UNITED STATES DISTRICT COURTFOR THE DISTRICT OF MASSACHUSETT S

ABBEY BLATT, et al ., On Behalf OfThemselves And All Others SimilarlySituated,

Plaintiffs ,

-against-

MUSE TECHNOLOGIES, INC ., CURTIZ J .GANGI, and BRIAN R . CLARK,

Defendants .

Civil Action No . 01-11010-DPW

JURY TRIAL DEMANDED

AMENDED CLASS ACTION COMPLAINT

Lead Plaintiffs, Abbey Blatt, George Rhodes, and Sara Rhodes, individually and on

behalf of all others similarly situated, by their attorneys, allege the following based upon th e

investigation of their counsel, except as to allegations specifically pertaining to plaintiffs an d

their counsel which are based on their personal knowledge . The investigation of counsel i s

predicated upon, among other things, a review of public filings by Muse Technologies, Inc .

("Muse" or the "Company") with the United States Securities and Exchange Commission

("SEC"), drafts of SEC forms that were never publicly filed, press releases issued by th e

Company, letters, emails, and memoranda both to and from officers of the Company, medi a

reports about the Company, a published report by a financial analyst who regularly followed th e

Company, publicly available trading data relating to the price and volume of Muse's common

J0~ ..J

stock, and consultations with individuals knowledgeable about the Company and other fact s

contained in this complaint, including members of the Class and a former officer of a compan y

that merged with Muse during the Class Period. Many, if not most, of the specific SEC filings ,

drafts, correspondence, analyst reports, press releases, news articles, and trading data reviewed i n

connection with counsels' investigation are identified below by name, date, etc ., and are quoted

from extensively herein, thereby providing the detailed factual basis underlying the allegations i n

this Complaint .

NATURE OF THE ACTION

1 . Lead Plaintiffs bring this action as a class action on behalf of themselves and al l

other persons or entities who acquired Muse securities other than defendants and certain relate d

persons and entities (the "Class"), during the period beginning on January 24, 2000, throug h

February 21, 2001, inclusive (the "Class Period"), to recover damages caused to the Class b y

defendants' violations of the federal securities laws . The suit alleges a scheme to defraud o r

deceive acquirers of Muse securities through defendants' nondisclosures and misrepresentation s

of material financial information concerning Muse .

JURISDICTION AND VENUE

2. This action arises under Sections 10(b) and 20(a) of the Securities Exchange Ac t

of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and the rules and regulations

promulgated thereunder, including SEC Rule lOb-5, 17 C .F.R. 240.1 Ob-5 .

3 . This Court has jurisdiction of this action under Section 27 of the Exchange Ac t

and 15 U.S.C. § 78aa, 28 U .S .C. § 1331 .

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4. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and

28 U.S .C. § 1391(b) . Many of the acts alleged herein, including the dissemination to the

investing public of false and misleading statements, occurred in substantial part in this District .

In addition, defendants' principal place of business and executive offices are located in thi s

District .

5 . In connection with the acts and conduct complained of, defendants, directly o r

indirectly, used the means and instrumentalities of interstate commerce, including the mails ,

interstate telephone communications, and the facilities of a national securities exchange .

THE PARTIES

6. Lead Plaintiffs, Abbey Blatt, George Rhodes, and Sara Rhodes, acquired Mus e

securities during the Class Period at artificially-inflated prices and suffered damages thereby a s

set forth in their certifications previously filed with the Court .

7. Defendant Muse is a corporation duly organized and existing under the laws of th e

State of Delaware, with its principal corporate offices located at 300 Fifth Avenue, Waltham,

Massachusetts 02451 . Prior to December 11, 2000, the Company maintained its principal office s

at 1601 Randolph SE, Albuquerque, New Mexico 87106 . The Company allegedly provides data

visualization software that enables computer users to interact with business, scientific, an d

engineering data.

8. Defendant Curtiz J . Gangi ("Gangi") was, from prior to the beginning of the Class

Period until May 9, 2000, the Chairman of the Board of Directors and Chief Executive Officer o f

the Company. On May 9, 2000, Gangi resigned from both positions . Because of defendant

Gangi's positions with the Company, he had access to the material adverse non-publi c

3

information about the Company's finances, including its improper revenue recognition and it s

secret investment account, as detailed below . As of the beginning of the Class Period, Gang i

held 828,289 shares of Muse common stock, which represented 7 .2% of the common stock

outstanding at that time .

