SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

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                                   FORM 10-QSB

                Quarterly report Under Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

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                      For Quarter Ended: September 30, 2001

                           Commission File No. 1-14559

                             MUSE TECHNOLOGIES, INC.
        (Exact name of small business issuer as specified in its charter)

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             DELAWARE                               85-0437001
     (State of Incorporation)            (IRS Employer Identification No.)

                                300 FIFTH AVENUE
                             WALTHAM, MA 02451-4518
                     (Address of principal executive office)
                                   (Zip code)

                                 (781) 890-4300
                 Issuer's telephone number, including area code

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     Indicate  by check  mark  whether  the  issuer  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  and Exchange Act
of 1934  during the  preceding  12 months (or for such  shorter  period that the
issuer was  required  to file such  reports),  and (2) has been  subject to such
filing requirements for the past 90 days.

                                 Yes [X] No [ ]

     As of  September  30,  2001 there were  issued and  outstanding  13,103,714
shares of Common Stock, $.015 par value per share, and Class A Redeemable Common
Stock Purchase Warrants to purchase 2,798,388 shares of Common Stock.

Transitional Small Business Disclosure Format

                                 Yes [ ] No [X]

<PAGE>

                             MUSE TECHNOLOGIES, INC.

                                      INDEX

                                                                     PAGE NUMBER
                                                                     -----------

PART I.  FINANCIAL INFORMATION

Item 1.  Condensed consolidated financial statements
              (Unaudited and not reviewed by an outside accountant)

         Consolidated balance sheet as of September 30, 2001                   3
              (Unaudited and not reviewed by an outside accountant)

         Consolidated statements of operations for the three and nine
             Months ended September 30, 2001 and 2000                          4
              (2001 is unaudited and not reviewed by an outside accountant)

         Consolidated statements of cash flows for the nine Months
             ended September 30, 2001 and 2000                                 5
              (2001 is unaudited and not reviewed by an outside accountant)

         Notes to financial statements                                         6

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                   9

PART II. OTHER INFORMATION                                                    17

INDEX TO EXHIBITS                                                             17

SIGNATURES                                                                    18

<PAGE>

                             MUSE TECHNOLOGIES, INC.

                           CONSOLIDATED BALANCE SHEET

                               September 30, 2001

                                                                     (UNAUDITED)

                                     ASSETS
                                     ------

CURRENT ASSETS:
   Cash and cash equivalents                                       $    250,718
   Accounts receivable                                                1,862,709
   Notes receivable-related parties (net of reserve of $1,000,000)      183,189
   Other current assets                                                 237,991
                                                                   ------------
      TOTAL CURRENT ASSETS                                            2,534,607
                                                                   ------------

PROPERTY AND EQUIPMENT - NET                                            307,655

OTHER ASSETS:
   Capitalized development costs-net                                    428,076
   Other assets                                                         141,951
                                                                   ------------
      TOTAL OTHER ASSETS                                                570,027
                                                                   ------------

                                                                   $  3,412,289
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

CURRENT LIABILITIES:
   Accounts Payable                                                $  2,577,262
   Accrued Liabilities                                                2,528,405
   Deferred Maintenance Revenue                                         739,461
   Bank Note Payable                                                    272,981
   Current Portion Lease Payable                                         85,132
                                                                   ------------
      TOTAL CURRENT LIABILITIES                                       6,203,241
                                                                   ------------
LONG-TERM LIABILITIES:
   Lease Payable-less current portion                                    30,774
   Convertible Debentures (less discount of $80,664)                  3,759,672
                                                                   ------------
      TOTAL LONG-TERM LIABILITIES                                     3,790,446
                                                                   ------------

STOCKHOLDERS EQUITY:
   Common stock, par value $.015, authorized 50,000,000 shares;
      issued and outstanding 13,103,714                                 196,556
   Additional Paid in Capital                                        26,011,201
   Accumulated Deficit                                              (31,944,670)
   Less : Treasury Stock at Cost                                       (776,315)
   Cumulative Translation adjustment                                    (68,171)
                                                                   ------------
      TOTAL STOCKHOLDERS EQUITY                                      (6,581,399)
                                                                   ------------

                                                                   $  3,412,288
                                                                   ============


             See notes to consolidated financial statements.

<PAGE>

                             MUSE TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                      For the Three Months Ended       For the Nine Months Ended
                                                            September 30                     September 30
                                                     ----------------------------    ----------------------------
                                                         2001            2000            2001            2000
                                                      (UNAUDITED)                     (UNAUDITED)
<S>                                                  <C>             <C>             <C>             <C>
REVENUES                                             $  2,206,710       2,703,801       7,968,650       9,784,225

EXPENSES:
   Cost of revenues                                       198,333         516,853       1,048,967       1,902,291
   Selling, general and administrative expenses         2,012,763       4,592,292       5,492,374      10,531,662
   Research and development                               464,319       2,058,137       2,076,152       4,733,405
   Officer Severance Costs                                      0               0               0         994,062
   Bad Debt Expense                                       252,000               0         752,000               0
   Amortization                                            96,556         250,000         592,681         484,315
   Depreciation                                           200,348         193,070         639,910         573,892
                                                     ------------    ------------    ------------    ------------

TOTAL OPERATING EXPENSES                                3,224,319       7,610,352      10,602,084      19,219,627
                                                     ------------    ------------    ------------    ------------

NET OPERATING  LOSS                                    (1,017,609)     (4,906,551)     (2,633,434)     (9,435,402)
                                                     ------------    ------------    ------------    ------------

OTHER INCOME (EXPENSE)
   Other Expense                                          (69,575)            756         (52,993)       (178,582)
   Gain (Loss) on Investments                             822,300           3,136         572,467          61,642
   Gain/(Loss) on Foreign Currency Transactions                 0        (133,896)         44,534        (107,980)
   Interest Expense                                      (101,741)       (149,634)       (276,189)       (259,638)
   Interest Income                                              0          73,090               0         466,200
   Gain/(Loss) on Asset Disposal                            4,000               0           4,000               0
   Merger/acquisition costs                                     0        (747,225)              0      (1,267,943)
   Forgiveness of Debt                                    387,753               0         387,753
   Taxes                                                   (5,944)        (13,918)        (13,834)        (40,294)
                                                     ------------    ------------    ------------    ------------
TOTAL OTHER INCOME (EXPENSE)                            1,036,793        (967,691)        665,738      (1,326,595)
                                                     ------------    ------------    ------------    ------------

NET LOSS FROM CONTINUING OPERATIONS                  $     19,184      (5,874,242)     (1,967,696)    (10,761,997)
                                                     ============    ============    ============    ============

INCOME/(LOSS) FROM DISCONTINUED OPERATIONS                      0      (1,520,161)     (1,596,386)     (1,682,506)

NET LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS                 0               0        (958,085)              0
                                                     ------------    ------------    ------------    ------------
NET LOSS FROM DISCONTINUED OPERATIONS                           0      (1,520,161)     (2,554,471)     (1,682,506)
                                                     ------------    ------------    ------------    ------------

                                                     ------------    ------------    ------------    ------------
NET LOSS                                                   19,184      (7,394,403)     (4,522,167)    (12,444,503)
                                                     ============    ============    ============    ============

NET LOSS PER COMMON SHARE - CONTINUING OPERATIONS    $       0.00           (0.46)          (0.15)          (0.84)

NET LOSS PER COMMON SHARE - DICONTINUED OPERATIONS           0.00           (0.12)          (0.12)          (0.13)
                                                     ------------    ------------    ------------    ------------
NET LOSS PER SHARE-BASIC AND DILUTED                 $       0.00           (0.58)          (0.27)          (0.98)
                                                     ============    ============    ============    ============

WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES OUTSTANDING:                          13,103,714      12,738,461      13,103,714      12,738,461
                                                     ============    ============    ============    ============

NET LOSS                                                   19,184      (7,394,403)     (4,522,167)    (12,444,503)

OTHER COMPREHENSIVE LOSS
   Change in cummulative translation adjustment            31,696               0         (68,171)              0
                                                     ------------    ------------    ------------    ------------
COMPREHENSIVE LOSS                                         50,880      (7,394,403)     (4,590,338)    (12,444,503)
                                                     ============    ============    ============    ============
</TABLE>

                See notes to consolidated financial statements.

