MUSE TECHNOLOGIES INC, 424B3, 1998-11-17

MUSE TECHNOLOGIES INC
424B3, 1998-11-17
HOSPITALS

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Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-62495

PROSPECTUS

[LOGO]
1,200,000 UNITS

MUSE TECHNOLOGIES, INC.

CONSISTING OF 1,200,000 SHARES OF COMMON STOCK
AND CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
TO PURCHASE 600,000 SHARES OF COMMON STOCK
------------------------

Muse Technologies, Inc. (the "Company") is offering 1,200,000 units (the
"Units"), consisting of 1,200,000 shares of Common Stock, par value $.015 per
share (the "Common Stock"), and Class A Redeemable Common Stock Purchase
Warrants (the "Warrants") to purchase 600,000 shares of Common Stock. Each
Warrant entitles the holder to purchase that number of shares of Common Stock
represented by such Warrant at an exercise price of $9.60 per share, subject to
adjustment and subject to prior redemption by the Company, until November 15,
2003 (the "Expiration Date"). No fractional shares of Common Stock or Warrants
will be issued. The shares of Common Stock and Warrants comprising the Units are
separately transferrable immediately upon issuance and will not trade as a Unit.
The Warrants are redeemable by the Company at a redemption price of $.01 per
Warrant, upon at least 30 days' prior written notice, during the period
commencing one year from the date of this Prospectus, or earlier with the
consent of HD Brous & Co., Inc. (the "Underwriter"), provided that the average
closing price of the Common Stock is at least $12.00 per share, subject to
adjustment, for the twenty day period ending not earlier than five days prior to
the date on which the Warrants are called for redemption. See "Description of
Securities--Class A Redeemable Common Stock Purchase Warrants."

Prior to this Offering, there has been no public market for the Common Stock
or the Warrants, and there can be no assurance that any such market will
develop, or if developed, will be maintained. The Common Stock and Warrants will
be quoted on the Nasdaq SmallCap Market under the symbols "MUZE" and "MUZEW",
respectively, and on the Boston Stock Exchange under the symbols "MZE" and
"MZEW", respectively.

The initial public offering price and composition of the Units and the terms
of the Warrants have been determined by negotiations between the Company and the
Underwriter and does not necessarily relate to the Company's book value, net
worth, financial condition or other established criteria of value. See
"Underwriting" for information about factors considered in determining the
initial public offering price.
------------------------

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 AND
"DILUTION."
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

[CAPTION]
<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit.................................... $8.00 $0.80 $7.20
Total(3).................................... $9,600,000 $960,000 $8,640,000
</TABLE>

(1) Excludes additional compensation to be received by the Underwriter in the
form of (i) a non-accountable expense allowance of 3% of the gross proceeds
of this Offering, for a total of $288,000 ($331,200 if the Underwriter's
over-allotment option is exercised in full); (ii) options to purchase up to
120,000 units ("Underwriter's Units") at a price equal to $13.20 per Unit,
exercisable over a four-year period commencing one year from the date of
this Prospectus (the "Underwriter's Unit Purchase Option"); and (iii) fees,
if any, in the event that the Underwriter introduces the Company to a party
which enters into a business combination or other business transaction with
the Company, which fee will be based on a percentage of the transaction
consideration. The Company has agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). The Underwriter also has the right, for a
period of three years, to appoint a member to the Company's Board of
Directors. See "Underwriting."

(2) Before deducting expenses payable by the Company (including the
Underwriter's non-accountable expense allowance) which are estimated to be
approximately $655,000.

(3) The Company has granted the Underwriter an option exercisable within
45 days after the date of this Prospectus, to purchase up to an additional
180,000 Units on the same terms and conditions as the Units offered hereby
solely to cover over-allotments, if any. If the over-allotment option is
exercised in full, total "Price to Public," "Underwriting Discounts and
Commissions" and "Proceeds to Company" will be $11,040,000, $1,104,000 and
$9,936,000, respectively.
------------------------

The registration statement of which this Prospectus is a part also relates
to the sale by certain selling securityholders (the "Selling Securityholders"),
commencing twelve months from the date of this Prospectus, of an aggregate of
423,881 shares of Common Stock and Warrants to purchase 423,881 shares of Common
Stock. See "Sales by Selling Securityholders." Such securities offered by the
Selling Securityholders are not part of the underwritten offering of Units being
made by the Underwriter. Any such sales by the Selling Securityholders may be
made through broker-dealers or otherwise. The Company will not receive any of
the proceeds from such sales except to the extent that the Warrants are
exercised.

The Units are being offered on a "firm commitment" basis, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to the approval of certain legal matters by counsel and certain other
conditions. The Underwriter reserves the right to reject an order in whole or in
part. It is expected that delivery of the certificates representing the Common
Stock and Warrants comprising the Units will be made against payment therefor at
the offices of the Underwriter at 40 Cuttermill Road, Great Neck, New York 11021
on November 19, 1998.
------------------------

HD BROUS & CO., INC.

NOVEMBER 16, 1998
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

A SIGNIFICANT NUMBER OF UNITS MAY BE SOLD TO CUSTOMERS OF THE UNDERWRITER.
SUCH CUSTOMERS MAY SUBSEQUENTLY ENGAGE IN THE SALE OR PURCHASE OF THE COMMON
STOCK AND/OR WARRANTS THROUGH OR WITH THE UNDERWRITER. ALTHOUGH IT HAS NO
OBLIGATION TO DO SO, THE UNDERWRITER MAY BECOME A MARKET MAKER AND OTHERWISE
EFFECT TRANSACTIONS IN THE COMMON STOCK AND/OR WARRANTS, AND, IF THE UNDERWRITER
PARTICIPATES IN SUCH MARKET, IT MAY BE A DOMINATING INFLUENCE IN THE TRADING OF
SUCH SECURITIES. THE PRICES AND THE LIQUIDITY OF SUCH SECURITIES MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE PARTICIPATION OF THE
UNDERWRITER IN SUCH MARKET, SHOULD A MARKET DEVELOP.

Upon consummation of this Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Securities and Exchange Commission. See "Additional
Information."

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that the Warrants, outstanding options and warrants, the
Underwriter's Unit Purchase Option and the Underwriter's over-allotment option
are not exercised. All share and per share information reflects a 1-for-3.04
reverse stock split effective as of March 5, 1998.

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

THE COMPANY

Muse Technologies, Inc. (the "Company") has developed and commenced
marketing several software products designed to enhance the user's ability to
understand and analyze data and information and to provide solutions to complex
data integration and data management problems encountered by scientists,
engineers and other computing professionals. The Company believes that
"MuSE(Trademark)" (pronounced "muse"), its core software product, represents a
new approach to computer interaction since it permits the integration of various
types of data from multiple sources without affecting the integrity of such data
and the presentation of data in a multisensory environment to enhance the user's
ability to analyze and understand such data. MuSE can be used with different
computing platforms and different physical or logical input and output devices.
The multisensory capabilities of MuSE enables the user to present information in
real time using visual, auditory, tactile and other perceptual tools.

The Company has also developed a proprietary software product,
"Continuum(Trademark)," designed for multiuser, real-time collaboration within
the MuSE environment. Continuum permits multiple users to work and interact with
each other within a common environment and to analyze and manipulate the same
data independent from other users in a parallel private environment. Since it is
designed for use with MuSE, users can interact using various platforms, devices
and tools. MuSE and Continuum were developed for the Unix operating system and
for the Windows-NT(Trademark) platform.

In addition to its software products, the Company also offers custom design
and other consulting and support services relating to MuSE. The Company provides
such services to customers in order to provide customized solutions to specific
customer problems.

The Company has not generated significant revenue to date. Historically,
its largest customers have been agencies or departments of the United States
government, which accounted for 25%, 70% and 72% of revenue for the nine months
ended June 30, 1998, the fiscal year ended September 30, 1997 and the period
from inception to September 30, 1996, respectively. The Company has devoted most
of its resources to date to the development of MuSE and Continuum, and has
conducted only a limited marketing effort for its products and services.

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

In furtherance of this strategy, in July 1998, the Company entered into an
agreement (the "CRI Agreement") with Continuum Resources International ASA
("CRI"), a Norwegian company and wholly-owned subsidiary of The Norex Group, a
major publicly-held Norwegian company engaged in providing data collection
services to the oil and

3
<PAGE>
gas industry worldwide, for CRI to market, sell, distribute and support
MuSE-based products in the oil and gas industry worldwide. See "Business--The
CRI Agreement." In addition, in July 1998, CRI purchased, for $8 million,
1,000,000 shares of Common Stock and warrants (the "CRI Warrants") to purchase
an additional 1,000,000 shares of Common Stock. See "Financings." Although the
Company is engaged in preliminary discussions with other companies to market
MuSE in other industries, there can be no assurance that the Company can or will
be able to enter into other strategic relationships or that any agreements with
strategic partners will generate revenue or profits for the Company. See
"Business--Strategic Relationships."

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"). Sandia is the operator, under the auspices of the United States
Department of Energy, of Sandia National Laboratories ("SNL"). Prior to
organizing the Company, certain of the Company's founders were employed by
Sandia, where they developed MuSE. See "Business--The License Agreement." Unless
the context otherwise requires, references to "Sandia" include Sandia
Corporation and SNL.

The Company is a Delaware corporation organized on October 24, 1995. Its
executive offices are located at 1601 Randolph, SE, Albuquerque, New Mexico
87106, and its telephone number is (505) 843-6873.

THE OFFERING

<TABLE>
<S> <C>
Securities Offered by the Company......... 1,200,000 Units, each Unit consisting of one share of Common Stock
and one-half Warrant. However, only whole shares of Common Stock and
whole Warrants will be issued and, accordingly, one whole Warrant
will be required to purchase one whole share of Common Stock. A
Warrant certificate will reflect the number of shares of Common Stock
issuable upon exercise of such Warrant certificate. The Common Stock
and Warrants comprising the Units are separately transferable
immediately upon issuance and will not trade as a Unit.
Exercise of Warrants...................... Each Warrant is exercisable immediately upon issuance until November
15, 2003 and entitles the holder thereof to purchase that number of
shares of Common Stock represented by such Warrant at an exercise
price of $9.60 per share (subject to adjustment and subject to
earlier redemption by the Company).
Redemption of Warrants.................... The Warrants are redeemable by the Company commencing one year from
the date of this Offering, or earlier with the consent of the
Underwriter, at $.01 per each share of Common Stock issuable upon
exercise of the Warrant, upon 30 days prior written notice; provided,
however, that the Warrants are covered by an effective registration
statement, listed on the Nasdaq SmallCap Market (or a national
securities exchange) and the average closing price of the Common
Stock is at least $12.00 per share, subject to adjustment, for the
twenty day period prior to the date which is five days before the
date the Warrants are called for redemption.
Common Stock Outstanding
Prior to Offering (1)................... 8,763,893 Shares
Common Stock Outstanding
After Offering (2)...................... 9,963,893 Shares
Warrants Outstanding
Prior to Offering (3)................... 423,881 Warrants
Warrants Outstanding
After Offering (3)...................... 1,023,881 Warrants
</TABLE>

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<PAGE>

<TABLE>
<S> <C>
Use of Proceeds........................... The Company intends to apply the net proceeds of this Offering
primarily for repayment of certain indebtedness, marketing
activities, product development activities, and for working capital
and general corporate purposes. See "Use of Proceeds."
Listing of securities..................... The Company's securities offered hereby have been approved for
listing on the Nasdaq SmallCap Market and the Boston Stock Exchange
(the "BSE"). See "Risk Factors--No Prior Trading Market."
Trading Symbols (4)
Nasdaq SmallCap Market:
Common Stock............................ "MUZE"
Warrants................................ "MUZEW"
BSE:
Common Stock............................ "MZE"
Warrants................................ "MZEW"
Sales by Selling Securityholders.......... An additional 423,881 shares of Common Stock and Warrants to purchase
423,881 shares of Common Stock have been registered pursuant to the
registration statement of which this Prospectus forms a part, for
sale by the holders thereof, subject to a contractual restriction not
to sell such securities for a period of twelve months from the date
hereof. Sales by the Selling Securityholders are not part of the
Offering being sold by the Underwriter and the Company will not
receive any proceeds from any sales of securities by the Selling
Securityholders, except to the extent that the Warrants are
exercised.
The Selling Securityholders may effect sales of the Common Stock,
including Common Stock issuable upon exercise of the Warrants, or
Warrants on the Nasdaq SmallCap Market or the BSE at prevailing
prices or in transactions at negotiated prices or by gift or a
combination thereof. Any such sales may be made to the Underwriter or
other registered broker-dealers, acting as either principal or
broker, at any time commencing one year from the date of this
Prospectus. See "Sales by Selling Securityholders."
Risk Factors.............................. Investment in the Common Stock and the Warrants involves a high
degree of risk and immediate substantial dilution. See "Risk Factors"
and "Dilution."
</TABLE>

- ------------------
(1) Does not include Common Stock issuable upon exercise of warrants to purchase
an aggregate of 1,869,243 shares of Common Stock (including 423,881 shares
of Common Stock subject to Warrants held by the Selling Securityholders) and
an aggregate of 5,231,250 shares of Common Stock subject to options under
the Company's 1995 and 1996 Stock Option Plans, of which options to purchase
2,458,750 shares are outstanding.

(2) Does not include (i) 180,000 shares of Common Stock issuable pursuant to the
Underwriter's over-allotment option, (ii) 120,000 shares of Common Stock
issuable pursuant to the Underwriter's Unit Purchase Option, and
(iii) 1,173,881 shares of Common Stock issuable pursuant to exercise of the
Warrants and Warrants includable in the Underwriter's over-allotment option
and the Underwriter's Unit Purchase Option. See "Underwriting."

(Footnotes continued on next page)

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(Footnotes continued from previous page)
(3) Does not include Warrants issuable pursuant to the Underwriter's
over-allotment option and the Underwriter's Unit Purchase Option, and other
outstanding warrants to purchase an aggregate of 1,445,362 shares of Common
Stock.

(4) A listing does not provide any assurance that an active trading market will
develop or be maintained.

SUMMARY FINANCIAL INFORMATION

The summary financial information as of June 30, 1998 and September 30,
1997, and for the year ended September 30, 1997 ("fiscal 97"), for the period
October 24, 1995 (inception) to September 30, 1996 ("fiscal 96") and the nine
months ended June 30, 1997, has been abstracted from the financial statements of
the Company included elsewhere herein (audited, with the exception of the nine
months ended June 30, 1998 and 1997). The interim financial statements for the
nine months ended June 30, 1998 and 1997 are unaudited. In the opinion of
management, these financial statements include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair representation of the
interim financial statements. The results of operations for the interim periods
are not necessarily indicative of results that may be expected for the full
year.

SUMMARY FINANCIAL DATA

SUMMARY STATEMENTS OF OPERATIONS DATA:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NINE MONTHS ENDED JUNE 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1997 1996(1)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue............................................... $ 1,761,251 $ 533,351 $ 755,705 $ 355,392
Net loss.............................................. (2,116,400) (1,264,798) (2,049,102) (1,203,745)
----------- ----------- ----------- -----------
Net loss per share.................................... $ (0.29) $ (0.18) $ (0.28) $ (0.18)
----------- ----------- ----------- -----------
Weighted average number of
shares of Common Stock
outstanding......................................... 7,418,768 7,191,398 7,193,169 6,871,642
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------------
ACTUAL AS ADJUSTED(2)
---------- --------------
<S> <C> <C>
Working capital................................................. $ 163,861 $ 14,948,861
Total assets.................................................... 1,710,004 16,403,734
Total liabilities............................................... 936,202 368,944
Total stockholders' equity...................................... 773,802 16,147,532
Net tangible book value per share............................... $ .10 $ 1.62
---------- ------------
---------- ------------
</TABLE>

- ------------------
(1) Commencing from October 24, 1995 (the date of inception).

(2) As adjusted to give effect to the sale of 1,200,000 Units offered by the
Company, the sale by the Company of 1,000,000 shares of Common Stock to CRI
in a private transaction and the application of a portion of the proceeds of
this Offering to pay certain indebtedness. See "Use Of Proceeds,"
"Capitalization" and "Financing."

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<PAGE>
RISK FACTORS

An investment in the securities offered hereby is highly speculative and
subject to a high degree of risk, and only those who can bear the risk of the
entire loss of their investment should participate. Prospective investors should
carefully consider the following factors in analyzing this Offering.

HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY AND SUBSTANTIAL
ACCUMULATED DEFICIT.

The Company has incurred significant losses since inception. For the nine
months ended June 30, 1998, fiscal 1997 and fiscal 1996, the Company incurred
losses of approximately $2.1 million, $2.0 million and $1.2 million,
respectively. Through June 30, 1998, the Company incurred cumulative losses of
approximately $5.4 million, and at such date the Company had an accumulated
deficit of $5.7 million. The Company's revenue to date has not been substantial,
and 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. Following completion of this Offering, 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

EXPLANATORY PARAGRAPH IN INDEPENDENT ACCOUNTANTS' REPORT CONCERNING THE
COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN.

The Company's independent accountants have included an explanatory
paragraph in their report on the Company's financial statements for fiscal 1997
to the effect that the Company's net losses and working capital deficiency raise
substantial doubt about the ability of the Company to continue as a going
concern. See Note 3 of Notes to Financial Statements.

CASH REQUIREMENTS.

The Company's principal short-term cash obligation is a $270,000 payment of
principal and interest on notes which are due in November and December 1998. The
Company will require substantial additional funds in order to continue its
marketing and product development programs. 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 this Offering, together
with the net proceeds from the sale of securities to CRI in July 1998 and funds
generated from operations, including payments and royalties received through the
date hereof under the CRI Agreement, will be sufficient to satisfy the Company's
operations for at least the next twelve months. However, if the Company's
current and projected needs change due to unanticipated events or otherwise, the
Company may be required to obtain additional capital and there can be no
assurance that additional financing will be available or that the terms of any
financing will be acceptable to the Company. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate one or
more of its product development programs, including but not limited to the
further development of MuSE 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

TECHNOLOGICAL UNCERTAINTIES.

The commercial success of the Company's software will be dependent on its
acceptance by potential customers. The Company's software is based on technology
that has not been generally proven in the marketplace and is subject to the
risks of failure inherent in products based on new technologies. A significant
portion of the Company's resources, including approximately $6,200,000, or 78%
of the net proceeds of this

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Offering, will be used for research and development and marketing relating to
the Company's software and other products and services. There can be no
assurance that the Company can or will develop marketable products. The failure
of the Company to achieve market acceptance of its products will have a material
adverse effect on the Company. See "Business."

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. A portion of the proceeds of this Offering is allocated to
marketing activities, although 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. See
"Business--Marketing and Sales."

To date, the Company has undertaken only a limited marketing program which
has been conducted by its officers, employees and, to a lesser extent,
independent consultants. The Company believes that, in order to realize the
maximum market potential from its products and services, it will be necessary
for the Company to enter into strategic relationships with partners that have
the financial, technological and marketing capability to develop applications
for MuSE for use in specific industries. See "Business--Strategy" and
"--Marketing and Sales."