9. Defendant Brian R. Clark ("Clark") was the Chief Financial Officer of the

Company from prior to the commencement of the Class Period until March 2000 . In March 2000

he was named President of Muse and continued in that position through the remainder of th e

Class Period. Clark was also a member of the Company's Board of Directors throughout th e

Class Period. Prior to working at Muse, Clark was, among other things, a Chartered Accountan t

with Deloitte & Touche in Canada. Because of defendant Clark's position with the Company an d

Board membership, he had access to the material adverse non-public information about th e

Company's finances, including its improper revenue recognition during the second and thir d

quarters of fiscal 2000 and its secret Merrill Lynch investment account, as alleged herein . As of

the beginning of the Class Period, Clark held 347,763 shares of Muse common stock, whic h

represented 3 .1 % of the common stock outstanding at that time .

10. Defendants Gangi and Clark are sometimes referred to herein collectively as th e

"Individual Defendants . "

11 . The Individual Defendants, by reason of their executive positions with Muse ,

were controlling persons of the Company and had the power and influence, and exercised th e

same, to cause Muse to engage in the conduct complained of herein .

12. During the Class Period, each of the Individual Defendants occupied position s

that made them privy to non-public information concerning Muse . Because of their positions an d

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access, each of these defendants knew that the material adverse facts specified herein were being

concealed from the public .

13 . As officers, directors and/or controlling persons of a publicly-held compan y

whose common stock was traded during the Class Period in an open, actively-traded and efficien t

market on the NASDAQ/Small Cap Market, defendants had a duty to disseminate accurate an d

truthful information promptly with regard to Muse's finances and to correct any previously issued

statements that had become untrue and to disclose any adverse trends that would materially affec t

the present and future finances of the Company, so that the market price of the Company's stoc k

would be based upon truthful and accurate information .

14 . The Individual Defendants controlled and/or possessed the power and authority t o

control the contents of the Company's quarterly and year-end reports, press releases an d

presentations to securities analysts and thereby the investing public . Both of the Individua l

Defendants participated in the dissemination of the Company's filings, reports and press release s

alleged herein to be misleading and had the ability and opportunity to prevent their issuance or

cause them to be corrected . Because of their positions and access to material non-public

information available to them, each of these defendants knew or recklessly disregarded that the

material adverse facts specified herein had not been disclosed to, and were being concealed from,

the public and that the positive representations that were being made were then materially fals e

and misleading. As a result, each of the defendants is responsible for the accuracy of the publi c

reports and releases and is liable for the representations contained therein .

15 . Each of the defendants is liable as a participant in a fraudulent scheme and cours e

of business that operated as a fraud or deceit on acquirers of Muse securities, as set forth herein .

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The scheme (i) deceived the investing public regarding Muse ; (ii) artificially inflated the price o f

Muse securities; and (iii) caused plaintiffs and the other members of the Class to acquire Mus e

securities at artificially inflated prices to their financial detriment .

CLASS ACTION ALLEGATIONS

16. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federa l

Rules of Civil Procedure on behalf of the Class consisting of all persons who acquired Mus e

securities during the Class Period. Excluded from the Class are the defendants herein, members

of their immediate families, any subsidiary, affiliate, or control person of any such person o r

entity, officers and directors of Muse and the legal representatives, heirs, successors or assigns of

any such excluded party.

17 . The members of the Class are so numerous that the joinder of all members i s

impracticable . While the exact number of Class members is unknown to plaintiffs at this tim e

and can only be ascertained through appropriate discovery, plaintiffs believe that there are at leas t

hundreds of members of the Class . As of December 31, 2000, the Company had in excess of 1 3

million shares of its common stock outstanding . The holders of Muse securities are believed t o

be geographically dispersed throughout the United States . During the Class Period, Mus e

common stock was listed and actively traded on the NASDAQ/Small Cap Market .

