership arising from the Offering.

17
<PAGE>

Release of Escrowed Shares and Options

In connection with the Offering, the current shareholders of the Company
and holders of options are placing a portion of their shares and/or options in
escrow pending the Company's attainment of certain revenue or market price
goals. See "Principal Stockholders." The Commission has taken the position with
respect to the release of securities from escrow that in the event any of the
shares or options are released from escrow to directors, officers, employees or
consultants of the Company, the release will be treated, for financial reporting
purposes, as compensation expense to the Company. In the event the Company
attains any of the earnings or market price targets required for the release of
Escrow Shares and Options, the release of the Escrow Shares and Options to such
individuals will be deemed additional compensation expense to the Company.
Accordingly, the Company will, in the event of the release of the Escrow Shares
and Options recognize during the period in which the earnings or market price
targets are met, what could be a substantial one-time charge which would
substantially increase the Company's loss or reduce or eliminate earnings, if
any, at such time. Such charge to earnings will not be deductible by the Company
for income tax purposes. The amount of compensation expense recognized by the
Company will not affect the Company's total stockholders' equity. See Note F of
Notes to Financial Statements.

Plan of Operations

The report of the independent auditors on the Company's financial
statements as of December 31, 1995 contains an explanatory paragraph regarding
an uncertainty with respect to the ability of the Company to continue as a going
concern. The Company has generated only nominal revenues and has incurred an
accumulated deficit through September 30, 1996 of $(1,956,000). However, the
Company believes that upon the completion of the Offering and the receipt of the
proceeds therefrom, it will have the necessary liquidity and capital resources
to sustain planned operations for the 18 month period following the Offering.

During the 12-month period following completion of the Offering, the
Company intends to focus its efforts on marketing the Intellifit System to
certain target markets, including the military, commercial clubs, hospital
facilities, corporations, insurance companies and health maintenance
organizations. See "Business-Strategy." The Company expects to hire three or
four additional sales and marketing personnel during the next 12 months who will
pursue a variety of marketing techniques in order to gain access to potential
customers. See "Business-Marketing."

During the 12-month period following completion of the Offering, the
Company also intends to devote its resources to the development of enhancements
of the Intellifit System in order to enable the Company to target the
rehabilitation market. The company will also focus on the provision of technical
support for purchasers of its products and on the development of product
improvements and upgrades. See "Use of Proceeds and Plan of Operations."

In the event that the Company's internal estimates relating to its planned
expenditures prove materially inaccurate or the Company's marketing efforts do
not result in significant product sales, the Company may be required to
reallocate funds among its planned activities and curtail certain planned
expenditures. In any event, the Company is unable to predict whether revenues
from operations will be sufficient to fund the Company's working capital
requirements beyond 18 months. Therefore, the Company may be required to obtain
substantial additional financing through equity or debt financings,
collaborative arrangements or otherwise. There can be no assurance as to the
availability or terms of any required additional financing, when and if needed.
In the event that the Company fails to raise any funds it requires, it may be
necessary for the Company to significantly curtail its activities or cease
operations. See "Use of Proceeds and Plan of Operations".

<PAGE>

BUSINESS

General

The Company was formed in July 1994 and currently its sole product is the
IntelliFit System, a computerized system which generates personalized exercise
prescriptions and tracks and records fitness progress. The exercise
prescriptions are based on, among other things, an individual's weight, ability,
medical history, goals, fitness level and exercise preferences. The IntelliFit
System interacts with a user by applying algorithms to an individual's personal
profile and adjusting a user's exercise prescription based on progress,
frequency of workouts and other variables. The Company believes that this
interactive feature helps motivate users to continue exercising, and allows
users to reach their goals more quickly. The IntelliFit System is designed to
accommodate all levels of exercise experience and all age groups. The software
embodied in the IntelliFit System is based on training guidelines and circuit
training techniques recommended by the American College of Sports Medicine which
the Company believes provide superior results in less time than other training
methods.

The original computer source programs and related documentation and
computerized services and instructional material (collectively, the "EIS
System") on which the IntelliFit System is based was developed for Nautilus
Group Japan, Ltd. ("NGJ Ltd."), an American company operating in Japan and
currently the owner of all of the issued and outstanding shares of Series A
Preferred Stock of the Company. The Company acquired the rights to the EIS
System from NGJ Ltd. in August 1994 in exchange for the Series A Preferred Stock
and spent approximately 2 years modifying and expanding upon the EIS System in
order to create the IntelliFit System. NGJ Ltd. has advised the Company that the
EIS System is currently installed in nine facilities in Japan and has generated
over 7 million individualized exercise prescriptions. EIS System users in Japan
range in age and are divided almost equally among males and females. See
"Business-Relationship with NGJ Ltd."

During the first 18 months of the Company's existence, management focused
on research and development activities and on limited sales and marketing
activities. Beginning in the spring of 1996, the Company installed the
IntelliFit System in selected facilities in different markets, including
military, hospital, private and corporate fitness centers. The Company has
refined and improved the IntelliFit System based on its experience in the trial
markets. The Company has recently begun to focus on broader-based marketing
activities. The Company has generated only nominal revenues from product sales
as the Company has concentrated on evaluating acceptance of the IntelliFit
System in a variety of markets, varying sales and pricing approaches and
modifying installation, training and support services provided. There can be no
assurance that the Company will successfully commercialize its product, generate
any significant revenues or ever achieve profitable operations.

Strategy

The Company's strategy is to market and sell the IntelliFit System
initially in selected United States markets. The Company's first target markets
are military facilities, commercial clubs, hospital facilities, corporate
facilities, insurance companies and health maintenance organizations. The
Company believes that these markets have the greater user concentration and that
penetration of these markets could help establish the Company's credibility in
other markets. Subsequent target markets include universities, schools,
government facilities and resorts. The Company anticipates developing
enhancements to the IntelliFit System to enable the System to serve the
rehabilitation market. This will enable patients who exercise as part of their
rehabilitation program to use the System to follow their exercise program in a
local fitness center. In addition, the Company intends to explore other markets
for the IntelliFit software, including selling the software as an individually
packaged product for use on personal computers and providing the software to
Internet users.

The Company believes that the potential benefits to a fitness center of
installing the IntelliFit System are: (i) membership turnover will be reduced as
use of the IntelliFit System increases member interest by providing
goal-oriented personalized training at affordable prices and reduces the time
spent in the fitness center as a full workout using IntelliFit can be completed
in 30 minutes; (ii) since workouts based on circuit training techniques are

19
<PAGE>

shorter, overcrowding in the fitness center can be reduced; (iii) fitness
centers can use the continual information provided on member usage, interests,
history, performance and goals for marketing purposes; (iv) fitness centers can
track patterns of facility and equipment use and can incorporate such knowledge
into scheduling facility hours and determining staffing requirements; (v) the
fitness facility will be able to standardize the method by which members train
and thereby eliminate the uncertainties created by multiple instructors who use
differing techniques; (vi) fitness centers will be able to reduce the number of
trainers employed; and (vi) fitness centers will be better positioned to
integrate technologies incorporating synergistic products relating to health,
wellness and lifestyle. The Company also believes that insurance companies and
health maintenance organizations ("HMOs") can benefit from the IntelliFit
System. Insurance companies and HMOs are increasingly searching for ways to
reduce medical costs by helping their insureds lead healthier lifestyles. Some
insurance companies and HMOs have begun to offer financial incentives to
insureds who exercise regularly; however, there is a need to monitor compliance
by the insured with any programs offered. The IntelliFit System allows the
insurance companies and HMOs to monitor if, and how frequently, its insureds are
using a fitness center, the types of exercises being done and the progress made.
Weight loss clinics can similarly benefit from the ability to monitor their
clients' exercise routines.

The Company believes that there are many benefits to the users of the
IntelliFit System including, among other things, that it (i) motivates a user by
providing continual encouragement and information on a user's progress in
reaching his goals; (ii) provides interactive personalized training at
affordable prices; and (iii) enables a user to follow his personalized exercise
program in any fitness center that has the IntelliFit System.

Product

The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf hardware purchased from major equipment manufacturers. The
components include a computer with touch screen display, a modem used to
communicate with a central database, a motorized smart card reader, a scanner
and a printer. All user information is stored on the IntelliCard. The
IntelliCard can be used at any site which has an IntelliFit System. The software
embodied in the IntelliFit System is an expert system which takes numerous
variables for each individual, applies the variables to an equation and
determines the best workout program for that specific individual using the
exercise equipment at a particular facility. Each time an individual uses the
IntelliFit System, an individual's variables are updated and a new exercise
program is generated.

The IntelliFit software is written in C++ object-oriented programming
language which allows ease of customization and portability to new hardware
components and platforms.

The IntelliFit software is based on training guidelines and circuit
training techniques recommended by the American College of Sports Medicine.
Circuit training means that a user can perform a single set of approximately 8
to 12 repetitions of different exercises in approximately 30 minutes. This
method contrasts to the traditional multiple sets approach used by many
body-builders. Based on the Company's research, the Company believes that users
of the IntelliFit System will be able to attain their goals using circuit
training techniques and will be more inclined to exercise as 30 minutes of
exercise generally represents a reasonable commitment for many time-pressured
individuals.

The IntelliFit System utilizes an electronic medium, known as digital
insertion media, to display on each personalized workout sheet a specific
advertising, promotional message or announcement targeted to that particular
user. The top right quadrant of the workout sheet is currently dedicated to this
application which the Company believes will become an additional source of
revenue. The IntelliFit system also provides personalized exercise suggestions
and motivational messages on a user's workout sheet based on that specific
user's performance. The Company believes that these personalized suggestions and
messages serve as important deterrents to exercise termination.

The Company maintains a central database system consisting of a Sun Server
with two hard drives designed for expandability, a high speed modem, a high end
backup unit and a laser printer. Administrative workstations are connected to
the server and are used to perform digital entry for processing new members,
creating smart cards and generating download files. The system runs utilities to
maintain the databases, automatically back them up, generate reports and
transfer files to and from administrative workstations. The server can also
download files to the kiosks. Each kiosk is able to continue standard operation
even if there is no communication with the central computer system for up to two
weeks in view of the system's ability to receive and process delayed
communications and out of sequence information. Based on its current
configuration, the system can support one million members.

Fitness centers are not required to purchase new equipment or modify
existing equipment to use the IntelliFit System, as the System can be used with
any type of exercise equipment. This is unlike certain of the Company's
competitors' products which require fitness centers to use one brand of fitness
equipment or to retrofit existing

<PAGE>

equipment. The IntelliFit System can prescribe alternative equipment in order to
vary a user's workout or to work around injuries or machines that are being
serviced. As part of the Company's preinstallation procedures, the Company
obtains a list of the equipment configuration for the fitness center where the
IntelliFit System is to be installed. Based on this information, the IntelliFit
System prescribes exercise programs for users using the equipment in that
particular facility. In the event that a facility changes certain pieces of
equipment or in the event that certain pieces of equipment are being serviced,
the facility staff is trained to input such information into the IntelliFit
System and the System will automatically prescribe around such equipment.

The Company intends to lease the IntelliFit System to its customers for a
set monthly fee and to charge its customers an annual fee for each user which
may be paid by the facility or the user. IntelliFit forms, pencils, clipboards,
cleaning solutions and instruments will be provided to the fitness center with
each installation and additional supplies will be available to be purchased at
cost.

Use of the IntelliFit System. An individual who desires to use the
IntelliFit System first completes a new member form which asks the individual to
answer questions about, among other things, the individual's medical history,
activities in which the individual regularly participates, general fitness goals
and current fitness level. The individual fills in bubbles to answer certain of
the questions and hand writes answers to other questions. A member of the
fitness center staff then scans the form into the IntelliFit System and the
IntelliFit System prints out a personalized printed exercise program for the
user for that day. The Company suggests to each fitness center that a staff
member accompany the user the first time the user follows his personalized
exercise program in order to adjust equipment seat heights and to make any
individualized changes which appear to be necessary. An IntelliCard which
contains the user's personal information and the user's personalized exercise
program is issued to the user the next day. The next time the user goes to the
fitness center, the user is instructed to insert his IntelliCard into the kiosk
through a simple touch-screen interface on the computer screen in the kiosk. The
IntelliFit System generates the user's personalized printed workout sheet which
the user carries with him and marks off as he completes his exercises generally
by filling in bubbles. When the user finishes his workout, the user inserts the
completed workout sheet back into the kiosk. The information from the workout
sheet is scanned into the computer and the user's IntelliCard is updated. The
IntelliFit software then adjusts the user's next workout based on the exercises
the user has completed and the progress the user has made. All user information
is uploaded at the end of each day onto the Company's central database.

Types of Programs Offered. Currently the IntelliFit System provides over
300 goal-oriented programs for users to choose from. The following are some
examples:

Basic Fitness

Basic fitness is designed as an initial exercise program for individuals
who are beginning an exercise program.

General Fitness

General Fitness provides exercises for all the major muscle groups and
cardiovascular exercise to help strengthen the heart and lungs.

Active Fitness

Active Fitness prescribes exercise to increase endurance by strengthening
all the major muscle groups.

Aerobic Protection

Aerobic Protection is designed to strengthen the specific muscle groups
used in aerobic fitness exercises.

CardioFlex

CardioFlex is a comprehensive stretching and strengthening program used to
regain flexibility.

WalkPro

WalkPro strengthens the muscles of the upper and lower body helping to burn
calories while building strength and endurance.

Weight Management

Weight Management concentrates on weight loss goals with three phases and
difficulty levels of exercises.

<PAGE>

Corporate Fitness

Corporate Fitness is designed to counteract the physical and emotional
stress of working in an office.

Body Sculpting

Body Sculpting tones and strengthens the entire body as well as specific
areas.

Sports Conditioning

Sports conditioning programs provide specialized workouts designed to
concentrate on specific muscles used in sporting activities.

Each program is presented as a 20-session course. By providing varying work-out
course programs, the Company believes that users will continue to be interested
in and motivated to exercise. Each IntelliFit program accommodates all levels of
experience, from entry-level to seasoned fitness center veteran to professional
athlete. In addition, each IntelliFit program can be used by individuals in any
age group.