ANTICIPATED DEPENDENCE ON STRATEGIC PARTNERS.

Other than the CRI Agreement, 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.

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.

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

The ability of the Company to enter into arrangements with strategic
partners on acceptable terms may be affected by the Company's financial
condition. To the extent that the Company is in a position where it requires
substantial capital to fund its operations, it may be necessary for the Company
to grant to strategic partners certain rights to the Company's products or
technology which the Company would not otherwise grant. See "Business--Marketing
and Sales."

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<PAGE>
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. See
"Business--The License Agreement" and "Business--Competition."

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. See "Business--Research and Product Development."

DISCRETION AS TO USE OF PROCEEDS BY MANAGEMENT.

Except for the payment of approximately $270,000 (3% of the estimated net
proceeds) to pay principal and accrued interest on outstanding debt due in
November and December 1998, the net proceeds of this Offering are allocated to
working capital purposes, including marketing and research and development and
other general corporate purposes. However, unforeseen circumstances, including
general economic and business conditions or material shifts in the Company's
strategy or business plan may result in a reallocation of such intended use of
proceeds. Accordingly, management will have broad discretion with respect to the
expenditure of in excess of 97% of the net proceeds of this Offering, which is
allocated to research and development, marketing and working capital. Purchasers
of the Units offered hereby will be entrusting their funds to the Company's
management, upon whose judgment the investors must depend, with only limited
information concerning management's specific plans or intentions. See "Use of
Proceeds."

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

9
<PAGE>
any claim. No assurance can be given that third parties will not challenge the
validity and enforceability of the patent applications or any patents owned or
issued in the future to the Company, or that such challenges will not be
successful. There can be no assurance that patent infringement claims will not
be asserted and found to have merit, that the Company will not be enjoined from
using MuSE and licensing MuSE, or that the Company would not be forced to obtain
a license and pay future royalty fees as well as past damages to the party
claiming infringement.

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. The Company
derives a significant portion of current 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. See
"Business."

DEPENDENCE ON MANAGEMENT.

The Company is dependent upon the services of Dr. Creve Maples, Chairman of
the Board and Chief Technical Officer, Curtiz J. Gangi, President, and Craig
Peterson, Senior Software Development Manager, for the development of the
Company's products, and Douglas Harless, Vice President-Sales and Marketing, for
the marketing of the Company's products and services. Given the Company's early
stage of development and the shortage of personnel trained in the application
and adaptation of MuSE, the Company is dependent on its ability to identify,
hire, train, retain and motivate high quality personnel, especially highly
skilled engineers involved in the ongoing developments required to adapt MuSE to
specific applications and solutions. Loss of the services of any of Dr. Maples
or Messrs. Gangi or Peterson would have a material adverse effect on the
Company's operations and financial condition. Pursuant to the underwriting
agreement, the Company has obtained, and the underwriting agreement requires the
Company to maintain, key man life insurance on the lives of Dr. Maples and Mr.
Gangi in the amount of $1,000,000 each and Mr. Peterson in the amount of
$500,000 while employed by the Company. The Company has entered into three-year
employment agreements with Dr. Maples, Messrs. Gangi, Clark and Harless
commencing as of June 1, 1998 and with Mr. Peterson commencing as of August 1,
1998, providing for current annual compensation of $175,000, $215,000, $150,000,
$150,000 and $90,000, respectively. Each agreement provides for certain bonuses,
severance benefits, non-competition covenants and, in some cases, payments in
the event of a change of control of the Company. In addition, certain officers
have the right to obtain a 5% loan from the Company to cover certain relocation
expenses. See "Management--Employment Agreements."

10
<PAGE>
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 Group PLC
("Division"), Paradigm Systems, Inc. ("Paradigm"), Advanced Visual Systems,
Inc., Gemini Technology Corp., Autodesk, Inc. ("Autodesk") and SGI International
("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. See
"Business--Competition."

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 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. See
"Business--Marketing and Sales."

EFFECTIVE CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS.

The officers and directors of the Company currently beneficially own
approximately 32.6% of the Common Stock of the Company (approximately 29.1%
after this Offering) and will have the ability to significantly influence the
election of the directors of the Company and otherwise significantly influence
the affairs of the Company. In addition, CRI owns approximately 11.4% of the
Common Stock of the Company (10.0% after this Offering) and may also be able to
significantly influence the affairs of the Company. See "Principal
Stockholders."

RELATED PARTY TRANSACTIONS.

The Company has entered into several business transactions with its
directors, officers and principal stockholders and their affiliates. Such
arrangements could result in certain conflicts of interest between such persons
and the Company. See "Certain Relationships and Related Transactions." Also, a
portion of the net proceeds of this Offering may be used to make relocation
loans of up to $300,000 to certain officers of the Company. See "Use of
Proceeds" and "Management--Employment Agreements."

ABSENCE OF DIVIDENDS.

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

11
<PAGE>
SUBSTANTIAL DILUTION OF BOOK VALUE.

An investment in such Units will result in an immediate and substantial
dilution to investors in this Offering, based upon the Company's net tangible
book value at June 30, 1998, of $6.38 per share, or 79.8% of the initial public
offering price of $8.00 per Unit, with no value being ascribed to the Warrants.
See "Dilution."

SUBSTANTIAL DIFFERENCE IN INVESTMENT IN THE COMPANY.

Purchasers of the Units in this Offering will have a substantially greater
cash investment in their Common Stock than the present investors, other than
CRI. Assuming no value is allocated to the Warrants, the purchasers in this
Offering will pay $8.00 per share of Common Stock. The present stockholders,
other than CRI, have an average base purchase price of $.40 per share. As a
result, the investors in this Offering will have substantially more cash at
risk, on a per share basis, than the present stockholders, other than CRI. See
"Dilution."

SHARES OF COMMON STOCK ISSUABLE PURSUANT TO WARRANTS AND UNDERWRITER'S UNIT
PURCHASE OPTION; REGISTRATION RIGHTS.

In addition to the 8,763,893 shares of Common Stock outstanding and the
shares of Common Stock and Warrants issuable pursuant to this Offering, there
are outstanding Warrants to purchase 423,881 shares of Common Stock, which
Warrants are held by the Selling Securityholders, and other outstanding warrants
to purchase 1,445,362 shares of Common Stock. The Company will issue to the
Underwriter for nominal consideration the Underwriter's Unit Purchase Option to
purchase 120,000 Units. The Company also has stock option plans pursuant to
which options to purchase 2,458,750 shares of Common Stock are outstanding. See
"Financings," "Sales by Selling Securityholders," "Management--Stock Option
Plans" and "Underwriting." 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. See "Description of Securities."

ARBITRARY DETERMINATION OF OFFERING PRICE.

The initial public offering price and composition of the Units and terms of
the Warrants have been determined by negotiations between the Company and the
Underwriter and does not necessarily relate to the Company's book value, net
worth, financial condition or other established criteria of value. See
"Underwriting" for information about factors considered in determining the
initial public offering price. The factors considered in determining the public
offering price and terms, in addition to prevailing estimates of the business
potential and earning prospects of the Company, the present state of the
Company's development and an assessment of the Company's management, as well as
the consideration of the foregoing factors in relation to market valuations of
comparable companies, do not necessarily bear any relationship to the Company's
assets, accounting results or the book value of the Company or other generally
accepted criteria of value. See "Underwriting."

NO PRIOR PUBLIC TRADING MARKET.

Prior to this Offering, there was no established market for the Company's
securities. The Common Stock and Warrants have been approved for listing on the
Nasdaq SmallCap Market and the BSE, however, there can be no assurance that an
active market in the Common Stock or Warrants will develop or be maintained or
that the

12
<PAGE>
Common Stock or Warrants will continue to be listed on either or both of such
exchanges. Purchasers of the securities offered hereby may, therefore, have
difficulties in selling such securities should they desire to do so. The market
price for the Company's securities following this Offering may be highly
volatile. Factors such as the Company's financial results, introduction of new
products in the marketplace, and various factors affecting the computer industry
generally may have a significant impact on the market price of the Company's
securities, as well as price and volume volatility affecting small and emerging
growth companies, in general, and not necessarily related to the operating
performance of such companies. Accordingly, securities received in this Offering
may be deemed illiquid.

A significant number of the Units may be sold to customers of the
Underwriter. Such customers may subsequently engage in the sale or purchase of
the Common Stock or Warrants or with the Underwriter. Although it has no
obligation to do so, the Underwriter may become a market maker and otherwise
effect transactions in such securities, and, if it participates in such market,
may be a dominating influence in the trading of such securities. The prices and
the liquidity of such securities may be significantly affected by the degree, if
any, of the participation of the Underwriter in such markets, should a market
develop. See "Underwriting."

POTENTIAL ADVERSE EFFECT OF REDEMPTION OF THE WARRANTS.

Commencing one year from the date of this Prospectus, or earlier with the
consent of the Underwriter, 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. See "Description of Securities--Class A Redeemable Common Stock
Purchase Warrants."

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. Pursuant to
Section 10(a)(3) of the Securities Act, this Prospectus, unless amended or
supplemented in accordance with the rules and regulations of the Commission
pursuant to the Securities Act, may not be used by the Company in connection
with the exercise of any Warrants subsequent to nine months from the date of
this Prospectus. Prior to the expiration of nine months from the date of this
Prospectus, it may be necessary to amend or supplement this Prospectus under
certain conditions, in which event the Warrants could not be exercised prior to
the date of the amended Prospectus or supplement. Unless there is an effective
and current registration statement covering the issuance of the Common Stock
upon exercise of the Warrants, the Company will not accept payment for, or issue
Common Stock with respect to, the exercise of any Warrants, and any payments
made by a Warrant holder will be refunded by the Company. The value of the
Warrants may be greatly reduced if a current prospectus covering the Common
Stock issuable upon the exercise of the Warrants is not kept effective or if
such securities are not qualified or exempt from qualification in the states in
which the holders of Warrants reside.

The Company has registered 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, even if the Underwriter is able
to sell the Units in such states. Although the Company is not aware of any
states which prohibit the registration or qualification of

13
<PAGE>
securities of the type offered by the Company and anticipates that it will
qualify for available after-market exemptions in a majority of states within
several months after the completion of the Offering, there can be no assurance
that an exception permitting the exercise of the Warrants will be available in
any jurisdiction other than those in states which the Common Stock and Warrants
were initially registered or are exempt from registration at the time a holder
seeks to exercise Warrants. See "Description of Securities--Class A Redeemable
Common Stock Purchase Warrants."

POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN COMPANY'S SECURITIES.

The Common Stock and Warrants have been approved for listing on the Nasdaq
SmallCap Market and the BSE. The Underwriter has advised the Company that it
intends to make a market in the Company's securities following consummation of
this Offering. Regulation M promulgated under the Exchange Act may prohibit the
Underwriter from engaging in any market making activities with regard to the
Company's securities for the period from one or five business days (or such
other applicable period as Regulation M may provide) prior to any distribution
by the Underwriter of the Company's securities until the later of the
termination of such distribution activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
sale of such securities. As a result, the Underwriter may be unable to provide a
market for the Company's securities during such distribution period. Any
temporary cessation of such market making activities could have an adverse
effect on the market price of the Company's Securities. See "Underwriting."

FUTURE SALES OF COMMON STOCK UNDER RULE 144 OR OTHERWISE.

All of the 8,763,893 issued and outstanding shares of Common Stock as of
the date of this Prospectus, are "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act. Of the total shares
outstanding, approximately 7,000,000 shares are subject to the restrictions
contained in certain agreements with the Underwriter and officers, directors and
certain stockholders of the Company restricting the sale or other disposition of
such persons' Common Stock for 12 months following the date of this Prospectus
without the prior written consent of the Underwriter. Subsequent to the end of
such 12 month 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. See "Shares Eligible for Future
Sale" and "Principal Stockholders."

POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SMALLCAP MARKET.

The Common Stock and Warrants will be listed on the Nasdaq SmallCap Market.
The Company's failure to meet the listing maintenance criteria of the Nasdaq
SmallCap Market in the future for any reason may result in the discontinuance of
the inclusion of the Company's securities on such market. To qualify for
continued inclusion in the Nasdaq SmallCap Market, a company will have to
maintain (a) either $2,000,000 in net tangible assets (total assets minus total
liabilities and goodwill); market capitalization of $35,000,000; or net income
of $500,000 in the most recently completed fiscal year or in two of the last
three most recently completed fiscal years; and (b) a market value of the public
float of $1,000,000. In addition, continued inclusion requires two market-makers
and a minimum bid price of $1.00. In the event of Nasdaq SmallCap Market
delisting, trading, if any, in the Company's securities may then continue to be
conducted on the OTC Electronic Bulletin Board or in the non-Nasdaq
over-the-counter market. As a result, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of the
Company's securities. The Company will also have to comply with the maintenance
criteria of the BSE for continued listing on such exchange. See "Description of
Securities--Common Stock" and "--Class A Redeemable Common Stock Purchase
Warrants."

14
<PAGE>
DISCLOSURE RELATING TO LOW-PRICED STOCKS.

The Commission has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the Nasdaq system, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure documented prepared by
the Commission that provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson on the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker dealer and
salesperson compensation information must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. These disclosure
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
If the Company's securities become subject to the penny stock rules, investors
in this Offering may find it more difficult to sell their securities. The
Company's securities will not, however, at the time of consummation of this
Offering, be deemed to be a penny stock under the rules.

YEAR 2000 COMPLIANCE

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

15
<PAGE>
DILUTION

The net tangible book value of the Company's Common Stock at June 30, 1998
was approximately $.10 per share. Net tangible book value per share of Common
Stock represents the amount of the Company's tangible assets reduced by the
amount of its liabilities divided by the number of outstanding shares of Common
Stock. Without taking into account any change in the net tangible book value of
the Company after June 30, 1998, other than as a result of (i) the sale of the
1,200,000 shares of Common Stock included in the Units offered hereby at an
initial public offering price of $8.00 per share, after deducting estimated fees
and other expenses of the Offering, and (ii) the receipt by the Company of
$8.0 million from the sale of securities to CRI, net of bonuses paid to three
officers of the Company, the Company's net tangible book value as of June 30,
1998 would have been approximately $1.62 per share. This amount represents an
immediate increase in net tangible book value per share of approximately $1.52
to the present stockholders and an immediate dilution of Common Stock (the
difference between the offering price of the Units (with no value ascribed to
the warrants) and the net tangible book value per share after the Offering) of
approximately $6.38, or 79.8% of the initial public offering price, to the
purchasers of the Units.

The following table illustrates the dilution of one share of Common Stock
as of June 30, 1998:

<TABLE>
<S> <C> <C>
Public offering price per share..................................................... $8.00
Net tangible book value per share before the Offering............................. $0.10
Increase per share attributable to new investors.................................. $1.52(1)
-----
Pro forma net tangible book value per share after the Offering...................... $1.62
-----
Dilution per share to new investors................................................. $6.38(2)
-----
-----
</TABLE>

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

(1) After giving effect to the sale by the Company to CRI, in July 1998, of
1,000,000 shares of Common Stock at $8.00 per share, the pro forma net
tangible book value per share at June 30, 1998 would be $0.94. Accordingly,
after giving effect to this Offering, such increase per share attributable
to new investors would be $0.68.

(2) If the Underwriter exercises the over-allotment option in full, the pro
forma net tangible book value would be $1.72 per share of Common Stock,
resulting in an increase in the net tangible book value per share of $1.62
and dilution to the public investors of $6.28 per share.

The following table summarizes on a pro forma basis, as of September 30,
1998, the differences between existing stockholders and purchasers of shares in
this Offering with respect to the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average purchase price
per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Current Stockholders*..................... 7,763,893 78.0% $ 3,073,279 14.9% $0.40
CRI....................................... 1,000,000 10.0% $ 8,000,000 38.7% $8.00
Public Investors.......................... 1,200,000 12.0% $ 9,600,000 46.4% $8.00
--------- ------- ----------- -------
Total..................................... 9,963,893 100.0% $20,673,279 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>

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

* Other than CRI.

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<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the Units offered hereby
are estimated to be $7,985,000 after deducting underwriting discounts and
commissions of approximately $960,000 and expenses of this Offering of
approximately $655,000. The Company anticipates that the net proceeds of this
Offering will be applied substantially as follows:

<TABLE>
<CAPTION>
APPROXIMATE
ALLOCATION OF PROCEEDS DOLLAR AMOUNT PERCENT
- --------------------------------------------------------------------- ------------- -------
<S> <C> <C>
Payment of 1997 Notes(1)............................................. $ 270,000 3%
Relocation Loans to Officers(2)...................................... 300,000 4%
Marketing Activities................................................. 2,915,000 37%
Product Development Activities....................................... 3,300,000 41%
Working Capital...................................................... 1,200,000 15%
----------- ---
Total........................................................... $ 7,985,000 100%
----------- ---
----------- ---
</TABLE>

- ------------------
(1) These notes were issued to 18 accredited investors and bear interest at 8%
per annum. The net proceeds from the notes were used for capital
expenditures and working capital. See "Financings--December 1997 Private
Placement."

(2) Such loans, if taken by such officers, will mature in five years and will
bear interest at 5% per annum. See "Management--Employment Agreements."

The foregoing represents the Company's current estimate of its proposed use
of the net proceeds of this Offering based upon the present state of its
business, operations and plans, current business conditions and the Company's
evaluation of the market for its services. Except for the payment of the 1997
Notes, for which approximately $270,000 is required (inclusive of estimated
interest), management will have broad discretion with respect to the expenditure
of a substantial portion of the net proceeds of this Offering. In particular,
management will have broad discretion to allocate funds to marketing, product
development and other working capital purposes, based on the business of the
Company as it develops from time to time.

The Company intends to use the portion of the proceeds devoted to marketing
to continue to market its core software product, MuSE, and its proprietary
software product, Continuum, in certain strategic markets. The Company intends
to hire additional sales and marketing personnel with expertise and contacts in
such targeted markets. Additionally, the Company will seek to leverage its
existing relationships and applications of its software products to enhance its
marketing efforts. In addition, the Company will devote a portion of the
proceeds to market its custom design and consulting and support services
relating to MuSE. Such funds may also be used to assist customers in marketing
the Company's products and services. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--The CRI
Agreement."

The Company intends to use the portion of the proceeds devoted to product
development to redesign, develop and update the MuSE software and its related
products to facilitate its use within high-end industrial, scientific and
educational sectors. The Company may also use such proceeds to develop new
products and enhance existing products to improve price and performance, expand
product capabilities, simplify user interfaces and develop interoperability with
most products and devices commonly used in the Company's targeted markets.

The Company intends to use the portion of the proceeds devoted for working
capital to maintain and fulfill its current obligations under license contracts,
employment agreements and other material agreements and for other corporate
purposes which may include capital expenditures that may be incurred in the
normal course of business.

