<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


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

                  For the fiscal year ended September 30, 1999

                                       OR

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from    to

                         Commission File Number: 1-14559

                             MUSE TECHNOLOGIES, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


                   Delaware                         85-0437001
         -------------------------------      ---------------------
         (State or other jurisdiction of         (I.R.S. Employer
          incorporation or organization)      Identification Number)


        1601 Randolph, SE, Suite 210, Albuquerque, NM           87106
        ---------------------------------------------         ----------
          (Address of principal executive offices)            (Zip Code)


                    Issuer's telephone number: (505) 843-6873

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


                                  Common Stock
                                ---------------
                                (Title of Class)

                Class A Redeemable Common Stock Purchase Warrants
                -------------------------------------------------
                                (Title of Class)

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


                                  Common Stock
                                ----------------
                                (Title of Class)

                Class A Redeemable Common Stock Purchase Warrants
                -------------------------------------------------
                                (Title of Class)


<PAGE>


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X|  No |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained is this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes |_| No |X|

State issuer's revenues for its most recent fiscal year: $1,723,267.

As of December 17, 1999, there were outstanding 10,333,148 shares of common
stock, $.015 par value (the "Common Stock"), and Class A Redeemable Common Stock
Purchase Warrants (the "Warrants") to purchase 1,944,243 shares of Common Stock.
Based on the closing prices of the Common Stock and the Warrants on that date,
$2.8755 and $.875, respectively, the approximate aggregate market value of
the Common Stock and the Warrants held by non-affiliates was $29,707,801 and
$826,213, respectively.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's 2000 Definitive Proxy Statement, which statement
will be filed not later than 120 days after the end of the fiscal year covered
by this Report, are incorporated by reference in Part III hereof.

Certain exhibits are incorporated by reference to the Registrant's Registration
Statement on Form SB-2 and the amendments thereto and certain of the Company's
periodic reports, as listed in response to Item 13(a)(2).

Transitional Small Business Disclosure Format (check one): Yes |_| No |X|


              [The remainder of this page is intentionally blank.]



<PAGE>



This Report contains certain forward-looking statements and information relating
to the Company that are based on the beliefs of management as well as
assumptions made by, and information currently available to, the Company. When
used in this Report, the words "anticipate," "believe," "estimate," "expect,"
"will," "could," "may" and similar expressions, are intended to identify
forward-looking statements, but the absence of any such words does not mean that
the statement is not forward-looking. Such statements reflect the current views
of management with respect to future events and are subject to certain risks,
uncertainties and assumptions, including those described under "Factors
Affecting Operating Results and Market Price of Stock" and elsewhere in this
Report. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein. In addition to the other information in
this Report, the above factors should be carefully considered in evaluating the
Company and its business.

ITEM 1.  DESCRIPTION OF BUSINESS

General

MUSE Technologies, Inc. (the "Company") develops and markets several software
products designed to enhance the user's ability to understand and analyze data
and information and to provide solutions to complex data integration and data
management problems encountered by scientists, engineers and other computing
professionals. The Company believes that the "MuSE (Registered)/1 (MuSE
Development Environment System) Development System", its core software product,
represents a new approach to computer interaction since it permits the
integration of various types of data from multiple sources without affecting the
integrity of such data and the presentation of data in a multisensory
environment to enhance the user's ability to analyze and understand such data.
MuSE can be used with different computing platforms and different physical or
logical input and output devices. The multisensory capabilities of MuSE enables
the user to present information in real time over global networks using visual,
auditory, tactile and other perceptual tools. The Company has been recognized by
Computer Graphics World magazine with its prestigious "Innovation Award" for the
Company's advances in the fields of human computer interaction (1996) and
network collaboration (1997).

MuSE is a tool which can be used in a wide variety of industrial, commercial,
entertainment and governmental applications. Each application would be designed
to meet the specific requirements of the end-users in a particular industry. In
order to maximize the market potential from its products and services, the
Company has entered into strategic relationships with partners that have the
financial, technological and marketing capability of developing applications for
MuSE in specific industries. See "Marketing and Sales."

The Company formed MUSE Federal Systems Group Inc., ("MUSE Federal"), a wholly
owned subsidiary that will provide software and consulting services exclusively
to federal agencies and government contractors. MUSE Federal will support
existing government accounts of the Company, which include


----------
1/ MuSE (spelled with the Greek "mu" symbol as the first character) is a
registered trademark of the Company registered in the United States Patent and
Trademark Office. For the purposes of electronic submission, the Greek symbol
"mu" appears as the letter "M" in this Report.


                                        2

<PAGE>



NASA Langley, Kennedy Space Center, Jet Propulsion Laboratory, NASA Ames
Research Center, Stennis Space Flight Center and various projects for the US
Navy. Through direct sales efforts and a growing network of Strategic Reselling
Partners (which includes Federal Data Corporation, Intergraph and Analytical
Mechanics Associates), the new company plans to broaden its federal customer
base and develop special capabilities and services that are designed to meet the
unique requirements of governmental agencies. The Company believes that MUSE
Federal will obtain all requisite government approvals to operate as a
government contractor in the first quarter of calendar 2000.

Additionally, on November 16, 1999, the Company completed the acquisition of
UK-based Virtual Presence Limited ("Virtual Presence"), a provider of
interactive visualization solutions for companies in the European defense,
medical and manufacturing industries. The Company believes that its acquisition
of Virtual Presence will provide synergistic opportunities to expand the
Company's business and products and services internationally. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

MuSE is based on software licensed to the Company by Sandia Corporation
("Sandia") pursuant to a license agreement dated October 9, 1995 (as amended,
the "License Agreement"). Sandia is the operator, under the auspices of the
United States Department of Energy, of Sandia National Laboratories ("SNL").
Prior to organizing the Company, certain of the Company's founders were employed
by Sandia, where they developed MuSE. Unless the context otherwise requires,
references to "Sandia" include Sandia Corporation and SNL.

The Company was incorporated on October 24, 1995 in order to acquire certain
assets and liabilities from Viga Technologies Corporation ("Viga"), including
the License Agreement and related technology. Such acquisition was consummated
in December 1995. The Company's executive offices are located at 1601 Randolph,
SE, Albuquerque, New Mexico 87106, and its telephone number is (505) 843-6873.

Products And Services

The MuSE Development System ("MuSE") represents a new paradigm in how computer
users interact with computer-based information. It was designed for initial use
within the advanced industrial, scientific and research sectors, and for
eventual migration to more conventional desktop computing arenas. Both of these
sectors are largely driven by technological advances in two complementary areas:
(1) increasing amount and diversity of data, particularly real-time simultaneous
processing of three dimensional graphics, audio video images and text; and (2)
increased performance capabilities of high-performance computers, especially the
growth of the Windows NT(Registered) platform.

The MuSE Development System represents an extension of traditional "visual
computing" to the more advanced "perceptual computing." Visual computing is used
to create and manipulate true-color, three-dimensional ("3D") objects
representing complex data with extreme precision and speed, thereby enhancing
understanding. In visual computing, a 3D full color image replaces the
two-dimensional screen image. The use of visually rich images makes it possible
to represent complex data more understandably as well as to simulate real-world
characteristics. Visual computing can be significantly enhanced when combined
with appropriate input and output devices, including standard off the shelf
products sold by others. Such an enhanced computing environment can create a
data-rich problem-solving experience.


                                        3

<PAGE>


Historically, advanced visual computing has been limited to the high-end of the
professional computer industry for use by scientists, engineers, researchers and
others. However, as a new generation of more powerful and lower cost
workstations, mostly WindowsNT-based systems, rapidly enter the market, the full
capabilities of perceptual computing are becoming available to larger segments
of the professional marketplace. The Company identified this trend several years
ago and last year took the necessary steps to evolve its core product from its
original UNIX configuration to the WindowsNT platform. The MuSE Development
System now runs on Dell, Hewlett Packard, Intergraph and Silicon Graphics (SGI)
WindowsNT systems.

The Company believes that MuSE enhances visual computing with the rendering of
multi-dimensional data, and empowers the user through a multi-sensory (sight,
sound and touch) highly interactive and collaborative experience that is more
like real life and is known as perceptual computing. Perceptual computing takes
advantage of some of the most basic and powerful human skills, including trend
analysis, pattern recognition and anomaly detection. By pairing these
fundamental skills with the ability to engage multiple senses, the use of voice
for system command and networked collaboration, the Company has made it possible
for third-party software developers to use the MuSE Development System to create
feature-rich applications in which complex data is brought to life and becomes
surprisingly easy to comprehend.

MuSE assists software developers in creating synthetic or virtual environments
in which information can be processed in ways which are different from
traditional use of computers. Most computer software requires users to learn an
entirely new way of interacting with and processing information that is not
consistent with human perceptual processing. MuSE adapts the computer to humans
by complementing human perceptual processes. MuSE is designed to allow the user
to interact with the computer as if the computer is an extension of the user and
the way that particular user processes and analyzes information.

The Company's proprietary software product, "Continuum(Trademark)," is designed
for multiuser, real-time collaboration within the MuSE environment. Continuum
permits multiple users to work and interact with each other within a common
environment and to analyze and manipulate the same data independent from other
users in a parallel private environment. A particular user can manipulate a
parallel private environment according to individual interests and perceptual
tools, and can be joined by other users for collaboration and idea exchange as
such user deems appropriate. Similarly, a user can jump from a private parallel
environment at any time to rejoin other users in the "public" environments.
Since it is designed for use with MuSE, users can interact using various
platforms, devices and tools. MuSE and Continuum were developed for the Unix
operating system and for the WindowsNT platform.

After more than three years of commercial operation, the Company adopted a new
strategy to achieve greater market penetration in light of a shift in computer
platform preference from the UNIX platform to the WindowsNT platform. As a
result, the Company has repriced and repositioned the MuSE Development System to
be more competitive and appeal to a broader population of advanced computer
users in several industries. To that end, the Company integrated its two
formerly separate products (MuSE and Continuum) into a single MuSE Development
System, significantly reduced the cost of the MuSE Development System and the
fees associated with licensing of MuSE applications created with the MuSE
Development System, and offered an array of technical enhancements that extend
the MuSE Development System's features and capabilities.


                                        4

<PAGE>


The Company's software products can be utilized with a wide range of hardware
configurations and can be used simultaneously by more than one user in desktop,
office, laboratory or theatre settings.

In addition to its software products, the Company also offers custom
applications design and development services as well as consulting and support
services relating to its products.

Strategy

The Company believes that, in order to maximize the market potential from its
products and services, it will be necessary for the Company to enter into
strategic relationships with partners, through its strategic reselling partner
distribution program (the "SRP Program"), that have the financial, technological
and marketing capability of developing applications for MuSE or distributing the
Company's products and services in specific industries.

In June 1998, the Company entered into an SRP agreement (the "CRI Agreement")
with Continuum Resources International ASA, a Norwegian Company ("CRI"), with
respect to distribution of the Company's products and services in the oil and
gas industry worldwide. In exchange for such exclusive rights, CRI paid the
Company a non-refundable license fee of $5,000,000 and will pay minimum sales
commitments totaling $12,000,000 through 2001, which minimum commitments are
currently in the process of being reduced.

In December 1998, the Company entered into a non-exclusive SRP agreement with
Intergraph Corp., an automated business solutions company with customers
worldwide in a variety of commercial sectors and government. The agreement with
Intergraph provides Intergraph with the non-exclusive right to resell the
Company's products and services worldwide in exchange for minimum annual sales
commitments aggregating $4 million through 2001.

In February 1999, the Company entered into non-exclusive reseller agreements
under its SRP program with Analytical Mechanics Associates, a technical
consulting firm, and Federal Data Corporation, an information technology
provider serving primarily the Federal government. Each agreement is for a term
of three years with minimum sales commitments of $3 million over the term of the
agreement.

Although the Company's existing SRP agreements provide for minimum annual sales
commitments, failure to satisfy such commitments will permit the Company to
terminate such SRP agreement. Accordingly, there can be no assurance that the
threat of termination of any SRP agreement will be an effective deterrent
against any breach thereof or that such minimum sales commitments will be
realized.

