<PAGE>
                       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: December 31, 1998

                           Commission File No. 1-14559

                             MUSE TECHNOLOGIES, INC.

        (Exact name of small business issuer as specified in its charter)

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


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

                                1601 Randolph, SE
                             Albuquerque, New Mexico
                                      87106
                     (Address of principal executive office)
                                   (Zip code)

                                 (505) 843-6873
                 Issuer's telephone number, including area code

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



         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            No     X          (Issuer has not been subject to filing
                                          requirements for the past 90 days)

         As of February 12, 1999, there were issued and outstanding 10,143,893
shares of Common Stock, $.015 par value per share, and Class A Redeemable Common
Stock Purchase Warrants to purchase 1,113,881 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)

         Balance sheet as of December 31, 1998                           3

         Statements of operations for the three months
                  ended December 31, 1998 and 1997                       4

         Statements of cash flows for the three months
                  ended December 31, 1998 and 1997                       5

         Notes to financial statements                                   6

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                             7

PART II.  OTHER INFORMATION                                              14

INDEX TO EXHIBITS                                                        16

SIGNATURES                                                               17



                                       2
<PAGE>

                             MUSE TECHNOLOGIES, INC.

                                  BALANCE SHEET

                                DECEMBER 31, 1998
                                   (UNAUDITED)

                                     ASSETS

<TABLE>
<CAPTION>
CURRENT ASSETS:
<S>                                                                             <C>                      
         Cash                                                                   $              16,925,923
         Accounts receivable                                                                    1,195,553
         Prepaids                                                                                  33,028
                                                                                   ----------------------
                  TOTAL CURRENT ASSETS                                                         18,154,404
PROPERTY AND EQUIPMENT - NET                                                                      410,499
NOTES RECEIVABLE                                                                                1,205,000
OTHER ASSETS                                                                                        8,252
                                                                                   ----------------------
                  TOTAL ASSETS                                                  $              19,778,155
                                                                                   ======================
                                  LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES:

         Accounts payable                                                       $                   5,667
         Accrued liabilities                                                                      379,831
                  TOTAL CURRENT LIABILITIES                                                       385,498
                                                                                   ----------------------
STOCKHOLDERS' EQUITY:

         Common stock, $.015 par value, authorized 50,000,000 shares;                             152,158
         issued and outstanding 10,143,893 shares
         Additional paid-in capital                                                            23,905,787
         Stock subscription receivable                                                           (87,500)
         Accumulated Deficit                                                                  (4,192,290)
                                                                                   ----------------------
                  TOTAL STOCKHOLDERS' EQUITY                                                   19,392,657
                                                                                   ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                       $              19,778,155
                                                                                   ======================
</TABLE>


                        See notes to financial statements



                                       3
<PAGE>

                             MUSE TECHNOLOGIES, INC.

                            STATEMENTS OF OPERATIONS

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                      Three Months Ended
                                                                                         December 31,
                                                                       ------------------------------------------------
                                                                                      1998                       1997
                                                                       ---------------------      ---------------------
<S>                                                                    <C>                        <C>            
REVENUE                                                                      $       398,882            $       304,333
EXPENSES:
         Selling, general and administrative expenses                                865,048                    260,592
         Research and development                                                    320,920                    171,978
         Depreciation                                                                119,500                    120,595
         Interest Expense                                                             11,751                    203,803
                                                                       ---------------------      ---------------------
TOTAL EXPENSES                                                                     1,317,219                    756,968
                                                                       ---------------------      ---------------------
NET LOSS                                                                   $       (918,337)          $       (452,635)
                                                                       =====================      =====================
NET LOSS PER SHARE:

Basic and assuming dilution                                                            (.09)                      (.06)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:                                                                      9,395,197                  7,278,279

</TABLE>

                        See notes to financial statements



                                       4
<PAGE>

                                              MUSE TECHNOLOGIES, INC.