Benefits to IntelliFit Customer and User. The Company believes that the
potential benefits to a fitness center of installing the IntelliFit System are:
(i) membership turnover will be reduced as use of the IntelliFit System
increases member interest by providing goal-oriented personalized training at
affordable prices and reduces the time spent in the fitness center as a full
workout using IntelliFit can be completed in 30 minutes; (ii) since workouts
based on circuit training techniques are shorter, overcrowding in the fitness
center can be reduced; (iii) fitness centers can use the continual information
provided on member usage, interests, history, performance and goals for
marketing purposes; (iv) fitness centers can track patterns of facility and
equipment use and can incorporate such knowledge into scheduling facility hours
and determining staffing requirements; (v) the fitness facility will be able to
standardize the method by which members train and thereby eliminate the
uncertainties created by multiple instructors who use differing techniques; (vi)
fitness centers will be able to reduce the number of trainers employed; and (vi)
fitness centers will be better positioned to integrate technologies
incorporating synergistic products relating to health, wellness and lifestyle.
The Company also believes that insurance companies and HMOs can benefit from the
IntelliFit System. Insurance companies and HMOs are increasingly searching for
ways to reduce medical costs by helping their insureds lead healthier
lifestyles. Some insurance companies and HMOs have begun to offer financial
incentives to insureds who exercise regularly; however, there is a need to
monitor compliance by the insured with any programs offered. The IntelliFit
System allows the insurance companies and HMOs to monitor if, and how
frequently, its insureds are using a fitness center, the types of exercises
being done and the progress made. Weight loss clinics can similarly benefit from
the ability to monitor their clients' exercise routines.

Marketing

Currently, the Company has only five persos dedicated to sales and
marketing of the IntelliFit System and has very limited marketing experience. As
the Company's business grows, the Company will require additional sales and
marketing personnel. There is no assurance that the Company will be able to
recruit, train or retain qualified personnel to sell and market its product or
that it will develop a successful sales and marketing strategy. To date, the
Company has marketed the IntelliFit System primarily through demonstrations at
trade shows and advertisements in trade journals. The Company has allocated
$500,000 of the proceeds of the Offering for sales and marketing purposes. See
"Use of Proceeds and Plan of Operations." The Company expects to hire three to
four sales and marketing personnel during the next 12 months. Sales and
marketing efforts to be undertaken by the Company will include conducting
product demonstrations for potential customers, installations of kiosks on a
trial basis, attendance at conferences and meetings with military and hospital
personnel. There can be no assurance that any sales and marketing efforts
undertaken by the Company will be successful or will result in any significant
sales of its product.

The success of the Company's business is dependent upon acceptance of the
IntelliFit System by both the Company's potential customers and the actual users
of the System. The Company believes that there will be interest in its product
from military facilities, commercial clubs, hospital facilities, corporate
facilities, insurance

<PAGE>

companies and health maintenance organizations. However, there can be no
assurance that acceptance by any of the Company's potential customers will
occur. In addition, even if the IntelliFit System is installed in a fitness
center, ultimate success for the Company depends on whether individuals actually
use the System on a regular basis. The Company does not market its product
directly to these users. Instead, the Company trains fitness center staff to use
the IntelliFit System, provides each fitness center with brochures on the
IntelliFit System to distribute to users and requires fitness center staff to
introduce the IntelliFit System to its new members and all renewing members. The
Company has limited ability to monitor the manner and frequency with which
fitness center staff introduce the IntelliFit System to its new members or
renewing members or stimulate current member's interest in using the IntelliFit
System. In addition, a user must use the IntelliCard in order to access the
IntelliFit System. Although the Company believes that acceptance of smart cards
is increasing, there can be no assurance that such acceptance will occur in the
near future, if at all. A number of companies that have developed computer-based
fitness systems which prescribe personalized exercise programs have either had
limited success or have failed.

To date, the Company has installed kiosks in only six fitness centers on a
test basis. Three of the kiosks have been installed on one military base, three
have been installed in one hospital fitness center, one kiosk has been installed
in a private fitness center and one kiosk has been installed in a corporate
fitness center. Two kiosks are currently used for demonstrations at trade shows.
To date, the results of such tests have indicated satisfaction with the product
and a number of sites have reported enthusiastic responses. However, there can
be no assurance that the IntelliFit System will continue to perform as
anticipated or that the tests sites will result in significant purchase
contracts. In addition, the software embodied in the IntelliFit System may
contain errors which only become apparent subsequent to widespread commercial
use. The IntelliFit System may require improvements and refinements.
Difficulties in improving and refining the IntelliFit System could delay further
introductions and installations of the System and could cause the Company to
incur additional costs. This would have a material adverse effect on the
Company.

Relationship with Nautilus Group Japan, Ltd.

In August 1994, pursuant to an Assignment Agreement (the "Assignment
Agreement"), NGJ Ltd. assigned the EIS System along with registration for the
trademark "EIS Expert Instructor System" (the "Trademark") to the Company as a
contribution to capital in consideration for the issuance to NGJ Ltd. of 50
shares of the Company's Series A Preferred Stock, $.01 par value (the "Series A
Preferred Stock"). In addition, in August 1994 the Company issued 550 shares of
Series A Preferred Stock to NGJ for $550,000 in cash. Upon the closing of the
Offering, NGJ Ltd. will convert its shares of Series A Preferred Stock into
175,792 shares of Common Stock. See "Principal Stockholders." The assignment to
the Company is subject to a Japanese company's right to use the EIS System in
Sumitomo Nautilus Clubs in Japan pursuant to an exclusive franchise agreement
(the "NGJ Franchise Agreement") granted to such company by NGJ Ltd. Pursuant to
the Assignment Agreement, the Company granted NGJ Ltd. a royalty-free
non-exclusive license with respect to any and all improved, updated and enhanced
EIS Systems which may be designed, developed and implemented by the Company or
any of the Company's agents, employees and consultants (including, without
limitation, the right to sublicense such use) exclusively in Sumitomo Nautilus
Clubs in Japan pursuant to the NGJ Franchise Agreement. In addition, the Company
granted NGJ Ltd. a non-exclusive license with respect to the EIS Systems and the
Trademark and any and all improved, updated and enhanced EIS Systems (including
the IntelliFit System) ("New Products") which may be designed, developed and
implemented by the Company or any of the Company's agents, employees and
consultants (including, without limitation, the right to sublicense such use)
exclusively in Japan, such license to be effective upon (i) termination of the
NGJ Franchise Agreement, provided the NGJ Franchise Agreement is not replaced
with another license or franchise agreement between NGJ Ltd. and the Japanese
company or (ii) the date on which NGJ Ltd. reasonably concludes, based on an
examination of its quarterly financial results, that its annual revenue from the
NGJ Franchise Agreement has fallen below $1,000,000 (the "Termination
Conditions").

In June 1995, the Company entered into an Exclusive Distribution License
Agreement with NGJ Ltd. pursuant to which the Company granted NGJ Ltd. the
exclusive right and license to market, use and grant sub licenses to others to
distribute all fitness-related hardware and software products owned and
developed by the Company during the term of the Agreement in Japan. The
Agreement is terminable by either party on notice for cause or without cause, on
notice delivered not less than 90 days in advance of and effective on the fifth,
tenth, fifteenth, twentieth, or any subsequent five year anniversary of the date
the product is in a form suitable for sale in Japan (the "Suitability Date"). In
the event that the Company terminates the Agreement without cause, and within
120 days thereafter proposes to enter into an agreement with a third party to
distribute the products in Japan, NGJ Ltd. must be given the right to distribute
the products in Japan on the same terms as are contained in the agreement with
the third party. The Agreement also contains a provision requiring NGJ Ltd. to
use reasonable commercial efforts to exploit the

<PAGE>

products in Japan. As the sole remedy for NGJ Ltd.'s failure to exploit the
products, the Company may terminate the Agreement on 60 days notice at any time
after the third anniversary of the Suitability Date.

In November 1996, the Company and NGJ Ltd. entered into a letter agreement
pursuant to which the parties agreed that (i) in the event that neither of the
Termination Conditions have been met, royalties payable by NGJ Ltd. to the
Company on distributions of the EIS System and New Products by NGJ Ltd. outside
of Sumitomo Nautilus Clubs in Japan will be determined by the parties in the
future, and (ii) in the event that either of the Termination Conditions have
been met, no royalties will be payable by NGJ Ltd. to the Company on the first
$2,000,000 of revenue derived from distributions of the EIS System and New
Products by NGJ Ltd. outside of Sumitomo Nautilus Clubs in Japan and all
royalties in excess of such amount will be determined by the parties in the
future.

Service

The Company currently employs a technical support staff of four persons.
The technical support staff's responsibilities include being present on-site
when the IntelliFit System is delivered to a facility, unpacking and testing the
System and training the facility staff to use the System and to correct problems
with the System. In addition, technical support staff and engineers who are
qualified to answer more complex technical problems are generally available by
telephone during business hours to respond to questions. In the event that a
fitness center has difficulties with its computer hardware, the Company
contracts with local computer service centers for maintenance of the hardware.

Manufacturing and Development

The IntelliFit System operates from a freestanding kiosk which houses
off-the-shelf computer hardware purchased from major equipment manufacturers.
The Company does not intend to manufacture the kiosks or any of the hardware
components of the IntelliFit System. The kiosks are off-the-shelf products with
certain modifications and are currently manufactured for the Company by one
manufacturer. To date, kiosks have been manufactured on an as-needed basis;
however, the Company expects that in the future, kiosks will be manufactured in
increments of ten. The manufacturer of the kiosks also installs all of the
hardware in the kiosk and ships the fully-installed kiosk to the Company's
customers. Although all kiosks delivered have met Company specifications, there
can be no assurance that future deliveries of kiosks will be completed on a
timely basis. Although the Company believes that additional alternative sources
are available, failure by the manufacturer to supply the Company with high
quality finished products on commercially reasonable terms, or at all, could
have a material adverse effect on the Company.

The Company purchases its hardware from several suppliers. Although the
Company does not maintain formal agreements with any of its suppliers of
hardware, the Company believes that its current supply arrangements will satisfy
the Company's present and anticipated production requirements, and that the
Company has suitable alternative supply sources in the event that its current
arrangements are terminated or that current suppliers are otherwise unable to
fulfill its needs. However, there can be no assurance that such alternative
suppliers will be available. The failure or delay of other suppliers in
supplying product to the Company could result in delays in marketing or
operation of the IntelliFit System, which would have a material adverse effect
on the Company. In addition, a change in certain pieces of hardware could
require revisions to the software which could have a material adverse effect on
the Company.

The software embodied in the IntelliFit System was developed for the
Company by TransPac and a number of other third party software developers. In
August 1994, the Company entered into a Retainer Agreement with TransPac
pursuant to which TransPac was retained in order to assist the Company in
developing the specification for an update to the EIS System. For TransPac's
work under the Retainer Agreement, the Company paid TransPac a fee of $120,000.
In addition, the Company granted TransPac an option to acquire 10% of the Common
Stock of the Company at an exercise price per share equal to the price paid by
the initial purchasers of the Company's Common Stock. TransPac exercised this
option in February 1996. The Retainer Agreement contains a provision requiring
TransPac to provide future development services to the Company upon the
Company's request on designated, scheduled projects through December 31, 1998.
The first 500 hours of services in a calendar year will be compensated at a rate
of $125 per hour and the second 500 hours of services in a calendar year (and
any additional time) will be compensated at a rate of $150 per hour. Pursuant to
the Retainer Agreement, TransPac shall be entitled to designate one member to
the Company's Board of Directors until December 31, 1998. TransPac's current
designee to the Board of Directors is Kenneth W. Krugler, the President of
TransPac. The Company does not have any written contracts with any other
software developers. Currently, the Company has limited capability

24
<PAGE>

internally to perform upgrades or modifications to the software and there can be
no assurance that any required upgrades or modifications to the software can be
successfully made. This could have a material adverse effect on the Company. See
"Management-Officers and Directors."

Competition

The Company competes with companies that have developed computer-based
fitness systems which prescribe personalized exercise programs. The Company will
attempt to compete on the basis of cost, features offered, ease of use, time
spent at the kiosk and service; however, there is no assurance that the Company
will be able to compete with its competitors. Certain of the Company's
competitor's products require fitness centers to use one brand of fitness
equipment or to retrofit existing equipment. The Company believes that it has a
competitive advantage in this respect as fitness centers do not need to make any
additional expenditures for equipment or parts in order to use the IntelliFit
System. In addition, certain of the Company's competitor's have developed
products that are not interactive. The IntelliFit System interacts with a user
through artificial intelligence and adjusts a user's exercise prescription based
on progress, frequency of workouts and other variables. The Company believes
that this interactive feature helps motivate users to continue exercising,
reduces injuries and allows users to reach their goals more quickly. The
IntelliFit System is simple to use as a user merely inserts his IntelliCard into
the kiosk, receives an exercise program card, marks off the exercises completed
on the card generally by filling in bubbles and feeds the completed card back
into the kiosk. Certain of the Company's competitor's products require users to
type information directly onto the computer in the kiosk. This is time consuming
for the user and can create lines of users waiting to use the kiosk. The
IntelliFit System has been designed so that a user's average length of time
spent at the kiosk is under one minute. Finally, the Company intends to
concentrate on technical support in order to provide the fitness centers with
uninterrupted use of the IntelliFit System.

Certain of the Company's competitors have substantially greater financial,
marketing, technical, distribution and other resources and greater name
recognition than the Company. In addition, certain competitors have a
relationship with companies that manufacture exercise equipment. The Company may
also face competition from new companies that develop similar products to the
IntelliFit System. In addition, certain competitors have a relationship with
companies that manufacture exercise equipment. There can be no assurance that
enhancements to or future generations of competitive products will not be
developed which offer superior prices more attractive features, easier use
and/or better service than the Company's products.

Insurance

The provision of personalized exercise programs may subject the Company to
liability to its customers and/or the ultimate users of the IntelliFit System.
The Company's $1,000,000 insurance policy currently excludes coverage for bodily
injury. Although the Company intends to seek appropriate additional insurance,
there can be no assurance that any insurance obtained by the Company will be
sufficient to cover any or all claims against the Company which may arise. If
such insurance is insufficient, this could have a material adverse effect on the
Company.

