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: March 31, 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 March 31, 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 2,598,388 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)

         Consolidated balance sheet as of March 31, 2001                  3

         Consolidated statements of operations for the three months
             ended December 31, 2001 and 2000                             4

         Consolidated statements of cash flows for the three months
             ended March 31, 2001 and 2000                                5

         Notes to financial statements                                    6

Item 2.  Management's Discussion and Analysis or Plan of Operation        9

PART II.  OTHER INFORMATION                                              15

INDEX TO EXHIBITS                                                        15

SIGNATURES                                                               16






<PAGE>



                             MUSE TECHNOLOGIES, INC.
                           CONSOLIDATED BALANCE SHEET
                                MARCH 31, 2001
                                   (UNAUDITED)

                                     ASSETS
<TABLE>
<CAPTION>
<S>                                                                      <C>
CURRENT ASSETS:
         Cash and cash equivalents                                       $  1,046,818
         Marketable securities                                                 88,247
         Accounts receivable                                                3,842,085
         Notes receivable-related parties (net of reserve of $250,000)        433,189
         Inventories                                                          202,879
         Other current assets                                                 329,498
                                                                         ------------
                  TOTAL CURRENT ASSETS                                      5,942,716
                                                                         ------------

PROPERTY AND EQUIPMENT - NET                                                1,453,291

OTHER ASSETS
         Goodwill-net                                                       1,326,522
         Capitalized development costs-net                                  1,384,944
         Other assets                                                         625,105
                                                                         ------------
                  TOTAL OTHER ASSETS                                        3,336,571
                                                                         ------------
TOTAL ASSETS                                                             $ 10,732,578
                                                                         ============

                      LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
         Accounts payable                                                $  4,507,565
         Accrued liabilities                                                4,561,127
         Deferred Maintenance Revenue                                       1,341,976
         Bank note payable                                                  1,000,000
         Current portion lease payable                                         94,363
                                                                         ------------
                  TOTAL CURRENT LIABILITIES                                11,505,031
                                                                         ------------

LONG TERM LIABILITIES
         Lease payable-less current portion                                    30,774
         Convertible debentures (less discount of $110,916)                 3,091,363
                                                                         ------------
                  TOTAL LONG-TERM LIABILITIES                               3,122,137
                                                                         ------------
STOCKHOLDERS' DEFICIENCY:
         Common stock, par value $.015, authorized 50,000,000 shares;
             issued and outstanding 13,103,714 shares                         196,556
         Additional paid in capital                                        30,756,855
         Accumulated deficit                                              (34,079,380)
         Less: treasury stock at cost                                        (776,315)
         Cumulative translation adjustment                                      7,694
                                                                         ------------
             TOTAL STOCKHOLDERS' DEFICIENCY                                (3,894,590)
                                                                         ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY                           $ 10,732,578
                                                                         ============
</TABLE>


                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                        3
<PAGE>



                             MUSE TECHNOLOGIES, INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                            March 31,
                                                     2001                  2000(1)
                                                     ----                  ----
<S>                                               <C>                   <C>
REVENUE                                           $4,787,306           $ 6,648,638

EXPENSES:
    Cost of products sold                          1,133,491             2,099,011
    Selling, general and administrative
    expenses                                       2,766,358             3,685,822
    Research and development                         395,669               767,593
    Bad Debt Expense                                 500,000                    --
    Impairment charge - long lived asset           1,500,000                    --
    Amortization                                     301,571                89,614
    Depreciation                                     279,439               268,367
                                                 -----------           -----------
TOTAL OPERATING EXPENSES                           6,876,528             6,910,407
                                                 -----------           -----------
NET OPERATING LOSS                               $(2,089,222)          $  (261,769)
                                                 -----------           -----------
OTHER (EXPENSE) INCOME:
    Other Expense                                   (115,836)             (147,141)
    Unrealized gain/(loss)on investment             (197,959)                3,136
    Gain/(Loss) on foreign currency
    transactions                                     112,331               100,049
    Interest expense                                (113,081)              (55,994)
    Interest income                                      433               402,676
    Taxes                                                 --               (10,447)
                                                 -----------           -----------
TOTAL OTHER INCOME (EXPENSE)                        (314,112)              302,726
                                                 -----------           -----------
NET (LOSS) INCOME                                ($2,403,335)          $    30,510
                                                 ===========           ===========
NET (LOSS) INCOME PER SHARE
Basic and assuming dilution                           ($0.18)                $0.00
                                                 ===========           ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:                        13,103,714            12,699,980
                                                 ===========           ===========
NET LOSS                                         ($2,403,335)          $    30,510
OTHER COMPREHENSIVE LOSS
     Change in cumulative translation
     adjustment                                    ($111,034)                   --
                                                 -----------            ----------
COMPREHENSIVE (LOSS)INCOME                       ($2,514,369)            $  30,510
                                                 ===========            ==========
</TABLE>