<PAGE>

                             MUSE TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                            Nine months ended September 30
                                                            ------------------------------
                                                                 2001            2000
                                                            --------------   -------------
                                                              (UNAUDITED)
<S>                                                          <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss from continuing operations                       $ (1,967,696)   $(10,761,997)
   Adjustments to reconcile net loss to net cash
      used in operating activities:
         Depreciation                                             639,910         573,892
         Amortization                                             592,681         484,315
         Write-off of note receivable                             752,000              --
         Unrealized (gain)loss on investments                          --         (61,642)

   Changes in assets and liabilities:
      Accounts receivable                                       1,020,907       1,152,122
      Inventory                                                    10,559           6,980
      Other current assets                                        (54,747)        (36,359)
      Other assets                                                224,186         435,950
      Accounts payable                                            589,845         357,301
      Accrued liabilities                                      (1,155,330)        539,774
      Deferred Maintenace Revenue                                (913,233)       (183,068)
                                                             ------------    ------------
   NET CASH USED IN CONTINUING OPERATIONS                        (260,918)     (7,492,732)
                                                             ------------    ------------

                                                             ------------    ------------
   NET CASH USED IN DISCONTINUED OPERATIONS                      (707,761)      1,195,186
                                                             ------------    ------------

                                                             ------------    ------------
   NET CASH USED FOR OPERATING ACTIVITIES                        (968,679)     (6,297,546)
                                                             ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
         Sale/Purchase of property and equipment                  251,358        (171,685)
         Acquisition of subsidiaries, net of cash acquired             --        (397,949)
                                                             ------------    ------------
   CASH USED IN INVESTING ACTIVITIES                              251,358        (569,634)
                                                             ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES :
         Sale/Purchase of marketable securirtes                   286,206      (2,000,000)
         Principal payments on capital leases                     (38,077)        (31,305)
         Repayments of notes payable-others                      (727,019)              0
         Borrowings-convertible debentures                        724,688         272,100
                                                             ------------    ------------
      NET CASH PROVIDED BY FINANCING ACTIVITIES                   245,798      (1,759,205)
                                                             ------------    ------------

EFFECT OF EXCHANGE ON CASH                                        112,148         279,278
                                                             ------------    ------------

NET (DECREASE) INCREASE IN CASH                                  (359,375)     (8,347,107)

CASH - BEGINNING OF PERIOD                                        610,093       9,804,400
                                                             ------------    ------------
CASH - END OF PERIOD                                         $    250,718    $  1,457,293
                                                             ============    ============
</TABLE>

                       See notes to financial statements.

<PAGE>

                          NOTES TO FINANCIAL STATEMENTS

1.   THE COMPANY

     MUSE  Technologies,  Inc. (the  "Company") was  incorporated in Delaware on
October 24, 1995,  and,  together  with its  subsidiaries,  develops and markets
software  products  designed to enhance a computer  users  ability to integrate,
present, analyze and better understand many different types of data. The Company
also provides its customers with professional services, and training and support
relating to data  visualization.  The Company,  as of January 1, 2001,  conducts
business under the name Advanced  Visual  Systems (AVS).  As of January 1, 2001,
the Company  changed its financial  reporting year to end on December 31 instead
of a fiscal year end of September 30.

2.   BASIS OF PRESENTATION

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly,  they do
not include all of the information and footnotes  required by generally accepted
accounting  principles  for  complete  financial  statements.  In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.  The financial  statements
as of September  30, 2001 and for the periods then ending have NOT been reviewed
by an independent public accountant. The results of operations for the three and
nine month periods ended September 30, 2001, are not  necessarily  indicative of
the  results to be  expected  for the full year ended  December  31,  2001.  The
unaudited  consolidated financial statements have been retroactively restated to
give effect to Advanced  Visual Systems merger  consummated on November 9, 2000.
This merger was accounted for using the pooling-of-interests method. For further
information, refer to the financial statements and footnotes thereto included in
the  Company's  Annual  Report on Form 10-KSB for the year ended  September  30,
2000.

3.   RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Intangible  Assets ("SFAS No. 142"). SFAS No. 141 requires
that all business  combinations  initiated  after June 30, 2001 be accounted for
using  the  purchase   method  of  accounting  and  prohibits  the  use  of  the
pooling-of-interests  method for such transactions.  SFAS No. 142 applies to all
goodwill and intangible assets acquired in a business combination. Under the new
standard,  all goodwill,  including goodwill acquired before initial application
of the standard,  should not be amortized but should be tested for impairment at
least annually at the reporting  level,  as defined in the standard.  Intangible
assets  other than  goodwill  should be  amortized  over their  useful lives and
reviewed for  impairment  in  accordance  with SFAS no. 121. The new standard is
effective for fiscal years  beginning  after December 15, 2001. The Company must
adopt this standard on January 1, 2002.  As of September  30, 2001,  the Company
had no unamortized goodwill.

4.   GOING CONCERN

     The accompanying  financial statements have been prepared assuming that the
Company will  continue as a going  concern.  The Company  incurred a net loss of
approximately   $4,522,00  for  the  nine  months  ended   September  30,  2001.
Additionally,  the Company had working capital and total capital deficiencies of
approximately  $3.7 million and $6.6 million at September 30, 2000 and September
30,  2001,  respectively.  The parent  company is not  currently  engaged in any
business  activities.   These  conditions  raise  substantial  doubt  about  the
Company's  ability  to  continue  as a going  concern.  Management's  plans with
respect to these matters include the possibility of  restructuring  its existing
debt,  converting  existing  debt into equity,  and raising  additional  capital
through future issuances of stock and or debentures.  The accompanying financial
statements  do not include any  adjustments  that might be necessary  should the
Company be unable to continue as a going concern.

<PAGE>

5.   BUSINESS COMBINATION

     On November 9, 2000,  MUSE  Technologies  completed a merger with  Advanced
Visual Systems (AVS) and issued an aggregate of 1,929,579 shares of common stock
of the Company in exchange  for all of the capital  stock of AVS. The merger was
accounted for as a pooling of interests. Accordingly, the Company's consolidated
financial  statements have been restated to include the pooled operations of AVS
as if it had combined  with the Company  since AVS'  inception.  Included in net
revenues for the three-month periods ending September 30, 2001 and September 30,
2000 were $2.2 million and $2.5 million, respectively.  Included in restated net
income for the  three-month  periods ended  September 30, 2001 and September 30,
2000  were a net  loss of  $150,000  and a net loss of  $450,000,  respectively.
Restated  diluted net income per share for the three months ended  September 30,
2001 and September 30, 2000 included a net loss of $.01 per share and a net loss
of $.03 per share  respectively.  Included in net  revenues  for the  nine-month
periods  ending  September 30, 2001 and September 30, 2000 were $7.8 million and
$8.38 million, respectively.  Included in restated net income for the nine-month
periods  ended  September 30, 2001 and September 30, 2000 was net income of $1.2
million  and net income of $0.7  million,  respectively.  Restated  diluted  net
income per share for the nine-months  ended September 30, 2001 and September 30,
2000 included income of $.09 per share and $.06 per share respectively.