Employees

The Company currently has 11 full-time employees, including two in
management and administration, five in sales and marketing and four in product
development/technical support. The Company also utilizes the services of five
independent contractors. The Company is highly dependent on the principal
members of its management including Steven R. Gumins, the Chief Executive
Officer of the Company and Deborah E. Griffin, the Chief Operating Officer of
the Company. The Company has employment agreements with each of Mr. Gumins and
Ms. Griffin and has obtained a $2,000,000 key person life insurance policy
covering Mr. Gumins' life. See "Management-Employment Agreements." The Company
is the sole beneficiary of such life insurance policy. The Company will not be
able to obtain key person life insurance on Deborah Griffin's life in view of
health problems affecting Ms. Griffin. The future success of the Company depends
in large part on its ability to attract and retain highly qualified personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to hire sufficient qualified personnel on a timely basis or
can retain such personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good.

<PAGE>

Facilities

The Company's corporate headquarters are located at 17575 Pacific Coast
Highway, Pacific Palisades, California 90272 where the Company occupies
approximately 2,000 square feet of space under a lease which expires August 18,
1997. The lease contains an option, exercisable by the Company, to renew for
continual additional one year terms. The lease currently provides for monthly
rental payments of $2,675. The monthly rental payment for each additional one
year term can be increased by no more than 7% per year. The Company believes
that in the event it does not renew this lease it can enter into a new lease for
equivalent space on commercially reasonable terms. The Company believes that its
existing facility is well maintained, in good operating condition and adequate
to meet its current requirements.

Legal Proceedings

The Company is not involved in any material legal proceedings.

26
<PAGE>

MANAGEMENT

Executive Officers and Directors

The following table sets forth the names, ages and positions of the
executive officers and directors of the Company.

Name Age Position
---- --- --------
Jonathan W. Seybold(1)(2) ............ 53 Chairman of the Board of Directors
Gregory L. Zink ...................... 40 President, Chief Financial Officer
and Director
Steven R. Gumins...................... 45 Chief Executive Officer, Vice
President-- Sales and
Director
Deborah E. Griffin(2)................. 44 Chief Operating Officer, Secretary
and Director
William Blase(1) ..................... 45 Director
Kenneth W. Krugler ................... 35 Director
M. Caroline Martin(2) ................ 56 Director
Allan Dalfen(1) ...................... 53 Director

- --------
(1) Member of Compensation Committee.

(2) Member of Audit Committee.

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 and Chief Financial
Officer since July 1994 and a director of the Company since July 1994. Mr. Zink
is not involved in the day to day management of the Company and devotes only a
small portion of his business time to the Company. The Company expects to hire a
new Chief Financial Officer during the three months following the Offering. 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.

STEVEN R. GUMINS has been the Company's Chief Executive Officer and Vice
President Sales since August 1994 and a director of the Company since August
1994. From August 1984 to January 1988 Mr. Gumins was the President of Computers
for Education, a provider of publishing materials to schools. From October 1992
to October 1993, Mr. Gumins was a Portfolio Analyst of Guild Investment
Management, Inc., an investment advisory firm. From October 1993 to August 1994,
Mr. Gumins was a Vice President of Portfolio Advisory Services, Inc., an
investment advisory firm. Mr. Gumins has a B.A. from the University of Buffalo
and participated in a United Nations program at the University of Chile in
Santiago, Chile.

DEBORAH E. GRIFFIN has served as the Company's Chief Operating Officer and
a director since August 1994. Prior to joining the Company, from 1982 to 1990,
Ms. Griffin was the Vice President Operations of Seybold Seminars. From November
1990 to July 1994, Ms. Griffin was the Vice President, Operations at Ziff-Davis
Exposition and Conference Company, Inc., a computer publishing company.

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.

<PAGE>

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, subject to rights, if any, under contracts of
employment. See "Management -- Employment Agreements."

Board Committees and Designated Directors

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. See "Management -- Stock Option Plan." The Board of Directors also
has an Audit Committee which reviews the results and scope of the audit and
other accounting related matters.

Pursuant to the Retainer Agreement entered into by the Company and
TransPac, TransPac shall be entitled to designate one member to the Company's
Board of Directors until December 31, 1998. TransPac's current designee to the
Board of Directors is Kenneth W. Krugler, the President of TransPac. See
"Business-Manufacturing and Development."

The Company has agreed, if requested by the Underwriter, to nominate a
designee of the Underwriter to the Company's Board of Directors for a period of
five years from the date of this Prospectus. The Underwriter has not designated
a nominee as of the date of this Prospectus. See "Underwriting."

Director Compensation

Directors are entitled to receive options pursuant to the Company's 1996
Stock Option Plan. See "Management-Stock Option Plan." On effectiveness of the
Offering, the Company will grant five-year options to purchase 1,000 shares of
Common Stock to each of Jonathan W. Seybold, Gregory L. Zink, Dr. William Blase,
M. Caroline Martin, Allan Dalfen and Kenneth W. Krugler. On such date, the
Company also intends to enter into a consulting agreement with Mr. Seybold
pursuant to which he will receive 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.

Executive Compensation

The following Summary Compensation Table sets forth the compensation earned
by Steven Gumins, the Company's Chief Executive Officer and one other executive
officer of the Company whose total annual salary and bonus exceeded $100,000 for
the fiscal year ended December 31, 1996.

Summary Compensation Table
<TABLE>
<CAPTION>

Long-term
Annual Compensation Compensation
--------------------------- ----------------------
Name and Securities Underlying
Principal Position Year Salary Bonus Options
------------- ---- ----- ----- ---------
<S> <C> <C> <C> <C>
Steven R. Gumins, Chief Eecutive Officer 1996 $133,436 -- 138,110
and Vice President-Sales.................. 1995 $100,000 $6,000
1994 $ 34,722 --

Deborah E. Griffin, Chief Operating Officer.. 1996 $133,436 -- 140,564
1995 $100,000 $6,000
1994 $ 34,722 --

</TABLE>

<PAGE>

Options Granted in Last Fiscal Year

The following table sets forth certain information concerning stock options
granted to the named executive officers during the fiscal year ended December
31, 1996:

<TABLE>
<CAPTION>
Number of
Shares of Percent of Total
Common Stock Options Granted Exercise or
Underlying to Employees Base Price Expiration
Name Options During 1996 Per Share (1) Date
- ----- ----------- --------------- ------------ ----
<S> <C> <C> <C> <C>
Steven R. Gumins..................... 38,110(1) 49.6% $ .50 8/06
100,000(2) $5.00 10/06
Deborah E. Griffin................... 40,564(1) 50.4% $ .50 8/06
100,000(2) $5.00 10/06
- ---------
(1) Such options are currently exercisable.

(2) Such options vest in four equal annual installments commencing October 16,
1997.

</TABLE>

Employment Agreements

On December 1, 1996, the Company entered into three-year employment
agreements with each of Mr. Gumins and Ms. Griffin. The agreements provide for a
base annual salary of $150,000 and bonuses at the discretion of the Board to be
based on the achievement of performance objectives, with a bonus of $25,000
during the first year of the agreement if the Company attains break-even during
any fiscal quarter of 1997. The agreements provide for severance equal to four
months' base salary in the event of termination other than for "cause" (as
defined), except that in the event of death or disability, severance shall be
equal to six months' base salary. All of the agreements also contain a five-year
post-termination confidentiality provision and a six-month post termination
non-competition provision.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Company's Board is comprised of Jonathan
W. Seybold, M. Caroline Martin and Allan Dalfen. None of these individuals other
than Mr. Seybold was at any time during the fiscal year ended December 31, 1995
or at any other time, an officer or employee of the Company. No member of the
Compensation Committee of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.

Stock Option Plan

In October 1996, the Board of Directors adopted and the Company's
stockholders approved, the 1996 Stock Option Plan (the Plan") covering 250,000
shares of the Company's Common Stock pursuant to which employees, officers and
directors of, and consultants or advisers to, the Company and any subsidiary
corporations are eligible to receive incentive stock options ("incentive
options") within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and/or options that do not qualify as incentive
options ("non-qualified options"). The Plan, which expires in October 2006, will
be administered by the Board of Directors or a committee of the Board of
Directors; provided, however, that with respect to "officers" and "directors,"
as such terms are defined for the purposes of Rule 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), such
committee shall consist of "disinterested" directors as defined in Rule 16b-3,
but only if at least two directors meet the criteria of "disinterested"
directors as defined in Rule 16b-3. The purposes of the Plan are to ensure the
retention of existing and future executive personnel, key employees, directors,
consultants and advisors who are expected to contribute to the Company's future
growth and success and to provide additional incentive by permitting such
individuals to participate in the ownership of the Company, and the criteria to
be utilized by the Board of Directors or the committee in granting options
pursuant to the Plan will be consistent with these purposes. The Plan provides
for automatic grants of options to certain directors in the manner set forth
below.

Options granted under the Plan may be either incentive options or
non-qualified options. 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. To the extent that the
aggregate fair market value, as of the date of grant, of the shares for which
incentive options become exercisable for the first time by an optionee during
the calendar year exceeds $100,000, the portion of such option which is in
excess of the $100,000 limitation will be treated as a non-qualified option.
Options granted under the Plan to officers, directors or employees of the
Company may be exercised only

<PAGE>

while the optionee is employed or retained by the Company or within 90 days of
the date of termination of the employment relationship or directorship. However,
options which are exercisable at the time of termination by reason of death or
permanent disability of the optionee may be exercised within 12 months of the
date of termination of the employment relationship or directorship. Upon the
exercise of an option, payment may be made by cash or by any other means that
the Board of Directors or the committee determines. No option may be granted
under the Plan after October 2006.

Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company as
the Board of Directors or the committee shall select from time to time in its
sole discretion, provided that only employees of the Company or a subsidiary of
the Company shall be eligible to receive incentive options. An optionee may be
granted more than one option under the Plan. The Board of Directors or the
committee will, in its discretion, determine (subject to the terms of the Plan)
who will be granted options, the time or times at which options shall be
granted, and the number of shares subject to each option, whether the options
are incentive options or non-qualified options, and the manner in which options
may be exercised. In making such determination, consideration may be given to
the value of the services rendered by the respective individuals, their present
and potential contributions to the success of the Company and its subsidiaries
and such other factors deemed relevant in accomplishing the purpose of the Plan.

To date, options to purchase an aggregate of 200,000 shares at an exercise
price of $5.00 per share have been granted under the Plan, 100,000 of which were
issued to each of Deborah E. Griffin and Steven R. Gumins. These options are
exercisable in four equal annual installments commencing one year from the date
of grant. On the date of this Prospectus, options to purchase an aggregate of
11,000 shares at an exercise price of $5.00 per share will be granted to certain
directors of the Company. See "Director Compensation."

Limitation of Liability and Indemnification Matters

The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors. This provision does not eliminate
the liability of a director (i) for breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions by the director not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for willful or negligent declaration of an unlawful dividend, stock
purchase or redemption, or (iv) for transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.

The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act, the provision is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Such limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or recision.

The Company intends to enter into indemnification agreements
("Indemnification Agreement(s)") with each of its directors and officers after
the Offering. Each such Indemnification Agreement will provide that the Company
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
Such indemnification will be available if the indemnitee acted in good faith and
in a matter he reasonably believed to be in or not opposed to the best interests
of the Company, and, with respect to any criminal action, had no reasonable
cause to believe his conduct was unlawful. The Indemnification Agreements will
also require that the Company indemnify the director or other party thereto in
all cases to the fullest extent permitted by applicable law. Each
Indemnification Agreement will permit the director or officer that is party
thereto to bring suit to seek recovery or amounts due under the Indemnification
Agreement and to recover the expenses of such a suit if he is successful.

The Company's By-laws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
Delaware General Corporation Law, and the Company shall have the right to
purchase and maintain insurance on behalf of any such person whether or not the
Company would have the power to indemnify such person against the liability. The
Company has not currently purchased any such insurance policy on behalf on any
of its directors, officers, employees or agents.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.

30
<PAGE>

CERTAIN TRANSACTIONS

In October 1995, the Company borrowed an aggregate of $241,666 from NGJ
Ltd., Deborah E. Griffin, Steven R. Gumins, Jonathan W. Seybold and TransPac. In
March 1996, the Company borrowed an aggregate of $289,579.60 from NGJ Ltd. and
Jonathan W. Seybold. In June 1996, the Company borrowed an aggregate of
$112,810.75 from NGJ Ltd., Jonathan W. Seybold and William Blase. In August
1996, the Company borrowed an aggregate of $129,197.14 from NGJ Ltd., Deborah E.
Griffin, Jonathan W. Seybold and William Blase.

In June 1995, the Company borrowed $250,000 from NGJ Ltd. pursuant to a one
year promissory note at an interest rate of 10% per annum. In September 1996,
NGJ Ltd. extended the repayment date of the promissory note to June 1997.
Repayment of a portion of the loan was secured by 2,988 shares of Common Stock
held by each of Deborah E. Griffin and Steven R. Gumins. NGJ Ltd. agreed to
eliminate the security for repayment of the note in September 1996.

All of the foregoing indebtedness will be converted upon completion of the
Offering into an aggregate of 263,921 shares, representing a conversion rate of
$4.11 per share.

In August 1996, the Company issued ten-year options to purchase 40,564
shares of Common Stock to Ms. Griffin and options to purchase 38,110 shares of
Common Stock to Mr. Gumins, each at an exercise price of $.50 per share. Such
options are currently exercisable. See "Management Employment Agreements" and
"Principal Stockholders -- Escrowed Shares and Options."

In addition, in October 1996, the Company issued options to purchase
100,000 shares at an exercise price of $5.00 per share to each of Deborah E.
Griffin and Steven R. Gumins under the 1996 Stock Option Plan. Such options are
exercisable in four equal annual installments commencing one year from the date
of grant. See "Management-Stock Option Plan."

From September to December 3, 1996, the Company borrowed an aggregate of
$17,316, $10,221, $47,490, $4,946 and $90,044 from Deborah E. Griffin, Steven R.
Gumins, Jonathan W. Seybold, William Blase and NGJ Ltd., respectively, pursuant
to promissory notes bearing interest at the rate of 10% per annum. Such amount
will be repaid together with accrued interest from the proceeds of the Offering.
See "Use of Proceeds and Plan of Operations."

