VIRTUAL COMMUNITIES INC/DE/, SB-2/A, 2000-09-07

VIRTUAL COMMUNITIES INC/DE/
SB-2/A, 2000-09-07
COMPUTER PROGRAMMING SERVICES

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<PAGE>

As filed with the Securities and Exchange Commission on September 7, 2000

Registration No. 333-36482

This Registration Statement is a Post-effective amendment to File Nos. 333-17635
and 333-89593
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

AMENDMENT NO. 3 to
FORM SB-2

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

VIRTUAL COMMUNITIES, INC.
(Name of small business issuer in its charter)

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

Delaware 7371 95-4491750
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)

589 Eighth Avenue, 7th Floor Avi Moskowitz, President
New York, New York 10018 589 Eighth Avenue, 7th Floor
(212) 931-8600 New York, New York 10018
(212) 931-8600
(Address and telephone number of
principal executive offices (Name, address and telephone number of
and principal place of business) agent for service)

--------------
Copies to:

Travis L. Gering, Esq.
Wuersch & Gering LLP
11 Hanover Square, 21st Floor
New York, NY 10005
(212) 509-5050

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 continued 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
<PAGE>

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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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. [_]

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.

CALCULATION OF REGISTRATION FEE

-----------------------------------------------------------------------------------------------------------
Proposed
maximum Proposed
Amount of offering maximum Amount of
Title of each class of securities to be price per aggregate registration
securities to be registered registered share offering price fee
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock (1) 1,911,863 shares $2.92 $ 5,586,272.50 $ 1,474.78 (3)
-----------------------------------------------------------------------------------------------------------
Common stock (2) 981,266 shares 14.87 $14,591,425.42 $ 3,852.02 (3)
-----------------------------------------------------------------------------------------------------------
TOTAL 2,893,129 shares $ 5,326.80 (3)
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
</TABLE>

(1) The amount of the registration fee with respect to such securities has been
calculated in accordance with Rule 457(c).

(2) The amount of the registration fee with respect to such securities has been
calculated in accordance with Rule 457(g).

(3) Pursuant to Rule 457(a), the registrant has previously paid a registration
fee of $5,327.52 based on a bonafide estimate of the maximum offering price in
connection with the filing of its registration statement on Form SB-2, filed
with the Commission on May 5, 2000, of which this registration statement is a
pre-effective amendment. The number of securities offered has not been increased
by this pre-effective amendment.
<PAGE>

EXPLANATORY NOTE

This Registration Statement covers the registration for resale of up to an
aggregate of 2,893,129 shares of restricted common stock of Virtual Communities,
Inc., a Delaware corporation. These shares are being registered on behalf of
purchasers of restricted securities in private placements of the registrant
during the period from December 1999 through April 2000. All of such shares of
common stock are registered hereunder solely for resale. Such shares to be
registered consist of 1,911,863 shares of common stock registered for resale on
behalf of the registrant's private placement purchasers of such shares, and up
to 981,266 shares of common stock underlying outstanding warrants, which shares
are registered for resale on behalf of warrant holders following exercise of
such warrants. See "Registered Security Holders."

Pursuant to Rule 429 under the Securities Act, this registration statement
is also a post-effective amendment relating to previously registered securities
with respect to (1) the issuance by the registrant of common stock and warrants
underlying outstanding units, unit purchase options and warrants, and (2) resale
of shares of common stock upon exercise of units and warrants by the holders of
such instruments. Such securities were registered under the following
registration statements: (a) the registrant's registration statement on Form
SB-2 (File No. 333-17635), with respect to 1,380,000 units consisting of one
share of common stock and one redeemable class B warrant, and 2,760,000 shares
of common stock underlying the class B warrants registered thereby; and (b) the
registrant's registration statement on Form SB-2 (File No. 333-89593), with
respect to (i) up to 1,794,335 shares of common stock on behalf of warrant
holders with respect to the resale of such shares following such holders'
exercise of outstanding warrants that were issued by the registrant's
predecessor in private placements and that were assumed by the registrant
pursuant to the terms of that certain Agreement and Plan of Merger, dated as of
June 2, 1999, as amended, (ii) 500,000 redeemable class B warrants issuable upon
exercise of certain outstanding redeemable class A warrants, and 1,000,000
shares of common stock issuable upon the exercise of such class A and class B
warrants, which class A and class B warrants are the "Selling Securityholder
Warrants" and "Selling Securityholder Class B Warrants" referred to in the
company's Registration Statement on Form SB-2 (File No. 333-17635), filed with
the Commission on February 11, 1997, and (iii) 120,000 units issuable upon
exercise of certain outstanding unit purchase options, each consisting of one
share of common stock, one redeemable class A warrant and one redeemable class B
warrant, 120,000 class B warrants issuable upon the exercise of the class A
warrants, and 360,000 shares of common stock issuable on exercise of the
redeemable class A and class B warrants.

We will not receive any proceeds from the resale of securities by holders
of any of the securities registered hereunder. We will not receive any proceeds
from the sale of shares by those who have purchased securities pursuant to
private placements.

The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. The prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any State where the offer or sale is not permitted.
<PAGE>

SUBJECT TO COMPLETION--DATED September 7, 2000

PROSPECTUS

VIRTUAL COMMUNITIES, INC.

1,911,863 shares of common stock and
981,266 shares of common stock issuable upon exercise of warrants

1,794,335 shares of common stock issuable upon exercise
of outstanding warrants by warrant holders

500,000 redeemable class B warrants and
500,000 shares of common stock issuable upon exercise
of outstanding redeemable class A warrants and 500,000 shares
of common stock issuable upon exercise of the class B warrants

120,000 units consisting 120,000 shares of common stock,
120,000 redeemable class A warrants and
120,000 redeemable class B warrants

and 120,000 class B warrants issuable upon exercise of the class A warrants,
and 360,000 shares of common stock issuable upon exercise
of the class A and class B warrants

This prospectus relates to the resale of an aggregate of 2,893,128 shares
of our common stock, par value $.01 per share, by the registered security
holders identified in this prospectus. The common stock for resale covered by
this prospectus consists of 1,911,863 shares of common stock and 981,265 shares
issuable upon exercise of warrants previously issued to the registered security
holders.

In addition, this prospectus covers the issuance and resale of the
following securities underlying outstanding securities previously registered by
us: 1,794,335 shares of common stock issuable upon exercise of warrants by
warrant holders; 500,000 redeemable class B warrants and 500,000 shares of
common stock issuable upon exercise of outstanding redeemable class A warrants;
500,000 shares of common stock issuable upon exercise of the class B
warrants; 120,000 shares of common stock, 120,000 redeemable class A warrants
and 120,000 redeemable class B warrants upon excerise of 120,000 units that are
issuable upon exercise of outstanding unit purchase options; 120,000 class B
warrants issuable upon exercise of the class A warrants, and 360,000 shares of
common stock issuable upon exercise of the class A and class B warrants .

Each class A warrant entitles the holder to purchase one share of common
stock and one class B warrant at an exercise price of $6.50, subject to
adjustment, at any time until February 11, 2002. Each class B warrant entitles
the holder to purchase one share of common stock at an exercise price of $8.75
at any time until February 11, 2002. The class A and class B warrants are
subject to redemption by us at a redemption price of $0.05 per warrant on 30
days' written notice, provided that the closing bid price of the common stock
averages in excess of $9.10 and $12.25, respectively, for any 30 consecutive
trading days ending within 15 days of the notice of redemption. Each unit
purchase option entitles the holder to purchase one share of common stock, one
redeemable class A warrant and one redeemable class B warrant at an exercise
price of $6.00 at any time until February 10, 2002. See "Description of
Securities."
<PAGE>

The prices at which the registered security holders may sell the securities
will be determined by the prevailing market price for the shares or through
negotiated transactions. We will not receive any of the proceeds from the resale
of the shares of commons stock underlying the securities, however, we are paying
for the costs of registering the shares of common stock covered by this
prospectus.

The registered security holders will receive all of the amounts received
upon any sale by them of the securities, less any brokerage commissions or other
expenses incurred by them. While this offering is not being underwritten, the
registered security holders and the brokers or other third parties through whom
the registered security holders sell the common stock may be deemed
"underwriters" as that term is defined in the Securities Act of 1933, as
amended, for purposes of the resale of the shares of common stock offered in
this prospectus. See "Registered Security Holders," and "Plan of Distribution."

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

Investment in these securities involves a high degree of risk.
See "Risk Factors" beginning on page 4.

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

Our common stock, our outstanding class A warrants and our outstanding class B
warrants trade on the Nasdaq SmallCap Market under the symbols VCIX, VCIXW and
VCIXZ, respectively. Our outstanding units offered in our 1997 initial public
offering trade on the Nasdaq SmallCap Market under the symbol VCIXU.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.

Pursuant to Exemption Application 91/99 filed by Heuristic Development Group,
Inc., the Israeli Securities Authority decided, on May 30, 1999, in accordance
with their authority under Section 41 of the Israel Securities Law, 5728-1968,
to exempt Heuristic Development Group, Inc. from publishing a prospectus
approved by the Authority, with respect to the offering of securities of
Heuristic Development Group, Inc.

The date of this prospectus is September 7, 2000.
<PAGE>

TABLE OF CONTENTS

Page
----
Part I

Summary Information and Risk Factors ............................ 1
Determination of Offering Price.................................. 15
Use of Proceeds. ................................................ 17
Dividend Policy.................................................. 19
Registered Security Holder....................................... 19
Plan of Distribution............................................. 23
Legal Proceedings................................................ 25
Directors, Executive Officers, Promoters and Control Persons..... 25
Security Ownership of Certain Beneficial Owners and Management... 29
Description of Securities........................................ 32
Description of Business.......................................... 39
Market for Common Equity and Related Stockholder Matters......... 41
Executive Compensation........................................... 61
Management's Discussion and Analysis or Plan of Operation........ 70
Description of Property.......................................... 76
Certain Relationships and Related Transactions................... 76
Virtual Communities, Inc. Consolidated Financial Statements for
the year ended December 31, 1999 and 1998.................... F-1
Virtual Communities, Inc. Condensed Financial Statements for
the period ended June 30, 2000 and 1999 (unaudited)............ F-26

Part II

Item 24. Indemnification of Directors and Officers............... II-1
Item 25. Other Expenses of Issuance and Distribution............. II-1
Item 26. Recent Sales of Unregistered Securities................. II-1
Item 27. Exhibits................................................ II-3
Item 28. Undertakings............................................ II-8

SIGNATURES II-12

i
<PAGE>

Part I.

SUMMARY INFORMATION AND RISK FACTORS

This summary highlights selected information from this prospectus. It does
not contain all of the information that may be important to you. You should
carefully read this entire document and the other documents to which we refer.
Together, these documents will give you a more complete description of the
transactions we are proposing.

Virtual Communities, Inc.

Our company is the product of a merger consummated October 29, 1999, in
which Virtual Communities, Inc. merged with and into a wholly owned subsidiary
of Heuristic Development Group, Inc., our predecessor company. For accounting
purposes, the Merger has been treated as a recapitalization of VCI with VCI as
the acquirer (reverse acquisition). The historical financial statements prior to
October 29, 1999, are those of VCI and as of October 29, 1999 the financial
statements reflect the two companies.

Prior to the merger, under the name Heuristic Development Group, we were a
development stage company originally organized to research, develop, design and
market fitness-related products. Due to disappointing acceptance of our primary
product, the IntelliFit System, we decided to pursue a strategy of acquisition
of an existing company culminating in the merger with Virtual Communities, Inc.

Virtual Communities, Inc., was organized in 1996 to develop, acquire and
operate online communities on the Web that aggregate and publish various news,
media and entertainment content targeted to specific ethnic groups. After the
merger, we changed our name to Virtual Communities, Inc. The Company is
currently a developer of content management and Web publishing software for
online business-to-business and business-to-consumer communities. Through its
proprietary Community Management Solution (CMS), the Company designs and
develops web-based communities containing a comprehensive suite of products and
services including its Cortext content management software, integrated
e-commerce solutions and best-of-breed interactive community features. In July
2000, the Company restructured its operations in order to focus on the further
development and marketing of its Cortext software and in connection therewith
intends to sell its five online ethnic communities.

As part of the restructuring of the Company, management determined that the
Company will focus its near term efforts on the further development of its
Cortext content management and Web publishing software. The Cortext software,
currently under development by VCIX and its subsidiaries, is meant to address
what management believes is a widespread need by Web publishers for a simple
software tool for Web site content management, including e-business
transactional content. The Company's aim is to develop a suite of Cortext
software tools that will enable the creation, organization, delivery and
maintenance of both non-transactional Web-site-oriented content and business-to-
business (B2B) and business-to-consumer (B2C) commerce transaction content
conducted on a Web site.

Our principal executive offices are located at 589 8th Avenue, 7th Floor,
New York, NY 10018, telephone (212) 931-8600. Information contained on our Web
site does not constitute a part of this prospectus.

1
<PAGE>

The Offering

This prospectus relates to the offering of the following securities:

. 1,911,863 shares of outstanding common stock registered for resale on
behalf of registered security holders; and

. 981,265 shares of common stock registered for resale on behalf of warrant
holders following their exercise of outstanding warrants;

In addition, this prospectus covers the issuance and resale of the
following securities underlying outstanding securities previously registered
by us:

. 1,794,335 shares of our common stock registered for resale following exercise
of outstanding warrants that were issued by our predecessor in private
placements and which were assumed by us pursuant to the terms of the Agreement
and Plan of Merger, dated as of June 2, 1999, as amended ;

. 500,000 redeemable class B warrants issuable upon exercise of outstanding
redeemable class A warrants, and 1,000,000 shares of our common stock
issuable upon exercise of those class A and class B warrants. We issued
these class A warrants in 1997 in connection with our initial public
offering.

. 120,000 units issuable upon exercise of outstanding unit purchase options,
each consisting of one share of common stock, one redeemable class A
warrant and one redeemable class B warrant, together with an aggregate of
360,000 shares or our common stock issuable on exercise of the class A and
class B warrants included in these units.

See "REGISTERED SECURITY HOLDERS", "PLAN OF DISTRIBUTION" and "DESCRIPTION OF
SECURITIES."

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

We have not authorized anyone to give any information or make any
representation about us that differs from, or adds to, the information in this
prospectus or in our documents that are publicly filed with the Securities and
Exchange Commission. The information contained in this prospectus speaks only as
of our date unless the information specifically indicates that another date
applies.

2
<PAGE>

SUMMARY HISTORICAL FINANCIAL INFORMATION

The following table shows selected financial data of
Virtual Communities, Inc., as of and for the six months ended

June 30, 2000 (unaudited) and as of and for the year ended
December 31, 1999 (U.S. Dollars in thousands)

June 30, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Total assets.......................... $ 4,465 $ 2,364
Cash and cash equivalents............. 365 469
Total liabilities..................... 5,823 2,888
Shareholders deficit.................. (1,501) (524)
Net loss.............................. (6,567) (5,930)

Virtual Communities, Inc. historical per share data

Six Months Ended Year Ended
June 30, 2000 December 31, 1999
---------------- -----------------
Net loss per weighted average
common share (basic and
diluted (0.41) (0.56)

Weighted average common
shares outstanding 16,006,451 10,532,530

Dividends declared per
share 0 0

Book value per share at
end of period(1) (0.09) (0.04)
</TABLE>

-----------
(1) The book value per share is computed by dividing stockholders' equity by the
number of shares of common stock outstanding.

3
<PAGE>

RISK FACTORS

In addition to the other information in this report, the following factors
should be carefully considered in evaluating our business and prospects.

We face risks associated with our operations

Virtual Communities, Inc. was founded in August 1996. We have a limited
operating history and cannot predict the viability of our online community
design, development and maintenance business and our own published communities
business.

We have a history of losses and expect to incur losses in the future, and
we may never achieve profitability.

For the years ended December 31, 1998 and 1999, and the six months ended
June 30, 2000, VCI incurred net losses of $1,434,000, $5,930,000 and $6,567,000,
respectively, and had an accumulated deficit of $15,423,000 as of June 30, 2000.
To date, neither VCI nor Heuristic Development Group, Inc., our predecessor
company, has been profitable on either a quarterly or on annual basis, and we
expect to incur net losses in the future. We expect our operating expenses to
increase significantly, especially in the areas of CMS sales and marketing, the
expansion of our CMS design and development and maintenance business, and, as a
result, we will need to increase our revenue substantially to become profitable.
If our revenue does not grow as expected or increases in our expenses are not in
line with our forecasts, we will continue to incur net losses.

Our operating results depend on revenues from CMS clients that could be
affected by cancellation of key contracts and future revenues from the sale of
our Cortext content management software.

CMS sales represented 100% of VCI's revenues for the six months ended
June 30, 2000 and the year ended December 31, 1999, respectively, and we
anticipate that a majority of our revenues will derive from CMS sales in the
year 2000. These revenues, if and when received by the Company, will derive from
a limited number of customers, who could have a significant impact on revenues
in the event they were to cancel one or more of such CMS agreements. The Company
has entered into four CMS agreements to date all of which agreements contain
cancellation clauses in the event of a fundamental breach by the Company in the
performance of its obligations thereunder and, in some instances, at the
discretion of the client, upon the completion of and payment for a portion of
services rendered to the client.

You should consider the risks and difficulties frequently encountered by
companies like us, an early stage company involved in Web site software
development. These risks include, without limitation, risk that we may not be
able to successfully complete the development of our software, attract or retain
clients for such software; the risk that our software may not be integrated into
and with other Web publishing and content management software or other
technology used by our potential customer; the risk that we may not anticipate
and adapt to changes in the Internet industry and the potential level of use and
acceptance of the Cortext software by design firms and others who require Web
related software that we are currently developing.

If our CMS revenues fall below the expectations of securities analysts and
investors, the market price of our shares will likely decline.

4
<PAGE>

If our capital is insufficient to promote our business and we cannot obtain
needed financing, we will not be able to continue developing and commence
marketing our software business and exploit opportunities.

Since our current revenues are insufficient to pay for our current
operating expenses, we depend on additional investments to fund our existing and
future operations as well as to execute our business plans, and expand our
marketing and sales efforts. We believe that our available cash and revenues to
be due from current CMS clients upon the delivery of certain CMS deliverables
pursuant to agreements are not sufficient to support our current operations and
therefore we need to raise additional funds to continue the development of our
software, maintain operations and develop our position in the marketplace. It
may be difficult or impossible for us to obtain additional financing on
favorable terms. Raising funds by issuing equity securities or convertible debt
securities will dilute the percentage ownership of our current stockholders.
Also, if we issue new securities they may have rights senior to the rights of
our common stock. If we cannot obtain needed financing, we will be unable to
execute our business plans and may be forced to liquidate our assets or file for
bankruptcy.

The Company intends to sell its five online ethnic communities. There is no
certainty of the Company's ability to find one or more buyers of the online
ethnic communities. Even if buyers can be found, there can be no certainty that
the sales prices, if any, of the communities will generate sufficient proceeds
to cover the costs, time, resources and expenses incurred by the Company in its
efforts to sell the communities.

Our independent auditors have expressed doubt over our ability to continue
as a going concern.

The report of independent public accountants on our December 31, 1999
consolidated financial statements includes an explanatory paragraph stating that
the recurring losses incurred from operations and a net capital deficiency raise
substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

We face increasing competition and competitors with longer operating
histories for our online community design and development services.

In 1999 we began offering third parties Web site design and development
services that focus on creating online communities and Web site content
management software. The market for these services and software is relatively
new, intensely competitive and subject to rapid technological change. We expect
competition not only to persist, but also to increase. Increased competition may
result in price reductions, reduced margins and loss of market share. Our
competitors fall into several categories, including Internet service firms,
technology consulting firms, technology integrators, strategic consulting firms,
and in-house information technology, marketing and design departments of our
potential clients. These competitors include Vignette Ltd., Interwoven, Inc. and
Openmarket, Inc.

The barriers to entry for Web publishing and content management software is
also relatively low, As a result, we expect to face additional competition from

5
<PAGE>

new market entrants in the future. Since the market for these services and
software is rapidly evolving, our competitors may be better positioned to
service clients. We compete on the basis of a number of factors, including the
breadth and quality of the services and software offered, creative design and
software engineering expertise, pricing, technological innovation, and
understanding clients' strategies and needs. Many of these factors are beyond
our control, therefore, existing or future competitors may develop or offer
services that provide significant advantages over the services offered by us.

Many of our competitors have longer operating histories in the Web market,
greater name recognition, larger customer bases and significantly greater
resources. In addition to current competitors, it is likely that additional
competitors will enter our markets in the future, and that many of these
competitors will have substantially greater resources than us. We cannot assure
you that we will be able to compete successfully in any of our current markets.

Our business model relies on our plan to further develop our CMS business
for third parties and our ability to provide content management and Web
publishing software to prospective clients such as Web design firms. We have
sold only four CMS systems to date and have not licensed the Cortext software
independently of CMS as is our current intention. Our inability to market and
sell our community building services and software could adversely affect our
ability to increase revenues.

Changes in the political and economic stability of the State of Israel
could adversely affect our operations.

Our major subsidiary, Virtual Communities Israel Ltd.("VCIL"), and Cortext
Ltd., which jointly develop our Cortext Software, are located in the State of
Israel. Accordingly, we are directly influenced by the political, economic and
military conditions affecting Israel. Any military or terrorist action or threat
or other significant hostilities involving Israel, the interruption or
curtailment of trade between Israel and our present trading partners or a
significant downturn in the economy or financial conditions in Israel could have
a material adverse effect on our ability to operate our business. Israel's
economy has been subject to numerous destabilizing factors, including a period
of rampant inflation in the early to mid-1980's, low foreign exchange reserves,
fluctuations in world commodity prices, military conflicts and civil unrest.

In addition, since the establishment of the State of Israel in 1948,
significant hostilities exist, varying in degree and intensity, between Israel
and some Arab countries. Although Israel entered into various agreements with
some Arab countries and the Palestine Liberation Organization, and various
declarations were signed to resolve some of the economic and political problems
in the Middle East, we cannot predict if a full resolution of these problems
will be achieved, or the form of any resolution. Furthermore, all non-exempt
male adult permanent residents of Israel under the age of 50, including certain
of our employees, are obligated to perform military reserve duty and are subject
to being called into active duty under emergency circumstances. While we
operated despite these conditions in the past, we cannot predict the likelihood
of emergency circumstances occurring in the future or the impact of these
conditions on our operations in the future.

Any failure of our network infrastructure could adversely effect our
operations.

6
<PAGE>

Our success depends upon the capacity, reliability and security of our
networking hardware and software infrastructure. We have developed a hardware
and software system that is designed for reliability, however, on isolated
occasions in the past the system has been subject to isolated failures due to
human error or software failure. The system integrates Web site management,
network monitoring, quality assurance, transaction processing and fulfillment
services. In addition, our CMS system, which is utilized on our online
communities and the communities of the CMS clients with whom we enter into
relationships, and our servers in the United States and Israel, emphasize
extensive automation and the back-up of our Web sites using various technologies
and a degree of redundancy. The system is designed to minimize single points of
failure.

Demands on our infrastructure that exceed our current forecasts could
result in technical operating difficulties for the online communities of our CMS
clients.

Any system failure that interferes with the access to our CMS clients, and
the use by users and registrants of the Internet services that our CMS clients
provide, could diminish the level of traffic on their Web sites. Continuing or
repeated system failures could impair their reputation and brand name and reduce
their e-commerce referral and advertising revenue. At present, we do not know
that we will be able to scale our systems to handle a larger amount of traffic
at higher transmission speeds. Further, any expansion of our network
infrastructure will require substantial financial, operational and management
resources, all of which could affect the results of our operations by diverting
these resources from other areas of our business that we may seek to develop.

We use our own network servers that are housed at Frontier Global Services,
Inc.'s facilities in Herndon, Virginia and New York City, and at our facility in
Israel. Our online communities and those of our CMS clients are connected to the
Internet by Frontier Global Center in the United States and by Netvision Ltd. in
Israel via multiple DS-3, OC-3, and 128Kbs links on a continuous basis. Global
Center is responsible for ensuring that all of our servers have power and
connectivity to the Internet. We manage and monitor our servers and network
remotely from our facility in Israel and, in addition, Frontier Global monitors
our Web sites on a continuous basis.

Although the agreements we have with Frontier Global and Netvision provide
us with remedies for service interruptions, we cannot assure you that we will
have uninterrupted access to the Internet for communities of our CMS clients.

We are currently in discussions with Frontier Global regarding certain
amounts charged by them for services provided to us. We believe that we will be
able to resolve such differences in a mutually satisfactory manner, and, in any
event, such differences are not material to our results of operations. However,
in the event we are unable to resolve such differences, we could experience a
disruption in the services provided to us by Frontier Global.

A disruption for any reason in the Internet access provided to us by
Frontier Global or Netvision, any interruption in the service that Frontier
Global or Netvision receives from other providers, or any failure of Frontier
Global or Netvision to handle higher volumes of Internet users to our Web sites
could have a material adverse effect on our business, results of operations and
financial condition by causing a breach in our agreements with our CMS clients.

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<PAGE>

The Company recently entered into an agreement with UUNET Technologies,
Inc. pursuant to which UUNET will provide the Company with global colocation
facilities where the Company's servers will reside and be maintained. Upon the
relocation of the servers, the Company's relationship with Frontier Global will
be terminated.

Despite precautions taken by us and by Frontier Global and Netvision, our
system is susceptible to natural and man-made disasters such as earthquakes,
fires, floods, power loss and sabotage.

Our systems are also vulnerable to disruptions from human error, computer
Viruses and attempts by hackers to penetrate our network security. Hackers have
succeeded in penetrating our network security in the past, and we expect these
attempts to continue from time to time. Breaches of our network security could
also disrupt the operation of our Web sites and jeopardize the security of
confidential information stored in our servers. We have recently started
implementing "Firewall" network security in our Israel facility and at Frontier
Global's United States facilities. "Firewall" is an industry standard product,
manufactured by CheckPoint and installed for us by industry experts, that is
designed to prevent unauthorized entry into network security systems.

Although we believe that Firewall will prevent unauthorized entry to our
network security in most instances, we cannot assure you that computer viruses
and hackers will not penetrate our systems in the future.

Any of the events listed above could cause us interference, delays, or
service interruptions and adversely affect our business and results of
operations. Our success is dependent upon, among other things, our ability to
deliver uninterrupted Web site service to our CMS clients and users and
registrants of our CMS clients. As a result, we must protect our computer
equipment and the information stored in our servers against damage by fire,
natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events.

Web site services and other services based on software and computer systems
often encounter development and completion delays and the underlying software
may contain undetected errors or failures. In the case of Web sites, these
problems are heightened when the volume of traffic on a site increases. Such
delays and errors and other electronic or telecommunications failures are
generally beyond our control. In addition, we cannot assure you that errors will
not be found in the software underlying our content management systems or other
software that we license for use on our online communities or a community
developed by us for a third party. These errors might include bugs in the code
of standard "off the shelf" software product releases, and may result in delays
in the completion or launch of one of our own communities or a community or
other project that we develop on behalf of others. Other similar factors include
the timing of the commercial release of particular services or products and the
market acceptance thereof, unanticipated costs to cure any defect if it is
subject to cure, the need to refund money paid to us or to pay for damages
caused by the delay or defect.

We depend on third party content partners and suppliers to provide services
and retention elements to our CMS clients.

While no single content partner or third party provider of licenses is
material to our operations, (with the exception of the Cortext software in which
we have a controlling interest in the licensor thereof) we may not be able to
maintain or expand our base of content partners and third party providers of
interactive

8
<PAGE>

elements. If we are unable to obtain content or elements from them, we would
reduce the attractiveness of CMS.

We currently rely on other companies to provide Internet services for our
online communities, which we intend to sell, and our CMS clients, including the
following companies:

Company Service
------- -------

Accuweather, Inc. Weather Service
Commtouch Inc. Free Email Service
deltathree.com Inc. Internet Telephony
eCal Corporation Calendars
eShare Technologies Inc. Chat and Forums
homestead.com Incorporated Free Home Pages
iMediation, Inc. Affiliate Software
Intershop Communications, Inc. E-commerce Malls and Stores
iQ.COM Corporation Loyalty Solution
MatchNet.com (Jdate) Dating Service
MBNA America Bank, N.A. Affinity Credit Cards
otherproducts.com LLC (Meandaur) Free Home Pages
Netgravity, Inc. Advertising Management Software
OANDA Corp. Currency Converter
OpenSite Technologies, Inc. Auctions
Reuters Limited News Services and Photographs
Screaming Media-Net, Inc. Content Provider
Talk City, Inc. Chat Services
Tribal Voice, Inc. Instant Messaging
UUNet Technologies, Inc. Global Colocation Facilities

As a result of our reorganization in July 2000, we are currently attempting
to terminate several of these relationships which are no longer critical to the
company's operations. If we terminate such relationships with any of these
companies our ability to offer such Internet services to our CMS clients may be
adversely affected, as would the potential sales value of the ethnic
communities, which utilize a portion of the software available to us as a result
of such relationships.

The loss of Avi Moskowitz, our President and Chief Executive Officer,
Arthur Dubroff, our Chief Financial Officer, Michael Harwayne, our Chief
Operation Officer, or other key personnel, or the inability to attract and
retain additional, qualified personnel in both the United States and Israel,
could adversely affect our ability to manage and grow our businesses.

Our success depends to a significant degree upon the continued
contributions of our executive management team, most of whom have worked
together only for a short time. We do not carry key man life insurance on the
lives of any of our employees except for Avi Moskowitz, our Chairman of the
Board, Chief Executive Officer and President. Our success will also depend upon
the continued service of our management team as well as technical, marketing and
sales personnel, graphic artists and editorial staff. Although we have entered
into employment contracts with all the members of our management team, including
Mr. Moskowitz, all of our employees may voluntarily terminate their employment
at any time.

Our success also depends upon our ability to attract, hire and retain

9
<PAGE>

additional highly qualified management, technical, sales and marketing and
customer support personnel both in the United States and Israel. Locating
personnel with the combination of skills and attributes required to carry out
our strategy is often a lengthy process and competition for qualified employees
in the Internet industry, both in the United States and Israel, is intense. The
loss of key personnel, or the inability to attract, hire and retain additional,
qualified personnel, could have a material adverse effect on our ability to
manage and grow our businesses.

Our business now depends upon demand for content management and Web
publishing software and services.

Because we are currently in the business of providing Web site design and
development services, and we are currently focused on further developing and
beginning to market our Cortext Web related software, our future success
depends, on the continued expansion of, and reliance of consumers and businesses
on, the Internet. The Internet may not be able to support an increased number of
users or an increase in the volume of data transmissions. As a result, the
performance or reliability of the Internet may be adversely affected as use
increases. The improvement of the Internet in response to increased demand will
require timely improvement of the high speed modems and other communications
equipment that form the Internet infrastructure. The Internet has already
experienced outages and delays as a result of damage to portions of our
infrastructure.

The effectiveness of the Internet may also decline due to delays in the
development or adoption of new technical standards and protocols designed to
support increased levels of activity. We cannot assure you that the
infrastructure, products or services necessary to maintain and expand the
Internet will be developed, and without these developments, there will be
limited, if any, demand for our Web site design and development services.
Because competition in the online community business is intense, and many of our
competitors have greater resources than us, our ability to maintain or improve
our position in this market could be harmed.

The market for Internet software and services is relatively new and rapidly
evolving. Competition is intense and is expected to increase over time. Barriers
to entry are relatively low. Other companies that are primarily focused on
creating online communities and with whom we compete are:

We could be liable for legal proceedings that would injure our business
reputation or result in substantial damages against us.

Our failure or inability to meet a client's expectations in the performance
of Web site design and development services could injure either our or the
client's business reputation or result in a claim for substantial damages
regardless of our responsibility for such failure. In addition, the services we
provide to our clients may include access to confidential or proprietary client
information or the sublicense of software or other proprietary systems. Although
we have implemented policies to prevent such client information or licenses from
being disclosed to unauthorized parties or used inappropriately, any such
unauthorized disclosure or use could result in a claim against us for
substantial damages. Our contractual provisions attempting to limit such damages
may not be enforceable in all instances or may otherwise fail to protect us from
liability for damages. We do not currently have errors and omissions insurance.

10
<PAGE>

We face risks typical of the Internet industry

Privacy concerns, government regulation and legal uncertainties could adversely
affect activity on the Internet.

Laws and regulations that apply directly to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has been
some legislative action. It may take years to determine whether and how existing
laws that govern intellectual property, privacy, libel and taxation apply to the
Internet. The development of laws governing these areas may decrease the growth
in the use of the Internet, or give rise to claims by our clients for whom we
develop or design Web sites or other third parties. In addition, the growth and
development of the e-commerce market may prompt calls for more stringent
consumer protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online. The adoption or
modification of these laws or regulations could adversely affect our ability to
generate e-commerce referral revenue.

The Federal Communications Commission is currently reviewing our regulatory
positions on data transmissions over telecommunications networks and could seek
to impose some form of telecommunications carrier regulation on
telecommunications functions of information services. State public utility
commissions generally have declined to regulate information services, although
the public service commissions of some states continue to review potential
regulation of such services. Future regulation or regulatory changes could have
an adverse effect on our business and results of operations.

Imposition of new taxes or fees by the Federal government of the United
States or by foreign governments on Internet transactions or on the use of the
Internet as a means of communication could also adversely effect our advertising
or e-commerce revenue.

Our inability to protect our intellectual property rights could adversely
affect our ability to operate our businesses.

We consider our names, logos and designs as proprietary and try to protect
them under existing United States and international laws relating to protection
of intellectual property. We also developed internal procedures to control
access and dissemination of proprietary information. Despite our precautions,
third parties may succeed in misappropriating our intellectual property or
independently developing similar intellectual property. Protecting our
intellectual property against infringement could result in substantial legal and
other costs and could divert our limited management resources and attention from
our business plans.