(1) The  consolidated  statement  of  operations  have  been  restated  to  give
    retroactive  effect to the November 9, 2000 merger  accounted  for using the
    pooling-of-interest method.


                  See notes to consolidated financial statements.

                                        4
<PAGE>



                             MUSE TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                    Three Months Ended
                                                                          March 31,
                                                                  ----------------------------
                                                                      2001           2000(1)
                                                                  ------------    ------------
<S>                                                               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net (loss) income                                             $ (2,403,335)   $     30,510
    Adjustment to reconcile net income (loss) to net cash
    (used in) operating activities:
         Depreciation                                                  279,439         268,367
         Amortization                                                  570,417          89,614
         Write-off of note receivable                                  500,000          --
         Impairment charge - long lived asset                        1,500,000          --
         Realized and unrealized loss on investment                    197,959          --
Changes in assets and liabilities:
    Increase in accounts receivable                                   (476,357)       (111,932)
    Decrease /(Increase) in inventory                                   16,963         (51,912)
    Decrease / (Increase) in prepaid assets                             29,915        (111,555)
    Increase in other assets                                          (452,600)     (1,315,424)
    Increase/(decrease) in accounts payable                            674,970         (29,537)
    Increase in accrued liabilities                                    224,522         446,519
    Decrease in deferred maintenance revenue                          (310,718)       (229,218)
                                                                  ------------    ------------
         NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES           351,175      (1,004,121)
                                                                  ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
         Purchase of property and equipment                            --             (256,550)
         Acquisition of subsidiary-net of cash                         --             (397,949)
         Purchase of marketable securities                             --           (2,000,000)
                                                                  ------------    ------------
         NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES           --           (2,654,499)
                                                                  ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of notes receivable                                        (59,117)         --
   Principal payments on capital leases                                (28,846)        (23,253)
   Borrowings-convertible debentures                                      --           100,000
   Repayments-line of credit                                              --          (989,538)
                                                                  ------------    ------------
   NET CASH USED IN FINANCING ACTIVITIES                               (86,963)       (912,791)
                                                                  ------------    ------------

   EFFECT OF EXCHANGE ON CASH                                         (111,034)        (40,598)
                                                                  ------------    ------------

NET INCREASE (DECREASE) IN CASH                                        153,178      (4,612,009)
CASH - BEGINNING OF PERIOD                                             883,640       9,558,426
                                                                  ------------    ------------
CASH - END OF PERIOD                                              $  1,046,818    $  4,946,417
                                                                  ============    ============
</TABLE>

(1) The  consolidated  statement  of  cash  flows  have  been  restated  to give
    retroactive  effect to the November 9, 2000 merger  accounted  for using the
    pooling-of-interest method.

                 See notes to consolidated financial statements.

                                        5
<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  user's ability to integrate,
present, analyze and better understand many different types of data. The Company
also provides its customers with professional services, systems integration, and
training  and  support  relating  to data  visualization  and other  methods  of
advanced  computer  graphics.  The  Company,  as of January  1,  2001,  conducts
business under the name Advanced Visual Systems (AVS).

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 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.   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   $2,403,000   for  the  three   months   ended  March  31,  2001.
Additionally,  the Company had working capital and total capital deficiencies of
approximately  $5,562,000  and  $3,895,000 at March 31, 2001.  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, 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.