During the year ended December 31, 1995 and the nine months ended September
30, 1996, the Company paid approximately $10,000 and $79,000, respectively, to
TransPac for services under a Retainer Agreement. Kenneth W. Krugler, a director
of the Company, is the President of TransPac. At September 30, 1996, the Company
had an outstanding payable to Transpac of $61,437.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company has adopted a policy that all future
transactions, including loans, between the Company and its officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will continue to
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.

<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information 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, (a) prior to the Offering giving pro forma effect to the conversion
of the Stockholder Debt and the Series A Preferred Stock into Common Stock upon
the completion of the Offering and (b) as adjusted to give effect to the sale of
the 1,200,000 Units offered hereby:

Percent of Shares
Beneficially Owned
Shares --------------------
Name and Address Beneficially Before After
of Beneficial Owner Owned(1) Offering Offering
------------------- -------- ------- -------

Nautilus Group Japan, Ltd.(2) ......... 366,514 50.8% 19.1%
Clark Trust u/t/d 6/30/69 (3) ......... 63,456 8.8 3.3
Seybold Family Trust (4) .............. 141,464 19.6 7.4
Jonathan W. Seybold (5) ............... 141,464 19.6 7.4
Gregory L. Zink (6) ................... 379,908 52.7 19.4
Steven R. Gumins (7) .................. 47,078 6.2 2.4
Deborah E. Griffin (8) ................ 54,182 7.1 2.8
William Blase (9) ..................... 14,278 2.0 *
Kenneth W. Krugler (10) ............... 21,108 * *
M. Caroline Martin (11) ............... -- * *
Allan Dalfen (12) ..................... -- * *
All executive officers and directors
as a group (eight persons)........... 658,018 82.3 32.9

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

(1) Includes such individuals' Escrow Shares. 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
outstanding. Such shares, however, are not deemed outstanding for
purposes of computing the percentage ownership of each 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. Gregory L. Zink is the Chief
Operating Officer of NGJ, Ltd.

(3) The address of such trust is c/o Clark Management Co. Inc., P.O. Box
3090, Boynton Beach, Florida 33424. Linda S. Potter and Stephen E.
Szlezak are co-trustees of the trust and exercise voting and
investment power with respect to the shares. The beneficiaries of such
trust are the children of Alfred Clark.

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

(5) Consists of 141,464 shares held by the Seybold Family Trust. Mr.
Seybold is a Trustee of such trust, the beneficiaries of which are his
wife and children. The address of such individual is c/o Heuristic
Development Group, Inc., 17575 Pacific Coast Highway, Pacific
Palisades, California 90272.

(6) 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.

(7) Includes options to purchase 38,110 shares of Common Stock, a portion
of which are being held in escrow. The address of such individual is
c/o Heuristic Development Group, Inc., 17575 Pacific Coast Highway,
Pacific Palisades, California 90272.

32
<PAGE>

(8) Includes options to purchase 40,564 shares of Common Stock, a portion
of which are being held in escrow. The address of such individual is
c/o Heuristic Development Group, Inc., 17575 Pacific Coast Highway,
Pacific Palisades, California 90272.

(9) 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.

(10) Represents shares held by TransPac. Mr. Krugler is the President of
TransPac. The address of such company is 467 Saratoga Avenue, Suite
550, San Jose, California 95129.

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

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

Escrowed Shares and Options

In connection with the Offering, 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 agreed to place
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 such transferees agree
to be bound by the provisions of the Escrow Agreement. The Escrow Shares may be
voted. Holders of Escrow Options may exercise their options prior to their
release from escrow; however, the shares issuable upon such exercise will
continue to 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;

(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 the date of this
Prospectus; 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 the date of this Prospectus.

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 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 cancelled and contributed
to the capital of the Company. The Company expects that the release of the
Escrow Shares and Escrow Options to officers, directors, employees and
consultants of the Company

<PAGE>

will be deemed compensatory and, accordingly, will result in a substantial
charge to 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note F of Notes to Financial
Statements.

The Minimum Pretax Income and Bid Price levels set forth above were
determined by negotiation between the Company and the Underwriter 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.

The following sets forth the number of Escrow Shares and Escrow Options
held by executive officers, directors and principal stockholders of the Company:

Number of Number of
Name Escrow Shares Escrow Options
---- ------------- --------------
Nautilus Group Japan, Ltd................. 183,258 --
Clark Trust............................... 31,728 --
Jonathan W. Seybold....................... 70,732(1) --
Gregory L. Zink........................... 6,697 --
Steven R. Gumins.......................... -- 23,539
Deborah E. Griffin........................ -- 27,091
William Blase............................. 7,140(2) --
Kenneth W. Krugler ....................... 10,554(3) --

- ----------
(1) Represents shares owned by the Seybold Family Trust.
(2) Represents shares owned by the Blase Family Trust.
(3) Represents shares owned by TransPac.

34
<PAGE>

CONCURRENT OFFERING

The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering by the Selling
Securityholders. The Selling Securityholders' Warrants are being issued to the
Selling Securityholders as of the effective date of the Offering upon the
automatic conversion of all of the Company's outstanding Bridge Warrants. These
Selling Securityholders' Warrants are identical to the Class A Warrants included
in the Units offered hereby. All of the Selling Securityholder Warrants issued
upon conversion of the Bridge Warrants, the Common Stock and Class B Warrants
issuable upon exercise of such Class A Warrants and the Common Stock issuable
upon exercise of the Class B Warrants will be registered, at the Company's
expense, under the Securities Act and are expected to become tradeable on or
about the closing of the Offering, subject to a contractual restriction that
such Class A Warrants and underlying securities may not be exercised, sold,
transferred, hypothecated, assigned or otherwise disposed of until one year
after the closing date of the Offering. After the one year period following the
closing date of the Offering, the Selling Securityholders may exercise and sell
the Common Stock issuable upon exercise of the Selling Securityholder Warrants
without restriction if a current prospectus relating to such Common Stock is in
effect and the securities are qualified for sale. The Company will not receive
any proceeds from the sale of the Selling Securityholder Warrants. Sales of
Selling Securityholder Warrants issued upon conversion of the Bridge Warrants or
the securities underlying such Class A Warrants or even the potential of such
sales could have an adverse effect on the market prices of the Units, the Common
Stock and the Warrants.

There are no material relationships between any of the Selling
Securityholders and the Company, nor have any such material relationships
existed within the past three years. The Company has been informed by the
Underwriter that there are no agreements between the Underwriter and any Selling
Securityholder regarding the distribution of the Selling Securityholder Warrants
or the underlying securities.

The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices or in negotiated transactions, a combination of such methods of sale or
otherwise.

Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers from whom such broker-dealer may act as agents or to whom they may
sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).

The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter declines to make such solicitation. Upon
any exercise of the Warrants after the first anniversary of the date of this
Prospectus, the Company will pay the Underwriter a fee of 5% of the aggregate
exercise price of the Warrants, if (i) the market price of the Company's Common
Stock on the date the Warrants are exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrants was solicited by a
member of the NASD; (iii) the Warrants are not held in a discretionary account;
(iv) disclosure of compensation arrangements was made both at the time of the
Offering and at the time of exercise of the Warrants; and (v) the solicitation
of exercise of the Warrant was not in violation of Regulation M promulgated
under the Exchange Act.

The Commission has recently adopted Regulation M which will replace Rule
10b-6 and certain other rules and regulations under the Exchange Act. Regulation
M will prohibit any person engaged in the distribution of the Selling
Securityholder' Warrants from simultaneously engaging in market-making
activities with respect to any securities of the Company during the applicable
"cooling-off" period (one or five business days) prior to the commencement of
such distribution. Accordingly, in the event the Underwriter or Blair & Co. is
engaged in a distribution of the Selling Securityholder Warrants, neither of
such firms will be able to make a market in the Company's securities during the
applicable restrictive period. However, neither the Underwriter nor Blair & Co.
has agreed to nor is either of them obligated to act as broker-dealer in the
sale of the Selling Securityholder Warrants and the Selling Securityholders may
be required, and in the event Blair & Co. is a market-maker, will likely be
required, to sell such securities through another broker-dealer. In addition,
each Selling Securityholder desiring to sell Warrants will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder,

<PAGE>

which provisions may limit the timing of the purchases and sales of shares of
the Company's securities by such Selling Securityholder.

The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discount and commissions under the Securities Act.

DESCRIPTION OF SECURITIES

The following description of the Company's securities does not purport to
be complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Certificate of Incorporation and By-laws, the
Warrant Agreement among the Company, the Underwriter and American Stock Transfer
& Trust Company, as warrant agent, pursuant to which the Warrants will be issued
and the Underwriting Agreement between the Company and the Underwriter, copies
of all of which have been filed with the Commission as Exhibits to the
Registration Statement of which this Prospectus is a part.

General

The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $.01 par value, and 5,000,000 shares of "blank check" preferred
stock, $.01 par value ("Preferred Stock").

Units

Each Unit consists of one share of Common Stock, one redeemable Class A
Warrant and one redeemable Class B Warrant. Each Class A Warrant entitles the
holder thereof to purchase one share of Common Stock and one redeemable Class B
Warrant. Each Class B Warrant entitles the holder thereof to purchase one share
of Common Stock. The Common Stock and Warrants comprising the Units are
separately transferable immediately upon issuance.

Common Stock

The Company has outstanding 721,326 shares of Common Stock which includes
(i) an aggregate of 175,793 shares issuable on the completion of the Offering
upon the automatic conversion of Preferred Stock and (ii) an aggregate of
263,921 shares issuable on the completion of the Offering upon the automatic
conversion of the Stockholder Debt. Holders of Common Stock have the right to
cast one vote for each share held of record on all matters submitted to a vote
of holders of Common Stock, including the election of directors. There is no
right to cumulate votes for the election of directors. Stockholders holding a
majority of the voting power of the capital stock issued and outstanding and
entitled to vote, represented in person or by proxy, are necessary to constitute
a quorum at any meeting of the Company's stockholders, and the vote by the
holders of a majority of such outstanding shares is required to effect certain
fundamental corporate changes such as liquidation, merger or amendment of the
Company's Certificate of Incorporation.

Holders of Common Stock are entitled to receive dividends pro rata based on
the number of shares held, when, as and if declared by the Board of Directors,
from funds legally available therefor, subject to the rights of holders of any
outstanding preferred stock. In the event of the liquidation, dissolution or
winding up of the affairs of the Company, all assets and funds of the Company
remaining after the payment of all debts and other liabilities, subject to the
rights of the holders of any outstanding preferred stock, shall be distributed,
pro rata, among the holders of the Common Stock. Holders of Common Stock are not
entitled to preemptive or subscription or conversion rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be when issued, fully paid and non-assessable.

Redeemable Warrants

Class A Warrants. Each Class A Warrant entitles the registered holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $6.50 at any time until 5:00 P.M., New York City time, on , 2002. Commencing
one year from the date of this Prospectus, the Class A Warrants are redeemable
by the Company on 30 days' written notice at a redemption price of $.05 per
Class A Warrant if the "closing price" of the Company's Common Stock for any 30
consecutive trading days ending within 15 days of the notice of

<PAGE>

redemption averages in excess of $9.10 per share. "Closing price" shall mean the
closing bid price if listed in the over-the-counter market on Nasdaq or
otherwise or the closing sale price if listed on the Nasdaq National Market or a
national securities exchange. All Class A Warrants must be redeemed if any are
redeemed.

Class B Warrants. Each Class B Warrant entitles the registered holder to
purchase one share of Common Stock at an exercise price of $8.75 at any time
after issuance until 5:00 P.M. New York City Time, on , 2002. Commencing
one year from the date of this Prospectus, the Class B Warrants are redeemable
by the Company on 30 days' written notice at a redemption price of $.05 per
Class B Warrant, if the closing price (as defined above) of the Company's Common
Stock for any 30 consecutive trading days ending within 15 days of the notice of
redemption averages in excess of $12.25 per share. All Class B Warrants must be
redeemed if any are redeemed.

General. The Class A Warrants and Class B Warrants will be issued pursuant
to a warrant agreement (the "Warrant Agreement") among the Company, the
Underwriter and American Stock Transfer & Trust Company, New York, New York, as
warrant agent (the "Warrant Agent"), and will be evidenced by warrant
certificates in registered form. The Warrants provide for adjustment of the
exercise price and for a change in the number of shares issuable upon exercise
to protect holders against dilution in the event of a stock dividend, stock
split, combination or reclassification of the Common Stock or upon issuance of
shares of Common Stock at prices lower than the market price of the Common
Stock, with certain exceptions.

The exercise prices of the Warrants were determined by negotiation between
the Company and the Underwriter and should not be construed to be predictive of
or to imply that any price increases in the Company's securities will occur.

The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Common Stock for issuance upon the exercise of
the Class A Warrants and the Class B Warrants. A Warrant may be exercised upon
surrender of the Warrant certificate on or prior to its expiration date (or
earlier redemption date) at the offices of the Warrant Agent, with the
Subscription Form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the Warrant is being exercised. Shares issued upon
exercise of Warrants and payment in accordance with the terms of the Warrants
will be fully paid and non-assessable.

For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market value of the Common Stock, with a resulting
dilution in the interest of all other stockholders. So long as the Warrants are
outstanding, the terms on which the Company could obtain additional capital may
be adversely affected. The holders of the Warrants might be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain any
needed capital by a new offering of securities on terms more favorable than
those provided for by the Warrants.

The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrantholders, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants.

Unit Purchase Option

The Company has agreed to grant to the Underwriter and the Finder, upon the
closing of the Offering, the Unit Purchase Option and the Finder's Unit Purchase
Option to purchase up to an aggregate of 120,000 Units. These Units will be
identical to the Units offered hereby except that the Class A Warrants and the
Class B Warrants included in the Unit Purchase Option and the Finder's Unit
Purchase Option will only be subject to redemption by the Company at any time
after the Unit Purchase Option and the Finder's Unit Purchase Option have been
exercised and the underlying Warrants are outstanding. The Unit Purchase Option
and the Finder's Unit Purchase Option cannot be transferred, sold, assigned or
hypothecated for two years, except to any officer of the Underwriter or members
of the selling group or their officers. The Unit Purchase Option and the
Finder's Unit Purchase Option are exercisable during the three-year period
commencing two years from the date of this Prospectus at an exercise price of
$6.00 per Unit (120% of the initial public offering price) subject to adjustment
in certain events to protect against dilution. The holders of the Unit Purchase
Option and the Finder's Unit Purchase Option have certain demand and/or
piggyback registration rights. See "Underwriting."