6.   DISCONTINUED OPERATIONS

     On July 27, 2001, the Company  entered into a definitive  agreement to sell
Virtual Presence,  Ltd. to Optionmaster  Ltd., a U.K.  company.  The transaction
involved  the Company  selling  all of its  interest  in Virtual  Presence  Ltd.
(including $1.9 million in assets and $2.6 million in debt) to Optionmaster Ltd.
for retirement of approximately 165,000 shares of MUSE common stock held by John
Hough, a principal of Optionmaster Ltd. and former executive and director of the
Company,  forgiveness of judgments and  settlements  of other claims,  and other
considerations.  Under  the terms of the  transaction,  Optionmaster  Ltd.  also
acquired Virtual Presence Ltd.  subsidiaries SimTeam SARL,  Simulation Solutions
Ltd.  and  Virtual  Presence,  Inc.  The  divestiture  resulted in MUSE taking a
one-time  charge of $1.3  million  for the  quarter  ending  June 30,  2001 in a
write-down  of  goodwill  related  to its  acquisition  of Virtual  Presence  in
November 1999.

     All assets and liabilities of Virtual Presence and its'  subsidiaries  have
been written down to the net  realizable  value as of  September  30, 2001.  Net
operating  results for Virtual Presence and its'  subsidiaries has been shown as
"Net Income/(Loss) from discontinued operations" for all reporting periods.

7.   NOTES PAYABLE

     In December  1997,  the Company,  through AVS,  entered into a  convertible
subordinated promissory note agreement with Kubota Corporation.  In exchange for
a $2,000,000 payment, Kubota received a convertible subordinated promissory note
due December 2001. The note,  which is subordinated to all the Company's  senior
indebtedness,  bears  interest at the rate of 5% per year  payable  quarterly in
arrears.  Kubota has the right to convert the Note into fully paid shares of the
Company's  common  stock at $9.86 per share.  Interest  expense  of $25,000  was
accrued at  September  30, 2001.  As of December  31,  2001,  the Company was in
arrears for four quarterly interest payments. On February 12, 2001 Kubota served
the Company with a formal demand for payment.

     On June 16, 2000, the Company  secured a $1,000,000 line of credit with the
Bank of Albuquerque to provide interim working capital.  The agreement was for a
one-year  period and expired on June 16, 2001.  The interest  rate is 0.5% above
the Chase  Manhattan  Bank prime rate.  The  initial  rate was 10% per annum and
interest is payable monthly.  On February 5, 2001, as a result of the diminution
in value of a MUSE investment  account with a leading  national  investment firm
(which  collateralized  the Bank of  Albuquerque  line of  credit),  the Bank of
Albuquerque accelerated and demanded payment of amounts outstanding. The Company
was unable  meet this due date.  In October  2001,  the  Company  assigned  its'
remaining  interest in the MUSE investment  account of approximately  $65,000 to
the Bank of Albuquerque. In November 2001, the Company entered into a settlement
agreement  and  release  between  the major  investment  company and the Bank of
Albuquerque. As part of the agreement,

<PAGE>

the major investment company paid to the Bank of Albuquerque a total of $700,000
and $90,000 to the  Company's  legal firm in exchange  for a full release of any
claims against them. As of February 18, 2002, there is an outstanding balance of
$272,980  with the Bank of  Albuquerque.  The  Company is  currently  engaged in
discussion  with  the  Bank of  Albuquerque  for  repayment  of the  outstanding
balance.

     On June 1, 2000,  the  Company  entered  into an  $18,000,000  equity  line
agreement with Kingsbridge  Capital Limited subject to certain limitations based
on the market price and trading volume of the Company's  common stock. On August
7, 2000, the Company sold to Kingsbridge Capital, LTD, a convertible note in the
principal amount of $1,000,000 with interest at the annual rate of 10%. The note
is  convertible  into  shares  of the  Company's  common  stock  after the first
anniversary  of the  issuance of such note at the per share rate of the lower of
$2.375 or 88% of the average  closing bid price for the five  trading days prior
to conversion. If Kingsbridge does not elect to convert the note after the first
anniversary of its issuance,  the note is due and payable on August 7, 2002. The
Company also issued to  Kingsbridge  warrants to purchase  200,000 shares of the
Company's common stock in connection with the equity line agreement  exercisable
at $3.76 per share over the four-year period commencing on November 28, 2000 and
warrants to purchase  75,000 shares of the Company's  common stock in connection
with the note  issuance  exercisable  at  $2.6125  per share  over the four year
period  commencing  on August 7, 2001.  On April 16, 2001 the  Company  received
notice from  Kingsbridge  Capital LTD  terminating its equity line agreement and
demanding  $900,000,  an amount equal to the unused  minimum  commitment  of the
equity line agreement  ($7,500,00)  multiplied by the applicable discount (12%).
The  Company  never  received  any funds nor issued any common  stock  under the
equity line agreement and Kingsbridge has never exercised any warrants.

     Between  December  2000 and January 2002,  the Company  received a total of
$915,000 in short-term financing from an individual investor,  and in July 2001,
the Company  received  $300,000 in short-term  financing  from Third  Millennium
Technologies.  Each of these  financings carry an annual interest rate of 9% and
were due and  payable  90 days from  inception.  Both  notes are  secured by the
Company's Accounts Receivables.  As of January 25, 2002 there was an outstanding
balance of $590,000 to the individual investor and $149,500 to Third Millennium.

8.   Capitalized Development Costs

     The Company  accounts for  software  development  costs under  Statement of
Financial  Accounting Standards No. 86, ("FASB 86") "Accounting for the Costs of
Computer  Software to Be Sold,  Leased or otherwise  Marketed,  "which  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.  When the  software  is fully  documented  and  available  for
unrestricted sale or license,  capitalization  of development costs ceases,  and
amortization  commences and is computed on a product-by-product  basis, based on
either a straight-line  basis over the economic life of the product or the ratio
of current  gross  revenues to the total  current and  anticipated  future gross
revenues,  whichever is greater. The establishment of technological  feasibility
and the ongoing assessment of recoverability of capitalized software development
costs  require  considerable  judgment  by  management  with  respect to certain
external  factors,  including,  but not limited to,  technological  feasibility,
anticipated  future  gross  revenues,  estimated  economic  life and  changes in
software and hardware technologies.

     Realization of  capitalized  software  development  costs is subject to the
Company's ability to market its software product in the future and generate cash
flows sufficient to support future operations.  Capitalized software development
costs totaled  $2,056,429 as of September 30, 2001.  Amortization of capitalized
software  development  costs was  $1,628,353  as of September  30, 2001 of which
$71,346 is included as  operating  expenses in the  accompanying  statements  of
operations  for  the  three-month  period  ended  September  30,  2001.  For the
nine-month  period ended September 30, 2001, a total of $361,362 of amortization
of capitalized development costs was included in operating expenses.  Management
has  determined  that due to the lack of current  product  revenue for its' MuSE
software  product,  that  a  writedown  to  zero  of  the  capitalized  software
development  costs  associated  with that product was  appropriate.  A charge to
income of $610,633 was reflected in the three-month period ended June 30, 2001.

<PAGE>

9.   LEGAL MATTERS

     During the  quarter  ended March  31,2001 it was  reported  that  Continuum
Resources had obtained a temporary  restraining order ex-parte citation on April
11, 2001 in the District Court of Harris County, Texas, 129th Judicial District,
against  MUSE and AVS to refrain  from  destroying  the MuSE  source code and to
place a copy of the source code on CD-ROM and all related documentation with the
registry  of the Court  through  the Clerk of the  Harris  County  courts.  At a
subsequent  hearing  on  June  8,  2001,  the  Harris  County  Court  awarded  a
restraining order to Continuum Resources,  and the Company has complied with all
obligations  of the order and  provided  the  subject  source  code  directly to
Continuum  Resources.  On July 10 2001,  the Company and two of its officers and
directors were served with an amended petition by Continuum  Resources  claiming
breach of contract and other charges related to the Company's sale of securities
and certain  technologies  and related  distribution  rights to  Continuum.  The
amended  petition seeks adequate damages and includes the officers and directors
as  respondents.  The  Company's  lawyers have  entered a general  denial to the
amended  petition and are presently  evaluating  the complaint and the filing of
counterclaims.