4.   BUSINESS COMBINATION

         On  November 9, the Company  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 March 31, 2001 and March 31, 2000
were $3.2  million and $3.3  million,  respectively.  Included  in restated  net
income for the three-month  periods ended March 31, 2001 and March 31, 2000 were
a net loss of  $600,000  and a net  income of  $17,000,  respectively.  Restated
diluted net income per share for the three months ended March 31, 2001 and March
31,  2000  included  income of $.32 per share and a net income of $.01 per share
respectively.

                                        6
<PAGE>

5.   IMPAIRMENT CHARGE-LONG LIVED ASSET

         During March 2001,  the Company  evaluated  the  carrying  value of the
goodwill that resulted from the purchase of Virtual  Presence  Limited  ("VPL").
The Company has not achieved the desired sales levels it had expected  since the
time of purchase,  nor can management  reasonably  estimate  expected cash flows
from  future  revenues  to  substantiate  such  carrying  value.  Based on these
circumstances management recorded a $1,500,000 impairment charge related to such
goodwill.

6.   FINANCIAL ADVISORY AGREEMENTS

         On December  12, 2000,  the Company  appointed  an  investment  banking
entity, as their financial and investment banking advisors.  Under the term of a
non-exclusive  agreement,  this  entity  is 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 this entity.

         On December 26,  2000,  the Company  entered  into an agreement  with a
company 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,  this company
was paid a retainer fee of $30,000 and will  receive a 6%  placement  fee on any
funds raised. No funding activities have been consummated as of May 15, 2001.

         On January 2, 2001, the Company hired a financial  relations  advisors.
Under the terms of an agreement,  the advisors will 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  agreement  is for a term of one year and can be
cancelled  by  either  party  upon 90 days  written  notice,  at which  time the
advisors  will  refund a  prorated  portion  of the  warrants.  Pursuant  to the
Company's  agreement  with the  advisors , the number of shares of common  stock
underlying  the  warrants  that can be  purchased  at a price of $0.52 per share
doubled to 200,000 in April 2001 as a result of our non-payment of monthly fees.

         In March 2001 we retained,  on an hourly  consulting  basis, a business
consultant  to  assist  our  senior  management  team  in an  evaluation  of our
operations and to refine our short- and long-term strategies.

7.   CONVERTIBLE DEBENTURES AND 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 March 31, 2001.  As of April 30, 2001,  the Company is in arrears for
one quarterly interest 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 is for
a one-year  period and expires 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. As of April 30, 2001, the Company is in arrears for
one quarterly interest payment. The line of credit balance at March 31, 2001 was
$1,000,000  and  interest  expense of $4,167 was accrued at March 31,  2001.  On
February  5,  2001,  as a result of the  diminution  in value of our  investment
account with a leading national investment firm (which  collateralized this line
of credit), the Bank of Albuquerque  accelerated and demanded payment of amounts
outstanding.

         On June 1, 2000, the Company entered into an equity line agreement with
Kingsbridge  Capital Limited.  The equity line agreement entitles the Company to
sell and obligates Kingsbridge to purchase, from time to time, up to $18,000,000
of the Company's common stock. The Company's  ability to require  Kingsbridge to
purchase the Company's common stock is 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 at 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


                                        7
<PAGE>

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.

8. CAPITALIZED DEVELOPMENT COSTS

         The Company has adopted 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  $2,199,120  as of March 31. 2001.  Amortization  of  capitalized
software  development  costs was $814,176 as of March 31, 2001 of which $218,670
is included as operating expenses in the accompanying  statements of operations.
There were $1,384,944 of capitalized  software development costs as at March 31,
2000.

9.   SUBSEQUENT EVENTS

         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.  The delisting followed a hearing
by Nasdaq's Listing Qualifications Panel on March 16, 2001. Commencing April 16,
2001,  the  Company's  common  stock and warrants are quoted on the OTC Bulletin
Board.

         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%).

         On April 12, 2001 the Boston Stock  Exchange  notified the Company that
they failed to meet its minimum shareholders equity requirement of $500,000.  On
April 27, 2001 the Company  proposed to the Boston Stock Exchange a plan to meet
its  minimum  requirements  for  continued  listing,  however,  there  can be no
assurance  that the Boston Stock  Exchange  will accept the proposal for meeting
such requirements.