<PAGE>

Preferred Stock

The Company currently has outstanding 600 shares of Series A Preferred
Stock, .01 par value, all of which are held by NGJ Ltd. NGJ Ltd. has agreed to
convert such shares into 175,793 shares of Common Stock on the completion of the
Offering.

After completion of the Offering, the class of Preferred Stock designated
as Series A Preferred Stock will be eliminated and the Company will be
authorized to issue up to 5,000,000 shares of "blank-check" Preferred Stock. The
Board of Directors will have the authority to issue this Preferred Stock in one
or more series and to fix the number of shares and the relative rights,
conversion rights, voting rights and terms of redemption (including sinking fund
provisions) and liquidation preferences, without further vote or action by the
stockholders. If shares of Preferred Stock with voting rights are issued, such
issuance could affect the voting rights of the holders of the Company's Common
Stock by increasing the number of outstanding shares having voting rights, and
by the creation of class or series voting rights. If the Board of Directors
authorizes the issuance of shares of Preferred Stock with conversion rights, the
number of shares of Common Stock outstanding could potentially be increased by
up to the authorized amount. Issuance of Preferred Stock could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company and may adversely affect the rights of holders of Common Stock.
Also, Preferred Stock could have preferences over the Common Stock (and other
series of preferred stock) with respect to dividend and liquidation rights. The
Company currently has no plans to issue any Preferred Stock.

Transfer Agent

American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.

Business Combination Provisions

The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under the law, a corporation may
not engage in any business combination with any interested stockholder for a
period of three years from the date such person became an interested stockholder
unless certain conditions are satisfied. The statute contains provisions
enabling a corporation to avoid the statute's restrictions.

The Company has not sought to "elect out" of the statute and, therefore,
upon closing of the Offering and the registration of its shares of Common Stock
under the Exchange Act, the restrictions imposed by such statute will apply to
the Company.

Registration Rights

The holders of the Unit Purchase Option and Finder's Unit Purchase Option
will have demand and/or piggy-back registration rights relating to such options
and the underlying securities. See "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering the Company will have outstanding 2,000,000
shares of Common Stock. Of these shares, the 1,200,000 shares of Common Stock
offered hereby will be freely transferable without restriction or further
registration under the Securities Act, unless purchased by affiliates of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The 721,326 shares of Common Stock currently outstanding
(giving effect to conversion of the Stockholder Debt and the Series A Preferred
Stock) are "restricted securities" or owned by affiliates within the meaning of
Rule 144 and may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. The 721,326 shares of Common Stock currently outstanding will be
eligible for sale in the public market pursuant to Rule 144 at various times
beginning 90 days after the date of this Prospectus. However, holders of the
outstanding shares have agreed not to sell or otherwise dispose of any shares of
Common Stock without the Underwriter's prior written consent for a period of 13
months after the date of this Prospectus. In addition, 349,370 of such shares
are Escrow Shares subject to the restrictions on transfer set forth in the
Escrow Agreement. See "Principal Stockholders -- Escrowed Shares and Options"
and "Underwriting."

<PAGE>

In general, under Rule 144 a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least two years that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not deemed an affiliate and has
beneficially owned such shares for at least three years is entitled to sell such
shares without regard to the volume or other resale requirements.

Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period. If all the requirements of Rule 701 are
met, an aggregate of 78,674 shares subject to outstanding vested options
(including the Escrow Options) may be sold pursuant to such rule at the end of
this 90-day period, subject to (i) an agreement by all option holders not to
sell or otherwise dispose of any shares of Common Stock for a period of 13
months after the date of this Prospectus without the Underwriter's prior written
consent and (ii) the restrictions on transfer set forth in the Escrow Agreement.
See "Principal Stockholders -- Escrowed Shares and Options." An additional
100,000 shares may be sold from time to time pursuant to this rule as additional
outstanding options vest.

Pursuant to registration rights acquired in the Bridge Financing, the
Company has, concurrently with the Offering, registered for resale on behalf of
the Selling Securityholders, the Selling Securityholder Securities subject to
the contractual restriction that the Selling Securityholders agreed not to
exercise, sell, transfer, hypothecate, assign or otherwise dispose of the
Selling Securityholder Warrants for a period expiring one year after the closing
of the Offering.

The Underwriter and the Finder also have demand and/or "piggy-back"
registration rights with respect to the securities underlying the Unit Purchase
Option and the Finder's Unit Purchase Option. See "Underwriting."

Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.

<PAGE>

UNDERWRITING

D. H. Blair Investment Banking Corp., the Underwriter, has agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from the
Company the 1,200,000 Units offered hereby on a "firm commitment" basis, if any
are purchased. It is expected that Blair & Co. will distribute as a selling
group member substantially all of the Units offered hereby. Blair & Co. is
substantially owned by family members of J. Morton Davis. Mr. Davis is the sole
stockholder of the Underwriter.

The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers who are members of the NASD, at such prices
less concessions of not in excess of $ per Unit, of which a sum not in excess of
$ per Unit may in turn be reallowed to other dealers who are members of the
NASD. After the commencement of the offering, the public offering price, the
concession and the reallowance may be changed by the Underwriter.

The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of Units offered hereby,
including any Units purchased pursuant to the Underwriter's overallotment
option, $40,000 of which has been paid to date. The Underwriter has agreed to
pay Marc J. Gorlin, the Finder, who is an unaffiliated party, $10,000 for
introducing the Company to the Underwriter. As discussed below, the Finder will
also receive the Finder's Unit Purchase Option.

The Company has granted to the Underwriter an option exercisable during the
30-day period commencing on the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts, up to 180,000
additional Units for the purpose of covering over-allotments, if any.

All of the Company's current stockholders, officers and directors have
agreed not to sell, assign, transfer or otherwise dispose publicly of any of
their shares of Common Stock for a period of 13 months from the date of this
Prospectus without the prior written consent of the Underwriter.

The Underwriter has the right to designate one director to the Company's
Board of Directors for a period of five years from the completion of the
Offering, although it has not yet selected any such designee. Such designee may
be a director, officer, partner, employee or affiliate of the Underwriter.

During the five-year period from the date of this Prospectus, in the event
the Underwriter originates a financing or a merger, acquisition or a similar
transaction to which the Company is a party, the Underwriter will be entitled to
receive a finder's fee in consideration for origination of such transaction. The
fee is based on a percentage of the consideration paid in the transaction
ranging from 7% of the first $1,000,000 to 2 1/2% of any consideration in excess
of $9,000,000.

The Commission has recently adopted Regulation M which will replace Rule
10b-6 and certain other rules promulgated under the Exchange Act. Regulation M
may prohibit Blair & Co. or any other soliciting broker-dealer from engaging in
any market making activities with regard to the Company's securities for the
period from five business days (or such other applicable period as Regulation M
may provide) prior to any solicitation by the Underwriter of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriter may have
to receive a fee for the exercise of Warrants following such solicitation. As a
result, Blair & Co. may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable.

The Company has agreed to sell to the Underwriter and its designees and the
Finder, for nominal consideration, the Unit Purchase Option and the Finder's
Unit Purchase Option to purchase up to 108,000 Units and 12,000 Units,
respectively, substantially identical to the Units being offered hereby, except
that the Class A Warrants and Class B

<PAGE>

Warrants included therein are subject to redemption by the Company at any time
after such options have been exercised and the underlying warrants are
outstanding. The Unit Purchase Option and the Finder's Unit Purchase Option will
be exercisable during the three-year period commencing two years from the date
of this Prospectus at an exercise price of $6.00 per Unit, subject to adjustment
in certain events to protect against dilution and are not transferable for a
period of two years from the date of this Prospectus except to officers of the
Underwriter or members of the selling group or their respective officers. The
Company has agreed upon request to register during the four-year period
commencing one year from the date of this Prospectus, on two separate occasions,
the securities issuable upon exercise of the Unit Purchase Option under the
Securities Act, the initial such registration to be at the Company's expense and
the second at the expense of the holders. The Company has also granted certain
"piggy-back" registration rights to holders of the Unit Purchase Option and the
Finder's Unit Purchase Option.

The Underwriter has informed the Company that it does not expect sales to
discretionary accounts to exceed 5% of the total number of the Units offered
hereby.

The Underwriter acted as Placement Agent for the Bridge Financing in
December 1996 for which it received a Placement Agent fee of $100,000 and a
non-accountable expense allowance of $30,000.

The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co., a selling group member which will
distribute substantially all of the Units offered hereby. The investigation
appears to be broad in scope, involving numerous aspects of the Underwriter's
and Blair & Co.'s compliance with the Federal securities laws and compliance
with the Federal securities laws by issuers whose securities were underwritten
by the Underwriter or Blair & Co., or in which the Underwriter or Blair & Co.
made over-the-counter markets, persons associated with the Underwriter or Blair
& Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and that
it is cooperating with the investigation. The Underwriter cannot predict whether
this investigation will ever result in any type of formal enforcement action
against the Underwriter or Blair & Co., or, if so, whether any such action might
have an adverse effect on the Underwriter or the securities offered hereby. The
Company has been advised that Blair & Co. will make a market in the securities
following this offering. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to make a
market in the Company's securities, which could affect the liquidity or price of
such securities.

Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the public offering price of the Units
offered hereby and the terms of the Warrants have been determined by negotiation
between the Company and the Underwriter and are not necessarily related to the
Company's asset value, net worth or other established criteria of value. Factors
considered in determining such prices and terms, in addition to prevailing
market conditions, include the history of and the prospects for the industry in
which the Company competes, the present state of the Company's development and
its future prospects, an assessment of the Company's management, the Company's
capital structure, demand for similar securities of comparable companies and
such other factors as were deemed relevant.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriter by Singer Zamansky LLP,
New York, New York. Bachner, Tally, Polevoy & Misher LLP represents the
Underwriter in other matters.

EXPERTS

The financial statements of the Company at December 31, 1995 and for the
year ended December 31, 1995, and the period from July 20, 1994 (commencement of
all operations) to December 31, 1995 appearing in this Prospectus and
Registration Statement have been audited by Richard A. Eisner & Company, LLP,
independent auditors, as set forth in their report thereon (which contains an
explanatory paragraph with respect to the uncertainty regarding the Company's
ability to continue as a going concern) appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.

41
<PAGE>

ADDITIONAL INFORMATION

The Company is not a reporting company under the Exchange Act. The Company
has filed a Registration Statement on Form SB-2 under the Securities Act with
the Commission in Washington, D.C. with respect to the Units offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Units
offered hereby, reference is hereby made to the Registration Statement and such
exhibits, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at 500 West Madison (Suite 1400), Chicago, Illinois 60661. Copies
of such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of such site is
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.

Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish to its
stockholders annual reports containing audited financial statements and may
furnish interim reports as it deems appropriate.

<PAGE>

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

INDEX TO FINANCIAL STATEMENTS

Page
----

Report of Independent Auditors F-2

Balance Sheets F-3

Statements of Operations F-4

Statements of Changes in Stockholders
Equity (Captial Deficiency) F-5

Statements of Cash Flows F-6

Notes to Financial Statements F-7

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Heuristic Development Group, Inc.
Pacific Palisades, California

We have audited the accompanying balance sheet of Heuristic Development
Group, Inc. (a development stage company) as at December 31, 1995, and the
related statements of operations, changes in stockholders' equity (capital
deficiency) and cash flows for the period from July 20, 1994 (inception) through
December 31, 1994, for the year ended December 31, 1995 and for the period from
July 20, 1994 (inception) through December 31, 1995. 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 audits.

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

In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of Heuristic Development Group,
Inc. at December 31, 1995 and the results of its operations and cash flows for
the period from July 20, 1994 (inception) through December 31, 1994, for the
year ended December 31, 1995 and for the period from July 20, 1994 (inception)
through December 31, 1995 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 A to the
financial statements, the Company has sustained recurring losses from operations
and has a net working capital and capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

RICHARD A. EISNER & COMPANY, LLP

New York, New York
September 18, 1996

F-2
<PAGE>

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

BALANCE SHEETS

September 30,
December 31, ------------------------------
1995 1996 1996
----------- ----------- -----------
(Unaudited) (Unaudited)
(Historical) (Pro Forma)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash .................................................................... $ 279,000 $ 18,000 $ 998,000
Due from employees ...................................................... 3,000 3,000
Prepaid expenses and other current assets ............................... 5,000 2,000 2,000
----------- ----------- -----------
Total current assets ............................................ 284,000 23,000 1,003,000
Capitalized software costs ................................................ 267,000 267,000
Furniture and equipment (net of accumulated depreciation) ................. 205,000 199,000 199,000
Organizational costs (net of accumulated amortization) .................... 27,000 21,000 21,000
Deferred registration costs ............................................... 61,000 61,000
Deferred financing costs .................................................. 160,000
----------- ----------- -----------
Total ........................................................... $ 516,000 $ 571,000 $ 1,711,000
=========== =========== ===========

LIABILITIES
Current liabilities:
Accounts payable ........................................................ $ 92,000 $ 110,000 $ 110,000
Accrued expenses ........................................................ 26,000 23,000 23,000
Accrued payroll ......................................................... 24,000 25,000 25,000
Notes payable - stockholders ............................................ 250,000
Interest payable - stockholders ......................................... 28,000
----------- ----------- -----------
Total current liabilities ....................................... 142,000 436,000 158,000
Notes payable-- stockholders .............................................. 492,000 804,000 170,000
Interest payable-- stockholders ........................................... 18,000 32,000
Bridge notes, net of discount ............................................. 500,000
----------- ----------- -----------
Total ................................................. 652,000 1,272,000 828,000
----------- ----------- -----------

STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)