The Company's primary strategy is to seek to enter into similar SRP arrangements
in other markets. As a result of the significant lead time necessary to market
and consummate such distribution and reseller agreements, the Company's
quarterly results are expected to fluctuate significantly depending on the
timing of completion of such arrangements and any up front fees and sales
commitments associated therewith. Accordingly, results in any one quarter are
not indicative of results to be experienced in subsequent quarters.

In April, 1999, the Company entered into a three-year agreement with The
Goodyear Tire & Rubber Company ("Goodyear") to develop applications using the
Company's advanced visualization and network

                                        5

<PAGE>



collaboration software. The Company will provide software, system design,
consulting, and technical support services to Goodyear on a project-by-project
basis. The agreement includes a three-year renewal option and provides Goodyear
with exclusivity for consulting or application design services within the tire
and rubber manufacturing business throughout its term, provided that minimum
annual project commitments are satisfied. Sales activities in the tire and
rubber manufacturing industry by the Company's SRP's are not affected by this
agreement.

Marketing and Sales

The Company has expanded its marketing staff, currently consisting of 12
employees, including an Executive Vice President, Vice President of Sales (North
America), Vice President of Communications, Vice President of Marketing and
Business Development and Vice President of European Business Development. The
Company is in the process of hiring additional sales and marketing personnel
with expertise and contacts in the Company's targeted markets. Additionally, the
Company will seek to leverage its existing relationships and applications of its
software products to enhance its marketing efforts.

The Company has entered into agreements with potential strategic partners that
have the financial, technological and marketing capability of developing
applications for MuSE or distributing the Company's products and services in
specific industries. See "Strategy" above. The Company is initially directing
its marketing efforts to obtain strategic partners in the automotive
manufacturing, computer and medical imaging industries, and from agencies of the
Federal government (primarily through MUSE Federal).

The License Agreement

Pursuant to the License Agreement, the Company received (i) a limited exclusive
worldwide license to use and reproduce the MuSE software, (ii) a license to
create derivative works of MuSE software and (iii) the right to distribute and
sublicense the MuSE software. The License Agreement provides the Company with a
ten year exclusive license with respect to the MuSE software, and thereafter
provides a non-exclusive right through 2015. After the end of such ten year
period of exclusivity, the Company may request Sandia to extend exclusivity
through 2015, which determination shall be made in Sandia's sole discretion and
subject to continued royalty payments under the License Agreement. If the
License Agreement continues in force for a total of 20 years, the Company's
rights under the License Agreement convert to a paid-up non-exclusive license.

The Company is required to pay a licensing fee of $10,000 per year until
December 31, 1999. In addition, the Company is required to pay royalties (with
an annual minimum royalty of $20,000) for the term of the License Agreement,
based on the Company's gross revenues, less cost of goods sold and certain other
expenses, from the sale of products utilizing MuSE. Additionally, the Company
paid a one-time license fee of $400,000 in connection with the acquisition of
the License Agreement from Viga. The Company is also required to retain the
services of key personnel capable of supporting the MuSE software. In addition,
the License Agreement is terminable by Sandia in the event of a breach
thereunder by the Company (including, without limitation, due to failure to pay
minimum royalties in the annual amount of $20,000), or in its discretion, in the
event of any such breach, Sandia may convert the license into a non-exclusive
license or otherwise reduce the Company's rights thereunder.


                                        6

<PAGE>


As part of the License Agreement, the Company has agreed to grant Sandia an
irrevocable non-exclusive license to use the MuSE software (and all
enhancements, modifications and corrections made by the Company) and to develop
derivative works based on the MuSE software for internal use at Sandia.

Under the License Agreement, the Company bears the risk that the information and
technology licensed from Sandia and incorporated in the MuSE software may
infringe the rights of third parties and must indemnify Sandia in respect of any
claims for copyright infringement brought against them and arising from the
development and distribution of the programs incorporated in the MuSE software.
The Company has agreed to treat the originally licensed MuSE software as
proprietary to Sandia. However, enhancements and modifications to such original
software, which have been extensive, are considered proprietary to the Company.

Intellectual Property Rights

The Company has been advised that Sandia has filed patent applications for
aspects of the MuSE software and holds copyrights to the MuSE software. The
Company depends on Sandia for the protection of the intellectual property
covered by the License Agreement. No assurance can be given that Sandia will be
able to patent other inventions present in the MuSE software or otherwise
protect the proprietary intellectual property covered by the License Agreement.

The Company has filed and is in the process of filing patent applications for
Continuum and related technologies, and it has also filed trademark and logo
applications.

The Company will generally rely on a combination of trade secret, copyright,
trademark and patent law to protect its proprietary rights in the intellectual
property developed by it. Although the Company intends to provide products
utilizing the MuSE software to its customers primarily in object code form, no
assurance can be given that unauthorized third parties will not be able to copy
the MuSE software. In addition, there can be no assurance that the Company's
competitors will not independently utilize existing technologies to develop
products that are substantially equivalent or superior to MuSE. The Company
could incur substantial costs in defending itself or its licensees in litigation
brought by third parties, or in seeking a determination of the scope and
validity of the proprietary rights of others.

Research and Product Development

Management believes that the Company's future success depends in large part upon
the timely enhancement of existing products and the development of new products
and MuSE-based applications by its customers and third party software
developers. The Company is currently developing new software products relating
to information management with broad applications in the commercial, government
and education markets and enhancing existing products to improve price and
performance, expand product capabilities, simplify user interfaces, help define
and support emerging industry standards, and develop interoperability with most
products and devices commonly used in the Company's targeted markets. MuSE-based
products operate on a broad range of platforms and with a variety of display and
input/output devices. The Company also believes that it is beneficial to work
with third parties to accomplish these goals and has, in the past, received
funding from outside sources, such as grants from government organizations, to
develop products and applications. The Company intends to continue to pursue
such external research and development funding sources.

                                        7

<PAGE>


For fiscal 1999, fiscal 1998 and fiscal 1997, the Company's research and
development expense was approximately $2,303,000, $957,000 and $742,000,
respectively. Except for payments related to Small Business Innovative Research
grants from the Federal government of approximately $341,000 which was included
in revenue in fiscal 1998 and related to development of certain applications of
MuSE, all research and development was Company-sponsored.

Competition

The Company believes that the current market for MuSE and other visual computing
software products is relatively small and fragmented. However, based upon
publicly available market research, the Company believes that this market will
grow rapidly over the next decade. The Company believes that no single company
dominates the market at the present time; however, a number of emerging
companies are aggressively pursuing opportunities in this market, including
Parametric Technologies, Inc.'s Division Group ("Division"), Engineering
Automation, Inc.'s Sense8 division ("Sense8"), Advanced Visual Systems ("AVS")
and Multigen-Paradigm ("Paradigm"). Many of the companies with whom the Company
competes or expects to compete have substantially greater financial resources,
research and development capabilities, sales and marketing staffs and
distribution channels and are better known than the Company.

The Company believes that the principal factors affecting the Company's ability
to compete are the capabilities, functionality and architecture of its products;
the quality, ease of use by end-users, performance and functionality of the
derivative applications developed and marketed by the Company; the effectiveness
of the Company in marketing and distributing its products and services; and
price.

Employees

As of December 17, 1999, the Company, including its newly-acquired subsidiary,
Virtual Presence, had 82 full-time employees. The Company believes that its
relationships with its employees are satisfactory. The Company has no history of
any work stoppages and no employees of the Company are currently represented by
a union.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company has completed the construction of a synthetic environment laboratory
and other facilities to develop and demonstrate applications of MuSE within its
Albuquerque headquarters. The Company leases 8,762 square feet of office and
laboratory space in Albuquerque, New Mexico. The Company by amendment of its
lease, has leased an additional 8,787 square feet of space at its Albuquerque
headquarters in contemplation of the Company's expansion. The lease, as amended,
provides for base rental payments of approximately $17,600 per month. The
amended lease extends the termination date until January 31, 2001.

The Company subleases 1,445 square feet of space from CRI in Houston, Texas to
provide support services for CRI and its customers. This sublease provides for
rental payments of $3,000 per month and terminates on June 14, 2000. The Company
believes that such properties are adequately insured and are suitable for their
intended purposes.

                                        8

<PAGE>


ITEM 3.  LEGAL PROCEEDINGS

The Company is not a party to any material pending legal proceedings as of the
date hereof.

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

The Company did not submit any matters to a vote of its stockholders, through
the solicitation of proxies or otherwise, during the fourth quarter of fiscal
1999.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK-HOLDER MATTERS

The Company's Common Stock and Warrants are traded on the Nasdaq
SmallCap(Trademark) Market ("Nasdaq") under the symbol "MUZE" and "MUZEW",
respectively, and on the Boston Stock Exchange ("BSE") under the symbols "MZE"
and "MZEW", respectively. The following table sets forth, for the periods
indicated, the range of high and low bid prices of the Common Stock and the
Warrants as reported by Nasdaq and the BSE. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.

Common Stock                                              High             Low
------------                                              ----             ---

From November 17, 1998 (first trade date)                $14.00           $8.50
through December 31, 1998
Quarter ended March 31, 1999                             $10.50           $3.88
Quarter ended June 30, 1999                              $ 8.13           $3.88
Quarter ended September 30, 1999                         $ 6.25           $3.25

Warrants
--------

From November 17, 1998 (first trade date)                $ 4.18          $1.25
through December 31, 1998
Quarter ended March 31, 1999                             $ 3.50          $1.25
Quarter ended June 30, 1999                              $ 1.75          $1.13
Quarter ended September 30, 1999                         $ 1.63          $0.75


The approximate number of record holders of the Common Stock at December 17,
1999 was 165, not including beneficial owners whose shares are held by banks,
brokers and other nominees.

The Company has not paid any dividends. The Company does not expect to pay cash
dividends on its Common Stock in the foreseeable future as any earnings are
expected to be retained to finance the

                                        9

<PAGE>


Company's operations. Declaration of dividends in the future will remain within
the discretion of the Company's Board of Directors.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATION

The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's Consolidated Financial Statements, the
accompanying notes thereto and other financial information appearing elsewhere
in this Report. This section and other parts of this Report contain forward-
looking statements that involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operation--Factors
Affecting Operating Results and Market Price of Stock" commencing on page 14.

Operational Overview

The Company receives revenues from sales and licensing of its products and
providing consulting and maintenance services related thereto and from its
strategic reselling partner ("SRP") program. The Company attributes the lower
than expected results for the fiscal year ended September 30, 1999 to a longer
roll-out period by several of its SRP's and a strategic price reduction of the
MuSE Development System to meet the competitive demands of the marketplace.
Notwithstanding such lower than expected results, product sales have increased
as compared to the prior fiscal year.

In June 1998, the Company entered into the CRI Agreement with respect to
distribution of the Company's products and services in the oil and gas industry
worldwide. In exchange for such exclusive rights, CRI paid the Company a
non-refundable license fee of $5,000,000 and will pay minimum sales commitments
totaling $12,000,000 through 2001, which minimum commitments are currently in
the process of being reduced as a result of price decreases in the Company's
products and services. The Company has recognized the $5,000,000 license fee
under the CRI Agreement as revenue for the fiscal year ended September 30, 1998.
CRI's minimum commitment for 1999 was not met, however, the Company has
determined not to take any action with respect thereto at this time and is
currently in discussions regarding CRI's commitments for the balance of the
contract term and other matters relating to the Company's relationship with CRI.

In December 1998, the Company entered into a non-exclusive SRP agreement with
Intergraph Corp., an automated business solutions company with customers
worldwide in a variety of commercial sectors and government. The agreement with
Intergraph provides Intergraph with the non-exclusive right to resell the
Company's products and services worldwide in exchange for minimum annual sales
commitments aggregating $4 million through 2001.

In February 1999, the Company entered into non-exclusive reseller agreements
under its SRP program with Analytical Mechanics Associates, a technical
consulting firm, and Federal Data Corporation, an information technology
provider serving primarily the Federal government. Each agreement is for a term
of three years with minimum sales commitments of $3 million over the term of the
agreement.