Some of the technology incorporated in our Web sites, and offered to our
content partners and clients of our Web site design and development services, is
based on technology licensed from third parties. As we continue to introduce new
services, we may need to license additional technology. If we are unable to
timely license needed technology on commercially reasonable terms, we could
experience delays and reductions in the quality of our services, all of which

11
<PAGE>

could adversely affect our business and results of operations, our reputation
and the value of our proprietary information could also be adversely affected by
actions of third parties to whom we license our proprietary information and
intellectual property. If someone asserts a claim relating to proprietary
information against us, we may seek licenses to this intellectual property. We
may not, however, be able to obtain licenses on commercially reasonable terms,
if at all. The failure to obtain the necessary licenses or other rights could
prevent or limit our ability to develop our Web sites.

Our inability to incorporate content management software from a third party
into Web sites of our clients could adversely effect our ability to expand our
CMSbusiness.

In July 1999, we acquired a license from Cortext Ltd., an Israeli software
developer to content management software for use by us in maintaining content on
our own online communities. We acquired a majority control of Cortext Ltd. in
February 2000. We also offer this software in the operation of the Web sites of
our content partners and community-building clients. We cannot assure you that
we will be able to successfully integrate this software into the communities our
CMS clients and to use the same as a platform for the integration of additional
software elements for such communities. If we are unable to integrate the
software into our own, and our clients' Web sites, our ability to expand our Web
publishing and content management business could be adversely affected.

Our applications operate in complex network environments and directly and
indirectly interact with a number of other hardware and software systems. We are
unable to predict to what extent our business may be affected if our systems or
the systems that operate in conjunction with our systems experience a material
failure.

Known or unknown errors or defects that affect the operation of our
software and systems could result in delay or loss of revenue, interruption of
services, cancellation of contracts and registrants, diversion of development
resources, damage to our reputation, increased service and warranty costs, and
litigation costs, any of which could adversely affect our business, financial
condition and results of operations.

One of the most likely worst-case scenarios for us is that access to our
Web sites through the Internet would be limited or impossible due to a
telecommunications problem beyond our control. In such a scenario, we would be
dependent on third party telecommunications providers to remedy the problem.

We are subject to risks related to our stock

Our stock price may be highly volatile, which could result in substantial
losses to investors.

The trading price of our common stock is likely to be highly volatile due
to a variety of factors, including:

. actual or anticipated variations in quarterly operating results and changes
in financial estimates by securities analysts;

. announcements of technological innovations;

. new products or services offered by us or our competitors;

12
<PAGE>

. conditions or trends in the advertising or e-commerce market;

. our announcement of significant acquisitions, strategic partnerships, joint
ventures or capital commitments (or the absence of the same);

. additions or departures of key personnel; and

. sales of common stock or the exercise of our outstanding options, warrants
or unit purchase options.

In addition, the Nasdaq SmallCap Market, where many publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These fluctuations are often unrelated or disproportionate to the
operating performance of these companies. These broad market and Internet
industry factors may materially adversely affect the market price of our common
stock, warrants, and units regardless of our actual operating performance.

Your investment in our stock may become illiquid and you may lose your
entire investment.

Under the Nasdaq Stock Market Marketplace Rules, Nasdaq requires Nasdaq
SmallCap Market issuers to comply with applicable requirements for continued
listing on the Nasdaq SmallCap Market. Following the completion of our recent
merger with VCI, Nasdaq initially denied, but subsequently approved, the listing
of our stock and warrants. On August 29, 2000 we received a letter from Nasdaq
indicating that the Nasdaq staff is again reviewing the Company's eligibility
for continued listing on the Nasdaq SmallCap market. The letter stated that we
no longer meet the requirements for continued listing on the Nasdaq SmallCap
market with respect to minimum net tangible assets, market capitalization or net
income. As a result, the Nasdaq Staff has asked us to provide a specific plan to
achieve or sustain compliance with all of the Nasdaq SmallCap Market listing
requirements. If, after reviewing our plan, the Nasdaq Staff determines that the
submission does not adequately address maintenance of minimum net tangible
assets, market capitalization or net income, a formal notice of deficiency will
be sent to us and formal delisting process will be commenced. There can be no
assurance that we can currently maintain the minimum listing standards for
continued trading of our securities on the Nasdaq SmallCap Market. If our
securities are no longer traded on the Nasdaq SmallCap Market, investment in our
stock may become illiquid and you may lose your entire investment.

If our common stock is not quoted on the Nasdaq SmallCap Market or listed
on another exchange, trading in our common stock would be covered by the
Exchange Act's "penny stock" rules if our common stock is deemed a penny stock
(as defined below). Under these rules, broker-dealers who recommend penny stocks
to persons other than established customers and "accredited investors" must make
a special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from these rules if the market price is at least $5.00 per share.

If our securities were to become subject to the regulations applicable to
penny stocks, the market liquidity for these securities would be severely
affected, limiting the ability of broker-dealers to sell these securities and
your ability to sell our common stock in the public market.

As of August 15, 2000, we have issued and outstanding 17,122,506 shares of
common stock substantially all of which is freely tradable without restriction
under the Securities Act. The number of shares outstanding excludes
approximately

13
<PAGE>

16,550,000 shares reserved for issuance by the Company under its stock options
plans, warrants and outstanding convertible securities. Giving effect to the
exercise and conversion of all outstanding securities instruments, we would have
outstanding as of August 15, 2000 on a fully diluted basis approximately
33,675,000 shares of common stock.

Under the terms of the private placement financings undertaken by us during
the period from December 1999 through April 2000, we are registering on behalf
of those private placement purchasers this registration statement providing for
the resale of an aggregate of 2,893,128 shares of common stock and common stock
underlying warrants following the exercise of such warrants. See, "Registered
Security Holders."

In September 1999, we filed a Form S-8 registration statement under the
Securities Act to register all shares of common stock issuable pursuant to
outstanding options and all shares of common stock reserved for issuance under
our 1996 Stock Option Plan. This registration statement became effective
immediately upon filing, and shares covered by this registration statement
therefore are eligible for sale in the public markets, subject to options
becoming exercisable, the lock-up agreements described above and Rule 144
limitations applicable to affiliates. As of August 15,2000 there were
outstanding options to purchase up to 137,000 shares of common stock that will
be eligible for sale in the public market subject to becoming exercisable.

On May 1, 2000 Virtual Communities, Inc. (the "Company") filed a
Registration Statement on Form S-8 to register 4,589,750 shares of Virtual
Communities, Inc.'s common stock, issuable to eligible employees, officers,
directors, advisors and consultants of the registrant under the Virtual
Communities, Inc. 1997 Stock Option Plan (the "VCI 1997 Plan"), the Virtual
Communities, Inc. 1998 Stock Option Plan (the "VCI 1998 Plan"), the Virtual
Communities, Inc. 1999 Stock Option Plan (the "VCI 1999 Plan" and collectively
with the VCI 1997 Plan and the VCI 1998 Plan, the "VCI Stock Option Plans"), and
the 1999 Stock Incentive Plan of Virtual Communities, Inc. (the "1999
Post-Merger Plan"). The VCI Stock Option Plans were authorized and approved by
the shareholders of Virtual Communities, Inc. prior to its merger into Heuristic
Development Group that subsequently changed its name to Virtual Communities,
Inc. The 1999 Post-Merger Plan was authorized and approved by the shareholders
of Heuristic Development Group, which subsequently changed its name to Virtual
Communities, Inc. Options exercisable into 3,564,927 shares are outstanding of
which approximately 904,000 have vested and are fully exercisable as of August
15, 2000.

As authorized under the provisions of the 1999 Post-Merger Plan, the Board
of Directors of Virtual Communities, Inc. (hereinafter, "VCI") amended the
Post-Merger Plan. Such amendments (i) increased the number of shares of Virtual
Communities, Inc. common stock reserved for issuance under such plan from
1,000,000 shares to 2,000,000 shares, and (ii) increased the maximum annual
percentage of shares available for replenishment of the Post-Merger Plan from 2%
to 5% of the outstanding number of shares of common stock of Virtual
Communities, Inc. Such amendments were ratified by the Company's stockholders at
the Company's Annual Meeting of Shareholders on June 6, 2000.

As restrictions on resale end and/or registrations of restricted shares are
effectuated to permit resales of the same, the market price could drop
significantly if the holders of such restricted shares sell them or are
perceived by the market as intending to sell them.

14
<PAGE>

Anti-takeover provisions in our charter could deter a takeover effort,
which could inhibit your ability to receive an acquisition premium for your
shares.

Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock without the need for stockholder approval. The Board may also
determine the economic and voting rights of this preferred stock. Issuance of
preferred stock could impede or prevent transactions that would cause a change
in control of our company. This might discourage bids for our common stock at a
premium over the market price of our common stock and adversely affect the
trading price of our common stock. We have no current plans to issue shares of
preferred stock.

The forward-looking statements made in this prospectus might prove
inaccurate, resulting in a material difference between such statements and our
actual results.

Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity, performance
or achievements following the merger to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements.

Such factors include, among other things, those listed under "Risk Factors"
and elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"could," "expects," "plans," "intends," "anticipates," "believes," "thinks,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
and other comparable terminology.

DETERMINATION OF THE OFFERING PRICE

This prospectus relates to the resale by the registered security holders of
1,911,863 shares of common stock and 981,265 shares of common stock issuable
upon exercise of warrants. Such shares are being registered on behalf of
purchasers of restricted Company securities in private placements which occurred
in the period from December 13, 1999 through April 2000. The warrants are
exercisable for one share of common stock each at exercise prices ranging from
$2.11 to $14.87 per share. The Company may redeem up to 129,450 warrants at $.75
per share underlying those warrants, which price decreases to $.50 per share
underlying the warrant after July 5, 2000 and thereafter by $.05 per month to a
minimum of $.25. The offering of the securities hereunder is not an underwritten
offering. The resales of securities registered hereunder are expected to be
offered by the registered security holders at various offering prices that
reflect the current market price of our securities, however there can be no
assurance in this regard. See, "Plan of Distribution."

In addition, we are offering under this prospectus, as a post-effective
amendment pursuant to Rule 429 under the Securities Act, the following
securities previously registered on the registration statements indicated below
with respect to (1) the issuance by us of common stock and warrants underlying
outstanding units, unit purchase options and warrants, and (2) resale of shares
of common stock upon exercise of units and warrants by the holders of such
instruments:

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<PAGE>

(a) Our registration statement on Form SB-2 (File No. 333-17635), with
respect to 1,380,000 units consisting of one share of common stock and one
redeemable class B warrant, and 2,760,000 shares of common stock underlying the
class B warrants registered thereby; and

(b) Our registration statement on Form SB-2 (File No. 333-89593), with
respect to the following:

(i) 1,794,335 shares of common stock on behalf of warrant holders in regard
to the resale of such shares following these warrant holders' exercise of
outstanding warrants that were issued by the registrant's predecessor in private
placements and that were assumed by the registrant pursuant to the terms of that
certain Agreement and Plan of Merger, dated as of June 2, 1999, as amended,

(ii) 500,000 redeemable class B warrants issuable upon exercise of
outstanding redeemable class A warrants, and 1,000,000 shares of common stock
issuable upon the exercise of such class A and class B warrants, which class A
and class B warrants are the "Selling Securityholder Warrants" and "Selling
Securityholder Class B Warrants" referred to in our Registration Statement on
Form SB-2 (File No. 333-17635), filed with the Commission on February 11, 1997;
and

(iii) 120,000 units issuable upon exercise of certain outstanding unit
purchase options, each consisting of one share of common stock, one redeemable
class A warrant and one redeemable Class B warrant, 120,000 class B warrants
issuable upon the exercise of the class A warrants, and 360,000 shares of common
stock issuable on exercise of the redeemable class A and class B warrants
referred to in our Registration Statement on Form SB-2 (File No. 333-89593),
filed with the Commission on January 14, 2000.

In connection with the merger, holders of outstanding warrants to purchase
shares of pre-merger Virtual Communities, Inc., are entitled to exercise those
warrants for that number of shares of our common stock that such holders would
have received in the merger if the shares of Virtual Communities, Inc. common
stock underlying their warrants were held by them at the effective time of the
merger.

At the time of the merger, there were outstanding warrants to purchase
225,113 shares of Virtual Communities, Inc. common stock at exercise prices
ranging from $0.8052 to $2.10 per share. These warrants were issued to the
placement agent in connection with a placement of Series A and B convertible
preferred stock of pre-merger Virtual Communities, Inc. in early 1999. There
were also outstanding warrants to purchase 1,333,823 shares of common stock, at
exercise prices ranging from $0.30 to $2.10, issued to directors, shareholders,
employees and vendors in consideration for loans granted to Virtual Communities,
Inc., waivers and deferrals of compensation, guarantees of bank lines of credit
and services rendered to Virtual Communities, Inc. Accordingly, the 1,794,335
shares of our common stock that we will issue to holders of the former Virtual
Communities, Inc. warrants was determined by multiplying 1,558,936 (the number
of shares of pre-merger common stock issuable on exercise of such warrants)
times 1.151, the conversion ratio determined in accordance with the merger
agreement. All of these warrants are currently exercisable according to their
terms.

Shares and warrants to be issued to holders of outstanding class A warrants

In connection with our initial public offering of units in February 1997, a

16
<PAGE>

group of investors received 500,000 redeemable class A warrants in exchange for
warrants that those investors had received in December 1996 as part of a bridge
financing transaction. We are registering the securities underlying such class A
warrants in the registration statement of which this prospectus is a part.

Units to be issued to holders of unit purchase options

We are also registering 120,000 units issuable upon exercise of outstanding
unit purchase options granted to the underwriter and finder in connection with
our initial public offering in February 1997, 120,000 class B warrants issuable
upon the exercise of the class A warrants included in such units, and 360,000
shares of common stock issuable on exercise of the redeemable class A and class
B warrants included in such units. Each unit purchase option entitles the holder
to purchase one share of common stock, one redeemable class A warrant and one
redeemable class B warrant at an exercise price of $6.00 at any time until
February 10, 2002. See "Description of Securities--Unit Purchase Option."

This prospectus is also included in a post-effective amendment to our
registration statement on Form SB-2 (File No. 333-17635), filed with the SEC in
connection with our initial public offering of 1,380,000 units consisting of
common stock, redeemable class A warrants and redeemable class B warrants.

Depending on a number of factors, which include the price of our common
stock, general market conditions, capital raising activities by us, and our need
for additional funds, we may in the near future decide to change the terms of
the class A and class B warrants by lowering one or both of their exercise
prices in order to encourage our warrant holders to exercise their warrants so
that we can raise additional funds from such exercises. To the extent that we
lower the exercise price of the warrants, we will receive less funds that we
would at the current exercise prices. There is no assurance that even if we do
lower the exercise price, our warrant holders will exercise their warrants.

USE OF PROCEEDS

Assuming all of the warrants previously issued by pre-merger Virtual
Communities, Inc. are exercised, we would receive approximately $1,355,714 in
proceeds, minus expenses.

Upon exercise of the currently outstanding warrants issued in connection
with our initial public offering, and warrants issuable upon exercise of such
warrants, we would receive gross proceeds as follows (in each case minus
expenses):

. assuming all of the outstanding class A warrants are exercised, we would
receive $12,220,000 in proceeds;

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<PAGE>

. assuming all of the outstanding class B warrants are exercised, we would
receive an additional $12,075,000 in proceeds; and

. assuming all of the class B warrants issuable upon exercise of the
outstanding class A warrants are exercised, we would receive an additional
$16,450,000 in proceeds.

In addition, we would receive the following gross proceeds, minus expenses,
upon exercise of the unit purchase options and the warrants underlying the unit
purchase options:

. assuming exercise of all of the outstanding unit purchase options,
$720,000;

. assuming exercise of all of the class A warrants issuable upon exercise
of the unit purchase options, $780,000;

. assuming exercise of all of the class B warrants issuable upon exercise
of the unit purchase options, $1,050,000;

. assuming exercise of all of the class B warrants issuable upon exercise of
the class A warrants underlying the unit purchase options, an additional
$1,050,000; and

. assuming the exercise of warrants issued to an investment banker in
connection with the merger, we would receive an additional $336,000.

Assuming exercise of the 981,265 shares underlying the warrants being
registered herein and issued in connection with the Company's private placements
from December 1999 through April 2000 we would receive $9,359,219. There can be
no assurance of such exercises and consequent receipt of any such proceeds at
this time.

We plan to use the proceeds from the exercise of the warrants for general
corporate purposes, including equipment, software and licenses, marketing and
advertising of our communities and Community Management Solution ("CMS")
business, and general working capital.

We will not receive any proceeds from the resale of shares by warrant
holders. We will not receive any proceeds from the sale of shares by those who
have purchased securities pursuant to private placements.

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<PAGE>

DIVIDEND POLICY

Neither Heuristic Development Group, Inc. nor Virtual Communities, Inc.
have ever paid any dividends, and we do not expect to pay any dividends in the
foreseeable future. Any determination to pay dividends in the future will be at
the discretion of our board of directors, and will be dependent on our future
results of operations, financial conditions, capital expenditures, working
capital requirements and other relevant factors.

REGISTERED SECURITY HOLDERS

The following table sets forth certain information with respect to each
registered security holder for whom the Company is registering the shares of
common stock for resale to the public. The Company will not receive any of the
proceeds from the resale of such shares by any of the registered security
holders. None of the registered security holders listed in the table below are
broker-dealers or affiliates of broker-dealers except as indicated in the
footnotes to the table. Except as set forth in the footnotes below, no Selling
Security Holders held any position, office or had any other material
relationship with the registrant or its officers, directors or affiliates during
the past three years. The information below is current as of August 15, 2000.

AMOUNT OF SHARES PERCENTAGE OF SHARES
SHARES OFFERED BENEFICIALLY OWNED BENEFICIALLY OWNED
SECURITIES PURSUANT TO THIS AFTER OFFERING AFTER OFFERING
SELLING OWNED PRIOR TO OFFERING (1) PROSPECTUS (2)(3) (2)(3)
STOCKHOLDER
<S> <C> <C> <C> <C>
Paul and Hannah
Lindenblatt (4) 830,446 440,000 390,446 2.3%
Business Systems
Consultants Limited 760,793 760,793 65,937 *
Rachel Charitable
Trust (5) 360,226 110,793 249,433 1.5%
Musgrave Ltd. (6) 360,226 110,793 249,433 1.5%
Magellan
International, Ltd. (7) 191,208 191,208 0 *
Aspen International, Ltd. (8) 2,369,220 191,208 2,178,012 11.2%
Acqua Wellington
Value Fund, Ltd. (9) 1,270,312 191,208 1,079,104 5.9%
The Cuttyhunk Fund
Limited (10) 573,625 573,625 0 *
Shoham Investments
Ltd. Inc. (11) 93,633 93,633 0 *
Hindy Taub 56,180 56,180 0 *
Andrew W. Schonzeit 37,453 37,453 0 *
Irwin Zalcberg 37,453 37,453 0 *
Solomon Merkin 168,539 168,539 0 *
Ilan Kaufthal 56,180 56,180 0 *
ABDM Partners (12) 51,170 51,170 0 *
Jonathan Kolatch 7,310 7,310 0 *
Jed Sherwindt 5,848 5,848 0 *
Amos Tohar 11,000 11,000 0 *
Kobi Kantor 1,200 1,200 0 *
Debbie Kamioner 7,490 7,490 0 *
G.L.D. Consulting Corp. 3,745 3,745 0 *
Ilan Kaufthal 11,643 11,643 0 *
Josephthal & Co. (29) 36,246 36,246 0 *
</TABLE>

19
<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
E. Ohayon 20,000 20,000 0 *
Berell Corp. (13) 10,000 10,000 0 *
Gideon Trading Inc. (14) 175,884 175,884 0 *
Versaware Ltd. (15) 72,564 72,564 0 *
Peter A. Jacobs (16) 205,989 3,270 202,719 *
Musgrave Ltd. 360,226 110,793 249,433 1.5%
Grato Holdings Ltd.(17) 798,553 22,667 775,886 4.7%
George Moskowitz (18) 231,504 61,348 170,156 1.0%
Joseph Morgenstern 75,121 9,184 65,937 *
L.K.P. Ltd. (20) 6,122 6,122 0 *
David Morris (21) 116,464 58,921 38,328 *
Avi Moskowitz (22) 686,376 161,140 525,236 2.7%
David Kahn (23) 441,040 46,040 395,000 2.4%
Daniel Diker (24) 23,115 11,510 11,605 *
Michael Sondhelm (25) 11,510 11,510 0 *
Suzanne Cotton Levy 40,286 17,266 23,020 *
Michael Jacobs 17,266 17,266 0 *
Charley Warady 13,812 6,906 6,906 *
Jesup & Lamont
Partners (26) (27) 189,155 189,155 0 *
Howard F. Curd (27) 220,922 220,922 0 *
Michael Zariello (27) 55,232 55,232 0 *
David Rosinov (27) 56,304 56,304 0 *
Gilad Ottensauser (27) 73,835 73,835 0 *
Jack Siegal (27) 27,616 27,616 0 *
Bill Hales (27) 32,548 32,548 0 *
Ran Furman (27) 55,232 55,232 0 *
Joan Morgen (27) 16,570 16,570 0 *
Peninsula Industries Ltd. (28) 175,553 5,397 170,156 1.0%
Peter Stern (29) 28,688 28,688 0 *
Camden Virtual
Enterprises (30) 27,616 27,616 0 *
Jacquiline Waterman (27) 11,046 11,046 0 *
Andrew Adler (27) 4,039 4,039 0 *
Craig Petrassi (27) 4,038 4,038 0 *
George Hoos (27) 8,577 8,577 0 *
A & D Printers (31) 1,151 1,151 0 *
West End Holdings, Inc. (32)
3,155 3,155 0 *
* Less than 1%.
</TABLE>

(1) Includes shares issuable upon exercise of warrants and/or conversion of
preferred stock.

(2) Percentage of the Company's common stock shares beneficially owned is based
upon 17,122,506 shares of common stock outstanding as of August 15, 2000. The
number of shares outstanding excludes approximately 16,550,000 shares reserved
for issuance by the Company under its stock options plans, warrants and
outstanding convertible securities. Giving effect to the exercise and conversion
of all outstanding securities instruments, the Company would have outstanding as
of August 15, 2000 on a fully diluted basis approximately 33,675,000 shares of
common stock. Such additional securities are not taken into account for purposes
of the calculation of the percentage of beneficial ownership of each Registered
Security Holder except with respect to exercise of their respective warrants and

20
<PAGE>

convertible preferred stock beneficially held by such Registered Security Holder
as of August 15, 2000 and exercisable or convertible within 60 days of such
date.

(3) Assumes all of the securities offered hereby shall be sold.

(4) Mr. and Mrs. Lindenblatt are the brother-in-law and sister of Avi Moskowitz,
the Company's chairman of the Board, President and Chief Executive Officer. Such
stockholders are not involved in the management or control of Virtual
Communities, Inc. nor are they otherwise affiliated with us or our management.

(5) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Leo Noe.

(6) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Elie Lindenfeld.

(7) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Eusebio A. Morales.

(8) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Wenceslao Alfageme Quiros. Shares beneficially owned and
registered for resale hereunder include 86,300 shares of common stock and
104,908 shares of common stock issuable upon the exercise of warrants. Shares
beneficially owned but not registered for resale hereunder include an aggregate
of 2,178,012 shares of common stock issuable upon the exercise of warrants and
conversion of convertible preferred stock, provided, however, that such number
of shares is subject to change in accordance with the computational formula for
such conversion.

(9) Sole or shared voting power over such entity is exercised by multiple non-
U.S. investors. Shares beneficially owned and registered for resale hereunder
include 86,300 shares of common stock and 104,908 shares of common stock
issuable upon the exercise of warrants. Shares beneficially owned but not
registered for resale hereunder include an aggregate of 1,079,104 shares of
common stock issuable upon the exercise of warrants and conversion of
convertible preferred stock, provided, however, that such number of shares is
subject to change in accordance with the computational formula for such
conversion.

(10) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by J. Carlo Cannell.

(11) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by A.J. Gezunheit.

(12) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Daniel Strauss.

(13) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Steven Clark.

(14) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Barry Herman.

(15) Versaware Ltd. is an affiliate of Net Results Holdings, LLC ("NRH"), a
beneficial holder of shares of the Company. Excludes 1,347,687 Shares
beneficially owned by NRH. See footnote (13) under the heading "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."

(16) Peter Jacobs is a Director of the Company.

21
<PAGE>

(17) Grato Holdings Limited holds these warrants on behalf of Ramp Trustees
Limited, trustees of a trust of which Mr. David Morris, member of the Board of
Directors, is a potential beneficiary. Potential beneficiaries thereof currently
have no voting power nor the power to direct the vote of such shares nor any
investment power, including the power to dispose or direct the disposition of
the shares that are held by the trusts. Sole power of voting and disposition
over such shares on behalf of Grato Holdings Limited is controlled by L.A.
Nuttall.

(18) George Moskowitz is the brother of Avi Moskowitz, the Chairman, President
and Chief Executive Officer of the Company.

(19) Business Systems Consultants Ltd. is controlled by a trust of which Mr.
Morris, a director of the Company, is a potential beneficiary. Mr. Morris
disclaims beneficial ownership of the warrants to purchase shares of our common
stock held by Business Systems Consultants Ltd. Sole power of voting and
disposition over such shares on behalf of such entity is controlled by Peter
Cantle.

(20) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Yaucov Kirschen and Sally Ariel.

(21) David Morris is a member of the Board of Directors of the Company.

(22) Avi Moskowitz is Chairman, President and Chief Executive Officer of the
Company.

(23) David Kahn is Executive Vice President and General Counsel of Virtual
Communities Israel Ltd. ("VCIL"), a subsidiary of the Company.

(24) Daniel Diker is a former Vice President of VCIL.

(25) Michael Sondhelm is a former Vice President of VCIL.

(26) Jesup & Lamont Partners acted as Placement Agent in connection with several
financings completed by VCI (predecessor of registrant), including arranging a
$500,000 bridge loan to VCI in December 1998, which was converted into equity in
1999; two private placements in February and August, 1999, respectively; and the
merger with Heuristic Development Group in October 1999. Jesup and Lamont Group
Holdings, a holding corporation that is an affiliate of Jesup and Lamont
Securities Corporation and that also is a registered broker-dealer with NASD and
the Commission. Sole power of voting and disposition over such shares on behalf
of such entity is controlled by Howard Curd, President, CEO and sole stockholder
of Jesup & Lamont Group Holdings, Inc.

(27) Affiliate of Jesup & Lamont Group Holdings, Inc., parent company of Jesup
and Lamont Securities Corporation, a registered broker-dealer with the NASD and
the Commission. Such persons acquired their respective securities in the
ordinary course of business and at the time of the purchase of the securities,
the particular person had no agreements or understandings, directly or
indirectly, with any other person to distribute the common shares to be received
upon conversion or exercise of preferred securities or warrants.

(28) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Jackie Monderer.

(29) Josephthal & Co. is a registered broker-dealer and acquired its securities
in the ordinary course of business, and at the time of the acquisition of the

22
<PAGE>

securities, they had no agreements or understandings, directly or indirectly,
with any other person to distribute the common shares to be received upon
conversion or exercise of preferred securities or warrants. Sole power of voting
and disposition over such shares on behalf of such entity is controlled by Dan
Purjes.

(30) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Yossi Rubinstein.

(31) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Mark Eliassof.

(32) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by David Ekstein.

PLAN OF DISTRIBUTION

The registered security holders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Registered Security Holders may use any one or more of
the following methods when selling shares:

. ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

. block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;

. purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;

. an exchange distribution in accordance with the rules of the applicable
exchange;

. privately negotiated transactions;

. short sales

. broker-dealers may agree with the Registered Security Holders to sell a
specified number of such shares at a stipulated price per share;

. a combination of any such methods of sale; and

. any other method permitted pursuant to applicable law.

The Registered Security Holders may also sell shares under Rule 144 under
the Securities Act, if available, rather than under this prospectus.

The Registered Security Holders may also engage in short sales against the
box, puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Registered Security Holders may pledge their shares to
their brokers under the margin provisions of customer agreements. If a Selling
Stockholder

23
<PAGE>

defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged shares. The Registered Security Holders have advised the Company that
they have not entered into any agreements, understandings or arrangements with
any underwriters or broker-dealers regarding the sale of their shares other than
ordinary course brokerage arrangements, nor is there an underwriter or
coordinating broker acting in connection with the proposed sale of shares by the
Registered Security Holders.

Broker-dealers engaged by the Registered Security Holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Registered Security Holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The Registered Security Holders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.

The Registered Security Holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.

The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Registered Security Holders. The Company has agreed to indemnify the Registered
Security Holders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.

At any time a particular offer of the securities is made, a revised
prospectus or prospectus supplement, if required, will be distributed which will
contain the amount and type of securities being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents,
any discounts, commissions and other items constituting compensation from the
Registered Security Holders, selling securities and any discounts, commissions
or concessions allowed or reallowed or paid to dealers. A prospectus supplement
and, if necessary, a post-effective amendment to the registration statement of
which this prospectus is a part, will be filed with the U.S. Securities and
Exchange Commission to reflect the disclosure of additional information with
respect to the distribution of the securities.

The registered security holders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations under the Exchange Act, including, Regulation M, which
may limit the timing of purchases and sales of any of the common stock by you
and any other such person. Furthermore, under Regulation M under the Exchange
Act, any person engaged in the distribution of the common stock may not
simultaneously engage in market-making activities with respect to the particular
common stock being distributed for certain periods prior to the commencement of
or during such distribution. All of the above may affect the marketability of
the securities and the availability of any person or entity to engage in market-
making activities with respect to the common stock.

We do not intend to engage in any distribution efforts on behalf of any of
the registered security holders other than providing for registration of the
securities registered for sale with the U.S. Securities and Exchange Commission.
We do not intend to solicit or otherwise induce any selling security holders to

24
<PAGE>

exercise their respective warrants, units, or unit purchase options, or to
convert convertible preferred stock to shares of common stock.

Provided that any pledgees, assignees and successors-in-interest of any
registered security holder does not involve increasing the number of shares or
dollar amount registered, or include shares from a transaction other than the
one to which this filing relates, and absent circumstances indicating that the
change is material, we expect to reflect any such change in the filing of a Rule
424(b) prospectus supplement describing the change. In such prospectus
supplement, we would be required to set forth the disclosure information
regarding such successors in interest as required by the rules and regulations
of the U.S. Securities and Exchange Commission. The ability to reflect changes
in selling shareholders has not resulted in the names of known selling
shareholders to be omitted from the original filing of this prospectus with the
Commission.

LEGAL PROCEEDINGS

On April 14, 2000, a Complaint was filed against VCI in the Supreme Court
of the State of New York, County of New York, by six investors in VCI who
acquired Series B Preferred Stock of VCI pursuant to a private placement of
VCI's securities in August 1999 prior to its merger with, and into a
wholly-owned subsidiary of Heuristic Development Group, Inc. on October 29, 1999
(the "Merger"). The plaintiffs claim that they are entitled to additional shares
of VCI Common Stock as a result of a provision in the Private Placement
Memorandum, pursuant to which they acquired their securities in VCI, providing
for a reset of the conversion price of the plaintiffs' Series B Preferred Shares
into Common Stock of VCI. In the event the Plaintiffs are successful in this
action they would be entitled to approximately 52,320 shares of Common Stock and
Series B Preferred Shareholders as a group would be entitled to approximately
175,000 additional shares of Common Stock of the Company. The Company believes
that the complaint is without merit and intends to vigorously defend such action
and filed a motion to dismiss the action in June 2000.

In July 2000, a complaint was filed in the Los Angeles Superior Court
against the Company and a placement agency retained by the Company by a former
employee of the Company claiming wrongful termination of employment and
reinstatement of his position with the Company as well as compensatory and
punitive damages. The Company believes that the complaint is without merit and
intends to vigorously defend such action.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

Directors and Principal Officers

The following table sets forth the names, ages as of August 15, 2000 and
positions of all of our directors, executive officers and key personnel.

Avi Moskowitz........... 35 Chairman of the Board, CEO and President
Arthur C Dubroff........ 49 Chief Financial Officer
Michael Harwayne........ 30 Chief Operating Officer
Deborah Gaines.......... 39 Vice President, Editorial Services
Fred S. Lafer........... 71 Director
Allan Dalfen............ 55 Director
Peter A. Jacobs......... 57 Director
David Morris............ 31 Director

25
<PAGE>

Avi Moskowitz became Chairman of the Board, President and Chief Executive
Officer of the Company upon the completion of the Company's merger with VCI in
October 1999. Mr. Moskowitz founded VCI in August 1996 serving as Chairman,
Chief Executive Officer and President until it merged with a subsidiary of the
Company in October 1999. Mr. Moskowitz was also the founder of Virtual
Communities Israel Ltd. and served as the entity's sole Director and Chief
Executive Officer until May 1999. From 1994 until 1996, Mr. Moskowitz was a
principal of NetMedia, Ltd., an Israel Internet service provider. From 1986
through 1994, Mr. Moskowitz was President of MedPlus Inc., a New York-based
value-added reseller of healthcare software systems. Mr. Moskowitz attended
Yeshiva College of Yeshiva University.

Arthur Dubroff became Chief Financial Officer and Secretary of the Company
in June 2000. Prior thereto, Mr. Dubroff was, from 1996 through 1999, Executive
Vice President and Chief Financial Officer of Enhance Financial Services Group,
a New York City financial guaranty reinsurer, whose securities are listed on the
NYSE. From 1991 through 1996, he held several positions at First Data
Corporation/American Express Corporation, including Senior Vice President,
Corporate Finance (1995-1996) and Executive Vice President & Chief Financial
Officer of First Data Investor Services Group, Boston, Ma.(1993-1995). Mr.
Dubroff has a Bachelors of Science degree in Accounting and Economics with
honors from Brooklyn College, Brooklyn, N.Y. and a M.B.A. from Harvard Graduate
School of Business Administration, Boston, M.A., where he was also a Baker
Scholar. He is a member of the Board of Directors and Chairman of the Audit
Committee of Kobren Insight Funds, Wellesley Hills, Ma. and a Certified Public
Accountant.