Preferred stock, $.01 par value, authorized 1,500 shares;
issued and outstanding 600 shares (liquidating preference
$682,000 at December 31, 1995 and $733,000 at
September 30, 1996) no shares issued and outstanding
at September 30, 1996 (pro forma)
Common stock - $.01 par value, authorized 20,000,000 shares;
issued and outstanding 276,475 shares at December 31, 1995
and 281,612 shares at September 30, 1996 (historical)
and 721,326 shares at September 30, 1996 (pro forma)
including 349,370 shares in escrow ...................................... 3,000 3,000 7,000
Additional paid-in capital ................................................ 967,000 1,252,000 2,954,000
(Deficit) accumulated during the development stage ........................ (1,106,000) (1,956,000) (2,078,000)
----------- ----------- -----------
Total stockholders' equity (capital deficiency) ................. (136,000) (701,000) 833,000
----------- ----------- -----------
Total ........................................................... $ 516,000 $ 571,000 $ 1,711,000
=========== =========== ===========

</TABLE>

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

F-3
<PAGE>

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

STATEMENTS OF OPERATIONS

July 20, 1994 July 20, 1994 July 20, 1994
(Inception) (Inception) Nine Months Ended (Inception)
to Year Ended to September 30, to
December 31, December 31, December 31, -------------------------- September 30,
1994 1995 1995 1995 1996 1996
----------- ----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development:
Direct expenditures ................... $ 58,000 $ 280,000 $ 338,000 $ 118,000 $ 338,000
Payments under research
services agreement .................. 20,000 117,000 137,000 109,000 137,000
----------- ----------- ----------- ----------- -----------
Total research and development .. 78,000 397,000 475,000 227,000 475,000
General and administrative .............. 159,000 466,000 625,000 418,000 $ 808,000 1,433,000
----------- ----------- ----------- ----------- ----------- -----------
Total costs and expenses ........ 237,000 863,000 1,100,000 645,000 808,000 1,908,000
----------- ----------- ----------- ----------- ----------- -----------
(Loss) from operations .................... (237,000) (863,000) (1,100,000) (645,000) (808,000) (1,908,000)
Interest (expense) ........................ (18,000) (18,000) (7,000) (42,000) (60,000)
Interest income ........................... 7,000 5,000 12,000 5,000 12,000
----------- ----------- ----------- ----------- ----------- -----------
NET (LOSS) ................................ $ (230,000) $ (876,000) $(1,106,000) $ (647,000) $ (850,000) $(1,956,000)
=========== =========== =========== =========== =========== ===========
Pro forma net (loss) per share ............ $ (2.31) $ (2.17)
=========== -----------
Pro forma weighted average
shares outstanding 371,956 371,956
=========== ===========

</TABLE>

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

F-4
<PAGE>

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

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)

Preferred Stock Common Stock
Par Value $.01 Par Value $.01 Additional
----------------- ------------------- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>

Issuance of common stock for cash in August 1994............. 212,456 $2,000 $ 68,000
Issuance of preferred stock for cash in August 1994.......... 550 $-0- 550,000
Issuance of preferred stock in connection with
obtaining assignment rights to developed
technology in August 1994.................................. 50 50,000
Net (loss) for the period from July 20, 1994 (inception)
to December 31, 1994.......................................
--- ---- ------- ------ ----------
Balance-- December 31, 1994.................................. 600 -0- 212,456 2,000 668,000
Surrender of common stock in October 1995.................... (17,928)
Exercise of options in December 1995......................... 81,947 1,000 299,000
Net (loss) for the year ended December 31, 1995..............
--- ---- ------- ------ ----------
Balance-- December 31, 1995.................................. 600 -0- 276,475 3,000 967,000
Exercise of options in March 1996............................ 30,733 10,000
Issuance of common stock for cash in March 1996.............. 9,218 37,000
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 2,000
Surrender of common stock in August 1996..................... (3,163)
Compensation expense in connection with grant of
option in August 1996...................................... 236,000
Net (loss) for the nine months ended September 30, 1996......
--- ---- ------- ------ ----------
Balance-- September 30, 1996 (unaudited)..................... 600 -0- 281,612 3,000 1,252,000
Pro forma adjustments (Note I):
Warrants issued in connection with Bridge notes............ 500,000
Conversion of preferred stock and accrued and unpaid
dividends to common stock.................................. (600) 175,793 2,000 120,000
Conversion of notes payable-- stockholders and
accrued interest to common stock........................... 263,921 2,000 1,082,000
--- ---- ------- ------ ----------
PRO FORMA BALANCE -- SEPTEMBER 30, 1996
(UNAUDITED)................................................ -0- $-0- 721,326 $7,000 $2,954,000
=== ==== ======= ====== ==========

</TABLE>

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (Continued)

(Deficit)
Accumulated
During the
Development
Stage Total
----------- ----------
<S> <C> <C>

Issuance of common stock for cash in August 1994............. $ 70,000
Issuance of preferred stock for cash in August 1994.......... 550,000
Issuance of preferred stock in connection with
obtaining assignment rights to developed
technology in August 1994.................................. 50,000
Net (loss) for the period from July 20, 1994 (inception)
to December 31, 1994....................................... $ (230,000) (230,000)
----------- ----------
Balance-- December 31, 1994.................................. (230,000) 440,000
Surrender of common stock in October 1995....................
Exercise of options in December 1995......................... 300,000
Net (loss) for the year ended December 31, 1995.............. (876,000) (876,000)
----------- ----------
Balance-- December 31, 1995.................................. (1,106,000) (136,000)
Exercise of options in March 1996............................ 10,000
Issuance of common stock for cash in March 1996.............. 37,000
Surrender of common stock in March 1996......................
Surrender of common stock in June 1996.......................
Exercise of options in August 1996........................... 2,000
Surrender of common stock in August 1996.....................
Compensation expense in connection with grant of
option in August 1996...................................... 236,000
Net (loss) for the nine months ended September 30, 1996...... (850,000) (850,000)
----------- ----------
Balance-- September 30, 1996 (unaudited)..................... (1,956,000) (701,000)
Pro forma adjustments (Note I):
Warrants issued in connection with Bridge notes............ 500,000
Conversion of preferred stock and accrued and unpaid
dividends to common stock.................................. (122,000) -0-
Conversion of notes payable-- stockholders and
accrued interest to common stock........................... 1,084,000
----------- ----------
PRO FORMA BALANCE -- SEPTEMBER 30, 1996
(UNAUDITED)................................................ $(2,078,000) $ 883,000
=========== ==========

</TABLE>

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

F-5
<PAGE>

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

STATEMENTS OF CASH FLOWS

July 20, 1994 July 20, 1994
(Inception) (Inception)
to Year Ended to
December 31, December 31, December 31,
1994 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ............................................... $ (230,000) $ (876,000) $(1,106,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization .......................... 9,000 25,000 34,000
Value of preferred stock charged to research
and development ...................................... 50,000 50,000
Fair value of options granted ..........................
Accrued interest on notes payable-- stockholders ....... 18,000 18,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses .............. (7,000) 1,000 (6,000)
(Increase) in other assets ........................... (38,000) (38,000)
Increase in accounts payable and accrued expenses .... 30,000 111,000 141,000
----------- ----------- -----------
Net cash (used in) operating activities .......... (186,000) (721,000) (907,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisitions of fixed assets ............................. (40,000) (186,000) (226,000)
Advances to employees ....................................
Additions to capitalized software costs ..................
----------- ----------- -----------
Net cash (used in) investing activities .......... (40,000) (186,000) (226,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options 70,000 300,000 370,000
Proceeds from sale of preferred stock .................... 550,000 550,000
Proceeds from borrowings-- notes payable-- stockholders .. 492,000 492,000
Deferred financing costs .................................
----------- ----------- -----------
Net cash provided by financing activities ........ 620,000 792,000 1,412,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ............................ 394,000 (115,000) 279,000
Cash-- beginning of period ................................. 394,000
----------- ----------- -----------
CASH-- END OF PERIOD ....................................... $ 394,000 $ 279,000 $ 279,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Noncash transactions:
Preferred stock issued in connection with
assignment agreement ................................. $ 50,000 $ 50,000

</TABLE>

STATEMENTS OF CASH FLOWS (Continued)

July 20, 1994
Nine Months Ended (Inception)
September 30, to
-------------------------- September 30,
1995 1996 1996
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ............................................... $ (647,000) $ (850,000) $(1,956,000)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization .......................... 16,000 38,000 72,000
Value of preferred stock charged to research
and development ...................................... 50,000
Fair value of options granted .......................... 236,000 236,000
Accrued interest on notes payable-- stockholders ....... 7,000 42,000 60,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses .............. 3,000 3,000 (3,000)
(Increase) in other assets ........................... (38,000)
Increase in accounts payable and accrued expenses .... 57,000 18,000 159,000
----------- ----------- -----------
Net cash (used in) operating activities .......... (564,000) (513,000) (1,420,000)
----------- ----------- -----------
Cash flows from investing activities:
Acquisitions of fixed assets ............................. (72,000) (28,000) (254,000)
Advances to employees .................................... (3,000) (3,000)
Additions to capitalized software costs .................. (267,000) (267,000)
----------- ----------- -----------
Net cash (used in) investing activities .......... (72,000) (298,000) (524,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of options 49,000 419,000
Proceeds from sale of preferred stock ................... 550,000
Proceeds from borrowings-- notes payable-- stockholders .. 250,000 562,000 1,054,000
Deferred financing costs ................................. (61,000) (61,000)
----------- ----------- -----------
Net cash provided by financing activities ........ 250,000 550,000 1,962,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ............................ (386,000) (261,000) 18,000
Cash-- beginning of period ................................. 394,000 279,000
----------- ----------- -----------
CASH-- END OF PERIOD ....................................... $ 8,000 $ 18,000 $ 18,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Noncash transactions:
Preferred stock issued in connection with
assignment agreement ................................. $ 50,000

</TABLE>

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

F-6
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and September 30, 1995)

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

Heuristic Development Group, Inc. (the "Company" or "HDG"), formerly
EIS International Group, Ltd., is a development stage company. The Company is
engaged in the marketing and sale of the IntelliFit System, a computerized
system which generates personalized exercise prescriptions based on, among other
things, an individual's weight, ability, medical history, goals, fitness level
and exercise preferences and tracks and records fitness progress. The Company
was incorporated in Delaware and commenced operations on July 20, 1994. The
Company has not yet generated any revenue.

As reflected in the accompanying financial statements, the Company has
incurred substantial losses since inception and such losses are expected to
continue during the development stage. As at September 30, 1996, the Company has
a working capital and a capital deficiency. These factors raise substantial
doubt about its ability to continue as a going concern. Management's plans
include the following:

a) Obtain a minimum of $500,000 through the sale of Bridge Units
consisting of a $50,000 promissory note and two-year warrants (Note I).

b) Obtain net proceeds of approximately $5,220,000 through the sale of
1,200,000 units consisting of common stock and a Class A and a Class B
warrant in a public offering (see Note F).

c) (i) Convert all of the Series A preferred stock including accrued
and unpaid dividends aggregating $722,000 at August 31, 1996 into 175,793
shares of common stock and (ii) convert notes payable -- stockholders
including accrued interest aggregating $1,084,000 into 263,921 shares of
common stock.

Management of the Company believes that if the foregoing plan is
accomplished, the Company will remain viable at least through September 1997.

There is no assurance that the above plans can be accomplished. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

(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. Such costs will be amortized over their estimated useful lives,
usually seven years. Amortization will commence when the Company has revenue.

Development costs incurred prior to achievement of technological
feasibility (December 31, 1995) are expensed.

[2] Property and equipment:

Property 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.

[3] Income taxes:

The Company has applied to the accompanying financial statements provisions
required by accounting standards which requires the use of the liability method
of accounting for income taxes.

[4] Pro forma net loss per share of common stock:

Pro forma net loss per share assumes the conversion of preferred stock and
notes payable -- stockholders as if such transactions had occurred on January 1,
1995. The stockholders have agreed to place 349,370 shares in escrow and,
accordingly, such shares have been excluded from the computation.

F-7
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)

(NOTE B) -- Summary of Significant Accounting Policies: (Continued)

[5] 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.

[6] Recent pronouncements:

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company will adopt the disclosure requirements of SFAS 123 during the
Company's fiscal year ending December 31, 1996 but will account for its stock
option plans under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" as permitted under SFAS 123.

In addition, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121").
SFAS 121 is also effective for the Company's fiscal year ending December 31,
1996. The Company believes adoption of SFAS No. 121 will not have a material
impact on its financial statements.

[7] Organizational costs:

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

[8] Fair value of financial instruments:

The carrying value of cash, accounts payable and notes payable approximates
fair value because of the short-term maturity of those instruments. For other
debt instruments, the carrying value approximates the fair value based on stated
interest rates.

[9] Interim financial information:

The financial information presented as of September 30, 1996 and for the
nine-month periods ended September 30, 1996 and September 30, 1995 is unaudited,
but in the opinion of management contains all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of such
financial information. Results of operations for interim periods are not
necessarily indicative of those to be achieved for full fiscal years.

(NOTE C) -- Property and Equipment:

Property and equipment are summarized as follows:

December 31, September 30,
1995 1996
-------- --------
Assembled units......................... $107,000 $107,000
Components in process and on hand....... 29,000 29,000
Furniture and fixtures.................. 8,000 29,000
Office equipment........................ 65,000 70,000
Leasehold improvements.................. 17,000 18,000
-------- --------
226,000 253,000
Less accumulated depreciation .......... 21,000 54,000
-------- --------
Balance........................... $205,000 $199,000
======== ========

F-8
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)

(NOTE D) -- Notes Payable -- Stockholders:

During the year ended December 31, 1995 and the nine months ended September
30, 1996, the Company borrowed approximately $550,000 and $1,024,000,
respectively, from certain stockholders. These notes bear an interest rate of
10%.

Approximately $250,000 of the notes and accrued interest of approximately
$26,000 were due in June 1996. Subsequent to June 1996, the due date was
extended to June 1997. (See Note A with respect to proposed conversion of notes
payable.)

Future principal payments on long-term debt are as follows:

December 31, September 30,
1995 1996
-------- ---------
1997..................................... $250,000 $ 250,000
2000..................................... 242,000 242,000
2001..................................... 562,000
-------- ---------
$492,000 $1,054,000
======== =========

The interest on these notes is payable on the due dates of the notes.