     On June 13, 200l, a class action  complaint  was filed  against the Company
and one  former and one  current  officer  and  director  in the  United  States
District  Court for the  District of  Massachusetts  that,  as amended,  alleges
violations  under  Sections  10(b) and 20(a) of the  Securities  Exchange Act of
1934, as well as Securities and Exchange Commission Rule 10b-5 during the period
January 24, 2000 through  February 21, 2001. A comparable class action complaint
making  similar  allegations  is now also before the same Court.  On January 29,
2002, the defendants moved to dismiss both complaints.

     On July 30, 2001,  the Company and two of its officers and  directors  were
served a summons in a civil case in the United States District  Court,  District
of Massachusetts,  by a former Company officer and director claiming the Company
failed to make all payments agreed to under an employment  resignation and stock
option  repurchase  agreement.  On January 23, 2002, the Company entered into an
agreement with the former officer and director to settle all outstanding  claims
against the company and its officers  and  directors in exchange for the payment
of $62,000.

     On August 15,  2001,  the Company was served a notice of motion for summary
judgment in lieu of complaint in the Supreme  Court of the State of New York, by
Proskauer Rose LLP, the Company's  former  securities and general  counsel.  The
notice of motion  seeks  payment  from the Company of $563,536  for unpaid legal
bills as agreed under the terms of a promissory note entered into by the Company
on March 9, 2001, plus interest thereon at the rate of 10% per annum, compounded
monthly, from March 9, 2001, plus reasonable  attorneys' fees and expenses.  The
promissory note was payable in full on August 30, 2001 and had been  accelerated
due to default by the failure to make required interim payments.  The company is
in the  process  of  negotiating  the  terms of a  payment  plan and  settlement
agreement with Proskauer Rose LLP.

     During  September  and  October,  2001 the  Company  was a party to binding
arbitration in the case of three former  employees who claimed a breach of their
employment  contracts.  The Company was found to have  violated the terms of the
contracts for all three former  employees  and was ordered to pay  approximately
$315,000 to the claimants  and their  attorneys.  As of January 25, 2002,  these
amounts  have not been paid.  In  addition,  two of the  employees  can exercise
options for 361,128 shares of the Company's  common stock as of their employment
termination  dates. As a result the terminated  employees will be issued a total
of 116,070 shares on a cashless basis as of April and May of 2000.

     In January 2001, Access Graphics brought a state court action in New Mexico
against the Company for the collection of a Virtual  Presence  obligation in the
amount  of  321,808.32  GBP  (approximately  $450,000)  plus 12%  interest  from
December 11, 2000.  The  foundation  for the claim against the Company  consists
among  other  things  of a  guarantee  executed  without  authority  by the then
president of Virtual President who has since confirmed that he had no authority.
Access Graphics is also pursuing its claim in the courts of the Netherlands. The
matter is currently in discovery.

<PAGE>

     On January 23, 2002,  Intelligent  Systems Ltd and GLE Development  Capital
Ltd.  obtained a judgment  against the Company in a British Court for the amount
of   (pound)252,314.77   (approximately   $361,000)  related  to  the  Company's
acquisition of Virtual Presence Ltd.

10.  OTHER MATTERS

     On April 16, 2001 the  Company's  common stock and warrants  were  delisted
from the Nasdaq  Small Cap  market for  failing  to meet  Nasdaq's  minimum  net
tangible asset  requirements  and other factors.  Commencing April 16, 2001, our
common stock and warrants are quoted on the OTC Bulletin Board.

     On July 18, 2001,  the Boston Stock  Exchange  notified the Company that it
was delisted  from that  exchange  for failure to meet its minimum  shareholders
equity requirement of $500,000.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     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.  Readers  are  encouraged  to  review  the  section
entitled  "Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of  Operations--Factors  Affecting Operating Results and Market Price of
Stock"  commencing on page 24 of the Company's  Annual Report on Form 10-KSB for
the fiscal year ended  September  30, 2000 for a  discussion  of these risks and
uncertainties.

OPERATIONAL OVERVIEW

     The Company  receives  revenue from the sale and  licensing of its software
products,  and  by  providing  consulting,  training,  support  and  maintenance
services.

1.   As a result of low demand and inadequate  financial and human  resources to
     continue  product  development,  the Company's MUSE software  product is no
     longer being marketed to customers. No material future revenue is currently
     expected from the MuSE product.

     From the beginning of fiscal 1999 until the second  quarter of fiscal 2000,
     the primary sales strategy for the Company's  MuSE-related  business was to
     distribute  its  software  products  and  services  through  a  network  of
     resellers that had extensive  vertical market expertise.  That distribution
     strategy,  known as the MUSE Strategic Reselling Partner (SRP) program, has
     produced lower than expected results to date and is not expected to produce
     significant  revenue in the future.  Although existing reseller  agreements
     provide for minimum annual sales  commitments,  failure of a SRP to satisfy
     those commitments merely permits the Company,  under certain circumstances,
     to terminate that agreement.

     Accordingly,  the  Company  cannot  provide  assurance  that the  threat of
     terminating  any  strategic  reselling  partner  agreement  is an effective
     deterrent  against  a  breach  of the  agreement  that  the  minimum  sales
     commitments have not been realized.  From the second quarter of fiscal 2000
     through the first quarter of calendar 2001,  the Company  attempted to sell
     the MuSE software  product through a direct sales effort that produced only
     minimal results.

     In June 1998,  the  Company  entered  into a  strategic  reselling  partner
     agreement with Continuum Resources International, ASA, a Norwegian company,
     with respect to distribution of the Company's  products and services in the
     oil and gas  industry  worldwide.  In exchange for such  exclusive  rights,
     Continuum Resources paid the Company a non-refundable license fee of

<PAGE>

     $5,000,000.  Minimum sales commitments  totaling  $12,000,000  through 2001
     were  modified in June 2000 due to  significant  pricing  reductions in the
     cost  of the  Company's  products  and to  enable  Continuum  Resources  to
     implement its business  plan.  The modified  agreement  requires  Continuum
     Resources to generate  minimum  revenues of $250,000 during its 2001 fiscal
     year with minimum  requirements  for succeeding  years to be established by
     mutual  agreement.  Continuum  Resources has not met  renegotiated  minimum
     revenues  and has  brought  legal  action  against  the Company for matters
     related to the modified  agreement.  The Company has complied  with a court
     order and turned over the Muse source code to Continuum for its  restricted
     use.  Unless  and  until  required  by  court  order,  management  does not
     anticipate  any  compliance  from  Continuum  with its  obligations  to the
     Company under the various agreements. See Legal Proceedings.

     In April  1999,  the  Company  entered  into a  three-year  agreement  with
     Goodyear Tire & Rubber Company to develop  applications using the Company's
     advanced visualization and network collaboration  software. The Company has
     provided  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  other  strategic  reselling  partners  are not
     affected by this agreement.  The agreement was terminated by Goodyear as of
     December 31, 2000 citing internal budgeting constraints and is not expected
     to be reinstated.

     In 1999, the Company formed MUSE Federal Systems Group,  Inc.  ("MFSG"),  a
     wholly owned subsidiary that provides MuSE software  technology and related
     consulting   services   exclusively  to  federal  agencies  and  government
     contractors.  Through direct sales efforts and  resellers,  MFSG planned to
     broaden its customer  base and develop  special  capabilities  and services
     that  were  designed  to  meet  the  unique  requirements  of  governmental
     agencies. This effort has failed to meet management's  expectations and has
     produced insignificant revenue over the past several quarters.