                                             STATEMENTS OF CASH FLOWS
                                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                            Three Months Ended
                                                                                               December 31, 
                                                                                 ----------------------------------------
                                                                                        1998                   1997
                                                                                 ------------------      ----------------
<S>                                                                              <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES

         Net loss                                                                        $(918,337)            $(452,635)
         Adjustment to reconcile net loss to net cash provided by (used in)
         operating activities:
                  Depreciation                                                              119,500               120,755
                  Amortization of discount                                                                        165,885

         Changes in assets and liabilities:

         Decrease (increase) in accounts receivable                                       3,168,447              (74,467)
        (Increase) decrease in prepaid assets                                            (10,151)                10,006
         Decrease in other assets                                                                                   3,600
        (Decrease) in accounts payable                                                   (129,432)              (52,790)
        (Decrease) increase in accrued liabilities                                       (471,827)               16,548
                                                                                 ------------------      ----------------
NET CASH PROVIDED  BY (USED IN) OPERATING ACTIVITIES                                     1,758,200               (263,098)
                                                                                 ------------------      ----------------
CASH FLOWS FROM INVESTING ACTIVITIES

         Purchase of property and equipment                                                (69,832)              (17,287)
                                                                                 ------------------      ----------------
CASH USED IN INVESTING ACTIVITIES                                                          (69,832)              (17,287)
                                                                                 ------------------      ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:

         Net proceeds from sale of stock                                                  9,485,266               500,549
         Loans to officers and stockholders                                             (1,150,000)
         Collection of stock subscriptions receivable                                     4,000,000                     0
         Principal payments on capital leases                                              (12,214)               (10,129)
         Repayment of notes payable - affiliates                                          (625,000)
                                                                                 ------------------      ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                               11,698,052                490,420
                                                                                 ------------------      ----------------
NET INCREASE IN CASH                                                                     13,386,420               210,035
CASH - Beginning of period                                                                3,539,403               287,436
                                                                                 ------------------      ----------------
CASH - End of period                                                                    $16,925,923           $   497,471
                                                                                 ==================      ================
</TABLE>



                        See notes to financial statements



                                       5
<PAGE>

                          NOTES TO FINANCIAL STATEMENTS

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. MuSE is based on
         software licensed to the Company by Sandia Corporation ("Sandia")
         pursuant to a license agreement dated October 9, 1995 (the "License
         Agreement"). The Company has also developed a proprietary software
         product, "Continuum", designed for multiuser, real-time collaboration
         within the MuSE environment.

2.       BASIS OF PRESENTATION

         The accompanying unaudited condensed financial statements have been
         prepared in accordance with generally accepted accounting principles
         for interim financial information and the instructions to Form 10-QSB
         and rule 10-01 of Regulation S-X. 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. Operating results for the three months ended December 31,
         1998 are not necessarily indicative of the results that may be expected
         for the full fiscal year ended September 30, 1999. 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, 1998.

3.       NOTES RECEIVABLE

         In December 1998 and January 1999, the Company loaned an aggregate of
         $225,000 to two executive officers pursuant to their employment
         contracts in connection with their relocation to New Mexico.



                                       6
<PAGE>

ITEM 2.           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 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 10.

Operational Overview

         From the Company's inception (October 24, 1995) until September 30,
1996 the Company's primary activities consisted of developmental activities,
including the acquisition of MuSE, the Company's core software product, research
and development relating to MuSE and Continuum, the Company's multi-user
collaboration product for use with MuSE; commercialization of MuSE; developing
marketing strategies; selecting a management team; and obtaining financing.
During fiscal 1997, the Company commenced active sales and marketing activities
relating to MuSE and related products and began generating revenues from sales
and licensing of such products and providing consulting and maintenance
services.