(NOTE E) -- Stockholders' Equity (Capital Deficiency):

[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 holders of
the Series A Preferred are entitled to (i) vote on all matters on which the
common stock can vote and have twenty percent of the total voting power, (ii)
receive cumulative annual dividends equal to $100 per share and (iii)
liquidation preference of $1,000 per share plus any dividends accrued and
unpaid. The Series A Preferred is redeemable at the option of the Company at a
price of $1,000 per share plus accrued and unpaid dividends. (See Note A with
respect to proposed conversion of preferred stock.)

[2] Stock options:

Stock option activity is summarized as follows:

Shares Option Price Expiration Date
------- ------------ ---------------
<S> <C> <C> <C>

Granted-- for the period ended
December 31, 1994.............................. 115,359 $ .33-$3.67 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
Exercised-- nine months
ended September 30, 1996........................ (36,091) $ .33
-------
Balance at September 30, 1996..................... 78,674 $ .50 August 2006
=======

</TABLE>

In August 1996, the Company issued to two officers/ stockholders options to
purchase 78,674 shares of its common stock at $.50 per share. The Company has
reflected compensation expense of $236,000 in connection with the issuance of
such options. In connection with the proposed public offering, these options are
subject to escrow provisions as a condition of the offering (Note F).

F-9
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)

(NOTE E) -- Stockholders' Equity (Capital Deficiency): (Continued)

[3] Stock Option Plan:

In October 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan") which provides for issuance of 250,000 shares of the Company's common
stock. In October 1996, stock options to purchase 200,000 shares of common stock
at $5.00 per share were granted to officers/stockholders.

[4] Reorganization:

In October 1996, the Board of Directors and stockholders approved a
1,339.4362 to 1 stock split which has been given retroactive effect in the
accompanying financial statements. All references to shares and per share
amounts in the notes to financial statements have been adjusted to reflect the
stock split.

(NOTE F) -- Proposed Public Offering:

The Company signed a letter of intent with an underwriter with respect to a
proposed public offering of the Company's securities. There is no assurance that
such offering will be consummated. In connection therewith the Company
anticipates incurring substantial expenses which, if the offering is not
consummated, will be charged to expense.

In connection with such offering, the underwriter has 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. 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 upon
their release.

(NOTE G) -- Commitments and Other Matters:

Research Services Agreement:

In August 1994, the Company entered into a retainer agreement with Transpac
Software, Inc. ("Transpac"). The agreement provides for Transpac to assist the
Company in updating and improving the source programs and in designing,
developing and implementing such improved source programs for use in the EIS
Expert Instructor System. The agreement provides for the payment of $120,000.
Accordingly, the Company paid Transpac $20,000 during the year ended December
31, 1994 and $100,000 during the year ended December 31, 1995.

In addition, the agreement provides for additional services upon the
Company's request in designated, scheduled projects through December 31, 1998.
During the year ended December 31, 1995 and the nine months ended September 30,
1996, the Company paid Transpac approximately $10,000 and $79,000, respectively,
for additional services.

Employment agreements:

The Company has three-year, employment agreements with two officers
providing for aggregate annual base salaries of $300,000 commencing December 1,
1996. The agreements provide for bonuses at the discretion of the Board and
severance salary as defined in the agreements.

F-10
<PAGE>

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

NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to September 30, 1996 and
September 30, 1995) (Continued)

(NOTE H) -- Income Taxes:

At December 31, 1995 and September 30, 1996, the Company had available net
operating loss carryforwards to reduce future taxable income of approximately
$456,000 and $710,000, respectively. The net operating loss carryforwards expire
in various amounts through 2011. The Company's ability to utilize its net
operating loss carryforwards may be subject to annual limitations pursuant to
Section 382 of the Internal Revenue Code if future changes in ownership occur.

At December 31, 1995 and September 30, 1996, the Company has a deferred tax
asset of approximately $400,000 and $765,000, respectively, representing the
benefits of its net operating loss carryforwards and deferred taxes resulting
from capitalized start-up costs, cash basis tax reporting and compensation
expense in connection with the grant of options. The Company has provided a 100%
valuation allowance for such asset since the likelihood of realization cannot be
determined.

(NOTE I) -- Pro Forma Financial Information:

The pro forma balance sheet and statement of changes of stockholders'
equity (capital deficiency) give effect to the following transactions as though
they had occurred on September 30, 1996.

a. Bridge financing:

In December 1996, the Company issued Bridge notes aggregating
$1,000,000 which bear interest at 10% per annum and are due the earlier of
December 2, 1997 or the completion of the proposed public offering. In
connection with the sale of the notes, the Company issued warrants for the
purchase of 500,000 shares of common stock commencing December 2, 1998.
Upon completion of the contemplated public offering, the warrants will be
converted into Class A Warrants containing the same terms as the warrants
included in units expected to be sold in such public offering. The warrants
have been valued at $500,000 by application of the Black-Scholes model and
will be accounted for as debt discount which will be amortized over the
life of the loan.

In addition, the Company incurred costs in connection with obtaining
the financing of approximately $ 160,000 which will be amortized over the
life of the loan. The effective interest rate on the notes is 304%.

b. Additional borrowings from stockholders aggregating $140,000, bearing
interest at 10% and repayable at the earlier of five years or the effective date
of the Company's proposed public offering.

c. Conversion of notes payable -- stockholders' (Note A).

d. Conversion of preferred stock (Note A).

F-11
<PAGE>

================================================================================

No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by the Underwriter.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer, or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein contained is correct as of any time
subsequent to the date of this Prospectus.

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

TABLE OF CONTENTS

Page
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 6
Use of Proceeds and Plan of Operations .................................... 12
Dividend Policy............................................................ 12
Capitalization ............................................................ 13
Dilution .................................................................. 15
Selected Financial Data ................................................... 16
Managements' Discussion and Analysis of
Financial Condition and Results of Operations............................ 17
Business .................................................................. 19
Management ................................................................ 27
Certain Transactions ...................................................... 31
Principal Stockholders .................................................... 32
Concurrent Offering ....................................................... 35
Description of Securities ................................................. 36
Shares Eligible
for Future Sale ......................................................... 38
Underwriting .............................................................. 40
Legal Matters ............................................................. 41
Experts ................................................................... 41
Additional Information .................................................... 42
Index to Financial Statements ............................................. F-1

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

Until March , 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

================================================================================

1,200,000 Units

HEURISTIC
DEVELOPMENT
GROUP, INC.

Consisting of 1,200,000 shares of
Common Stock,
1,200,000 Redeemable Class A
Warrants
and
1,200,000 Redeemable Class B
Warrants

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

PROSPECTUS

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

D.H. BLAIR INVESTMENT
BANKING CORP.

February , 1997

================================================================================

<PAGE>

Alternate Prospectus Page

SUBJECT TO COMPLETION -- DATED February 7, 1997

PROSPECTUS

HEURISTIC DEVELOPMENT GROUP, INC.

500,000 Redeemable Class A Warrants
500,000 Shares of Common Stock and
500,000 Redeemable Class B Warrants issuable upon exercise of the
Redeemable Class A Warrants and 500,000 Shares of
Common Stock issuable upon exercise of the Class B Warrants

This Prospectus relates to 500,000 Redeemable Class A Warrants (the
"Selling Securityholder Warrants" or the "Class A Warrants") of Heuristic
Development Group, Inc., a Delaware corporation (the "Company"), held by 36
holders (the "Selling Securityholders"), the 500,000 shares of Common Stock,
$.01 par value ("Common Stock"), and 500,000 Redeemable Class B Warrants ("Class
B Warrants") issuable upon the exercise of the Selling Securityholder Warrants,
and 500,000 shares of Common Stock issuable upon exercise of such Class B
Warrants. The Selling Securityholder Warrants and the Class B Warrants are
referred to herein collectively as the "Warrants" and the securities issuable
upon exercise of the Selling Securityholder Warrants, together with the Selling
Securityholder Warrants, are sometimes collectively referred to herein as the
"Selling Securityholder Securities." The Selling Securityholder Warrants were
issued to the Selling Securityholders in exchange for warrants they received in
a private placement by the Company in December, 1996 (the "Bridge Financing").
See "Selling Securityholders" and "Plan of Distribution." Each Selling
Securityholder Warrant entitles the holder to purchase, at an exercise price of
$6.50, subject to adjustment, one share of Common Stock and one Class B Warrant,
and each Class B Warrant entitles the holder to purchase, at an exercise price
of $8.75, subject to adjustment, one share of Common Stock. The Warrants are
exercisable at any time after issuance through the fifth anniversary of the
closing of the offering (the "Offering") contemplated by this Prospectus
provided that the Selling Securityholders have agreed not to exercise the
Selling Securityholder Warrants for a period of one year from the date of the
closing of the Offering and not to sell the Selling Securityholder Warrants
except after the restrictive periods described under "Plan of Distribution."
Commencing one year from the date hereof, the Warrants are subject to redemption
by the Company for $.05 per Warrant, upon 30 days' written notice, if the
average closing bid price of the Common Stock exceeds $9.10 per share with
respect to the Class A Warrants and $12.25 share with respect to the Class B
Warrants (subject to adjustment in each case) for 30 consecutive business days
ending within 15 days of the date of the notice of redemption. See "Description
of Securities."

The securities offered by the Selling Securityholders by this Prospectus
may be sold from time to time by the Selling Securityholders or by their
transferees. The distribution of the Class A Warrants, Common Stock and the
Class B Warrants offered hereby by the Selling Securityholders may be effected
in one or more transactions that may take place on the over-the-counter market,
including ordinary brokers' transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders.

The Selling Securityholders, and intermediaries through whom such
securities are sold, may be deemed underwriters within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company has agreed to indemnify the
Selling Securityholders against certain liabilities, including liabilities under
the Securities Act.

The Company will not receive any of the proceeds from the sale of
securities by the Selling Securityholders. In the event the Selling
Securityholder Warrants are exercised, the Company will receive gross proceeds
of $ . See "Selling Securityholders" and "Plan of Distribution."

On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company
(the "Offering") of 1,200,000 Units, each Unit consisting of one share of Common
Stock, one Class A Warrant and one Class B Warrant, was declared effective by
the Securities and Exchange Commission (the "Commission"). The Company will
receive approximately $4,775,000 in net proceeds from the Offering (assuming no
exercise of the Underwriter's over-allotment option) after payment of
underwriting discounts and commissions and estimated expenses of the Offering.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE .

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

The date of this Prospectus is February , 1997

<PAGE>

Alternate Prospectus Page

SELLING SECURITYHOLDERS

An aggregate of up to 500,000 Class A Warrants, 500,000 shares of Common
Stock and 500,000 Class B Warrants issuable upon exercise of such Class A
Warrants and 500,000 shares of Common Stock issuable upon exercise of such Class
B Warrants may be offered for resale by investors who received their Class A
Warrants in exchange for warrants received in the Bridge Financing.

The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering the Selling
Securityholder Securities for resale to the public. The Company will not receive
any of the proceeds from the sale of such securities. To the Company's knowledge
there are no material relationships between any of the Selling Securityholders
and the Company, nor have any such material relationships existed within the
past three years.

<TABLE>
<CAPTION>
Number of Class A Warrants
Beneficially Owned and
Selling Securityholders Maximum Number to be Sold(1)
-------------------- -----------------------------
<S> <C>
Jack A. Bova ........................................................................... 18,750
Nicholas Casale ........................................................................ 6,250
Yong S. Chen ........................................................................... 6,250
Yong S. Chen M.D. Pension Plan.......................................................... 6,250
CRC Communities ........................................................................ 6,250
Digestive Health Associates
Profit Sharing Plan..................................................................... 12,500
E&M RP Trust........................................................................... 25,000
J. Thomas Esslinger..................................................................... 12,500
Steven A. Finkler....................................................................... 12,500
Charles L. Fougerousse.................................................................. 6,250
Robert Franco........................................................................... 6,250
Mark Gilder and Judy Gilder, JTWROS..................................................... 12,500
Ross H. Golding......................................................................... 12,500
Richard C. Lehman....................................................................... 12,500
Loveless OrhopaediCare Profit Sharing Plan.............................................. 12,500
H. John Lyke........................................................................... 25,000
Paul K. Manger and Nancy S. Manger, JTWROS.............................................. 25,000
Arthur M. Marush, M.D................................................................... 18,750
Gary W. Mockler......................................................................... 18,750
Nano-Cap Hyper Growth Partnership L.P................................................... 12,500
Eugene F. Obermeyer and Barbara H. Obermeyer, JTWROS.................................... 25,000
Edwards O. Parry, Jr.................................................................... 12,500
The Mary Patoff Revocable Trust UA DTD 7/8/96........................................... 12,500
Phillip J. Picchietti................................................................... 6,250
Pattabhiraman Rajendran and Pindi L. Rajendran, JTWROS.................................. 12,500
Tushar Ramani........................................................................... 6,250
Brigid Ramchandran and Anjur Ramchandran, JTWROS........................................ 12,500
Sanford Schmookler and Alice Schmookler, JTWROS......................................... 6,250
Ira M. Shepard.......................................................................... 6,250
Doug Terry.............................................................................. 37,500
William P. Tinkler, Jr.................................................................. 25,000
Goss Townes............................................................................. 12,500
Sherwyn Wayne........................................................................... 12,500
George J. Wegler Trust.................................................................. 12,500
Richard D. Wilkinson.................................................................... 6,250
Robert D. Zucker........................................................................ 25,000
</TABLE>

- --------
(1) Does not include shares of Common Stock issuable upon exercise of the Class
A Warrants and issuable upon exercise of the Class B Warrants issuable upon
exercise of the Class A Warrants. The Selling Securityholders have agreed
not to exercise the Class A Warrants being offered hereby for a period of
one year from the date of this Prospectus. None of the Selling
Securityholders beneficially own in excess of 1% of the outstanding shares
of Common Stock after the Offering.

A-2

<PAGE>

PLAN OF DISTRIBUTION

The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, through the writing of options on the securities,
a combination of such methods of sale or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale or
at negotiated prices.

The Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer may
exceed customary commissions).

Each Selling Securityholder has agreed not to exercise, sell, transfer,
hypothecate, assign or otherwise dispose of the Selling Securityholder Warrants
until one year after the closing of the Offering. Purchasers of the Selling
Securityholder Warrants will not be subject to such restrictions.