         In April 2001, a former  executive of the Company and a current regular
member of our Board of Directors,  received  judgments totaling $178,000 against
the Company's wholly owned subsidiary Virtual Presence Ltd. ("VPL") for wrongful
termination,  and $26,500  against the Company for unpaid amounts related to the
purchase  of VPL in November  1999.  To date the Company has made no payments in
accordance with these judgments.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The following  presentation of management's  discussion and analysis of
the Company's  financial  condition and results of operations  should be read in
conjunction  with  the  Company's   consolidated   financial   statements,   the
accompanying notes thereto and other financial  information  appearing elsewhere
in  this  Report.   This  section  and  other  parts  of  this  Report   contain
forward-looking  statements that

                                        8
<PAGE>

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,  the sale of third-party  manufactured hardware and software,
and  by  providing  consulting,  training,  support  and  maintenance  services.
Revenues are  generated by three  operating  components,  whose  performance  is
outlined below:

1.       The MUSE  component of our business is related  exclusively to the sale
         of our MuSE  (Multi-dimensional  user-oriented  Synthetic  Environment)
         software  product and related  services.  From the  beginning of fiscal
         1999  until the  second  quarter  of fiscal  2000,  the  primary  sales
         strategy for our  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, we 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  $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 the next 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 us for matters related to the modified  agreement.
         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



                                        9
<PAGE>

         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,  we have
         reduced the personnel and operations  related to these activities.  The
         MUSE  workforce in  Albuquerque,  NM has been reduced to a core team of
         employees  and we are  attempting  to sublet our  existing  Albuquerque
         office  facilities and move into  significantly  smaller offices.  MFSG
         operations  have been  functionally  terminated and its  Arlington,  VA
         offices have been sublet.  Included in these  workforce and operational
         reductions were the elimination of two Vice President positions related
         to business development and sales.

         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, however, we
         may elect to market the technology in the future.

2.       The AVS  component of our business  sells a line of data  visualization
         software products and related professional  services and is the primary
         focus of our current business strategy.

         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 we have 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.

         The current  strategy for our AVS  subsidiary is to focus  primarily on
         direct sales by our own international sales staff to customers and ISVs
         and to  develop  ISV  relationships  in which  our  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,  the  Company  received a $1.5  million  one-time
         payment for software and professional  services.  In subsequent  years,
         the  customer  can  receive  new  releases  of  the  Company's  OpenViz
         technology and support for $300,000 per year.

3.       Virtual Presence Ltd. and its subsidiaries  provides highly  customized
         advanced  visualization  solutions;  systems integration,  training and
         consulting  services;  and  computer  hardware  and  accessories  to  a
         predominately European customer base.

         On November 16, 1999, we completed the acquisition of Virtual Presence,
         a provider of interactive  visualization solutions for companies in the
         European  defense,  medical and manufacturing  industries.  We acquired
         Virtual  Presence  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.  We are in the process
         of issuing 363,969 shares to settle this agreement.

         On  March  17,  2000,   through  Virtual  Presence  Ltd.,  we  acquired
         Simulation  Solutions,  Ltd.,  a U.K.  company that  provides  advanced
         software and  consulting  services in the field of plant and  equipment
         manufacturing  simulation. We acquired Simulation Solutions for a total
         of $117,333 in cash and 44,895 shares of our common  stock.  Simulation
         Solutions  has  been   incorporated  into  the  operations  of  Virtual
         Presence.

                                       10
<PAGE>

         On  March  28,   2000,   through   Virtual   Presence,   we   purchased
         theVRsource.com, a prominent e-commerce site for advanced visualization
         and virtual  reality  hardware,  from The  VRSource,  Inc.,  a Colorado
         corporation, for $400,000 in cash.

         In April 2000, MUSE Virtual  Presence was awarded a major contract with
         the Manchester  Visualization Centre to provide hardware,  software and
         services  at one of  the  world's  most  sophisticated  facilities  for
         advanced  research  and  development,  interactive  computer  graphics,
         multimedia, image processing and visualization. The contract, valued at
         $1,000,000,  provides  for MUSE Virtual  Presence to perform  extensive
         work at the Manchester  Visualization  Centre,  which is located at the
         University of Manchester in the U.K.