     As a result of significantly  less than expected  economic results from the
     MUSE SRP program, the MuSE software product and MFSG, the Company no longer
     has  personnel  and  operations  related to these  activities.  The Company
     vacated  its  Albuquerque  leased  facilities  in June  2000 and  currently
     maintains a small administrative office in Albuquerque.  With the exception
     of insignificant revenues related to the ongoing licensing of MuSE software
     by a small number of  customers,  no material  future  revenue is currently
     expected   from  the  MuSE   product  and   Management   has  no  plans  to
     conventionally market the MuSE software in the near term.

     MFSG  operations have been  functionally  terminated and it has vacated its
     Arlington,  VA  offices.   Included  in  these  workforce  and  operational
     reductions were the elimination of three Vice President  positions  related
     to technology  development,  business development and sales. Management has
     no  plans to  reactivate  MFSG in the near  term and has  relinquished  its
     facility security clearance.

2.   The Company's AVS subsidiary  sells a line of data  visualization  software
     products and related professional services through Advanced Visual Systems,
     Inc. (AVS), a wholly owned subsidiary of the Company.

     AVS and its  subsidiaries  have  historically  sold AVS  software  products
     through  a direct  sales  force,  without  any  significant  dependence  on
     resellers  or third party  representatives.  Through  AVS,  the Company has
     entered into several  Independent  Software Vendor (ISV)  relationships  in
     which  third-party  companies  embed AVS  technology  within their software
     products through a licensing and business model that is different than that
     of the MUSE SRP program.

<PAGE>

     The current strategy for the AVS subsidiary is to focus primarily on direct
     sales by its own  international  sales staff to  customers  and ISVs and to
     develop ISV relationships in which its data visualization software products
     are utilized and/or  embedded in third-party  products,  thereby  producing
     ongoing licensing revenue.

     In September 2000, AVS entered into a software  licensing  agreement with a
     leading  software  manufacturer.  Under the terms of a perpetual  licensing
     agreement,  AVS received a $1.5 million  one-time  payment for software and
     professional  services.  In subsequent  years, the customer can receive new
     releases of the AVS OpenViz technology and support for $300,000 per year.

3.   On July 27, 2001 the Company  entered into a  definitive  agreement to sell
     Virtual  Presence  Ltd. and its  subsidiaries  (see footnote 4 above to the
     financial   statements),   which   provide   highly   customized   advanced
     visualization  solutions;  systems  integration,  training  and  consulting
     services; and computer hardware and accessories to a predominately European
     customer base. The Company acquired Virtual Presence,  Ltd. on November 16,
     1999 for a total of  $300,000  in cash at the  closing,  $300,000  in notes
     payable over a nine-month period and 430,839 shares of the Company's common
     stock,  subject to  certain  restrictions.  Of those  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.  The Company is in the process of issuing  363,969  shares to settle
     this agreement.

     In March,  2000,  through Virtual  Presence Ltd., the Company  acquired two
     additional  companies  (that were included in the sale of Virtual  Presence
     Ltd.):  Simulation  Solutions,  Ltd., a U.K. company that provides advanced
     software  and  consulting  services  in the  field of plant  and  equipment
     manufacturing simulation,  and VRsource.com,  a Colorado corporation,  that
     was a prominent  e-commerce  site for  advanced  visualization  and virtual
     reality hardware.

     In April 2000, MUSE Virtual  Presence was awarded a major contract,  valued
     at  $1,000,000,   with  the  Manchester  Visualization  Centre  to  provide
     hardware, software and services.

     Since the  first  quarter  of fiscal  2001  until  its  divestiture  by the
     Company,  the operations of Virtual  Presence had been reduced  through the
     transfer of certain  technologies to another  company and through  employee
     attrition.

GENERAL

     On May 4, 2000,  the  Company's CEO and Chairman  resigned.  As a result of
certain  severance  arrangements  and  repurchase  of stock  options to purchase
750,000 shares of the Company's common stock in connection with his resignation,
the  Company  incurred  a  charge  to  earnings  of  $994,000.  As  part  of the
resignation  arrangement,  the Company  agreed to make certain  payments  over a
two-year  period.  The Company ceased  payments in December 2000, and the former
officer has brought legal action  against the Company.  On January 23, 2002, the
Company entered into an agreement with the former officer and director to settle
all  outstanding  claims  against the company and its officers and  directors in
exchange for the payment of $62,000.

     On February 6, 2001, Russell G. Barbour, the Company's CEO since its merger
with  AVS,  resigned  to assume  the title of  President  of the  Company's  AVS
subsidiary.  Steve  Sukman,  Senior Vice  President and a member of the Board of
Directors,  immediately assumed CEO  responsibilities and was formally appointed
CEO on March 14, 2001, at which time Mr. Barbour ceased employment with AVS.

     As a result of the  elimination of several  positions  within the Company's
US-based  marketing and  communications  departments  in April 2001,  activities
related to strategic media relations,  trade show  attendance,  direct marketing
and promotion have been  significantly  curtailed.  Accordingly,  it is possible
that sales of the Company's  software and services may decline in the future due
to a significant reduction in marketing activity.

<PAGE>

     As a result of significant lead time necessary to market and consummate the
Company's  direct sales and ISV  activities,  quarterly  results are expected to
fluctuate  significantly  depending on the timing and  successful  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 expected in subsequent quarters.  At the present time,  management efforts
are primarily  focused on seeking  additional  funding,  addressing  defaults on
Company  obligations and various legal matters to enable the Company to continue
as a going concern.

RESULTS OF OPERATIONS

     Revenues  for  the  three-month   period  ended  September  30,  2001  were
$2,206,710  as compared to revenues of  $2,703,801  for the  three-month  period
ended September 30, 2000. The decrease of $497,091,  or 18%, for the three-month
period  is  primarily  attributable  to a  decline  in  software  licensing  and
maintenance renewal revenues by users of older MUSE and AVS software products; a
slowdown in spending on software and services by major corporations related to a
general  decline in the global  economy;  and the events of September  11, 2001,
which caused many  candidate  customers to halt or  terminate  initiatives  that
could have  utilized  the  Company's  products  and  services.  Revenues for the
nine-month  period  ended  September  30,  2001 was  $7,968,650  as  compared to
revenues of $9,784,225 for the nine-month  period ended  September 30, 2000. The
decrease of  $1,815,575,  or 19%, for the  nine-month  period was related to the
reasons  stated  above,  with  greater  emphasis  being  placed on a decline  in
revenues from the Company's MUSE software and related services.

     Total  operating  expenses for the  three-month  period ended September 30,
2001 were $3,224,319 as compared to total  operating  expenses of $7,610,352 for
the three-month period ended September 30, 2000. The decrease of $4,386,033,  or
58%, for the  three-month  period is primarily  attributable  to reduced cost of
revenues,  significant cutbacks in staff, decreased legal expenses and reduction
or  elimination  of  certain  office  operations.  These  cost  reductions  were
partially  offset by a charge of $252,000 for the write-off of certain  accounts
and notes receivable.  Total operating  expenses for the nine-month period ended
September 30, 2001 were  $10,602,084 as compared to total operating  expenses of
$19,219,627 for the nine-month  period ended September 30, 2000. The decrease of
$8,617,543 or 45%, for the nine-month  period was also  attributable  to reduced
cost of revenues,  significant  cutbacks in staff,  decreased legal expenses and
reduction or elimination of certain office operations.  In addition, there was a
one-time  charge in the period  ending June 30, 2000 for $994,062 in  connection
with  resignation  of the  Company's  former  CEO.  These cost  reductions  were
partially  offset by a charge of $752,000 for the write-off of certain  accounts
and notes receivable.