The Company has agreed not to solicit Warrant exercises other than through
the Underwriter of the Company's initial public office, unless the Underwriter
declines to make such solicitation. Upon any exercise of the Warrants after the
first anniversary of the date of this Prospectus, the Company will pay the
Underwriter a fee of 5% of the aggregate exercise price of the Warrants, if (i)
the market price of the Company's Common Stock on the date the Warrants are
exercised is greater than the then exercise price of the Warrants; (ii) the
exercise of the Warrants was solicited by a member of the NASD; (iii) the
Warrants are not held in a discretionary account; (iv) disclosure of
compensation arrangements was made both at the time of the Offering and at the
time of exercise of the Warrants; and (v) the solicitation of exercise of the
Warrant was not in violation of Regulation M promulgated under the Exchange Act.

The Commission has recently adopted Regulation M which will replace Rule
10b-6 and certain other rules and regulations under the Securities Exchange Act
of 1934, as amended ("Exchange Act"). Regulation M will prohibit any person
engaged in the distribution of the Selling Securityholder Warrants from
simultaneously engaging in market making activities with respect to any
securities of the Company during the applicable "cooling-off" period (one or
five business days) prior to the commencement of such distribution. Accordingly,
in the event the Underwriter or D.H. Blair & Co. Inc. ("Blair") is engaged in a
distribution of the Selling Securityholder Warrants, neither of such firms will
be able to make a market in the Company's securities during the applicable
restrictive period. However, neither the Underwriter nor Blair have agreed to
nor are either of them obliged to act as broker/dealer in the sale of the
Selling Securityholder Warrants and the Selling Securityholders may be required,
and in the event Blair is a market maker, will likely be required, to sell such
securities through another broker/dealer. In addition, each Selling
Securityholder desiring to sell Warrants will be subject to the applicable
provisions of the Exchange Act and the rules and regulations thereunder, which
provisions may limit the timing of the purchases and sales of shares of the
Company's securities by such Selling Securityholders.

The Selling Securityholders and broker-dealers, if any, acting in connection
with such sale might be deemed to be underwriters within the meaning of Section
2(11) of the Securities Act and any commission received by them and any profit
on the resale of the securities might be deemed to be underwriting discounts and
commissions under the Securities Act.

CONCURRENT PUBLIC OFFERING

On the date of this Prospectus, a Registration Statement was declared
effective under the Securities Act with respect to an underwritten offering by
the Company of 1,200,000 Units by the Company and up to 180,000 additional Units
to cover over-allotments, if any.

A-3

<PAGE>

Alternate Prospectus Page

================================================================================

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

TABLE OF CONTENTS

Page
----
Prospectus Summary.........................................................
Risk Factors...............................................................
Use of Proceeds and Plan of Operations ....................................
Dividend Policy............................................................
Capitalization.............................................................
Dilution...................................................................
Selected Financial Data....................................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................
Business...................................................................
Management.................................................................
Certain Transactions.......................................................
Principal Stockholders.....................................................
Selling Securityholders....................................................
Plan of Distribution.......................................................
Concurrent Public Offering.................................................
Description of Securities..................................................
Shares Eligible for Future Sale............................................
Legal Matters..............................................................
Experts....................................................................
Additional Information.....................................................
Index to Financial Statements.............................................. F-1

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

================================================================================

HEURISTIC
DEVELOPMENT
GROUP, INC.

500,000 Redeemable Class A
Warrants
500,000 Shares of Common Stock and
500,000 Redeemable Class B
Warrants
issuable upon exercise of the
Redeemable Class A Warrants and
500,000 Shares of Common Stock
issuable upon exercise of the Class B
Warrants

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

PROSPECTUS

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

, 1997

================================================================================

<PAGE>

PART II

Information Not Required in Prospectus

Item 24. Indemnification of Directors and Officers

The Restated Certificate of Incorporation and By-Laws of the Registrant
provide that the Registrant shall indemnify any person to the full extent
permitted by the Delaware General Corporation Law (the "GAL"). Section 145 of
the GAL, relating to indemnification, is hereby incorporated herein by
reference.

In accordance with Section 102(a)(7) of the GAL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director with certain limited exceptions set forth in
Section 102(a)(7).

The Registrant also intends to enter into indemnification agreements with
each of its officers and directors, the form of which is filed as Exhibit 10.3
and reference is hereby made to such form of agreement.

Reference is made to Section 6 of the Underwriting Agreement (Exhibit 1.1)
which provides for indemnification by the Underwriter of the Registrant, its
officers and directors.

Item 25. Other Expenses of Issuance and Distribution

The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:

Amount
--------
SEC Registration Fee .............................................. $ 15,680
NASD Filing Fees .................................................. 5,625
Nasdaq Filing Fees ................................................ 10,000
Printing and Engraving Expenses ................................... 85,000
Accounting Fees and Expenses ...................................... 100,000
Legal Fees and Expenses ........................................... 180,000
Blue Sky Fees and Expenses ........................................ 40,000
Transfer Agent's Fees and Expenses ................................ 3,500
Underwriter's Non-Accountable Expense Allowance ................... 180,000
Miscellaneous Expenses ............................................ 5,195
--------
Total ......................................................... $ 625,000
========

Item 26. Recent Sales of Unregistered Securities

The following discussion gives retroactive effect to the stock split
effected in October 1996. Since its organization in July 1994, the Registrant
has sold and issued the following unregistered securities:

In August 1994, the Registrant issued 29,880.14 shares of Common Stock to
Steven R. Gumins for $8,784.29 in cash, 29,880.14 shares of Common Stock to
Deborah E. Griffin for $8,784.29 in cash, 1,339.44 shares of Common Stock to Jay
Shapiro for $438.60 in cash, 13,394.40 shares of Common Stock to Kimitane Sohma
for $4,386.00 in cash, 3,013.73 shares of Common Stock to CMC Partners for
$986.85 in cash (these shares were transferred to Clark Management Co. Inc. in
September 1996), 63,455.79 shares of Common Stock to Clark Trust u/t/d 6/30/69
for $20,778.68 in cash, 9,019 shares of Common Stock to ACC Trust for $2,960.55
in cash, 4,520.60 shares of Common Stock to Brooks Trust, 10/7/72 for $1,480.28
in cash, 13,394.36 shares of Common Stock to Gregory L. Zink for $4,386.00 in
cash, 3,013.56 shares of Common Stock to Arcadian & Co., L.P. for $986.85 in
cash, 1,339.44 shares of Common Stock to John Dobbs for $438.60 in cash,
18,752.64 shares of Common Stock to Jerald N. Downen for $6,140.40 in cash,
20,091.54 shares of Common Stock to Michael A. Hertzberg for $6,579.00 in cash
and 1,339.44 shares of Common Stock to R. Brett Lunger for $438.60 in cash.

In August 1994, pursuant to an Assignment Agreement between the Registrant
and NGJ Ltd., the Registrant issued 50 shares of Series A Preferred Stock to NGJ
Ltd. in consideration for an assignment of all of NGJ Ltd.'s right, title and
interest in and to the EIS System and the Trademark. In August 1994, the
Registrant issued 550 shares of Series A Preferred Stock to NGJ Ltd. for $550,00
in cash.

II-1

<PAGE>

In August 1994, pursuant to a Non-Qualified Stock Option Agreement, the
Registrant granted to TransPac an option to purchase 30,733.36 shares of Common
Stock. Such Option was amended to decrease the number of shares of Common Stock
purchasable upon exercise of the Option to 13,177.37. In February 1996, TransPac
exercised the Option and the Registrant issued 13,177.37 shares of Common Stock
to TransPac for $10,063.67.

In August 1994, pursuant to a Non-Qualified Stock Option Agreement, the
Registrant granted to Eric Rhodes an option to purchase 2,678.87 shares of
Common Stock. In September 1996, Mr. Rhodes exercised the Option and the
Registrant issued 2,678.87 shares of Common Stock to Mr. Rhodes for $877.20.

In August 1994, pursuant to a NonQualified Stock Option Agreement, the
Registrant granted to Jonathan W. Seybold an option to purchase 61,466.73 shares
of Common Stock. Such Option was amended on December 28, 1995 to increase the
number of shares of Common Stock purchasable upon exercise of the Option to
81,946.71. On December 29, 1995, Mr. Seybold exercised the Option and the
Registrant issued 81,946.71 shares of Common Stock to Mr. Seybold for $300,000.

In August 1994, pursuant to a Non-Qualified Stock Option Agreement, the
Registrant granted to Dr. William Blase an option to purchase 2,678.87 shares of
Common Stock. In September 1996, Dr. Blase exercised the Option and the
Registrant issued 2,678.87 shares of Common Stock to Dr. Blase for $877.20. In
March 1996, the Registrant issued 9,218 shares of Common Stock to Dr. Blase for
$37,500.00 in cash.

In August 1996, the Registrant also issued 40,564 options to purchase
Common Stock to Ms. Griffin and 38,110 options to purchase Common Stock to Mr.
Gumins, each at an exercise price of $.50 per share. In October 1996, the
Company issued 100,000 options to purchase Common Stock to each of Deborah E.
Griffin and Steven R. Gumins, each at an exercise price of $5.00 per share.

The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. The sale of securities
was without the use of an underwriter, and the certificates evidencing the
shares bear a restrictive legend permitting the transfer thereof only upon
registration of the shares or an exemption under the Securities Act of 1933, as
amended.

In December 1996, the Registrant issued 20 units, each unit consisting of a
note in the principal amount of $50,000 bearing interest at 10% per annum and
warrants to purchase 25,000 shares of Common Stock at an exercise price of $3.00
per share (assuming the offering contemplated by this Registration Statement is
not consummated) to 36 accredited investors for an aggregate purchase price of
$1,000,000.

The units were issued pursuant to an exemption from registration provided
by Regulation D promulgated under Section 4(2) of the Securities Act. The
Underwriter acted as the Registrant's placement agent in connection with this
private placement. In connection therewith, the Registrant paid sales
commissions in the aggregate amount of $100,000 and a non-accountable expense
allowance in the aggregate amount of $30,000.

Item 27. Exhibits and Financial Statement Schedules

(a) Exhibits

1.1 -- Form of Underwriting Agreement*

3.1 -- Form of Certificate of Incorporation of the Registrant, as
amended*
3.2 -- By-laws of the Registrant*
4.1 -- Form of Bridge Note*
4.2 -- Bridge Warrant Agreement*
4.3 -- Form of Warrant Agreement*
4.4 -- Form of Underwriter's Unit Purchase Option*
4.5 -- Form of Finder's Unit Purchase Option*
5.1 -- Opinion of Bachner, Tally, Polevoy & Misher LLP*
10.1 -- 1996 Stock Option Plan*
10.2 -- Form of Escrow Agreement by and between the Registrant,
American Stock Transfer & Trust Company and certain
securityholders of the Registrant*
10.3 -- Form of Indemnification Agreement*
10.4 -- Assignment dated August 22, 1994 between Nautilus Group
Japan, Ltd. and the Company*

II-2
<PAGE>

10.5 -- Exclusive Distribution License Agreement dated June 1995
between Nautilus Group Japan, Ltd. and the Company*
10.6 -- Letter Agreement dated November 27, 1996 between Nautilus
Group Japan, Ltd. and the Company*
10.7 -- Office Lease dated August 1, 1996 between Paulistic
Productions and the Company*
10.8 -- Retainer Agreement dated August 16, 1994 between TransPac
Software Inc. and the Company*
10.9 -- Employment Agreement dated as of December 1, 1996 between
the Company and Steven R. Gumins*
10.10 -- Employment Agreement dated as of December 1, 1996 between
the Company and Deborah E. Griffin*
10.11 -- Form of Conversion Agreement between the Company and the
holders of Indebtedness*
10.12 -- Conversion Agreement between the Company and Nautilus Group
Japan, Ltd.*
23.1 -- Consent of Bachner, Tally, Polevoy & Misher LLP -- Included
in Exhibit 5.1*

23.2 -- Consent of Richard A. Eisner & Company, LLP -- Included on
Page II-5

24.1 -- Power of Attorney -- Included on Page II-6*

- ----------
* Previously filed.

Item 28. Undertakings

(1) The undersigned Registrant hereby undertakes that it will:

(a) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act,

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement, and

(iii) Include any additional or changed material information on
the plan of distribution.

(b) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.

(c) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of this offering.

(2) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.

(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

(4) The undersigned Registrant hereby undertakes that it will:

(a) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act as part of this registration statement as
of the time it was declared effective.

(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of such securities at that time as the initial
bona fide offering of those securities.

II-3
<PAGE>

CONSENT OF COUNSEL

The consent of Bachner, Tally, Polevoy & Misher is contained in its opinion
filed as Exhibit 5.1 to the Registration Statement.

II-4

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

To The Board of Directors
Heuristic Development Group, Inc.

We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated September 18,
1996 in the Registration Statement (Form SB-2) and related prospectus of
Heuristic Development Group, Inc.

RICHARD A. EISNER & COMPANY, LLP

New York, New York
February 7, 1997

II-5

<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Registration
Statement or Amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Pacific Palisades, State of California
on the 7th day of February, 1997.

HEURISTIC DEVELOPMENT GROUP, INC.

By: /s/ Johnathan W. Seybold
--------------------------------
Jonathan W. Seybold,
Chairman of the Board

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or Amendment thereto has been signed by the following
persons in the capacities and on the dates stated.

Signature Title Date
------- ---- ----

<S> <C> <C>
/s/ Jonathan W. Seybold Chairman of the Board February 7, 1997
-------------------------------------- (principal executive officer)
Jonathan W. Seybold

/s/ Gregory L. Zink President, Chief Financial Officer February 7, 1997
-------------------------------------- and Director (principal financial
Gregory L. Zink officer and principal accounting
officer)

/s/ Steven R. Gumins Director February 7, 1997
-------------------------------------
Steven R. Gumins

/s/ Deborah E. Griffin Director February 7, 1997
-------------------------------------
Deborah E. Griffin

* Director February 7, 1997
-------------------------------------
William Blase

* Director February 7, 1997
-------------------------------------
Kenneth W. Krugler

* Director February 7, 1997
-------------------------------------
M. Caroline Martin

* Director February 7, 1997
-------------------------------------
Allan Dalfen

* By: /s/ Gregory L. Zink
- --------------------------------
Gregory L. Zink
Attorney-in-fact

</TABLE>

II-6