         Since the first  quarter  of fiscal  2001,  the  operations  of Virtual
         Presence have been reduced through the transfer of certain technologies
         to another company and employee  attrition.  Virtual Presence presently
         operates under certain  constraints  related to a significant amount of
         debt that have limited its ability to purchase products for resale.

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 of these payments
over a two-year period

         On May 4, 2000, the Company  entered into a letter of intent to acquire
Advanced  Visual Systems Inc.  through a  stock-for-stock  exchange.  Definitive
merger  documents were executed on July 18, 2000. The Company  believes that the
acquisition  creates one of the software  industry's leading companies dedicated
to  developing  and  integrating   software  and  solutions  using  3D  graphics
technology.  On November 9, 2000, the Company issued  1,929,579 shares of common
stock in exchange for all of the common and preferred  shares of AVS. The merger
was accounted for as a pooling-of-interests.

         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 us.

         As a result of the elimination of several positions within our 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 our
software and services may decline in the future due to a  significant  reduction
in marketing activity.

         As a result of significant lead time necessary to market and consummate
our direct  sales and ISV  activities  our  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
expected in subsequent quarters.

RESULTS OF OPERATIONS

         Revenues for the three-month period ended March 31, 2001 was $4,787,306
as compared to revenues of $6,648,638 for the three-month period ended March 31,
2000.  The  decrease  of  $1,861,332,  or 28%,  for the  three-month  period  is
primarily  attributable  to  a  reduction  in  sales  at  our  Virtual  Presence
subsidiary and MUSE software operation.

         During March 2001,  the Company  evaluated  the  carrying  value of the
goodwill that resulted from the purchase of Virtual  Presence  Limited  ("VPL").
The Company has not achieved the desired sales levels it had expected  since the
time of purchase,


                                       11
<PAGE>

nor can management  reasonably estimate expected cash flows from future revenues
to substantiate  such carrying value.  Based on these  circumstances  management
recorded a $1,500,000 impairment charge related to such goodwill.

         Total  operating  expenses for the  three-month  period ended March 31,
2001 were $6,876,528 as compared to total  operating  expenses of $6,910,407 for
the three-month period ended March 31, 2000. The decrease of $33,879, or 1%, for
the three-month period is primarily  attributable to reduced cost of revenues at
Virtual  Presence  and  reduced  selling and  administrative  costs due to staff
cutbacks,  office consolidations and reduced marketing expenditures as well as a
significant  reduction  in legal  fees.  These  reductions  were  offset  by the
$500,000 reserve taken against the note receivable from Continuum  resources and
a $1,500,000  impairment  charge related to goodwill  related to the purchase of
Virtual Presence,  LTD. Company management evaluated the goodwill in conjunction
with the future  earnings  potential  of Virtual  Presence and felt that a write
down was necessary to reflect this.

         Total other income/(expense) for the three-month period ended March 31,
2001 was  $314,112 of expense as  compared  to $302,726 of other  income for the
three-month  period ended March 31, 2000. The expense for the three-month period
ended March 31, 2001 is mainly  attributable to a loss on marketable  securities
of $197,959, an increase in interest expense of $57,087 as well as a decrease in
interest income of $402,676 compared to 2000 due to reduced cash balances.

         Accordingly,  the net loss for the  three-month  period ended March 31,
2001 of  $2,403,335 as compared to the net income of $40,957 for the three month
period ended March 31, 2000,  reflected the significant  decrease in revenues in
our Virtual Presence and MUSE operations, offset by reduced cost of revenues and
significant  reductions in selling and general and administrative costs, as well
as a write-off  of a note  receivable,  a write down of  goodwill,  a recognized
losses on marketable securities and reduced interest income.

         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.

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


LIQUIDITY AND CAPITAL RESOURCES

         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 any patent claims and other  intellectual
property  rights and the  combination of the Company's  operations with those of
AVS. 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 equity-based  funding,  nor does in anticipate  access to such funding in the
near future. 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.

         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
have also funded portions of our capital needs.