18 . Plaintiffs' claims are typical of the claims of the Class, as plaintiffs acquire d

securities of Muse during the Class Period and sustained damages arising out of defendants '

conduct in violation of federal law as complained of herein .

19 . Plaintiffs will fairly and adequately protect the interests of the members of the

Class, and have retained counsel competent and experienced in class action and securities litiga-

tion. Plaintiffs have no interests that are contrary to, or in conflict with, those of the Class the y

seeks to represent .

20. Common questions of law and fact exist as to all members of the Class an d

predominate over any questions affecting only individual members of the Class . Among the

questions of law and fact common to the Class which predominate over any questions affectin g

individual members of the Class are :

a. whether defendants violated Sections 10(b) and 20(a) of the Exchang e

Act, and SEC Rule lOb-5 promulgated thereunder ;

b. whether defendants participated in and pursued the common course o f

conduct complained of herein ;

c. whether documents, filings, releases and statements disseminated to th e

investing public during the Class Period omitted and/or misrepresented material facts about th e

Company;

d. whether the market price of Muse securities during the Class Period wa s

artificially inflated due to the nondisclosures and/or misrepresentations complained of herein ;

e. whether defendants acted knowingly, wilfully, or recklessly in omitting t o

state and/or misrepresenting material facts ;

f. whether the Individual Defendants were control persons of Muse ; and

g. whether the members of the Class have sustained damages and, if so, what

is the proper measure of such damages .

21 . A class action is superior to other available methods for the fair and efficient

adjudication of this controversy. Since the damages suffered by individual Class members may

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be relatively small, the expense and burden of individual litigation make it virtually impossibl e

for the Class members to seek redress for the wrongful conduct alleged . Plaintiffs know of no

difficulty which will be encountered in the management of this litigation which would preclud e

its maintenance as a class action .

APPLICABILITY OF PRESUMPTION OF RELIANCE :FRAUD-ON-THE-MARKET DOCTRINE

22. At all relevant times, the market for Muse securities was an efficient market for

the following reasons, among others :

(a) During the Class Period, Muse common stock met the requirements for listing, an d

was listed and actively traded, on the NASDAQ/Small Cap Market, an efficient and automate d

market ;

(b) During the Class Period, millions of shares of Muse common stock were traded on

the open market, having an average weekly trading volume in excess of 234,500 shares ;

(c) As a regulated issuer, the Company filed periodic public reports with the SEC and

the NASD;

(d) Numerous financial institutions acted as market makers with respect to the trading

of Muse securities, including Herzog, Heine, Geduld, Inc.; Mayer & Schweitzer, Inc . ; Island

Corporation; NDB Capital Markets Corp; Knight Securities LP ; Ladenburg, Thalman & Co . ;

Spear, Leeds & Kellogg ; Hill, Thompson, Magid & Co .; Josephthal Lyon & Ross ; S .W. Ryan &

Co. Inc . ; Wien Securities Corp .; and Instinet Corp . ;

(e) Muse was followed by at least one securities analyst employed by a brokerage firm

(Josephthal & Co .) who wrote reports which were distributed to the sales force and certain of it s

customers . Each of these reports was publicly available and entered the public marketplace ; and

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(f) The market price of Muse securities reacted to news about the Company that

entered the marketplace .

23. As a result, the market for Muse securities promptly digested current informatio n

regarding the Company from all publicly-available sources and reflected such information in th e

price of Muse's securities. Under these circumstances, all acquirers of the Company's securitie s

during the Class Period suffered similar injury through their acquisition of Muse securities a t

artificially inflated prices, and a presumption of reliance applies .

SUBSTANTIVE ALLEGATION S

Defendan ts Issue Fa lse And Mislead ingStatements Dur ing The C lass Per iod

24. Throughout the Class Period, beginning at least as early as January 24, 2000, the

defendants engaged in a plan and scheme and common course of conduct to inflate the marke t

price of Muse securities by misstating and /or concealing material information concerning the

Company's financial condition. Pursuant thereto, the defendants participated in, caused, o r

approved various public filings and releases issued by, or on behalf of, Muse that materially and

falsely inflated the revenues and earnings of the Company during the Class Period and falsely

reported the amount of the Company's cash when, in fact, a significant portion of the Company' s

"Cash" had secretly been invested in high-risk securities, including so-called "penny" an d

bulletin board stocks, in a Merrill Lynch account, which ultimately lost more than 85% of their

value .