     Total other  income/(expenses)  for the three-month  period ended September
30, 2001 was  $1,036,793  of income as compared to $967,691 of expenses  for the
three-month period ended September 30, 2000. The reduction of expenses is mainly
attributable  to an expense  for  merger and  acquisition  of  $747,225  in 2000
associated with the  acquisition of Advanced Visual Systems.  A gain of $822,300
was realized in connection with the settlement agreement with a major investment
firm and $387,753 in forgiveness  of debt was recognized in connection  with the
settlement   with  a  former   executive   and   board   member.   Total   other
income/(expenses)  for the  nine-months  ended  September  30, 2001 was $665,738
income  compared to $1,326,595  expense for the nine months ended  September 30,
2000. The reduction of expenses is mainly  attributable to an expense for merger
and  acquisition  of  $1,267,943  in 2000  associated  with the  acquisition  of
Advanced  Visual  Systems.  In addition,  there were gains  associated  with the
settlement  with a major  investment  firm and the  forgiveness  of debt  with a
former  executive and board member that was  recognized in the nine months ended
September 30, 2001.

     The Company  recognized a loss from  discontinued  operations of $1,596,386
for the nine-month  period ended  September 30, 2001 versus a loss of $1,682,506
for the  nine-month  period ended  September  30, 2000.  The loss on disposal of
discontinued  operations of $958,085 for the nine-month  period ended  September
30, 2001 is the cost  associated  with the disposal  along with the write-off of
the goodwill  from the  original  acquisition.  Accordingly,  net income for the
three-month  period ended  September  30, 2001 of $19,184 as compared to the net
loss of $5,874,242 for the

<PAGE>

three month period ended September 30, 2000,  reflected a significant  reduction
in operating expenses due to cost saving measures enacted by the Company, offset
by a decrease in revenues,  and the gains  associated with the settlement with a
major  investment  company  and  the  forgiveness  of  debt  associated  with  a
settlement  with a  former  executive  and  board  member.  The net loss for the
six-month  period ended September 30, 2001 of $4,522,1671 as compared to the net
loss of  $12,444,503  for the nine-  month  period  ended  September  30,  2000,
reflected a  significant  reduction  in  operating  expenses  due to cost saving
measures enacted by the Company, offset by a decrease in revenues and a one-time
charge for the disposition of the Virtual Presence subsidiary.

     The  Company's  primary  revenue  strategy is to build a direct sales force
that can  identify  international  revenue  opportunities  for the AVS  software
products.  As a result  of the  significant  lead  time  necessary  to create an
effective direct sales force and consummate  additional  customer,  distribution
and ISV relationships, 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.

     As of January 1, 2001, the Company changed our financial  reporting year to
end on December 31 instead of a fiscal year end of September 30.

LIQUIDITY AND CAPITAL RESOURCES

     Historically, the Company's capital requirements have been funded through a
series of debt and equity  financings  and  revenues  received  through  the SRP
program.  During fiscal 2000,  revenues  generated from direct sales  activities
also funded portions of the Company's capital needs.

     In July  1998,  the  Company  sold  1,000,000  shares of  common  stock and
warrants to purchase 1,000,000 shares of common stock to Continuum Resources for
an aggregate  purchase price of $8,000,000.  In October 1998, the Company loaned
$1,000,000 to a subsidiary of Continuum  Resources  for the  establishment  of a
Houston  facility.  The loan is payable on demand and bears interest at the rate
of 12% per annum.  In April 2001 the Company sent  Continuum a letter  demanding
payment of principal and accrued  interest.  The loan remains  outstanding as of
the date  hereof and our demand for  payment has  resulted  in  litigation  from
Continuum  Resources  for  claims  that  the  Company  failed  to  meet  certain
expectations of a June 2000 modified  agreement between our companies.  Pursuant
to the  June  2000  agreement,  Continuum  Resources  acknowledged  its  payment
obligations  on the loan and that the Company will be entitled to terminate  the
reseller agreement and Continuum  Resources'  exclusive  distribution rights for
MuSE  software  in the oil and gas  industry  if the  loan is  unpaid;  however,
management  cannot  provide  assurance  that that the loan will be repaid in the
near future. Accordingly, the Company wrote off $250,000 of the $1,000,000 loans
in the fiscal  year ended  September  30,  2000 and has wrote off an  additional
$500,000 in the second  quarter of 2001 and an additional  $250,000 in the third
quarter of 2001.

     On June 1, 2000,  the  Company  entered  into an  $18,000,000  equity  line
agreement with Kingsbridge  Capital Limited subject to certain limitations based
on the market price and trading volume of the Company's  common stock. On August
7, 2000, the Company sold to Kingsbridge Capital, LTD, a convertible note in the
principal amount of $1,000,000 with interest at the annual rate of 10%. The note
is  convertible  into  shares  of the  Company's  common  stock  after the first
anniversary  of the  issuance of such note at the per share rate of the lower of
$2.375 or 88% of the average  closing bid price for the five  trading days prior
to conversion. If Kingsbridge does not elect to convert the note after the first
anniversary of its issuance,  the note is due and payable on August 7, 2002. The
Company also issued to  Kingsbridge  warrants to purchase  200,000 shares of the
Company's common stock in connection with the equity line agreement  exercisable
at $3.76 per share over the four-year period commencing on November 28, 2000 and
warrants to purchase  75,000 shares of the Company's  common stock in connection
with the note  issuance  exercisable  at  $2.6125  per share  over the four year
period  commencing  on August 7, 2001.  On April 16, 2001 the  Company  received
notice from  Kingsbridge  Capital LTD  terminating its equity line agreement and
demanding $900,000, an amount equal to the unused minimum commitment

<PAGE>

of the equity line agreement  ($7,500,000  multiplied by the applicable discount
of12%).  The Company never  received any funds nor issued any common stock under
the equity line agreement and Kingsbridge has never exercised any warrants.

     As part of the acquisition of AVS through a merger,  the Company  exchanged
AVS'  outstanding  stock  options for MUSE stock options and will be required to
issue  232,800  shares of our common  stock  pursuant to a  convertible  note to
Kubota Corporation, if converted.

     On December 12, 2000, the Company  appointed  Bluestone  Capital  Partners,
L.P. as its  financial and  investment  banking  advisors.  Under the terms of a
non-exclusive agreement, Bluestone was to be paid a one-time retainer of $50,000
in addition to an advisory fee of $10,000 per month,  plus a  commission  at the
closing of the sale of securities, if any, to certain institutional,  accredited
individual or strategic  investors.  As of March 2001 the Company terminated its
monthly fee arrangement with Bluestone. No relevant sales were ever consummated.
The agreement with Bluestone was terminated in March 2001.

     On December 26, 2000,  the Company  entered into an agreement  with Prevail
With Vision,  Inc. (PWV) to assist the Company in identifying between $3,500,000
and $10,000,000 in loan or credit facilities. Under the terms of this agreement,
PVW was paid a retainer fee of $30,000 and will  receive a 6%  placement  fee on
any funds raised by PVW. No funding activities have been consummated by PWV. The
agreement with PWV terminated on May 26, 2001.

     On January 2, 2001,  the Company  retained The Wall Street  Group,  Inc. as
financial relations advisors.  Under the terms of an agreement,  The Wall Street
Group  was to  receive  $7,000  per month in  consulting  fees and  warrants  to
purchase  100,000 shares of our common stock at a price of $0.52 per share.  The
number of shares of common stock  underlying the warrants  doubled to 200,000 in
April 2001 as a result of our non-payment of monthly fees. The agreement was for
a term of one year subject to cancellation by either party upon 90 days' written
notice,  at which time The Wall  Street  Group is  required to refund a prorated
portion of the warrants. Notice of termination was given in March 2001.