Conditions may develop which could cause management to reallocate proceeds
from the categories listed above, including changes in its marketing program,
the ability of the Company to enter into agreements or arrangements with
strategic partners and changes in government policy, none of which can be
predicted with any degree of certainty. Furthermore, future events, including
unforseen problems, expenses, difficulties, complications and delays frequently
encountered by businesses, as well as changes in the economic climate,

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<PAGE>
changes or anticipated changes in government regulations, new technologies,
competition, reimbursement policies or acquisition or joint venture
opportunities, may make the reallocation of funds necessary or desirable. Any
such reallocation will be at the discretion of the Board of Directors.

The Company anticipates, based upon its current plans, that the net
proceeds of this Offering, together with the net proceeds from the sale of
securities to CRI in July 1998 and funds generated from operations, including
payments and royalties received through the date of this Prospectus under the
CRI Agreement, will be sufficient to satisfy its contemplated cash requirements
for at least twelve months. However, if the Company's current and projected
needs change due to unanticipated events or otherwise, the Company may be
required to obtain additional financing 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. The Company has no
current arrangements with respect to, or sources of, additional financing.

To the extent that the Underwriter's over-allotment option is exercised,
additional net proceeds will be added to working capital. Pending utilization of
the proceeds of this Offering, the Company may make temporary investments in
bank certificates of deposit, prime commercial paper, United States Government
obligations, investments in money-market funds or other similar short-term
low-risk investments.

CAPITALIZATION

The following table sets forth the Company's capitalization at June 30,
1998, and as adjusted to give effect to (a) the issuance and the sale of the
1,200,000 Units offered hereby, (b) the sale of securities to CRI, and (c)
application of a portion of the net proceeds to pay certain debt. This table
should be read in connection with the Company's Financial Statements and the
related notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------
ACTUAL AS ADJUSTED
----------- -------------
<S> <C> <C>
Short term debt.................................................................... $ 804,914 $ 237,566
----------- -------------
Stockholders' equity:
Common stock, par value $.015 per share, 50,000,000 shares authorized; 7,763,893
shares outstanding(1); 9,963,893 shares as adjusted........................... 116,458 149,458
Additional paid-in-capital....................................................... 6,459,091 21,799,821
Stock subscription receivable(2)................................................. (87,500) (87,500)
Accumulated deficit.............................................................. (5,714,247) (5,714,247)
----------- -------------
Total stockholders' equity.................................................... 773,802 16,147,532
----------- -------------
Total debt and stockholder's equity................................................ $ 1,578,716 $ 16,385,098
----------- -------------
----------- -------------
</TABLE>

- ------------------
(1) Does not include an aggregate of 9,150,493 shares of Common Stock reserved
as follows: (a) 2,869,243 shares of Common Stock (including Common Stock
issuable upon exercise of outstanding warrants to purchase 423,881 shares of
Common Stock held by the Selling Securityholders, Warrants to purchase
1,000,000 shares of Common Stock held by CRI and other warrants to purchase
445,362 shares of Common Stock), (b) 5,231,250 shares of Common Stock
issuable upon exercise of options granted or to be granted pursuant to the
Company's 1995 and 1996 Stock Option Plans (of which, options to purchase
2,458,750 shares of Common Stock are outstanding), (c) 600,000 shares of
Common Stock issuable upon exercise of Warrants included in the Units,
(d) 270,000 shares of Common Stock issuable as part of the Units issuable
upon exercise of the Underwriter's over-allotment option and upon exercise
of Warrants issuable upon exercise of such over- allotment option, and
(e) 180,000 shares of Common Stock issuable upon exercise of the
Underwriter's Unit Purchase Option and upon exercise of Warrants issuable
upon exercise of the Underwriter's Unit Purchase Option.

(2) See "Certain Relationships and Related Transactions" and Note 5 of Notes to
Financial Statements.

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<PAGE>
DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its earnings to finance the
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future.

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

The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto appearing
elsewhere in this Prospectus.

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; research and development relating to MuSE and
Continuum; 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 CRI Agreement with respect to
distribution of the Company's products and services in the oil and gas industry
worldwide. The CRI Agreement provides that in exchange for such exclusive
rights, CRI will pay the Company a non-refundable license fee of $5,000,000 (of
which $1,000,000 was paid in June 1998, $2,000,000 was paid in October 1998 and
the remaining $2,000,000 is due by November 30, 1998) and 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. The Company's strategy is to seek to enter
into similar arrangements in other markets. The Company intends to hire
additional sales and marketing personnel with expertise and contacts in such
targeted markets. Additionally, the Company will seek to leverage its existing
relationships and applications of its software products to enhance its marketing
efforts. See "Business."

Revenue during the nine months ended June 30, 1998 (the "June 1998 period")
was $1,761,000, of which $1,000,000 reflects the initial payment pursuant to the
CRI Agreement. Although such revenues represent a significant increase over the
nine months ended June 30, 1997 (the "June 1997 period"), such results are not
comparable since the Company did not begin commercialization and marketing
efforts until the latter part of fiscal 1997. The net loss during the nine
months ended June 30, 1998 was $2,116,400 due in part to increased marketing and
personnel costs associated with the commercialization effort, interest expense
and $948,000 for a non-cash imputed compensation expense incurred in connection
with the repricing of employee stock options.

Research and development expense was $710,000 for the June 1998 period, a
17.1% increase over the research and development expense for the June 1997
period, which was $606,000. The increase reflects expenditures relating to the
development of Continuum software modifications to enable MuSE and Continuum to
operate on Windows-NT(Trademark) computers.

Interest expense was $555,000 for the June 1998 period as compared to
$32,000 for the June 1997 period, reflecting accrued interest and debt issuance
costs in connection with various private placements of notes during the June
1998 period.

Revenues generated during fiscal 1997 and fiscal 1996 aggregated
approximately $756,000 and $355,000, respectively. Revenues for fiscal 1997
consisted primarily of product sales, licensing fees and consulting and
maintenance fees. Revenues for fiscal 1996 consisted primarily of fees related
to research and development services provided on behalf of government and
industrial customers. The net loss from operations for fiscal 1997 and for
fiscal 1996 of ($2,049,000) and ($1,204,000), respectively, resulted principally
from the disproportionate amount of overhead expenses in relation to revenues
received due to the recent commercialization of the Company's products and
services in fiscal 1997.

Research and development expense was $742,000 and $599,000 for fiscal 1997
and fiscal 1996, respectively, related primarily to the development of MuSE and
Continuum.

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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

The Company's independent auditors have included an explanatory paragraph
in their report on the Company's financial statements to the effect that certain
matters raise substantial doubt about the Company's ability to continue as a
going concern, which is contingent upon, among other things, the Company's
ability to secure financing and attain profitable operations.

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.

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. A portion of the 1997 Notes were paid and the balance
are payable in November and December 1998, together with accrued interest
thereon. The Company will use approximately $270,000 of the net proceeds of this
Offering to pay the 1997 Notes, together with accrued interest thereon. See "Use
of Proceeds."

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
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 CRI Warrants to purchase 1,000,000 shares
of Common Stock 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. See "Financings."

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.

The Company will require substantial additional funds in order to continue
its marketing and product development programs. 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 this Offering, 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, will be sufficient to satisfy
the Company's operations for at least the next twelve months. However, if the
Company's current and projected needs change due to unanticipated events or
otherwise, the Company may be required to obtain additional capital and there
can be no assurance that additional financing will be available or that the
terms of any financing will be

20
<PAGE>
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.

YEAR 2000 COMPLIANCE

BUSINESS

GENERAL

The Company was incorporated on October 24, 1995 in order to acquire
certain assets and liabilities from Viga Technologies Corporation ("Viga"),
including the License Agreement and related technology. In December 1995, such
acquisition was consummated. See "Certain Relationships and Related
Transactions--Organization of the Company; Transactions with Viga."

PRODUCTS AND SERVICES

The Company was organized to commercialize the MuSE technology and software
which were initially developed by the Company's founders and some of its current
employees at Sandia. MuSE allows the user to develop and execute software
programs and import data into a multisensory environment. The MuSE software has
been substantially redesigned and rewritten by the Company from the original
prototype developed at Sandia.

MuSE is a software shell that allows data representation and analysis
through a new approach to human-computer interaction and software development.
MuSE is designed both to allow the manipulation of data and information from
other sources and the incorporation of software programs within the MuSE
environment, and to enhance the user's ability to understand and analyze such
data and information. MuSE can be used with different computing platforms and
different physical or logical input and output devices. The multisensory
capabilities of MuSE enables the user to present information in real-time using
visual, auditory, tactile and other physical or interactive tools.

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

MuSE possesses the following attributes:

Device Independence: MuSE permits the incorporation of most existing
computer peripheral device technologies, including flat-screen display,
stereo viewing, head and body tracking devices, "virtual reality," sound,
speech recognition, voice synthesis, and other mechanical devices such as
mouse, joystick and steering wheel, without changes to the software
application code.

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<PAGE>
Software Simplification: Software development and integration for use
in the MuSE environment is significantly simplified by eliminating the need
to write specific software code to access and interface hardware devices
within the MuSE environment.

Real-Time Operation: MuSE is designed to rapidly and efficiently
coordinate parallel input and output devices and the operation of such
devices within the MuSE environment. Such efficient coordination results in
immediate output in the form of visual and auditory displays which
approximate real-time responses.

Ancillary Virtual Environment: Through the creation of a secondary
space around the user, MuSE allows the user to "travel" throughout the
virtual environment and explore data and applications in ways that the
Company believes are more consistent with human perceptual processes than
traditional computer environments. The user may pilot a virtual craft which
operates independent from any other application, and allows movement,
control of objects in the environment, provides both navigational and
managerial aids and the display of associated information in a readily
accessible manner within the virtual craft.

Multiprocessing: MuSE is designed to support multiprocessing
capabilities at several levels, including user interaction, device control
and foreground-background operation.

Continuum permits multiple users to work and interact with each other
within a common MuSE environment and to analyze and manipulate the same data
either together with other users in the same space or independent from other
users in a parallel private environment (or multiple environments) from which
other users can be excluded or included at the discretion of the user
establishing the parallel environment. A particular user can manipulate his or
her parallel private environment according to his or her own interests and
perceptual tools, and can be joined by other users for collaboration and idea
exchange as such user deems appropriate. Similarly, a user can jump from a
private parallel environment at any time to rejoin other users in the "public"
environments.

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

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

STRATEGY

At present, the Company's products are designed to be used within the
high-end industrial, scientific and educational sectors of "visual computing."
These sectors are largely driven by technological advances in the areas of
computer graphics; real-time simultaneous processing of three-dimensional ("3D")
graphics, audio, videos, images, and text; multiprocessing, and increased
computer processing capabilities through advanced chip technology and enhanced
graphics card capabilities. Visual computing is the use of digital inputs to
create and manipulate true-color, 3D objects, representing complex data with
extreme precision and speed, thereby enhancing human understanding. In visual
computing, a 3D, full-color window or screen replaces the standard
black-and-white, two-dimensional screen image. The use of images makes it
possible to represent complex data sets more understandably as well as simulate
real-world characteristics. Combined with appropriate input and output devices
(not provided by the Company), visual computing can be significantly enhanced
into a multi-dimensional synthetic environment. The Company believes that, with
MuSE, visual computing becomes not only multi-dimensional but also multi-sensory
and highly interactive.

MuSE is a platform which can be used in a wide variety of industrial,
commercial, educational, entertainment and governmental applications. Each
application would be designed to meet the specific requirements of a particular
end user or a particular industry.

MuSE and Continuum were initially designed to operate on UNIX-based,
high-end graphics computers and workstations such as those marketed by SGI and
Sun. The Company has expanded the potential market for its products and services
by developing MuSE and Continuum software that operates on Windows-NT(Trademark)
computers with advanced graphics capabilities.

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

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<PAGE>

In furtherance of this strategy, in June 1998, the Company entered into the
CRI Agreement, pursuant to which CRI was given the exclusive worldwide right to
market and sell the Company's software products and services in the oil and gas
industry. See "Business--The CRI Agreement." Although the Company is engaged in
discussion with other companies to market MuSE to other industries, there can be
no assurance that the Company can or will be able to enter into other strategic
relationships or that any agreement with strategic partners will generate
revenue or profits to the Company.

In addition, in connection with its marketing program, the Company may
enter into agreements with customers or potential strategic partners to develop
custom MuSE applications designed to address specific problems in a particular
market.

MARKETING AND SALES

The Company presently has a limited marketing staff, consisting of four
employees, including its Vice President of Sales and Marketing. The Company
intends to hire additional sales and marketing personnel with expertise and
contacts in such targeted markets. Additionally, the Company will seek to
leverage its existing relationships and applications of its software products to
enhance its marketing efforts.

The Company is seeking to enter into agreements with potential strategic
partners that have the financial, technological and marketing capability of
developing applications for MuSE or distributing the Company's products and
services in specific industries. In June 1998, the Company entered into the CRI
Agreement, which covers the exploration and production aspects of the oil and
gas industry. The Company is initially directing its marketing efforts to obtain
strategic partners in the database, automotive manufacturing and medical imaging
industries, and from agencies of the Federal government. There can be no
assurance that the Company will be able to enter into strategic relationships in
industries other than the oil and gas industry.

During the nine months ended June 30, 1998 and fiscal 1997 and 1996,
approximately 25%, 70% and 72%, respectively, of revenue was derived from
agencies of the Federal government. Such contracts are subject to renegotiation
or termination at the convenience of the government.

THE CRI AGREEMENT

On June 19, 1998, the Company and CRI entered into the CRI Agreement,
pursuant to which the Company granted CRI an exclusive, worldwide
non-transferable license to market, sell and distribute the Company's products
in the oil and gas industry relating to the exploration and production of oil
and gas. The CRI Agreement has a term of three years and continues for
successive three-year terms unless either party terminates the agreement on
written notice given not later than 60 days prior to the end of the initial term
or any renewal term. Upon the occurrence of an event of default under the CRI
Agreement, the Company can terminate the CRI Agreement upon 60 days notice.

Pursuant to the CRI Agreement, CRI is to pay the Company a $5,000,000
non-refundable initial payment, of which $3,000,000 has been paid and the
balance is due by November 30, 1998. The CRI Agreement has quarterly quotas,
which, during the initial term, range from $500,000 to $2,000,000. The quotas
are based on the Company's present price structure and are subject to adjustment
under certain conditions.

The CRI Agreement also requires the Company to hire a support team of four
persons to be dedicated to working with CRI on its sales and development
efforts. The cost of such support team is borne by the Company, except that,
under certain conditions, some or all of the cost of such persons is paid by
CRI.

THE LICENSE AGREEMENT

Pursuant to the License Agreement, the Company received (i) a limited
exclusive worldwide license to use and reproduce the MuSE software, (ii) a
license to create derivative works of MuSE software and (iii) the right to
distribute and sublicense the MuSE software. The License Agreement provides the
Company with a ten year

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<PAGE>

exclusive license with respect to the MuSE software, and thereafter provides a
non-exclusive right through 2015. After the end of such ten year period of
exclusivity, the Company may request Sandia to extend exclusivity through 2015,
which determination shall be made in Sandia's sole discretion and subject to
continued royalty payments under the License Agreement. If the License Agreement
continues in force for a total of 20 years, the Company's rights under the
License Agreement convert to a paid-up non-exclusive license.

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

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

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

ILLUSTRATIVE APPLICATIONS

MuSE has been used in various research and development projects at Sandia
from 1991 through October 1995 and by the Company since October 1995. During
this period, various technical applications programs were developed in pilot
projects by Sandia and the Company. Most of the work on the original MuSE
software was performed by certain of the Company's present employees who were
then employees of Sandia. The applications described below represent specific
customized applications of MuSE that were developed either by Sandia or the
Company. The Company does not intend to commercialize such applications and such
applications are not an ongoing source of revenue to the Company. The following
descriptions are intended to provide only illustrations of certain industrial or
governmental applications of MuSE and are not intended as any representation
that the Company can or will be engaged to develop any specific applications for
MuSE or that any applications of MuSE which are developed by the Company will
result in revenues or profits to the Company.

Medical--CT Scan of Human Head: This application demonstrates the
ability of MuSE to translate a standard CAT Scan and/or MRI data from
actual patients into full-color, 3D models; to present heart rate,
respiration, and other similar information as sound; and to permit users to
create cross sections for analysis and to examine potential medical
procedures.

Modeling--Dynamic Solar System: This educational/entertainment model
simulates the solar system, including 73 independently moving objects
(planets and moons). As in every MuSE application, the viewer can control
the speed of time and tether to any given object in the environment. The
user can also access certain additional NASA data and simulations.

Simulation--Explosive Welding: MuSE was used to investigate the
simulated explosive welding of two dissimilar metals for a production
process. The data was generated from a complex supercomputer data-set
input, which included data as to the physical characteristics of both
metals and the explosive charge. After this data was recreated in a MuSE
environment, the client/researchers discovered, within minutes, a process
flaw that required revisions of their proposed manufacturing process.

Astronomy--Impact of Shoemaker/Levy 9 Comet on Jupiter: MuSE was
applied to understand the predicted effects of the collision of the
Shoemaker/Levy 9 Comet with Jupiter in 1995 based on simulated

24
<PAGE>

supercomputer models. By placing the information in a MuSE environment,
scientists identified previously unanticipated effects of the collision,
which ultimately closely matched scientific observations.

Manufacturing--Design and Assembly: MuSE was used to simulate the
assembly of a radioactive-waste containment vessel. The components of the
vessel can be examined and manipulated and viewed externally and internally
in the MuSE environment. The MuSE System can capture and display CAD/CAE
data, including manufacturing, factory modeling, process simulation,
assembly-line design, architecture, art and sculpture, and special effects
for entertainment, games, education, training, biotechnology, and medicine.

Graphical Database Analysis: The database in this project contained
production-flow information obtained from roadway sensors over a one year
period at different geographical locations, the sensors measure the type,
weight, number of axles, time of detection and direction of travel for each
vehicle detected. Users were able to present the information in visual
displays. The customer quickly discovered significant amounts of erroneous
information provided by participants as well as invalid data resulting from
sensor malfunction.

Seismic Data Interpretation and Oil Reservoir Modeling: The Company
has deployed a variety of applications for customers in the oil and seismic
industries. One project yielded a simulation of an actual oil field with
four producing wells. The simulation revealed underground oil movement
relative to the wells over a two-year period and included information about
rock porosity and oil, gas and water pressure. Another oil industry project
produced a sophisticated surface-to-data analysis tool that helps analysts
create more accurate seismic models, saving oil companies time and money
and reducing unnecessary drilling.

Electronics Component Design Validation: MuSE was used to study the
design of an electronic controller chip intended to power a set of stepping
motors prior to the manufacture of the chip. This MuSE application
integrated results from commercial CAD programs, electronic circuit
simulation models, thermal modeling software and thermal transfer programs.
The mapping of electronic circuit data to sound permitted engineers to
detect a circuit failure, correlate such failure with overheating, isolate
the design components causing the failure and test a correction of the chip
design prior to prototype construction. MuSE resulted in several months of
analysis using conventional analytic tools to be condensed into a few
hours.