25 . On January 24, 2000, the first day of the Class Period, Muse issued a press release

announcing its financial results for the first fiscal quarter ending December 31, 1999 . Within that

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press release, Muse listed, among other things, the Company's total assets of approximately $1 8

million and current assets, which totaled over $11 million and included over $8,731,506 o f

"Cash." Thus, "Cash" represented more than 48% of the Company's total assets and almost 80 %

of the Company's current assets .

26. On February 4, 2000, the Company filed with the SEC its Form 10-QSB for th e

first fiscal quarter ended December 31, 1999 (the "First Quarter 10-QSB") . The First Quarter 10-

QSB was signed by defendants Gangi and Clark . The First Quarter 10-QSB, in its Consolidate d

Balance Sheet, stated that the Company had $8,731,506 in Cash and had no line item fo r

securities. The Financial Data Schedule in the First Quarterl0-QSB, which was required to b e

submitted pursuant to Item 601(c) of Regulation S-B, 17 CFR § 228 .601(c)(1)(iv) and required

the inclusion of a line item for "securities," however, specifically misstated that Muse had n o

marketable securities as follows :

"PERIOD TYPE: 3-MOS

FISCAL YEAR END : SEP-30-2000

PERIOD END: DEC-31-1999

CASH: 8,731,506

SECURITIES : 0 . . . . "

[Emphasis added . ]

27. The First Quarter 10-QSB, concerning the Company's cash position, stated :

For the three months ended December 31, 1999, there was a netreduction in cash of $3,101,379 as compared to a net increase incash of $11,698,052 for the three month period ended December31, 1998. The decrease in cash balances are attributable to theinvestment in Virtual Presence of $300,000, increase in accountsreceivable of $1,277,524, repayment of notes and creditors of

10

$566,607 and an increase in other assets of $926,782 . For the threemonth period ended December 31, 1998, the increase in cash wasattributable to the receipt of proceeds from the Company's IPO,collection of stock subscription receivable and collection ofaccounts receivable associated with the CRI Agreement .

28. The statements set forth in paragraphs 25, 26, and 27, including : (i) the statement

in the January 24, 2000 press release and the First Quarter 10-QSB that the Company had

$8,731,506 of "Cash."; (ii) the statement in Muse's Financial Data Schedule of the First Quarte r

10-QSB that the Company had "0 " in securities ; and (iii) the statement in the First Quarter 10-

QSB that "[fJor the three months ended December 31, 1999, there was a net reduction in cash o f

$3,101,379," were known to defendants to be materially false and misleading at the time the y

were made based on the fact that defendants knew (from, inter alia, Muse's Merrill Lync h

account statements), but failed to disclose: (i) that by this time a significant portion (nearly a

quarter) of the Company's cash - $2 million - had secretly been invested in high-risk securities ,

including so-called "penny stocks," in a Merrill Lynch account, as later revealed by th e

Company, which ultimately lost more than 85% of their value; (ii) that the largest single holding

in the Merrill Lynch account was a bulletin board company whose CEO was an early investor in

Muse; and (iii) that by secretly investing the Company's assets in high-risk securities, defendant s

put at risk the Company's ability to finance its business plan and, in addition, endangered Muse' s

ability to continue to satisfy NASDAQ's minimum net tangible asset listing requirements .

29 . The Individual Defendants were aware of the Company's investment account a t

Merrill Lynch during the Class Period because they received monthly statements concerning th e

account (with Gangi receiving these statements until May 9, 2000, when he left the Company' s

employ). The Merrill Lynch monthly account statements set forth precisely the amount of cas h

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and securities - as well as the specific securities - held in the Muse account as of the end of each

month, even breaking out, in pie-chart form, the percentage of the Company's account held i n

cash versus securities, including bonds, equities, etc . Each purchase, sale, dividend or othe r

transaction involving the Muse account during a month was also reflected on the Merrill Lyc h

account statement for that part icular month . Prior to the close of the AVS /Muse transaction, as

detailed herein, AVS sent its controller to Muse's New Mexico headquarters to perform du e

diligence. While at the headquarters, the controller observed that Muse had neatly filed an d

organized all of the Merrill Lynch account statements .