                                       10

<PAGE>


Although the Company's existing SRP agreements provide for minimum annual sales
commitments, failure to satisfy such commitments will permit the Company to
terminate such SRP agreement. Accordingly, there can be no assurance that the
threat of termination of any SRP agreement will be an effective deterrent
against any breach thereof or that such minimum sales commitments will be
realized.

The Company's primary strategy is to seek to enter into similar SRP arrangements
in other markets. As a result of the significant lead time necessary to market
and consummate such distribution and reseller agreements, the Company's
quarterly results are expected to fluctuate significantly depending on the
timing of completion of such arrangements and any up front fees and sales
commitments associated therewith. Accordingly, results in any one quarter are
not indicative of results to be experienced in subsequent quarters.

In April, 1999, the Company entered into a three-year agreement with Goodyear to
develop applications using the Company's advanced visualization and network
collaboration software. The Company will provide software, system design,
consulting, and technical support services to Goodyear on a project-by-project
basis. The agreement includes a three-year renewal option and provides Goodyear
with exclusivity for consulting or application design services within the tire
and rubber manufacturing business throughout its term, provided that minimum
annual project commitments are satisfied. Sales activities in the tire and
rubber manufacturing industry by the Company's SRP's are not affected by this
agreement.

In March 1999, the Company's former Chief Technical Officer and Chairman of the
Board resigned as an employee and director of the Company and entered into a
consulting arrangement with the Company. Pursuant to the terms of the
Termination Agreement with such officer, the Company paid such officer an
aggregate of $1,340,000 in exchange for, among other things, certain
restrictions relating to such officer's common stock, a non-compete provision,
repurchase of 155,263 shares of common stock and a right of first refusal on
future sales of common stock by such officer. The excess of the consideration
paid over the value of the shares purchased of $563,685 is reflected as costs in
excess of the value of repurchased stock on the Statement of Operations.

In June 1999, the Company opened an office in Houston, Texas to support the
development and distribution of its products and services in the oil and gas
industry. This office is currently staffed with six technical software
developers, and is expected to require capital expenditures of approximately
$160,000 during the first quarter of fiscal 2000.

The Company formed MUSE Federal, a wholly owned subsidiary that will provide
software and consulting services exclusively to federal agencies and government
contractors. MUSE Federal will support existing government accounts of the
Company, which include NASA Langley, Kennedy Space Center, Jet Propulsion
Laboratory, NASA Ames Research Center, Stennis Space Flight Center and various
projects for the US Navy. Through direct sales efforts and a growing network of
Strategic Reselling Partners (which includes Federal Data Corporation,
Intergraph and Analytical Mechanics Associates), the new company plans to
broaden its federal customer base and develop special capabilities and services
that are designed to meet the unique requirements of governmental agencies. The
Company believes that MUSE Federal will obtain all requisite government
approvals to operate as a government contractor in the first quarter of calendar
2000.

On November 16, 1999, the Company completed the acquisition of Virtual Presence,
a provider of interactive visualization solutions for companies in the European
defense, medical and manufacturing

                                       11

<PAGE>



industries. The Company acquired Virtual Presence for a total of $600,000 in
cash payable over a 9 month period and 430,839 shares of the Company's common
stock, subject to certain restrictions. Of such shares, 205,522 are subject to
adjustment in the event that the price of the common stock over the twenty
trading days prior to November 15, 2000 is less than $4.41 per share.

Results of Operations

Revenues for the fiscal years ended September 30, 1999 ("fiscal 1999") and
September 30, 1998 ("fiscal 1998") were $1,723,267 and $6,206,135, respectively.
The decrease in revenue of $4,482,868 or 72% was due to the entering into of the
CRI Agreement and the receipt of $5,000,000 in connection therewith in fiscal
1998, which was not duplicated in fiscal 1999. Actual product and contract sales
increased by $517,132 or 42%. The Company also received interest income in
fiscal 1999 of $729,061 as compared to $0 in fiscal 1998.

Total operating expenses for fiscal 1999 were $6,970,962 as compared to total
operating expenses of $5,083,588 for fiscal 1998. The increase of $1,887,374 or
37% reflects additional salaries, general and administrative expenses and
increased research and development expenses. Research and development
expenditures for fiscal 1999 increased $1,345,939 or 141% over the same period
in fiscal 1998 due to increases in engineering and technical personnel (from 8
to 24) and equipment purchases. Selling, general and administrative expenses for
fiscal 1999 increased $1,478,358 or 55% over the same period in 1998 due
primarily to increases in sales and marketing personnel and increased costs for
trade shows and advertising. During fiscal 1998, the Company repriced employee
stock options from an exercise price of $7.60 per share to an exercise price of
$2.50 per share, resulting in a one-time non-cash expense of $948,355.

Total other income for fiscal 1999 of $134,737 consisted of interest income of
$729,061 offset by charges of $564,636 related to costs in excess of the value
of repurchased stock of a former executive officer and interest expense of
$30,678. For the previous fiscal year, other expense consisted of $798,653 in
interest charges from notes payable.

Accordingly, the net loss for fiscal 1999 of $5,112,948 as compared to net
income of $323,894 for fiscal 1998, reflected the significant increases in costs
related to the hiring of additional personnel, increased research and
development costs and the $563,636 charge related to costs in excess of the
value of repurchased stock without a proportional increase in revenues for such
periods.

Liquidity and Capital Resources

The Company's capital needs have been funded through a series of debt and equity
financings and revenues received through the SRP program.

In July 1998, the Company sold 1,000,000 shares of Common Stock and warrants to
purchase 1,000,000 shares of Common Stock (the "CRI Warrants") to CRI for an
aggregate purchase price of $8,000,000.

In October, 1998, in order to assist CRI with its short term cash requirements
in connection with CRI's commencement of marketing efforts with respect to the
Company's products, the Company approved certain loans to CRI in the principal
amount of up to $1,000,000 payable on demand with interest at 12% per annum

                                       12

<PAGE>



accruing and payable monthly following 60 days from the draw-down date. As of
the date hereof, $1,000,000 is outstanding under such loan arrangement and
interest is accruing on such principal amount.

On November 19, 1998, the Company consummated its IPO through the sale of
1,200,000 shares of Common Stock and warrants to purchase 600,000 shares of
Common Stock (the "Warrants") and received gross proceeds of $9,600,000.
Additionally, on December 2, 1998, the underwriter of the Company's IPO
exercised its over-allotment option in full and the Company received gross
proceeds of $1,440,000. Total net proceeds to the Company approximated
$9,200,000.

Pursuant to their employment agreements, in December 1998 and January 1999,
respectively, Curtiz J. Gangi, the Company's President, and Brian Clark, the
Company's Chief Financial Officer, were given loans in the principal amounts of
$150,000 and $75,000, respectively, in connection with their relocation to New
Mexico. The loans bear interest at the rate of 5% per annum and are secured by a
pledge of vested stock options having a value equal to the principal amount of
the loans.

The Company anticipates that it will expend approximately $600,000 for the
purchase of computer hardware and software during fiscal 2000 primarily in
connection with the establishment of MUSE Federal.

The Company's wholly owned subsidiary, MUSE Federal, was created to provide
software development and consulting services exclusively to the Federal
government and government contractors. MUSE Federal will support and broaden the
existing government customer base of the Company and will develop unique
capabilities and services designed to meet the needs of government agencies and
government contractors. MUSE Federal has not yet performed services on behalf of
the Company, its Federal customers or new customers as it has yet to obtain all
requisite government approvals, which is expected in the first quarter of
calendar 2000.

In connection with the acquisition of Virtual Presence, the Company expects to
enhance its capabilities in providing interactive visualization solutions and to
broaden its market penetration abroad. Virtual Presence is a leader in providing
virtual reality and visualization solutions for high end customers in many
industry sectors. The Company expects greater efficiencies and economies of
scale as Virtual Presence becomes fully integrated into the Company's business
model. Additionally, the Company expects Virtual Presence to add significantly
to the Company's overall revenues. Additional information regarding the
financial impact of the Virtual Presence acquisition will be forthcoming in a
Current Report on Form 8-K to be filed with the Commission in January 2000.

The Company's capital requirements depend on numerous factors, including the
progress of its product development programs, the ability of the Company to
enter into strategic arrangements or other marketing arrangements which result
in the commercialization of its products, the need to purchase or lease
additional capital equipment and the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights. Based upon
its current plans, the Company believes that the net proceeds of its IPO,
together with the net proceeds from the sale of securities to CRI in July 1998
and funds generated from operations, including payments and royalties under the
Company's various SRP agreements, will be sufficient to satisfy the Company's
operations for at least the next 12 months. The foregoing sentence is considered
a forward-looking statement for purposes of the Private Securities Litigation
Reform Act of 1995 and is subject to the risks and factors set forth under
"Factors Affecting Operating Results and Market Price of Securities" commencing
on page 14 of this Report. However, if the Company's current and projected

                                       13

<PAGE>



needs change due to unanticipated events or otherwise, the Company may be
required to obtain additional capital and there can be no assurance that
additional financing will be available or that the terms of any financing will
be acceptable to the Company.

The Company continually explores strategic, joint venture and acquisition
opportunities both in the United States and abroad. From time to time, the
Company may be involved in negotiations for SRP arrangements, other strategic
relationships, joint ventures or possible acquisitions, however, current
negotiations, if any, are too preliminary to warrant disclosure at this time.
The Company will keep investors informed as such negotiations mature.

Year 2000 Compliance

There are issues associated with the programming code in existing computer
systems as the year 2000 approaches. The "year 2000 problem" is pervasive and
complex, as virtually every computer operation will be affected in some way by
the rollover of the two digit year value of 00. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company has not verified that
companies doing business with it are year 2000 compliant. The Company does not
anticipate that it will incur significant operating expenses or be required to
invest heavily in computer systems improvements to be year 2000 compliant. The
Company believes that its products are currently year 2000 compliant. However,
significant uncertainty exists concerning the potential costs and effects
associated with year 2000 compliance. Any year 2000 compliance problem of either
the Company or its customers or strategic partners could have a material adverse
effect on the Company's business, results of operations and financial condition.


                                       14

<PAGE>


FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF SECURITIES

Uncertainty of Future Profitability and Substantial Accumulated Deficit

Any increase in revenue will be dependent upon the ability of the Company to
market its software, either directly or through distributors or SRPs. The
Company expects to substantially increase its operating expenses in anticipation
of increased revenue with no assurance that the Company will generate sufficient
revenue to cover such expenses. Accordingly, there can be no assurance that the
Company can or will ever achieve profitable operations.

Cash Requirements

The Company's capital requirements depend on numerous factors, including the
progress of its product development programs, the ability of the Company to
enter into strategic arrangements or other marketing arrangements which result
in the commercialization of its products, the need to purchase or lease
additional capital equipment and the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights. To date, the
Company's principal source of funds has been from the sale of its debt and
equity securities. Based upon its current plans, the Company believes that the
net proceeds from its IPO, together with the net proceeds from the sale of
securities to CRI in July 1998 and funds generated from operations, including
payments and royalties received under various SRP agreements, will be sufficient
to satisfy the Company's operations for at least the next twelve months.
However, if the Company's current and projected needs change due to
unanticipated events or otherwise, the Company may be required to obtain
additional capital and there can be no assurance that additional financing will
be available or that the terms of any financing will be acceptable to the
Company. If adequate funds are not available, the Company may be required to
delay, scale back or eliminate one or more of its product development programs,
including but not limited to the further development of MuSE or related
products, or the Company may be forced to obtain funds through entering into
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies or products that the Company
would not otherwise relinquish.

Technological Uncertainties

The commercial success of the Company's software will be dependent on its
acceptance by potential customers. The Company's software is based on technology
that has not been generally proven in the marketplace and is subject to the
risks of failure inherent in products based on new technologies. A significant
portion of the Company's resources will be used for research and development and
marketing relating to the Company's software and other products and services.
There can be no assurance that the Company can or will develop marketable
products. The failure of the Company to achieve market acceptance of its
products will have a material adverse effect on the Company.