Michael S. Harwayne became Vice President of Marketing and Business
Development of the Company upon the completion of the Company's merger with VCI
in October 1999. He joined VCI in March 1999 and became Chief Operating Officer
of the Company in February 2000. From 1995 to 1999, Mr. Harwayne was employed by
McKinsey & Company, Inc. where he was an Associate until 1997, and then an
Engagement Manager. From 1991 to 1993, he held several positions at the
International Data Group, including account representative and management
associate to PC World magazine and circulation manager of Multimedia World. Mr.
Harwayne received a Bachelor of Arts degree, magna cum laude, from Harvard
College in 1991 and received his MBA at Harvard's Graduate School of Business in
1995.

Deborah Gaines joined the Company as Editorial Director in November 1999
and became Vice President of Editorial Services in January 2000. Before joining
VCI, Ms. Gaines served as Managing Editor for the Hearst magazine group at
Women.com from 1998-99, spearheading the launch of new sites for Redbook and
Good Housekeeping. From 1997-98, she was Managing Editor of iVillage: The
Women's Network. She has also held editorial positions at Money magazine and
Baby magazine, and written about travel for the New York Post, Ladies' Home
Journal, Modern Bride and others. Ms. Gaines graduated from Yale University and
has an M.A. in literature from Columbia University.

Fred S. Lafer become a director of the Company upon the completion of the
merger in October 1999. From 1994 to the present, Mr. Lafer has been President
of the Taub Foundation, a charitable foundation. Prior thereto, until 1996, Mr.
Lafer was Senior Vice President and Secretary of Automatic Data Processing,
Inc., a provider of employer, financial and data services. He is also a member
of the Board of Vestcom International.

26
<PAGE>

Allan Dalfen has been a director of the Company since January 1995. Mr.
Dalfen has 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 President, CEO and a Director of Dairy King Food Services, a
Los Angeles-based food company.

Peter A. Jacobs became a director of the Company upon completion of the
merger in October 1999 and was a director of VCI from April 1998. From March
1998 until July 1999, he was a director of Hillsdown Holdings PLC, a publicly
traded U.K. food and furniture company. In December 1998, Mr. Jacobs became
Chairman of Healthcall, Ltd., a doctor's deputizing service, and in November
1998, he became a director of Bank Leumi U.K. Since March 1998, Mr. Jacobs has
been a director of Allied Domecque, Ltd., a U.K.-based food, beverage and
spirits company. From May 1991 until August 1999, Mr. Jacobs was Chief Executive
Officer of BUPA, the U.K.'s largest private health care provider and health
insurer. Mr. Jacobs received a BSC in Mechanical Engineering in 1966 and a DMS
in Management Studies in 1969 from Aspon University, Birmingham, England.

David Morris became a director of the Company upon the completion of the
merger and was a director of VCI from April 1998 until the Merger. Since May
1998, he has been a director of ENG Ltd., a United Kingdom IT support company
which provides web hosting network management services. Since February 1998, he
has been a director of Vanco Ltd., a provider of wide area management network
systems. Since June 1997, Mr. Morris has been an employee of Monhouse Ltd., a
U.K.-based management company and, since June 1998, a director of Monhouse. He
is also a director of Kerbybridge Properties, a property investment/development
company, and a director of Voyeur Ltd. and PC Clothing, Ltd., two U.K.-based
clothing companies since February 1998. From 1996 through 1997, Mr. Morris was
an investment trusts specialist for Brewin Dolphin Ltd., a U.K. stock brokerage
firm. From January 1995 to December 1995, Mr. Morris was employed by Net Media
Ltd., an Israeli Internet service provider, that was partially owned by Mr.
Moskowitz until December 1995. Mr. Morris received a Bachelor of Arts degree
from University of Westminster, London in 1993.

Other Key Personnel

Arnold Roth, 48, became Chief Operating Officer of the Company's VCIL subsidiary
in February 2000. Prior to joining VCIL, Mr. Roth served as Chief Executive
Officer of Targetix Ltd., a Nes-Ziyona, Israel, Internet company from 1999 to
February 2000. From 1995 to 1999, he was Chief Executive Officer of Clockwork
Group, an Austin, Texas based subsidiary of the Formula Group, Herzliya, Israel.
Prior thereto, he was Chief Executive Officer of Pegasus Medical Inc., a Boston
based medical company prior to its sale to HBOC Inc., and Chief Executive
Officer of Acumen Systems Inc., an Israeli/US text-recognition company. From
1983 to 1988, Mr. Roth was a founder and managing director of Software
Corporation of Australia Ltd., an Australian company listed on the Australian
Stock Exchange. He was a partner in Roth Warren, a Melbourne law firm from its
inception in 1978 until 1985. Mr. Roth received a Bachelors of Economics degree
in 1973 and an LL.B. degree in 1974 from Monash University, Clayton, Australia.
He is admitted to practice as a lawyer in Australia and Israel.

David L. Kahn, 44, has been the Executive Vice President and General
Counsel of the Company's VCIL subsidiary since October 1996. From 1990 to 1996,
Mr. Kahn was associated with Corrine Davar Property Consultants, a Jerusalem

27
<PAGE>

real estate firm. Mr. Kahn received a Bachelors Degree in Political Science from
Yeshiva University, New York in 1978 and a J.D. Degree from Benjamin N. Cardozo
School of Law, New York in 1981.

Ellen Cohl, 33, became the Controller of VCIL in August 1997 and Vice
President - Finance in January 2000. From 1995 through 1997, she was a Senior
Auditor with Luboshitz Kasierer & Co., the Israeli affiliate of Arthur Andersen
& Co., the accountants for VCI, VCIL and VCIIP. During 1994, Mrs. Cohl was a
Special Project Leader at Deloitte & Touche LLP, New York. From July 1992
through April 1994 she was a Senior Auditor with Bank Leumi Trust Company. Mrs.
Cohl is a Certified Public Accountant and received a Bachelor of Science Degree
from New York University in 1988, and a Masters Degree in Business
Administration from Baruch College, The City University of New York in 1995.

All of the above directors hold office until the next annual meeting of the
stockholders in June 2001 and until their successors have been duly elected and
qualified. All of the above executive officers were elected by and serve at the
direction of the Board of Directors of the Company. All of the officers serve at
the discretion of the Board of Directors. There are no family relationships
among any of the directors, executive officers or key personnel.

28
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of August 15, 2000, information as to
the beneficial ownership of our common stock by:

(1) each person serving as a director on such date,

(2) each person who qualifies as a "named executive officer" as defined in
Item 402(a)(2) of Regulation S-B under the Exchange Act;

(3) all of such directors and executive officers as a group; and

(4) each person known to us as having beneficial ownership of more than 5%
of our common stock.

Name and Address of Beneficial Number of Shares Percentage of Shares
Owner(1) Beneficially Owned Beneficially Owned(2)
------------------------------ ------------------ ---------------------

Avi Moskowitz (3) 686,376 3.88%

Peter A. Jacobs (4) 205,989 1.2%

David Morris (5) 116,464 .67%

Michael Harwayne (6) 38,366 .22%

Allan Dalfen (7) 9,000 0%

Fred Lafer (8) 21,923 .13%

Paul and Hannah Lindenblatt (9) 870,446 5.07%

Roth Trust (10) 1,981,446 11.57%

Net Results Holdings, LLC (11) 858,093 5%

Grato Holdings Ltd. (12) 798,553 4.65%

Arthur Dubroff (13) - 0 - 0%

Deborah Gaines (14) - 0 - 0%

Aspen International, Ltd. (15) 2,369,220 12.2%

Acqua Wellington Value Fund, Ltd. (16) 1,270,312 6.94%

All Directors and Executive Officers 1,132,927 6.35%
(8 persons)

-----------

(1) Percentage of the Company's common stock shares beneficially owned is based
upon 17,122,506 shares of common stock outstanding as of August 15, 2000. The
number of shares outstanding excludes approximately 16,550,000 shares reserved
for issuance by the Company under its stock options plans, warrants and
outstanding convertible securities. Giving effect to the exercise and conversion
of all outstanding securities instruments, the Company would have outstanding as
of August 15, 2000 on a fully diluted basis approximately 33,675,000 shares of
common stock. Such additional securities are not taken into account for purposes
of the calculation of the percentage of beneficial ownership of each Registered
Security Holder except with respect to exercise of their respective warrants and
convertible preferred stock beneficially held by such Registered Security Holder
as of August 15, 2000 and exercisable or convertible within 60 days of such
date.

29
<PAGE>

(2) Except as otherwise provided, the address for all beneficial owners is c/o
Virtual Communities, Inc., 589 Eighth Avenue, New York, NY 10018. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, the beneficial owners have sole voting and investment power with
respect to all shares of VCI common stock set forth opposite their names.

(3) Includes options exercisable for 355,275 shares of our common stock
exercisable within 60 days after August 15, 2000, and 23,017 shares held by
Helen Moskowitz, wife of Avi Moskowitz. Also includes warrants exercisable for
161,140 shares of common stock exercisable within 60 days after August 15, 2000.
Does not include 1,981,446 shares of our common stock held by the Roth Trust, of
which Mr. Moskowitz is a potential beneficiary. Mr. Moskowitz disclaims
beneficial ownership of these shares.

(4) Includes options exercisable for 38,362 shares of our common stock and
warrants exercisable for 3,270 shares of common stock exercisable within 60 days
after August 15, 2000. Does not include options exercisable into 69,164 shares
not exercisable within 60 days of August 15, 2000.

(5) Includes options exercisable for 57,543 shares of our common stock
exercisable within 60 days after August 15, 2000. Also includes warrants
exercisable for 58,921 shares of our common stock exercisable within 60 days
after August 15, 2000. Does not include options exercisable into 107,557 shares
not exercisable within 60 days of August 15, 2000. Does not include 775,886
shares of our common stock held by Grato Holdings Limited, which holds the
shares on behalf of Ramp Trustees Limited, trustees of a trust of which Mr.
Morris is a potential beneficiary. Also does not include 286,280 shares of our
common stock held by Business Systems Consultants Ltd., which is controlled by a
trust of which Mr. Morris is a potential beneficiary. Also does not include
warrants exercisable for 22,667 shares of our common stock exercisable within 60
days after August 15, 2000, held by Grato Holding Limited, which is controlled
by a trust of which Mr. Morris is a potential beneficiary. Also does not include
warrants exercisable for 445,913 shares of common stock exercisable within 60
days after August 15, 2000, held by Business Systems Consultants Ltd., which is
controlled by a trust of which Mr. Morris is a potential beneficiary. Mr. Morris
disclaims beneficial ownership of our common stock held by Grato Holdings
Limited and Business Systems Consultants Ltd., and the warrants to purchase
shares of our common stock held by Grato Holdings Limited and Business Systems
Consultants Ltd. The address for Business Systems Consultants Ltd. is
31-33 Le Pollet Street, Peterport, Guernsey, Channel Islands GY1 4JG.

(6) Does not include options exercisable into 176,734 additional shares of our
common stock held by Mr. Harwayne not exercisable within 60 days of August 15,
2000.

(7) Includes options to purchase 9,000 shares of our common stock. Does not
include options exercisable into 50,000 shares of common stock granted in
November 1999 not exercisable within 60 days of August 15, 2000.

(8) Does not include options exercisable into 50,000 shares of common stock
granted in November 1999 not exercisable within 60 days of August 15, 2000. Also
does not include 32,886 shares held by three adult children of Mr. Lafer. Mr.
Lafer disclaims beneficial ownership of the shares held by his adult children.

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(9) Sister and brother-in-law of Mr. Moskowitz. Mr. Moskowitz disclaims
beneficial ownership of these shares. Includes warrants immediately exercisable
into 40,000 shares of Common Stock.

(10) The address of the Roth Trust is c/o Line Holdings Ltd., 57-63 Line Wall
Road, Gibraltar. Line Holdings Ltd. holds these shares as trustee of the Roth
Trust. Avi Moskowitz, President and Chief Executive Officer of the Company is a
potential beneficiary of the Roth Trust. Mr. Moskowitz disclaims beneficial
ownership of these shares. Potential beneficiaries thereof currently have no
voting power nor the power to direct the vote of such shares nor any investment
power, including the power to dispose or direct the disposition of the shares
that are held by the trusts. Potential beneficiaries of the trust do not have
the foreseeable right within 60 days to acquire ownership, voting power and/or
investment power over such securities. Sole power of voting and disposition
over such shares on behalf of the Roth Trust, in accordance with the terms and
conditions of the trust, is controlled by Ms. L.A. Nuttall.

(11) Includes warrants exercisable into 72,563 shares of Common Stock held by an
affiliate of Net Results Holdings, LLC ("NRH") exercisable within 60 days after
August 15, 2000. Does not include 266,711 shares of Common Stock held by Harry
Fox, the Chairman and CEO of NRH who is a former director of VCI, nor options
currently exercisable into 19,181 shares of Common Stock exercisable within 60
days after August 15, 2000 which were granted to Mr. Fox in connection with his
former service as a VCI director. Also does not include 528,792 shares of Common
Stock transferred by NRH in March and May 2000 to certain officers, directors
and employees of NRH. The address of NRH is 151 West 25th Street, New York, New
York 10001.

(12) Shares are held by Grato Holdings Limited on behalf of Ramp Trustees
Limited, trustees of a trust of which Mr. Morris is a potential beneficiary.
Potential beneficiaries thereof currently have no voting power nor the power to
direct the vote of such shares nor any investment power, including the power to
dispose or direct the disposition of the shares that are held by the trusts.
Potential beneficiaries of the trust do not have the foreseeable right within 60
days to acquire ownership, voting power and/or investment power over such
securities. Includes warrants exercisable for 22,667 shares of Common Stock
exercisable within 60 days after August 15, 2000. The address for Grato Holdings
is 57-63 Line Wall Road, Gibraltar. Grato disclaims beneficial ownership of all
such shares that it holds on behalf of the trust. Sole power of voting and
disposition over such shares on behalf of Grato Holdings Limited is controlled
by Line Trust Corporation as Trustees of the DG settlement.

(13) Does not include 300,000 shares of Common Stock underlying options held by
Mr. Dubroff not exercisable within 60 days after August 15, 2000.

(14) Does not include 86,325 shares of Common Stock underlying options held by
Ms. Gaines not exercisable within 60 days after August 15, 2000.

(15) Sole power of voting and disposition over such shares on behalf of such
entity is controlled by Wenceslao Alfageme Quiros. Shares beneficially owned and
registered for resale hereunder include 86,300 shares of common stock and
104,908 shares of common stock issuable upon the exercise of warrants. Shares
beneficially owned but not registered for resale hereunder include an aggregate
of 2,178,012 shares of common stock issuable upon the exercise of warrants and
conversion of convertible preferred stock. The Address of the stockholder is
Charlotte House, Charlotte Street, Nassau, Bahamas.

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(16) Sole or shared voting power over such entity is exercised by Anthony L.M.
Inder Rieden. Shares beneficially owned and registered for resale hereunder
include 86,300 shares of common stock and 104,908 shares of common stock
issuable upon the exercise of warrants. Shares beneficially owned but not
registered for resale hereunder include an aggregate of 1,079,104 shares of
common stock issuable upon the exercise of warrants and conversion of
convertible preferred stock. The address of the stockholder is c/o MeesPierson
Fund Services (Bahamas) Limited, Montague Sterling Centre, P.O. Box SS-6238,
East Bay Street, Nassau, Bahamas.

DESCRIPTION OF SECURITIES

As of the date of this prospectus, our authorized capital stock consists of
50,000,000 shares of which 45,000,000 shares are common stock, par value $.01
per share, and 5,000,000 shares of "blank check" preferred stock, par value $.01
per share. No other classes of capital stock are authorized under our
certificate of incorporation.

Common stock

The issued and outstanding shares of our common stock are duly authorized,
validly issued and nonassessable. Holders of the our common stock have no
preemptive, redemption, conversion, subscription or sinking fund rights. The
holders are entitled to receive dividends when and as declared by our board of
directors out of funds legally available for payment. Upon our liquidation,
dissolution or winding up, the holders of our common stock may share ratably in
our assets, subject to the rights and preferences of any outstanding preferred
stock.

Each holder of our common stock is entitled to one vote per share of common
stock held of record by such holder. Our common stockholders do not have any
right to cumulate votes for the election of our directors.

Preferred Stock

Our board of directors has the power, without further vote of the
stockholders, to authorize the issuance of up to 5,000,000 shares of preferred
stock and to fix the terms, limitations, rights, privileges and preferences of
any of these shares of preferred stock. This power includes the ability to
establish voting, dividend, redemption, conversion, liquidation and other rights
and preferences for any or these shares.

The Board of directors has authorized 5,750 shares of Series C Preferred
Stock, $.01 par value per share. The Series C Preferred Stock ranks (i) prior to
the common stock, par value $.01 per share, and to all other classes and series
of equity securities of the Company which by its terms does not rank senior to
the Series C Preferred Stock; (ii) on parity with any class and series of equity
securities which by its terms ranks on parity with the Series C Preferred Stock,
and (iii) junior to any class or series of equity securities which by its terms
shall rank senior to the Series C Preferred Stock. The Series C Preferred Stock
is subordinate to and ranks junior to all indebtedness of the Company now or
hereafter outstanding. The terms and conditions of the Series C Preferred Stock
are set forth in a Certificate of Designation filed in the State of Delaware,
as generally summarized below.

Dividends. The holders of record of shares of Series C Preferred Stock are
entitled to receive, out of any assets at the time legally available therefor
and when and as declared by the Board of Directors, dividends at the rate of
seven

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percent (7%) of the stated Liquidation Preference Amount (as defined below) per
share per annum (the "Dividend Payment"), and no more, payable in cash or in
shares of common stock, at the option of the holders in an amount equal to the
quotient of (i) the Dividend Payment divided by (ii) the Conversion Price. In
the case of shares of Series C Preferred Stock outstanding for less than a full
year, dividends are pro rated based on the portion of each year during which
such shares are outstanding. Such dividends on the Series C Preferred Stock are
cumulative, accrue and are payable only at conversion of the Series C Preferred
Stock into shares of common stock as defined below.

Dividends on the Series C Preferred Stock are prior and in preference to
any declaration or payment of any distribution (as defined below) on any
outstanding shares of common stock or any other equity securities of the Company
ranking junior to the Series C Preferred Stock as to the payment of dividends.
Such dividends accrue on each share of Series C Preferred Stock from day to day
from the date of initial issuance thereof whether or not earned or declared so
that if such dividends with respect to any previous dividend period at the rate
provided for herein have not been paid on, or declared and set apart for, all
shares of Series C Preferred Stock at the time outstanding, the deficiency shall
be fully paid on, or declared and set apart for, such shares on a pro rata basis
with all other equity securities of the Company ranking on a parity with the
Series C Preferred Stock as to the payment of dividends before any distribution
shall be paid on, or declared and set apart for common stock or any other equity
securities of the Company ranking junior to the Series C Preferred Stock as to
the payment of dividends.

So long as any shares of Series C Preferred Stock are outstanding, the
Company may not declare, pay or set apart for payment any dividend or make any
distribution on any Junior Stock (other than dividends or distributions payable
in additional shares of Junior Stock), unless at the time of such dividend or
distribution the Company has paid all accrued and unpaid dividends on the
outstanding shares of Series C Preferred Stock.

In the event of a dissolution, liquidation or winding up of the Company,
all accrued and unpaid dividends on the Series C Preferred Stock is payable on
the day immediately preceding the date of payment of the preferential amount to
the holders of Series C Preferred Stock. In the event of (i) a mandatory
redemption or (ii) a redemption upon the occurrence of a major reorganization
transaction or a triggering event such as the delisting of the Company's stock
from Nasdaq SmallCap Market, or at the election of the Company, therein all
accrued and unpaid dividends on the Series C Preferred Stock is payable on the
day immediately preceding the date of such redemption.

In the event of a voluntary conversion, all accrued and unpaid dividends on
the Series C Preferred Stock being converted are payable on the day immediately
preceding the Voluntary Conversion Date.

Class Voting Rights. The Series C Preferred Stock have the following class
voting rights.

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So long as any shares of the Series C Preferred Stock remain outstanding, the
Company may not, without the affirmative vote or consent of the holders of at
least three-fourths (3/4) of the shares of the Series C Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting, in which the holders of the Series C Preferred Stock vote separately as
class: (i) authorize, create, issue or increase the authorized or issued amount
of any class or series of stock, including, but not limited to, the issuance of
any more shares of previously authorized common stock or preferred stock,
ranking prior to or on parity with the Series C Preferred Stock, with respect to
the distribution of assets on liquidation, dissolution or winding up; (ii)
amend, alter or repeal the provisions of the Series C Preferred Stock, whether
by merger, consolidation or otherwise, so as to adversely affect any right,
preference, privilege or voting power of the Series C Preferred Stock; provided,
however, that any creation and issuance of another series of Junior Stock shall
not be deemed to adversely affect such rights, preferences, privileges or voting
powers; (iii) repurchase, redeem or pay dividends on, shares of the Company's
Junior Stock; (iv) amend the Certificate of Incorporation or By-Laws of the
Company so as to affect adversely any right, preference, privilege or voting
power of the Series C Preferred Stock; (v) effect any distribution with respect
to Junior Stock; or (vi) reclassify the Company's outstanding securities.

General Voting Rights. Except with respect to transactions upon which the
Series C Preferred Stock are entitled to vote separately as a class and except
as otherwise required by Delaware law, the Series C Preferred Stock have no
voting rights. The common stock into which the Series C Preferred Stock is
convertible, upon issuance, have all of the same voting rights as other issued
and outstanding common stock of the Company.

Liquidation Preference. In the event of the liquidation, dissolution or
winding up of the affairs of the Company, whether voluntary or involuntary,
after payment or provision for payment of the debts and other liabilities of the
Company, the holders of shares of the Series C Preferred Stock then outstanding
are entitled to receive, out of the assets of the Company whether such assets
are capital or surplus of any nature, an amount equal to $1,000 per share (the
"Liquidation Preference Amount") of the Series C Preferred Stock plus any
accrued and unpaid dividends before any payment shall be made or any assets
distributed to the holders of the common stock or any other Junior Stock. If the
assets of the Company are not sufficient to pay in full the Liquidation
Preference Amount plus any accrued and unpaid dividends payable to the holders
of outstanding shares of the Series C Preferred Stock and any series of
preferred stock or any other class of stock on a parity, as to rights on
liquidation, dissolution or winding up, with the Series C Preferred Stock, then
all of said assets are to be distributed among the holders of the Series C
Preferred Stock and the other classes of stock on a parity with the Series C
Preferred Stock, if any, ratably in accordance with the respective amounts that
would be payable on such shares if all amounts payable thereon were paid in
full. The liquidation payment with respect to each outstanding fractional share
of Series C Preferred Stock is equal to a ratably proportionate amount of the
liquidation payment with respect to each outstanding share of Series C Preferred
Stock.

A consolidation or merger of the Company with or into any other corporation
or corporations, or a sale of all or substantially all of the assets of the
Company, or the effectuation by the Company of a transaction or series of
transactions in which more than 50% of the voting shares of the Company is
disposed of or conveyed, shall not be deemed to be a liquidation, dissolution,
or winding up within the meaning of the Certificate of Designation. In the event
of the merger or consolidation of the Company with or into another corporation,
the

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Series C Preferred Stock shall maintain its relative powers, designations and
preferences provided for herein and no merger shall result inconsistent
therewith.

Conversion. The holder of Series C Preferred Stock have the following
conversion rights (the "Conversion Rights"):

Right to Convert. The holder of any such shares of Series C Preferred Stock
may, at such holder's option, elect to convert (a "Voluntary Conversion") all or
any portion of the shares of Series C Preferred Stock held by such person into a
number of fully paid and nonassessable shares of common stock (the "Conversion
Rate") equal to the quotient of (x) the Liquidation Preference Amount of the
shares of Series C Preferred Stock being converted divided by (y) the Conversion
Price (as defined below) then in effect as of the date of the delivery by such
holder of its notice of election to convert.

Mandatory Conversion. Each share of Series C Preferred Stock outstanding on
the Mandatory Conversion Date (as defined hereinafter), automatically and
without any action on the part of the holder thereof, converts into a number of
fully paid and non assessable shares of common stock equal to the quotient of
(i) the Liquidation Preference Amount of the shares of Series C Preferred Stock
outstanding on the Mandatory Conversion Date divided by (ii) the Conversion
Price in effect on the Mandatory Conversion Date. The "Mandatory Conversion
Date" is the date which is three (3) years after the applicable Closing Date;
provided that the Mandatory Conversion Date may be extended under certain
circumstances set forth in the Certificate of Designation.

Conversion Price. The term "Fixed Conversion Price" shall mean 110% of the
Closing Bid Price of the Common Stock (as reported by Bloomberg Financial
Markets ("Bloomberg")) on the Nasdaq SmallCap Market for such security (or on
such other United States stock exchange or public trading market ("Alternative
Exchange") on which the shares of the Company trade if, at the time of
conversion, they are not trading on the Nasdaq SmallCap Market) on the trading
day immediately preceding the Tranche I Closing Date; provided, however that (i)
on the 366th day after the Tranche I Closing Date, the Fixed Conversion Price
shall increase to 115% of the Closing Bid Price of the Common Stock on the
trading day immediately preceding the Tranche I Closing Date and (ii) on the
732nd day after the Tranche I Closing Date the Fixed Conversion Price shall
increase to 120% of the Closing Bid Price of the Common Stock on the trading day
immediately preceding the Tranche I Closing Date.

The term "Floating Conversion Price" shall mean 90% of the lowest Closing
Bid Price of the Common Stock on the Nasdaq SmallCap Market as reported by
Bloomberg (or on such other Alternative Exchange on which the shares of the
Company trade if, at the time of the conversion, they are not trading on Nasdaq
SmallCap Market) during the twenty (20) consecutive trading days ending on the
trading day immediately preceding the Voluntary Conversion Date or the Mandatory
Conversion Date for such conversion, as applicable.

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The term "Conversion Price" means, with respect to any conversion of Series
C Preferred Stock, the lesser of (a) the Fixed Conversion Price and (ii) the
Floating Conversion Price.

Class A and Class B 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 February 10, 2002.
The class A warrants are redeemable on 30 days' written notice at a redemption
price of $.05 per class A warrant if the "closing price" of our common stock for
any 30 consecutive trading days ending within 15 days of the notice of
redemption averages in excess of $9.10 per share. "Closing price" means 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 warrants 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 February 10, 2002. The
class B warrants are redeemable on 30 days' written notice at a redemption price
of $.05 per class B warrants, if the closing price (as defined above) of our
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 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 exceptions.

We have reserved from our authorized but unissued shares a sufficient
number of shares of common stock for issuance upon the exercise of the class A
warrants, class B warrants and options. 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 we could obtain additional capital may be
adversely affected. The holders of the warrants might be expected to exercise
them at a time when we would, in all likelihood, be able to obtain any needed

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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 warrant holder any voting or other
rights of a stockholder of the company. Upon notice to the warrant holders, we
have the right to reduce the exercise price or extend the expiration date of the
warrants.

We granted to the underwriter and a finder in connection with our initial
public offering a unit purchase option and a finder's unit purchase option,
respectively, to purchase up to an aggregate of 120,000 units. These units
consist of one share of common stock, one redeemable class A warrant and one
redeemable class B warrants. 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 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
are exercisable during the three-year period commencing February 11, 1999 at an
exercise price of $6.00 per unit (120% of the initial public offering price)
subject to adjustment to protect against dilution.

We have agreed upon request to register under the Securities Act during the
four-year period commencing February 11, 1998, on two separate occasions, the
securities issuable upon exercise of the unit purchase option and the finder's
unit purchase option, the initial such registration to be at our expense and the
second at the expense of the holders. We have also granted registration rights
to holders of the unit purchase option and finder's unit purchase option.

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.

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INDEMNIFICATION AND INSURANCE

We indemnify and hold harmless our and our subsidiaries' present and former
officers and directors, including former officers and directors of Heuristic
Development Group and pre-merger Virtual Communities, Inc., and its
subsidiaries, against any costs or expenses to the fullest extent permitted by
Delaware law. Also, the rights of present and former directors and officers to
indemnification under the respective companies' former certificates of
incorporation, bylaws and similar documents will continue in force for a period
of six years after October 29, 1999, the effective time of the merger of the
companies. For a period of six years after the effective time of the merger, we
will maintain in effect policies of directors' and officers' liability insurance
covering acts and omissions occurring prior to the effective time of the merger
for the benefit of present and former directors and officers, on terms no less
favorable than those provided by the companies prior to their merger.

LEGAL MATTERS

The validity of our common stock to be issued upon exercise of the
warrants, if and when such warrants are exercised, will be passed upon for us by
Wuersch & Gering LLP.

EXPERTS

The consolidated financial statements of Virtual Communities, Inc., as of
December 31, 1999 and for each of the two years then ended included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said report. Reference is made to
said report, which includes an explanatory paragraph with respect to the
uncertainty regarding our ability to continue as a going concern as discussed in
Note 1 to the financial statements.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information that we file at the Commission's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the Commission at 1-800-SEC-0330 for further information
on the public reference rooms. Our public filings are also available to the
public from commercial document retrieval services and at the Web site
maintained by the Commission at "http://www.sec.gov." Reports, proxy statements
and other information concerning our company also may be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.

We have filed with the Securities and Exchange Commission a registration
statement on Form SB2 with respect to the securities to be issued in the
offering described in this prospectus. This prospectus is a part of that
registration statement. As allowed by Commission rules, this prospectus does not
contain all the information that stockholders can find in the registration
statement or the exhibits to the registration statement.

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DESCRIPTION OF BUSINESS

Virtual Communities, Inc. (the "Company") is a developer and publisher of
online business-to-business and business-to-consumer communities. The Company
also licenses Cortext Web development and site management software. Through its
proprietary Community Management Solution (CMS), the Company designs and
develops web-based communities containing a comprehensive suite of products and
services that, including the Cortext software, integrated e-commerce solutions
and best-of-breed interactive community features. CMS provides a one-stop
solution for creating an online community that contains all the web tools
required for managing content, conducting e-commerce and attracting and
retaining online visitors.

The Company, a Delaware corporation formerly known as Heuristic Development
Group, Inc. ("HDG"), consummated a merger (the "Merger") with Virtual
Communities, Inc. ("VCI"), also a Delaware corporation, in October 1999. Prior
to the Merger, HDG was a development stage company organized to develop, design
and market fitness-related products. In 1999, HDG decided to pursue a strategy
of acquisition of an existing company culminating in the merger with VCI. VCI
was organized in 1996 to develop and operate online communities on the Web
targeted to specific ethnic groups. After the Merger, we changed our name to
Virtual Communities, Inc., to reflect that our Company's business is now the
development and operation of online communities and related services for third
parties, the publishing of our own online communities and the licensing of
Cortext software. In March 2000, we merged this wholly owned subsidiary into the
parent company.

Based upon its experience in designing and developing online communities,
in Q3 1999 the Company began offering its Community Management Solution ("CMS")
Web site design and development services to third parties on a fee for services
basis. The Company has sold four CMS Systems to date, the most recent one in
April 2000, pursuant to design and development agreements and maintenance
agreements that commence upon the completion of CMS development.

As part of the restructuring of the Company in July 2000, management
determined to focus the Company's resources on the further development and
expansion of its Cortext content management and Web publishing software
technology. The software, currently under development by VCIX and its
subsidiaries, addresses what management believes is a widespread need by Web
publishers for an easy-to-use, powerful software tool for Web site content
management, including e-business transactional content.

The Company's plan is to complete development by Q4 2000 of what it calls
Cortext Site Studio ("CSS"), a suite of software tools and to identify partners
for the distribution of this software to the end-user market. CSS is derived in
part, from Cortext software for which the Company originally obtained a master
license from Cortext Ltd. in July 1999 to enable it to manage its own online
communities. Subsequently, the Cortext software became the enabling technology
for the Company's Community Management Solution (CMS) service for providing its
clients with turnkey online communities. Cortext Ltd. is a Tel-Aviv-based
software developer in which the Company owns a majority interest.

VCI currently publishes proprietary online communities:
virtualjerusalem.com, virtualholyland.com, virtualireland.com,
www.virtualitaly.com and virtualindia.com, which were developed by the Company
between 1996 and 1999 and are designed to create a comprehensive Web environment
targeted to specific demographic profiles. As part of the July 2000
restructuring to focus its business activities primarily on developing and
marketing software for Web development and site management, the Company
announced its intention to

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<PAGE>

sell these communities. The Company is currently seeking to enter into a
transaction(s) that would transfer partial or complete ownership of these
communities. It has also restructured its Internet technologies division to
focus on further development of Cortext software. As a result of this
restructuring, the Company reduced its editorial staff located in its New York
and Jerusalem offices by 50%.

As part of the restructuring, the Company terminated most of its marketing
agreements related to the online communities and also eliminated several
technical, marketing and administrative staff positions that supported the
online communities and CMS operations in New York. It has also shifted certain
technical and administrative functions from its New York offices to VCIL, its
Israeli subsidiary, to achieve efficiency. Following the restructuring, the
Company employs 106 persons worldwide compared to approximately 155 employees
prior to the restructuring.

BACKGROUND

Prior to the merger, we were a development stage company originally
organized to research, develop, design and market fitness-related products. Our
primary product was the IntelliFit System, a proprietary computerized system
that generates personalized exercise prescriptions and tracks and records
fitness programs. Due to disappointing acceptance of the IntelliFit System, our
management decided to pursue a strategy of investment in or acquisition of an
existing company, culminating in the merger with VCI. Now that VCI has merged
with our wholly owned subsidiary, our business is that of VCI. In March 2000, we
merged this wholly owned subsidiary into the parent company.

Accordingly, when we discuss "our" business activities for time periods
prior to the merger in this and other sections of this Registration Statement,
we are referring to the business of VCI prior to the merger unless we expressly
state otherwise.

VCI was incorporated in August 1996 as Virtual Jerusalem Ltd., Inc. It was
founded to develop, acquire and operate online communities on the Web targeted
to members of demographic groups with interests in their historical ethnic
backgrounds and who want to share information with other members with like
interests. In June 1997, VCI acquired substantially all of the assets and
outstanding shares of Virtual Communities Israel Ltd., formerly called Virtual
Jerusalem Ltd. ("VCIL"). Virtual Jerusalem Ltd., was an Israeli corporation
formed in 1996 by the founders of VCI that developed and published an Internet
Web site called Virtual Jerusalem. VCIL currently develops and maintains the
Company's online communities and performs certain programming, design, software
development and web maintenance services on behalf of the Company pursuant to a
Cost Plus Agreement and certain general and administrative duties on behalf of
the Company pursuant to a Financial Services Agreement between the entities.