30 . In the days immediately following Muse's release of its first quarter results, th e

price of Muse shares increased dramatically. At the close on January 24, 2000, the first day of

the Class Period, Muse sold for $3 .6875 per share. By February 28, 2000, approximately on e

month later, Muse shares had shot up to $6 .125 per share, an increase of over 60%.

31 . On March 27, 2000, Muse announced that defendant Gangi had been promoted to

CEO of Muse . Gangi had been President since 1998, Chief Operating Officer since 1996, and a

member of the Company's Board of Directors since 1997 . The Company also announced that

defendant Clark had been promoted to President from CFO .

32. On April 20, 2000, Muse issued a press release announcing its financial results fo r

the second fiscal quarter ending March 31, 2000 . In the press release, the Company announced

"revenues of $3 .3M for the quarter ended March 31, 2000, an increase of 568% over the $0.5M

reported for the same quarter of the previous fiscal year . Net income for the quarter was

$23,000, or less than $ .0 1 per share, versus a loss of ($1 .4M), or ($ .14) per share, for the secon d

12

quarter of fiscal 1999 ." The press release quotes defendant Clark as stating : "Performance for

the second quarter of fiscal 2000 reflects a progressive increase in revenue and profitability."

33. In the press release, Muse also listed, among other things, the Company's tota l

assets of approximately $19 million and current assets, which totaled approximately $1 0

million and included approximately $6 .3 million of cash. Thus, at this time, to the public ,

"Cash" represented more than 33% of the Company's total assets and more than 62% of th e

Company's current assets . The press release failed to disclose, or even mention, the fact that

Muse had invested $2 million in highly risky securities, including penny stocks, and that it di d

not have a full $6 .3 million in cash at the time of the announcement .

34. On May 1, 2000, Josephthal & Co . initiated coverage of Muse with a "Buy"

recommendation and a 12-month price target of $9 per share (shares were currently each selling

for $3 .625) . This recommendation was included in Josephthal's research report (the "Josephtha l

Report") and was based in part on Muse's huge leap in revenues during the prior quarter and ,

also, on Muse having "a healthy cash position ($6 million on the balance sheet as of March 31 ,

2000) ." The market immediately reacted favorably to the Josephthal Report . On the day it was

issued, Muse stock rose from $3 .625 per share to $3 .875 per share on unusually high trading

volume of 251,900 shares, and the next day, the price jumped almost 25%, to close at $4 .8125,

also on unusually high trading volume of 242,700 shares . While the Josephthal research report,

which was authored by analyst William Relyea, omitted to mention any connection between

Josephthal and Muse, Muse's Form 10-QSB for the quarter ended December 31, 1999, at pag e

10, states :

In December 1999, the Company entered into a one-year agreementwith Josephthal & Co ., Inc . ("Josephthal") whereby Josephthal wil l

13

provide financial advisory services to the Company. In connectionwith this agreement, the Company paid $75,000 to Josephthal andgranted Josephthal three-year warrants to purchase 75,000 sharesof Common Stock at $3 .90 (representing 120% of the market priceof the Common Stock on the date of grant) . The Company is alsorequired to pay Josephthal $10,000 per month commencing onJune 1, 2000 and certain out-of-pocket expenses .

35. Relyea, in the Josephthal Report, also failed to disclose that in April 2000 - one

month before his "buy" recommendation - he, personally, had been given warrants to purchas e

7,500 shares of Muse common stock from the warrants to purchase 75,000 Muse shares that had

been given to Josephthal by Muse as part of their agreement . This distribution by Josephthal to

Relyea was reported, at page 57, in Muse's Form SB-2, which was filed on September 19, 2000 .

36. The statement in the Josephthal Report that Muse had "a healthy cash position ($ 6

million on the balance sheet as of March 31, 2000)" was known to, or recklessly disregarded by ,

Josephthal to be materially false and misleading at the time it was made based on the fact that as

a brokerage firm acting as financial advisors to Muse since December 1999, with access to

Muse's Merrill Lynch account statements, Josephthal knew, or recklessly disregarded, that th e

Company neither had a "healthy cash position," nor did it have $6 million in cash as of Marc h

31, 2000, but had invested $2 million of its "cash" in high-risk securities .