         In June 1998, the Company entered into the an 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 over the next three years. The Company
has recognized the $5,000,000 license fee under the CRI Agreement as revenue for
the fiscal year ended September 30, 1998. Additionally, in December 1998, the
Company entered into a non-exclusive reseller agreement with Intergraph, 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 over the
next three years aggregating $4 million.

         The Company's strategy is to seek to enter into similar 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 upfront fees associated therewith.
Accordingly, results in any one quarter are not indicative of results to be
experienced in subsequent quarters.

Results of Operations

         Revenues for the three month period ended December 31, 1998 were
$399,000, an increase of $95,000 or 31% compared to revenues of $304,000 for the
three month period ended December 31, 1997. The increase is primarily
attributable to interest income of $120,000 as a result of the equity investment
in the Company of $8 million from CRI in July 1998 and the proceeds from the
Company's initial public offering ("IPO") in November 1998. Otherwise, product
sales, licensing fees and consulting and maintenance fees decreased slightly in
the three month period ended December 31, 1998 due to management's preoccupation
with completion of the Company's IPO and focus on supporting the CRI
relationship which was entered into in the previous quarter.

         Total expenses for the three months ended December 31, 1998 were
$1,317,000, an increase of $560,000 or 74% compared to total expenses of
$757,000 for the same period in 1997. The increase was primarily attributable to
a $604,000 increase in selling, general and administrative expenses, including
increases in professional and other fees related to the IPO, and a $149,000
increase in research and development expenses due to



                                       7
<PAGE>

increased personnel and software engineers, partially offset by a reduction of
$192,000 in interest expense due to the repayment of indebtedness.

         Accordingly, the net loss for the three month period ended December 31,
1998 of $918,000, an increase of $465,000 or 102% compared to the net loss of
$453,000 for the same period in 1997, reflected the disproportionate amount of
overhead expenses in relation to revenues due to the increased commercialization
efforts in 1998 and expenses related to the Company's IPO.

Liquidity and Capital Resources

         To date, the Company's capital needs have been funded through a series
of debt and equity financings.

         In December 1995, the Company sold convertible promissory notes and
warrants for net proceeds of approximately $900,000, which proceeds were used to
pay certain liabilities assumed in connection with the acquisition of the
License Agreement and related technology. In April 1996, such notes were
converted into an aggregate of 131,579 shares of common stock, $.015 par value,
of the Company (the "Common Stock").

         During April through September 1996, the Company received net proceeds
of approximately $1,700,000 through the sale of Common Stock.

         In June 1997, the Company received net proceeds of $1,113,750 from the
issuance of notes in the principal amount of $1,237,500 and an aggregate of
81,411 shares of Common Stock. Of such notes, $937,500 were paid on maturity in
June 1998 out of the proceeds of the April 1998 Private Placement (described
below) and $309,960 of such notes and accrued interest were converted to an
aggregate of 68,881 shares of Common Stock and warrants to purchase 68,881
shares of Common Stock.

         In December 1997, the Company completed a private placement (the
"December 1997 Private Placement") consisting of 8% promissory notes (the "1997
Notes") in the aggregate principal amount of $875,000 and an aggregate of 57,566
shares of Common Stock. The net proceeds to the Company from the December 1997
Private Placement was $688,000. The Company used approximately $270,000 of the
net proceeds of its IPO completed in November 1998 to pay the balance due on the
1997 Notes, together with accrued interest thereon.

         In April and May 1998, the Company sold an aggregate of 355,000 shares
of Common Stock and warrants to purchase 355,000 shares of Common Stock, for net
proceeds of $1,412,750 (the "April 1998 Private Placement"). The underwriter of
the Company's IPO acted as placement agent in connection with the April 1998
Private Placement and received a commission of 10% of the gross proceeds of such
sale and reimbursement of its expenses (including legal fees and disbursements)
incurred in connection with such placement of $25,000.

         In July 1998, the Company entered into the CRI Agreement and it 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. The Company paid an aggregate of approximately $520,000 to three
officers of the Company in connection with such transaction.