     In March 2001 the Company retained, on an hourly consulting basis, Geoffrey
D. Lurie & Associates LLC to assist its senior  management team in an evaluation
of our  operations  and to refine  our  short-  and  long-term  strategies.  The
agreement with Geoffrey D. Lurie & Associates was terminated in June, 2001.

     In October 1999, the Company deposited  $2,000,000 in an investment account
with a leading national  investment banking  organization.  The current value of
the account as of July 30, 2001 was less than $20,000.  The Bank of  Albuquerque
had a security interest in the investment  account, in connection with a line of
credit as  discussed  elsewhere  in this  filing.  The Company  maintained  that
approximately  $900,000 of $1.4 million in losses may have been  attributable to
circumstances  other than normal market  fluctuations.  The Company  engaged the
services of a law firm and other  professionals to assist in analyzing the prior
activity in the  account  and to  recommend  appropriate  action  based on their
findings.  On May 8, 2001,the Company entered into mediation with the investment
banking organization  resulting in an unaccepted  settlement offer that was less
than  the  full  amount  of  the  Company's  losses  and,  following  additional
negotiation and evaluation, in October 2001, the Company assigned its' remaining
interest  in the  investment  account  of  approximately  $65,000 to the Bank of
Albuquerque.  In November 2001, the Company entered into a settlement  agreement
and release between the major investment company and the Bank of Albuquerque. As
part  of the  agreement,  the  major  investment  company  paid  to the  Bank of
Albuquerque  a total of  $700,000  and  $90,000 to the  Company's  legal firm in
exchange for a full release of any claims  against them. As of January 24, 2002,
the Company had an outstanding balance of $272,980 with the Bank of Albuquerque.

     On April 16, 2001 the  Company's  common stock and warrants  were  delisted
from the Nasdaq  Small Cap  market for  failing  to meet  Nasdaq's  minimum  net
tangible asset  requirements  and other factors.  Commencing April 16, 2001, the
Company's  common stock and warrants were quoted on the OTC Bulletin Board. As a
result of the Nasdaq delisting and current trading on the OTC Bulletin Board, it
will likely become more difficult for the Company to raise capital and its stock
will likely be traded with

<PAGE>

significantly  lower daily  volume,  possibly  resulting in less  liquidity  for
investors.

     On July 19, 2001 the  Company's  common stock and warrants that were traded
on the Boston Stock Exchange were removed from listing and  registration  on the
Boston Stock  Exchange due to the  Company's  inability to rectify a shareholder
equity deficit.

     During June and July,  2001,  the Company  received short term financing in
exchange for three 90-day loans in the aggregate amount of $1,215,000  ($100,000
on June 14,  $250,000 on June 26,  $300,000 on July 9, $100,000 on September 14,
$50,000 on October 26, $30,000 on November 16, $100,000 on November 29, $100,000
on December  13,  $85,000 on January 2, 2002,  and $50,000 on January 25,  2002)
that bear interest at the rate of 9% per annum and are secured by certain of the
Company's identified and general accounts receivable along with its intellectual
property.  There have been  subsequent  repayments  of principal and interest to
both lenders.  As of February 18, 2002, the principal balance to the two lenders
is $739,500.  In July 2001,  several of the AVS identified  accounts  receivable
that were pledged in accordance  with the short term  financing were paid to AVS
by its customers,  however, AVS was unable to remit the corresponding amounts to
the short term  lenders  because of  essential  payments  that were  required to
continue  operations.  The short- term lenders are no longer willing to postpone
repayment.

     For the nine months ended  September 30, 2001,  there was a net decrease in
cash of $359,375 as compared  to a net  decrease in cash of  $8,347,107  for the
nine-month period ended September 30, 2000. The decrease in net use of funds for
operations  of $968,879 was offset by  borrowings  on notes payable and sales of
fixed  assets.  As of  September  30,  2001,  the Company had a working  capital
deficiency of approximately  $3.7 million.  These  conditions raise  substantial
doubt about the Company's  ability to continue as a going concern.  Management's
plans with  respect to the above  include  seeking to raise  additional  capital
through  new loan and  credit  facilities,  as the  likelihood  of  conventional
equity-based funding sufficient for working capital seems unlikely. The recovery
of assets and continuation of future  operations is dependant upon  management's
ability to obtain  additional  financing  and  management's  ability to generate
revenues sufficient to continue pursuing our current business plan.

     In the absence of substantial  outside financing,  of which there can be no
assurance,  the  Company  will be  required  to operate  only to the extent that
future sales and related collections permit.

     The Company's capital  requirements  depend on numerous factors,  including
the progress of product  development  programs,  ability to enter into strategic
arrangements   or   other   marketing   arrangements   which   result   in   the
commercialization  and  distribution  of the  Company's  products,  the  need to
purchase  or  lease  additional  capital  equipment  and  the  cost  of  filing,
prosecuting,  defending  and  enforcing  claims  by  and  against  the  Company,
including any patent claims and other intellectual  property rights.  Based upon
the Company's current plans,  management believes that current cash resources as
well as anticipated funds to be generated from operations,  will be insufficient
to satisfy the Company's needs for the next 12 months. The equity line agreement
has been  terminated  and the  Company  has no current  sources of  conventional
equity-based  funding.  Accordingly,  the Company must obtain additional capital
from other sources and there can be no assurances that additional financing will
be available or that the terms of any financing will be acceptable.

     Further,  as a result of the merger  with AVS on  November  9, 2000 and the
Company's  substantially  weakened cash  position  subsequent to its fiscal year
end, the Company continues to require  significant  additional funds in order to
complete  the  effective  combination  of the  Company's  operations  (including
international  operations)  and to  continue  to  fund  certain  projects  under
development.  The  Company  cannot  provide  assurance  that such  funds will be
available.  The dollar  amount  required to  successfully  market the  Company's
product  and  service  offerings  is  significant  and in the  absence  of  such
marketing  activities,  it is likely that revenue  declines will  continue.  The
Company has significantly reduced the dimensions of its marketing activities and
has been unable to create a planned new corporate identity, launch new products,
revitalize existing products,  produce new marketing and promotional  materials,
expand an international  sales force,  create an effective  customer and product
support organization and invest in new technology development.

<PAGE>

     Although  the Company has engaged the  services of  investment  banking and
financial  services  firms  to  assist  management  in  identifying  sources  of
financing,  management  can provide no assurance that the amount or structure of
any such financings will be acceptable. As a result, the Company has been forced
to curtail  its  planned  marketing  and growth  strategies  and  certain of its
operations.  In this  regard,  management  has cut costs where  feasible and has
eliminated  all personnel  and operating  costs in the US except for AVS and has
moved the Company's principal offices and operations to Waltham, Massachusetts.

     The  Company  continually  explores  strategic,  joint  venture  and  other
opportunities  both in the United  States  and  abroad.  From time to time,  the
Company  may  be  involved  in  negotiations  for  ISV  arrangements,  strategic
relationships,  joint ventures,  financing  arrangements or possible mergers and
acquisitions.

     The Company's  primary sales strategy is to build a direct sales force that
can identify  international revenue opportunities for the AVS software products.
As a result of the significant lead time necessary to create an effective direct
sales  force  and  consummate   additional   customer,   distribution   and  ISV
relationships,  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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     In the FORM 10-QSB for the period  ended March  31,2001  filed on behalf of
the Company,  it was reported that Continuum  Resources had obtained a temporary
restraining  order ex parte  citation on April 11, 2001 in the District Court of
Harris County,  Texas, 129th Judicial District,  against MUSE and AVS to refrain
from  destroying  the MuSE source code and to place a copy of the source code on
CD-ROM and all related  documentation with the registry of the Court through the
Clerk of the Harris County courts. At a subsequent  hearing on June 8, 2001, the
Harris County Court awarded a restraining order to Continuum Resources,  and the
Company has complied with all  obligations of the order and provided the subject
source code directly to Continuum  Resources.  On July 10 2001,  the Company and
two of its  officers  and  directors  were  served  with an amended  petition by
Continuum Resources claiming breach of contract and other charges related to the
Company's sale of securities and certain  technologies and related  distribution
rights to  Continuum.  The  amended  petition  seeks  damages and  includes  the
officers and  directors as  respondents.  The  Company's  lawyers have entered a
general  denial  to the  amended  petition  and  are  presently  evaluating  the
complaint and the filing of counterclaims.