Marketing Activities Required

The Company's ability to generate revenue and profits from its software products
is dependent upon its ability to successfully market MuSE and applications using
MuSE. The Company's marketing efforts will be directed principally, at least
initially, toward potential strategic partners who can develop and market
applications based on MuSE products in various industries. Substantial marketing
efforts will be required

                                       15

<PAGE>


to obtain such strategic partnerships. No assurance can be given that the
Company will be successful in its marketing efforts. In addition, the Company is
subject to the risks inherent in any attempt to commercialize products based on
new technology, many of which are not within the Company's control.

Anticipated Dependence on Strategic Partners

To the extent that the Company relies upon strategic partners to perform such
functions as marketing or commercialization of applications based on MuSE
products, the Company will be dependent upon the ability and willingness of such
strategic partners to perform its obligations in a timely manner. The amount and
timing of the allocation of resources by any strategic partner pursuant to its
arrangement or agreement with the Company may be affected by numerous factors
not within the control of the Company, including, but not limited to, a change
in management or direction by the strategic partner, the introduction by the
strategic partner of products which may compete with the Company's products or
applications or the strategic partner's perception of the market for the
Company's products.

Certain conflicts of interest could arise between the Company and one or more of
its strategic partners which, depending on the nature of the conflict, could
have a material adverse effect upon the Company's business, prospects and
financial condition. Although the Company will seek to restrict its strategic
partners from developing competitive products it may not be able either to
obtain or enforce such restrictions. The Company's strategic partners or their
affiliates may develop, either alone or with others, products which are
competitive or have applications which are competitive with the Company's
products. Such conflicts could affect the support provided by the strategic
partner for the Company's products which could have a material adverse effect on
the Company.

The ability of the Company to enter into arrangements with strategic partners on
acceptable terms may be affected by the Company's financial condition. To the
extent that the Company is in a position where it requires substantial capital
to fund its operations, it may be necessary for the Company to grant to
strategic partners certain rights to the Company's products or technology which
the Company would not otherwise grant. There can be no assurance that the
Company can or will be able to enter into strategic relationships or that any
agreements or arrangements with strategic partners will generate revenue or
profits for the Company.

Dependence on License Agreement

MuSE is based on software which is licensed to the Company by Sandia pursuant to
the License Agreement, which grants the Company exclusive rights to develop and
commercialize MuSE until October 2005 and thereafter provides a non-exclusive
right through 2015. At the end of such ten year period of exclusivity, the
Company may request Sandia to extend exclusivity through 2015, which
determination shall be made in Sandia's sole discretion. Sandia has the right to
terminate the license or make the license non-exclusive in the event the Company
fails to pay the required royalties under the License Agreement, with an annual
minimum royalty of $20,000 through the year ending December 31, 2006. The
Company is also obligated to pay an annual license fee of $10,000 through the
year ending December 31, 1999. Any termination of the License Agreement will
have a material adverse effect on the Company. Furthermore, at such time as the
license becomes non-exclusive, other companies may obtain the rights to the MuSE
technology to develop products which may compete with those of the Company.


                                       16

<PAGE>


Rapid Changes in Technology

The computer industry in general and the software industry in particular are
subject to rapid changes in technology, which can make hardware or software
obsolete. Advances in technology create markets for new products and change or
reduce the market for existing products. There can be no assurance that future
technological developments will not result in technologies which render the
Company's products or applications obsolete. In order for the Company to obtain
market acceptance of MuSE or related products, the Company must be able to
convince its potential customers and strategic partners that it has the
technological capabilities to meet the technological demands of the marketplace.
Furthermore, the willingness of a potential strategic partner to enter into an
agreement or arrangement with the Company and to devote the financial and
personnel resources to the development of applications using MuSE may be
dependent on, among other factors, the ability of the Company or the strategic
partner to offer solutions which are competitive with products developed and
offered by others and whether such products can generate an acceptable market
share.

Uncertainty of Protection of Patents and Intellectual Property Rights

The Company believes that patent and other protection of intellectual property
rights is crucial to its business and that its future will depend in part on its
ability to develop proprietary and/or patented products, maintain trade secret
protection and operate without infringing the proprietary rights of others. The
Company's products are based on patents and other proprietary technology
developed by Sandia and by the Company. Patents have been issued separately to
Sandia and the Company with respect to various aspects of MuSE and to the
Company with respect to Continuum. However, no assurance can be given that the
patents will be upheld if challenged. Any challenge to the validity of the
Company's patent rights, regardless of whether the Company ultimately prevails,
could be expensive and could require the Company to use a significant portion of
its resources in any such litigation, without any assurance of success. Pursuant
to the License Agreement, Sandia has the obligation to defend the patents
licensed to the Company against any claim of infringement or invalidity, as a
result of which the Company will be dependent upon Sandia's willingness or
ability to defend the patents against any claim. No assurance can be given that
third parties will not challenge the validity and enforceability of the patent
applications or any patents owned or issued in the future to the Company, or
that such challenges will not be successful. There can be no assurance that
patent infringement claims will not be asserted and found to have merit, that
the Company will not be enjoined from using MuSE and licensing MuSE, or that the
Company would not be forced to obtain a license and pay future royalty fees as
well as past damages to the party claiming infringement.

The Company will generally rely on a combination of trade secret, copyright,
trademark and patent law to protect its proprietary rights in the intellectual
property developed by it or licensed to the Company. Although the Company
intends to provide products utilizing MuSE to its customers primarily in object
code form, no assurance can be given that unauthorized third parties will not be
able to duplicate the software code.

Risk of Product Liability; Product Liability Insurance May Be Insufficient or
Unavailable

The use of the Company products, including products designed and marketed by a
potential strategic partner, may expose the Company to liability claims
resulting from the use of the products. The Company currently maintains limited
product liability insurance in the aggregate amount of $2,000,000 per occurrence
with a

                                       17

<PAGE>


total aggregate limit of $5,000,000, and there can be no assurance that such
coverage will be adequate. Furthermore, there can be no assurance that adequate
product liability insurance will be available to the Company or any of its
strategic partners in the future at a reasonable cost, if at all. The inability
of the Company or any strategic partner to obtain sufficient coverage at an
acceptable cost or to obtain other protection against potential liability could
prevent or inhibit the commercialization of the one or more of Company's
proposed products. A successful product liability claim or a product recall
would have a material adverse effect upon the Company's business, prospects and
financial condition.

Government Contracts

The Company maintains several Federal government contracts and receives grants
from the Federal government, all of which are cancellable and subject to
renegotiation at the option of the government for any reason. Historically, the
Company derived a significant portion of revenues, and expects to continue to
derive a material portion of its revenues in the near future, from government
contracts. Accordingly, any such cancellation or renegotiation relating to
significant projects could have a material adverse impact on the Company.

Dependence on Management

The Company is dependent upon the services of Curtiz J. Gangi, Chairman of the
Board and President, and Craig Peterson, Senior Software Development Manager,
for the development of the Company's products. Given the Company's stage of
development and the shortage of personnel trained in the application and
adaptation of MuSE, the Company is dependent on its ability to identify, hire,
train, retain and motivate high quality personnel, especially highly skilled
engineers involved in the ongoing developments required to adapt MuSE to
specific applications and solutions. Loss of the services of any of Messrs.
Gangi or Peterson would have a material adverse effect on the Company's
operations and financial condition. The Company has obtained, and is required to
maintain, key man life insurance on the lives of Mr. Gangi in the amount of
$1,000,000 and Mr. Peterson in the amount of $500,000 while employed by the
Company. The Company has entered into three-year employment agreements with
Messrs. Gangi, Clark and Harless (Executive Vice President) commencing as of
June 1, 1998 and with Mr. Peterson commencing as of August 1, 1998, providing
for current annual compensation of $215,000, $150,000, $150,000 and $117,000,
respectively. Each agreement provides for certain bonuses, severance benefits,
non-competition covenants and, in some cases, payments in the event of a change
of control of the Company.

Competition

There are many companies, both public and private, engaged in developing and
marketing software products which compete or have applications which compete
with the Company's software products. At the present time, Division, Sense8, AVS
and Paradigm, among others, market such products. The Company believes that the
principal factors affecting its ability to compete include such factors as the
functionality and architecture of MuSE, the performance of specific applications
of products using MuSE, the price of MuSE and the perceived ability of the
Company and/or a strategic partner to support and service MuSE after
installation.


                                       18

<PAGE>



Most of the companies with which the Company competes or is expected to compete
have substantially greater financial resources, research and development
capabilities, sales and marketing staffs and distribution channels than the
Company. There can be no assurance that products and services based on MuSE will
achieve sufficient quality, functionality or cost-effectiveness to compete with
existing or future alternatives. Additionally, other major software companies
may be able to develop competing products and, if MuSE gains market acceptance,
other more established companies may enter the Company's markets.

Effects of Customers' Cost-reduction Programs

The pricing of software products in general, and those, such as the Company's,
that are based on new technology in particular, may be affected by the
continuing efforts of end-users and Information Technology Managers to contain
or reduce costs through various means, including curtailment of discretionary
spending or reduction in the scope of or termination of existing projects. The
Company cannot predict the effect such cost reduction measures or changes in the
overall economy may have on its business, and no assurance can be given that any
such actions or changes in the economy will not have a material adverse effect
on the Company's business, financial condition and results of operations.
Further, to the extent that such actions or changes have a material adverse
effect upon the business, financial condition and profitability of other
companies that are prospective strategic partners for certain of the Company's
products, the Company's ability to commercialize its products may be adversely
affected.

Effective Control by Officers, Directors and Principal Stockholders

The officers and directors of the Company currently beneficially own
approximately 25% of the Common Stock of the Company and will have the ability
to significantly influence the election of the directors of the Company and
otherwise significantly influence the affairs of the Company. In addition, CRI
owns approximately 10% of the Common Stock of the Company and may also be able
to significantly influence the affairs of the Company.

Absence of Dividends

The Company has not paid any cash dividends on its capital stock and does not
anticipate paying any such cash dividends in the foreseeable future. Earnings,
if any, will be retained to finance future growth.

Shares of Common Stock Issuable Pursuant to Warrants And Underwriter's Unit
Purchase Option; Registration Rights

In addition to the 10,333,148 shares of Common Stock outstanding, there are
outstanding Warrants to purchase 1,944,243 shares of Common Stock, of which
Warrants to purchase 423,881 shares of Common Stock are held by certain selling
securityholders, and other outstanding warrants to purchase 1,520,362

                                       19

<PAGE>


shares of Common Stock. The Company has issued to the underwriter of its IPO for
nominal consideration a Unit Purchase Option to purchase 120,000 units
consisting of 120,000 shares of Common Stock and Warrants to purchase 60,000
shares of Common stock. The Company also has stock option plans pursuant to
which options to purchase 2,541,636 shares of Common Stock are outstanding. The
holders of Warrants and the underwriter's Unit Purchase Option have certain
demand and/or piggyback registration rights. The Company will bear the cost of
preparing such registration statements but will not receive any proceeds from
the sale of shares of Common Stock or Warrants pursuant thereto other than
payment of the exercise price with respect to any Warrants that are exercised.
CRI also possesses certain demand and piggyback registration rights with respect
to the 1,000,000 shares of Common Stock held by CRI and the 1,000,000 shares of
Common Stock underlying the CRI Warrants. The existence of these registration
rights, as well as the sale of shares of Common Stock pursuant to registration
statements which the Company may be required to prepare, may have a depressive
effect on the price of the Common Stock in the open market. In addition, the
existence of such warrants and options and the registration rights referred to
above may adversely affect the terms on which the Company can obtain additional
equity financing. The holders of warrants are likely to exercise them at a time
when the Company would otherwise be able to obtain capital on terms more
favorable than those provided by the Warrants.