37. On May 4, 2000, the Company entered into a letter of intent to acquire Advance d

Visual Systems Inc. ("AVS") for "a maximum of 2 .1 million" Muse shares . Definitive merger

documents were executed on July 18, 2000 .

38 . On May 9, 2000, a little more than a month after he was promoted to CEO, th e

Company announced that defendant Gangi had resigned as the Company's CEO and Chairman .

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An article the next day in the Albuquerque Tribune, commenting on Gangi's "sudden"

resignation, reported :

"Curtiz left for personal reasons," said Steve Sukman, who is nowa senior vice president . "We're not at liberty to discuss that . Thecompany has been run by a group of managers for some time. Thewhole management team has been highly interactive in charting thecourse of the company ." Gangi, 54, has been president since 1998,chief operating officer since 1996 and a member of the board ofdirectors since 1997 . His three-year contract with the companywasn't up until June 1, 2001 .

Brian Clark, 42, named president in March, will continue in thatposition . He was previously the company's chief financial officerand has been a member of the board since last year . He describeshimself as "a behind-the-scenes kind of guy" who took th ecompany public and served as the company's representative toWall Street .

39. On May 15, 2000, the Company filed with the SEC its Form 10-QSB for th e

second fiscal quarter ended March 31, 2000 (the "Second Quarter 10-QSB") . The Second

Quarter 10-QSB was signed by defendant Clark . The Second Quarter 10-QSB listed quarterly

revenues of $3,308,976 compared to $495,136 in the prior year's second quarter and net incom e

of $23,237 compared to a loss of ($1,398,728) in the same quarter of the prior year .

40. The Second Quarter 10-QSB, in its "Management's Discussion and Analysis o f

Financial Condition and Results of Operations," states as follows :

Revenues for the three and six month periods ending March 31,2000 were $3,308,976 and $5,050,369, respectively, compared torevenues of $496,136 and $771,340 for the three and six monthperiod ending March 31, 1999, respectively. The increases of568% and 554% for the three and six month periods compared tothe same periods last year are due primarily to the acquisition ofVirtual Presence, which accounted for the majority of revenues forthe quarter and six month period fo fiscal 2000, together withincreases in product and contract sales during the fiscal 2000periods .

15

it

41 . The Second Quarter 10-QSB, in its Consolidated Balance Sheet, which was as of

March 31, 2000, reiterated that the Company had $6,301,368 in cash and had no line item fo r

securities. The Financial Data Schedule, which was required to be submitted pursuant to Item

601(c) of Regulation S-B, 17 CFR § 228.601(c)(1)(iv) and was required to contain a line item for

"securities," affirmatively misrepresented that the Company had no money invested in securitie s

by stating the following :

"PERIOD TYPE :

FISCAL YEAR END

PERIOD END :

CASH :

SECURITIES :

[Emphasis added.]

42

For the six months ended March 31, 2000, there was a net decreasein cash of $5,545,334 as compared to a net increase in cash of$12,134,747 for the six month period ended March 31, 1999 . Thedecrease in cash is p rimarily attributable to the acquisition ofsubsidiaries for $1,070,348, increases in accounts receivable of$2,247,901 and increase in other assets of $2,298,513 . For the sixmonth period ended March 31, 1999, the increase in cash wasprimari ly attributable to the receipt of proceeds from the .Company's IPO, collection of a stock subsc ription receivable andcollection of accounts receivable associated with an SRP

43 .

6-MOS

SEP-30-2000

MAR-31-2000

6,301,368

0 . . ., ,

Concerning the Company's cash position, the Second Quarter 10-QSB stated :

agreement.

The Second Quarter 10-QSB, in the Consolidated Statements of Operations, als o

stated that interest income for the quarter equaled $405,812 .