CMS offers customers a single source technology and service solution,
including scalable content management and publishing software, cutting-edge
e-commerce functionality, best-of-breed community retention features such as
chat, free-email, polls, quizzes, and forums, plus community design and
development services, ongoing maintenance, hosting and 24/7 support. CMS
includes Cortext web publishing and content management software and numerous
interactive elements, some of which we have developed through our VCIL
subsidiary and some of which are licensed from third parties as described in
more detail below. Since mid 1999, we have been increasingly focused on adding
software tools and services to CMS to make it a complete solution required by
Web publishers - be

40
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they businesses or other organizations - to manage the information,
advertisements and other interactive elements that make up the content of their
Web sites. We have entered into four CMS agreements with third parties to date
for the provision of these services, and are currently negotiating with several
other parties to provide these services on a fee basis and have received
interest from other entities for CMS. (See "Community Management Solution".)

In addition to marketing CMS and engaging in design, development and
maintenance activities for our CMS clients, we currently operate five online
communities: Virtual Jerusalem (www.virtualjerusalem.com), Virtual HolyLand
(www.virtualholyland.com), Virtual Ireland (www.virtualireland.com), Virtual
Italy (www.virtualitaly.com). and Virtual India (www.virtualindia.com). In
accordance with our restructuring announced in July 2000, we intend to sell such
communities in the near future.

As part of the restructuring of the Company in July 2000, management
determined that the Company will focus its near term efforts on the further
development of its Cortext content management and Web publishing software. The
Cortext software, currently under development by VCIX and its subsidiaries, is
meant to address what management believes is a widespread need by Web publishers
for a simple software tool for Web site content management, including e-business
transactional content. The Company's aim is to develop a suite of Cortext
software tools that will enable the creation, organization, delivery and
maintenance of both non-transactional Web-site-oriented content and business-to-
business (B2B) and business-to-consumer (B2C) commerce transaction content
conducted on a Web site.

Market for Common Equity and Related Stockholder Matters

Our common stock is traded on the Nasdaq SmallCap Market under the trading
symbol "VCIX." Prior to our recent merger on October 29, 1999, our stock traded
under the trading symbol "IFIT." As of August 15, 2000, we had approximately 124
the Nasdaq SmallCap Market for the periods indicated.

High Low Close
------- ------- -------
<S> <C> <C> <C>
2000
1st Quarter........ $8.8125 $ 2.75 $7.4375
2nd Quarter........ 2.9375 $2.0833 $2.3333

1999
1st Quarter........ $ 1.625 $ 0.75 $ 1.469
2nd Quarter........ 5.125 1.50 3.188
3rd Quarter........ 4.50 2.56 4.375
4th Quarter........ 4.312 3.00 3.25

1998
1st Quarter........ 2.25 .875 .875
2nd Quarter........ .875 .50 .688
3rd Quarter........ 1.125 .50 .688
4th Quarter........ 1.50 .981 1.00
</TABLE>

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<PAGE>

INDUSTRY BACKGROUND

Growth of the Internet

The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business electronically.
International Data Corporation ("IDC") estimates that the number of Web users
will grow from approximately 142 million worldwide in 1998 to approximately 502
million worldwide by the end of 2002. This growth is expected to be driven by
the large and growing number of personal computers ("PCs") installed in homes
and offices, the decreasing cost of PCs, easier, faster and cheaper access to
the Internet, improvements in network infrastructure, the proliferation of
Internet content and the increasing familiarity with and acceptance of the
Internet by businesses and consumers. The Internet possesses a number of unique
characteristics that differentiate it from traditional media: lack of geographic
or temporal limitations; real-time access to dynamic and interactive content;
and instantaneous communication with a single individual or with groups of
individuals. As a result of these characteristics, Web usage is expected to
continue to grow rapidly. The proliferation of users, combined with the Web's
reach and lower cost of marketing, has created a powerful channel for conducting
commerce, marketing and advertising.

IDC also estimates that revenue generated from Internet commerce will
exceed $1.3 trillion by 2003. As the Internet has become more accessible,
functional and widely used, it has emerged as a primary business channel.
Businesses are increasingly using the Web both for marketing and distribution of
their services and products and to communicate and conduct business with their
customers and others.

IDC estimates that the number of web pages will grow from 925 million in
1998 to 13.1 billion in 2003. This dramatic growth in content has created a
strong need for solutions to content management problems that will allow for the
rapid and effective delivery of information. These solutions must accommodate
the volume, complexity and variability of web content. In addition, these
solutions must be scalable and allow for use by large numbers of content
contributors. In order to address these needs, companies are increasingly
demanding software systems that automate the workflow of content creation,
management and delivery.

In addition, in an effort to create a more engaging online presence,
companies are seeking to deliver dynamic content and interactive services that
will ensure that visitors will become loyal to their sites, spend time on them
while interacting with other like-minded visitors and engage in e-commerce
activities.

The Content Management Market

According to Salomon Smith Barney, the market for Internet Commerce
Software is $4.2 billion in 2000 and is expected to grow to $22 billion by 2005.
This category of software is divided into three groups: sales and content
management; customer relation management and procurement and order management.
Within the category of sales and content management is: content management,
personalization, e-marketing and enterprise portals. The top six firms in this
category had a 37% share of $675 million in revenue in 1999. They are
Broadvision; Open Market; Vignette; Intershop; Interworld and Art Technology
Group (ATG). Most of these entities sell their software for prices ranging from
$250,000 to $400,000 but many

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customers pay in excess of $1million for customized services purchased together
with the software.

Other than Vignette and ATG, the primary focus of these companies is on the
e-commerce functionality of large site development, since dynamic content
generation has e-commerce applications and since most large-scale web site
development ($1 million plus cost) is focused on e-commerce and business process
implementation. Vignette is considered the clear leader in large-scale content
management and publishing installations. Although the software category is
fragmented, there is currently a significant amount of merger and acquisition
activity among the developers and marketers of content management software and
it is an attractive and growing market. Distribution of the software is often
done through partnerships with local consulting companies and system
integrators. Vignette differs somewhat by handling 85% of its implementations
through its own professional staff although it is moving towards more of a
channel strategy. Other key public content management software companies are
Eprise (EPRS), Documentum (DCTM), and Interwoven (IWOV), Inso/Dynabase (EBT)and
Allaire.

OUR STRATEGY

CSS Business

The Cortext Site Studio ("CSS") under development by the Company is based
on a three-tier software architecture:

A. CSS' base is an application server software tier which solves problems
of inter-operability among software applications. Application Servers build and
deliver scalable applications that integrate browser, server and database
technologies in an open integrated development environment. The Company intends
to license application server software from an unrelated third party such as BEA
Systems, IBM Corp. or Apple Computer. It has not entered into an agreement to
date to acquire such software.

B. The middle level of CSS is Cortext Object Server, a derivative of
Cortext Magazine which includes the following core functionality:

. Dynamic content publishing;
. Workflow management;
. Change Management - processes to control content development, code
development and versioning;
. Collaboration
. Extensible design templates;
. Web content repositories;
. Replication and deployment;
. Personalization;
. Security management and role-based access; and
. Scalability

Most of these functionalities are either completed or currently under
development and expected to be shipped to customers during the fourth quarter of
2000. To bring the Cortext Site Studio Rev 1.0 product to market, however, the
Company may need to acquire software from third parties or develop on its own
several additional components C. The top tier of CSS consists of a group of
Cortext Cartridges currently in development by the Company. These model the
logic

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of specific business processes using tools provided by the Cortext Object
Server. Cartridges to be available in the initial release of CSS are: Newsweb
Manager, a publisher of news and feature content; Classified Ads Manager, which
will manage online classified advertising; Resume Builder, which will be used to
build and manage resumes posted on Internet sites; and Corporate Intranet
Builder, which gathers, publishes and manages information typically used on an
intranet. An intranet is a repository of information for the internal use of a
particular organization or company which uses Internet tools. Each CSS Cartridge
will include a graphic user interface ("GUI"), or control panel designed for
non-technical users to easily manage the deployment and publishing of Web
content. This control panel will function as a "thin client" i.e. it will not
require installation on a user's computer but can be operated via a user's web
browser from any location.

CSS will include a Developer Console for technically proficient managers
and programmers to develop their own cartridges to operate in conjunction with
the Cortext Object Server.

In July 2000, the Company entered into an agreement with Cortext Ltd. for
the further development of the Cortext Object Server, which includes staged,
predefined delivery dates for certain functionality of the Server through
December 2000. We anticipate that following such development period the Cortext
software will contain the functionality required for a Release 1.0 version.
Quality assurance testing is being performed by the Company's VCIL subsidiary
upon its periodic receipt of the deliverables from Cortext and remedial
development, if any, is undertaken by Cortext Ltd. staff.

In addition to the Cortext Ltd. software development team based in Tel
Aviv, the Company currently maintains several development teams in its New York
offices and at the offices of its VCIL subsidiary in Jerusalem. These teams are
contributing to the CSS product and development specifically in E-Commerce
modules, interactive modules, product QA and product documentation.

In addition, the Company is assessing the commercial and technical
feasibility of developing additional cartridges. They include adaptations onto
the Cortext Object Server platform of interactive web applications previously
developed by VCIX such as modules for Polls, Sweepstakes, Bulletin Board/Forums
and Chat which are commonly included on interactive Web sites. The second
application class includes e-commerce applications already developed by the
Company as non-Cortext modules. Those applications include sell-side shop and
mall modules and an auction application based on a powerful transaction
engine.

CMS Business

In August 1999, our Company decided to re-focus its business model and
leverage its experience in building targeted, vertical online communities. The
Company began marketing its Community Management Solution (CMS), a comprehensive
software and services solution for developing and maintaining web-based
communities. A significant component of this solution, which allowed us to offer
our comprehensive community building solution was our acquisition of Cortext
Ltd., an Israeli based company that develops proprietary content management
software technology. Cortext software functions as the platform for CMS.
Cortext's technology allows publishers to easily update their online communities
without the need for programmers. The software's object-oriented architecture,
together with its powerful intuitive scripting language, meets the dynamic
requirements of the challenging environment of an online community. Using
Cortext software as our platform for CMS, we are able to deliver a complete
solution for building online communities in less than 90

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days.

Our management believes that as competition for Internet viewers increases,
Web publishers will need to add increasing amounts of content, services and
interactive elements to their vertical communities to attract and maintain
viewers. Increased competition will also require them to offer a wider array of
services that enable their users to interact with other users, through chat
rooms, message boards, games, free e-mail services and personal home pages. Our
management believes that managing these communities will likely require
sophisticated software and Web maintenance technologies, including content
management systems, Web site registration elements, statistical reporting
services and advertising management and placement software.

Based on our projection of the increased complexity of Web publishers'
sites, we believe that a growing number of such publishers will prefer a "one
stop" solution for their online needs that offers a comprehensive package of
enabling and enhancing tools, including development and maintenance options,
content management software and a flexible choice of interactive elements that
will serve as retention elements for their visitors. We believe that companies
offering such services will provide Web publishers with the ability to avoid the
relatively high cost associated with entering into numerous individual license
and service agreements with multiple parties to obtain such services.

As part of the Company's restructuring in July 2000, we have decided to
continue offering CMS but intend on subcontracting the design and development
portions of CMS to third party web design firms to whom we will provide Cortext
and other software we have licensed from Cortext and third party service
providers or developed ourselves.

Online Communities Business

In line with our restructuring in July 2000, our strategy is to sell our
five online communities that we currently own and publish, and which are
targeted to affinity groups which may include entering into arrangements for the
licensing to potential acquirors of such communities of the of Cortext web
publishing and content management software which we currently use to operate
such communities as well as other licenses for interactive elements and
e-commerce capabilities that we currently maintain on such communities. In so
doing, we expect that we can further increase the potential value of our online
communities.

We believe that several of these communities are mature niche web
properties that we can sell to third parties interested in acquiring an online
community targeted to a specific segment of the population with whom they
currently have a relationship. Such parties may be interested in acquiring one
of our communities for strategic reasons in the event they currently publish
another site targeted to such community and wish to increase their market share
of the same. An Internet service provider or online business that wishes to
obtain a content-rich portal for its current users may also be interested in
acquiring one of our online communities. An entity that may be interested in one
of our online communities could be one that wishes to create a substantial
e-commerce business tailored to one of our target population groups and wishes
to consolidate a Web entity that possesses large numbers of members of that
community with its own Web site.

The Company may also decide to enter into strategic relationships with
third parties interested in acquiring a percentage ownership in a holding
company that operates one of our communities. In any sale or relationship that
the Company

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enters into regarding its published communities, the Company may enter into an
agreement with the Company for the purpose of providing the same with our CMS
services.

Our Revenue Sources

We anticipate that the majority of our revenues in 2000 will be derived
from our CMS services and the licensing of our web publishing and content
management software. We project that our Web site design and development
services revenues will become the principal revenue source for the Company
during 2000 and licensing of software will become our principal revenue source
in 2001 and beyond.

Below is a more detailed description of our three projected revenue
streams.

CMS Business

From late 1999 through mid 2000 we offered CMS design and development
services and software to third party Web publishers on a fee basis. Following
the Company's reorganization in July 2000, we continue to offer CMS services on
a flexible or customized "modular" basis, allowing Web site publishers to select
individual modules for their specific needs in addition to the basic Cortext web
publishing and content management software. However, we intend on facilitating
the creation of a CMS system by engaging the services of unrelated Web design
firms who will perform the design and development functions for a CMS client
using software we will provide to them. To provide the standard suite of modules
to CMS customers, we arrange third party licenses for them or grant sublicenses
for software that we previously licensed from Internet service providers.

To date we have entered into four CMS agreements with third parties,
including one through our relationship with Vanco Limited (see "Our Marketing
Efforts -- CMS Business" below). At the same time we enter into a design and
development agreement with our CMS clients, we also enter into a second
agreement with them for the provision of hosting and maintenance services
following the completion of CMS development for them. The delivery of CMS is
pursuant to a detailed site specification document delivered to the client
within 30 days of the execution of the CMS development agreement. Typical
delivery of deliverables under the site specification is within 30 and 60 days
from the client's acceptance of the specification. Pursuant to our CMS
agreement, we grant a limited, non-exclusive, worldwide, perpetual royalty-free,
nontransferable license to use CMS and its various modules which is installed on
a client's existing site or on a new site. We also provide licenses for a
variety of programming elements designed by us and interactive elements provided
by third parties. We provide for the completion of CMS within a 90 day period
and the term of our maintenance agreements are for one year automatically
renewed for additional one-year terms unless either party elects to terminate
the same. Our CMS agreements include warranties extending from 60 days to 6
months on CMS following completion of the development thereof. Of the four CMS
clients to date, the Company has completed two installations and ceased work on
another installation pending resolution of a dispute regarding the services
provided to the CMS client. In another instance, the Company has agreed to
refund installment payments made in the event the CMS client does not accept
delivery of the CMS deliverables, which the Company anticipates will be
delivered in September 2000. In July 2000, the Company entered into a Approval
of Deliverables and Termination Agreement with one of these CMS clients pursuant
to which the client approved certain deliverables due under the Development
Agreement, paid the Company the amount due for the same and forwent other
deliverables due to it for which the Company would have been paid an additional
fee equal to 25% of the amount due under the agreement. However, the Client
agreed to pay the Company a cash fee representing in excess of 50% of the value
of the cash portion of the development agreement over a three month period
commencing in August 2000 in lieu of issuing to the Company stock options
exercisable into equity of the client as originally agreed under the Development
Agreement. These payments to the Company are conditioned upon the Company's
satisfactory provision of maintenance services to it under a maintenance
agreement previously entered into between the parties and for which the Company
shall receive a monthly fee.

In August 2000, the Company entered into a Termination and Accord of
Agreement with another CMS client pursuant to which the parties agreed that
subject to certain conditions each party shall have fulfilled its duties and
obligations under the agreement entered into in August 1999. Pursuant to the
same, the Company will continue to support the Client's web site developed by
the Company for a period of six months and shall assist the client in the
migration of the software and content residing on the Company's servers to the
client's hardware. Pursuant to the agreement, the Company agreed to license
certain software and assign the licenses for other software held by the Company
to the client which licenses are used for the publishing of the client site and
other assistance. The Company forwent certain termination payments in connection
with agreement.

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CSS Business

The Company is currently in discussions with several Web design firms for
the purpose of having such firms test CSS and intends on providing non- revenue
bearing licenses to such firms to effectuate the same The Company does not
anticipate revenues from its CSS activities until the end of the first quarter
2001.

Our Marketing Efforts

CSS Business

The Company intends to market and sell CSS to system integrators and web
consulting and design service firms. Product support will be delivered on a
second-line basis with the first line (direct support to end-users) being
provided by those firms. The Company has a trained customer support team and has
already implemented a web-based and phone-based support infrastructure. The
Company believes its support teams will be satisfactory for its anticipated
needs during the first year after release of CSS.

The Company is currently evaluating various pricing models for CSS but
anticipates that it will charge in the area of $50,000 to $150,000 for CSS which
the Company believes represents the low end of the content management software
market. The pricing for CSS will ultimately depend upon whether the license for
CSS will contain source vs. object (closed) code and whether it takes the form
of enterprise licensing, per-seat licensing, concurrent user licensing or
another form. The Company is also evaluating the benefits of charging customers
on a per cartridge basis. The Company is currently engaged in discussions with
several U.S. based Web design firms for the purpose of enlisting their
cooperation in testing and evaluating that portion of the Cortext content
management software which has already been developed on a beta site basis under
a Pilot Program initiated by the Company in August 2000. The Company expects to
enlist several well-established design firms to participate in the Pilot Program
and, while it does not anticipate incurring significant revenues from the same,
it believes it will obtain significant feedback from such firms that will enable
it to further refine the CSS product and position and price it competitively in
the Web software tools market.

The Company anticipates that its primary market for CSS will be "middle-
layer" vendors such as web consulting and design firms and digital services &
production houses. The Company believes it will market CSS as a technology
solutions software application and will also offer professional services to
configure and customize CSS to those entities that acquire CSS from the Company
and who provide end-to-end solutions for the creation of a business presence on
the web.

The target market is concentrated in the United States, particularly New
York City and northern and southern California, where such middle-layer vendors
are concentrated. However, the Company believes it will also be able to deliver
its technology solutions in other geographic markets, such as the UK and
Australia. According to Published research, as of 2000, there are currently
approximately 8.5 million commercially-oriented websites worldwide and
approximately 2,500 installations of content management software. The Company
believes that a significant percentage of such sites require some form of
content management software to maintain their Web presence.

The Company intends to promote CSS through trade journals, industry
analysts and attending Web software trade shows.

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<PAGE>

CMS Business

The market for CMS includes professional and trade associations, niche
publications and entrepreneurs that are potentially interested in creating a
targeted vertical online community, either business-to-business and business-to-
consumer related. There are approximately 130,000 professional and trade
organizations and 20,000 targeted niche publications in the United States alone.
The Gartner group estimates that the 300 current business-to-business online
marketplaces as of December 1999 will grow to 10,000 such marketplaces by 2002.

In addition to marketing CMS from our New York City offices, in May 2000,
the Company commenced marketing activities in Los Angeles, California to better
facilitate the marketing and implementation of CMS on the West Coast. The
Company currently employs three persons in Los Angeles.

In February 2000, VCI Community Solutions, Inc., a subsidiary of the
Company, entered into a Representation and Technical Support Agreement with
Vanco Consulting Limited, a U.K. company that is a subsidiary of Vanco Ltd., a
European independent network services company ("Vanco"). Pursuant to the
agreement, Vanco is meant to market and provide technical development and
support services for the Company in the European Community in return for which
Vanco will receive exclusivity for the right to market and support CMS in E.U.
countries. The Agreement is for a two-year period provided that the Company
sells a minimum of two CMS Systems to parties introduced by Vanco during the
first six months of the term and eight CMS systems during the first year of the
term. Vanco will receive a fixed fee from the Company for each Company client in
the EU for whom it provides marketing, development and technical support
services in the form of a percentage of the cash revenues and equity received by
the Company from its customers. All of the equity received from such customers
introduced by Vanco to the Company will be placed in escrow on behalf of VCI and
Vanco pending a decision by them to form a joint venture entity within a year
from the date of the agreement. In the event we do not do so, the equity will be
distributed 60% to the Company and 40% to Vanco.

In addition to marketing CMS, Vanco is meant to be responsible for
coordinating the development of an introduced party's online community project,
providing design and programming services, technical support, training and back
up services. Vanco will also be responsible for acquiring all components of the
network structure required to host, operate and back up the introduced parties'
communities with the exception of servers that shall be provided by VCI. Vanco
will also provide 24/7 emergency support lines. VCI is responsible for providing
training to Vanco staff and marketing and technical consultations and
documentation.

In June 2000, Vanco notified the Company that it would commence its
marketing activities on behalf of the Company only upon its receipt of certain
CMS marketing, sales and other materials and technical documentation being
developed by the Company and CMS training of Vanco staff. In light of the
Company's recent restructuring to focus on the development and marketing of its
Cortext software, the Company is currently reevaluating its relationship with
Vanco.

In June 2000, Vanco requested that the Company cease providing development
services for Buyskills.com pursuant to a Design and Development Agreement
entered into between the Company and Skills Communities Ltd., an affiliate of
Vanco, dated January 2000. The Company has already been paid in full for the
services to be

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performed under the agreement. The Company is prepared to complete all of its
obligations thereunder, however, it has been unable to do so due to Buyskills'
failure to finalize and deliver their site specifications to the Company and
ongoing discussions between the Company and Vanco related to development
issues.

Competition

CSS Business

The Company believes that the Cortext Site Studio will be advantageous
compared to current manual methods of Web content manipulation whereby each
individual page of a Web site must be published by hand through the direct
manipulation of HTML code. This is considered to be a slow and inefficient
method of managing a large Web site. It is especially unsuitable when the
content of a Web site must change often and/or rapidly or when individual
content items are stored once but must be deployed and displayed in many
different places on one Web site. The Company also considers CSS to be
advantageous compared to large, monolithic Web content tools from high-end
vendors whose management solutions require expensive and scarce technical
expertise to initially deploy such software tools and to manage them on an
ongoing basis. The Company intends to price CSS at a rate that will be
significantly less than the license fees, professional service charges and
computer resources required to acquire high end content management systems such
as those produced and marketed by Vignette, Interwoven and Broadvision, Art
Technology Group and others which focus on E-commerce applications and
personalization. Eprise, and Docuumentum are additional competitors that develop
and market content management software.

CSS has three major attributes that the Company believes distinguishes it
from its competition:

-- reusable component architecture. The Cortext software architecture is object-
oriented, allowing for faster initial development than conventional business
process modeling. The Company believes that the reusability of its components
will allow for an overall lower total cost of ownership;

-- adaptable business logic - Unlike monolithic, one-size-fits-all systems, CSS
does not confine users to a fixed, pre-existing model of the business process.
Instead, Cortext's model of the business process adapts to the client's actual
business logic, thus providing a more powerfully customized solution for the
client which allows for greater creativity and better designs.

-- natural publishing framework - Using CSS, publishers, editors and authors can
focus on their own areas of expertise without the need for them to acquire
special technical skills.

CMS Business

To create vertical online communities, organizations, and traditional
offline businesses, entrepreneurs are presented with a number of choices. They
can select a web development firm, Application Service Provider, ("ASP"),
content publishing software house and a host of other consulting services to
provide a solution to their Web needs. To create a robust community requires
building a Web presence that will generate repeat traffic, create member
registrations, provide targeted and timely content and allow for advertising and
revenue generating e-commerce opportunity. A potential CMS client needs to reach
its market quickly in a cost-efficient manner. In such circumstances outsourcing
an online community to multiple vendors or developing the same in-house is a
costly and time-consuming process requiring $2-4 million and 6-12 months.

CMS provides a significant advantage over its competitors in this regard.

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CMS provides a complete, single-source solution to creating, developing and
managing robust online communities. We also believe that our ability to commit
to creating online communities within a 90-day period provides us with a strong
competitive edge due to the desire of potential clients to create communities as
quickly as possible.

We face competition from a number of sources, including potential entities
that perform Web site development services in-house or contract with others for
such services. These sources include Web site service boutique firms, including
Vignette Ltd., a British company, OpenMarket, Inc., a Massachusetts company,
Interwoven, a U.S. company, on-line services companies, advertising agencies,
direct access Internet and Internet-services and access providers as well as
specialized and integrated marketing communication firms, all of which are
entering the Web site design and development market in varying degrees. Many of
our competitors or potential competitors have longer operating histories, longer
client relationships and significantly greater financial, management,
technological, development, sales, marketing and other resources than we have.

Cortext Web Publishing and Content Management Software

The central component of CMS is the Cortext Web Publishing and Content
Management Software. (see "Technology Acquisitions"). Cortext provides Web
publishers with the tools required for creating and maintaining a continually
generated Web site. Cortext consists of a suite of products designed to solve
the problems of creating and maintaining Web site publishing by aiding in the
following:

. management of data flow from text form to published Web site form
through to data archiving;

. editing data at each stage of the publishing process;

. creating attractive and sophisticated designs in HTML language;

. publishing a Web site as required (up to several times a day); and

. technical administration.

Cortext software can be used to build, edit and manage online communities
and Web sites of all sizes and requires little technical experience to permit
flexible development of Web sites. Cortext "object oriented" software manages
the publication of large quantities of data from PCs to Internet sites. The
application program for Cortext is written in open source code Perl language
software and uses industry standard databases. To help ensure the longevity of
Cortext as a publishing tool, Cortext was developed with an open industry
standard development platform and development tools to reduce development risks.

How Cortext Works

Cortext prompts a user for data on a "User Entry Screen" which is a data
entry screen on a database. This screen allows for the simultaneous entry,
modification and deletion of data while immediately and automatically updating
the associated Web pages of a Web site. By utilizing Cortext software, Web
publishers can directly interact with the database screens via the Internet.
Once data reaches a site by means of a standard database, Cortext allows for the
further editing of the published data by enabling the user to select the
articles, stories, graphics, or other components to be published on the

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Internet. The remainder of the data may be kept or archived to be used at a
later date. The selected information is then transferred from the database and
published "live" on the Internet by simply selecting the "publish" key. The
publishing process can take place as many times as required, making it
convenient to publish information that changes daily or even hourly, such as
breaking news.

Cortext software also allows for the easy removal of content published on
the Internet. Content may be saved for future use, by moving it to a viewable
and searchable archive or by simply removing it from the database altogether.
Cortext is designed to make it relatively easy and efficient for Web publishers
to alter their content contributions and dynamically update their online
communities as often as they wish while providing a powerful search and
archiving tool that does not require programming or production resources.

Cortext is also designed to allow the loading of existing text files and
graphics, in any format, to a database Web site, via an Internet browser. This
freely available Web interface allows for this function to be done from one's
office, home or abroad with password security protection.

In July 1999, we entered into a software license agreement with Cortext
Ltd., an Israeli company that develops content management software. Pursuant to
the agreement, Cortext licensed to us, on a worldwide, royalty free, non-
exclusive, transferable, perpetual and sublicenseable basis, a Web publishing
tool kit software developed by Cortext. We may use the software for our online
communities and for web sites maintained by our content partners. The agreement
also allows us to resell and distribute the software to third parties under
certain conditions. The agreement also calls for Cortext to provide support
services for the software and upgrades to the same if and when developed by
Cortext. In addition, Cortext shall provide development services for the
software to us for a period of six months from the completion of milestones set
forth in the license agreement. We acquired a majority stake in Cortext Ltd. in
February 2000.

Community Management Solution (CMS) Modules

Our management believes that based on programming elements we have
developed to date, existing licenses, equipment we have acquired and Virtual
Communities Israel, Ltd.'s programming and software development staff, we can
offer an array of interactive modules to Web publishers through our Community
Management Solution (CMS). We already employ many of these modules successfully
on our own online communities. The modules which we either currently license,
include:

. Site Search and Polling Engines;

. Sweepstakes Modules;

. Greeting Cards;

. Weather Services;

. E-mail an Article to a Friend;

. Free User E-mail Services;

. Registered User Databases;

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. E-mail List Servers;

. Advertising Management Systems;

. Bulletin Boards/Forums;

. Comprehensive Statistics and Traffic Measurement Modules;

. Site Indexing;

. E-Commerce Solutions;

. Chat Services;

. Online Classifieds Advertising;

. Free User Created Home Pages;

. Games Modules;

. Calendars; and

. Auctions.

(See "Proprietary Technology, Trademarks and Licenses" for a description of
licenses presently owned by us.)

Licenses, Service Agreements and Trademarks

Cortext

For a detailed description of Cortext, see "Cortext Web Publishing and
Content Management Software" and "Technology Acquisitions."

E-Commerce

In September 1999, we entered into an agreement with Intershop
Communications, Inc., a San Francisco, California based developer of e-commerce
software and applications. Pursuant to the agreement, Intershop granted us a
license to software that allows us to design and build on-line stores from
existing templates and create on-line "malls" for each of our communities and
Community Management Solution customers. The software also allows us to create
online stores for our content partners, or, alternatively, provide them with the
ability to build their own e-commerce solution. Pursuant to the agreement,
Intershop provides us with continuous support services and software upgrades. We
pay Intershop a license fee for the software products and an annual customer
service fee for Intershop's ongoing support services and software upgrades. The
agreement is for a period of three years with automatic renewal for additional
one-year terms unless terminated by either party upon 30 days written notice.
The licenses granted to us under the terms of the agreement survive the
expiration or earlier termination of the agreement.

Advertising Management System

We have a license agreement with NetGravity, Inc., a California company

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that provides software-enabling licensees to manage advertising on their Web
sites. Our license is a perpetual, worldwide, non-exclusive and non-transferable
license that enables us to manage advertising on our own Web sites and on Web
sites of our content partners as well as any other Web sites residing on our
servers. In exchange for this license we pay NetGravity a one-time license fee
for the first year plus an additional fee for support services during the first
and successive years of the license. An optional subscription maintenance for
the second year of the license is also available for an additional fee.
NetGravity may terminate the license upon thirty days notice to us if we are
delinquent in our payments to NetGravity.

Server Maintenance and Support

We have a Master Service Agreement with Frontier Global Inc., a California
internet service provider, that provides us with hosting services and
connectivity to the Internet for our servers on which our own Web sites and the
Web sites of our content partners reside. Global Center also provides continuous
supervision of our servers ensuring that such servers are connected to power
sources and viewable on the Internet. Global Center also assists in correcting
any possible malfunctions of our servers, which are housed at Global Center's
server installations in Herndon, Virginia and New York City. For these services,
we pay a monthly fee. Per the agreement, Global Center is not liable for injury
to our business, lost revenues or profits resulting from any negligence on their
part at our server maintenance facilities. The initial term was for a period of
six months starting September 4, 1997 which term has been extended for several
additional six-month periods.

In May 2000, we entered into several agreements with UUNET Technologies,
Inc., an MCI WorldCom Company based in Ashburn, Virginia, including an
application service provider ("ASP") agreement and internet service ("IS")
agreement. Pursuant to the agreements, the Company is recognized as an
Application Service Provider by UUNET and is permitted to offer certain UUNET
products to its customers and may utilize UUNET's global colocation facility for
its online CMS operations and publishing of online communities. The agreements
are for a term of three years. Pursuant to the agreement, the Company intends to
utilize UUNET's facilities in the United Kingdom and in Elmsford, New York, to
host its online operations.

Web User Tracking Software

In December 1999, we entered into a Software License and Support Agreement
with iMediation Inc, ("iMediation"), a California company that provides web user
tracking software. Pursuant to the agreement, iMediation has granted us a three-
year license for its use of iMediation software that enables the automated
tracking of web traffic to or within our online communities and/or those
communities maintained by us. In addition to a software license fee, we pay an
additional fee for software support services during the term. We are entitled to
use the software on up to eight of our communities. Thereafter, we must pay an
additional fee on a per community basis. We have the right to convert this
license into a perpetual license for a flat rate for up to 20 communities. The
agreement is for a total of 3 years, however, it may be terminated at the end of
each year.

Instant Messaging

In March 2000, we entered into an agreement with Tribal Voice, Inc., a
wholly owned subsidiary of CMGI, a Delaware corporation, to create co-branded

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versions of its "PowWow" technology for any of our communities. The "PowWow"
technology provides users with text and voice communications (such as instant
messaging), group activities and sharing of information. Tribal Voice also
provides us with continuous support and software upgrades. The agreement is for
a period of three years with automatic renewal for additional one-year terms
unless terminated by either party upon 60 days written notice. We have the
ability to terminate the Agreement at any time during the term upon 30 days'
written notice.

E-mail List Services

We have a license agreement with Revnet Systems, Inc., an Alabama company
that provides software for e-mail list processing applications. The agreement is
a license for a product developed by Revnet called "Unity Mail Server" that
enables the licensee to establish and manage information distribution lists or
groups while allowing participation by third party subscribers. The license
provides for unrestricted subscriber capacity for a period of one-year starting
December 31, 1998, and includes free upgrades and technical support. We recently
assigned this license to a CMS client.

Free E-mail Services

We have two custom email service agreements with Commtouch Inc., a
California company that provides Web Based e-mail products and services. One
agreement (the Custom Mail Service Agreement) requires Commtouch to provide us
with a customized e-mail service, including upgrades, hosted on Commtouch's
servers. These services are available for our Web sites and our CMS clients.
These services allow us to provide users of our online communities with free
e-mail addresses and allow us to advertise on the user interface pages. The
agreement stipulates that Commtouch is required to customize the e-mail services
to each of the Web sites and provide continuous customer support service. We are
obligated to pay Commtouch the greater of a minimum quarterly fee or a
predetermined percentage of the net banner ad revenue. The term of the agreement
commences June 1, 2000 and shall continue until the second anniversary of the
first launch date. The second agreement (the Reseller Agreement) appoints us to
be Commtouch's nonexclusive reseller of the custom mail service to our CMS
clients and provides continuous customer support service. Payment to Commtouch
is based on a per emailbox basis with a minimum invoice amount per customer
account per month. Both agreements contain the provision that subject to VCI's
prior written approval, Commtouch shall have the right to offer the end users
the ability to request the delivery of third party electronic messages to their
inboxes (Opt-in Programs). Commtouch pays VCI 20% of the gross opt-in revenue
generated by Commtouch through this means. This is a one year agreement
renewable for additional one year terms.