         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 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.

         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
$9,600,000.



                                       8
<PAGE>

         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'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 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 CRI Agreement and the Intergraph
agreement, 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 below under "Factors Affecting
Operating Results and Market Price of Securities." 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.

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 or devices that may be used with
the Company's products by an end-user 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.

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
strategic partners. 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



                                       9
<PAGE>

net proceeds from the sale of securities to CRI in July 1998 and funds generated
from operations, including payments and royalties received under the CRI
Agreement and the agreement with Intergraph, will be sufficient to satisfy the
Company's operations for at least the next 12 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 and Continuum 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.

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.

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. 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 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

         Other than the CRI Agreement and the agreement with Intergraph, the
Company does not currently have any agreements or understandings with other
potential strategic partners, and 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.



                                       10
<PAGE>

         To the extent that the Company relies upon strategic partners to
perform such functions as research and development and 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.

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 and a one-time payment of $20,000
prior to July 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.

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 and Continuum 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 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,



                                       11
<PAGE>

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 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.

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, Paradigm, Advanced Visual Systems, Inc., Gemini Technology Corp.,
Autodesk, and SGI 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.

         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 project directors 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



                                       12
<PAGE>

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.

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

         In addition to the 10,143,893 shares of Common Stock outstanding, there
are outstanding Warrants to purchase 1,113,881 shares of Common Stock, of which
Warrants to purchase 423,881 shares of Common Stock are held by certain selling
securityholders pursuant to an effective registration statement, and other
outstanding warrants to purchase 1,445,362 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 2,458,750 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. The Company anticipates that it will register the
shares of Common Stock pursuant to the Company's stock option plans pursuant to
a Form S-8 registration statement. 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, or earlier with the consent of the
underwriter of the Company's IPO, 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



                                       13
<PAGE>

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 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.

Future Sales of Common Stock Under Rule 144 or Otherwise

         Of the total shares outstanding, approximately 7,000,000 shares are
subject to the restrictions contained in certain agreements with the underwriter
of the Company's IPO and officers, directors and certain stockholders of the
Company restricting the sale or other disposition of such persons' Common Stock
until November 15, 1999 without the prior written consent of the underwriter.
Subsequent to the end of such restriction, all of such restricted shares will be
eligible for sale under Rule 144. In general, under Rule 144, a person (or
persons whose shares are aggregated) who has satisfied a one-year holding period
may sell "restricted securities" within any three-month period limited to a
number of shares which does not exceed the greater of one percent of the then
outstanding shares or the average weekly trading volume during the four calendar
weeks prior to such sale. Rule 144 also permits the sale (without any quantity
limitation) of "restricted securities" by a person who is not an affiliate of
the issuer and who has satisfied a two-year holding period. Accordingly, the
2,004,604 shares (and all shares subject to options and warrants) held by
officers and directors will be subject to the volume limitations described above
so long as such persons are deemed affiliates of the Company.

                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

         The Company is not a party to any legal proceedings.

Item 2.  Changes in Securities And Use of Proceeds

(c)      The information required by this item is incorporated by reference to
         Item 26 of Part II of the Company's Registration Statement No.
         333-62495 filed with the SEC on November 13, 1998

(d)      The following information is provided with respect to the use of 
         proceeds from the Company's IPO:

1.       Name of issuer: Muse Technologies, Inc.

2.       a. Effective date of the registration statement: November 16, 1998 

         b. Commission file number assigned to issuer: 333-62495

3.       Offering commencement date: November 16, 1998

4.       Managing underwriter: H.D. Brous & Co., Inc.

5.       Title of each class of security:

         a. Common Stock, par value $.015 per share ("Common Stock").

         b. Class A Redeemable Common Stock Purchase Warrants (the
            "Warrants"). Each Warrant is exerciseable into one-half share of
            Common Stock at an exercise price of $9.60 per whole share at any
            time up until November 15, 2003.