Situational Analysis and Environmental Evaluation: Topographical,
geometric, photographic, and observational information was combined in a
MuSE environment to recreate a portion of a real beach to show dynamic
lighting variation; actual weather and surf conditions; and changes in
terrain, structures, and climatic effects over a three-month period. MuSE
was used both by designers to actually construct the model as well as by
users to interact with it.

Command and Control Operations: Terrain information was used to
recreate an area in the Middle East for the purpose of studying a
hypothetical engagement between land-air and air-sea forces. This
simulation included a variety of ships, planes, and missiles and can
constantly acquire updated status information on all elements in the scene
from military simulators. The simulation permits the user to interact with
a complex, dynamically changing environment in real-time and to assess and
respond to new conditions. This simulation included a simulated missile
attack and response and used streamers and ground shadows to help interpret
movement patterns. The ability instantly to attach to moving objects and to
move anywhere within the simulated environment greatly enhances a viewer's
ability to understand and intelligently examine and respond to rapidly
changing, complex situations.

RESEARCH AND PRODUCT DEVELOPMENT

Management believes that the Company's future success depends in large part
upon the timely enhancement of existing products and the development of new
products and applications. The Company is currently developing new software
products relating to information management with broad applications in the
commercial, government and education markets and enhancing existing products to
improve price and performance, expand product capabilities, simplify user
interfaces, help define and support emerging industry standards, and develop
interoperability with most products and devices commonly used in the Company's
targeted markets. Such existing MuSE-based products include desktop, office,
laboratory and theatre environments that operate on a broad range of platforms
and with a variety of display devices and tools. The

25
<PAGE>

Company also believes that it is beneficial to work with third parties to
accomplish these goals and has, in the past, received funding from outside
sources, such as grants from government organizations, to develop products and
applications. The Company intends to continue to pursue such external research
and development funding sources.

For the nine months ended June 30, 1998 and fiscal 1997 and 1996, the
Company's research and development expense was approximately $710,000, $742,000,
and $599,000, respectively. Except for payments related to Small Business
Innovative Research grants from the Federal government of approximately $124,000
which was included in revenue in fiscal 1996 and related to development of
certain applications of MuSE, all research and development was
Company-sponsored.

INTELLECTUAL PROPERTY RIGHTS

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

The Company has filed and is in the process of filing patent applications
for Continuum and related technologies, and it has also filed trademark
applications and logo identifications for certain of its other products and its
logo, although the Company does not currently have copyright protection for all
of its trademarks.

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

COMPETITION

The Company believes that the current market for MuSE and other visual
computing software products is relatively small and fragmented. However, based
upon publicly available market research, the Company believes that this market
will grow rapidly over the next decade. The Company believes that no single
company dominates the market at the present time; however, a number of small
companies, such as Paradigm and Division, and larger companies, such as SGI and
Autodesk, are aggressively pursuing business opportunities in this field. Many
of the companies with whom the Company competes or expects to compete have
substantially greater financial resources, research and development
capabilities, sales and marketing staffs and distribution channels and are
better known than the Company.

The Company believes that the principal factors affecting the Company's
ability to compete are the availability, functionality and architecture of its
products; the quality, ease of use, performance and functionality of the
derivative applications developed and marketed by the Company; the effectiveness
of the Company in marketing and distributing its products and services; and
price. There can be no assurance that the Company will be successful in
competing with respect to any or all of these factors.

EMPLOYEES

As of the date hereof, the Company had 25 full-time employees. The Company
believes that its relationships with its employees are satisfactory. Of the 25
persons employed by the Company, six work in administration and management, six
work in sales and marketing and thirteen work in product development. The
Company has no history of any work stoppages and no employees of the Company are
currently represented by a union.

26
<PAGE>
FACILITIES

The Company has completed the construction of a synthetic environment
laboratory to develop and demonstrate applications of MuSE. The Company has a
three year lease for approximately 8,700 square feet of office and laboratory
space in Albuquerque, New Mexico. The lease provides for rental payments of
approximately $8,600 per month. The Company believes that such property is
adequately insured and is suitable for its intended purposes.

LEGAL PROCEEDINGS

The Company is not involved in any pending legal proceedings.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors, executive officers and key employees of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Dr. Creve Maples................................ 56 Chairman of the Board and Chief Technical
Officer
Curtiz J. Gangi................................. 53 President and Director
Douglas Harless................................. 51 Vice President--Sales and Marketing
Brian Clark..................................... 40 Chief Financial Officer, Secretary and Treasurer
Craig Peterson.................................. 35 Senior Software Development Manager
David Durgin.................................... 59 Director
Benjamin Huberman............................... 60 Director
Edward A. Masi.................................. 51 Director
</TABLE>

Dr. Creve Maples has been Chairman of the Board since the Company's
inception in 1995. He was the Company's President and Chief Executive Officer
from February 1997 until May 1998 and Vice President from the Company's
inception until February 1997. For more than three years prior to the
organization of the Company, Dr. Maples was employed by Sandia, where he headed
the development team responsible for the development of MuSE. Dr. Maples is a
nationally recognized expert and authority on synthetic environments, advanced
computer systems, including highly interactive graphic systems, language
extensions, parallel mass storage and applications development. He holds a
doctorate degree in nuclear science from the University of California (Berkeley)
and is an honors baccalaureate graduate of Massachusetts Institute of
Technology. From 1972 to 1974, he held a fellowship from the National Science
Foundation. Dr. Maples is the author of more than 100 papers and articles on
physics and computing. He is the recipient of a number of awards including, in
October 1995, the New Mexico Entrepreneur Association's Software Inventor of the
Year award for his work on MuSE.

Curtiz J. Gangi has been President of the Company since May 1998 and a
Director since November 1997. From September 1996 until May 1998, he served as
the Company's Chief Operating Officer. Mr. Gangi was Chief Operating Officer of
Visual Information Service, Inc., a hardware and software development company
from December 1995 to September 1996, Chief Executive Officer and President of
Foton, Inc., a computer software developer from August 1994 to December 1995,
President and General Manager of Timeworks, Inc., a software publisher from
March 1992 to July 1994, Director of Marketing and Sales of Commodore
International Ltd, a computer manufacturer and software publisher from October
1990 to January 1992. In addition, Mr. Gangi was a member of the Chicago Board
of Trade and a licensed financial commodities broker.

Douglas Harless has been the Vice-President--Sales and Marketing of the
Company since September 1997. Prior to becoming associated with the Company,
Mr. Harless was National Account Specialist of NCR, Inc., a computer hardware
company, from July 1996 to August 1997, Regional Sales Manager of Maximum
Strategy,

27
<PAGE>
Inc., a computer hardware company, from March 1995 until June 1996, Sales
Manager of Minnesota Supercomputer Center, Inc. from January 1994 until January
1995, and Director of Sales of Petroleum Industry, a computer hardware company,
from 1988 until January 1994.

Brian Clark has been Chief Financial Officer of the Company since October
1996 and is also the Company's Treasurer and Secretary. Prior to becoming
associated with the Company, Mr. Clark was an executive with Optimax Securities
Corporation, a corporation engaged in investment banking, from 1995 until
October 1996; Chief Financial Officer of Softcop International, a software
development company, from 1993 to 1995; Manager of Business Development for
Royal Insurance Company of Canada, from 1989 to 1993; and a Chartered Accountant
with Deloitte & Touche from 1985 to 1989.

Craig Peterson has been the Company's Senior Software Development Manager
since the Company's inception. For more than three years prior to his
involvement with the Company, Mr. Peterson was Senior Technician of Synthetic
Environment Laboratory at Sandia, where he was a principal developer of the MuSE
software with Dr. Maples.

David L. Durgin has been a Director of the Company since its inception.
Mr. Durgin was also the Company's Executive Vice President from the Company's
inception until April 1997. He is a founder, executive officer and director of
Quatro Corporation ("Quatro"), Technology Business Associates Inc. ("TBA"), a
technology commercialization firm, and a founder, director and past chairman of
Industry Network Corporation, a non-profit economic development company.
Mr. Durgin was previously a Senior Vice President with Booz Allen & Hamilton,
Inc. and a Vice President of BDM International, a leading defense contractor.

Benjamin Huberman has been a Director of the Company since its inception.
Since 1990, Mr. Huberman has been the President of the Huberman Consulting
Group, based in Washington, D.C., and consults on technology issues, including
the areas of aerospace, electronics, and nuclear power. Mr. Huberman is a member
of the Chief of Naval Operations' Executive Panel, which provides strategic and
topical assistance to the Chief of Naval Operations. Mr. Huberman is a past
member of the Secretary of Energy's Advisory Board and of the Galvin Task Force
evaluating alternative futures for the national laboratories of the Department
of Energy. From 1977 to 1980, he was Associate Director of the White House
Office of Science and Technology Policy ("OSTP") and a member of the National
Security Council Staff. In 1981, Mr. Huberman served as Deputy Director of OSTP.

Edward A. Masi has been a Director of the Company since January 1997. Since
June 1997, Mr. Masi has been a private consultant for a variety of companies.
From March 1992 until June 1997, Mr. Masi was a corporate Vice President at
Intel Corporation, responsible for the management of the super-computer business
and the commercial server product development division. From May 1980 until June
1992, Mr. Masi was Executive Vice President of Sales, Marketing, and Service at
Cray Research. Prior to his work for Cray, Mr. Masi held various sales and
marketing positions at IBM, where he began his career.

There is no family relationship among any of the Company's directors and
executive officers. There are no arrangements or understandings pursuant to
which any person has been elected as a director or executive officer.

The Company has agreed that, during the five-year period following the date
of this Prospectus, the Underwriter will have the right to designate one member
to the Company's Board of Directors. See "Underwriting."

EXECUTIVE COMPENSATION

The following tables set forth the compensation earned by the Company's
Chief Executive Officer and all other executive officers earning in excess of
$100,000 for the fiscal years ended September 30, 1998, 1997 and 1996.

28
<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
------------------------------------------ SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER UNDERLYING OPTIONS
- ------------------------------------------- ---- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Dr. Creve Maples, ......................... 1998 $137,585 $ 20,000 -- 428,028
Chief Technical Officer 1997 $120,000 -- -- --
(Chief Executive Officer from 2/97-5/98) 1996 $100,000 -- -- --
and Chairman of the Board
Curtiz J. Gangi, President................. 1998 $178,846 -- $172,467(1) 466,447
1997 $112,500 -- -- 361,842
Brian Clark, Chief Financial Officer, ..... 1998 $130,000 -- $172,467(1) 150,395
Secretary and Treasurer 1997 $120,000 -- -- 197,368
Douglas Harless, Vice President-- ......... 1998 $134,785 $478,155(1) -- 124,079
Sales and Marketing 1997 $ 10,000(2) -- -- 378,289
</TABLE>

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

(1) Includes amounts received in connection with the CRI transaction.

(2) Reflects that portion of Mr. Harless' salary earned in fiscal 1997.

The information in the table below sets forth each grant and exercise of
stock options during the last completed fiscal year by each of the named
executive officers and the fiscal year-end value of unexercised options.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE OR EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR BASE PRICE DATE
- ------------------------------------------------------- --------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Dr. Creve Maples....................................... 117,500 8.3% $7.50 06/08
310,528 21.9% $2.50(1) 02/08
Curtiz J. Gangi........................................ 375,000 26.5% $7.50 06/08
91,447 6.5% $2.50(1) 02/08
Brian Clark............................................ 117,500 8.3% $7.50 06/08
32,885 2.3% $2.50(1) 02/08
Douglas Harless........................................ 117,500 8.3% $7.50 06/08
6,579 0.5% $2.50(1) 02/08
</TABLE>

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

(1) Exercise price of options granted under the Company's Stock Option Plan were
repriced from $7.60 to $2.50 in April 1998.

The table below sets forth information with respect to option exercises
during the last fiscal year and the value of all options held at fiscal year end
for each of the named executive officers. No SARs have been granted by the
Company to date and no options were exercised by the named executive officers
during fiscal 1998.

29
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING EXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS OF FY-END AT FY-END
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- --------------------------------- --------------- --------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Dr. Creve Maples................. -- -- 310,526/117,500 $ 1,707,893/$58,750
Curtiz J. Gangi.................. -- -- 349,122/479,167 $ 1,920,171/$760,419
Brian Clark...................... -- -- 230,263/117,500 $ 1,266,447/$58,750
Douglas Harless.................. -- -- 264,254/238,114 $ 466,557/$722,127
</TABLE>

- ------------------
(1) The values of unexercised in-the-money options represent the aggregate
amount of the excess of $8.00, the market value of the Common Stock as of
the fiscal year-end, over the relevant exercise price of such options.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements (each an "Employment
Agreement" and collectively, the "Employment Agreements") with each of
Dr. Creve Maples, Curtiz Gangi, Brian Clark and Douglas Harless (each, an
"Executive" and collectively, the "Executives"). Under the Employment
Agreements, each Executive must devote his full business time and attention to
the affairs of the Company.

Dr. Creve Maples has entered into a three year Employment Agreement with
the Company which commenced as of June 1, 1998, to serve as a Chief Technical
Officer of the Company at an annual base salary of $175,000. Dr. Maples is
entitled to receive a bonus of up to $76,563 upon the Company achieving certain
performance objectives. Prior to entering into such Employment Agreement,
Dr. Maples received an annual salary of $120,000. In connection with his
Employment Agreement, Dr. Maples received options to purchase 117,500 shares of
Common Stock of the Company at an exercise price of $7.50 per share, which
options vest as follows: 30,000 shares on June 1, 1999, 37,500 shares on
June 1, 2000, and 50,000 shares on June 1, 2001.

Curtiz Gangi has entered into a three year Employment Agreement with the
Company which commenced on June 1, 1998, to serve as President at an annual base
salary of $215,000. Mr. Gangi is also entitled to receive a bonus of up to
$134,375 upon the Company achieving certain performance objectives. Prior to
entering into such Employment Agreement, Mr. Gangi received an annual salary of
$150,000. In connection with his Employment Agreement, Mr. Gangi received
options to purchase 375,000 shares of Common Stock of the Company at an exercise
price of $7.50 per share, which vests as follows: 100,000 shares on June 1,
1999, 125,000 shares on June 1, 2000 and 150,000 shares on June 1, 2001. Upon
the closing of this Offering, Mr. Gangi will have the right to receive a
five-year loan in the amount of $150,000 at 5% annual interest in connection
with his relocation to New Mexico. The loan will be secured by vested stock
options having a value equal to the principal amount of the loan. In connection
with the CRI transactions, Mr. Gangi received a payment of approximately
$172,000.

Douglas Harless has entered into a three year Employment Agreement with the
Company which commenced on June 1, 1998, to serve as Vice-President--Sales and
Marketing at an annual base salary of $150,000. Mr. Harless will receive
commissions under a sales commission plan established by the Board, which
commissions range from 2% to 6.5% of revenues generated. Prior to entering into
such Employment Agreement, Mr. Harless received an annual salary of $120,000. In
connection with his Employment Agreement, Mr. Harless received options to
purchase 117,500 shares of Common Stock of the Company at an exercise price of
$7.50 per share, which vests as follows: 30,000 shares on June 1, 1999, 37,500
shares on June 1, 2000 and 50,000 shares on June 1, 2001. Upon the closing of
this Offering, Mr. Harless will have the right to receive a five year loan in
the amount of $75,000 at 5% annual interest in connection with his relocation to
New Mexico. The loan will be secured by vested stock options having a value
equal to the principal amount of the loan. In consideration of services rendered
by Mr. Harless in connection with the CRI Agreement and the sale of securities
to CRI, options to purchase 197,369 shares of Common Stock previously granted to
Mr. Harless became exercisable at an exercise price of $7.60 per share and the
Company paid him approximately $176,000. In 1997, Mr. Harless also purchased
11,513 shares of Common Stock for $87,500. Mr. Harless borrowed the purchase
price from the Company, which loan is secured by a pledge of such shares and
must be repaid out of any net proceeds received

30
<PAGE>
upon the disposition of any securities held by Mr. Harless. Mr. Harless has
agreed to pay such loan within six months from the date hereof.

Brian Clark has entered into a three year Employment Agreement with the
Company which commenced on June 1, 1998, to act as Chief Financial Officer at an
annual base salary of $150,000. Mr. Clark is also entitled to receive a bonus of
up to $65,625 upon the Company achieving certain performance objectives. Prior
to entering into such Employment Agreement, Mr. Clark received up to $10,000 a
month under a Consultant Service Agreement. In connection with his Employment
Agreement, Mr. Clark received options to purchase 117,500 shares of Common Stock
of the Company at an exercise price of $7.50 per share, which vests as follows:
30,000 shares on June 1, 1999, 37,500 shares on June 1, 2000 and 50,000 shares
on June 1, 2001. Upon the closing of this Offering, Mr. Clark will have the
right to receive a five year loan in the amount of $75,000 at 5% annual interest
in connection with his relocation to New Mexico. The loan will be secured by
vested stock options having a value equal to the principal amount of the loan.
In connection with the CRI transactions, Mr. Clark received a payment of
approximately $172,000.

Under the Employment Agreements, if the Executive is terminated by the
Company other than "for cause" (as defined in each Employment Agreement), or if
the Executive dies or becomes permanently disabled or terminates for "good
reason" (as defined in each Employment Agreement), all stock options of the
Executive shall immediately vest upon such termination and such Executive shall
receive severance payments in an amount equal to one year's base salary in the
case of Messrs. Gangi and Clark, two year's base salary in the case of
Dr. Maples, and either three months base salary if termination occurs prior to
March 1, 1999 or one year's base salary if termination occurs thereafter in the
case of Mr. Harless. Each of the Employment Agreements also contain provisions
relating to severance payments equal to one year's base salary (two year's base
salary in the case of Dr. Maples) in the event of a change of control (as
defined in the Employment Agreement).

Each of the Employment Agreements prohibits disclosure of proprietary and
confidential information regarding the Company and its business to anyone
outside the Company both during and subsequent to employment. In addition, each
Executive has agreed, for the duration of his employment with the Company and
for a period of one year thereafter (three years in the case of Dr. Maples), if
the Executive is terminated for any reason or resigns, not to engage in any
competitive business activity; provided, however, that such non-compete shall be
in effect for so long as the Company continues to pay the Executive's monthly
base salary.

The Employment Agreements provide that the Company will indemnify the
Executive to the fullest extent permitted by the laws of Delaware and in
accordance with the Company's By-Laws and Certificate of Incorporation.

DIRECTORS' COMPENSATION

The Company pays each non-employee director a fee of $500 for attendance at
each board meeting and reimburses its non-employee directors for expenses
incurred in connection with their attendance at such meetings. Non-employee
directors receive options to purchase 5,000 shares of Common Stock upon initial
election to the Board of Directors and options to purchase 8,000 shares of
Common Stock upon re-election at each annual meeting of stockholders,
exercisable after one-year at an exercise price equal to the fair market value
on the date of grant. Additionally, current non-employee directors, Messrs.
Durgin, Masi and Huberman, shall each receive options to purchase 5,000 shares
of Common Stock upon the consummation of this Offering, exercisable after one
year at an exercise price equal to $7.50 per share.