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44. The statements set forth in paragraphs 25, 26, 27, 32, 33, 39, 40, 41, 42, and 43 ,

including: (i) the statements in the Company's April 20, 2000 press release and the Secon d

Quarter 10-QSB setting forth the Company's revenues and net income for the quarter and th e

reasons for their substantial increases ; (ii) the statement in the Company's April 20, 2000 pres s

release and Second Quarter 10-QSB that the Company had $6,301,368 of "Cash ."; (iii) the

statement in Muse's Financial Data Schedule of the Second Quarter 10-QSB that the Compan y

had "0" in securities ; (iv) the statement in the Second Quarter 10-QSB that "[fl or the six months

ended March 31, 2000, there was a net decrease in cash of $5,545,334" ; and (v) the statement i n

the Second Quarter 10-QSB that interest income for the quarter equaled $405,812 were known to

defendants to be materially false and misleading at the time they were made based on the fact that

defendants knew (from, inter alia, the financial records and reports of the Company and Muse' s

Merrill Lynch account statements), but failed to disclose the following :

(a) Rather than over $3 .3 million of revenue for the quarter that the Company

had reported, the Company actually had overstated its revenues by approximately 40% and ha d

revenues of $1,965,723 . The Company's net income was similarly overstated. Rather than a

profit for the quarter of $23,237, as reported by the Company, Muse had a loss for the quarter o f

($702,036) . This information was admitted by Muse in a draft revised 10-QSB for the perio d

ending March 31, 2000 (the "Draft Second Quarter 10-QSB"), which was circulated by Muse' s

controller, Dan Brown, and prepared for filing on February 2, 2001, but, in fact, never filed with

the SEC or disclosed to the public . Under the heading, "RESTATEMENT," the Draft Secon d

Quarter 10-QSB also states :

During an internal review of operating results, it was discoveredthat the Company's Virtual Presence, LTD subsidiary, had no t

17

recognized revenues in compliance with Company policy and incompliance with Statement of Position 97-2 ("SOP 97-2") asamended by Statement of Position 98-9 ("SOP 98-9") during theperiod ending March 31, 2000 and the period ending June 30,2000. In addition, certain expenses were capitalized and notrecognized as period costs . The Company had also incorrectlyclassified a marketable securities investment account as cash . Allrevenue recognition issues, capitalization issues as well as thetreatment of the marketable securities account had been correctedand were reported correctly on the Company's 10-KSB and 10-KSBA filings for the fiscal year ending September 30, 2000 .

The Draft Second Quarter 10-QSB also states that contrary to the line item listing in the form 10-

QSB that was filed with the SEC, the Company's interest income for the quarter was no t

$405,812, but was $98,397 - less than one quarter the amount represented to the public .

(b) Muse and the Individual Defendants were, in fact, using deceptive and

improper accounting methods in order to manipulate the Company's financial results to creat e

the appearance of rapid revenue growth . These deceptive devices were in violation of Generally

Accepted Accounting Principles ("GAAP") and included improperly recognizing as revenu e

during the quarter contracts that were entered into during the quarter but which would not be

performed until later periods, including a contract believed to be worth $1 million entered into o n

or about March 27, 2000, with the University of Manchester, which contract would not b e

performed until at least August of that year .

(c) By this time a significant portion (nearly one third) of the Company's cash

had secretly been invested in high-risk securities, including so-called "penny stocks," in a Merril l

Lynch account, which ultimately lost more than 85% of their value . The largest single holding in

the Merrill Lynch account was a bulletin board company whose CEO was an early investor i n

Muse. In fact, the Draft Second Quarter 10-QSB admits that rather than having over $6 .3 million

18

in "cash," the Company had approximately $3 .9 million in cash and $2,365,237 in "marketabl e

securities ." By secretly investing the Company's assets in high-risk securities, defendants put a t

risk the Company's ability to finance its business plan and, in addition, endangered Muse' s

ability to continue to satisfy NASDAQ's minimum net tangible asset listing requirements .

45 . Shortly after the Company's financial results for the second quarter of fiscal 200 0

were reported, NASDAQ issued an auditors' inquiry to Muse concerning the Company's revenue

recognition policy. In response, the Company provided a revenue recognition policy t o

NASDAQ, but it was not the policy that was followed by Muse during the quarter .

46 . On July 7, 2000, Josephthal reiterated its "buy" recommendation .