                                       12
<PAGE>

         In July 1998, we 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 we 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 we 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 we
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, we cannot provide assurance that that the loan will
be  repaid  in the near  future.  Accordingly,  we  wrote  off  $250,000  of the
$1,000,000  loans in the fiscal year ended  September  30, 2000 and have written
off an additional $500,000 in the second quarter of 2001..

         On  November  19,  1998,  the  Company  consummated  an initial  public
offering  through  the sale of  1,200,000  shares  of  common  stock and Class A
Warrants to purchase  600,000 shares of common stock and received gross proceeds
of  $9,600,000.  Additionally,  on  December  2, 1998,  the  underwriter  of the
Company's initial public offering  exercised its  over-allotment  option in full
and the Company received gross proceeds of $1,440,000. Total net proceeds to the
Company from the initial public offering were approximately $9,200,000.

         On November 16, 1999, the Company  completed the acquisition of Virtual
Presence  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 such  shares,  205,522  shares are
subject to  adjustment  in the event  that the  average  price of the  Company's
common stock over the twenty-day  period prior to November 15, 2000 is less than
$4.41 per share.  The  Company is in the process of issuing  363,969  additional
shares in satisfaction of this agreement.

         In December 1999, the Company entered into an agreement with Josephthal
& Co., Inc. for financial advisory services.  In connection with this agreement,
the  Company  paid  $75,000 to  Josephthal  and  granted  Josephthal  three-year
warrants to purchase 75,000 shares of common stock at $3.90  (representing  120%
of the market  price of the  common  stock on the date of  grant).  The  Company
recorded a charge to operations  of $113,000 in connection  with the granting of
such warrants.

         On March 17,  2000,  the  Company  acquired  Simulation  Solutions  for
$117,333  in cash and 44,895  shares of common  stock.  On March 28,  2000,  the
Company acquired the VRsource.com Web site for $400,000 in cash.

         On May 4, 2000, the Company  entered into a letter of intent to acquire
AVS  through a  stock-for-stock  exchange.  The  acquisition  created one of the
software  industry's  leading companies  dedicated to developing and integrating
software and solutions  using 3D graphics  technology.  On November 9, 2000, the
Company  issued  1,929,579  shares of common  stock in  exchange  for all of the
common and preferred shares of AVS.

         On June 1, 2000, the Company entered into an equity line agreement with
Kingsbridge  Capital Limited.  The equity line agreement entitles the Company to
sell and obligates Kingsbridge to purchase, from time to time, up to $18,000,000
of the Company's common stock. The Company's  ability to require  Kingsbridge to
purchase the Company's common stock is 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 at 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


                                       13
<PAGE>

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 we 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%).

         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 is for
a one-year  period and expires 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.  As of April 30, 2001,  we were in arrears for one
quarterly  interest  payment.  The line of credit  balance at March 31, 2001 was
$1,000,000  and  interest  expense of $4,167 was accrued at March 31,  2001.  On
February  5,  2001,  as a result of the  diminution  in value of our  investment
account with a leading national investment firm (which  collateralized this line
of credit), the Bank of Albuquerque  accelerated and demanded payment of amounts
outstanding.

         On  November  9, 2000 we  completed  the  acquisition  of AVS through a
merger, and AVS has become a wholly owned subsidiary of MUSE Technologies,  Inc.
As a result of the merger,  the  stockholders  of AVS  received an  aggregate of
1,929,579  shares of our common stock in exchange for all outstanding  shares of
AVS capital  stock.  Additionally,  we have  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, we appointed Bluestone Capital Partners,  L.P. as
our financial and investment banking advisors. Under the term of a non-exclusive
agreement, Bluestone is 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.

         On December  26, 2000,  we entered into an agreement  with Prevail With
Vision,   Inc.  (PVW)  to  assist  us  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.

         On January  2,  2001,  we  retained  The Wall  Street  Group,  Inc.  as
financial relations advisors.  Under the terms of an agreement,  The Wall Street
Group will 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 agreement
is for a term of one year and can be  cancelled  by either  party  upon 90 days'
written  notice,  at which time The Wall  Street  Group  will  refund a prorated
portion of the  warrants.  Pursuant  to the  Company's  agreement  with The Wall
Street Group,  the number of shares of common stock underlying the warrants that
can be purchased at a price of $0.52 per share  doubled to 200,000 in April 2001
as a result of our non-payment of monthly fees.