STOCK OPTION PLANS

The Company's Board of Directors and stockholders adopted the 1995 Stock
Option Plan (the "1995 Plan") on November 10, 1995, and the 1996 Stock Option
Plan (the "1996 Plan") on November 7, 1996, to induce certain individuals or
entities providing service to the Company to remain in the employ of, or
continue to serve as directors of, or as independent consultants to, the
Company, and to attract new employees, consultants and non-employee directors.
The terms of the 1995 Plan and the 1996 Plan (together, the "Plans") are
generally identical, except as otherwise indicated.

31
<PAGE>
The Plans are administered by the Board of Directors, which has the
exclusive power to select the individuals or entities eligible for option grants
(each a "Participant"), and to determine the terms and conditions of any options
granted, including but not limited to the option price, method of exercise and
the term during which the options may be exercised. The 1995 Plan was terminated
on January 7, 1997 as to the granting of new options. As of the date of this
Prospectus, options to purchase 92,105 shares of Common Stock have been granted
under the 1995 Plan and options to purchase 2,366,645 shares of Common Stock (of
which options to purchase 727,500 shares were granted in connection with the
Employment Agreements have been granted under the 1996 Plan. The 1996 Plan will
terminate not later than November 1, 2005. In October 1998, the Company's
stockholders approved amendments to the 1996 Plan to increase the number of
additional shares subject to options available for grant by 3,500,000 shares to
5,139,145 shares (of which options to purchase 2,366,645 shares are
outstanding).

As a result of the 1-for-3.04 reverse stock split in March 1998, the
exercise price of options granted under the Plans increased from $2.50 to $7.60.
In April 1998, the Board of Directors of the Company repriced all options under
the Plans and reduced the exercise price from $7.60 to $2.50, resulting in a
non-cash imputed compensation expense of $948,000. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations."

Additional shares of Common Stock may become available for grant under the
Plans as a result of cancellations or expiration of outstanding options. Options
granted under the Plans may be non-qualified options or options qualifying as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). The initial exercise option price
of each incentive stock option granted under the Plans shall be not less than
the fair market value (110% of the fair market value if the grant is to an
employee owning more than 10% of the outstanding Common Stock) of the Common
Stock subject to the option. The option price of each non-qualified option shall
not be less than 85% of the fair market value of the Common Stock subject to the
option.

No option granted pursuant to the Plans may be exercised more than ten
years after the date of grant, except that incentive stock options granted to
Participants who own more than 10% of the total combined voting power of all
classes of stock of the Company at the time the incentive stock option is
granted may not be exercised after five years after the date of grant. No
Participant may be granted incentive stock options which are exercisable for the
first time in any one calendar year with respect to Common Stock having an
aggregate fair market value in excess of $100,000 on the date of grant, the
options vest over a three year period (unless otherwise determined by the Board
of Directors), commencing on the first anniversary date of the grant. No option
granted under the Plans is transferable by the optionee other than by death or
to immediate family members.

Generally, an option may be exercised only while the recipient is in the
active employ or service of the Company, or within 30 days after termination of
a participant's employment or service as a director other than by reason of
retirement or death, or within one year after termination of employment or
service by reason of death, or within 90 days after termination of a
participant's termination of employment or service by reason of retirement. In
the event of the death or retirement of an optionee, each option granted to him
shall become immediately exercisable in full.

LIMITATION ON LIABILITY

The Company's Certificate of Incorporation eliminates the personal
liability of directors for monetary damages to the corporation for breach of
fiduciary duty, except for liability for (i) breaches of the director's duty of
loyalty to the Company or its stockholders; (ii) acts or omissions not in good
faith or involving intentional misconduct or knowing violations of law;
(iii) the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or (iv) transactions from which the director received an improper
personal benefit.

32
<PAGE>
PRINCIPAL STOCKHOLDERS

The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock of which 8,763,893 are currently outstanding. After giving effect
to this Offering, there will be 9,963,893 shares of Common Stock issued and
outstanding (assuming no exercise of the Warrants). The following table sets
forth information as of the date hereof with respect to the beneficial ownership
of the outstanding Common Stock of the Company by each director, all 5%
stockholders of the Company and all officers and directors as a group. Unless
otherwise indicated, each person has the sole voting and sole investment power
and direct beneficial ownership of the shares:

<TABLE>
<CAPTION>
PERCENT OF COMMON STOCK OUTSTANDING
NUMBER OF -----------------------------------------
NAME OF BENEFICIAL OWNER SHARES(1) BEFORE THE OFFERING AFTER THE OFFERING
- -------------------------------------------------------------- --------- ------------------- ------------------
<S> <C> <C> <C>
Creve Maples(2)
1601 Randolph SE
Albuquerque, NM 87106....................................... 1,258,883 13.9% 12.3%
Continuum Resources International ASA(3)
2424 Wilcrest
Houston, TX................................................. 1,000,000 11.4% 10.0%
Craig Peterson(4)
1601 Randolph SE
Albuquerque, NM 87106....................................... 745,065 8.4% 7.4%
Curtiz J. Gangi(5)............................................ 349,122 3.8% 3.4%
David Durgin(6)............................................... 323,027 3.7% 3.2%
Douglas Harless(7)............................................ 275,767 3.1% 2.7%
Brian Clark(8)................................................ 230,263 2.6% 2.3%
Benjamin Huberman(9).......................................... 83,553 * *
Edward A. Masi(10)............................................ 8,224 * *
Directors and executive officers as a group (8 persons)(11)... 3,273,902 32.6% 29.1%
</TABLE>

- ------------------
* Less than one percent.

(1) Includes currently exercisable options and warrants to purchase shares of
Common Stock issuable upon the exercise of such options and warrants for
each named person.

(2) Includes 310,526 shares of Common Stock issuable upon the exercise of
options.

(3) CRI is a wholly-owned subsidiary of The Norex Group, AS, a publicly-held
Norwegian company.

(4) Includes 65,789 shares of Common Stock issuable upon the exercise of
options.

(5) Includes 349,122 shares of Common Stock issuable upon the exercise of
options. Does not include 104,167 shares subject to options exercisable
through September 1999.

(6) Includes 240,790 shares of Common Stock held by Quatro Corporation, of
which Mr. Durgin is an officer and director, 57,566 shares of Common Stock
held by Technology Business Associates, Inc., of which Mr. Durgin is a
principal, and 24,672 shares of Common Stock issuable upon the exercise of
options.

(7) Includes 264,254 shares of Common Stock issuable upon the exercise of
options.

(8) Represents shares of Common Stock issuable upon the exercise of options.

(9) Includes 16,448 shares of Common Stock issuable upon the exercise of
options.

(10) Represents shares of Common Stock issuable upon the exercise of options.

(11) Includes an aggregate of 2,004,604 shares of Common Stock and 1,269,298
shares of Common Stock issuable upon the exercise of options.

33
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ORGANIZATION OF THE COMPANY; TRANSACTIONS WITH VIGA

The Company was organized in October 1995. Prior to the organization of the
Company, Dr. Creve Maples, Thomas Murphy, Arlan Andrews, David Durgin and Craig
Peterson and certain minority stockholders formed Viga for the purpose of
entering into the License Agreement with Sandia.

In October 1995, the Company issued, for nominal consideration, 6,694,080
shares of Common Stock to the stockholders of Viga, of which 950,987; 679,276;
475,758; 475,658; 339,474 and 67,105 shares were issued to Dr. Maples and
Messrs. Peterson, Murphy, Andrews, Durgin and Huberman, respectively.
Dr. Maples and Messrs. Peterson, Murphy, Andrews, Durgin and Huberman may be
deemed founders of the Company.

In December 1995, Viga agreed to transfer it assets, including the License
Agreement to the Company, which required the consent of Sandia. Pending such
transfer, Viga granted the Company a sublicense to the MuSE technology. On
July 15, 1996, the assignment of the License Agreement to the Company was
effected and the sublicense was terminated.

The purchase price for the Viga assets was $1,152,000 (exclusive of assumed
liabilities), reflecting $752,000 of computer and office equipment and a
$400,000 license fee for the sublicense of the MuSE technology. The Company
issued notes in the amounts of $222,670, representing the difference between
assets acquired and liabilities assumed, and $400,000, representing the
sublicense fee for the MuSE technology. The two notes were paid, without
interest, in 1996 from the proceeds of the 1996 Private Placement. See
"Financings." In 1997, Viga agreed to reduce the sublicense fee by $55,000, for
which Viga issued its 6.5% note for such amount due November 2001.

During fiscal 1996, the Company paid Viga $15,250 in license fees and
royalties pursuant to the sublicense agreement. In addition, during fiscal 1996,
Viga advanced the Company $193,000, and the Company advanced Viga $23,628 in
separate transactions. All of such advances were interest free and were repaid
by September 30, 1996.

CONSULTING RELATIONSHIPS

The Company entered into a consulting agreement with "TBA," a minority
stockholder of the Company. David Durgin, a director of the Company is the
founder, a director and executive officer of TBA. The Company received executive
and marketing consulting services and marketing support services from TBA.
During 1996, the Company paid $51,326 to TBA under the agreement, which expired
on September 30, 1996.

The Company entered into a consulting agreement with Quatro, a minority
stockholder of the Company, pursuant to which Quatro provided accounting
services, financial and business support, as well as executive, marketing and
manufacturing consulting services to the Company. David Durgin a director of the
Company, is also a stockholder, director and executive officer of Quatro. During
fiscal 1997 and 1996, the Company paid $19,324 and $33,564, respectively, to
Quatro for these services. This agreement expired on September 30, 1997 and
restricts Quatro from competing with the Company until September 30, 1998.

OTHER TRANSACTIONS

In connection with his employment with the Company in September 1997,
Mr. Harless purchased 11,513 shares of Common Stock for a purchase price of
$7.60 per share, or an aggregate of $87,500. Mr. Harless borrowed the purchase
price for such shares from the Company and issued a non-interest bearing
promissory note to the Company. The loan is secured by a pledge of such shares,
and any proceeds received by Mr. Harless upon the disposition of any securities
owned by him must be remitted to the Company to repay such loan. Mr. Harless has
agreed to pay such loan within six months from the date hereof.

Pursuant to his employment agreement, in connection with the CRI Agreement,
Mr. Harless received options to purchase 197,369 shares of Common Stock at an
exercise price of $7.60 per share. Additionally, in connection with the CRI
transactions, Mr. Harless received a payment of approximately $176,000 and
Messrs. Gangi and Clark each received payments of approximately $172,000.

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Upon the closing of this Offering, Messrs. Gangi, Clark and Harless will
have the right to receive five year loans from the Company in the amounts of
$150,000, $75,000 and $75,000, respectively, in connection with their relocation
to New Mexico. The loans will bear interest at the rate of 5% per annum and will
be secured by the pledge of vested stock options having a value equal to the
principal amount of the loan.

See "Business--The CRI Agreement" in connection with loans from the Company
to CRI.

Additionally, for prior and continuing services rendered to the Company,
each of Messrs. Durgin, Masi and Huberman, directors of the Company, will
receive options to purchase 5,000 shares of Common Stock upon the closing of
this offering exercisable after one year at an exercise price of $7.50 per
share.

From its inception, the Company has maintained and it intends to continue
to maintain at least two independent directors on its Board of Directors. In
connection therewith, any and all material transactions, including material
loans with officers, directors, stockholders holding greater than 5% of the
outstanding shares or affiliates, have been ratified and/or approved and, in the
future, will be ratified and/or approved by a majority of independent directors
who do not have an interest in the transactions, and will be on terms which are
at least as favorable to the issuer as those that can be obtained by
unaffiliated third parties, and all such transactions shall be entered into by
the Company for a bona fide purpose. Such independent directors will have full
access, at the Company's expense, to the Company's counsel or other independent
counsel in connection with such ratification or approval of any transaction. The
current independent directors are Edward A. Masi, Benjamin Huberman and David
Durgin.

FINANCINGS

1995 PRIVATE PLACEMENT

In December 1995, the Company sold, to four accredited investors, an
aggregate of four investment units (the "1995 Units") for $250,000 per 1995
Unit. Each 1995 Unit consisted of $249,900 face amount of 10% one-year mandatory
convertible promissory notes (the "1995 Notes") and warrants (the "1995
Warrants") to purchase 8,224 shares of Common Stock at a price of $7.60 per
share. The net proceeds of $900,000 were used to pay certain liabilities assumed
in connection with the acquisition of assets from Viga and to finance the
Company's operations. The 1995 Notes, which were unsecured, were convertible
into one share of Common Stock for each $7.60 face amount of the 1995 Notes.
Investors Associates, Inc. ("IAI") acted as placement agent for the 1995 Private
Placement and received a selling commission of $100,000, and warrants to
purchase up to 16,448 shares of Common Stock at $7.60 per share. In April 1996,
the 1995 Notes were converted into an aggregate of 131,579 shares of Common
Stock.

1996 PRIVATE PLACEMENT

From April through September 1996, the Company sold an aggregate of 250,921
shares of Common Stock at $7.60 per share to 21 accredited investors (the "1996
Private Placement"). The net proceeds from the 1996 Private Placement were
approximately $1,700,000, which was used to pay certain notes to Viga to
purchase equipment, and for working capital purposes, including salaries and
corporate overhead. IAI acted as placement agent for the 1996 Private Placement,
for which it received a fee of $190,700 and warrants to purchase 121,710 shares
of Common Stock at $7.60 per share. The warrants expire five years from the date
of issuance, except that warrants to purchase 16,448 shares expire three years
from the date of issuance.

JUNE 1997 PRIVATE PLACEMENT

In June 1997, the Company received net proceeds of $1,113,750 from the
issuance of notes (the "June 1997 Notes") in the principal amount of $1,237,500
and an aggregate of 81,411 shares of Common Stock to 15 accredited investors
(the "1997 Private Placement"). All of the June 1997 Notes, and accrued interest
thereon, were paid from the proceeds of the April 1998 Private Placement (except
$300,000 of such June 1997 Notes, which were converted into equity on the same
terms as the April 1998 Private Placement). IAI acted as placement agent in
connection with the placement of the June 1997 Notes and received commissions
equal to $123,750.

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DECEMBER 1997 PRIVATE PLACEMENT

In December 1997, the Company completed a private placement to 18
accredited investors, of units consisting of 8% promissory notes in the
aggregate principal amount of $875,000 and an aggregate of 57,566 shares of
Common Stock (the "December 1997 Shares"). The net proceeds to the Company from
the issuance and sale of the 1997 Notes and December 1997 Shares was
approximately $688,000 and were used for the purchase of equipment and working
capital purposes, including salaries and corporate overhead. The 1997 Notes are
payable one year from the date of issuance, together with accrued interest
thereon, in October, November and December 1998. The Company will use a portion
of the proceeds of this Offering to pay the remaining outstanding 1997 Notes,
together with accrued interest thereon. See "Use of Proceeds." The Company
engaged Worthington Capital Group, Inc. ("Worthington") to act as placement
agent in connection with the December 1997 Private Placement. As compensation
for its services as placement agent, Worthington received a fee of $138,750. See
"Description of Securities."

APRIL 1998 PRIVATE PLACEMENT

In April and May 1998, the Company sold to 15 accredited investors, an
aggregate of 35.5 investment units, each unit consisting of 10,000 shares of
Common Stock and a warrant (the "April 1998 Warrants") to purchase 10,000 shares
of Common Stock, at a per unit price of $45,000 (the "April 1998 Private
Placement"). The net proceeds of $1,412,750 were used to pay a portion of the
June 1997 Notes. The Company used the Underwriter to act as Placement Agent in
connection with the April 1998 Private Placement. As compensation for such
placement, the Placement Agent received a commission of 10% of the gross
proceeds from the sale of the units. In addition, the Company reimbursed the
Placement Agent for its expenses incurred in connection with the April 1998
Private Placement offering of $25,000. Pursuant to the terms of the April 1998
Warrants, upon completion of this Offering, the April 1998 Warrants will be
automatically converted into Warrants. All references in this Prospectus to the
warrants issued in the April 1998 Private Placement assume such automatic
conversion. The Company has given the holders of the Common Stock and warrants
issued in the April 1998 Private Placement registration rights with respect to
such shares and warrants and the shares of Common Stock issuable upon exercise
of such warrants. See "Sales by Selling Securityholders."

CRI PRIVATE PLACEMENT

In July 1998, the Company sold 1,000,000 shares of Common Stock and CRI
Warrants to purchase an additional 1,000,000 shares of Common Stock to CRI for
an aggregate purchase price of $8,000,000 (the "CRI Private Placement"). The CRI
Warrants are exercisable at $9.60 per share commencing on the date hereof
through June 30, 2003. The CRI Warrants are redeemable by the Company at any
time after December 31, 1998 at $.01 per CRI Warrant upon 30 days prior notice,
provided that (i) the following criteria are satisfied: (A) with respect to
redemption of up to 50% of the CRI Warrants, the average closing price of the
Common Stock as listed on the Nasdaq Stock Market (or other securities exchange)
is at least $14.40 for the twenty day period ending at least two days before the
redemption date, or (B) with respect to redemption of up to 100% of the CRI
Warrants, the average closing price of the Common Stock as listed on the Nasdaq
Stock Market (or other securities exchange) is at least $19.20 for the twenty
day period ending at least two days before the redemption date, and (ii) the
Company is engaged in a subsequent underwritten public offering of its
securities in which the managing underwriter thereof requires redemption of the
CRI Warrants. CRI received both demand and piggyback registration rights in
connection with such purchase commencing one year from consummation of this
Offering. CRI also has the right to send an observer to all Board meetings.

SALES BY SELLING SECURITYHOLDERS

This registration statement also related to the sale by the Selling
Securityholders of an aggregate of 423,881 shares of Common Stock and Warrants
to purchase 423,881 shares of Common Stock as well as the 423,881 shares of
Common Stock issuable upon exercise of such Warrants. The Selling
Securityholders acquired their shares of Common Stock and Warrants in the April
1998 Private Placement. See "Financings--April 1998 Private Placement." With
respect to the shares of Common Stock issuable upon exercise of the Warrants,
the registration statement covers both the issuance of the Common Stock upon
such exercise and the subsequent sale by the holders thereof. The sale of such
securities by the Selling Securityholders is to be made by a separate

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Prospectus dated the date of this Prospectus. None of the Selling
Securityholders has had any position, office or other material relationship with
the Company or any of its affiliates since the Company's organization.