Potential Adverse Effect of Redemption of The Warrants

Commencing November 16, 1999, the Warrants may be redeemed by the Company at a
redemption price of $.01 per Warrant upon not less than 30 days' notice if the
average closing price per share of the Common Stock is at least $12.00, subject
to adjustment, during the 20 day period ending not earlier than five days from
the date the Warrants are called for redemption. Redemption of the Warrants
could force the holders to exercise the Warrants and pay the exercise price
therefor at a time when it may be disadvantageous for the holder to do so, to
sell the Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or to accept the redemption price, which, at the time
the Warrants are called for redemption, is likely to be substantially less than
the market value of the Warrants. The Company will not call the Warrants for
redemption except pursuant to a currently effective prospectus and registration
statement.

Current Prospectus And State Registration Required to Exercise Warrants

Holders of the Warrants will only be able to exercise the Warrants if (a) a
current prospectus under the Securities Act relating to the shares of Common
Stock issuable upon exercise of the Warrants is then in effect and (b) such
securities are qualified for sale or exemption from qualification under the
applicable securities laws of the states in which the various holders of
Warrants reside. Although the Company has undertaken to use commercially
reasonable efforts to maintain the effectiveness of a current prospectus
covering the Common Stock underlying the Warrants, and may not call the Warrants
for redemption unless there is a current and effective registration statement
covering the issuance of the Common Stock upon exercise of the Warrants, there
can be no assurance that the Company will be able to do so. Unless there is an
effective and current registration statement covering the issuance of the Common
Stock upon exercise of the Warrants, the Company will not accept payment for, or
issue Common Stock with respect to, the exercise of any Warrants, and any
payments made by a Warrant holder will be refunded by the Company. The value of
the Warrants may be greatly reduced if a current prospectus covering the Common
Stock issuable upon the exercise of the Warrants is not kept effective or if
such securities are not qualified or exempt from qualification in the states in
which the holders of Warrants reside. The Company has registered

                                       20

<PAGE>



or qualified the Warrants for sale in a limited number of states. There is no
assurance that, at the time a holder of Warrants desires to exercise the
Warrants, that such holder will reside in a state in which the underlying Common
Stock may be issued.

Quarterly Fluctuations in Revenues And Market Price

Quarterly revenues and operating results will fluctuate as a result of a variety
of factors. These factors, some of which are beyond the Company's control,
include the timing of the completion, material reduction or cancellation of
major projects, the loss of a major customer or the termination of a
relationship with a strategic partner, timing of the receipt of new business,
timing of the hiring or loss of personnel, changes in the pricing strategies and
business focus of the Company or its competitors, capital expenditures,
operating expenses and other costs relating to the expansion of operations,
general economic conditions and acceptance and use of the Company's software
products. Revenues and operating results are difficult to forecast because of
those fluctuations.

The trading prices of the Common Stock and the Warrants are subject to
fluctuation in response to quarterly variations in operating results,
announcements of technological innovations or new products or services by the
Company or its competitors, as well as other events or factors. In addition, the
stock market has from time to time experienced price and volume fluctuations
which have particularly affected the market price of technology-oriented and
computer software companies, which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Common Stock and the Warrants.



                                       21

<PAGE>


ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See Item 13(a)(1) in Part IV.

ITEM 8.  CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

         Not Applicable

                                    PART III

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

The information required for this item is incorporated by reference to the
Company's 1998 Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to
September 30, 1999.

ITEM 10.  EXECUTIVE COMPENSATION

The information required for this item is incorporated by reference to the
Company's 1998 Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to
September 30, 1999.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required for this item is incorporated by reference to the
Company's 1998 Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to
September 30, 1999.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required for this item is incorporated by reference to the
Company's 1998 Definitive Proxy Statement which the Company will file with the
Securities and Exchange Commission no later than 120 days subsequent to
September 30, 1999.

                                       22

<PAGE>


                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a   Documents filed as part of this report.
                                                                            Page
                                                                            ----

     1.  Financial Statements (appearing at end of this report)

         Independent Auditor's Report                                       F-1

         Balance Sheet - September 30, 1999                                 F-2

         Statements of Operations - For the years ended
         September 30, 1999 and 1998                                        F-3

         Statements of Stockholders' Equity -
         For the years ended September 30, 1999 and 1998                    F-4

         Statements of Cash Flows - For the years ended
         September 30, 1999 and 1998                                        F-5

         Notes to Financial Statements                                      F-6

     2.  Exhibits

         1.1     Revised Form of Underwriting Agreement.(1)

         1.2     Revised Form of Underwriter's Unit Purchase Option.(1)

         3.1     Certificate of Incorporation of the Registrant, as amended.(1)

         3.2     By-Laws of the Registrant.(1)

         3.3     Amendment No. 1 to By-Laws of Registrant.(1)

         4.1     Specimen Stock Certificate.(1)

         4.2     Revised Form of Warrant Agreement between the Registrant and
                 American Stock Transfer & Trust Company, including the revised
                 form of Class A Redeemable Common Stock Purchase Warrant and
                 the form of Class B Redeemable Common Stock Purchase
                 Warrant.(1)

         10.1    License Agreement dated October 9, 1995 between the Company and
                 Sandia, as amended.(1)/**


                                       23

<PAGE>



         10.2    Office Lease dated September 6, 1995 between the Company and
                 Airpark Associates, as amended.(1)

         10.3    1995 Stock Option Plan.(1)

         10.4    1996 Stock Option Plan.(1)

         10.4(a) Amendment No. 1 to 1996 Stock Option Plan.(1)

         10.6    Employment Agreement, dated as of August 1, 1998, between Craig
                 Peterson and the Registrant.(1)

         10.7    Employment Agreement, dated as of June 1, 1998, between Curtiz
                 J. Gangi and the Registrant.(1)

         10.8    Employment Agreement, dated as of June 1, 1998, between Brian
                 Clark and the Registrant.(1)

         10.9    Employment Agreement, dated as of June 1, 1998, between Douglas
                 Harless and the Registrant.(1)

         10.10   Super Value-Added Reseller (S-VAR) Agreement, dated June 19,
                 1998 between Continuum Resources International ASA and the
                 Registrant.(1)/**

         10.11   Share Purchase Agreement, dated as of November 15, 1999,
                 between John Edmund Hough and the Registrant.(2)

         10.12   Share Purchase Agreement, dated as of November 15, 1999,
                 between GLE Development Capital Limited and the Registrant.(2)

         10.13   Assignment Agreement, dated as of November 16, 1999, among the
                 Registrant, VR Solutions Limited and Intelligent Solutions
                 Limited.(2)

         10.14   Sixth Amendment to Lease, dated November 18, 1999, by and
                 between Merit Albuquerque Limited Partnership, successor in
                 interest to Airpark Associates, and the Company.

         10.15   Agreement of Sublease, dated June 15, 1999, by and between
                 Continuum Resources International, Inc. and the Company.

         21      List of Subsidiaries

         27.1    Financial Data Schedule

------------------------
     (1)  Incorporated by reference from the Registrant's Registration Statement
          on Form SB-2 (Commission File No. 333-62495).
     (2)  Incorporated by reference from the Registrant's Current Report on Form
          8-K filed with the Commission on November 24, 1999.

                                       24

<PAGE>


     **   Portions of this document have been deleted pursuant to a request for
          confidential treatment.

(b) The Company did not file any Current Reports on Form 8-K during the last
quarter of the period covered by this Report.

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

MUSE TECHNOLOGIES, INC.

By:  /s/ Curtiz J. Gangi                            Dated: December 29, 1999
     --------------------------
     Curtiz J. Gangi, President


                                POWER OF ATTORNEY

Each of the undersigned hereby appoints Curtiz J. Gangi, as his attorney-in-fact
to sign his name, in any and all capacities, to any amendments to this Form
10-KSB and any other documents filed in connection therewith to be filed with
the Securities and Exchange Commission.

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
      Signature                               Title                                 Date
      ---------                               -----                                 ----
<S>                                <C>                                         <C>
/s/Curtiz J. Gangi                 President and Chairman                      December 29, 1999
------------------                 (principal executive officer)
Curtiz J. Gangi

/s/Brian Clark                     Chief Financial Officer                     December 29, 1999
------------------                 (principal financial and
Brian Clark                        accounting officer), Treasurer,
                                   Secretary and Director


/s/Jack Berenzweig                 Director                                    December 29, 1999
------------------
Jack Berenzweig

/s/Edward Masi                     Director                                    December 29, 1999
------------------
Edward Masi
</TABLE>


                                       25


<PAGE>

                             MUSE TECHNOLOGIES, INC.

                          INDEX TO FINANCIAL STATEMENTS


                                                                           Page
                                                                           ----

Independent Auditors' Report...............................................F-1

Balance Sheets.............................................................F-2

Statements of Operations...................................................F-3

Statement of Stockholders' Equity..........................................F-4

Statements of Cash Flows...................................................F-5

Notes to Financial Statements...........................................F-6-18



<PAGE>


                          INDEPENDENT AUDITORS' REPORT

To the Stockholders and
Board of Directors of
MUSE Technologies, Inc.
Albuquerque, New Mexico

         We have audited the accompanying balance sheet of MUSE Technologies,
Inc. as of September 30, 1999, and the related statements of operations,
stockholders' equity and cash flows, for the years ended September 30, 1999 and
1998. 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 MUSE Technologies,
Inc. as of September 30, 1999, and the results of their operations and their
cash flows, for the years ended September 30, 1999 and 1998 in conformity with
generally accepted accounting principles.



                                           /s/Feldman Sherb Horowitz & Co., P.C.
                                           -------------------------------------
                                           Feldman Sherb Horowitz & Co., P.C.
                                           Certified Public Accountants

New York, New York
December 3, 1999



                                       F-1


<PAGE>


                             MUSE TECHNOLOGIES, INC.

                                  BALANCE SHEET

                               SEPTEMBER 30, 1999



                                     ASSETS

CURRENT ASSETS:
     Cash                                                         $ 12,064,734
     Accounts receivable                                               667,593
     Notes receivable - related parties (including
         interest receivable of $90,922)                             1,145,922
     Other current assets                                              117,870
                                                                  ------------
         TOTAL CURRENT ASSETS                                       13,996,119

PROPERTY AND EQUIPMENT - net                                         1,162,797

NOTES RECEIVABLE - RELATED PARTIES
     (including interest receivable of $9,955)                         284,955

OTHER ASSETS                                                            81,574
                                                                  ------------

         TOTAL ASSETS                                             $ 15,525,445
                                                                  ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable                                             $     23,165
     Accrued liabilities                                               922,751
     Capital lease - current portion                                    16,478
                                                                  ------------
         TOTAL CURRENT LIABILITIES                                     962,394

CAPITAL LEASE, less current portion                                     49,150

                                                                  ------------
         TOTAL LIABILITIES                                           1,011,544
                                                                  ------------

STOCKHOLDERS' EQUITY:
     Common stock, $.015 par value, 50,000,000 shares
         authorized, issued and outstanding 10,333,148                 154,997
     Additional paid-in capital                                     23,609,620
     Stock subscription receivable                                     (87,500)
     Treasury stock - 155,263 shares, at cost                         (776,315)
     Accumulated deficit                                            (8,386,901)
                                                                  ------------
         TOTAL STOCKHOLDERS' EQUITY                                 14,513,901
                                                                  ------------

                                                                  ============
                                                                  $ 15,525,445
                                                                  ============


                       See notes to financial statements.


                                      F-2

<PAGE>


                             MUSE TECHNOLOGIES, INC.