Free Home Pages

In August 1999, we entered into an agreement with Homestead Technologies,
Inc., a California company that develops co-branded sites where Internet users
may create free personal homepages. Pursuant to the agreement, Homestead and we
will create sites co-branded using technology developed by Homestead. Homestead
will provide us with all necessary hardware, software, and bandwidth necessary
for the co-branded sites. We are obligated to promote such site on our
communities and email newsletters to our registered database and maintain links
to the co-branded sites from our communities. In consideration for us providing
Homestead with access to our registered user base and collective statistical
data on users of the co-branded sites, Homestead creates the co-branded sites

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and pays us a portion of revenues from advertisements placed on the user
homepages. We may also place banners on the co-branded site pages and retain a
percentage of revenues collected from the same. The parties also agree to create
an integrated registration process for the free home page service.

Auction Services

In March 2000 we entered into an agreement with OpenSite Technologies,
Inc., to obtain a perpetual, worldwide license to their AuctionNow software,
which enables the creation of branded, online auction galleries. OpenSite also
provides us with free upgrades and maintenance and support. Under a separate
agreement simultaneously entered into with OpenSite, we are also an authorized
reseller of the OpenSite software.

News Services

In September 1999, we entered into an agreement with Reuters Limited, a
U.K. company, for the supply of Reuters' online media services for distribution
on our communities. The agreement calls for Reuters to supply our world news
services, including a number of daily print and audio stories and photographs
and a license for software designed to receive, classify and manage the news
stories, photos and graphics transmitted from Reuters to us. We pay a monthly
service fee for these news services. The agreement is for a period of two years.

Customized Content

In December 1999, we entered into an agreement with ScreamingMedia.Net,
Inc., a Delaware corporation for customized content for use on VCI's Virtual
Ireland, Virtual Italy and Virtual India communities. The agreement calls for
ScreamingMedia to supply us with news and information from a wide range of
content providers via ScreamingMedia's content engine technology that employs
custom filters created for each of its clients. In addition to a set-up fee, we
pay ScreamingMedia a monthly fee for the service. The term of the agreement is
one year, with automatic renewal for additional one-year periods unless
terminated by either party on 90 days written notice.

Currency Converter

In February 2000, we entered into an agreement with OANDA Corp. to have the
ability to create co-branded versions, for any of our communities, of its
currency converter software that enables users to access current foreign
exchange data and conversions. OANDA provides us with continual technical
support. Should OANDA fail to ensure continued functionality of the service, we
may terminate the Agreement upon 15 days' written notice. The Agreement is for a
period of two years.

Promotion and Loyalty Programs

In March 2000, we entered into an agreement with iQ.COM Corporation to
license their software, which enables the creation, targeting, distribution and
tracking of sales promotions and loyalty programs. IQ.COM also provides us with
free upgrades and support. Should we not be reasonably satisfied with the
performance of the software, we may terminate the agreement upon 30 days'
written notice. The agreement is for a period of one year with automatic renewal
for additional one-year terms unless terminated by either party upon 60 days
written notice.

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Chat Services

We have an agreement with Talk City, Inc., a California company that
provides supporting software that enables Web sites to offer chat services to
their users. Per the agreement, Talk City provides us with all necessary
facilities, servers, connectivity, related equipment and technology to host chat
rooms on our servers. Talk City is responsible for continuous coverage of the
chat rooms to ensure the enforcement of their Code of Conduct. Talk City is
responsible for selling and managing advertising on the chat room sites, however
we may also sell advertising but must pay a percentage of gross revenues
collected by us to Talk City. The agreement requires us to pay Talk City an
annual fee for our three online communities and up to an additional fifteen Web
sites. The term of the agreement is for one year starting June 17, 1999 and is
automatically renewed for additional one-year terms unless canceled on thirty
days notice by either party.

Weather Services

We have a license agreement with Accuweather, Inc., a Pennsylvania company
that provides online weather services. The agreement, as amended, requires that
Accuweather make available to us selected weather forecasts, satellite images
and other weather services for our three existing online communities, including
forecasts for cities of specific interest to each community and general weather
information for over 450 cities around the world. The term of the agreement is
for 18 months starting December 22, 1998, and Accuweather may terminate the
agreement on 30 days written notice in the event of a breach of the agreement by
us. We pay Accuweather a monthly fee for such services, but are entitled to 25%
of any revenues received by Accuweather from users of our Web sites who
independently subscribe for additional Accuweather services.

OnLine Bulletin Boards/Forums

We have a license from DiscusWare, LLC, for a popular freeware discussion
board software package called "Discus" which we use on our online communities.
Discus allows visitors to our communities to read and post messages. The license
permits us to modify the source code for our own use, however, this license may
not be resold or distributed.

Internet Camera

We have a non-exclusive, non-transferable license agreement with Perceptual
Robotics, Inc., an Illinois company that provides the software, maintenance and
support required to manipulate an interactive camera on the Internet. The
software allows up to twenty simultaneous users to control a telerobotic camera
and view panoramic images within Jerusalem. The license's term is for one year
starting September 3, 1998, for which we paid a flat fee excluding annual
software support and upgrades.

NT Server Licenses and Microsoft Office Software

We have licenses from Microsoft for the use of our Microsoft Office
software on PCs and the PCs of our subsidiaries' employees in the U.S. and
Israel. We also have access licenses from Microsoft for our Windows NT server
software, required for the operation of our computer servers on which our Web
sites and the Web sites of many of our content partners reside.

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Maven Index and Search Engine

We have an agreement with Matthew Album, an individual who developed a
comprehensive, proprietary database of over 12,000 Jewish related Web sites
known as the "Maven Index" which resides at www.maven.co.il. Per the agreement,
we provide Maven with technical, Web site design, hosting, marketing and e-mail
services and Mr. Album, in exchange, updates the Maven database regularly and
provides technical services required to operate the database. The term of the
agreement is three years starting March 9, 1998.

Sale of Online Communities

In accordance with the Company's restructuring in July 2000,the Company is
currently attempting to sell its five online communities: Virtual Jerusalem,
Virtual HolyLand, Virtual Ireland, Virtual Italy and Virtual India. For
accounting purposes, the online communities division is considered discontinued
operations. A brief description of each is provided below.

Virtual Jerusalem

Virtual Jerusalem, located on the Web at www.virtualjerusalem.com,
aggregates a variety of Jewish and Israel related content from the Web as well
as offering interactive features and services. This Web site includes a portal,
called the Maven Index, to over 10,000 Jewish related Web sites. Popular
elements include the Kotel Kam (an Internet zoom camera which transmits live
pictures of the Western Wall), "Send a Prayer to the Western Wall" (permitting
members to post a message online that is downloaded by us and placed in the
Western Wall) and "Time Travel Through Jerusalem" (which features multi-media
tours by historical figures). Virtual Jerusalem also contains a series of Jewish
Holiday Web pages with games, quizzes and a variety of educational content. The
Web site also offers members a range of community features and services
including forums, free e-mail, personal Web pages, interactive guest book,
global weather forecasts and classified advertisements. Virtual Jerusalem
contains several channels, each of which features topical content that is
updated daily. These Channels, and their descriptions, include: News, Travel,
Business, Torah (religious material), Living (sections on health and parenting,
books, films, Jews in sports, music, dance, humor, art, drama and
self-improvement) Food, History and Teens.

Virtual Ireland

Virtual Ireland, located on the Web at www.virtualireland.com, was launched
on Saint Patrick's Day 1999 and aggregates content from a variety of Irish Web
sites on the Internet. Virtual Ireland offers members a range of interactive
elements, community features and services including bulletin boards, free
e-mail, global weather forecasts, pen pals, video and audio files, a shopping
center and greeting cards. The Web Site also offers five Channels including:
News, Travel, Geneology, Business and the Craic (Entertainment).

In addition to using Irish related content from Screaming Media and
Reuters, the Company has agreements with several content partners for the use of
their content on Virtual Ireland. These partners include Appletree Press--
Ireland's Eye (one of Ireland's largest book publishers), WildIreland, IAIS
(Irish American Information Service), The Irish Emigrant (an Irish newspaper),

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Irishfood.com (a Web site featuring foods from Ireland), Irishradio.com,
Regional Media Bureau of Ireland (a publisher of 27 local Irish newspapers), The
Irish World Online, Gathering of the Irish (irishclans.com), Boston Irish Pub
and Restaurant Guide, CELT (Corpus of Electronic Texts).

Virtual HolyLand

Virtual HolyLand ("VHL"), located on the Web at www.virtualholyland.com,
was launched on Christmas Day 1998 and aggregates content from a variety of
Christian Web sites on the Internet. VHL offers visitors a wide range of
community features and services including chat rooms and forums, free e-mail,
personal Web pages, interactive guest book, global weather forecasts, classified
advertisements, virtual tours of Christian places of interest and a planned
online shopping experience. VHL also offers Channels featuring up-to-the-minute
news from Israel, Millennium-related activities, prayer, travel information and
interactive elements. These Channels include: Christian Life, Land of Promise,
Israel News, ZionTraveler, Prophesy, Christian Bookstore Online and Family.
Virtual HolyLand has agreements with several content partners, including Bridges
for Peace and the International Christian Embassy.

Virtual Italy

Virtual Italy, located on the Web at www.virtualitaly.com, was created on
Columbus Day in October 1999 and relaunched in April 2000. Virtual Italy offers
a variety of content and interactive elements targeted to persons interested in
Italian culture, the Italian American community in particular. In addition to
daily news and weather, Virtual Italy offers free email addresses and personal
homepages, greeting cards, chat rooms and forums, guest books, and quizzes. The
site's channels include: Today in Italy (News), Travel, Geneology, La Cucina
(Cooking) and Divertimenti (Entertainment).

Virtual India

Virtual India, located on the Web at www.virtualindia.com was introduced
during the Diwali Festival in November 1999 and places the latest news from the
India world alongside interactive elements that allow community members to
interact in a family safe environment. Virtual India is targeted to the Indian
American community and others interested in Indian culture and news. Virtual
India offers free email addresses and personal homepages, greeting cards, chat
rooms and bulletin boards, global weather reports, pen pal searches and games.
The site includes the following channels: News, Travel and Food. We recently
hired an Editor and editorial team to administer the Virtual India site and
enter into additional content partner agreements for use of content on the site.
The formal launch of Virtual India will occur in July 2000.

Trademarks

In April 1999, we filed five service mark applications with the Assistant
Commissioner for Trademarks in the United States for the following names and
designs used by us: Virtual Communities, Inc., Virtual Jerusalem, Virtual
HolyLand, Virtual Ireland and IsraelWire, together with designs for each of
them. In April 2000 the Company was issued certificates of registration for the
Virtual Jerusalem and Virtual Holyland service marks. The applications are
currently under review by the U.S. Trademark Office. These names and service
marks for these sites are currently used in our business. We intend to
file additional applications for other online communities and Web properties
that we may establish in the future, including an application for vjradio.com.
There is

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no assurance that we will be successful in obtaining approval of such
applications, and if obtained, of enforcing such service marks. We are aware of
the fact that there are a number of entities incorporated in a number of states
in the U.S. that currently use the name "Virtual Communities" and that at least
one such entity has filed an application for protection for such name, although
such entity provides somewhat different Internet services than we do. Our
management cannot assure you if and when the U.S. Trademark Office will rule on
such applications, or that such applications will ever be granted or
enforceable.

Technology Acquisitions

In February 2000, we entered into a Share Purchase Agreement ("SPA") with
Cortext Ltd., and the principal shareholders of Cortext, to acquire a majority
interest in the equity of Cortext Ltd., which was established in 1996. VCI
currently utilizes Cortext's Magazine Software pursuant to a License Agreement
with Cortext dated July 18, 1999 to manage content on several of the ethnic
communities published by VCI and as a central component of its Community
Management Solution (CMS) turnkey solution which it markets and licenses to
third party web publishers and uses for its own online communities.

Pursuant to the terms of the SPA, VCI was issued shares of Cortext so that
it currently holds approximately 60% of the outstanding shares of Cortext
following the payment of certain funds to and on behalf of Cortext.

Simultaneously with execution of the SPA, VCI and Cortext entered into an
Assignment Agreement with Planet Communications Ltd. ("Planet"), an Israel-based
unaffiliated third party holder of 50% of the rights in Cortext's software
whereby Planet agreed to irrevocably assign all of its rights, title and
interest in the Magazine Software to Cortext in consideration of VCI's payment
of a portion of the transaction consideration on behalf of Cortext and subject
to such third party's retaining the right to sell up to ten end user licenses.
Cortext agreed to provide Planet with certain upgrades and technical support
services in connection with such End User licenses if and when the same are
granted. The majority of the payments to Planet have been made and its
assignment of its rights to the Magazine Software has been effectuated.
Following the assignment of the rights by Planet, Cortext holds 100% of the
rights in and to the Magazine Software.

Concurrently with the execution of the SPA, Cortext also entered into long-
term employment agreements with its C.E.O. and C.T.O. and amended its By Laws.
Pursuant to the SPA, VCI has the right to name two members to Cortext's Board
and to name a majority of the Board upon the completion of its payments and
acquisition of shares in August 2000.

In July 2000, the Company entered into an Amendment to the SPA whereby it
agreed to fund further development of Cortext software for a period from July
through December 31, 2000 in consideration for the issuance of additional equity
to the Company. In addition, the Company entered into an agreement with the two
founders of Cortext Ltd. who are the CEO and CTO of Cortext, respectively, to
acquire an additional 20% of the equity of Cortext from them from August through
December 2000. In accordance with such agreements, the founders were issued
additional options to acquire up to five percent of the outstanding equity of
Cortext upon the vesting of the options over a three-year period.

The Company does not currently need any government approval for delivery of
its principal products or services nor does it expect such approval to be
required during the foreseeable future. The business of the Company is not

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materially affected by any governmental regulations nor does the Company expect
to be subject to any special regulations during the foreseeable future, however
there can be no assurance in this regard. The Company has not expended any
material amounts of money on research and development activities during the past
two fiscal years. The Company has not incurred any material expenses or costs
with respect to compliance with environmental laws (federal, state and local).

Employees

As of August 15, 2000, we, together with our Israeli subsidiaries, Virtual
Communities Israel Ltd. and V.C.I. Internet Properties Ltd., employed [106]
full-time employees, [68] of whom are located in Virtual Communities Israel,
Ltd.'s offices in Jerusalem, Israel, 1 of whom are located in V.C.I. Internet
Properties, Ltd.'s offices in Eli, Israel, [38] of whom are based in our offices
in New York, New York and 3 who are based in Los Angeles. Over the next several
months, we may retain additional software development persons for Virtual
Communities Israel, Ltd.'s Jerusalem office and additional persons for our New
York office where such personnel will be engaged in sales and marketing.

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EXECUTIVE COMPENSATION

The table below provides information concerning the annual and long-term
compensation for services rendered during the year ended December 31, 1999 by:

Summary Compensation Table

Long-Term
Compensation
Annual Compensation Awards
-------------------------- ---------------------------
Name and Year Salary Bonus Options Other
principal position Compensation
------------------------------------------------------------------------------
Avi Moskowitz 1999 $150,175(1) $ 0 748,150(3) $34,901(2)
Chairman of the Board 1998 $104,950 $ 0 439,682(4) $17,900
President and CEO 1997
And Chairman

Gregory Zink 1998 $97,500
Former Acting CEO 1997 $40,000(5)

Steven Gumins (6) 1997 $68,750 $50,000(8)
Former CEO

Deborah Griffin (7) 1997 $64,516 $50,000(8)
Former COO

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

(1) Mr. Moskowitz's compensation for 1999 was received pursuant to two separate
agreements, as follows: A. an employment agreement, effective as of January 1,
1998, between Mr. Moskowitz and Virtual Communities Israel Ltd. This employment
agreement was terminated in May 1999. B. an employment agreement, effective as
of June 1, 1999, between Mr. Moskowitz and Virtual Communities Inc.

(2) Includes: $5,000 in the form of the use of a company automobile and related
expenses; $3,798 in the form of life insurance premium; $2,890 in the form of
amounts paid by Virtual Communities Israel Ltd. for "Managers Insurance", a type
of pension, insurance and severance fund commonly offered by Israeli employers;
and $1,016 in the form of supplemental health insurance and holiday gifts. In
1999, Mr. Moskowitz received, in part for services rendered to Virtual
Communities Israel Ltd. during 1999, $22,197 in the form of reimbursement for
vacation time not taken since 1997.

(3) Represents 230,200 shares of common stock underlying options granted to Mr.
Moskowitz in 1999.

(4) Represents 278,542 shares of common stock underlying options granted to Mr.
Moskowitz in 1997, and 161,140 shares of common stock underlying warrants
issued, to Mr. Moskowitz in 1998.

(5) Amounts paid for consulting services.

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

(7) In December, 1996, the Company entered into a three-year employment
agreement with Ms. Griffin. The agreement provided for a base annual salary of

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$150,000 and bonuses at the discretion of the Board. Ms. Griffin resigned as
Chief Operating Officer in May 1997.

(8) Represents severance payment.

Option Grants

The following table provides information regarding warrants issued during
the year ended December 31, 1999 to officers of the Company. Virtual
Communities, Inc. has never granted stock appreciation rights.
<TABLE>
<CAPTION>

Option Grants in Last Fiscal Year Individual Grants
---------------------------------------------------------
Percent of Total
Options Granted to
Employees
Number of (net of forfeitures)
Securities in Fiscal Exercise
Underlying Year Ended Price Per Share Expiration
Name Options Granted December 31, 1999 ($/Share) Date
---- --------------- ----------------- --------- ----

<S> <C> <C> <C> <C>
Avi Moskowitz............ 230,200(1) 13.1%(2) $2.10 June 30, 2004

Michael Harwayne......... 115,100(3) 6.5%(4) $0.81 March 2, 2004
50,000(5) 2.8%(6) $3.62 Nov. 10, 2004

Deborah Gaines........... 86,325(7) 4.9%(8) $2.10 Oct. 25, 2004
</TABLE>

(1) These options were issued pursuant to the Company's employment agreement
with Mr. Moskowitz entered into in June 1999.

(2) Based on an aggregate of 1,757,428 options and warrants issued (net of
forfeitures) to employees in the year ended December 31, 1999, including options
issued to Mr. Moskowitz.

(3) These options were issued under the Company's 1999 ISOP upon Mr. Harwayne's
joining the Company in March 1999. A third of these options vest over a three-
year period commencing on the first anniversary of the date of their grant.

(4) Based on an aggregate of 1,757,428 options and warrants issued (net of
forfeitures) to employees in the year ended December 31, 1999, including options
issued to Mr. Harwayne.

(5) These options were awarded based on Mr. Harwayne's performance in accordance
with his employment agreement with the Company.

(6) Based on an aggregate of 1,757,428 options and warrants issued (net of
forfeitures) to employees in the year ended December 31, 1999, including options
issued to Mr. Harwayne.

(7) These options were issued under the Company's 1999 ISOP upon Ms. Gaines'
joining the Company in October 1999. A third of these options vest over a three-
year period commencing on the first anniversary of the date of their grant.

(8) Based on an aggregate of 1,757,428 options issued (net of forfeitures) to
employees in the year ended December 31, 1999, including options issued to Ms.
Gaines.

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Fiscal Year End Option Values

The following table provides information concerning unexercised options held
by officers as of December 31, 1999. None of the officers exercised any options
during the year ended December 31, 1999.

Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values

Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End(1)
----------------------------- -------------------------

Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- -------------------------

Avi Moskowitz..... 185,676 (2) 323,066 (2) $603,447 $1,049,964
161,140 (3) 0 (3) $523,705 0
23,018 (4) 11,512 (4) $74,808 $37,414

Michael Harwayne.. 0 (5) 165,100 (5) 0 $536,575

Deborah Gaines.... 0 (6) 86,325 (6) 0 $280,506
---------

(1) Assumes a market price for the Common Stock of the Company at December 3l,
1999 of $3.25 per share.

(2) Represents 508,742 shares of the Company's Common Stock underlying options
held by Mr. Moskowitz as of December 31, 1999. 278,542 options are exercisable
at $.40 per share and 230,200 options are exercisable at $2.10 per share.

(3) Represents 161,140 shares of the Company's Common Stock underlying warrants
held by Mr. Moskowitz as of December 31, 1999. 115,100 warrants are exercisable
at $1.00 per share and 46,040 warrants are exercisable at $.65 per share.

(4) Represents 34,530 shares of the Company's Common Stock underlying options
held by Helen Moskowitz, wife of Avi Moskowitz, as of December 31, 1999. The
options are exercisable at $.65 per share.

(5) Represents 165,100 shares of the Company's Common Stock underlying options
held by Mr. Harwayne as of December 31, 1999. 115,100 options are exercisable at
$.81 per share and 50,000 options are exercisable at $3.62 per share.

(6) Represents 86,325 shares of the Company's Common Stock underlying options
held by Ms. Gaines' as of December 31, 1999. All the options are exercisable at
$2.10 per share.

DIRECTORS COMPENSATION

None of our directors receive cash compensation, however, directors receive
expense reimbursement for services provided as a director, including attendance
at meetings of the Board of Directors or at meetings of committees of the Board
of Directors of which they are members. David Morris was reimbursed by the
Company for travel and lodging in the amounts of $6,626 in 1999.

Directors are entitled to receive options pursuant to the Company's Stock

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Option Plans.

In February 1997, we entered into a consulting agreement with Mr. Seybold,
the Company's former Chairman and a current director, pursuant to which he
received five-year options to purchase 6,000 shares of common stock. All of such
options are exercisable at $5.00 per share commencing one year from the date of
grant. Under the same consulting agreement, Mr. Seybold received 10,000 five-
year options exercisable at the market price at February 11, 1998 ($2.25), for
remaining Chairman of the Board for 1998.

In February 1997, we also granted options to purchase 1,000 shares of our
common stock at an exercise price equal to the fair market price of our common
stock on the date of the grant ($5.00) to each of William Blase, M. Caroline
Martin, Allan Dalfen, Brian Wasserman, Kenneth W. Krugler and Gregory L. Zink,
who was also President of the Company from inception in 1994 until the Company's
merger with VCI in October 1999. Such options are exercisable until October 29,
2001. As of March 31, 2000, Mr. Blase had exercised 8,000 options.

In April 1998, we granted options to purchase 10,000 shares of our common
stock at an exercise price equal to the fair market value of our common stock on
the date of the grant ($.875) to each of William Blase, M. Caroline Martin,
Allan Dalfen, Brian Wasserman and Kenneth W. Krugler. Such directors each vested
a total of 6,000 of their options prior to the Company's merger with VCI in
October 1999. Such options are exercisable until October 29, 2001. On such date,
we also granted options to purchase 10,000 shares of our Common Stock at an
exercise price equal to the fair market value of our common stock on the date of
the grant ($.875) to Theodore Lanes, who served as our Chief Financial Officer
until the Company's merger with VCI in October 1999. Such options are
exercisable until October 29, 2001.

In April 1999, we also granted options to purchase 22,500 shares of our
common stock to each of Messrs. Lanes and Zink at an exercise price equal to the
fair market value of our common stock on the date of the grant ($1.00) in
consideration for their services to the Company from April 1, 1999 through June
30, 1999. Such options are all exercisable until October 29, 2001. As of March
31, 2000, Mr. Lanes had exercised all of his options. In April 1999, the Company
also issued options to purchase 2,000 shares of our common stock at $1.50 per
share to each of William Blase, M. Caroline Martin, Allan Dalfen, Brian
Wasserman and Kenneth W. Krugler, former directors of the Company. Such options
are exercisable until October 29, 2001.

On September 10, 1999, Mr. Zink was granted options to purchase 30,000
shares of our common stock at $4.3125 per share as compensation for services
from July 31, 1999 through the consummation of the merger on October 29, 1999.

In January 1998, Virtual Communities, Inc. granted to each of David Morris,
Sonja Simon and Peter A. Jacobs options to purchase 57,550 shares of our common
stock pursuant to the 1998 Stock Option Plan, exercisable at a price equal to
$0.65 per share. These options vest in equal amounts over three years.

In September 1999, David Morris was granted an additional option to
purchase 57,550 shares of our common stock pursuant to the 1999 Stock Option
Plan in consideration for financial consulting services provided to Virtual
Communities, Inc. since 1997.

In September 1999, Avi Moskowitz was granted an additional five-year option
to acquire 230,200 shares at $2.10 per share upon entering into an employment

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agreement with the Company.

In November 1999, the Company granted five-year options which vest over a
three- year period into 50,000 shares of our common stock to each of Jonathan
Seybold and Alan Dalfen, members of the Board prior to the merger with VCI in
October 1999, and Robert Levenson and Fred Lafer, two then-newly elected members
of the Board. The options are exercisable at a price of $3.69 per share.

Employment Agreement

In June 1999, Virtual Communities, Inc. entered into an employment
agreement with Avi Moskowitz, our President and Chief Executive Officer. The
agreement is for an initial three-year term, which will extend automatically
unless either party gives written notice at least 90 days prior to the end of
the initial term. If the agreement is automatically renewed, it will continue
until terminated by either party pursuant to the agreement. Mr. Moskowitz
receives an annual base salary of $182,700 (subject to change at the discretion
of the Board of Directors), and will be eligible to receive annual bonuses as
may from time- to-time be awarded by the Board of Directors. The agreement
entitles Mr. Moskowitz to incentive stock options to purchase 230,200 shares of
our common stock, which options vest over three years and are subject to the
1999 Stock Incentive Plan and a related option agreement, and provides that Mr.
Moskowitz is eligible for such other options as may be granted by the Board of
Directors.

Mr. Moskowitz is also entitled to other benefits including the use of an
automobile and life insurance, and is entitled to participate in benefit plans
that may be established by us. During the term of his employment and for one
year thereafter, Mr. Moskowitz is prohibited from engaging in any business
competitive with us. The agreement also imposes confidentiality and assignment
of work product obligations on Mr. Moskowitz. In the event the agreement is
terminated due to Mr. Moskowitz's death, for 6 months following his death we are
obligated to pay the premiums for any continuation coverage for Mr. Moskowitz's
immediate family pursuant to the Consolidated Omnibus Budget Reconciliation
Act("COBRA"). In the event the agreement is terminated because Mr. Moskowitz
becomes permanently disabled, for 6 months following such termination we are
obligated to pay the premiums for any continuation coverage for Mr. Moskowitz
and his immediate family pursuant to COBRA. At any point during the term of the
agreement, we are able to terminate Mr. Moskowitz "without cause" (as defined in
the agreement) upon 12 months notice, provided Mr. Moskowitz receives his
compensation during the notice period. At any point during the term of the
agreement, Mr. Moskowitz is able to terminate the agreement for "good reason"
(as defined in the agreement), and we will be obligated to pay Mr. Moskowitz's
compensation as if Mr. Moskowitz had been terminated by us without cause.

Pursuant to a separate arrangement, Virtual Communities, Inc. reimbursed
Mr. Moskowitz for $10,000 of the expenses he incurred in moving his family from
Israel to the New York City area.

In February 1999, the Company entered into an employment agreement with
Michael Harwayne to serve as the Company's Vice President of Business
Development and Marketing. In February 2000, he was appointed Chief Operating
Officer. Pursuant to the terms of the agreement, Mr. Harwayne received a salary
of $90,000 per annum for the first four months of the term which amount
increased to $125,000 per annum thereafter. Mr. Harwayne was also granted an
option to acquire up to 100,000 shares of Common Stock of Virtual Communities,
Inc. under the Company's Incentive Stock Option Plan at the fair market value of

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<PAGE>

the shares at the date of grant for an exercise price of $.81 per share. One
third of such shares vest on each of the first three anniversaries of the date
of Mr. Harwayne's employment. Subject to approval by the Company's Board of
Directors, Mr. Harwayne was also entitled to acquire options exercisable into an
additional 100,000 shares of Common Stock at an exercise price equal to the then
fair market value of the Common Stock of the Company on the date of grant of the
option in the event he reaches certain performance targets as determined by the
Company. 50,000 of such options were granted to Mr. Harwayne in November 1999
and the remaining 50,000 options were granted by the Company in February 2000
when he was promoted to Chief Operating Officer of the Company. Either party may
terminate the Employment Agreement for any reason or without cause, provided
that Mr. Harwayne provides notice in writing no less than sixty (60) days prior
to the effective date of such termination or the Company submits to him notice
in writing no less than ninety (90) days prior to the effective date of such
termination. The agreement contains confidentiality provisions and Mr. Harwayne
has undertaken that he will not engage in a competing business anywhere in the
world during the term and for a period of twelve (12) months thereafter.

In October 1999, the Company entered into an employment agreement with
Deborah Gaines to serve as the Company's Editorial Director. In January 2000,
Ms. Gaines was promoted to Vice President of Content Services. Pursuant to the
terms of the agreement, Ms. Gaines received a salary of $90,000 per annum for
the first four months of the term which amount increased to $95,000 per annum
thereafter. Upon her appointment as a Vice President, Ms. Gaines' salary
increased to $125,000 per annum. Ms. Gaines was also granted an option to
acquire up to 75,000 shares of Common Stock of Virtual Communities, Inc. under
the Company's Incentive Stock Option Plan at the fair market value of the shares
at the date of grant for an exercise price of $2.10 per share. One third of such
shares vest on each of the first three anniversaries of the date of Ms. Gaines'
employment. Either party may terminate the Employment Agreement for any reason
or without cause, provided that Ms. Gaines on notice in writing no less than
sixty (60) days prior to the date of such termination. Ms. Gaines' agreement
contains confidentiality provisions and she has undertaken that she will not,
directly or indirectly, on her own behalf or in the service or on behalf of
others, engage in or be involved in any competing business anywhere in the world
during the term and for a period of twelve (12) months thereafter.

In June 2000, the Company entered into an employment agreement with Arthur
Dubroff to serve as the Company's Chief Financial Officer. Pursuant to the terms
of the agreement, Mr. Dubroff receives a salary of $175,000 per annum. Mr.
Dubroff was also granted an option to acquire up to 200,000 shares of Common
Stock of the Company under the Company's 1999 Incentive Stock Option Plan
exercisable at $1.50 per share, the fair market value of the Common Stock at the
date of grant. One third of such shares vest on each of the first three
anniversaries of the date of Mr. Dubroff's employment and are exercisable for a
period of ten years. Mr. Dubroff was also granted an option to acquire an
additional 100,000 shares of Common Stock (the "Additional Options"), at the
same exercise price under the Company's 1999 VCI Stock Option Plan. The
Additional Options vests and becomes exercisable over a seven-year period, with
one-seventh of the Additional Options to vest and become fully exercisable on
each of the first through seventh consecutive anniversaries of the date the
agreement with Mr. Dubroff. Notwithstanding the same, the vesting of the
Additional Options will be accelerated, whereby one-third of the Additional
Options shall vest and become fully exercisable on each of the first, second and
third consecutive anniversaries of the date of the agreement upon Mr. Dubroff's
achievement by January 1, 2001, with respect to one-half of the Additional
Options, and his achievement by June 15, 2001, with respect to the balance of
the Additional Options, of certain

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performance targets to be established by the Board of Directors and accepted by
Mr. Dubroff. Once vested, the Additional Options are exercisable for a period of
ten years. Each stock option agreement provides that Mr. Dubroff will have up to
two years following his termination of employment with the Company, for any
reason, prior to the end of the ten-year option term, to exercise his stock
options. Either party may terminate the Employment Agreement for any reason or
without cause, provided that in the event of a change in control of the Company
or termination by VCI other than for cause, the Company will pay Mr. Dubroff a
severance fee equal to one year's salary based on his then current salary on the
date of termination. Mr. Dubroff has also entered into a Confidentiality
Agreement with the Company.

In July 2000, the Company entered into a retention agreement with Ms.
Gaines in connection with the Company's restructuring and its intention to sell
its online communities. Pursuant to the agreement, Ms. Gaines was guaranteed her
current rate of employment by the Company through November 1, 2000 unless she is
earlier employed by an entity that acquires control of one or more of the ethnic
communities, in which case she will be guaranteed employment by the Company
until she commences her employment with such entity. In addition, Ms. Gaines was
granted a "stay bonus" equal to six months salary at her current rate of pay
which is equal to the sum of $62,500, which stay bonus shall be payable to her
in cash in a lump sum on the earlier of a) her termination by the Company; b)
the sale by the Company of its ethnic online communities and c) January 2,
2001.

In addition to the above cash payment, Ms. Gaines will also be entitled to
(i) an incentive bonus equal to 1 percent (1%) of the sales price received or to
be received by VCIX in exchange for all or any portion of the communities sold
during the period between now and June 30, 2001, payable in cash within ten (10)
business days of the consummation of the sale transaction(s) and the receipt of
proceeds therefrom or from the Company's eventual receipt of proceeds therefrom;
plus (ii) if at any time VCIX decides for any reason to continue owning or
operating any of the communities which are currently contemplated to be sold,
within 10 business days following such decision, Ms. Gaines will receive a cash
bonus equal to $50,000 minus any amounts received, regardless of whether or not
she remain employed by VCIX. In the event that VCIX is unable to sell all or any
portion of the communities and ceases operations of the communities prior to
January 1, 2001, Ms. Gaines will not be entitled to any incentive bonus. Ms.
Gaines will be entitled to exercise options granted to her under the Company's
Incentive Stock Option Plan that have vested as of the date of her termination
for a period of one year from the date of her termination and will be entitled
to the continuation of her health plan coverage in the form currently provided
to her by the Company for a period of six months from the date of her
termination unless she is retained by an entity that acquires one or all of the
Company's online communities.

Stock Option Plans

In connection with the signing of the merger agreement, substantially all
of the option holders of the predecessor Company (HDG) signed agreements not to
dispose of their securities for a period of 180 days after the consummation of
the merger. In connection with the merger, our board of directors and
stockholders approved a new 1999 stock incentive plan.

Prior to the merger, VCI had adopted a 1997 Stock Option Plan, 1998 Stock
Option Plan and 1999 Stock Option Plan (the "VCI Plans"). The Company assumed
the VCI Plans, and all outstanding options under them, and the compensation
committee of our Board is the administrator of the VCI Plans as well as the

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Company's original plan.