The Selling Securityholders may effect such transactions by selling such
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase Warrants or
shares of Common Stock as principals and thereafter sell the securities from
time to time on the Nasdaq SmallCap Market, the BSE, in negotiated transactions
or otherwise. In any such transaction, the Underwriter may act as broker-dealer
for the Selling Securityholder and/or for the purchasing party or the
Underwriter may purchase shares of Common Stock or Warrants for its own account
although the Underwriter has no agreement or understanding, either formal or
informal, with any Selling Securityholder with respect to any such transactions.
Such broker-dealers, if any, including the Underwriter, may receive compensation
in the form of discounts, concessions or commissions from the Selling
Securityholder and/or the purchasers from whom such broker-dealer may act as
agents or to whom they may sell as principals or otherwise (which compensation
as to a particular broker-dealer may exceed customary commissions). Pursuant to
the subscription agreement or the conversion agreement between the Company and
each Selling Securityholder, the Company has agreed to pay on behalf of the
Selling Securityholders, all expenses related to the registration of their
shares of Common Stock and Warrants.

The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Security Act and any commission received by them and any
profit on the resale of the securities might be deemed to be underwriting
discounts and commissions under the Securities Act.

DESCRIPTION OF SECURITIES

The Company's authorized capital stock consists of 50,000,000 shares of

Common Stock of which 8,763,893 are currently outstanding. The following
description of the Common Stock and certain provisions of the Company's
Certificate of Incorporation, as amended (the "Certificate") and its By-Laws, as
amended (the "By-Laws") is a summary and is qualified in its entirety by
reference to the provisions of the Certificate and the By-Laws, copies of which
are available from the Company upon request. After giving effect to this
Offering, there will be 9,963,893 of Common Stock issued and outstanding.

COMMON STOCK

The holders of the outstanding shares of Common Stock are entitled to one
vote per share, and are entitled to receive dividends as and when declared by
the Board of Directors out of funds legally available therefor. The holders of
the outstanding shares of Common Stock have no preemptive or cumulative voting
rights and no rights to convert their shares of Common Stock into any other
securities. All of the outstanding shares of Common Stock are, and the shares of
Common Stock being offered by the Company hereby will be, fully paid and non-
assessable. On liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata the net assets of the
Company remaining after the payment of all creditors and liquidation
preferences, if any.

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CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS

The holder of each Warrant is entitled to purchase one share of Common
Stock at an aggregate exercise price of $9.60 per share. The Warrants are
exercisable immediately following the date of this Prospectus, and terminate
five years from the date of this Prospectus. 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.

Commencing one year from the date of this Prospectus, or earlier with the
consent of the Underwriter, the Warrants are subject to redemption by the
Company, on not more than 60 nor less than 30 days' written notice, at a price
of $.01 per Warrant, if the average closing price per share of the Common Stock
is at least $12.00, subject to adjustment, for the twenty day period ending not
earlier than five days prior the date the Warrants are called for redemption.
Holders of Warrants will automatically forfeit their rights to purchase the
shares of Common Stock issuable upon exercise of such Warrants unless the
Warrants are exercised before the close of business on the business day
immediately prior to the date set for redemption. All of the outstanding
Warrants must be redeemed if any are redeemed. A notice of redemption shall be
mailed to each of the registered holders of the Warrants by first class, postage
prepaid, within five business days (or such longer period to which the
Underwriter may consent) after the Warrants are called for redemption, but no
earlier than the sixtieth nor later than the thirtieth day before the date fixed
for redemption. The notice of redemption shall specify the redemption price, the
date fixed for redemption, the place where the Warrant certificates shall be
delivered and the redemption price to be paid, and that the right to exercise
the Warrants shall terminate at 5:00 p.m. (New York City time) on the business
day immediately preceding the date fixed for redemption. The Warrants can only
be redeemed if, on the date the Warrants are called for redemption, there is an
effective registration statement covering the shares of Common Stock issuable
upon exercise of the Warrants and the Common Stock is listed on the Nasdaq Stock
Market or such other stock market which is acceptable to the Underwriter.

The Warrants may be exercised upon surrender of the certificate(s) therefor
on or prior to 5:00 p.m. New York City time on the expiration date of the
Warrants or, if the Warrants are called for redemption, the day prior to the
redemption date at the offices of the Company's warrant agent (the "Warrant
Agent") with the form of "Election to Purchase" on the reverse side of the
certificate(s) filled out and executed as indicated, accompanied by payment of
the full exercise price for the number of shares as to which the Warrant is
being exercised.

The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events. The holder of the Warrants will not
possess any rights as a stockholder of the Company unless and until the holder
exercises the Warrants.

OTHER WARRANTS

In addition to the Warrants, there are also outstanding warrants to
purchase 445,362 shares of Common Stock at an exercise price of $7.60 per share,
which expire as follows: warrants to purchase 49,342 shares in December 1998;
warrants to purchase 6,579 shares in October 1999; warrants to purchase 65,789
shares in December 1999; and warrants to purchase 323,652 shares in April 2001.
Additionally, the CRI Warrants entitle CRI to purchase 1,000,000 shares of
Common Stock at $9.60 per share. The CRI Warrants expire on June 30, 2003. Such
warrants contain provisions that protect the holders thereof against dilution by
adjustment of the exercise price in certain events, such as stock dividends,
stock splits, mergers, sale of substantially all of the Company's assets, and
for other extraordinary events. The holders of certain of these warrants have
registration rights with respect to the underlying shares of Common Stock. See
"Financings" for information relating to the issuance of certain of these
warrants. See "Underwriting" with respect to the Underwriter's Unit Purchase
Option and the Class B Redeemable Common Stock Purchase Warrants thereunder.

The holders of the outstanding warrants have been given the opportunity to
profit from a rise in the market for the shares of the Company's Common Stock
with a resulting dilution in the interests of stockholders. The holders of the
outstanding warrants can be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain equity capital, if then needed, by a
new equity offering on terms more favorable than those provided by the
outstanding warrants. Such facts may adversely affect the terms on which the
Company could obtain additional financing.

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DIVIDEND POLICY

The Company presently intends to retain future earnings, if any, in order
to provide funds for use in the operation and expansion of its business and
accordingly does not anticipate paying cash dividends on its Common Stock in the
foreseeable future.

TRANSFER AGENT AND WARRANT AGENT

The transfer agent for the Common Stock and Warrant Agent for the Warrants
is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005.

ANTI-TAKEOVER PROTECTIONS

The Company is a Delaware corporation, and the Delaware General Corporation
Law contains certain provisions applicable to the Company which may have the
effect of preventing a non-negotiated change of control of the Company. These
provisions, among other things, prevent anyone who owns 15% or more of the
outstanding voting stock of the Company or who is an affiliate or associate of
the Company and owned 15% or more of the outstanding shares of stock of the
Company at any time within the prior three years (in either case, an "interested
stockholder") from engaging in any business combination with the Company for a
period of three years after becoming an interested stockholder, unless
(i) prior to the date the stockholder became an interested stockholder, the
Board of Directors approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) the
interested stockholder, while acquiring his or her 15%, acquires at least 85% of
the outstanding shares, excluding shares held by directors who are also officers
and certain shares held under employee stock option plans; or (iii) on or
subsequent to such date, the business combination is approved by the Company's
Board of Directors and by the affirmative vote of two-thirds of the shares
voting at a stockholders' meeting, excluding shares held by the interested
stockholder.

SHARES ELIGIBLE FOR FUTURE SALE

Upon the consummation of this Offering the Company will have 9,963,893
shares of Common Stock outstanding (10,143,893 shares if the Underwriter's
over-allotment option is exercised in full), excluding shares issuable upon the
exercise of the outstanding stock options and warrants and the Underwriter's
Unit Purchase Option. Of these outstanding shares, the 1,200,000 shares offered
hereby (1,380,000 if the Underwriter's over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act, except for any shares purchased by an "affiliate" of the
Company (in general, a person who has a control relationship with the Company)
which will be subject to the limitations of Rule 144 adopted under the
Securities Act. All of the remaining shares of Common Stock are deemed to be
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act and will be eligible for sale under Rule 144 within
90 days of the date of this Prospectus, provided, however, that certain of such
shares are subject to certain contractual restrictions on the sale or transfer
of such shares for a period of twelve months from the date of this Prospectus,
without the prior written consent of the Underwriter.

In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or person whose shares are aggregated), who has owned restricted
Common Stock beneficially for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
(99,638 shares after the Offering) of the total number of outstanding shares of
the same class or, if the Common Stock is quoted on the Nasdaq Stock Market, the
average weekly trading volume during the four calendar weeks preceding the sale.
A person who has not been an affiliate of the Company for at least the three
months immediately preceding the sale and who has beneficially owned such shares
of Common Stock for at least two years is entitled to sell such shares under
Rule 144 without regard to any of the limitations described above.

The directors, officers and major stockholders of the Company, have agreed
not to sell or otherwise dispose of their Common Stock (or securities
convertible into Common Stock) for a period of twelve months from the completion
of this Offering without the prior written consent of the Underwriter. In
addition, the Underwriter has received certain registration rights under the
Securities Act with respect to the Underwriter's Unit Purchase Option and the
Common Stock issuable upon exercise of the Underwriter's Unit Purchase Option.
See "Underwriting."

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UNDERWRITING

HD Brous & Co., Inc. (the "Underwriter") has agreed, on the terms and
subject to the conditions of the Underwriting Agreement, to purchase from the
Company, and the Company has agreed to sell to the Underwriter, 1,200,000 Units.
The Underwriter is committed to purchase and pay for all of the Units offered
hereby on a "firm commitment" basis if any are purchased.

The Underwriter has advised the Company that it proposes to offer the Units
to the public at the initial public offering prices set forth on the cover page
of this Prospectus. The Underwriter may allow to certain dealers, who are
members of the National Association of Security Dealers, Inc. ("NASD"),
concessions not exceeding $.40 per Unit. After the initial public offering, the
offering price, the concession and the reallowance may be changed.

The Company has granted an option to the Underwriter, exercisable during
the 45 day period from the date of this Prospectus, to purchase up to a maximum
of 180,000 additional Units at the public offering price set forth on the Cover
Page of this Prospectus, less the underwriting discount, for the sole purpose of
covering over-allotments of the Units.

The Company has agreed to pay to the Underwriter a non-accountable expense
allowance of 3% of the aggregate public offering price of all Units sold
(including any Units sold pursuant to the Underwriter's over-allotment option).

The Underwriting Agreement also provides for the Company to pay the
Underwriter a fee in the event that the Underwriter introduces the Company to a
party which enters into a business combination or other business transaction
with the Company.

All of the Company's officers, directors and major stockholders have agreed
not to sell (including any short sale or sale against the box) publicly or
otherwise transfer, subject to certain exceptions for transfers to related
parties, any of their securities without the written consent of the Underwriter
for a period of twelve months from the date of this Prospectus. The Company has
agreed that, during the 18 months following the date of this Prospectus, it will
not, without the consent of the Underwriter, register any securities pursuant to
the Securities Act without the consent of the Underwriter, except that such
restrictions do not apply to the registration of stock issuable pursuant to the
Company's present stock option plans on a Form S-8 registration statement.

The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the registration statement, including liabilities under the Securities Act.

In connection with this Offering, the Company has agreed to sell to the
Underwriter, for nominal consideration, Underwriter's Unit Price Options to
purchase from the Company up to 120,000 Units at an exercise price of $13.20 per
Unit. The warrants issuable upon exercise of the Underwriter's Unit Purchase
Options are identical to the Warrants included in the Units offered hereby,
except that such warrants will be designated Class B Redeemable Common Stock
Purchase Warrants (the "Class B Warrants") and the exercise price thereof will
be $11.52 per share and Class B Warrants are redeemable if the average closing
price of the Common Stock is at least $14.40 for the twenty day period ending
not earlier than five days before the Class B Warrants are called for
redemption. The Underwriter's Unit Purchase Options are exercisable for a
four-year period commencing one year from the date of this Prospectus, except
that if the Warrants are redeemed prior to the exercise of the Underwriter's
Unit Purchase Options, upon such exercise, the Underwriter will be required to
exercise the underlying Class B Warrants at the same time as the Underwriter's
Unit Purchase Options are exercised or waive the right to receive the Class B
Warrants. During the one-year period commencing on the date of this Prospectus,
the Underwriter's Unit Purchase Options may not be sold, transferred, assigned
or hypothecated, except to the officers of the Underwriter or to selling group
members or officers or partners or members thereof, all of which shall be bound
by such restrictions. The Underwriter's Unit Purchase Options will contain
anti-dilution provisions providing for adjustment under certain circumstances
similar to those applicable to the Warrants. The holders of the Underwriter's
Unit Purchase Options have no voting, dividend or other rights as stockholders
of the Company with respect to securities underlying the Underwriter's Unit
Purchase Options until the Underwriter's Unit Purchase Options or the underlying
Class B Warrants, as the case may be, are exercised. The holders of the
Underwriter's Unit Purchase Options have been given the opportunity to profit
from a rise in the market for the Company's securities at a nominal cost, with a
resulting dilution in the interests of

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stockholders. The holders of the Underwriter's Unit Purchase Options can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain equity capital, if then needed, by a new equity offering on
terms more favorable than those provided by the Underwriter's Unit Purchase
Options. Such facts may adversely affect the terms on which the Company could
obtain additional financing. Any profit received by the Underwriter on the sale
of the Underwriter's Unit Purchase Options or the securities issuable upon
exercise of the Underwriter's Unit Purchase Options may be deemed additional
underwriting compensation.

The Company has agreed during the term of the Underwriter's Unit Purchase
Options and for two years thereafter to give advance notice to the holders of
the Underwriter's Unit Purchase Options or underlying securities of its
intention to file a registration statement, and in such case, the holders of the
Underwriter's Unit Purchase Options and underlying securities shall have the
right to require the Company to include the underlying securities in such
registration statement at the Company's expense. At the demand of the holders of
a majority of the Underwriter's Unit Purchase Options and underlying Common
Stock, including Common Stock issued or issuable upon exercise of the Class B
Warrants issuable upon exercise of the Underwriter's Unit Purchase Options,
during the term of the Underwriter's Unit Purchase Options, the Company will
also be required to file one such registration statement at the Company's
expense. In addition, the Company has agreed to cooperate with the holders of
the Underwriter's Unit Purchase Options in filing a second registration at the
expense of the holders of the Underwriter's Unit Purchase Options or underlying
securities.

The Underwriting Agreement provides that, during the three-year period
following the date of this Prospectus, the Underwriter will have the right to
designate one member to the Company's board of directors. The Underwriting
Agreement also requires the Company to maintain key man life insurance on the
lives of Dr. Creve Maples ($1,000,000), Curtiz J. Gangi ($1,000,000) and Craig
Peterson ($500,000) during their respective terms of employment with the
Company.

Prior to this Offering, there has been no public market for the Common
Stock or Warrants of the Company. The public offering price and composition of
the Units and the exercise price and other terms of the Warrants have been
determined by negotiation between the Company and the Underwriter and are not
related to the Company's assets, book value, financial condition or any other
recognized criteria of value. In determining such price and terms, the Company
and the Underwriter considered a number of factors, including estimates of the
Company's business potential, the amount of dilution to public investors, the
Company's prospects, and the general condition of the securities markets.

The Underwriter has informed the Company that sales to any account over
which the Underwriter exercises discretionary authority will not exceed 1% of
this Offering.

LEGAL MATTERS

The legality of the issue of the shares of Common Stock and Warrants
offered hereby will be passed upon for the Company by Proskauer Rose LLP, New
York, New York. Certain legal matters will be passed upon for the Underwriter by
Esanu Katsky Korins & Siger, LLP, New York, New York.

EXPERTS

The balance sheet as of September 30, 1997 and the statements of
operations, stockholders' equity and cash flows for the years ended September
30, 1997 and for the period from inception (October 1995) to September 30, 1996
of the Company included in this Prospectus, have been included herein in
reliance on the report, which includes an explanatory paragraph with respect to
the entity's ability to continue as a going concern as described in Note 3 to
Notes to Financial Statements, of Feldman Sherb Ehrlich & Co., P.C. (formerly
Feldman Radin & Co., P.C.), independent certified public accountants, given on
the authority of that firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company will be subject to certain informational requirements of the
Exchange Act, and, in accordance therewith, will file reports and other
information with the Commission. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 or at the regional
offices of the Commission at Northwestern Atrium Center, 500 West

41
<PAGE>
Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, New York,
New York 10048. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is http//www.sec.gov.

A registration statement on Form SB-2 relating to the securities offered
hereby has been filed by the Company with the Commission. The Prospectus does
not contain all of the information set forth in such registration statement. For
further information with respect to the Company and to the Securities offered
hereby, reference is made to such registration statement, including the exhibits
thereto. Statements contained in this Prospectus as to the content of any
contract or other document referred to in this Prospectus are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.

42
<PAGE>
MUSE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statement of Stockholders' Equity.......................................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Stockholders and
Board of Directors of
Muse Technologies, Inc.

We have audited the accompanying balance sheet of Muse Technologies, Inc.
as of September 30, 1997, and the related statements of operations,
stockholders' equity and cash flows, for the year ended September 30, 1997, and
for the period from October 24, 1995 (inception) through September 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Muse Technologies, Inc. as
of September 30, 1997, and the results of its operations and cash flows, for the
year ended September 30, 1997, and for the period from October 25, 1995
(inception) through September 30, 1996, in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company incurred significant net losses in the amounts
of $2,049,102 and $1,203,745 in 1997 and 1996, respectively. Additionally, the
Company has a working capital deficiency of approximately $880,000 at
September 30, 1997. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with respect to these
matters are also discussed in Note 3 to the financial statements. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company not be able
to continue as a going concern.

/s/ FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants
(Formerly Feldman Radin & Co., P.C.)

New York, NY
November 7, 1997
(except notes 1, 3, 7, 9
and 14, as to which
the date is July 15, 1998)

F-2
<PAGE>
MUSE TECHNOLOGIES, INC.
BALANCE SHEET

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................................................. $ 924,348 $ 287,436
Accounts receivable............................................................... 162,467 215,449
Prepaid insurance................................................................. 13,248 23,254
----------- -----------
TOTAL CURRENT ASSETS...................................................... 1,100,063 526,139
PROPERTY AND EQUIPMENT--NET......................................................... 444,619 762,173
NOTE RECEIVABLE--AFFILIATE.......................................................... 55,000 55,000
DEFERRED OFFERING COSTS............................................................. 91,270 --
OTHER ASSETS........................................................................ 19,052 22,652
----------- -----------
TOTAL ASSETS.............................................................. $ 1,710,004 $ 1,365,964
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 36,381 $ 211,992
Accrued liabilities............................................................... 94,907 203,687
Capital lease--current portion.................................................... 10,785 7,904
Notes payable (net of discount of $129,792 and $305,157).......................... 794,129 932,343
Line of credit.................................................................... -- 50,000
----------- -----------
TOTAL CURRENT LIABILITIES................................................. 936,202 1,405,926
CAPITAL LEASE, less current portion................................................. -- 17,740
----------- -----------
TOTAL LIABILITIES......................................................... 936,202 1,423,666
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.015 par value, 50,000,000 shares authorized, issued and
outstanding 7,763,893 and 7,278,279, respectively.............................. 116,458 109,174
Additional paid-in capital........................................................ 6,459,091 3,518,471
Stock subscription receivable..................................................... (87,500) (87,500)
Accumulated deficit............................................................... (5,714,247) (3,597,847)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY................................................ 773,802 (57,702)
----------- -----------
$ 1,710,004 $ 1,365,964
----------- -----------
----------- -----------
</TABLE>

See notes to the financial statements.