                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                       Years Ended September 30,
                                                     ----------------------------
                                                         1999            1998
                                                     ------------    ------------

<S>                                                  <C>             <C>
REVENUES                                             $  1,723,267    $  6,206,135
                                                     ------------    ------------

EXPENSES:
     Selling, general and administrative expenses       4,180,717       2,702,359
     Research and development                           2,302,885         956,946
     Non-cash imputed compensation expense                      -         948,355
     Depreciation                                         487,360         475,928
                                                     ------------    ------------

TOTAL EXPENSES                                          6,970,962       5,083,588
                                                     ------------    ------------

NET OPERATING INCOME (LOSS)                            (5,247,695)      1,122,547
                                                     ------------    ------------

OTHER INCOME (EXPENSE):

     Costs in excess of value of repurchased stock       (563,636)              -
     Interest income                                      729,061               -
     Interest expense                                     (30,678)       (798,653)
                                                     ------------    ------------
TOTAL OTHER INCOME (EXPENSE):                             134,747        (798,653)
                                                     ------------    ------------

NET INCOME (LOSS)                                    $ (5,112,948)   $    323,894
                                                     ============    ============


NET INCOME (LOSS) PER SHARE:
     Basic                                           $      (0.51)   $       0.04
                                                     ============    ============
     Diluted                                         $      (0.51)   $       0.04
                                                     ============    ============


WEIGHTED AVERAGE NUMBER OF SHARES:
     Basic                                             10,048,842       7,672,010
                                                     ============    ============
     Diluted                                           10,048,842       8,654,838
                                                     ============    ============
</TABLE>


                       See notes to financial statements.

                                      F-3

<PAGE>


                             MUSE TECHNOLOGIES, INC.

                        STATEMENT OF STOCKHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                             Common Stock                      Additional              Stock
                                                  --------------------------------------         Paid-in            Subscription
                                                       Shares               Amount               Capital             Receivable
                                                  ------------------   ------------------   ------------------    -----------------

<S>                                                   <C>                 <C>                  <C>                 <C>
BALANCE - October 1, 1997                             7,278,279           $    109,174         $  3,518,471        $    (87,500)
     Issuance of common stock pursuant to
       consulting agreements                              4,058                     61               30,780                   -
     Sale of common stock pursuant to
       private placements                             1,412,566                 21,188            9,637,285                   -
     Conversion of notes into common stock               68,880                  1,033              308,927                   -
     Exercise of stock options                              110                      2                  273                   -
     Non-cash imputed compensation expense                    -                      -              948,355                   -
     Net income                                               -                      -                    -                   -
                                                   ------------           ------------         ------------        ------------

BALANCE - September 30, 1998                          8,763,893                131,458           14,444,091             (87,500)
     Issuance of common stock pursuant to
       initial public offering                        1,380,000                 20,700            9,083,393
     Purchase of common shares for treasury
     Issuance of common stock pursuant to
       exercise of cash-less options                    155,265                  2,329               (2,329)
     Exercise of stock options                           33,990                    510               84,465
     Net loss                                                 -                      -                    -                   -
                                                   ------------           ------------         ------------        ------------


BALANCE - September 30, 1999                         10,333,148           $    154,997         $ 23,609,620        $    (87,500)
                                                   ============           ============         ============        ============
</TABLE>



<TABLE>
<CAPTION>
                                                                                                Total
                                                     Treasury           Accumulated         Stockholders'
                                                      Stock               Deficit               Equity
                                                  ----------------    -----------------    -----------------

<S>                                               <C>                   <C>                  <C>
BALANCE - October 1, 1997                         $          -          $ (3,597,847)        $     (57,702)
     Issuance of common stock pursuant to
       consulting agreements                                                       -                30,841
     Sale of common stock pursuant to
       private placements                                                          -             9,658,473
     Conversion of notes into common stock                                         -               309,960
     Exercise of stock options                                                     -                   275
     Non-cash imputed compensation expense                                         -               948,355
     Net income                                                              323,894               323,894
                                                  ------------          ------------         -------------

BALANCE - September 30, 1998                                 -            (3,273,953)           11,214,096
     Issuance of common stock pursuant to
       initial public offering
     Purchase of common shares for treasury                                                      9,104,093
     Issuance of common stock pursuant to             (776,315)                                   (776,315)
       exercise of cash-less options                                                                     -
     Exercise of stock options                                                                      84,975
     Net loss                                                             (5,112,948)           (5,112,948)
                                                  ------------          ------------         -------------


BALANCE - September 30, 1999                      $   (776,315)         $ (8,386,901)        $  14,513,901
                                                  ============          ============         =============
</TABLE>


                       See notes to financial statements.

                                      F-4

<PAGE>


                                         MUSE TECHNOLOGIES, INC.

                                        STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                           Years Ended September 30,
                                                                     --------------------------------------
                                                                           1999                 1998
                                                                     -----------------    -----------------
<S>                                                                   <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net (loss) income                                                $ (5,112,948)        $    323,894
     Adjustment to reconcile net income (loss) to net cash
         provided by (used in) operating activities:
            Depreciation                                                   487,360              475,928
            Amortization of discount                                        25,521              585,886
            Amortization of finance cost                                         -              138,421
            Non-cash imputed compensation expense                                -              948,355
            Repurchase of common shares for treasury                      (776,315)                   -
            Issuance of common shares for consulting expense                     -               30,841
            Issuance of common shares for interest expense                       -                9,960
     Changes in assets and liabilities:
            Decrease (increase) in accounts receivable                   3,696,407           (4,148,551)
            Decrease in prepaid assets                                      22,877                  377
            Increase in interest receivable                               (100,877)                   -
            Increase in other current assets                              (117,870)                   -
            Increase in other assets                                       (52,332)              (6,590)
            Decrease  in accounts payable                                 (111,934)             (76,893)
            (Increase) decrease in accrued liabilities                      71,093              647,971
                                                                      ------------         ------------
         CASH USED IN OPERATING ACTIVITIES                              (1,969,018)          (1,070,401)
                                                                      ------------         ------------

CASH FLOWS FROM INVESTING ACTIVITIES
            Purchase of property and equipment                          (1,143,672)            (147,521)
                                                                      ------------         ------------
         CASH USED IN INVESTING ACTIVITIES                              (1,143,672)            (147,521)
                                                                      ------------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
            Net proceeds from sale of stock                              9,104,093            5,411,561
            Receipt of stock subscription receivable                     4,000,000                    -
            Net proceeds from exercise of stock options                     84,975                  275
            Net proceeds from issuance of notes payable                          -              677,241
            Deferred offering cost                                         363,860             (363,860)
            Issuance of notes receivable                                (1,275,000)                   -
            Principal payments of capital lease obligations                (14,907)             (17,828)
            Borrowings -  line of credit                                         -              (50,000)
            Repayments of notes payable                                   (625,000)          (1,187,500)
                                                                      ------------         ------------
         CASH PROVIDED BY FINANCING ACTIVITIES                          11,638,021            4,469,889
                                                                      ------------         ------------

NET INCREASE IN CASH                                                     8,525,331            3,251,967

CASH - Beginning of year                                                 3,539,403              287,436
                                                                      ------------         ------------

CASH - End of year                                                    $ 12,064,734         $  3,539,403
                                                                      ============         ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid during the year for:
            Interest                                                  $     30,678         $     59,778
                                                                      ============         ============
     Non-cash financing and investing activities:

            (1)  Issuance of common shares pursuant                          2,329                    -
                 to exercise of cash-less options
            (2)  Convertible notes converted to common stock                     -              300,000
            (3)  Reclass of stock subscription receivable
                 to note receivable                                              -               87,500
            (4)  Common stock issued in conjunction with note issuance           -              306,250
            (5)  Purchase of equipment through leases payable               68,321                4,398
</TABLE>

                       See notes to financial statements.

                                       F-5


<PAGE>



                             MUSE TECHNOLOGIES, INC.

                          NOTES TO FINANCIAL STATEMENTS

              YEARS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998


1.       THE COMPANY

         MUSE Technologies, Inc. (the "Company") was incorporated in Delaware on
         October 24, 1995 to develop and market software products, designed to
         enhance the user's ability to understand and analyze data and
         information and to provide solutions to complex data integration and
         data management problems. The multisensory capabilities of the software
         ("MuSE"), enables the user to present information in real time using
         visual, auditory, tactical and other analytical tools. The Company has
         also developed a proprietary software product, "Continuum", designed
         for multiuser, real-time collaboration within the MuSE environment.

         In December, 1995 the Company acquired substantially all assets and
         liabilities from Viga Technologies Corporation ("Viga"), an affiliate
         with common ownership. As part of the acquisition Viga agreed to
         transfer the License Agreement to the Company.

         The Company commenced operations in December 1995. Prior to entering
         into an exclusive marketing agreement in June 1998 (see note 14), the
         majority of the Company's revenue had been generated from products
         utilizing the MuSE technology and applied research and development
         services for customers in the Federal, corporate and nonprofit markets
         of the United States. Sales to the United States government represented
         $830,242 or 48%, and $906,055 or 15%, of revenue in 1999 and 1998,
         respectively. Accounts receivable from the United States government
         were $346,086 and $361,000 at September 30, 1999 and 1998,
         respectively. The Company does not require collateral on its accounts
         receivable.

         In November 1998, the Company completed an initial public offering of
         its securities. A total of 1,200,000 units were sold for $8.00 per unit
         for a total of $9,600,000. Each unit consists of one share of the
         Company's common stock and warrants to purchase common stock equal to
         one-half share of common stock for each warrant. Warrants can be used
         to purchase only whole shares of common stock. The warrants are
         exercisable upon issuance until November 13, 2003 at $9.60 per share of
         common stock. Net proceeds after underwriting commissions and other
         related fees were approximately $7,900,000.


                                       F-6

<PAGE>


         In December 1998, an additional 180,000 shares were subsequently issued
         pursuant to the underwriter's over allotment option. Net proceeds after
         underwriting commissions and other related fees were approximately
         $1,300,000.

         In July 1999 the Company created a whole owned subsidiary, MUSE Federal
         Systems Group, Inc. (the "Subsidiary") to market the Company's software
         to various agencies of the federal government. Activity for the
         Subsidiary has not commenced as of September 30, 1999.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

         b.       Revenue Recognition - The Company licences software to end
                  users under license agreements. The Company recognizes
                  revenues in accordance with Statement of Position 97-2 ("SOP
                  97-2"), issued by the American Institute of Certified
                  Accountants. SOP 97-2, is effective on a prospective basis for
                  fiscal years beginning after December 15, 1997. The adoption
                  of the new SOP is not expected to have a material effect on
                  the Company's financial statements.

         c.       Research and Development - Research and development
                  expenditures are charged to operations as incurred. Statement
                  of Financial Accounting Standards No. 86, "Accounting for the
                  Costs of Computer Software to Be Sold, Leased or Otherwise
                  Marketed," requires capitalization of certain software
                  development costs subsequent to the establishment of
                  technological feasibility. Based on the Company's product
                  development process, technological feasibility is established
                  upon completion of a working model. Costs incurred by the
                  Company between completion of the working model and the point
                  at which the product is ready for general release have been
                  immaterial.

         d.       Property and Equipment - Property and equipment are stated at
                  cost. Depreciation is calculated on the straight-line method
                  over three years, which is the estimated useful life of the
                  assets.

         e.       Net Income (Loss) Per Share - Basic earnings (loss) per share
                  is computed using the weighted average number of shares of
                  outstanding common stock. Diluted per share amounts also
                  include the effect of dilutive common stock equivalents from
                  the assumed exercise of stock options.


                                       F-7

<PAGE>


         f.       Income Taxes - Income taxes are accounted for under Statement
                  of Financial Accounting Standards No. 109, "Accounting for
                  Income Taxes," which is an asset and liability approach that
                  requires the recognition of deferred tax assets and
                  liabilities for the expected future tax consequences of events
                  that have been recognized in the Company's financial
                  statements or tax returns.

         g.       Stock Based Compensation - The Company accounts for its stock
                  option plans under APB Opinion No. 25, "Accounting for Stock
                  Issued to Employees," ("APB 25"), under which no compensation
                  cost is recognized. In fiscal 1997, the Company adopted SAS
                  No. 123, "Accounting for Stock-Based Compensation," ("SAS
                  123") for disclosure purposes, and has adopted the proforma
                  disclosure requirements of SAS 123.

         h.       Fair Value of Financial Instruments - The Company's financial
                  instruments under Statement of Financial Accounting Standards
                  No. 107 ("SFAS 107") "Disclosures About Fair Value of
                  Financial Instruments," includes cash, accounts receivable,
                  notes receivable, and accounts payable. The Company believes
                  that the carrying amounts of these accounts are a reasonable
                  estimate of their fair value because of the short-term nature
                  of such instruments.

         i.       Impairment of Long-Lived Assets - The Company reviews
                  long-lived assets and certain identifiable assets on a
                  quarterly basis for impairment whenever circumstances and
                  situations change such that there is an indication that the
                  carrying amounts may not be recovered. At September 30, 1999,
                  the Company does not believe that any impairment has occurred.