6.       Amount and aggregate offering price:
         a. Common Stock and Warrants:

                    Amount registered: (1)               2,250,000 Shares

-------- 
         (1) Includes 1,200,000 units (the "Units") (consisting of 1,200,000
shares of Common Stock and Warrants to purchase 600,000 shares of Common Stock),
the underwriter's over-allotment option (which was exercised) for 180,000 Units,
and an option to purchase 120,000 Units at $13.20 per Unit that was issued to
the
                                                                  (continued...)


                                       14
<PAGE>


         Aggregate price of offering amount registered: (2)    $11,040,000
         Amount sold:                                            1,200,000 Units
         Aggregate offering price of amount sold: (2)          $11,040,000

                     For the period ending December 31, 1998

<TABLE>
<CAPTION>
                                                        Direct or indirect payments         
                                                          to directors, officers,           
                                                          general partners of the
                                                       issuer or their associates; to
                                                         persons owning ten percent
                                                          or more of any class of
                                                          equity securities of the          Direct or indirect
                                                         issuers; and to affiliates         payments to others
<S>                                                    <C>                                  <C>
                                                                                            
7.     Costs of offering: 
          (01) Underwriting discounts and
          commissions                                     / /                                 / /         $      1,104,000
          (02) Finder's fees                              / /                                 / /                        0
          (03) Expenses paid to or for underwriters       / /                                 / /         $        331,200
          (04) Other expenses                             / /                                 /X/         $        655,000
          (05) Total expenses                             / /                                 /X/         $      2,090,200

8.     Net offering proceeds after expenses in item 7:                                        / /                8,949,800

9.     Use of net offering proceeds:

          (01) Construction of plants, building and
          facilities                                      / /                                 / /                        0
          (02) Purchase of machinery and equipment        / /                                 / /         $         70,000
          (03) Purchase of real estate                    / /                                 / /                        0
          (04) Acquisition of other business(es)          / /                                 / /                        0

</TABLE>

----------
(continued...)

underwriter. The amount registered includes 750,000 shares of Common Stock
underlying Warrants contained in the Units (including the over-allotment
option). Does not include 423,881 shares of Common Stock and Warrants to
purchase 423,881 shares of Common Stock registered on behalf of certain selling
stockholders, none of which may be sold prior to November 16, 1999.

         (2) Does not include exercise price of Warrants outstanding, none of
which have been exercised to date.



                                       15
<PAGE>

<TABLE>
<S>                                                    <C>                                 <C>

       (05) Repayment of indebtedness                  / /                                 / /           $        270,000
       (06) Working capital                            / /                                 / /           $      1,200,000
       (07) Government securities-greater than 90
       days                                            / /                                 / /                          0
       (08) Cash and investments-less than 90
       days                                            / /                                 / /           $      6,934,800
       (09) Research & development                     / /                                 / /           $        325,000
       (10) Relocation Loans to Officers               / /     $           225,000         / /
       (11) Marketing Activities                       / /                                 / /           $        150,000
10.  Do the use(s) of proceeds in Item 9 represent     Yes     / /                         No          /X/
     a material change in the use(s) of proceeds
     described in the prospectus?
</TABLE>


Item 3.       Defaults Upon Senior Securities

       Not applicable

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

       Not applicable

Item 5.       Other Information

       Not applicable

Item 6.       Exhibits and Reports on Form 8-K

       (a)    Exhibit Index:

              27.1  Financial Data Schedule

       (b) No Current Reports have been filed during the period.



                                       16
<PAGE>

                                   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: February 12, 1999

                                    /s/ Curtiz J. Gangi
                                    --------------------------------------------
                                    Curtiz J. Gangi, President

                                    /s/ Brian Clark
                                    --------------------------------------------
                                    Brian Clark, Chief Financial Officer 
                                    (Principal Financial and Accounting Officer)



                                       17