Each plan has terms substantially similar to the other. The purpose of each
plan is to provide an incentive to employees, directors and consultants of our
company and our subsidiaries, and to offer additional inducement in obtaining
the services of such persons. The VCI Board of Directors adopted the 1997, 1998,
and 1999 plans on May 20, 1997, December 13, 1998, and April 28, 1999,
respectively. The shareholders of VCI approved the 1997 plan on May 20, 1997,
and the 1998 and 1999 plans in September 1999.

Each plan provides for the grant of both incentive stock options and non-
qualified stock options. The 1997 and 1998 plans limit the number of shares of
common stock subject to options granted under the plan to any one employee
during any one calendar year to 250,000. The 1999 plan originally set this limit
at 100,000, but was amended and restated to increase this limit to 300,000
shares.

VCI reserved 835,626 shares of common stock for issuance under its 1997
plan, 603,124 shares for issuance under its 1998 plan and 1,151,000 shares for
issuance under its amended and restated 1999 plan. As of August 15, 2000,
options for 2,085,411 shares were granted and outstanding, options for [504,339]
shares were available for grant, and [144,326] options had been exercised. In
addition, at our Annual Meeting held in October 1999, our shareholders approved
a 1999 Incentive Stock Option Plan and reserved for issuance 1,000,000 shares
under the Plan. Due to significant hiring of employees by the Company and the
Company's use of incentive options to attract qualified personnel during Q4 1999
and Q1 2000, the Company's Board of Directors increased the number of shares
reserved for issuance under our 1999 Plan by 1,000,000 for a total of 2,000,000
shares which increase was ratified by the Company's stockholders at its June
2000 Annual Meeting of Stockholders. As of August 15, 2000, options for
[1,479,516] shares were granted and outstanding under the plan, options for
[520,484] shares were available for grant and no options had been
exercised.

The total number of shares exercisable from options granted under all the
plans is [3,564,927] shares. As of August 15, 2000, options totaling
approximately [904,000] shares have vested.

Each plan is administered by a Board committee thereof subject to the
provisions of each plan, the plan administrator has the authority to determine
which eligible persons shall receive grants, the time of grant, the type of
grant and the number of shares underlying the options, the term of the options,
the vesting schedule and other option terms.

The exercise price for options granted under the plans is to be determined
by the plan administrator. However, the exercise price of all incentive stock
options must be at least equal to the fair market value of the underlying shares
on the date of grant. With respect to any optionee who owns capital stock
possessing more than 10% of the voting power of all classes of stock, the
exercise price of any incentive stock option must be not less than 110% of the
fair market value of the underlying shares on the date of grant. Each plan
provides for cashless exercise.

The plan administrator establishes the term of each option granted pursuant
to the plans. The maximum term, however, for incentive stock options is ten
years. With respect to any incentive stock option granted to an optionee who
owns capital stock possessing more than 10% of the voting power of all classes

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of stock, the maximum term is five years. Options are subject to earlier
termination as provided in the plans.

Options are exercisable at such times and in such installments as the plan
administrator provides in the terms of the individual option agreement. Subject
to the terms of the plans, an optionee shall not have the rights of a
shareholder until the date of issuance of a stock certificate to the optionee
for the shares underlying the exercised option.

Except as provided in the individual option agreement, any optionee whose
relationship with us has terminated for any reason other than death or
disability may exercise his or her options (if otherwise exercisable) for 3
months following the date of termination if the employee optionee has resigned,
or for one year following the date of termination if the employee optionee is
terminated by us, or the optionee is our director or consultant. If, however,
such relationship is terminated by us for cause or without our consent, the
optionee's options terminate immediately. With respect to non-employee
directors, except as provided in the individual option agreement, a non-employee
director optionee whose directorship with us has terminated for any reason other
than death or disability may exercise his or her options (if otherwise
exercisable) for three months following the date of termination. If such
directorship is terminated for cause, the options terminate immediately.

The plans also provide that in the event of the death or disability of an
optionee, such optionee (or the optionee's representative) is entitled, under
the appropriate circumstances, to exercise their options (if otherwise
exercisable) for up to one year from the date of death or termination due to
disability.

In the event of a stock dividend, recapitalization, certain mergers, split-
up, combination or exchange of shares or similar corporate event which results
in a change in the number or kind of our shares of common stock, the aggregate
number and kind of shares subject to options under the plans and the related
exercise price shall be adjusted accordingly. In the event of "corporate
transactions" or a "change in control" (as defined in the plans), or upon our
dissolution, an optionee's vesting rights under the plans are accelerated.

With respect to the 1997, 1998 and 1999 plans, no option may be granted
after May 31, 2007, December 31, 2001 and December 31, 2001, respectively. Each
plan may be terminated or amended by the Board of Directors generally without
shareholder approval. However, shareholder approval is required for certain
types of amendments as provided in the plans. No termination or amendment of the
plans may be made that adversely affects the rights of an existing option
holder, without such person's consent. Options granted under the plans may not
be transferred other than by will or pursuant to the laws of descent and
distribution.

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

The following description of our financial condition and results of
operations should be read in conjunction with the information included in this
prospectus. The description contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ significantly from the
results discussed in the forward-looking statements.

Overview

VCI also publishes proprietary online communities:
virtualjerusalem.com, virtualholyland.com, virtualireland.com,
www.virtualitaly.com and virtualindia.com, which were developed by the Company
between 1996 and 1999 and are designed to create a comprehensive Web environment
targeted to specific demographic profiles. In July 2000, the Company implemented
a restructuring of its business activities to focus primarily on developing and
marketing software for Web development and site management. In line with this
new strategy, the Company announced its intention to sell these communities. The
Company is currently seeking to enter into a transaction(s) that would transfer
partial or complete ownership of these communities. It has also restructured its
Internet technologies division to focus on further development of Cortext
software. As a result of this restructuring, the Company reduced its editorial
staff located in its New York and Jerusalem offices by 50%.

As part of the restructuring, the Company terminated most of its marketing
agreements related to the online communities and also eliminated several

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technical, marketing and administrative staff positions that supported the
online communities and CMS operations in New York. It has also shifted certain
technical and administrative functions from its New York offices to VCIL, its
Israeli subsidiary, to achieve efficiencies. Following the restructuring, the
Company employs 105 persons worldwide compared to approximately 155 employees
prior to the restructuring.

In connection with the restructuring of its operations the Company
established a VCIX 2000 Corporate Reorganization Severance Plan (the "Plan"),
effective as of July 24, 2000. The Plan was established to offer eligible
employees of the Company who suffer an involuntary termination of employment, as
a result of the restructuring, the option to elect to receive severance pay and
additional benefits. The Plan is intended to constitute an "employee welfare
benefit plan" under Section 3(1) of the Employee Retirement Income Security Act
of 1974, as amended.

In connection with the restructuring, the Company also enacted a Retention
Plan to retain members of the editorial staff of the communities for the purpose
of ensuring that the communities continue to be operated in an effective manner
until such time as the Company sells them or until such time as operations are
terminated.

We believe that continued enhancement of the Cortext Web development and
site management software and commencement of marketing efforts for Cortext
software are essential to achieving our financial goals. While we have
significantly reduced expenditures in operations such as online communities and
CMS, we anticipate increases in cost of Cortext related revenues, marketing and
administrative expenses as we focus on the continued development of the Cortext
software and commence marketing activities for the same. To the extent that such
expenses significantly precede or are not subsequently followed by revenues from
sales of the Cortext software, our business, financial condition and operating
results will be materially adversely affected.

HISTORICAL RESULTS OF OPERATIONS

Historical Comparison of Years Ended December 31, 1999 and 1998 and Six
Months Ended June 30, 2000 and 1999. All of the following results give effect to
our restatement of results for all prior periods reflecting our discontinued
operations, as discussed below

Revenue

Total revenues for the fiscal years ended December 31, 1998 and 1999 were 0
and $165,000, respectively, and for the six months ended June 30, 1999 and June
30, 2000 were $0 and $627,000, respectively. Revenues during the first half of
1999 were generated exclusively from our Online Communities and are reflected in
Discontinued Operations. CMS Services revenues commenced in the third quarter of
1999.

CMS Services are considered, for accounting purposes, software products and
technology, and therefore, revenue from the sale of CMS Services is recognized
in accordance with Statement of Position (SOP) 97-2, as amended by SOP 98-4 and
SOP 98-9. Therefore, revenue is recognized upon delivery, when collection is
probable, the fee is fixed and determinable, vendor-specific objective evidence
exists to allocate the total fee to the elements of the arrangement and
persuasive evidence of an arrangement exists. Revenue for maintenance and
support services are deferred and recognized ratably over the service
period.

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For the fiscal year ended December 31, 1999, and for the six months ended
June 30, 2000, CMS Services accounted for all revenues, giving effect to
accounting treatment for our discontinued operations. This revenue was generated
in its entirety from one and two CMS customers, respectively. To date, VCI has
entered into four CMS agreements.

Cost of Revenues

Cost of revenues consists primarily of salaries of the CMS and Cortext
support teams and licensing fees for software licensed by the Company for use in
the CMS system. Costs of Revenues for the six months ended June 30, 2000 were
$1,316,000. No comparable Cost of Revenues were incurred during the six months
ended June 30, 1999 since we entered the CMS and Cortext business in the third
quarter of 1999. Cost of Revenues for the year ended December 31, 1999 were
$378,000. No comparable Cost of Revenues were incurred during the year ended
December 31, 1998.

Research and Development

During the six months ended June 30, 2000, the Company recorded $665,000 in
research and development expenses in conjunction with the Company's development
of compatible software for the Cortext Web development and site management
software licensed to the Company and used by it as the central component of its
CMS system and in licensing third parties for use of the Cortext software. No
Research and Development expenses were incurred during the six months ended June
30, 1999.

Sales and Marketing

Selling and marketing expenses consist of salaries, travel expenses for
sales and marketing staff and marketing expenses incurred in promoting CMS
Services and Cortext. Selling and Marketing expenses incurred during the six
months ended June 30, 2000 amounted to $727,000. No Selling and Marketing
expenses were incurred during the six months ended June 30, 1999 since CMS and
Cortext sales activities were not initiated until the third quarter of 1999.
Selling and Marketing expenses incurred during the fiscal year ended December
31, 1999 amounted to $79,000. No Selling and Marketing expenses were incurred
during the fiscal year ended June 30, 1998.

General and Administrative

General and administrative expenses consist primarily of salaries and legal
and professional services. In addition, our rent, utilities and administrative
employee benefits are included in general and administrative expenses. General
and administrative expenses amounted to $1,800,000 and $891,000 for the six
months ended June 30, 2000 and 1999, respectively. This increase was primarily
due to increased hiring of personnel; expansion of office space; and, increased
use of support services related to the expansion of CMS operations and Cortext
development. In addition, legal fees increased significantly for work related to
special projects and new contract formation. General and administrative expenses
amounted to $2,108,000 and $872,000 for the fiscal years ended December 31, 1999
and 1998, respectively.

Discontinued Operations

We recently announced our intention to sell the Online Communities. The
financial statements all periods presented have been restated accordingly.
Losses from Discontinued Operations were $2,721,000 and $649,000 for the six
months ended

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June 30, 2000 and 1999, respectively. The overall increase in reported losses
reflects a significant expansion in the scope of the Online Communities. Four of
the five communities were completely redesigned and relaunched during the six
months ended June 30, 2000. Increased personnel costs were incurred as the sites
added functionality and features. Marketing expenses also expanded significantly
during the first half of 2000 compared to the first half of 1999 to coincide
with the launch of the new, expanded sites, resulting in a significant increase
in registered users and traffic to the Online Communities. The loss from
Discontinued Operations for the six months ended June 30, 2000 also reflects the
severance and retention costs associated with the discontinued operations.
Losses from discontinued operations for the year ended December 31, 1999 and
1998 were $2,364,000 and 371,000, respectively.

Liquidity and Capital Resources

Prior to 1999, we funded our operations, working capital needs and capital
expenditures primarily through private placements of our common stock, and the
issuance of short-term convertible loans and notes.

In February 1999, we received $815,000 in net proceeds from the sale of
9,550 shares of our series A preferred stock. At the same time we issued 5,000
shares of our series A preferred stock upon the conversion of a $500,000
convertible secured promissory note issued by us on December 31, 1998. Between
June and September 1999, we received net proceeds of $874,000 from the sale of
10,325 shares of our series B preferred stock.

On December 14, 1999, we received a total of $985,400 for the private
placement sale to accredited investors of 400,000 shares of restricted common
stock and a three-year warrant, exercisable for 40,000 shares of common stock at
a purchase price of $2.46 per share. We made the private placement offering
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"). The terms of the offering provided for issuance of the restricted common
stock at a purchase price equal to 35% below the market valuation of our
publicly traded common stock and the issuance of a warrant exercisable for the
purchase of one share of common stock for each ten shares purchased. The
warrants become exercisable six months after the date of issuance.

During the first quarter of 2000, the Company issued 981,864 shares of
common stock at prices per share ranging from $2.11 to $3.42 to 12 individuals
and entities, including three existing non-U.S. shareholders of the Company, for
aggregate gross proceeds of $2,524,000. In connection with the issuance of
468,098 of such shares to three existing shareholders of the Company, the
Company issued three-year warrants to acquire a total of 46,808 shares of common
stock at exercise prices ranging from $2.11 to $2.75. The Company paid
consultant and finders fees related to this financing in the form of three-year
warrants exercisable into 108,762 shares of common stock at exercise prices
ranging between $2.11 and $3.42 per share.

73
<PAGE>

c) 36,246 warrants exercisable for three years at $5.80 per share to Josephthal
& Company d) and 2,000,000 callable warrants which were cancelled in July
2000.

In June 2000, the Company borrowed $1,000,000 from an institutional
investor in the IFSC financing. The loan and interest thereon was due on July
27, 2000 or could be convertible, at the holder's option, into securities of the
Company. The loan was converted into Series C Preferred Stock and warrants of
the Company in July 2000.

The Company maintains an operating line of credit with Israel General Bank
in the amount of $560,000. As of June 30, 2000, the amount outstanding on this
line of credit totaled $549,000. Israel General Bank has also provided us with a
$58,000 guarantee for three months rent on the leaseholds occupied by Virtual
Communities Israel, Ltd. The credit line is currently due and payable. The
company is currently renegotiating the continued effectiveness of this credit
line for an additional six month period, however there can be no assurance of
the outcome of such negotiations. If the credit line is not continued by the
bank and the Company is unable to obtain a replacement credit facility, the
Company's obligation to repay the current outstanding amounts due and the
absence of a credit line would have a material adverse effect on the Company's
operations.

In July 1999, we entered into a five-year lease for approximately 5,000
square feet of office space in New York City for a rental fee of approximately
$22,500 per quarter. In October 1999, we exercised our option to lease an
additional 5,000 square feet of office space in the same building for a five-
year term at a monthly rental of approximately $8,250.

As a result of our July 2000 restructuring we have terminated our lease for
such additional space, in return for which we received a rebate on the remaining
space for a period of 8 months. In June 1999, Virtual Communities Israel, Ltd.,
("VCIL"), one of our Israeli subsidiaries, entered into a three-year lease for
approximately 10,000 square feet of office space in Jerusalem for approximately
$45,000 in quarterly leasehold costs which payments commenced in December 1999.
In January and March 2000, VCIL exercised options for additional space that
serves primarily as the Company's software development, programming and
communities design center. Total leasehold costs for the new space are
approximately $165,000 per year. In addition, the lessor of the new Jerusalem
premises is contributing $234,000 in build out costs that VCIL is obligated to
repay over the course of the lease term. We intend to sublet the majority of
this additional space in the near term as a result of our restructuring. In
January 1999, VCIL entered into a three-year lease for approximately 3,800
square feet of office space in Jerusalem which it vacated upon our move to new
premises in August 1999 and which it intends to sublet upon vacancy of the
current sub-lessor in July 2000. Although VCIL believes that it will be able to
continue to sublet such space, our management cannot assure you that it will be
successful in doing so, and in the event such space cannot be sublet, we would
be obligated to pay approximately $15,000 in quarterly leasehold fees in
addition to the lease costs for our new premises until December 2001.

Given our recently announced change in strategic direction to focus on the
licensing of Cortext technology, we anticipate that future capital expenditure
levels will be significantly less than previous expenditure levels.

In March 2000, the Company entered into a finance lease agreement with
Microtech Leasing Corp., a Princeton, New Jersey company for the lease of up to
$250,000 of computer equipment to the Company. The credit facility provides the

74
<PAGE>

Company with the ability to obtain certain computer equipment financed by the
lease that is secured by such equipment.

In June 2000, the Company entered into a finance lease agreement with
Syscap Computer Rentals PLC, a U.K. entity, to obtain certain equipment required
by the Company in the U.K. The Company entered into a 24 month lease for
approximately $420,000 worth of computer and Internet equipment pursuant to the
agreement with Syscap and can acquire such equipment in consideration for an
additional monthly payment. The lease is secured by the equipment.

We anticipate that our existing cash balance combined with financing
proceeds, anticipated revenue from operations and proceeds from the sale of the
Online Communities will be sufficient to meet our working capital and capital
expenditure needs through December 31, 2000. If the cash that we generate from
our operations and from the sale of the Online Communities is insufficient to
satisfy our liquidity requirements after this period, then we may need to sell
additional securities. The sale of additional equity or convertible debt
securities may result in additional dilution to our shareholders. We may not be
able to raise any additional capital or obtain such capital on acceptable
terms.

FINANCIAL STATEMENTS

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

75
<PAGE>

DESCRIPTION OF PROPERTY

The headquarters and offices of VCI and VCI's Israeli subsidiaries, VCIL
and VCIIP, are located at 589 Eighth Avenue, New York, New York 10018, Jerusalem
Technology Park, Jerusalem, Israel 91481 and Yishuv Eli 37, Eli, Israel 44828,
respectively.

Management believes that the condition of the Company's property is
reasonably adequate for commercial purposes.

VCI's Web site servers are housed in server parks in Herndon, Virginia and
in New York, New York where they receive 24-hour maintenance and back-up
services pursuant to an agreement with Frontier Global, Inc.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In January 1996, Virtual Communities Israel, Ltd. ("VCIL"), a subsidiary of
the Company, purchased equipment, intellectual property rights and contractual
rights from Avi Moskowitz, our President, Chief Executive Officer and Chairman,
and his wife, Helen Moskowitz, in return for an obligation to pay $100,000. In
June 1997, VCIL sold these assets to VCI, and we assumed the payment obligation.
In December 1998, VCI permitted the Moskowitzes to convert $60,000 of this
obligation into shares of VCI's common stock at a rate of $.47 per share. VCI
paid the remaining $40,000 to the Moskowitzes in the form of cash and by barter
between May 1998 and January 1999.

In June, 1998, Mr. Moskowitz received a warrant exercisable until June 30,
2001 into 115,100 shares of our common stock at an exercise price of $1.00 per
share in connection with his agreement to guarantee bank lines of credit for
VCIL in the amount of $130,000 during 1997 and 1998. In December 1998, Mr.
Moskowitz received a warrant exercisable until December 31, 2001 into 46,040
shares of our common stock at $.65 per share in consideration for the deferral
of a portion of his salary from July through November 1998 and a reduction in
his salary from December 1998 through February 1999.

In April 1997, Virtual Communities, Inc. borrowed $100,000 from Business
Systems Consultants ("BSC"), an entity that is affiliated with the family of
David Morris, a Virtual Communities, Inc. director. In December 1998, Virtual
Communities, Inc. permitted BSC to convert the principal and accrued interest of
$16,900 into 286,280 shares of Virtual Communities, Inc. common stock at a rate
of $.47 per share. While the original conversion rate on the loan was $.60 per
share, Virtual Communities, Inc. lowered the conversion rate as an incentive to
BSC to convert the loan. In consideration of the BSC loan, Virtual Communities,
Inc. also issued to BSC three two-year warrants, each expiring December 31,
2000, to acquire a total of 220,992 shares of Virtual Communities, Inc. common
stock at exercise prices ranging from $.30 to $.65 per share. In June 1997,
Virtual Communities, Inc. issued BSC a two-year warrant, expiring December 31,
2000, to acquire 4,834 shares of Virtual Communities, Inc. common stock at an
exercise price of $.60 per share. This warrant was issued in consideration of a
30-day loan to Virtual Communities, Inc. from BSC in the amount of $50,000,
which Virtual Communities, Inc. repaid in July 1997. In September 1999, David
Morris was issued two three-year warrants to acquire up to 243,902 shares of
common stock at an exercise price of $2.10 per share in consideration of his
father's guarantee of a $500,000 line of credit to Virtual Communities, Inc.
Subsequently, in October 1999, Mr. Morris transferred 219,511 of these warrants
to BSC in consideration for BSC's agreement to cover the guarantee by Mr.
Morris' father.

76
<PAGE>

In August and September 1999, VCIL increased its line of credit from Israel
General Bank by $500,000 to $560,000. The additional amount of the line is
secured by a guarantee from Conrad Morris, the father of David Morris, a
director of the Company. In consideration for providing the guarantee, Virtual
Communities, Inc. issued to David Morris two three-year warrants exercisable
into a total of 243,902 shares of common stock at an exercise price of $2.10 per
share. One warrant, for the purchase of 90,435 shares vests quarterly so that
22,609 shares vest for each quarter the guarantee remains in effect. The other
warrant, exercisable into 153,466 shares, vests on a semi-annual basis so that a
minimum of 76,733 shares are exercisable for every half-year that the guarantee
remains in effect. Virtual Communities, Inc. also agreed to pay Conrad Morris a
fee equal to two and one quarter percent (2.25%) of the amount of the line as
further consideration for his guarantee. In October 1999, Mr. Morris transferred
219,511 of the 243,902 warrants to Business Systems Consultants in consideration
for its agreement to back the guarantee of Conrad Morris.

In June 1998, Mr. Morris received a warrant exercisable until June 30, 2001
into 34,530 shares of our common stock at an exercise price of $1.00 per share
in connection with his agreement to guarantee a bank line of credit for VCIL in
the amount of $60,000 during 1997 and 1998.

In June 1997, Peter A. Jacobs, a Director of the Company, loaned VCI
$50,000. In January 1998, Mr. Jacobs converted this loan into 95,916 shares of
VCI common stock at a rate of $.60 per share. In February 1998, Mr. Jacobs
loaned VCI an additional $2,706, which amount was converted in December 1998
into 7,207 shares of VCI common stock at the rate of $.47 per share. At the time
of the loan, Mr. Jacobs received a warrant exercisable into 3,270 shares of our
common stock at an exercise price of $.66 per share until October 31, 2000. In
December 1998, Mr. Jacobs also purchased 61,233 shares of common stock from VCI
for $25,000, or $.47 per share.

In 1996 and 1997, Net Results Holdings, LLC ("NRH") loaned to Virtual
Communities Israel, Ltd., on an interest-free basis, an aggregate of $250,000.
Harry Fox, a former director of VCI, is a 33.6% shareholder of NRH and its Chief
Executive Officer. In August 1998, VCI permitted NRH to convert the loan into
1,673,554 shares of Virtual Communities, Inc. common stock at a rate of
approximately $.17 per share. NRH and certain officers and directors of NRH own
approximately 10.1% of our outstanding capital stock.

During 1997 and 1998, Virtual Communities Israel, Ltd. ("VCIL") rented
approximately 2,500 square feet of office space and obtained administrative
services from Versaware, Ltd., an Israeli subsidiary of Versaware Technologies,
Inc. ("Versaware"). Harry Fox, a former director of VCI prior to its merger with
the Company in October 1999, is the Chairman and Chief Executive Officer, and a
31% shareholder, of Versaware. VCIL paid Versaware, Ltd. $97,000 in 1997, and
$129,000 in 1998 for this space and these services. With respect to the
Versaware arrangement:

In February 1998, VCI issued to Versaware, Ltd., a two-year warrant,
expiring February 15, 2000, subsequently extended to October 2000, to purchase
16,306 shares of common stock at an exercise price of $.66. This warrant was
issued in consideration of Versaware, Ltd.'s agreement to provide VCIL a 90-day
extension for the payment of approximately $47,000 due to Versaware, Ltd.
through May 15, 1998.

In August 1998, VCI issued to Versaware, Ltd. a two-year warrant, expiring

77
<PAGE>

August 24, 2000, to purchase 15,375 shares of common stock at an exercise price
of $.66 in consideration of Versaware, Ltd.'s agreement to give VCIL a 100-day
extension for the payment of approximately $75,119 due to Versaware, Ltd.
through August 24, 1998.

In December 1998, VCI issued to Versaware, Ltd. a two-year warrant,
expiring December 31, 2000, to purchase 40,882 shares of common stock at an
exercise price of $.66 in consideration of Versaware, Ltd.'s agreement to give
VCIL a 125-day extension for the payment of approximately $115,000 due to
Versaware, Ltd. through from September through December 1998.

In addition, during 1997 and 1998, Virtual Communities, Inc. sublet office
space and obtained office services from NRH. Harry Fox, a former director of
Virtual Communities, Inc., is a 33.6% shareholder of NRH and our Chief Executive
Officer and a director. Pursuant to this arrangement, VCI paid NRH $9,000 during
1997, and $19,000 during 1998. As of July 1999, VCI ceased subletting office
space from NRH.

In February 1998, VCI borrowed $50,000 from George Moskowitz, the brother
of Avi Moskowitz, our President, Chief Executive Officer and Chairman. This
convertible loan bore interest at the rate of 10% per annum. In consideration
for the loan and for a 5-month extension of the maturity date, VCI issued to
George Moskowitz a two-year warrant, expiring February 2000, which expiration
date was later extended to October 2000, to purchase 61,233 shares of common
stock at an exercise price of $.66 per share. Mr. Moskowitz exercised a portion
of the warrant exercisable into 37,878 shares in March 2000. The loan, and
interest thereon, was repaid by the VCI in January 1999. In August 1998, George
Moskowitz loaned VCI an additional $50,000. This loan bore interest at the rate
of 12% per annum and was due in September 1998. In consideration for this loan,
VCI provided George Moskowitz with $4,200 of goods and services available to VCI
through barter arrangements with our customers and agreed to issue George
Moskowitz 11,510 shares of common stock for each 30-day period the loan remained
outstanding following the maturity date. In December 1998, VCI issued to George
Moskowitz 41,955 shares of common stock in consideration of his agreement to
extend the loan through December 1998. In addition, in December 1998, Mr.
Moskowitz converted the principal and accrued interest on the loan into 128,202
shares of common stock at the rate of $.47 per share.

In connection with a private placement of securities by the Company from
December 1999 though February 2000, we received a total of $985,400 in December
1999 for the sale to Paul and Hannah Lindenblatt, the sister and brother-in-law
of Avi Moskowitz, our Chairman of the Board, President and Chief Executive
Officer, of 400,000 shares of restricted common stock and a three-year warrant,
exercisable for 40,000 shares of common stock at a purchase price of $2.46 per
share. We made the private placement offering under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). The terms of the
offering provided for issuance of the restricted common stock at a purchase
price equal to 35% below the market valuation of our publicly traded common
stock and the issuance of a warrant exercisable for the purchase of one share of
common stock for each ten shares purchased. The warrants become exercisable six
months after the date of issuance. The restricted shares of common stock and the
shares of common stock to be issued upon exercise of the warrant may be offered
for public resale only if registered under the Securities Act of 1933 or an
exemption therefrom. We have agreed to provide the purchasers with certain
registration rights with respect to the restricted common stock and the common
stock underlying the warrants.

78
<PAGE>

The Lindenblatts are not involved in the management or control of the
Company nor are they otherwise affiliated with us or our management, and their
respective holdings of common stock after such purchase represent in the
aggregate approximately 5% of outstanding shares of our common stock. The sale
of the first tranche of the private placement to the purchasers was made without
regard to any familial relationship, at arms length, on the same terms and
conditions of the private placement offering to other accredited investors.

The second tranche of such private placement of securities was made in
January 2000 when the Company sold 286,280 shares of restricted common stock and
a three-year warrant, exercisable into 28,628 shares of common stock at a
purchase price of $2.11 per share, to BSC.

Such registration rights commence six months from the date of purchase and
if the registration is declared effective by the Securities and Exchange
Commission, public resale of such securities shall be permitted. We paid
approximately $50,000 in financial advisory consultant fees and issued warrants
exercisable into 205,884 shares at exercise prices ranging from $2.11 to $2.46
related to the closing of the first and second tranches of the private placement
offering. The remainder of the private placement was made to non-affiliated,
accredited investors in subsequent tranches through February 2000, for aggregate
proceeds of approximately $3.5 million, including the proceeds from the sale of
the securities to the Lindenblatts and BSC. The Company issued additional
warrants exercisable into 41,058 shares of our common stock at exercise prices
ranging from $2.67 to $3.42 per share in connection with additional sales made
under the private placement. The terms and conditions of the private placement
offering were duly authorized by our Board of Directors as being reasonable and
in the best interests of the Company, with particular regard to our need for
operating capital and the limited availability of other reasonable financing
alternatives.

In April 2000, the Company sold 517,800 of its shares at $5.80 per share to
four institutional investors in a private placement arranged by Josephthal &
Company and Intercoastal Financial Services Corp. ("Intercoastal") for an
aggregate gross proceeds of approximately $3,000,000 (the "IFSC Financing"). In
connection with the private placement, the Company issued a) 500,000 four-month
warrants to the purchasers of the shares exercisable at $14.875 per share, b)
129,450 three-year warrants to such purchasers exercisable at $7.4375 per share
which are redeemable at the price of $0.75 per share decreasing to $0.50 in July
2000 and thereafter by $0.05 per month until such redemption price reaches $0.25
per share, c) 36,246 warrants exercisable for three years at $5.80 per share to
Josephthal & Company and d) 2,000,000 callable warrants which were cancelled in
July 2000.

In June 2000, the Company borrowed $1,000,000 from an institutional
investor in the IFSC financing. The loan and interest thereon was due on July
27, 2000 or could be converted, at the holder's option, into securities of the
Company. In July 2000, the $1,000,000 loan made to the Company in June 2000 was
converted to preferred stock and the Company received $1,000,000 in cash
proceeds in exchange for the issuance by the Company of an aggregate of 2,010
shares of Series C Convertible Preferred Stock and 355,556 three-year warrants
exercisable into common stock at $2.25 per share.

79
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

Contents

Page
----

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheet as of December 31, 1999 F-3

Consolidated Statements of Operations for the year ended F-4
December 31, 1999 and 1998

Consolidated Statements of Changes in Shareholders' Deficiency F-5
for the year ended December 31, 1999 and 1998

Consolidated Statement of Cash Flows for the year ended F-6
December 31, 1999 and 1998

Notes to the Consolidated Financial Statements F-7 - F-25

Condensed Interim Consolidated Financial Statements as of
June 30, 2000 F-26 - F-36

# # # # # # #

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
Virtual Communities, Inc.

We have audited the accompanying consolidated balance sheet of Virtual
Communities, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999, and the related consolidated statements of operations, changes in
shareholders' deficiency and cash flows for each of the two years ended December
31, 1999. 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 referred to above present fairly,
in all material respects, the financial position of Virtual Communities, Inc.
and subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for each of the two years ended December 31, 1999 in
conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1B to the consolidated financial statements, the Company has suffered recurring
net losses from operations and has a shareholder deficiency. Accordingly, the
Company is dependent on obtaining additional sources to finance its operations.
These matters raise substantial doubt about the Company ability to continue as a
going concern. Management's plans in regard to these matters and financings
completed subsequent to the balance sheet date are also described in Note 1B.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that might result
should the Company be unable to continue as a going concern.

Arthur Andersen LLP

New York, New York

August 30, 2000

F-2
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(U.S. Dollars in thousands except per share data)

<TABLE>
<CAPTION>
December 31
1999
--------------
(NOTE 1A)
ASSETS
<S> <C>
Current Assets
Cash and cash equivalents $ 469
Other receivables 128
Assets of discontinued operations 221
----
Total current assets 818

Property and Equipment, net of accumulated depreciation and
amortization 1,120

Severance Pay Deposits 83

Other Assets 343
-------
Total Assets $ 2,364
-------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities

Short-term bank borrowings and current maturities of long-term loan $ 731
Shareholders' loans 150
Accounts payables and accrued expenses 1,511
-------
Total current liabilities 2,392

Long-Term Liabilities

Long-term loan 167
Accrued severance pays 329
-------
Total long-term liabilities 496
-------
Total liabilities 2,888
-------
Commitments and contingencies (Note 9)

Shareholders' Deficiency
Preferred stock of $0.01 par value
Authorized - 5,000,000 shares; none issued and outstanding --
Common stock of $0.01 par value
Authorized - 45,000,000 shares; issued and outstanding -
14,630,224 shares 146
Additional paid-in capital 8,336
Accumulated deficit (8,856)
-------
(374)

Treasury stock 149,900 shares at cost (150)
-------
Total shareholders' deficiency (524)
-------
Total liabilities and shareholders' deficiency $ 2,364
=======
</TABLE>

The accompanying notes form an integral part of the financial statements.