3.       PROPERTY AND EQUIPMENT

         Property and equipment at September 30, 1999 is as follows:


            Computer equipment                     $  2,603,453
            Furniture and fixtures                      196,102
                                                   ------------
                                                      2,799,555
            Less: accumulated depreciation            1,636,758
                                                   ------------
                                                   $  1,162,797
                                                   ============



                                       F-8

<PAGE>



4.       ISSUANCES OF STOCK AND DEBT

         (i)      During June 1997, the Company issued $1,237,500 principal
                  amount of, 8% promissory notes and shares of the Company's
                  common stock for which it received net proceeds of $1,113,750.
                  The principal balance and accrued interest were due and
                  payable upon the earlier of the one year anniversary of the
                  date of the note or seven days after the consummation of an
                  initial public offering. During the year ended September 30,
                  1998, $937,500 of such notes were repaid and $300,000 plus
                  accrued interest of $9,960 was converted into common stock.

         (ii)     In September 1997, the Company sold to an officer 11,513
                  shares of Common Stock at a purchase price of $7.60 per share
                  for an aggregate of $87,500. Payment of the purchase price was
                  made by issuance of a non-recourse promissory note secured by
                  a pledge of the shares purchased. The officer had agreed to
                  pay such loan within six months of the effective date of the
                  Company's initial public offering. Subsequent to September 30,
                  1999 the promissory note was paid in full.

         (iii)    In April and May 1998, the Company received net proceeds of
                  $1,411,500 from the sale in a private placement of 35.5 units
                  at $45,000 per unit. Each unit consisted of 10,000 shares of
                  the Company's common stock and a series A common stock
                  purchase warrant to purchase 10,000 shares of common stock.

         (iv)     During the year ended September 30, 1998, the Company issued
                  $875,000 of promissory notes at 8% interest, attached with
                  shares of the Company's common stock for which it received net
                  proceeds of $688,131. The principal balance and accrued
                  interest were payable upon the earlier of the one year
                  anniversary of the date of the note or seven days after the
                  consummation of an initial public offering. For valuation
                  purposes, $306,250 debt discount was allocated to the common
                  stock, less $48,448 attributed to offering costs. A total of
                  57,566 shares of the Company's common stock was issued. The
                  Company repaid $625,000 and $250,000 of such notes during the
                  years ended September 30, 1999 and 1998, respectively.

         (vi)     On July 15, 1998, the Company sold 1,000,000 shares of common
                  stock and common stock purchase warrants for the purchase up
                  to 1,000,000 shares of common stock at $9.60 per share. Such
                  warrants are exercisable upon issuance through June 30, 2003.
                  The common stock and the warrants were sold as a unit for
                  $8,000,000. The Company received $4,000,000 as of September
                  30, 1998 with respect to such sale. The remaining $4,000,000
                  was received in November 1998.

                  The Company paid its Vice President of Sales and Marketing and
                  two other executives a commission of $520,000 in connection
                  with this investment.


                                       F-9

<PAGE>



                  The warrants are redeemable by the Company at any time after
                  December 31, 1998 at $.01 per warrant upon 30 days prior
                  notice, provided that the following criteria are satisfied:
                  (a) with respect to redemption of up to 50% of the warrants,
                  the average closing price of the Common Stock as listed on the
                  Nasdaq Stock Market (or other securities exchange) is at least
                  $14.40 for the twenty day period ending at least two days
                  before the redemption date, or (b) with respect to redemption
                  of up to 100% of the warrants, the average closing price of
                  the Common Stock as listed on the Nasdaq Stock Market (or
                  other securities exchange) is at least $19.20 for the twenty
                  day period at least two days before the redemption date, and
                  (B) the Company is engaged in a subsequent underwritten public
                  offering of its securities in which the managing underwriter
                  thereof requires redemption of such warrants.

         (vii)    In November 1998, the Company completed an initial public
                  offering of its securities. A total of 1,200,000 units were
                  sold for $8.00 per unit for a total of $9,600,000. Each unit
                  consists of one share of the Company's common stock and
                  warrants to purchase common stock equal to one-half share of
                  common stock for each warrant. Warrants can be used to
                  purchase only whole shares of common stock. The warrants are
                  exercisable upon issuance until November 13, 2003 at $9.60 per
                  share of common stock. Net proceeds after underwriting
                  commissions and other related fees were approximately
                  $8,360,000.

                  In December 1998 an additional 180,000 shares were
                  subsequently issued pursuant to the underwriters over
                  allotment option. Net proceeds after underwriting commissions
                  and other related fees was approximately $1,253,000.

         (viii)   In March 1999, the Company's Chief Technical Officer resigned
                  as an employee of the Company and entered into a consulting
                  arrangement with the Company. Pursuant to the terms of an a
                  Employment Termination Agreement, the Company paid this
                  officer an aggregate of $1,340,000 in exchange for, among
                  other things: a non-compete agreement, repurchase of 155,263
                  shares of common stock, and the right of first refusal on
                  future sales of common stock. The Company charged $563,685 of
                  the consideration paid as costs in excess of the value of
                  repurchased stock on the Statements of Operations. The balance
                  of the payment is accounted for as the repurchase of treasury
                  stock for $776,315, representing a market value of $5.00 per
                  share. In addition, this officer exercised on a cashless
                  basis, options to purchase an aggregate of 310,526 shares of
                  common stock at an exercise price of $2.50 per share.

         (ix)     In the year ended September 30, 1999 the Company issued 33,990
                  shares of common stock, pursuant to the exercise of stock
                  options at an exercise price of $2.50 per share.


                                      F-10

<PAGE>


5.       STOCK OPTIONS AND WARRANTS

         The Company currently has two stock option plans with essentially
         identical terms and conditions. Under the 1995 Stock Option Plan, the
         Company may grant non-qualified stock options to purchase up to
         3,586,513 shares of common stock. Under the 1996 Stock Option Plan, the
         Company may grant non-qualified or incentive stock options to purchase
         up to 1,644,737 shares of common stock. Options may be granted to
         employees, officers, directors, consultants and independent
         contractors. Under the Plans, options may be issued for periods up to
         ten years and become exercisable in varying amounts based on a vesting
         schedule. Generally, options are granted at prices equal to market
         value on the date of the grant.

         For disclosure purposes the fair value of each stock option grant is
         estimated on the date of grant using the Black-Scholes option-pricing
         model with the following weighted average assumptions used for stock
         options granted during the years ended September 30, 1999 and 1998: (i)
         annual dividends of $0.00,(ii) expected volatility of 68% and 50% for
         the years ended September 30, 1999 and 1998, respectively, (iii)
         risk-free interest rate of 5.7%, and (iv) expected option lives of five
         and six years for the years ended September 30, 1999 and 1998,
         respectively. The weighted average fair value of the stock options
         granted for the years ended September 30, 1999 and 1998 was $5.61 and
         $2.79, respectively.

         See Note 4 with respect to the issuance of warrants by the Company.

         The following table summarizes the changes in options and warrants
         outstanding, and the related exercise price for shares of the Company's
         common stock:




                                      F-11

<PAGE>


<TABLE>
<CAPTION>
                                             Stock Options                                               Warrants
                          -----------------------------------------------------     ------------------------------------------------
                                              Exercise                                                 Exercise
                            Shares            Price (1)          Exercisable           Shares            Price         Exercisable
                          ------------      -------------      ----------------     -------------    -------------   ---------------
<S>                          <C>            <C>                <C>                <C>                <C>               <C>
Outstanding at
October 1, 1997              1,066,446      $   2.50-7.60             307,610           445,362      $        7.60         445,362
                                                               ==============
      Granted                  689,804               2.50                  __           423,881               4.50              __
      Granted                  727,500               7.50                  __         1,000,000               9.60              __
      Canceled                 (24,671)              2.50                  __                __                 __              __
      Exercised                   (329)              2.50                  __                __                 __              __
                          ------------      -------------      --------------     -------------      -------------    ------------
Outstanding at
September 30, 1998           2,458,750          2.50-7.60           1,426,035         1,869,243          4.50-9.60       1,869,243
                                                               ==============
      Granted                  545,850          3.50-9.89                  __                __                 __              __
      Canceled                (171,711)              2.50                  __                __                 __              __
      Canceled                (102,000)              7.50                  __                __                 __              __
      Exercised               (189,253)              2.50                  __                __                 __              __
                          ------------      -------------      --------------     -------------      -------------    ------------
Outstanding at
September 30, 1999           2,541,636      $   2.50-9.89           1,372,417         1,869,243      $   4.50-9.60       1,869,243
                          ============      =============      ==============     =============      =============    ============
</TABLE>

         (1)      As a result of the March 5, 1998 1-for-3.04 reverse stock
                  split, the exercise price of the options under the Company's
                  1995 and 1996 stock option plans was $7.60. In April 1998, the
                  exercise price of the options was reduced to $2.50 per share.
                  The above table reflects such repricing. The Company incurred
                  a non-cash compensation expense of $948,355 related to such
                  repricing.

         Had compensation cost for the Company's two option plans been
         determined in accordance with SFAS 123, the Company's net income (loss)
         and income (loss) per share would have been decreased (increased) to
         the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                                                                 Years Ended September 30,
                                                                        -------------------------------------------
                                                                               1999                     1998
                                                                        ------------------       ------------------
<S>                                           <C>                         <C>                         <C>
         Net income (loss):................   As reported                 $  (5,112,948)              $  323,894
                                              Pro forma                   $  (7,047,379)              $ (127,077)

         Net income (loss) per share:......
              Basic                           As reported                 $       (0.51)              $     0.04
                                              Pro forma                   $       (0.70)              $    (0.02)

              Diluted                         As reported                 $       (0.51)              $     0.04
                                              Pro forma                   $       (0.70)              $    (0.01)
</TABLE>


                                      F-12

<PAGE>

6.       EMPLOYMENT AGREEMENTS

         Effective June 1, 1998 the Company has entered into three year
         employment agreements with various officers of the Company as follows:

         -        The President of the Company receives an annual base salary of
                  $215,000 and a bonus of up to $134,000 upon the Company
                  achieving certain performance objectives. The President also
                  received options to purchase Common Stock of the Company at an
                  exercise price of $7.50 per share, which vests as follows:
                  100,000 shares on June 1, 1999, 125,000 shares on June 1, 2000
                  and 150,000 shares on June 1, 2001. The President, as part of
                  the agreement, received on December 2, 1998 a five year loan
                  in the amount of $150,000 bearing interest at 5% per year, in
                  connection with his relocation to New Mexico. The note is
                  secured by options to acquire 21,249 shares of common stock.

         -        The Vice-President of Sales and Marketing receives an annual
                  base salary of $150,000. This officer will receive commissions
                  under the Company's Sales Compensation Plan. The officer also
                  received options to purchase Common Stock of the Company at an
                  exercise price of $7.50 per share, which vests as follows:
                  30,000 shares on June 1, 1999, 37,500 shares on June 1, 2000
                  and 50,000 shares on June 1, 2001.

         -        The Chief Financial Officer receives an annual base salary of
                  $150,000 and a bonus of up to $65,000 upon the Company
                  achieving certain performance objectives. This officer also
                  received options to purchase Common Stock of the Company at an
                  exercise price of $7.50 per share, which vests as follows:
                  30,000 shares on June 1, 1999, 37,500 shares on June 1, 2000
                  and 50,000 shares on June 1, 2001. Such officer, as part of
                  the agreement, received on January 20, 1999 a five year loan
                  in the amount of $75,000 bearing interest at 5% per year, in
                  connection with his relocation to New Mexico. The note is
                  secured by options to acquire 10,715 shares of common stock.