         In March 2001 we retained,  on an hourly consulting basis,  Geoffrey D.
Lurie & Associates LLC to assist our senior  management team in an evaluation of
our operations and to refine our short- and long-term strategies.

         In October 1999, we deposited  $2,000,000 in an investment account with
a leading national investment banking organization. As of May 8, 2001, the value
of the account was approximately  $90,000.  The Bank of Albuquerque is currently
in control of such funds in connection with the line of credit  discussed above.
We  believe  that  approximately  $900,000  of $1.4  million  in  losses  may be
attributable to  circumstances  other than normal market  fluctuations.  We have
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.  We believe that improprieties may have been committed,
and to the extent that we may have valid legal claims  relating to these losses,
we intend to  prosecute  those  responsible.  To the extent  that our claims are
adverse  to  the  investment  banking   organization  charged  with  supervisory
oversight  of such  account,  such  claims  will be  subject  to an  arbitration
proceeding.  On May 8,  2001,  we entered  into  mediation  with the


                                       14
<PAGE>

investment  banking  organization  resulting in a settlement  offer that is less
than the full amount of our losses and is subject to additional  negotiation and
evaluation.

         On January  22,  2001,  the  Company  received a letter from the Nasdaq
Stock  Market  indicating  that,  as a result of the  failure to timely file our
annual  report,  our common stock would be delisted from the Nasdaq Stock Market
as of January 30, 2001 unless our annual  report was filed by January 29,  2001.
Although we complied  with this  request,  the Nasdaq  Stock  Market  decided to
review our ability to continue to comply with all listing maintenance  criteria,
including the  requirement  to maintain net tangible  assets of  $2,000,000.  On
April 16, 2001 our 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.  The  delisting  followed  a  hearing  by  Nasdaq's  Listing
Qualifications  Panel on March 16, 2001.  Commencing  April 16, 2001, our common
stock and  warrants  are quoted on the OTC  Bulletin  Board.  As a result of our
Nasdaq  delisting and current  trading on the OTC Bulletin Board, it will likely
become  more  difficult  for us to raise  capital  and our stock will  likely be
traded  with  significantly  lower  daily  volume,  possibly  resulting  in less
liquidity for our investors.

         For the three months ended March 31, 2001,  there was a net increase in
cash of $153,178 as compared  to a net  decrease in cash of  $4,612,009  for the
three-month  period  ended March 31,  2000.  The  increase in cash is  primarily
attributable  to an  increase  in  accounts  payable,  accrued  liabilities  and
deferred  maintenance  revenue of $1,210,211,  offset by an increase in accounts
receivable of $476,357 and the net loss of $903,335. As of March 31, 2001 we had
working capital and total capital  deficiencies of  approximately  $5,562,000 an
$2,395,000,  respectively.  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  equity-based  funding seems
unlikely.  The  recovery  of assets and  continuation  of future  operations  is
dependant  upon our ability to obtain  additional  financing  and our ability to
generate revenues sufficient to continue pursuing our current business plan.

         While the  total  amount of cash and  equivalents  on the  accompanying
balance  sheet is shown as  $1,046,818 as of March 31, 2001, on May 10, 2001 the
amount  of cash and  equivalents  available  to the  Company  was  approximately
$300,000.  Cash for operations is limited  strictly to accounts  receivable that
were  $3,842,085  as of March 31, 2001 and  $3,113,611  on May 10, 2001.  In the
absence of 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.

         Further, as a result of the merger with AVS on November 9, 2000 and our
substantially  weakened cash  position  subsequent to our fiscal year end, it is
anticipated that the Company will 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 or that the Company can effectively  combine its operations with those
of AVS as anticipated.  The dollar amount  required to  successfully  market the
combined  product and service  offerings of the Company and AVS has not yet been
determined; however, management believes that it will be significant and may not
produce immediate results. The Company has significantly  reduced the dimensions
of its marketing  activities and may be 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.