F-3
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars in thousands except per share data)

For the year ended
December 31
-----------
1999 1998
---------- ---------
(NOTE 1A)

REVENUES $ 165 $ -0-
---------- ---------

OPERATING COST AND EXPENSES

Cost of revenues 378 -0-

Selling and marketing expenses 79 -0-

General and administrative expenses 2,108 872

Merger costs 1,057 -0-
---------- ---------
Total operating costs and expenses 3,622 872
---------- ---------

Operating loss (3,457) (872)

Financing expenses, net 109 191
---------- ---------
Loss from continuing operations $(3,566) $(1,063)

Discontinued operations (2,364) (371)
---------- ---------
Net loss (5,930) (1,434)
========== =========

NET LOSS PER SHARE, BASIC AND DILUTED

Continuing Operations $ (0.34) $ (0.13)

Discontinued Operations (0.22) (0.04)
---------- ---------
Net loss per share (0.56) (0.17)
========== =========

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 10,532,530 8,485,904
========== =========

The accompanying notes form an integral part of the financial statements

F-4
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' DEFICIENCY
(U.S. Dollars in thousands except per share data)

Number of Number of Common stock Additional Accumulated Treasury Total
Series A Series B --------------------- paid-in deficit stock
preferred preferred Shares Amount capital
shares shares
---------- --------- --------- ------ ---------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1998 -- -- 4,354,588 $ 44 $ 604 $ (1,492) $ -- $ (844)

Common stock issued -- -- 2,256,383 22 827 -- -- 849

Common stock issued
upon conversion of
loans -- -- 3,087,008 31 554 -- -- 585

Options issued -- -- -- -- 72 -- -- 72

Net loss -- -- -- -- -- (1,434) -- (1,434)
---------- --------- --------- ------- ---------- ----------- --------- ------

Balance as of
December 31, 1998 -- -- 9,697,979 $ 97 $ 2,057 $ (2,926) $ -- $ (772)

Common stock issued -- -- 529,519 5 1,067 -- -- 1,072

Series A preferred
stock issued upon
conversion of
convertible loans 5,000 -- -- -- 500 -- -- 500

Series A preferred
stock issued, net of
issuance costs 9,550 -- -- -- 815 -- -- 815

Series B preferred
stock issued, net of
issuance costs -- 10,325 -- -- 874 -- -- 874

Common stock issued
upon conversion of
Series A and B
preferred stock (14,550) (10,325) 2,645,770 26 (26) -- -- --

Common stock issued
upon the Merger -- -- 1,751,956 18 2,777 -- (150) 2,645

Warrants issued -- -- -- -- 268 -- -- 268

Common stock issued
upon exercise of
warrants -- -- 5,000 -- 4 -- -- 4

Net loss -- -- -- -- -- (5,930) -- (5,930)
---------- --------- --------- ------- ---------- ------------- -------- -------
Balance as of
December 31, 1999 -- -- 14,630,224 $ 146 $ 8,336 $ (8,856) $ (150) $ (524)
---------- --------- --------- ------- ---------- ----------- --------- ------
</TABLE>

The accompanying notes form an integral part of the financial statements.

F-5
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. Dollars in thousands except per share data)

For the year ended
December 31
--------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,930) $(1,434)
Adjustments to reconcile net loss to net cash
used in operating activities (see below) 1,284 274
------- -------
Net cash used in operating activities (4,646) (1,160)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (962) (77)
Investment in other assets (293) --
------- -------
Net cash used in investing activities (1,255) (77)
------- -------

CASH FLOWS FROM FINANCING ACTIVITIES
Short-term bank borrowings, net 583 32
Receipt of shareholders' loans 150 200
Repayment of shareholders' loans (200) --
Receipt (repayment) of convertible loans (75) 624
Issuance of shares 2,765 921
Cash acquired in the Merger 2,573 --
------- -------
Net cash provided by financing activities 5,796 1,777
------- -------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (105) 540
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 574 34
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 469 $ 574
======= =======

ADJUSTMENT TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Items not affecting operating cash flows:

Depreciation and other $ 207 $ 78
Accrued severance pay, net 203 14
Issuance of warrants 268 --
Changes in operating assets and liabilities:

Increase in trade receivables, net (52) (19)
Increase in other receivables (66) (21)
Increase in payables and accrued expenses 724 222
------- -------
$ 1,284 $ 274
======= =======
SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION:

CASH PAID FOR INTEREST $ 31 $ 23
======= =======
NONCASH TRANSACTIONS
Issuance of shares upon conversions of loans $ 500 $ 585
======= =======
Purchased of fixed assets on credit $ 214 $ --
======= ========

The accompanying notes form an integral part of the financial statements.

F-6
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(U.S. Dollars in thousands except per share data)

Note 1 - GENERAL

A. Virtual Communities, Inc. (the "Company"), a Delaware corporation, is
the product of a merger consummated October 29, 1999 (the "Merger"),
in which Virtual Communities, Inc. ("VCI") merged with and into a
wholly-owned subsidiary of Heuristic Development Group, Inc. ("HDG").
Prior to the Merger, HDG was a development stage company organized to
research, develop, design and market fitness- related products. VCI
was incorporated in 1996 to develop, acquire and operate online
communities on the Web that aggregate and publish various news, media
and entertainment content targeted to specific ethnic groups. VCI
commenced its operation in June 1997. After the Merger, HDG's name was
changed to Virtual Communities, Inc. to reflect that the Company's
primary business is the development and operation of online
communities and related services for third parties and the publishing
of its own communities.

As a result of the Merger, VCI shareholders received 1.151 shares of
HDG common stock for each share of VCI common stock held by them.
HDG's Board of Directors and management resigned and were replaced
with VCI's Board of Directors and management. Following the Merger,
VCI shareholders held 88.6% of the common stock of the Company with
HDG shareholders holding the remaining 11.4%. In connection with the
Merger, HDG began trading its securities (former symbol: IFIT) on the
NASDAQ Small Cap Market under the symbols: "VCIX" - for the common
stock, "VCIXU" for the Units, "VCIXW" for the Class A Warrants and
"VCIXZ" for the Class B warrants.

For accounting purposes the acquisition has been treated as a
Recapitalization of VCI with VCI as the acquirer (reverse acquisition)
The historical financial statements prior to October 29, 1999 are
those of VCI and since October 29, 1999 the financial statements
reflect the two companies.

The results of operation of HDG for the period January 1, 1999 to
October 29, 1999 are as follows:

Selling, marketing and general
and administrative expenses $ 589
Merger costs 140
Financing income, net (137)
-----
Net loss $ 592
=====

F-7
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 1 - GENERAL (Cont.)

A. (Cont.)

The historical financial statements of VCI reflect the retroactive
restatement of number of shares and earnings per share data, based on
the exchange ratio of shares issued in the Merger.

Prior to the Merger, in June 1997, VCI acquired the majority of the
net assets and shares of Virtual Communities Israel Ltd. ("VCIL" -
formerly Virtual Jerusalem Ltd.), an Israeli company. VCIL commenced
operations in January 1996. VCIL develops and maintains the Company's
online communities and performs certain programming, design, software
development and web maintenance services on behalf of the Company
pursuant to a Cost Plus Agreement, and certain general and
administrative duties on behalf of the Company and pursuant to a
Financial Services Agreement between the entities.

The Company markets and sells its online community design, development
and Web maintenance services to web site publishers through VCI
Community Solutions, Inc., a wholly-owned subsidiary established by
VCI in August 1999. These services include the Company's proprietary
Community Management Solution ("CMS"), a turnkey solution for the
creation of online communities that includes content management and
publishing software, e-commerce functionality and a comprehensive set
of community retention features designed to attract and retain
visitors to a community. The Company provides several of its CMS
features through license arrangements with third party service
providers and by developing its own programming tools. As of December
31, 1999 the Company entered into one agreement for its CMS system.

F-8
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 1 - GENERAL (Cont.)

A. (Cont.)

In July 2000, the Company implemented a restructuring of its business
activities to focus primarily on developing and marketing software for
Web development and site management. In line with this new strategy,
the Company announced its intention to sell its portfolio of online
communities. The Company is currently seeking to enter into a
transaction that would transfer partial or complete ownership of its
online communities. It has also restructured its Internet technologies
division to focus on further development of Cortext software. As a
result of this restructuring, the Company reduced its editorial staff
located in the Company's New York and Jerusalem offices by
approximately 50%. The Company also terminated most of its marketing
agreements related to the communities and eliminated several
technical, marketing and administrative staff positions that supported
the communities and other operations in New York and Israel and
shifted certain technical and administrative functions to its Israeli
subsidiary to achieve efficiencies.

Accordingly, the online communities division has been accounted for as
a discontinued operation. The accompanying financial statements have
been restated to separately report the assets and operating results of
these discontinued operations.

In connection with the restructuring of its operations the Company
established a VCIX 2000 Corporate Reorganization Severance Plan (the
"Severance Plan"), effective as of July 24, 2000. The Plan was
established to offer eligible employees of the Company who suffer an
involuntary termination of employment as a result of the
restructuring, the option to elect to receive severance pay and
additional benefits. The Plan is intended to constitute an "employee
welfare benefit plan" under Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended.

In connection with the restructuring, the Company enacted a Retention
Plan to retain certain members of the editorial staff of the
communities for the purpose of ensuring that the communities are
operated until such time as they are sold by the Company or cease
operating. Employees who receive the bonus are not eligible to receive
termination payments under the Severance Plan.

B. The Company incurred net losses in 1999 amounting approximately to
$5.9 million and anticipates that it will continue to incur losses for
some time. The Company's continued existence is dependent on its
ability to generate more revenues and on obtaining additional
financing from its shareholders and external sources. Subsequent to
the balance sheet date, the Company entered into several private
placements selling various securities and warrants (See Note 12B and
12C). Management expects the proceeds from these private placements
and the proceeds from the expected exercise of the warrants to be
sufficient to finance the Company's operations through December 31,
2000. However, there can be no assurance that the Company will obtain
all the financing necessary for its operations. These matters raise
substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not
include any adjustments that might be necessary should the Company be
unable to continue as a going concern.

F-9
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 2 - ACCOUNTING POLICIES

The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. The significant accounting
policies followed in the preparation of the financial statements, applied
on a consistent basis, are as follows:

A. PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of VCI and its
wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.

B. USE OF ESTIMATES

The preparation of the consolidated 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
dates of the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting periods. Actual results may
differ from those estimates.

C. CASH AND CASH EQUIVALENTS

All highly liquid investments with an original maturity of three months
or less are considered cash equivalents.

D. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization is
calculated using the straight-line method over the estimated useful lives
of the assets ranging as follows:

Years
-----
Computers 3 - 4
Furniture and office equipment 7 - 14

F-10
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 2 - ACCOUNTING POLICIES (Cont.)

E. INCOME TAXES

The Company adopted SFAS No. 109, "Accounting for Income Taxes". Under
SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequence attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable. Income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets or liabilities of a change in tax rates is
recognized in the period in which the tax change occurs. Valuation
allowances are established, when necessary, to reduce deferred tax assets
amounts expected to be realized.

F. REVENUE RECOGNITION

Revenues from sales of software products and technology are recognized in
accordance with Statement of Position (SOP) 97-2, as amended by SOP 98-4
and SOP 98-9, upon delivery, when collection is probable, the vendor's
fee is fixed or determinable, vendor-specific objective evidence exists
to allocate the total fee to the elements of the arrangement and
persuasive evidence of an arrangement exists. Provided that all other
elements of SOP 97-2 are met, revenues are recognized upon delivery,
whether the customer is a distributor or the final end user. Revenues for
maintenance and support services are deferred and recognized ratably over
the service period.

F-11
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 2 - ACCOUNTING POLICIES (Cont.)

G. COST OF REVENUES

Cost of revenues consists primarily of direct labor costs and
licenses.

F-12
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 2 - ACCOUNTING POLICIES (Cont.)

H. LONG-LIVED ASSETS

The Company records its long-lived assets at costs. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121.
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," the Company reviews its long-lived
assets for impairment whenever events or changes in circumstances
indicate that the carrying amounts of the assets may not be
recoverable. Furthermore, the assets are evaluated for continuing
value and proper useful lives by comparison to expected future cash
projections. Management has performed a review of all long-lived
assets and has determined that no impairment of the respective
carrying values has occurred as of December 31, 1999.

I. LOSS PER SHARE

The Company adopted the provision of SFAS No. 128, "Earnings per
Share", which establishes new standards for computing and presenting
earnings per share ("EPS"). The new standard requires the presentation
of basic EPS and diluted EPS. Basic EPS is calculated by dividing
income available to common shareholders by the weighted average
numbers of shares of common stock outstanding during the period.
Diluted EPS is calculated by dividing income available to common
shareholders by the weighted average number of common shares
outstanding adjusted to reflect potentially dilative securities. All
outstanding options and warrants have been excluded from the
calculation of diluted EPS, as they would be antidilutive.

J. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalent, accounts,
receivable, accounts payable and bank loans approximate fair value,
due to the short-term maturity of these instruments. The carrying
amount of long-term loan approximates fair value.

F-13
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 2 - ACCOUNTING POLICIES (Cont.)

K. STOCK BASED COMPENSATION

The Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", and elected to continue the accounting set
forth in Accounting Policy Board No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25"), and to provide the necessary pro forma
disclosures as if the fair value method has been applied.

L. CONCENTRATION

For the year ended December 31, 1999, the Company has 1 customer which
represent 100% of revenues.

M. NEW ACCOUNTING PROUNCEMENTS

In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet at their fair value.
SFAS No. 133 was subsequently amended by SFAS No. 137, which deferred
the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The Company currently does not use derivatives and
therefore this new pronouncement is not applicable.

F-14
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 2 - ACCOUNTING POLICIES (Cont.)

M. NEW ACCOUNTING PROUNCEMENTS (Cont.)

In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements". SAB 101 expresses the views of the SEC staff in
applying generally accepted accounting principles to certain revenue
recognition issues. The Company has concluded that the implementation
of this SAB will not have a material impact on its financial position
or its results of operations.

Note 3 - PROPERTY AND EQUIPMENT, NET

December 31
1999
------
Computers $1,317
Furniture and office equipment 92
------
1,409

Less - accumulated depreciation 289
------
Net book value $1,120
======

Depreciation expenses amount to $207 and $78 for the year ended December 31,
1999 and 1998, respectively.

Note 4 - SHORT-TERM BANK BORROWINGS AND CURRENT MATURITIES OF LONG-TERM LOAN

December 31
1999
----

Bank overdrafts $285
Bank loans 399
Current maturities of long-term loan 47
----
$731
====

Bank overdrafts (in New Israeli Shekels) bear interest of
approximately 16% per annum. Bank loans (in U.S.$) bear interest of
approximately 7.6% and Libor + 2.0% per annum (approximately 8.2% at
December 31, 1999).

F-15
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 5 - SHORT TERM SHAREHOLDERS LOANS

In January 1999, the Company received a six-month, interest-free loan
in the principal amount of $150 from a shareholder of the Company. The
loan incurred interest at the rate of 10% per annum commencing July
1999. The lender was entitled to convert all or a portion of the loan
into common stock of the Company at a rate of $0.58 per share, which
approximated fair market value at that date, until such time as the
Company repays the loan, provided, however, that the Company's
investment bankers agree to such conversion.

Subsequent to balance sheet date the loan was converted into 297,672
shares of common stock after giving effect to the Merger exchange rate
of 1.151.

Note 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

December 31
1999
------
Accounts payable $ 979
Accrued payroll and related costs 251
Accrued expenses 201
Deferred revenues 80
-----
$1,511
======

Note 7 - LONG TERM LOAN

The Company's facilities in Israel are leased under a 3 year lease
agreement. The lessor of the facilities has incurred building
improvements costs, of which $234 the Company's subsidiary is obligated
to pay back over the term of the lease. As of December 31, 1999, this
obligation amounts to $214, of which $167 is classified as long term.

Note 8 - ACCRUED SEVERANCE PAY

The Company's obligation for severance pay to employees in Israel is
partially covered by payments to insurance companies. The accrual for
severance pay and deposits with insurance companies in respect of
severance pay are included in the balance sheet.

F-16
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 9 - COMMITMENTS AND CONTINGENCIES

Leases

The Company and its subsidiaries lease certain facilities under operating
leases expiring in various years through 2005. Future minimum payments due under
these leases are as follows:

Year ending December 31,
------------------------

2000 $ 524
2001 595
2002 533
2003 229
2004 233
Thereafter 58
------
Total $2,172
======

Of this amount, a lease commitment of a subsidiary in the amount of $867 is
linked to the Israeli Consumer Price Index.

Lease expenses amount to $214 and $122 for the year ended December 31, 1999
and 1998, respectively.

Legal Proceedings

Employment Agreement

In June 1999, the Company entered into a three year employment agreement
with its President and Chairman providing for a base salary of $183 per year and
an annual bonuses as may be awarded by the Board of Directors. The agreement
also providing for options to purchase 230,200 shares of the Company's common
stock subject to the 1999 Stock Option Plan and for additional options as may be
granted by the Board of Directors.

Note 10 - SHARE CAPITAL

A. During 1999, prior to the Merger, the Company issued 129,519 shares of
common stock of the Company at $0.47 per share to a consultant of the
Company, and to a non-affiliated investor. This price approximated
fair market value at the dates of such issuances. In December 1999,
the Company issued, as part of a private placement offering (see Note
12B), 400,000 shares at $2.46 per share to a non- affiliated investor.

B. In February 1999, the Company raised gross proceeds of $955 (before
issuance costs) through the issuance of 9,550 shares of Series A
preferred stock to 35 accredited investors. At the same time, a $500
Secured Convertible Promissory Note provided by the Company to Virtual
Acquisition Co. LLC (a company affiliated with principals of Jesup &
Lamont, a New York investment bank) on December 31, 1998, was
converted into 5,000 shares of Series A preferred stock. Holders of
Series A preferred stock had the right to convert their stock into
common stock of the Company at a conversion ratio of $0.80 per share.

The 14,550 shares of Series A preferred stock were converted as part
of the Merger into 2,079,862 shares of common stock after giving
effect to the Merger exchange ratio of 1.151.

F-17
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 10 - SHARE CAPITAL (Cont.)

C. In June 1999, the Company raised gross proceeds of $932 (before
issuance costs) through the issuance of 9,325 shares of Series B
preferred stock to 24 accredited investors. In September 1999, the
Company issued 1,000 shares of Series B preferred stock for $100 to an
individual who was elected as a member of the Board of the Company.
Holders of the Series B preferred stock had the right to convert their
stock into common stock of the Company at a conversion ratio of $2.1
per share.

The 10,325 Series B preferred stock was converted, as part of the
Merger into 565,908 shares of common stock after giving effect to the
Merger exchange ratio of 1.151.

D. VCI reserved 835,626, 603,124 and 1,151,000 shares of common stock
under its 1997, 1998 and 1999 Stock Option Plan respectively. In
addition, HDG shareholders approved the issuance of a HDG 1999 Stock
Options Plan effective upon the Merger which reserved a total of
1,000,000 additional common shares. The Company also granted warrants
to certain employees (see Note 10E). As of December 31, 1999, 294,363
options were available for future grants. A summary of the Company's
stock options and warrants activity during 1999 is presented below:

Number of Weighted - Weighted -
options average average
and Exercise fair value
warrants price of options
granted
---------- --------- ----------
<S> <C> <C> <C>

Balance at January 1, 1998 487,449 $ 0.40
Granted 815,876 0.65 $0.11
Forfeited (69,636) 0.40
---------
Balance at December 31, 1998 1,233,689 0.57
Granted 2,501,143 2.08 $0.96
HDG outstanding options as of
the day of the Merger 170,044 1.86
Forfeited (56,150) 0.67
---------
Balance at December 31, 1999 3,848,726 $ 1.60
==========
</TABLE>

F-18
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 10 - SHARE CAPITAL (Cont.)

D. (Cont.)

The following table summarizes information about options and warrants
outstanding and exercisable at December 31, 1999:

Options and warrants outstanding Options and warrants exercisable
------------------------------------------- --------------------------------
Range of Number Weighted- Weighted- Number Weighted-
exercise outstanding at average average exercisable at average
prices December 31, remaining exercise December 31, exercise
1999 contractual life prices 1999 prices
$ $ $
---------- -------------- ---------------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C>

0.40-0.81 1,448,569 3.09 0.60 665,951 0.55

1.00-1.45 925,501 3.77 1.16 250,670 1.02

2.10-2.25 804,656 4.12 2.10 253,903 2.11

3.50-3.93 547,000 4.92 3.68 - -

4.06-4.25 123,000 4.90 4.27 42,000 4.51
--------- ---------
3,848,726 1,212,524
========= =========
</TABLE>

The Company applies APB No. 25 and related interpretations in accounting for
its 1997, 1998 and 1999 Stock Option Plans. Accordingly, compensation cost
has been recognized for stock option plan based on the intrinsic value of
the option at the date of grant. No compensation cost has been charged for
stock options for the years ended December 31, 1999 and 1998.

Had compensation cost been determined under the alternative fair value
accounting method provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation" the Company's net loss and net loss per share
would have been increased to the following pro forma amounts:

1999 1998
------- -------
Net loss:
As reported $(5,930) $(1,434)
Pro forma (6,110) (1,470)

Net loss per share:
As reported (0.56) (0.17)
Pro forma $ (0.58) $ (0.17)

Under SFAS 123 the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1999: (1) expected
life of the option of 3 years (1998 - same); (2) dividend yield of 0% (1998
- same); (3) expected volatility as of the Merger of 135% (1999 before the
Merger and 1998 - 0%) (4) risk-free interest rate of 5% (1998 - 6%).

F-19
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 10 - SHARE CAPITAL (Cont.)

E. As of December 31, 1999, the Company has outstanding warrants
exercisable into 8,304,592 shares of common stock as follows:

- Class A Warrants (traded on NASDAQ as "VCIXW") exercisable into
2,000,000 shares of common stock at $6.50 per share until
February 2002;

- Class B Warrants (traded on NASDAQ as "VCIXZ") exercisable into
1,500,000 shares of common stock at $8.75 per share until
February 2002;

- Class B Warrants exercisable into 2,000,000 shares of common
stock at $8.75 share issuable upon the exercise of the Class A
Warrants;

- Underwriter's Unit Purchase Option exercisable into 120,000
shares of common stock;

- VCI Warrants issued prior to the Merger immediately exercisable
into 1,794,342 shares of common stock (after giving effect to the
merger exchange ratio of 1.151 to 1) at exercise prices ranging
from $0.30 to $2.10 (including 553,339 to employees). The
warrants have different expiration dates ranging from August 2000
to June 2004. All of the shares of Common Stock underlying such
warrants have been registered pursuant to a Registration
Statement on Form SB2/A declared effective by the Securities and
Exchange Commission on January 14, 2000. The majority of such
warrants are subject to lock up agreements restricting the sale
of 75% of the shares underlying the warrants until May 1, 2000
and 50% of such shares until August 1, 2000, at which time such
lock-up period expires. Subsequent to balance sheet date, three
VCI warrants have been exercised into 133,480 shares of common
stock of the Company.

- Warrants issued to Jesup & Lamont Capital Corporation as partial
consideration for its services in connection with the Merger
exercisable until October 28, 2004 into 160,206 shares of common
stock at a price of $2.10 per share.

F-20
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 10 - SHARE CAPITAL (Cont.)

E. (Cont.)

- Warrants issued by HDG prior to and upon the completion of the Merger
exercisable into a total of 570,044 shares of common stock at exercise
prices ranging from $0.50 to $5.00 per share with expiration dates
ranging from October 2001 to August 2006.

- Warrants exercisable into 160,000 shares issued in December 1999 in
connection with a private placement of the Company's securities. The
warrants are exercisable until December 31, 2002 at an exercise price
of $2.46 per share and are subject to certain registration rights.

Note 11 - TAXES ON INCOME

A. At December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $7 million. Such losses can be
utilized against future taxable income and expire primarily between
2012 and 2019. These losses may be limited due to certain
circumstances, such as ownership changes.

A full valuation allowance of approximately $3 million has been
provided on the deferred tax asset associated mainly with the loss
carryforwards since the Company has no assurance of realizing such
asset.

B. The Israeli subsidiaries are subject to the Israeli Income Tax Law
(Adjustments for Inflation), 1985, which provides for an adjustment
for the effects of inflation on taxable income in respect of that
portion of shareholders' equity not invested in inflation-resistant
assets. The carryforward loss for tax purposes at December 31, 1999
approximate $100 and it has no expiration date.

F-21
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 12 - SUBSEQUENT EVENTS

A. Acquisition of Cortext Ltd.

In February 2000, VCI entered into a Share Purchase Agreement ("SPA") with
Cortext Ltd. ("Cortext"), a corporation registered under the laws of the
State of Israel, and the principal shareholders of Cortext, to acquire
approximately 60% interest in the equity of Cortext in consideration for an
aggregate of $760. Cortext was established in 1999 and is engaged in the
development and licensing of content management software for web
publishers.

F-22
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 12 - SUBSEQUENT EVENTS (Cont.)

A. Acquisition of Cortext Ltd. (Cont.)

The transaction was accounted for as a purchase. The purchase method
of accounting allocates the aggregate purchase price to the assets
acquired and liabilities assumed based upon their respective fair
values. The excess of the purchase price over the fair value of assets
and liabilities acquired of approximately $423 was allocated to
intellectual property.

In July 2000, the Company entered into a Share Transfer Agreement with
the two founders of Cortext Ltd. Pursuant to the Share Transfer
Agreement, the Company will acquire 20% of Cortext's outstanding
equity from Cortext founders in stages over a five-month period ending
December 2000 in consideration for an aggregate $900.

B. Private Placement Financing

In December 1999, the Company announced a private placement offering
up to $5,000 in restricted common stock and warrants to accredited
investors. The warrants become exercisable six months from the date of
issuance. The private placement investors agreed to a four to six
month lock-up period from the date of issuance of the restricted
securities, after which time the Company has provided certain
registration rights to permit public trading of the common stock and
shares of common stock underlying the warrants.

In January and February 2000, in consideration of the offering the
Company issued 981,864 shares of common stock at prices per share
ranging from $2.11 to $3.42 to 12 individuals and entities, including
three existing non-U.S. shareholders of the Company, for aggregate
gross proceeds of $2,524. In connection with the issuance of 468,098
of such shares to three existing shareholders of the Company, the
Company issued three-year warrants to acquire a total of 46,808 shares
of common stock at exercise prices ranging from $2.11 to $2.75. The
Company paid consultant and finders fees related to this financing in
the form of three-year warrants exercisable into 108,762 shares of
common stock at exercise prices ranging between $2.11 and $3.42 per
share.

F-23
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 12 - SUBSEQUENT EVENTS (Cont.)

C. April 2000 Private Financing

In April 2000, the Company sold 517,800 of its shares of common stock
at $5.80 per share to four institutional investors in a private
placement arranged by Josephthal & Company and Intercoastal Financial
Services Corp. for an aggregate gross proceeds of approximately $3
million (the "IFSC Financing").

In connection with the private placement, the Company issued a)
500,000 four-month warrants to the purchasers of the shares
exercisable at $14.875 per share, b) 129,450 three-year warrants to
such purchasers exercisable at $7.4375 per share c) 36,246 warrants
exercisable for three years at $5.80 per share to Josephthal & Company
and d) 2,000,000 one year callable warrants exercisable at a price
ranging from $18.00 to $27.00 per share, which callable warrants were
cancelled in July 2000.

In June 2000, the Company borrowed $1,000 from an institutional
investor in the IFSC financing. The loan was evidenced by a note made
by the Company to the lender and bears interest at the rate of 12% per
annum. The loan and interest thereon was due on July 27, 2000 or would
have been convertible, at the holder's option, into securities of the
Company. In July 2000, the $1,000 loan made to the Company in June
2000 was converted to Series C Convertible Preferred Stock and the
Company received an additional $1,000 in cash proceeds in exchange for
the issuance by the Company of an aggregate of 2,010 shares of Series
C Convertible Preferred Stock and 355,556 three-year warrants
exercisable into common stock at $2.25 per share.

D. Equipment Lease

In March 2000, the Company entered into a finance lease agreement with
Microtech Leasing Corp., a Princeton, New Jersey company for the lease
of up to $250 of computer equipment to the Company. The credit
facility provides the Company with the ability to obtain certain
computer equipment financed by the lease which is secured by such
equipment. The Company also agreed to provide Microtech with a UCC
financing statement covering the equipment leased pursuant to the
agreement. The lease cannot be canceled by the Company during the term
of the lease of the equipment which term is set forth on a lease
schedule.

In June 2000, the Company entered into a finance lease agreement with
Syscap Computer Rentals PLC, a U.K. entity to obtain certain equipment
required by the Company in the U.K. The Company entered into a 24
month lease for approximately $420 worth of computer and Internet
equipment and can acquire such equipment in consideration for an
additional monthly payment. The lease is secured by the equipment.

F-24
<PAGE>

VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)

Note 12 - SUBSEQUENT EVENTS (Cont.)

E. Lease of Additional Facilities by VCIL

In January and March 2000, VCIL exercised options for additional space
in the Jerusalem Technology Park, Israel, which serves primarily as
the Company's software development, programming and communities design
center. Total leasehold costs for the new space will equal to
approximately $165 per year.

F. Increase in the Number of Authorized ISOP Shares.

In March 2000, the Board of Directors approved the increase in the
authorized number of shares under the HDG 1999 Stock Option Plan by
500,000 for a total of 1,500,000 shares. In June 2000 the shareholders
of the Company ratified an increase of 1,000,000 more authorized
shares under the plan for a total of 2,000,000 shares, including the
500,000 approved by the Directors in March 2000.

F-25

<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
as of June 30, 2000
-------------------
(In U.S. dollars)
(Unaudited)

Contents
--------

<TABLE>
<CAPTION>
Page
-------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheet as of June 30, 2000 F-27

Consolidated Statements of Operations for the three and F-28
six months ended June 30, 2000 and 1999

Consolidated Statements of Shareholders' Deficiency for
The six months ended June 30, 2000. F-29

Consolidated Statements of Cash Flows for the six F-30
Months ended June 30, 2000 and 1999

Notes to the Consolidated Financial Statements F-31 - F-36

</TABLE>

F-26

<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. Dollars in thousands except per share data)

<TABLE>
<CAPTION>
June 30
2000
-----------
(Unaudited)
-----------
<S> <C>
ASSETS

Current Assets

Cash and cash equivalents $ 365
Trade receivables, net of allowance for doubtful debts of $28 237

Other receivables 143
Assets of discontinued operations 422
-------
Total current assets 1,167

Property and Equipment, net of depreciation and amortization of $ 578 1,981

Severance Pay Deposits 138

Other assets 1,179

-------
Total assets $ 4,465
=======

LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities

Short-term bank borrowings and current maturities of long-term loan $ 664
Shareholders' loans 24
Payables and accrued expenses 3,325
-------
Total current liabilities 4,013
-------
Long-Term Liabilities

Convertible Loan 1,000
Long-term loan 339
Accrued severance pay 471
-------
Total long-term liabilities 1,810
-------
Total liabilities 5,823
-------
Minority Interest 143
-------
Shareholders' Deficiency
Share capital

Shares of $0.0001 par value
Preferred stock of $0.01 par value
Authorized - 5,000,000 shares; none issued and outstanding
Common stock of $0.01 par value
Authorized - 45,000,000 shares; issued and outstanding -
17,122,506 shares 169
Additional paid-in capital 13,903
Accumulated deficit (15,423)
-------
(1,351)

Treasury stock 149,900 shares at cost (150)
-------
Total shareholders' deficiency (1,501)
-------
Total liabilities and shareholders' deficiency $ 4,465
=======
</TABLE>

The accompanying notes form an integral part of the financial statements.

F-27
<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars in thousands except share and per share data)

For the three For the six
months ended months ended
June 30 June 30
--------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
--------------------- -------------------

REVENUES $ 321 $ -- $ 627 $ --
---------------------------------------------------
<S> <C> <C> <C> <C>
COST AND EXPENSES

Cost of revenues 748 -- 1,316 --

Research and development 392 -- 665 --

Selling and marketing expenses 475 -- 727 --

General and administrative expenses 1,013 532 1,800 891

Expenses of merger -- 241 -- 241
------------ ------------ ------------ ------
Total operating costs and
expenses 2,628 773 4,508 1,132
------------ ------------ ------------ ------

Operating loss (2,307) (773) (3,881) (1,132)

Financing expenses, net (63) (12) (84) (58)

Minority interest in loss of subsidiary 63 -- 119 --
------------ ------------ ------------ ------
Loss from continuing operations (2,307) (785) (3,846) (1,190)

Discontinued operations (1,590) (382) (2,721) (649)
------------ ------------ ------------ ------

Net loss $ (3,897) $ (1,167) $ (6,567) $(1,839)
============ ============ ============ ========

NET LOSS PER SHARE, BASIC
AND DILUTED:
Continuing operations $ (0.14) $ (0.08) $ (0.24) $(0.12)
Discontinued operations $ (0.09) $ (0.04) $ (0.17) $(0.07)
------------ ------------ ------------ -------
Net loss per share $ (0.23) $ (0.12) $ (0.41) $(0.19)
============ ============ ============ =======
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING, BASIC AND
DILUTED 16,821,625 9,827,556 16,006,451 9,801,887
============ ============ =========== =========
</TABLE>

The accompanying notes form an integral part of the financial statements.

F-28
<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' DEFICIENCY
(U.S. Dollars in thousands except share data)
(Unaudited)

Common stock Additional
------------ paid-in Accumulated Treasury
Shares Amount capital deficit stock Total
------ ------ ---------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 2000 14,630,224 $146 $ 8,336 $ (8,856) $(150) $(524)

Common stock issued 1,499,664 14 5,120 -- -- 5,134

Common stock issued
Upon exercise of
Warrants and options 557,883 6 300 -- -- 306

Common stock issued
Upon conversion of
Loans 297,672 3 147 -- -- 150

Net loss -- -- -- (6,567) -- (6,567)
---------- ---- ------- -------- ----- -------

16,985,443 $169 $13,903 $(15,423) $(150) $(1,501)
========== ==== ======= ======== ===== =======
</TABLE>

The accompanying notes form an integral part of the financial statements.