F-3
<PAGE>
MUSE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 24,
1995
NINE MONTHS ENDED (INCEPTION)
JUNE 30, YEAR ENDED THROUGH
---------------------------- SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1997 1996
------------- ------------- ------------- -------------
(UNAUDITED)

<S> <C> <C> <C> <C>
REVENUE.............................................. $ 1,761,251 $ 533,351 $ 755,705 $ 355,392
------------- ------------- ----------- -----------

EXPENSES:

Selling, general and administrative expenses....... 1,321,018 849,604 1,467,240 675,898

Research and development........................... 710,068 606,488 741,910 599,026

Non-cash imputed compensation expense.............. 948,355 -- -- --

Depreciation....................................... 343,334 309,885 427,735 251,954

Interest expense................................... 554,876 32,172 167,922 32,259
------------- ------------- ----------- -----------

TOTAL EXPENSES....................................... 3,877,651 1,798,149 2,804,807 1,559,137
------------- ------------- ----------- -----------

NET LOSS............................................. $ (2,116,400) $ (1,264,798) $(2,049,102) $(1,203,745)
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------

NET LOSS PER SHARE--BASIC............................ $ (0.29) $ (0.18) $ (0.28) $ (0.18)
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------

WEIGHTED AVERAGE NUMBER OF
SHARES............................................. 7,418,768 7,191,398 7,193,169 6,871,642
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
</TABLE>

See notes to the financial statements.

F-4
<PAGE>
MUSE TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK STOCK TOTAL
--------------------- ADDITIONAL SUBSCRIPTION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL RECEIVABLE DEFICIT EQUITY
--------- -------- --------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE--
October 24, 1995 (inception)... -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock..... 6,694,079 100,411 (80,061) -- -- 20,350
Dividend..................... (400,000) (400,000)
Sale of common stock......... 250,921 3,764 1,651,379 -- -- 1,655,143
Conversion of notes into
common stock............... 131,579 1,974 865,957 -- -- 867,931
Net loss..................... (1,203,745) (1,203,745)
--------- -------- ----------- -------- ----------- -----------

BALANCE--
September 30, 1996............. 7,076,579 106,149 2,437,275 -- (1,603,745) 939,679
Sale of common stock pursuant
to private placement....... 99,014 1,485 584,000 -- -- 585,485
Sale of common stock in
connection with notes...... 81,415 1,221 335,855 -- -- 337,076
Issuance of common stock
pursuant to consulting
agreement.................. 9,758 146 74,014 -- -- 74,160
Sale of Stock to officer..... 11,513 173 87,327 (87,500) -- --
Dividend adjustment.......... -- -- -- -- 55,000 55,000
Net loss..................... -- -- -- -- (2,049,102) (2,049,102)
--------- -------- ----------- -------- ----------- -----------

BALANCE--
September 30, 1997............. 7,278,279 109,174 3,518,471 (87,500) (3,597,847) (57,702)
Issuance of common stock
pursuant to consulting
agreements................. 4,058 61 30,780 -- -- 30,841
Sale of common stock pursuant
to private placements...... 412,566 6,188 1,652,285 -- -- 1,658,473
Conversion of notes into
common stock............... 68,880 1,033 308,927 -- -- 309,960
Exercise of stock options.... 110 2 273 -- -- 275
Non-cash imputed compensation
expense...................... -- -- 948,355 -- -- 948,355
Net loss....................... (2,116,400) (2,116,400)
--------- -------- ----------- -------- ----------- -----------

BALANCE--
June 30, 1998 (unaudited)...... 7,763,893 $116,458 $ 6,459,091 $(87,500) $(5,714,247) $ 773,802
--------- -------- ----------- -------- ----------- -----------
--------- -------- ----------- -------- ----------- -----------
</TABLE>

See notes to the financial statements.

F-5
<PAGE>
MUSE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD
INCEPTION
(OCTOBER 24,
1995)
NINE MONTHS ENDED JUNE 30, YEAR ENDED THROUGH
----------------------------- SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1997 1996
------------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(2,116,400) $(1,264,798) $(2,049,102) $(1,203,745)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation...................................... 343,334 309,885 427,735 257,071
Amortization of discount.......................... 491,575 -- 127,968 --
Non-cash imputed compensation expense............. 948,355 -- -- --
Retirement of fixed assets........................ -- -- 17,028 --
Issuance of shares under consulting agreements.... 30,841 -- -- --
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable........ 52,982 40,459 (45,015) (170,434)
Decrease (Increase) in prepaid assets............. 10,007 -- (23,254) --
Decrease in other assets.......................... 3,600 24,308 47,224 --
(Decrease) Increase in accounts payable........... (175,611) 195,658 190,326 21,666
Increase in accrued interest...................... 48,921 -- -- --
(Decrease) in accrued liabilities................. (116,684) (146,077) (14,784) 218,471
----------- ------------ ----------- -----------
CASH USED IN OPERATING ACTIVITIES................. (479,080) (840,565) (1,321,874) (876,971)
----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................ (25,780) (222,528) (273,555) (979,374)
----------- ------------ ----------- -----------
CASH USED IN INVESTING ACTIVITIES................. (25,780) (222,528) (273,555) (979,374)
----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend paid upon acquiring assets............... -- -- -- (400,000)
Net proceeds from sale of stock................... 1,658,748 676,903 629,062 1,643,424
Net proceeds from issuance of convertible notes... -- 1,113,750 1,113,750 900,000
Proceeds from issuance of notes................... 568,749 -- -- --
Deferred offering costs........................... (91,270) -- -- --
Due from affiliate................................ -- -- 23,627 (23,627)
Increase in notes payable--affiliates............. -- -- -- 815,000
(Repayments) Increase in capital lease payable.... (6,955) -- 25,644 --
Repayment of notes payable--affiliates............ -- -- -- (1,037,670)
Repayment of notes payable--others................ (937,500) -- -- --
(Repayments) Borrowings-line of credit............ (50,000) 50,000 50,000 --
----------- ------------ ----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES............. 1,141,772 1,840,653 1,842,083 1,897,127
----------- ------------ ----------- -----------
NET INCREASE IN CASH 636,912 777,560 246,654 40,782
CASH--Beginning of year............................... 287,436 40,782 40,782 --
----------- ------------ ----------- -----------
CASH--End of year..................................... $ 924,348 $ 818,342 $ 287,436 $ 40,782
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.......................................... $ 49,894 $ 32,172 $ 167,922 $ 32,259
Non-cash financing and investing activities:
(1) In connection with the acquisition from an
affiliate:
Assets acquired................................ -- -- -- 751,664
Liabilities assumed............................ -- -- -- 528,994
----------- ------------ ----------- -----------
Notes issued -- -- -- 222,670
(2) Convertible notes converted to common stock... 309,960 -- -- 900,000
(3) Common stock issued in connection with note
issuance..................................... -- -- $ 433,125 --
</TABLE>

See notes to the financial statements.

F-6
<PAGE>
MUSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

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.

In December, 1995 the Company acquired substantially all assets and
liabilities from Viga Technologies Corporation ("Viga"), an affiliate with
common ownership. As part of the acquisition Viga agreed to transfer the License
Agreement to the Company. Pending completion of the transfer Viga sublicensed
its rights under the License Agreement to the Company. On July 15, 1996, the
License Agreement was formally assigned to the Company.

The Company commenced operations in December 1995. To date, the majority of
the Company's revenue has been generated from products utilizing the MuSE
technology and applied research and development services for customers in the
Federal, corporate and nonprofit markets of the United States. Sales to the
United States government represented $528,748, or 70%, and $256,892 or 72%, of
revenue in 1997 and 1996, respectively. Accounts receivable from the United
States government were $98,125 at September 30, 1997. The Company does not
require collateral on its accounts receivable.

The Company effected two stock splits since inception, a 1000-for-1 forward
stock split on November 9, 1995 and a 1-for-3.04 reverse stock split on
March 5, 1998. In addition, in conjunction with the 1-for-3.04 reverse stock
split, the par value of the Company's stock was changed from $0.01 per share to
$0.015 per share. All references to the number of shares of common stock and per
share amounts in the accompanying financial statements and related footnotes
have been restated as appropriate to reflect the splits for all periods
presented.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

b. Revenue Recognition--The Company licenses software to end users under
license agreements. The Company recognizes revenues in accordance with Statement
of Position 91-1 entitled "Software Revenue Recognition" ("SOP-91"), issued by
the American Institute of Certified Public Accountants ("AICPA"). SOP-91
requires that software license revenue be recognized upon the receipt of a valid
order and product shipment, provided no significant obligation to the customer
exists. Maintenance (post-contract support) revenues are recognized on a
straight-line basis over the term of the maintenance agreement (generally, one
year). Maintenance revenues not currently recognized are recorded as deferred
revenues. Revenues for other services and training are recognized upon
performance of the service.

The AICPA has issued SOP 97-2 with regards to recognizing revenues on
software transactions. SOP 97-2, which supersedes SOP 91-1, is effective on a
prospective basis for fiscal years beginning after December 15, 1997. The
adoption of the new SOP is not expected to have a material effect on the
Company's financial statements.

F-7
<PAGE>
MUSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

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

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

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

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

g. Cash Equivalents--Cash equivalents are carried at cost, which
approximates market value. For purposes of the statement of cash flows, the
Company considers all highly liquid short-term investments that are readily
convertible to cash and have original maturities of three months or less from
their date of purchase to be cash equivalents. Cash equivalents consist of
overnight interest funds.

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

3. BASIS OF PRESENTATION

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate the continuation of
the Company as a going concern. However, the Company reported net losses of
$2,049,102 and $1,203,745 in 1997 and 1996, respectively. Additionally, the
Company has a working capital deficiency of approximately $880,000 at
September 30, 1997. Consequently, recoverability of a major portion of the
recorded asset amounts shown in the accompanying balance sheet is dependent upon
the Company's ability to obtain financing and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue in existence.

During 1996, in connection with the private placement offering and the
issuance of convertible notes, the Company sold 386,312 shares of common stock
for net proceeds of $2,523,074. During the fiscal year ended September 30, 1997,
an additional 99,014 shares were sold for net proceeds of $585,485. In December
1997, the Company sold, through a private placement offering, 35 units, each
unit consisting of a one year, 8% promissory note in the principal amount of
$25,000 and 1,645 shares of common stock. The Company believes that future
operations, together with the additional capital from future sales of stock
through private or public financings, will provide sufficient liquidity for the
Company to continue as a going concern.

F-8
<PAGE>
MUSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

4. PROPERTY AND EQUIPMENT

Property and equipment at September 30, 1997 is as follows:

<TABLE>
<S> <C>
Computer equipment.................................................... $ 1,328,952
Furniture and fixtures................................................ 111,227
------------
1,440,179
Less: accumulated depreciation........................................ (678,006)
------------
$ 762,173
------------
------------
</TABLE>

5. ISSUANCES OF STOCK AND DEBT

(i) In October 1995, the Company issued, for nominal consideration,
6,694,080 shares of Common Stock to the stockholders of Viga. (See Note 9)

(ii) In December 1995, the Company received net proceeds of $900,000 from
the sale of four units, each of which consisted of $249,900 face amount of 10%
convertible promissory notes and warrants to purchase 8,306 shares of common
stock at $7.60 per share. In April 1996, the notes were converted into 131,579
shares of common stock at a conversion price of $7.60 per share.

(iii) During 1996, the Company sold 250,921 shares of common stock for net
proceeds of $1,655,143. During the year ended September 30, 1997, an additional
99,014 shares were sold for net proceeds of $585,485.

(iv) In June 1997, the Company issued $1,237,500 principal amount of, 8%
promissory notes and shares of the Company's common stock for which it received
net proceeds of $1,113,750. The principal balance and accrued interest are due
and payable upon the earlier of the one year anniversary of the date of the note
or seven days after the consummation of an initial public offering. For
valuation purposes, $433,125 was allocated to the common stock and the remainder
to the notes. Accordingly, the notes were issued at a discount from their face
value. The discount will be amortized over the one year term of the notes. At
September 30, 1997, the unamortized discount and related amortization expense
was $305,157 and $127,968, respectively.

(v) In September 1997, the Company sold to an officer 11,513 shares of
Common Stock at a purchase price of $7.60 per share or an aggregate of $87,500.
Payment of the purchase price was made by issuance of a non-recourse promissory
note secured by a pledge of the shares purchased.

6. STOCK OPTIONS AND WARRANTS

The Company currently has two stock option plans with essentially identical
terms and conditions. Under the 1995 Stock Option Plan, the Company may grant
non-qualified stock options to purchase up to 565,449 shares of common stock.
Under the 1996 Stock Option Plan, the Company may grant non-qualified or
incentive stock options to purchase up to 1,644,737 shares of common stock.
Options may be granted to employees, officers, directors, consultants and
independent contractors. Under the Plans, options may be for periods up to ten
years and become exercisable in varying amounts based on a vesting schedule. In
general, the options become exercisable in three installments beginning on the
first anniversary of the grant. All options allow for the purchase of common
stock at prices equal to market value at the date of the grant.

The Company accounts for its stock option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25"), under which no
compensation cost is recognized. In fiscal 1997, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") for disclosure
purposes: accordingly, no compensation has been recognized in the results of
operations for its stock option plans as required by APB 25.

F-9
<PAGE>
MUSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

6. STOCK OPTIONS AND WARRANTS--(CONTINUED)
For disclosure purposes the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for stock options granted during
the years ended September 30, 1997 and 1996; annual dividends of $0.00, expected
volatility of 50%, risk-free interest rate of 5.7%, and expected option lives of
six years. The weighted average fair value of the stock options granted for the
years ended September 30, 1997 and 1996 was $1.89 and $1.38, respectively.

See Notes 5 and 9 with respect to the issuance of warrants by the Company.

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

<TABLE>
<CAPTION>
STOCK OPTIONS WARRANTS
------------------------------------------- -----------------------------------
EXERCISE EXERCISE
SHARES PRICE(1) EXERCISABLE SHARES PRICE EXERCISABLE
--------- --------------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
October 24, 1995...................... -- $ -- -- -- $ -- --
Granted............................ 141,447 2.50 -- -- -- --
Canceled........................... (49,342) 2.50 -- 121,710 7.60 --
--------- --------------- ------- -------- ------ -------
Outstanding at
September 30, 1996.................... 92,105 2.50 16,630 121,710 7.60 --
------- -------
------- -------
Granted............................ 906,907 2.50 -- 419,112 7.60 --
Granted............................ 197,368 7.60 -- -- -- --
Canceled........................... (13,158) 2.50 -- (102,039) 7.60 36,033
--------- --------------- ------- -------- ------ -------
Outstanding at
September 30, 1997.................... 1,183,222 $ 2.50-7.60 307,610 438,783 $ 7.60 438,783
--------- --------------- ------- -------- ------ -------
--------- --------------- ------- -------- ------ -------
</TABLE>

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

Had compensation cost for the Company's two option plans been determined in
accordance with SFAS 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated below for the years ended
September 30:

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C> <C>
Net Loss................................................... As reported $(2,049,102) $(1,203,745)
Pro forma $(2,241,718) $(1,214,318)
Net Loss per Common Share.................................. As reported $ (0.28) $ (0.18)
Pro forma $ (0.31) $ (0.18)
</TABLE>

7. EMPLOYMENT AGREEMENTS

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

The Chief Technical Officer of the Company will receive an annual base
salary of $175,000 and a bonus of up to $76,000 upon the Company achieving
certain performance objectives. This officer also received options to purchase
Common Stock of the Company at an exercise price of $7.50 per share, which vests
as follows: 30,000 shares on June 1, 1999, 37,500 shares on June 1, 2000, and
50,000 shares on June 1, 2001.

F-10
<PAGE>
MUSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

7. EMPLOYMENT AGREEMENTS--(CONTINUED)
The President of the Company will receive an annual base salary of $215,000
and a bonus of up to $134,000 upon the Company achieving certain performance
objectives. The President also received options to purchase Common Stock of the
Company at an exercise price of $7.50 per share, which vests as follows: 100,000
shares on June 1, 1999, 125,000 shares on June 1, 2000 and 150,000 shares on
June 1, 2001. The President will also receive a five year loan in the amount of
$150,000 at 5% annual interest in connection with his relocation to New Mexico
upon the successful completion of an initial public offering ("IPO") of the
Company's securities.

The Vice-President of Sales and Marketing will receive an annual base
salary of $150,000. This officer will receive commissions under the Company's
Sales Compensation Plan and will be entitled to receive a bonus as determined by
the Board of Directors. The officer also received options to purchase Common
Stock of the Company at an exercise price of $7.50 per share, which vests as
follows: 30,000 shares on June 1, 1999, 37,500 shares on June 1, 2000 and 50,000
shares on June 1, 2001. Such officer will also receive a five year loan in the
amount of $75,000 at 5% annual interest in connection with his relocation to New
Mexico upon the successful completion of an IPO.

The Chief Financial Officer will receive an annual base salary of $150,000
and a bonus of up to $65,000 upon the Company achieving certain performance
objectives. This officer also received options to purchase Common Stock of the
Company at an exercise price of $7.50 per share, which vests as follows: 30,000
shares on June 1, 1999, 37,500 shares on June 1, 2000 and 50,000 shares on
June 1, 2001. The Chief Financial Officer will also receive a five year loan in
the amount of $75,000 at 5% annual interest in connection with his relocation to
New Mexico upon the successful completion of an IPO.

Under the above agreements, if such the officer is terminated by the
Company other than for cause (as defined in each employment agreement), or if
the officer dies or becomes permanently disabled or terminates for good reason
(as defined in each employment agreement), all stock options held by such
officer shall immediately vest upon such termination and such officer shall
receive severance payments in an amount equal to one year's base salary for the
President, Chief Financial Officer and the Vice President of Sales and Marketing
(if terminated after February 28, 1999), and two year's base salary for the
Chief Technical Officer. Each of the employment agreements also contain
provisions relating to severance payments equal to one year's base salary in the
event of a change of control (as defined in the employment agreement).

8. RETIREMENT PLAN

In October 1996, the Company established a defined contribution plan
(401(k) plan) covering substantially all employees. Under the terms of the plan,
eligible employees may contribute up to fifteen percent of their compensation,
subject to statutory limitations. The Company expensed $23,249, representing
three percent of eligible employees compensation, for their contribution to the
plan for the year ended September 30, 1997.