         Although  we have  engaged  the  services  of  investment  banking  and
financial  services firms to assist us in identifying  sources of financing,  we
can provide no assurance  that the amount or  structure  of any such  financings
will be  acceptable.  As a result,  we have been  forced to curtail  our planned
marketing and growth  strategies and certain of our operations.  In this regard,
we have cut costs where feasible and have  significantly  reduced  personnel and
operating  costs in our


                                       15
<PAGE>

Albuquerque,  NM office and have moved our principal  offices and  operations to
Waltham,  Massachusetts to take advantage of the synergies available as a result
of the merger with AVS.

         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;  however,  current  negotiations,  if any, are too  preliminary to
warrant  disclosure at this time.  The Company will keep  investors  informed as
such negotiations mature.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         On  March  28,  2001,  we  were  served  with a  lawsuit  from  Panoram
Technologies,  Inc. in Los Angeles  Superior  Court,  related to certain  unpaid
obligations of Virtual Presence Ltd. MUSE  Technologies,  Inc.,  Advanced Visual
Systems Inc. and Virtual Presence Ltd. were all named in the suit, however,  the
liability for the subject unpaid invoices is exclusively the  responsibility  of
Virtual  Presence Ltd. and we have  retained  counsel to argue that MUSE and AVS
should not be named in the court action.  Virtual Presence Ltd. has acknowledged
the debt to Panoram  Technologies  and is  attempting  to reach an  out-of-court
settlement directly through our Virtual Presence subsidiary.

         On March 29, 2001, Virtual Presence Ltd. was served with a lawsuit from
Access Graphics B.V., in a Dutch court, related to certain unpaid obligations of
Virtual  Presence.  MUSE  Technologies is named in a separate but related matter
brought in a New Mexico court, alleging that the subject unpaid obligations were
guaranteed by MUSE Technologies, which we deny and dispute. Virtual Presence has
acknowledged  the  debt  to  Access  Graphics  and is  attempting  to  reach  an
out-of-court  settlement.  A motion  has been  filed to  dismiss  the  action on
grounds  that the New  Mexico  courts  are an  inappropriate  forum to  decide a
contractual matter under Dutch law.

         On April 11, 2001, Continuum Resources obtained a temporary restraining
order ex parte  citation 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.  A  hearing  was held on April 23,  2001 in the  129th  Judicial
District  Court,  which MUSE and AVS did not attend  because  the court was only
addressing a temporary  order and the source code is not  physically  located in
Texas . An additional  hearing is scheduled  for June 8, 2001,  for which we are
presently  evaluating our legal options and obligations.  As of May 8, 2001, the
subject source code has not been placed into escrow.

         In October 1999, we deposited  $2,000,000 in an investment account with
a leading national investment banking organization. As of May 8, 2001, the value
of the account was approximately  $90,000.  The Bank of Albuquerque is currently
in control of such funds in connection with the line of credit  discussed above.
We  believe  that  approximately  $900,000  of $1.4  million  in  losses  may be
attributable to  circumstances  other than normal market  fluctuations.  We have
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.  We believe that improprieties may have been committed,
and to the extent that we may have valid legal claims  relating to these losses,
we intend to  prosecute  those  responsible.  To the extent  that our claims are
adverse  to  the  investment  banking   organization  charged  with  supervisory
oversight  of such  account,  such  claims  will be  subject  to an  arbitration
proceeding.  On May 8,  2001,  we entered  into  mediation  with the  investment
banking organization  resulting in a settlement offer that is less than the full
amount of our losses and is subject to additional negotiation and evaluation.

         We are a party to two arbitration proceedings with respect to claims by
two former employees,  one of which was an executive officer,  alleging wrongful


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<PAGE>

dismissal.  The former employees are seeking  unspecified  damages in amounts in
excess of $100,000.

         On April 19,  2001,  we were  served with a lawsuit  from Rabrob  Corp.
d/b/a Sales Consultants of Plantation, in the Circuit Court of the 17th Judicial
Circuit in and for Broward County, Florida, related to $25,000 in certain unpaid
obligations of Advanced Visual Systems.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     Not applicable.

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

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


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibit Index:

     (b)  The following  Current  Reports on Form 8-K have been filed during the
          period:





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<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: May 15, 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



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