- F-29
<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars in thousands)

<TABLE>
<CAPTION>
For the six months ended
June 30
-------------------------
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(6,567) $(1,839)
Adjustments to reconcile net loss to net cash used in
operating activities (see below) 1,686 361
------- -------
Net cash used in operating activities (4,881) (1,478)
------- -------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (1,279) (281)
Investment in other assets (511) --
Investment in subsidiary 23 --
------- -------
Net cash used in investing activities (1,767) (281)
------- -------

CASH FLOWS FROM FINANCING ACTIVITIES
Short-term bank borrowing, net (68) (42)
Receipt of shareholders' loans -- 150
Repayment of shareholders' loans -- (200)
Receipt of long-term loan 172 --
Receipt (repayment) of convertible loans 1,000 (75)
Issuance of common stock 5,440 148
Issuance of preferred stock, Series A and B -- 1,572
------- -------
Net cash provided by financing activities 6,544 1,553
------- -------

DECREASE IN CASH AND CASH EQUIVALENTS (104) (206)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 469 574
------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 365 $ 368
======= =======

ADJUSTMENT TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Items not involving operating cash flows:

Depreciation $ 401 $ 64
Accrued severance pay, net 41 3
Minority interest in loss of subsidiary (119) --
Changes in operating assets and liabilities
Increase in receivables (280) (156)
Decrease in other receivables ( 26) --
Increase in payable and accrued expenses 1,669 450
------- -------
$ 1,686 $ 361
======= =======
PURCHASE OF SUBSIDIARY
Fair value of assets acquired $ (318) $ --
Liabilities assumed and minority interest 341 --
------- -------
$ 23 $ --
NONCASH TRANSACTIONS
Issuance of preferred stock, Series A upon conversion of loans $ -- $ 500
======= =======
Investment in other assets on credit $ 113 $ --
======= =======
Issuance of common stock upon conversion of loans $ 150 $ --
======= =======
</TABLE>

The accompanying notes form an integral part of the financial statements

F-30
<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

NOTES TO THE CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
(U.S. dollars in thousands)
(Unaudited)

Note 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles relating to the provision of
interim financial information. Accordingly, they do not include
all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for the
three and the six month period ended June 30, 2000, are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2000. For further information, refer to
the financial statements and notes for the year ended December 31,
1999.

Note 2 - ACQUISITION OF CORTEXT LTD.

In February 2000, VCI entered into a Share Purchase Agreement
("SPA") with Cortext Ltd. ("Cortext"), a corporation registered
under the laws of the State of Israel, and the principal
shareholders of Cortext, to acquire approximately 60% interest in
the equity of Cortext. Cortext is engaged in the development and
licensing of content management software for web developers.

The transaction was accounted for as a purchase. The purchase
method of accounting allocates the aggregate purchase price to the
assets acquired and liabilities assumed based upon their
respective fair values. The excess of the purchase price over the
fair value of assets and liabilities acquired of approximately
$423 was allocated to intellectual property, of which the
unamortized portion of $386 is included in other assets.

F-31
<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

NOTES TO THE CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)
(U.S. dollars in thousands)
(Unaudited)

Note 2 - ACQUISITION OF CORTEXT LTD. (Cont.)

Subsequent to balance sheet date, the Company entered into a Share
Transfer Agreement with the principal shareholders of Cortext Ltd.
Pursuant to the Share Transfer Agreement, the Company will acquire
20% of Cortext's outstanding equity from Cortext's principal
shareholders in stages over a five-month period ending December
2000 in consideration for an aggregate $900.

Note 3 - CONVERTIBLE LOAN

In June 2000, the Company borrowed $1,000 from an institutional
investor in the IFSC financing. The loan was evidenced by a note
made by the Company to the lender at the rate of 12% per annum.
The loan and interest thereon were due on July 27, 2000 or could
be converted, at the holder's option, into securities of the
Company. The loan was converted into 1,010 shares of Series C
Preferred Stock of the Company in July 2000.

Note 4 - COMMITMENTS

A. In March 2000, the Company entered into a finance lease
agreement with Microtech Leasing Corp., a Princeton, New
Jersey company for the lease of up to $250 of computer
equipment to the Company. The credit facility provides the
Company with the ability to obtain certain computer equipment
financed by the lease that is secured by such equipment. The
Company also agreed to provide Microtech with a UCC financing
statement covering the equipment leased pursuant to the
agreement. The lease cannot be canceled by the Company during
the term of the lease of the equipment which term is set forth
on a lease schedule.

In June 2000, the Company entered into a finance lease
agreement with Syscap Computer Rentals PLC, a U.K. entity to
obtain certain equipment required by the Company in the U.K.
The Company entered into a 24 month lease for approximately
$420 of computer and Internet equipment and can acquire such
equipment in consideration for an additional monthly payment.
The lease is secured by the equipment.

F-32
<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

NOTES TO THE CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)
(U.S. dollars in thousands)
(Unaudited)

Note 4 - COMMITMENTS (Cont.)

B. In January and March 2000, the Company's Israel subsidiary,
Virtual Communities Israel Ltd. ("VCIL") exercised options for
additional space in the Jerusalem Technology Park, Israel,
which serves primarily as the Company's software development,
programming and communities design center. Total leasehold
costs for the new space are approximately $165 per year.

Note 5 - SHARE CAPITAL

A. During the first quarter of 2000, the Company issued 981,864
shares of common stock at prices per share ranging from $2.11
to $3.42 to 12 individuals and entities, including three
existing non-U.S. shareholders of the Company, for aggregate
gross proceeds of $2,524. In connection with the issuance of
468,098 of such shares to three existing shareholders of the
Company, the Company issued three-year warrants to acquire a
total of 46,808 shares of common stock at exercise prices
ranging from $2.11 to $2.75. The Company paid consultant and
finders fees related to this financing in the form of
three-year warrants exercisable into 108,762 shares of common
stock at exercise prices ranging between $2.11 and $3.42 per
share.

B. During the period, warrants exercisable into 442,446 shares of
common stock were converted.

C. In April 2000, the Company sold 517,800 of its shares at $5.80
per share to four institutional investors in a private
placement arranged by Josephthal & Company and Intercoastal
Financial Services Corp. ("Intercoastal") for an aggregate
gross proceeds of approximately $3,000 (the "IFSC Financing").
In connection with the private placement, the Company issued
a) 500,000 four-month warrants to the purchasers of the shares
exercisable at $14.875 per share, b) 129,450 three-year
warrants to such purchasers exercisable at $7.4375 per share
c) 36,246 warrants exercisable for three years at $5.80 per
share to Josephthal & Company and d) 2,000,000 one year
callable warrants exercisable at a price ranging from $18.00
to $27.00 per share which were cancelled in July 2000.

D. During the period, a short-term loan in the amount of $150 was
converted into 297,672 shares of common stock.

F-33
<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

NOTES TO THE CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)
(U.S. dollars in thousands)
(Unaudited)

Note 5 - SHARE CAPITAL (Cont.)

E. During the period, 821,500 stock options were granted under
VCI Stock Option Plans, 115,437 options were exercised into
shares of common stock and 193,600 options were forfeited.

F. Increase in the Number of Authorized ISOP Shares.

In March 2000, the Board of Directors approved the increase in
the authorized number of shares under the HDG 1999 Stock
Option Plan by 500,000 for a total of 1,500,000 shares. In
June 2000 the shareholders of the Company ratified an increase
of 1,000,000 authorized shares under the plan for a total of
2,000,000 shares, including the 500,000 approved by the
Directors in March 2000.

Note 6 - SUBSEQUENT EVENTS

A. In July 2000, the $1,000 loan made to the Company in June 2000
was converted to Series C convertible preferred stock and the
Company received an additional $1,000 in cash proceeds in
exchange for the issuance by the Company of an aggregate of
2,010 shares of Series C Convertible Preferred Stock and
355,556 three-year warrants exercisable into common stock at
$2.25 per share.

F-34
<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

NOTES TO THE CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)
(U.S. dollars in thousands)
(Unaudited)

Note 6 - SUBSEQUENT EVENTS (Cont.)

B. In July 2000, the Company implemented a restructuring of its
business activities to focus primarily on developing and
marketing software for Web development and site management. In
line with this new strategy, the Company announced its
intention to sell its portfolio of online communities. The
Company is currently seeking to enter into a transaction that
would transfer partial or complete ownership of its online
communities. It has also restructured its Internet
technologies division to focus on further development of
Cortext software. As a result of this restructuring, the
Company reduced its editorial staff located in the Company's
New York and Jerusalem offices by approximately 50%. The
Company also terminated most of its marketing agreements
related to the communities and eliminated several technical,
marketing and administrative staff positions that supported
the communities and other operations in New York and Israel
and shifted certain technical and administrative functions to
its Israeli subsidiary to achieve efficiencies.

Accordingly, the online communities division has been
accounted for as a discontinued operation. The accompanying
financial statements have been restated to separately report
the assets and operating results of these discontinued
operations. The loss from discontinued operations includes
estimated termination costs of approximately $365.

In connection with the restructuring and the discontinuation
of the online communities division, the Company established a
VCIX 2000 Corporate Reorganization Severance Plan (the
"Severance Plan"), effective as of July 24, 2000. The Plan was
established to offer eligible employees of the Company who
suffer an involuntary termination of employment as a result of
the restructuring, the option to elect to receive severance
pay and additional benefits. The Plan is intended to
constitute an "employee welfare benefit plan" under Section
3(1) of the Employee Retirement Income Security Act of 1974,
as amended.

F-35
<PAGE>

VIRTUAL COMMUNITIES, INC. and SUBSIDIARIES

NOTES TO THE CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)
(U.S. dollars in thousands)
(Unaudited)

Note 6 - SUBSEQUENT EVENTS (Cont.)

B. (Cont.)

In addition, the Company enacted a Retention Plan to retain
members of the editorial staff of the communities for the
purpose of ensuring that the communities continue to be
operated in an effective manner until such time as the Company
sells them or until operations are terminated. Employees who
receive the bonus are not eligible to receive severance
payments under the Severance Plan.

As a result of the restructuring and the discontinuation of
the online communities division, the Company will operate
under one business segment.

F-36
<PAGE>

Part II

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 "DGCL"). Section 145 of
the DGCL, relating to indemnification, is hereby incorporated herein by
reference.

In accordance with Section 102(a)(7) of the DGCL, 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).

Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

All expenses other than the Commission's filing fees are estimated.

Amount
-------
SEC Registration Fee ........................ $ 5,327
Printing Fees and Expenses .................. 15,000
Accounting Fees and Expenses ................ 5,000
Legal Fees and Expenses ..................... 35,000
Miscellaneous Expenses ...................... 5,000
-------
Total ..................................... $65,327
-------

Item 26. RECENT SALES OF UNREGISTERED SECURITIES.

In December 1996, the company 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 to 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. D.H. Blair
Investment Banking Corp. 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.

In October 1999, the Company issued a three year warrant exercisable into
160,206 shares of Common Stock at an exercise price of $2.10 per share to Jesup
& Lamont Capital Markets, Inc. as partial consideration for services rendered by
it to the Company in connection with the Company's merger with HDG.

On December 14, 1999, the Company received a total of $985,400 for the

II - 1
<PAGE>

private placement sale to accredited investors of 400,000 shares of restricted
common stock and a three-year warrant, exercisable for 40,000 shares of common
stock at a purchase price of $2.46 per share. The Company made the private
placement offering under Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"). The terms of the offering provided for issuance of the
restricted common stock at a purchase price equal to 35% below the market
valuation of the Company's publicly traded common stock and the issuance of a
warrant exercisable for the purchase of one share of common stock for each ten
shares purchased. The warrants become exercisable six months after the date of
issuance. The restricted shares of common stock and the shares of common stock
to be issued upon exercise of the warrant may be offered for public resale only
if registered under the Securities Act of 1933 or an exemption therefrom. The
Company has agreed to provide the purchasers with certain registration rights
with respect to the restricted common stock and the common stock underlying the
warrants. Such registration rights commence six months from the date of purchase
and if the registration is declared effective by the Securities and Exchange
Commission, public resale of such securities shall be permitted. The Company
paid approximately $50,000 and issued warrants exercisable for 120,000 shares of
common stock on the same terms and conditions as the warrants issued in the
private placement as financial advisory consultant fees related to the closing
of the first tranche of the private placement offering. The Company expects to
continue the private placement offering to accredited investors in subsequent
tranches through the first quarter of 2000, up to an aggregate amount of $5
million, on terms substantially similar to the first tranche. The terms and
conditions of the private placement offering were duly authorized by the
Company's Board of Directors as being reasonable and in the best interests of
the Company, with particular regard to the Company's need for operating capital
and the limited availability of other reasonable financing alternatives.

The purchasers of the first tranche of the private placement described
above were Paul and Hannah Lindenblatt, the sister and brother-in-law of Avi
Moskowitz, the Company's chairman of the Board, President and Chief Executive
Officer. The purchasers are not involved in the management or control of the
Company nor are they otherwise affiliated with the Company or its management,
and their respective holdings of common stock after such purchase represent in
the aggregate less than 5% of outstanding shares of the Company's common stock.
The sale of the first tranche of the private placement to the purchasers was
made without regard to any familial relationship, at arms length, on the same
terms and conditions of the private placement offering to other accredited
investors.

In December 1999, the Company agreed to issue a three year warrant
exercisable into 120,000 shares to Venture Capital USA, Inc. ("VCUSA") in
connection with certain financial consulting services provided to the Company at
an exercise price of $2.46 per share.

In January 2000, the Company issued a three-year warrant exercisable into
85,884 shares to VCUSA in connection with certain financial consulting services
provided to The Company at an exercise price of $2.11 per share.

In January 2000, the Company issued a three year warrant exercisable into
28,628 shares of Common Stock at an exercise price of $2.11 per share to
Business Systems Consultants, Ltd. ("BSC"), pursuant to a private placement sale
of 286,280 shares to BSC, for a purchase price of $604,050.80.

In February 2000, the Company issued a three year warrant exercisable into
90,909 shares of Common Stock at an exercise price of $2.75 per share to Rachel

II - 2
<PAGE>

Charitable Trust, pursuant to a private placement sale of 90,909 shares, for a
purchase price of $250,000.

In February 2000, the Company issued a three year warrant exercisable into
90,909 shares of Common Stock at an exercise price of $2.75 per share to
Musgrave Ltd., pursuant to a private placement sale of 90,909 shares, for a
purchase price of $250,000.

In February 2000 the Company issued an aggregate of 449,438 shares at $2.67
per share pursuant to a private placement to six individuals and entities for
gross proceeds of $1,200,000. In connection therewith, the Company issued
warrants exercisable into 19,663 shares at $2.67 per share to three individuals.

In February 2000 the Company issued an aggregate of 64,327 shares to three
individuals at $3.42 per share for total proceeds of $220,000. In connection
therewith, the Company issued three year warrants exercisable into 3,216 shares
at $3.42 per share exercisable to one party.

In April 2000, the Company issued to Intercoastal Financial Services Corp.
("IFSC"): 2,000,000 callable warrants exercisable for three years at an exercise
price of $18.00 increasing to up to $29.00 per share depending upon the date of
exercise in consideration for IFSC's arranging the Company's sale of a total of
(1) 517,870 shares of common stock to four institutional investors for an
aggregate purchase price of $3,000,000; (2) 500,000 four-month warrants
exercisable by such investors at $14.875 per share and (3) 129,450 three-year
warrants exercisable at $7.4375 per share. In connection therewith, the Company
also issued 36,246 warrants exercisable at $5.80 per share to Josephthal &
Company. In July 2000, the Company cancelled the 2,000,000 warrants issued as
part of the IFSC Financing. In July 2000, the $1,000,000 loan made to the
Company in June 2000 was converted to preferred stock and the Company received
$1,000,000 in cash proceeds in exchange for the issuance by the Company of an
aggregate of 2,010 shares of Series C Convertible Preferred Stock and 355,556
three-year warrants exercisable into common stock at $2.25 per share.

Item 27. EXHIBITS.

(a) The following is a list of Exhibits filed herewith as a part of this
Registration Statement:

Exhibit No. Description of document
----------- -----------------------

2(1) Agreement and Plan of Merger between Heuristic Development Group and
Virtual Communities dated June 2, 1999, as filed with the Commission as
Exhibit 2.1 to Heuristic Development Group's Form 10-Q for the quarter
ended on June 30, 1999, is incorporated by reference.

2(2) Amendment to Agreement and Plan of Merger between Heuristic
Development Group and Virtual Communities, dated September 8, 1999,
as filed with the Commission as Annex L to Heuristic Development
Group's Registration Statement on Form S-4 Amendment No. 1 (File
No. 333-87373), is incorporated by reference.

2(3) Amendment No. 2 to Agreement and Plan of Merger between Heuristic
Development Group and Virtual Communities, dated October 29, 1999,
as filed with the Commission as Exhibit 2(3) to Virtual
Communities, Inc.'s Registration Statement on Form SB-2 Amendment
No. 1 filed on January 4, 2000, is incorporated by reference.

3(1) Certificate of Incorporation of Heuristic Development Group, as amended,
as filed with the Commission as Exhibit XI to Appendix A

II - 3
<PAGE>

to Heuristic Development Group's Registration Statement on Form S- 4 Amendment
No. 1 filed on September 30, 1999 (File No. 333- 87373), is incorporated by
reference.

3(2) Bylaws of Heuristic Development Group, as amended, as filed with the
Commission as Exhibit XII to Appendix A to Heuristic Development
Group's Registration Statement on Form S-4 Amendment No. 1 filed on
September 30, 1999 (File No. 333-87373), is incorporated by reference.

5(1) Opinion of Wuersch & Gering, LLP, as filed with the Commission as
Exhibit 5.1 to Virtual Communities, Inc.'s Registration Statement on
Form SB-2 filed on May 5, 2000, is incorporated by reference.

10(1) Software License and Support Agreement between iMediation Inc. and
Virtual Communities, dated December 30, 1999, as filed with the
Commission as Exhibit 10(1) to Virtual Communities, Inc.'s Registration
Statement on Form SB-2 Amendment No. 1 filed on January 4, 2000, is
incorporated by reference.

10(2)(a) Partner Agreement between Intershop Communications, Inc. and Virtual
Communities, dated September 30, 1999, as filed with the Commission as
Exhibit 10(2)(a) to Virtual Communities, Inc.'s Registration Statement
on Form SB-2 Amendment No. 1 filed on January 4, 2000, is incorporated
by reference.

10(2)(b) Professional Services Agreement between Intershop Communications, Inc.
and Virtual Communities, dated September 30, 1999, as filed with the
Commission as Exhibit 10(2)(b) to Virtual Communities, Inc.'s
Registration Statement on Form SB-2 Amendment No. 1 filed on January 4,
2000, is incorporated by reference.

10(3) Agreement between Jewish Telegraphic Agency, Inc. and Virtual
Jerusalem, dated September, 1996, filed with the Commission as Exhibit
10(1) to Heuristic Development Group's Registration Statement on Form
S-4 on September 17, 1999 (File No. 333-87373), is incorporated by
reference.

10(4) Letter Agreement between Continental Airlines, Inc. and Virtual
Communities, Inc. dated May 18, 1999, as filed with the Commission as
Exhibit (10)2 to Heuristic Development Group's Registration Statement
on Form S-4 on September 17, 1999 (File No. 333-87373), is incorporated
by reference.

10(5) Agreement between Jewish Television Network and Virtual Jerusalem, Ltd.
dated March 23, 1997, as filed with the Commission as Exhibit 10(3) to
Heuristic Development Group's Registration Statement on Form S-4 on
September 17, 1999 (File No. 333-87373), is incorporated by reference.

10(6) Agreement between Matthew Album and Virtual Communities, Inc., dated
March 2, 1998, as filed with the Commission as Exhibit 10(4) to
Heuristic Development Group's Registration Statement on Form S- 4 on
September 17, 1999 (File No. 333-87373), is incorporated by reference.

10(7) Agreement between Haaretz Daily Newspaper Ltd. and Virtual

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<PAGE>

Communities, Inc., dated July 15, 1998, as filed with the Commission as
Exhibit 10(5) to Heuristic Development Group's Registration Statement
on Form S-4 on September 17, 1999 (File No. 333-87373), is incorporated
by reference.

10(8) Netgravity Adserver License Agreement between Netgravity, Inc. and
Virtual Communities dated June 30, 1999, as filed with the Commission
as Exhibit 10(6) to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.

10(9) Software License Agreement between Cortext Ltd. and Planet
Communications Ltd., on the one hand, and Virtual Communities, Inc., on
the other hand, dated July 16, 1999, as filed with the Commission as
Exhibit 10(7) to Heuristic Development Group's Registration Statement
on Form S-4 on September 17, 1999 (File No. 333-87373), is incorporated
by reference.

10(10) Web Design and Development Agreement between VCI Community Solutions,
Inc. and Tromaville.com, Inc., dated August 6, 1999, as filed with the
Commission as Exhibit 10(8) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.

10(11) Frontier Global Center, Inc. Master Service Agreement between Frontier
GlobalCenter, Inc. and Virtual Communities dated March 15, 1998, as
filed with the Commission as Exhibit 10(9) to Heuristic Development
Group's Registration Statement on Form S-4 on September 17, 1999 (File
No. 333-87373), is incorporated by reference.

10(12) Financial Services Agreement between Virtual Communities, Inc. and
Virtual Communities Israel, Ltd. dated September 1, 1999, as filed with
the Commission as Exhibit 10(10) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.

10(13) Cost Plus Agreement between Virtual Communities, Inc. and Virtual
Communities Israel, Ltd. dated September 1, 1999, as filed with the
Commission as Exhibit 10(11) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.

10(14) Lease Agreement between Allied Investments Ltd., as Lessor, and Virtual
Jerusalem, as Lessee, dated December 29, 1998, as filed with the
Commission as Exhibit 10(12) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.

10(15) Letter Guarantee to Allied Investments from Israel General Bank Ltd..
dated December 23, 1998, as filed with the Commission as Exhibit 10(13)
to Heuristic Development Group's Registration Statement on Form S-4 on
September 17, 1999 (File No. 333-87373), is incorporated by reference.

10(16) Lease Agreement between J.T.P. The Jerusalem Technology Park Ltd., as
Lessor, and Virtual Communities Israel, Ltd., as Lessee, dated May 19,
1999, as filed with the Commission as Exhibit 10(14) to

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<PAGE>

Heuristic Development Group's Registration Statement on Form S-4 on
September 17, 1999 (File No. 333-87373), is incorporated by reference.

10(17) Letter Guarantee to J.T.P. The Jerusalem Technology Park Ltd. from
Israel General Bank Ltd.. dated August 16, 1999, as filed with the
Commission as Exhibit 10(15) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.

10(18) Lease Agreement between Eighth Avenue Loft Associates and Virtual
Communities, Inc. dated June 14, 1999, as filed with the Commission as
Exhibit 10(16) to Heuristic Development Group's Registration Statement
on Form S-4 on September 17, 1999 (File No. 333-87373), is incorporated
by reference.

10(19) Employment Agreement between Deborah Gaines and Virtual Communities,
dated October 25, 1999, as filed with the Commission as Exhibit 10(19)
to Virtual Communities, Inc.'s Registration Statement on Form SB-2
Amendment No. 1 filed on January 4, 2000, is incorporated by reference.

10(20) Employment Agreement between Avi Moskowitz and Virtual Communities,
Inc. dated June 1, 1999, as filed with the Commission as Exhibit 10(17)
to Heuristic Development Group's Registration Statement on Form S-4 on
September 17, 1999 (File No. 333-87373), is incorporated by reference.

10(21) Employment Agreement between Michael Harwayne and Virtual Communities,
Inc. dated February, 1999, as filed with the Commission as Exhibit
10(18) to Heuristic Development Group's Registration Statement on Form
S-4 on September 17, 1999 (File No. 333-87373), is incorporated by
reference.

10(22) Employment Agreement between Mark McCourt and Virtual Communities, Inc.
dated February, 1999, as filed with the Commission as Exhibit 10(19) to
Heuristic Development Group's Registration Statement on Form S-4 on
September 17, 1999 (File No. 333-87373), is incorporated by reference.

10(23) Warrant to Purchase Shares of Common Stock of Virtual Communities, Inc.
No. W-15, between Virtual Communities and Avi Moskowitz dated December
31, 1998, as filed with the Commission as Exhibit 10(20) to Heuristic
Development Group's Registration Statement on Form S- 4 on September
17, 1999 (File No. 333-87373), is incorporated by reference.

10(24) Warrant to Purchase Shares of Common Stock of Virtual Communities, Inc.
No. W-17, between Virtual Communities and Avi Moskowitz dated June,
1998, as filed with the Commission as Exhibit 10(21) to Heuristic
Development Group's Registration Statement on Form S-4 on September 17,
1999 (File No. 333-87373), is incorporated by reference.

10(25) Warrants to Purchase Shares of Common Stock of Virtual Communities,
Inc. Nos. W-14, W-25 and W-26 between Virtual Communities and David
Morris dated June, 1998, as filed with the Commission as Exhibit

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<PAGE>

10(22) to Heuristic Development Group's Registration Statement on Form
S-4 on September 17, 1999 (File No. 333-87373), is incorporated by
reference.

10(26) 1997 Stock Option Plan of Virtual Communities, as filed with the
Commission as Exhibit 10(23) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.

10(27) 1998 Stock Option Plan of Virtual Communities, as filed with the
Commission as Exhibit 10(24) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.

10(28) 1999 Stock Option Plan of Virtual Communities, as filed with the
Commission as Exhibit 10(25) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.

10(29) 1996 Stock Option Plan of Heuristic Development Group, as filed with
the Commission as Exhibit 10.1 to Heuristic Development Group's
Registration Statement on Form SB-2 filed on December 11, 1996 (File
No. 333-17635), is incorporated by reference.

10(30) Escrow Agreement among Heuristic Development Group, American Stock
Transfer & Trust Company, and shareholders of Heuristic Development
Group, as filed with the Commission as Exhibit 10.2 to Heuristic
Development Group's Registration Statement on Form SB-2 filed on
December 11, 1996 (File No. 333-17635), is incorporated by reference.

10(31) Form of Indemnification Agreement, as filed with the Commission as
Exhibit 10.3 to Heuristic Development Group's Registration Statement on
Form SB-2 filed on December 11, 1996 (File No. 333- 17635), is
incorporated by reference.

10(32) Assignment dated August 22, 1994 between Nautilus Group Japan, Ltd. and
Heuristic Development Group, as filed with the Commission as Exhibit
10.4 to Heuristic Development Group's Registration Statement on Form
SB-2 filed on December 11, 1996 (File No. 333- 17635), is incorporated
by reference.

10(33) Exclusive Distribution License Agreement dated June 1995 between
Nautilus Group Japan, Ltd. and Heuristic Development Group, as filed
with the Commission as Exhibit 10.5 to Heuristic Development Group's
Registration Statement on Form SB-2 filed on December 11, 1996 (File
No. 333-17635), is incorporated by reference.

10(34) Letter Agreement dated November 27, 1996 between Nautilus Group Japan,
Ltd. and Heuristic Development Group, as filed with the Commission as
Exhibit 10.6 to Heuristic Development Group's Registration Statement on
Form SB-2 filed on December 11, 1996 (File No. 333-17635), is
incorporated by reference.

10(35) Office Lease dated August 1, 1996 between Paulistic Productions and
Heuristic Development Group, as filed with the Commission as Exhibit
10.7 to Heuristic Development Group's Registration

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<PAGE>

Statement on Form SB-2 filed on December 11, 1996 (File No. 333-
17635), is incorporated by reference.

10(36) Retainer Agreement dated August 16, 1994 between TransPac Software and
Heuristic Development Group, as filed with the Commission as Exhibit
10.8 to Heuristic Development Group's Registration Statement on Form
SB-2 filed on December 11, 1996 (File No. 333-17635), is incorporated
by reference.

10(37) Employment Agreement dated as of December 1, 1996 between Heuristic
Development and Steven R. Gumins, as filed with the Commission as
Exhibit 10.9 to Heuristic Development Group's Registration Statement on
Form SB-2 filed on December 11, 1996 (File No. 333-17635), is
incorporated by reference.

10(38) Employment Agreement dated as of December 1, 1996 between Heuristic
Development Group and Deborah E. Griffin, as filed with the Commission
as Exhibit 10.10 to Heuristic Development Group's Registration
Statement on Form SB-2 filed on December 11, 1996 (File No. 333-17635),
is incorporated by reference.

10(39) Conversion Agreement between Heuristic Development Group and holders of
Indebtedness, as filed with the Commission as Exhibits 10.11 and 10.12
to Heuristic Development Group's Registration Statement on Form SB-2
filed on December 11, 1996 (File No. 333- 17635), is incorporated by
reference.

10(40) Share Purchase Agreement between Virtual Communities, Inc., Cortext
Ltd., and Ran Eilam and Noam Ilan dated February 7, 2000, as filed with
the Commission as Exhibit 10(40) to Virtual Communities, Inc.'s
Registration Statement on Form SB-2 filed on May 5, 2000, is
incorporated by reference.

10(41) Assignment Agreement between Planet Communications Ltd, Cortext Ltd.,
and Virtual Communities, Inc., dated February 10, 2000, as filed with
the Commission as Exhibit 10(41) to Virtual Communities, Inc.'s
Registration Statement on Form SB-2 filed on May 5, 2000, is
incorporated by reference.

10(42) Representation And Technical Support Agreement between VCI Communities
Solutions, Inc and Vanco Consulting Limited, dated February 21, 2000,
as filed with the Commission as Exhibit 10(42) to Virtual Communities,
Inc.'s Registration Statement on Form SB-2 filed on May 5, 2000, is
incorporated by reference.

10(43) Form of Callable Warrant to Purchase Shares of Common Stock of Virtual
Communities, Inc., as filed with the Commission as Exhibit 10(43) to
Virtual Communities, Inc.'s Registration Statement on Form SB-2 filed
on May 5, 2000, is incorporated by reference.

10(44) Form of A Warrant to Purchase Shares of Common Stock of Virtual
Communities, Inc., as filed with the Commission as Exhibit 10(44) to
Virtual Communities, Inc.'s Registration Statement on Form SB-2 filed
on May 5, 2000, is incorporated by reference.

10(45) Registration Rights Agreement between Virtual Communities, Inc. and
Intercoastal Financial Services Corp. dated March 31, 2000, as

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<PAGE>

filed with the Commission as Exhibit 10(45) to Virtual Communities,
Inc.'s Registration Statement on Form SB-2 filed on May 5, 2000, is
incorporated by reference.

10(46) Registration Rights Agreement between VCI and Magellan International,
Ltd., Aspen International, Ltd., Acqua Wellington Value Fund Ltd.,
Cuttyhunk Fund Ltd. dated March 31, 2000, as filed with the Commission
as Exhibit 10(46) to Virtual Communities, Inc.'s Registration Statement
on Form SB-2 filed on May 5, 2000, is incorporated by reference.

10(47) Common Stock and Warrants Purchase Agreement dated March 31, 2000,
between VCI and Magellan International, Ltd., Aspen International,
Ltd., Acqua Wellington Value Fund Ltd., and Cuttyhunk Fund Ltd, as
filed with the Commission as Exhibit 10(47) to Virtual Communities,
Inc.'s Registration Statement on Form SB-2 filed on May 5, 2000, is
incorporated by reference.

10(48) Form of B Warrant to Purchase Shares of Common Stock of Virtual
Communities, Inc., as filed with the Commission as Exhibit 10(48) to
Virtual Communities, Inc.'s Registration Statement on Form SB-2 filed
on May 5, 2000, is incorporated by reference.

10(49) Bridge Loan Note by Virtual Communities, Inc. in favor of Aspen
International dated June 26, 2000 as filed with the Commission as
Exhibit 10(49) to Virtual Communities, Inc.'s Form 10Q Quarterly Report
filed on August 14, 2000, is incorporated by reference.

10(50) Conversion of Promissory Note Letter by Aspen International, Ltd. dated
August 2, 2000 as filed with the Commission as Exhibit 10(50) to
Virtual Communities, Inc.'s Form 10Q Quarterly Report filed on August
14, 2000, is incorporated by reference.

10(51) Termination Agreement and Mutual Release by and between Intercoastal
Financial Services Corp. and Virtual Communities, Inc. dated July 28,
2000 as filed with the Commission as Exhibit 10(51) to Virtual
Communities, Inc.'s Form 10Q Quarterly Report filed on August 14, 2000,
is incorporated by reference.

10(52) Amendment of Share Purchase Agreement, dated July 14, 2000, between
Virtual Communities, Inc., Cortext, Ran Eilam and Noam Ilan.

10(53) Share Transfer Agreement dated July 14, 2000, between Virtual
Communities, Inc., and Noam Ilan.

10(54) Certificate of Designation of the Relative Rights and Preferences of
the Series C Convertible Preferred Stock of Virtual Communities, Inc.,
dated July 28, 2000 and filed with the Secretary of State of Delaware
on July 28, 2000.

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<PAGE>

21(1) List of Subsidiaries, as filed with the Commission as Exhibit 21(1) to
Virtual Communities, Inc.'s Registration Statement on Form SB-2
Amendment No. 1 filed on January 4, 2000, is incorporated by reference.

23(1) Consent of Arthur Andersen, LLP.

23(2) Consent of Wuersch & Gering, LLP (see Exhibit 5(1)).

24(1) Certified resolutions of the Board of Directors of Virtual Communities,
Inc., taken at a special meeting of the Board held December 16, 1999,
appointing Avi Moskowitz as attorney in fact for the filing of the
company's Registration Statement on Form SB- 2, as filed with the
Commission as Exhibit 24(1) to Virtual Communities, Inc.'s Registration
Statement on Form SB-2 Amendment No. 1 filed on January 4, 2000, is
incorporated by reference.

Item 28. UNDERTAKINGS.

(a) (a) Virtual Communities, Inc., hereby undertakes:

(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:

(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total value of securities offered would not
exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Securities
and Exchange Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement; and

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

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

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

(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of

II - 10

<PAGE>

Virtual Communities, Inc. pursuant to the foregoing provisions, or otherwise,
Virtual Communities, Inc. has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by Virtual Communities, Inc. of expenses incurred or
paid by a director, officer or controlling person of Virtual Communities, Inc.,
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, Virtual Communities, Inc., 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 of 1933 and will be
governed by the final adjudication of such issue.

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<PAGE>

SIGNATURES

Pursuant to 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 of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on September 7, 2000.

VIRTUAL COMMUNITIES, INC.

By /s/ Avi Moskowitz
-------------------------------------------
Avi Moskowitz, President, President and CEO

By /s/ Arthur Dubroff
-----------------------------------------
Arthur Dubroff, Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
date indicated.

<TABLE>
<S> <C> <C>
/s/ Avi Moskowitz
------------------------ President, CEO and Chairman September 7, 2000
Avi Moskowitz

/s/ Fred S. Lafer Director September 7, 2000
-------------------------
Fred S. Lafer

/s/ Allan Dalfen Director September 7, 2000
-------------------------
Allan Dalfen

/s/ Peter A. Jacobs Director September 7, 2000
-------------------------
Peter A. Jacobs

/s/ David Morris Director September 7, 2000
-------------------------
David Morris
</TABLE>

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