9. RELATED PARTY TRANSACTIONS

a. Viga Technologies Corporation--In October 1995, the Company issued
6,694,080 shares of Common Stock to the stockholders of Viga, including certain
officers, directors and principal stockholders of the Company in proportion to
the beneficial stock ownership of Viga. In December 1995, the Company acquired
the assets of Viga, including its rights under the License Agreement. As part of
the acquisition, Viga sublicensed the MuSE technology to the Company until the
License Agreement could be transferred to the Company, which transfer was
completed in July 1996. The purchase price for the Viga assets was $1,152,000
(not including assumption of certain liabilities). The Company issued notes in
the amount of $222,670 representing the difference between the assets acquired
and liabilities assumed, and $400,000 representing the sublicense fee. The two
notes were paid, without interest, in 1996. In 1997, Viga reduced the purchase
price by $55,000, for which Viga issued its 6.5% note due November 2001. (See
Note 1).

F-11
<PAGE>
MUSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

9. RELATED PARTY TRANSACTIONS--(CONTINUED)
Since the Company and Viga were controlled by substantially the same
persons, the excess of purchase price over book value of net assets acquired was
recorded as a dividend to stockholders. A summary of the transaction is as
follows:

<TABLE>
<S> <C>
Purchase Price......................................................... $ 622,670
Assets Acquired........................................................ (751,664)
Liabilities Assumed.................................................... 528,994
-----------
Dividend............................................................... $ 400,000
-----------
-----------
</TABLE>

The above mentioned License Agreement, which was amended in July 1998,
grants the Company exclusive rights to develop and commercialize MuSE until
October 2005 and thereafter provides a non-exclusive right through 2015. At the
end of such ten year period of exclusivity, the Company may request the licensor
to extend exclusivity through 2015, which determination shall be made in the
licensor's sole discretion. The licensor has the right to terminate the license
or make the license non-exclusive in the event the Company fails to pay the
required royalties under the license agreement, with an annual minimum royalty
of $20,000 through the year ended December 31, 2006. The Company is also
obligated to pay an annual license fee of $10,000 through the year ending
December 31, 1999 and a one-time payment of $20,000 prior to July 1999.

b. Investment Banking Agreement--The Company has entered into an investing
banking agreement with Investors Associates, Inc. ("IAI"). Certain owners of IAI
are stockholders of the Company. In general, the Company has engaged IAI to
provide investment banking services relating to the financings described in
Note 5. On June 30, 1997, the investment banking agreement with IAI was mutually
terminated.

For services as placement agent for such transactions, in 1997, the Company
paid IAI fees of $123,750 and issued to IAI warrants to purchase 317,073 of
common stock at $7.60 per share, and in 1996, the Company paid IAI fees of
$203,490 and issued to IAI warrants to purchase 121,710 shares of common shares
at $7.60 per share. The warrants expire at various times from December 31, 1998
to April 2001.

c. Transactions With Stockholders--The Company had entered into a
consulting agreement expiring September 30, 1997 with Quatro Corporation
("Quatro"), a minority shareholder, in which Quatro will provide accounting
services, financial and business support, executive and marketing consulting,
and manufacturing consulting services to the Company. The Company paid $19,324
and $33,564 to Quatro for these services in 1997 and 1996, respectively.

The Company entered into an executive marketing and consulting agreement
with Technology Business Associates ("TBA"), a minority shareholder of the
Company, which expired September 30, 1996. During 1996, the Company paid $51,326
to TBA under the agreement. An officer and director of the Company is also the
founder, a director and executive officer of both Quatro and TBA.

d. Consulting Agreement--In March 1997, the Company entered into a
consulting agreement with an independent contractor, wherein the contractor will
act as an advisor to the Company with respect to business development and
strategic alliance matters. The contractor was granted options to purchase
23,688 shares of Company common stock at a price of $7.60 per share, vesting at
1,974 shares per month.

10. INCOME TAXES

The Company accounts for income taxes using an asset and liability approach
which generally requires the recognition of deferred income tax assets and
liabilities based on the future income tax consequences of events that have
previously been recognized in the Company's financial statements or tax returns.
Since the Company cannot currently conclude that it is more likely than not that
some or all of the deferred income tax asset will be

F-12
<PAGE>
MUSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

10. INCOME TAXES--(CONTINUED)
realized, the related net deferred tax assets have been fully offset by a
valuation allowance. The Company has reported net operating losses of
approximately $1,924,000 and $1,594,000 for income tax purposes in 1997 and
1996, respectively. Utilization of this loss as a carryforward to offset future
taxable income is dependent on the Company having taxable income. The net
operating loss carryforwards expire beginning 2011, if not utilized.

Significant components of the deferred tax assets are as follows as of
September 30, 1997:

<TABLE>
<S> <C>
Net operating loss carryforward...................................... $ 1,263,000
-------------
Total gross deferred tax asset....................................... 1,263,000
Less valuation allowance............................................. (1,263,000)
-------------
Net deferred tax assets.............................................. $ --
-------------
-------------
</TABLE>

11. LEASES

The Company leases its laboratory and office facilities under
non-cancellable lease arrangements. Rent expense for 1997 and 1996 was $109,583
and $85,182, respectively. Future minimum lease payments under noncancellable
operating leases are:

12. GOVERNMENT CONTRACTS

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

13. LINE OF CREDIT FACILITY

In November 1996, the Company obtained a revolving line of credit in the
amount of $50,000. Outstanding balances on the line bear interest at prime plus
one and one-half percent and the line expires on November 1, 1997. In addition,
the Company received a credit card with an available borrowing limit of $25,000.
As part of the borrowing arrangements, the Company is required to maintain a
compensating cash balance in the amount of $75,000. Borrowings against the line
of credit were $50,000 as of September 30, 1997. The line of credit agreement
has been extended to February 1, 1998.

14. OTHER SUBSEQUENT EVENTS

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

b. Marketing Agreement--In July 1998, the Company entered into an agreement
with an entity which grants such entity the rights to market, sell and
distribute the Company's products.

F-13
<PAGE>
MUSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

14. OTHER SUBSEQUENT EVENTS--(CONTINUED)
Under the terms of the agreement, the Company will receive a $5,000,000 fee
granting the entity exclusive worldwide selling rights of the Company's products
in the oil and gas industry. As of June 30, 1998, the Company has received
$1,000,000 of the $5,000,000, with the balance due in two equal installments on
September 30, 1998 and November 30, 1998.

The agreement is for an initial term of three years with a provision for
three successive three year renewal periods. The agreement provides for the
Company to receive a minimum of $12,000,000 from the entity for the sale of MuSE
software over the initial and renewal terms of the agreement.

In connection with this agreement, the Company's Vice President of Sales
and Marketing earned previously granted options to purchase 197,369 shares at an
exercise price of $7.60 per share.

c. Subscription Agreement--On July 15, 1998, the Company entered into a
subscription agreement with an entity for the sale of 1,000,000 shares of common
stock and a series stock purchase warrant for the purchase up to 1,000,000
shares of common stock. The stock and the warrants were sold as a unit for
$8,000,000. The Company paid its Vice President--Sales and Marketing a bonus of
$176,000 and two other executive officers $172,000 each in connection with this
sale.

d. Proposed Public Offering--In February 1998, the Company entered into a
letter of intent with respect to an initial public offering of its securities.

F-14
<PAGE>

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

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES, IMPLY
THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Summary Financial Information.................. 6
Risk Factors................................... 7
Dilution....................................... 16
Use of Proceeds................................ 17
Capitalization................................. 18
Dividend Policy................................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 19
Business....................................... 21
Management..................................... 27
Principal Stockholders......................... 33
Certain Relationships and Related
Transactions................................. 34
Financings..................................... 35
Sales by Selling Securityholders............... 36
Description of Securities...................... 37
Shares Eligible for Future Sale................ 39
Underwriting................................... 40
Legal Matters.................................. 41
Experts........................................ 42
Additional Information......................... 42
Index to Financial Statements.................. F-1
</TABLE>

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

UNTIL DECEMBER 11, 1998 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

[LOGO]

1,200,000 UNITS

MUSE TECHNOLOGIES, INC.

CONSISTING OF
1,200,000 SHARES OF COMMON STOCK AND
CLASS A REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
TO PURCHASE 600,000 SHARES
OF COMMON STOCK
------------------------
PROSPECTUS
------------------------

HD BROUS & CO., INC.

NOVEMBER 16, 1998

MUSE TECHNOLOGIES, INC.

423,881 SHARES OF COMMON STOCK AND CLASS A REDEEMABLE COMMON STOCK PURCHASE
WARRANTS TO PURCHASE 423,881 SHARES OF COMMON STOCK

This Prospectus relates to the sale or other disposition of 423,881
outstanding shares of common stock, par value $.015 per share ("Common Stock"),
of Muse Technologies, Inc. (the "Company"), and outstanding Class A Redeemable
Common Stock Purchase Warrants (the "Warrants") to purchase 423,881 shares of
Common Stock owned by certain selling securityholders (the "Selling
Securityholders"), and the issuance of 423,881 shares of Common Stock upon
exercise of such Warrants. The outstanding shares of Common Stock and Warrants
were issued by the Company in connection with a private placement and upon
conversion of certain outstanding debt of the Company.

Each Warrant entitles the holder thereof to purchase one share of Common
Stock represented by such Warrant at an exercise price of $9.60 per share,
subject to adjustment, until November 15, 2003, subject to prior redemption by
the Company. The Warrants are redeemable by the Company at a redemption price of
$.01 per share of Common Stock represented by such Warrant, upon at least
30 days' prior written notice, during the period commencing one year from the
date of this Prospectus or earlier with the consent of the HD Brous & Co., Inc.,
the underwriter of the Company's initial public offering (the "Underwriter"),
provided that the average closing price of Common Stock is at least $12.00 per
share, subject to adjustment, for the twenty day period ending not earlier than
five days prior to the date on which the Warrants are called for redemption. See
"Description of Securities--Class A Redeemable Common Stock Purchase Warrants."

The Selling Securityholders' securities may be sold from time to time
commencing one year from the date of this Prospectus. The Selling
Securityholders may effect such transactions by selling securities directly to
purchasers, through broker-dealers, including the Underwriter, acting as agents
for the Selling Securityholders or to broker-dealers, including the Underwriter,
who may purchase securities as principals and thereafter sell the securities
from time to time in the Nasdaq SmallCap Market, the BSE in negotiated
transactions or otherwise. Such broker-dealers, if any, may receive compensation
in the form of discounts, concessions or commissions from the Selling
Securityholder and/or the purchasers from whom such broker-dealer may act as
agents or to whom they may sell as principals or otherwise (which compensation
as to a particular broker-dealer may exceed customary commissions). Such
securities may also be transferred by gift.

The Selling Securityholders and brokers through whom such securities are
sold may be deemed "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered,
and any profits realized or commissions received may be deemed underwriting
compensation. The Company has agreed to indemnify the Selling Securityholders
against certain liabilities, including liabilities under the Securities Act.

The registration statement of which this Prospectus is a part also relates
to an underwritten public offering (the "Offering") of 1,200,000 Units by the
Company. The Units are comprised of a total of 1,200,000 shares of Common Stock
Warrants to purchase 600,000 shares of Common Stock.

The Company will not receive any of the proceeds from the sale of
securities by the Selling Securityholders other than the exercise price of any
Warrants which are exercised. The cost of the registration of the securities
being sold by the Selling Securityholders will be paid by the Company.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY
THE DISCUSSION UNDER THE CAPTIONS "RISK FACTORS" BEGINNING ON PAGE 7 AND
"DILUTION."
------------------------

THE DATE OF THIS PROSPECTUS IS NOVEMBER 16, 1998
<PAGE>
SALES BY SELLING SECURITYHOLDERS

This registration statement also relates to the sale by the Selling
Securityholders named below of an aggregate of 423,881 shares of Common Stock
and Warrants to purchase 423,881 shares of Common Stock as well as the 423,881
shares of Common Stock issuable upon exercise of such Warrants. The Selling
Securityholders acquired their shares of Common Stock and Warrants in the April
1998 Private Placement or upon conversion of certain of the June 1997 Notes. See
"Financings." With respect to the shares of Common Stock issuable upon exercise
of the Warrants, the registration statement covers both the issuance of the
Common Stock upon such exercise and the subsequent sale by the holders thereof.

The following table sets forth (i) the name of each Selling Securityholder,
(ii) the number of shares of Common Stock and Warrants owned by each Selling
Securityholder prior to the offering, (iii) the number of shares of Common Stock
and Warrants offered for each Selling Securityholder's account and (iv) the
percentage of the Common Stock owned by each Selling Securityholder after
completion of the offering. None of the Selling Securityholders has had any
position, office or other material relationship with the Company or any of its
affiliates since the Company's organization.
<TABLE>
<CAPTION>
NUMBER OF SHARES
AND WARRANTS
OWNED
AFTER OFFERING
----------------
NUMBER OF SHARES AND
NUMBER OF SHARES WARRANTS OFFERED FOR
AND WARRANTS OWNED ACCOUNT OF SELLING
PRIOR TO OFFERING SECURITYHOLDER
--------------------- --------------------------------------------
SELLING SECURITYHOLDER SHARES(1) WARRANTS SHARES WARRANTS
- --------------------------------- --------- -------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
James Scannell................... 10,000 10,000 10,000 10,000 0
Irene C. Snyder.................. 5,000 5,000 5,000 5,000 0
Stephen J. Thomas................ 10,000 10,000 10,000 10,000 0
David P. Franco.................. 206,447 190,000 190,000 190,000 16,447
D. Max Bruce and Ruth A. Bruce as
Trustees of the Ruth Ann Bruce
Trust.......................... 10,000 10,000 10,000 10,000 0
Abbey E. Blatt................... 10,000 10,000 10,000 10,000 0
Allan Y. Cohen................... 11,645 10,000 10,000 10,000 1,645
Sterling Furniture Co............ 20,000 20,000 20,000 20,000 0
Lee Ginsberg..................... 20,000 20,000 20,000 20,000 0
Edward C. Smith.................. 5,000 5,000 5,000 5,000 0
Tim Connolly..................... 10,000 10,000 10,000 10,000 0
Valerie Cramer................... 10,000 10,000 10,000 10,000 0
Bruce H. Elliott................. 5,000 5,000 5,000 5,000 0
Stephen F. Bergen................ 10,000 10,000 10,000 10,000 0
Paul McCarthy.................... 30,000 30,000 30,000 30,000 0
Ting H. Liu and
Elizabeth S. Liu............... 44,524 34,656 34,656 34,656 9,868
Nino Selimaj..................... 44,093 34,225 34,225 34,225 9,868

PERCENTAGE
OWNED AFTER
OFFERING
-----------

SELLING SECURITYHOLDER
- ---------------------------------
<S> <C>
James Scannell................... 0
Irene C. Snyder.................. 0
Stephen J. Thomas................ 0
David P. Franco.................. *
D. Max Bruce and Ruth A. Bruce as
Trustees of the Ruth Ann Bruce
Trust.......................... 0
Abbey E. Blatt................... 0
Allan Y. Cohen................... *
Sterling Furniture Co............ 0
Lee Ginsberg..................... 0
Edward C. Smith.................. 0
Tim Connolly..................... 0
Valerie Cramer................... 0
Bruce H. Elliott................. 0
Stephen F. Bergen................ 0
Paul McCarthy.................... 0
Ting H. Liu and
Elizabeth S. Liu............... *
Nino Selimaj..................... *
</TABLE>

- ------------------
* Less than one percent.

(1) Does not include shares of Common Stock issuable upon the exercise of the
Warrants owned by such Selling Securityholder.

The Selling Securityholders have advised the Company that any sales of the
outstanding shares of Common Stock and Warrants and any shares of Common Stock
which are issuable upon exercise of the Warrants may be effected from time to
time in transactions (which may include block transactions by or for the account
of the Selling Securityholder) on the Nasdaq SmallCap Market, the BSE or in
negotiated transactions, a combination of such methods of sale or otherwise.
Sales may be made at fixed prices which may be changed, at market prices or in
negotiated transactions, a combination of such methods of sale or otherwise. In
addition, Selling Securityholders may transfer any of the shares of Common Stock
or Warrants covered by this Prospectus by gift. The Selling Securityholders have
agreed that they will not sell any of the their Securities pursuant to this
Prospectus prior to one year from the date of this Prospectus. Any donee of the
securities would be subject to the same restriction.
<PAGE>
The Selling Securityholders may effect such transactions by selling such
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase Warrants or
shares of Common Stock as principals and thereafter sell the securities from
time to time on the Nasdaq SmallCap Market, the BSE, in negotiated transactions
or otherwise. In any such transaction, the Underwriter may act as broker-dealer
for the Selling Securityholder and/or for the purchasing party or the
Underwriter may purchase shares of Common Stock or Warrants for its own account
although the Underwriter has no agreement or understanding, either formal or
informal, with any Selling Securityholder with respect to any such transactions.
Such broker-dealers, if any, including the Underwriter, may receive compensation
in the form of discounts, concessions or commissions from the Selling
Securityholder and/or the purchasers from whom such broker-dealer may act as
agents or to whom they may sell as principals or otherwise (which compensation
as to a particular broker-dealer may exceed customary commissions). Pursuant to
the subscription agreement or conversion agreement governing the issuance of the
securities offered by the Selling Securityholders, the Company has agreed to pay
all expenses of registration on behalf of each Selling Securityholder.

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Securityholder's securities may not
simultaneously engage in market-making activities with respect to any securities
of the Company during the applicable restricted period (which may be one or five
days or such other period as Regulation M of the Commission under the Exchange
Act may provide) prior to the commencement of such distribution. Accordingly, in
the event the Underwriter is engaged in a distribution of a Selling
Securityholder's securities, it will not be able to make a market in the
Company's securities during the applicable restrictive period. However, the
Underwriter has not agreed to and is not obligated to act as broker-dealer in
the sale of any Selling Securityholder's securities and the Selling
Securityholders may be required, and in the event the Underwriter is a
market-maker, will likely be required, to sell such securities through another
broker-dealer. In addition, each Selling Securityholder desiring to sell
securities will be subject to the applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M, which provisions may limit the timing of the purchases and sales of shares of
the Company's securities by such Selling Securityholders.

The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act and any commission received by them and
any profit on the resale of the securities might be deemed to be underwriting
discount and commissions under the Securities Act.
<PAGE>

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Summary Financial Information.................. 6
Risk Factors................................... 7
Dilution....................................... 16
Use of Proceeds................................ 17
Capitalization................................. 18
Dividend Policy................................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 19
Business....................................... 21
Management..................................... 27
Principal Stockholders......................... 33
Certain Relationships and Related
Transactions................................. 34
Financings..................................... 35
Sales by Selling Securityholders............... 36
Description of Securities...................... 37
Shares Eligible for Future Sale................ 39
Legal Matters.................................. 41
Experts........................................ 41
Additional Information......................... 41
Index to Financial Statements.................. F-1
</TABLE>

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

[LOGO]

MUSE TECHNOLOGIES, INC.

423,881 SHARES OF COMMON STOCK AND
CLASS A REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
TO PURCHASE 423,881 SHARES
OF COMMON STOCK

------------------------
PROSPECTUS
------------------------

NOVEMBER 16, 1998