         Under the above agreements, if such officer is terminated by the
         Company other than for cause (as defined in each employment agreement),
         or if the officer dies or becomes permanently disabled, all stock
         options held by such officer shall immediately vest upon such
         termination and such officer shall receive severance payments in an
         amount equal to one year's base salary. Each of the employment
         agreements also contain provisions relating to severance payments equal
         to the salary and bonus for the remainder of the employment term plus
         an additional one year's base salary in the event of a change in
         control (as defined in the employment agreement).


                                      F-13

<PAGE>



         In addition to the above agreements, effective August 1, 1998 the
         Company entered into a three year employment agreement with an employee
         to serve as the Company's Director of Product Development at an annual
         salary of $90,000. During the year ended September 30, 1999, this
         employee's title changed to Managing Director of Strategic Development,
         with an amended annual salary of $117,000.

         -        The employment agreement with the Chief Technical Officer of
                  the Company was terminated in March 1999 (see Note 4-(viii)).
                  As of the date of the termination agreement, the officer
                  entered into a consulting agreement with the Company until
                  December 31, 1999 for: (i) $3,000 per month from the date of
                  the termination agreement until June 30, 1999 and (ii) from
                  July 1, 1999 until December 31, 1999 at an annualized rate of
                  $175,000, based upon days actually employed.

7.       RETIREMENT PLAN

         In October 1996, the Company established a defined contribution plan
         (SARSEP plan) covering substantially all employees. Under the terms of
         the plan, eligible employees may contribute up to fifteen percent of
         their compensation, subject to statutory limitations. The Company
         charged to operations $47,995 and $27,759, representing 3% and 2%
         percent of eligible employees compensation, for their contribution to
         the plan for the years ended September 30, 1999 and 1998 respectively.

8.       LICENSE AGREEMENT

         The Company's license agreement, for the "MuSE" technology grants the
         Company exclusive rights to develop and commercialize MuSE until
         October 2005 and thereafter provides a non-exclusive right through
         2015. At the end of such ten year period of exclusivity, the Company
         may request the licensor to extend exclusivity through 2015,which
         determination shall be made in the licensor's sole discretion. The
         licensor has the right to terminate the license or make the license
         non-exclusive in the event the Company fails to pay the required
         royalties under the license agreement, with an annual minimum royalty
         of $20,000 through the year ended December 31, 2006. The Company is
         also obligated to pay an annual license fee of $10,000 through the year
         ending December 31, 1999 and a one-time payment of $20,000 prior to
         July 1999.


                                      F-14

<PAGE>


9.       NOTES RECEIVABLE - RELATED PARTIES

         Notes receivable consists of the following as of September 30, 1999:


<TABLE>
<S>                                                                                        <C>
         a.   Employee Shareholders - Two notes each for $25,000 bearing
              interest at 5% per annum, with principal and interest due upon
              maturity at December 2, 2001. The notes are each secured by
              10,000 shares of the Company's common stock.                                 $     50,000

         b.   Shareholder:

                  -  In October 1998 and November 1998, respectively, the
                     Company issued two notes in the principal amounts of
                     $250,000 and a $750,000. The maker of the note is the
                     entity that purchased 1,000,000 shares of the Company's
                     common stock in July 1998. The notes, which are payable
                     upon demand, are interest free for the first sixty days
                     from issuance and after such period bear interest at 12%
                     per year. As of September 30, 1999, demand for payment has
                     not been made by the Company.                                            1,000,000

                 -   In 1997 Viga reduced by $55,000 the purchase price that the
                     Company had paid to acquire the assets and rights to the
                     license agreement for the MuSE Technology. Viga issued a
                     note for the $55,000, bearing interest at 6.50% due in
                     November 2001. Subsequent to September 30, 1999, this note
                     plus accrued interest has been satisfied. Approximately
                     $2,600 of accrued interest due the Company was forgiven,
                     upon repayment.                                                             55,000

         c.   Officers: - In conjunction with employment agreements (see
              Note 6), the Company's President and Chief Financial Officer were
              issued notes in the principal amounts of $150,000 and $75,000,
              respectively, bearing interest at 5% per year. The note principal
              and accrued interest are due upon maturity on December 2, 2003.
              The notes are secured by options to acquire 21,249 and 10,715
              shares, respectively, of the Company's common stock.                              225,000
                                                                                           ------------

                                                                                           $  1,330,000
                                                                                           ============
</TABLE>


                                      F-15

<PAGE>



10.      INCOME TAXES

         A reconciliation between the federal statutory tax rate and the
         effective income tax rate for the years ended September 30, 1999 and
         1998 are as follows:


                                                       1999           1998
                                                      -----           ----
         Statutory Federal income tax rate            (34%)            34%
         Benefit of operating loss carry forwards       -             (34%)
         Losses for which no benefit is provided       34%              -
                                                      ----            ----
         Effective income tax rate                      0%              0%
                                                      ====            ====

         As of September 30, 1999 the Company had net operating loss carry
         forwards of approximately $ 6,700,000 for federal tax purposes,
         $1,800,000 expiring in 2012 and $4,900,000 expiring in 2019. The
         resulting tax deferred tax asset of approximately $2,400,000 has been
         offset by a corresponding valuation allowance.

11.      LEASES

         The Company leases its laboratory and office facilities under
         non-cancelable lease arrangements. Rent expense for 1999 and 1998 was
         $114,579 and $104,712 respectively.

         In June 1999, the Company entered into a sublease agreement with a
         stockholder to lease office space in Houston, Texas at a monthly rental
         of $3,000, expiring in June 2000.

         Future minimum lease payments under noncancellable operating leases
         include: a lease for the facility of Muse Federal Systems whose
         operations have not commenced as of September 30, 1999 and the existing
         and expanded lease on the Albuquerque facility. Expansion at
         Albuquerque occurred subsequent to September 30, 1999.


                  2000                     $   221,096
                  2001                          70,316
                                           -----------
                                           $   291,412
                                           ===========





                                      F-16

<PAGE>


12.      GOVERNMENT CONTRACTS

         The Company derives a portion of its revenue from contracts with the
         Federal government. Recognition of revenue is generally conditioned
         upon compliance with terms and conditions of the contracts and
         applicable Federal regulations. Substantially all contracts are subject
         to audit by agencies of the Federal government or their designees.
         Disallowances by Federal officials as a result of these audits may
         become liabilities of the Company. The Company has not recorded any
         liability for disallowances which may be determined in the future.

13.      CONCENTRATION OF CREDIT RISK

         During the year ended September 30, 1999 the Company maintained cash at
         financial institutions in excess of the Federal Depository Insurance
         Corp. ("FDIC") limit of $100,000. At September 30, 1999 cash deposits
         exceed the FDIC limit by approximately $11,964,000.

14.      MARKETING AGREEMENTS

         -        In June 1998, the Company entered into an agreement with an
                  entity which grants them the rights to market, sell and
                  distribute the Company's products. This entity is the same
                  that purchased 1,000,000 shares of the Company's common stock
                  in July 1998.

                  Under the terms of the agreement, the Company received a
                  $5,000,000 non-refundable fee granting the entity exclusive
                  worldwide selling rights of the Company's products in the oil
                  and gas industry for three years.

                  The agreement is for an initial term of three years with a
                  provision for three successive three year renewal periods. The
                  agreement provides for the Company to receive a minimum of
                  $12,000,000 from the entity for the sale of MuSE software over
                  the initial term of the agreement. As of September 30, 1999,
                  the Company is in the process of modifying the terms of the
                  agreement, due to the entity not having attained its sales
                  commitment under the agreement.

         -        In December 1998, the Company entered into a non-exclusive
                  agreement with an entity which grants them the rights to
                  market, sell and distribute the Company's products, in
                  exchange for minimum annual sales commitments aggregating
                  $4,000,000 through 2001.


                                      F-17

<PAGE>


         -        In February 1999, the Company entered into two non-exclusive
                  agreements with two entities, that primarily service the
                  Federal government, that grants them the rights to market,
                  sell and distribute the Company's products, in exchange for
                  minimum annual sales commitments for each agreement
                  aggregating $3,000,000 through the three year term of the
                  agreements.

         -        In June 1999, the Company entered into an agreement with an
                  entity to provide software, system design, consulting and
                  technical services on a project by project basis. The
                  agreement is for three years, and provided exclusivity for
                  consulting or application deigns, within the entity's industry
                  of specialization, provided that minimum annual project
                  commitments are satisfied.

15.      SUBSEQUENT EVENTS

         On November 16, 1999 the Company completed the acquisition of Virtual
         Presence Limited ("VPL"), a private company incorporated in the United
         Kingdom. VPL is a provider of interactive visualization solutions for
         companies in the European defense, medical and manufacturing
         industries. The Company acquired VPL for a total of $600,000 in cash
         payable over a nine month period and 430,839 shares of the Company's
         common stock valued at approximately $1,300,000, subject to certain
         restrictions. Of such shares, 205,522 are subject to adjustment in the
         event that the price of the common stock over the twenty trading days
         prior to November 15, 2000 is less than $4.41 per share.



                                      F-18


<PAGE>

                                Exhibit Index


        Exhibit No.   Document Description


               1.1    Revised Form of Underwriting Agreement.(1)

               1.2    Revised Form of Underwriter's Unit Purchase Option.(1)

               3.1    Certificate of Incorporation of the Registrant, as
                      amended.(1)

               3.2    By-Laws of the Registrant.(1)

               3.3    Amendment No. 1 to By-Laws of Registrant.(1)

               4.1    Specimen Stock Certificate.(1)

               4.2    Revised Form of Warrant Agreement between the Registrant
                      and American Stock Transfer & Trust Company, including the
                      revised form of Class A Redeemable Common Stock Purchase
                      Warrant and the form of Class B Redeemable Common Stock
                      Purchase Warrant.(1)

               10.1   License Agreement dated October 9, 1995 between the
                      Company and Sandia, as amended.(1)/**

               10.2   Office Lease dated September 6, 1995 between the Company
                      and Airpark Associates, as amended.(1)

               10.3   1995 Stock Option Plan.(1)

               10.4   1996 Stock Option Plan.(1)

               10.4(a) Amendment No. 1 to 1996 Stock Option Plan.(1)

               10.6   Employment Agreement, dated as of August 1, 1998, between
                      Craig Peterson and the Registrant.(1)

               10.7   Employment Agreement, dated as of June 1, 1998, between
                      Curtiz J. Gangi and the Registrant.(1)

               10.8   Employment Agreement, dated as of June 1, 1998, between
                      Brian Clark and the Registrant.(1)


<PAGE>


               10.9   Employment Agreement, dated as of June 1, 1998, between
                      Douglas Harless and the Registrant.(1)

               10.10  Super Value-Added Reseller (S-VAR) Agreement, dated June
                      19, 1998 between Continuum Resources International ASA and
                      the Registrant.(1)/**

               10.11  Share Purchase Agreement, dated as of November 15, 1999,
                      between John Edmund Hough and the Registrant.(2)

               10.12  Share Purchase Agreement, dated as of November 15, 1999,
                      between GLE Development Capital Limited and the
                      Registrant.(2)

               10.13  Assignment Agreement, dated as of November 16, 1999, among
                      the Registrant, VR Solutions Limited and Intelligent
                      Solutions Limited.(2)

               10.14  Sixth Amendment to Lease, dated November 18, 1999, by and
                      between Merit Albuquerque Limited Partnership, successor
                      in interest to Airpark Associates, and the Company.

               10.15  Agreement of Sublease, dated June 15, 1999, by and between
                      Continuum Resources International, Inc. and the Company.

               21     List of Subsidiaries

               27.1   Financial Data Schedule


------------------------
        (1)    Incorporated by reference from the Registrant's Registration
               Statement on Form SB-2 (Commission File No. 333-62495).
        (2)    Incorporated by reference from the Registrant's Current Report on
               Form 8-K filed with the Commission on November 24, 1999.
        **     Portions of this document have been deleted pursuant to a request
               for confidential treatment.