     On June 13, 200l, a class action  complaint  was filed  against the Company
and one  former and one  current  officer  and  director  in the  United  States
District  Court for the  District of  Massachusetts  that,  as amended,  alleges
violations  under  Sections  10(b) and 20(a) of the  Securities  Exchange Act of
1934, as well as Securities and Exchange Commission Rule 10b-5 during the period
January 24, 2000 through  February 21, 2001. A comparable class action complaint
making  similar  allegations  is now also before the same Court.  On January 29,
2002, the defendants moved to dismiss both complaints.

     On July 30, 2001,  the Company and two of its officers and  directors  were
served a summons in a civil case in the United States District  Court,  District
of Massachusetts,  by a former Company officer and director claiming the Company
failed to make all payments agreed to under an employment  resignation and stock
option  repurchase  agreement.  On January 23, 2002, the Company entered into an
agreement with the former officer and director to settle all outstanding  claims
against the company and its officers  and  directors in exchange for the payment
of $62,000.

     On August 15,  2001,  the Company was served a notice of motion for summary
judgment in lieu of complaint in the Supreme  Court of the State of New York, by
Proskauer  Rose LLP, the  Company's  former  securities  counsel.  The notice of
motion  seeks  payment  from the Company of $563,536  for unpaid  legal bills as
agreed under the terms of a promissory note entered into by the Company on March
9, 2001, plus

<PAGE>

interest thereon at the rate of 10% per annum, compounded monthly, from March 9,
2001,  plus  reasonable  attorneys'  fees and expenses.  The promissory  note is
payable in full on August 30, 2001, but has been  accelerated  due to default by
the failure to make required interim payments.  The company is in the process of
negotiating the terms of a payment plan and settlement  agreement with Proskauer
Rose LLP.

     During  September  and  October,  2001,  the Company was a party to binding
arbitration in the case of three former  employees who claimed a breach of their
employment  contracts.  The Company was found to have  violated the terms of the
contracts for all three former  employees  and was ordered to pay  approximately
$315,000 to the claimants and their  attorneys.  As of February 15, 2002,  these
amounts have not been paid. In addition,  two of the employees were permitted to
exercise  options for 361,128  shares of the Company's  common stock as of their
employment  termination  dates.  As a result,  the terminated  employees will be
issued a total of 116,070 shares on a cashless basis.

     In January,  2001,  Access  graphics  brought a state  court  action in New
Mexico against the Company for the collection of a Virtual  Presence  obligation
in the amount of 321,808.32 GBP (approximately  $450,000) plus 12% interest from
December 11, 2000.  The  foundation  for the claim against the Company  consists
among  other  things  of a  guarantee  executed  without  authority  by the then
president of Virtual  Presence who has since confirmed that he had no authority.
Access Graphics is also pursuing its claim in the courts of the Netherlands. The
matter is currently in discovery.

     On January 23, 2002,  Intelligent  Systems, Ltd and GLE Development Capital
Ltd.  obtained a judgment  against the Company in the amount of  252,314.77  GBP
(approximately  $361,000) in connection  with  non-payment of a debt  associated
with the acquisition of Virtual Presence, Ltd. in November 1999.

     There are other legal proceedings reported in previous quarterly reports of
this fiscal year in which  there have been no material  developments  since June
30, 2001.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     On June 21, 2001,  the Board of Directors  granted  options to employees of
the Company and its  subsidiaries  pursuant to the  Company's  1996 Stock Option
Plan to purchase  5,605,000  shares of the Company's common stock at fair market
value, of which options to purchase  2,900,000 were granted to the directors and
executive  officers of the Company.  Fair market  value is $0.10 per share,  the
closing  price  on the  date of the  grant.  The  options  vest  in  four  equal
allotments  beginning on September  30, 2001,  and every six months  thereafter,
subject to  continuing  employment.  The options may be exercised on a "cashless
basis" so that sufficient  shares are considered to be exercised and immediately
sold to cover the excise  price of the options  exercised.  The shares for which
options were granted exceed the shares  currently  available  under the terms of
the plan as previously  approved by the  shareholders of the Company and to that
extent were granted subject to approval or  ratification of the  shareholders of
the Company.

     As of February 18, 2002, the Company has  outstanding a total of $739,500in
short-term notes payable that are secured by the Company's  accounts  receivable
and  intellectual  property.  In January  2002,  the lender of  $590,000  of the
short-term  notes  advised the  Company of his intent to  exercise  his right to
demand immediate payment in full. In the opinion of Management, the Company does
not have the  liquidity  to repay the  short-term  financing in its entirety and
continue  operations  over the next twelve  months,  and intensive  conventional
fundraising efforts by Management over the past year have been unsuccessful.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     Defaults in the payment of interest and  principal in  indebtedness  of the
Company  not  cured  within  30 days are  discussed  above  (1) in note 7 to the
financial   statements  with  respect  to  Kubota   Corporation,   the  Bank  of
Albuquerque, and Kingsbridge Capital Limited, (2) under the "General" heading of
Part I, Item 2, Management's  Discussion and Analysis,  with respect to payments
due a former CEO and Chairman, and (3) under Part II, Item 1, Legal Proceedings,
with respect to

<PAGE>

Proskauer  Rose LLP and former  employees.  The amounts of the default and total
arrearages as of February 18, 2002, the date of the filing of this report are as
follows:

-------------------------------------- -------------- --------------
                                       Default        Total
                                       Amount         Arrearages
-------------------------------------- -------------- --------------
Kubota Corporation                     $2,050,000     $2,050,000

-------------------------------------- -------------- --------------
Bank of Albuquerque                    $325,048       $325,048

-------------------------------------- -------------- --------------
Kingsbridge Capital Limited            $1,975,000     $1,975,000

-------------------------------------- -------------- --------------
Former Employees                       $315,000       $315,000

-------------------------------------- -------------- --------------
Proskauer Rose LLP                     $563,537       $563,537

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

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

     Not applicable.

ITEM 5. OTHER INFORMATION

     As of January 1, 2001, the Company changed its financial report year to end
on December 31 instead of a fiscal year end of September 30.

     Effective  June 8, June 12 and June 13,  2001,  respectively,  each of Jack
Berenzwig,  Ed Masi and John Hough tendered their respective  resignations  from
the Company's  Board of Directors.  The Company's  Board of Directors  currently
consists  of Steve  Sukman and Brian R. Clark,  the  Company's  Chief  Executive
Officer, and President and Chief Financial Officer, respectively.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  No exhibits are required or attached.

     (b)  As discussed above in Note 6 to the financial statements,  a report on
Form 8-K was  filed  during  the  quarter  to report  that on July 27,  2001 the
Company  entered  into a  definitive  agreement  to sell all of its  interest in
Virtual Presence, LTD., which was wholly owned subsidiary of the Company.

          SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

Dated: August 20, 2001

                                         MUSE TECHNOLOGIES, INC.

                                         By: /s/ Brian R. Clark
                                             --------------------
                                             Brian R. Clark, President and
                                             Chief Financial Officer
                                             (Principal Financial and
                                             Accounting Officer)


                                         By: /s/ Steve Sukman
                                             --------------------
                                             Steve Sukman,
                                             Chief Executive Officer