47 . On August 14, 2000, Muse issued a press release announcing its financial result s

for the third fiscal quarter ending June 30, 2000. The press release listed revenues of $1 .5 million

for the quarter, "an increase of 336% over the $342,000 reported for the same quarter of th e

previous fiscal year ." Defendant Clark is quoted as stating, "The third quarter of fiscal 2000

demonstrated a continuation in revenue improvement over the previous fiscal year . . . ." Within

that press release, Muse also listed, among other things, the Company's current assets, whic h

now totaled $6,974,934 and included $2,438,542 of cash . Thus, at this time "Cash" allegedl y

represented almost 35% of the Company's current assets .

48. On August 22, 2000, the Company filed with the SEC its Form 10-QSB for th e

third fiscal quarter ended June 30, 2000 (the "Third Quarter 10-QSB") . The Third QuarterlO-

QSB was signed by defendant Clark . The Third Quarter 10-QSB reiterated that Muse had thir d

quarter revenues of $1,492,176 and, in its Consolidated Balance Sheet, which was as of June 30 ,

2000, also reiterated that the Company had $2,438,542 in cash and contained no line item for

19

securities. The Financial Data Schedule, which was required to be submitted pursuant to Item

601(c) of Regulation S-B, 17 CFR § 228 .601(c)(1)(iv), and was required to contain a line ite m

for "securities," affirmatively misrepresented that the Company had no money invested in

securities by stating the following :

"PERIOD TYPE: 9-MOS

FISCAL YEAR END : JUN-30-200 0

PERIOD END: JLJN-30-2000

CASH: 2,438,542

SECURITIES : 0 . . . . "

[Emphasis added.]

49. Concerning the Company's cash position, the Third Quarter 10-QSB stated :

For the nine months ended June 30, 2000, there was a net decreasein cash of $9,626,192 as compared to a net increase in cash of$10,621,998 for the nine month period ended June 30,1999 . Thedecrease in cash is primarily attributable to the net loss of$3,532,325, the acquisition of subsidiaries for $1,820,595,increases in accounts receivable of $2,883,330, increase in otherassets of $2,360,499, and an increase in notes receivable of$819,822. For the nine month period ended June 30, 1999, theincrease in cash was primarily attributable to the receipt ofproceeds from the Company's initial public offering and collectionof accounts receivable associated with a strategic reselling partneragreement offset in part by the net loss of $3,440,252 .

50. The Third Quarterl0-QSB also reported, for the first time, that the Company had

obtained a $1 million line of credit with the "Bank of Albuquerque," but failed to disclose tha t

the Merrill Lynch account that contained the secretly-invested high-risk securities was placed a s

collateral for the line of credit, and as part of the agreement with the bank, the securities in th e

20

Merrill Lynch account were to have at all times a market value greater than or equal to $ 2

million. The Third Quarter 10-QSB stated :

On June 16, 2000, the Company secured a $1,000,000 line of creditwith the Bank of Albuquerque to provide interim working capital .The agreement is for a one year period and expires on June 16,2001 . The interest rate is 0 .5% above the Chase Manhattan Bankprime rate. The initial rate was 10% per annum and interest ispayable monthly. The line of credit balance at June 30, 2000 was$400,000 and interest expense of $1,524 was accrued at June 30,2000 .

51 . The statements set forth in paragraphs 47, 48, 49, and 50, including : (i) the

statement in the Company's August 14, 2000 press release and the Third Quarter 10-QSB tha t

the Company had revenues for the quarter of $1,492,176 ; (ii) the statement in the Third Quarte r

10-QSB that the Company had "Cash" of $2,438,542 ; (iii) the statement in the Financial Dat a

Schedule of the Third Quarter 10-QSB that the Company had "0" in securities ; and (iv) th e

statement in the Third Quarter 10-QSB that "[fJorthe nine months ended June 30, 2000, there

was a net decrease in cash of $9,626,192" were known to defendants to be materially false and

misleading at the time they were made based on the fact that defendants knew (based, inter alia ,

on the financial records and reports of the Company and Muse's Merrill Lynch accoun t

statements), but failed to disclose, the following :

(a) Rather than almost $1 .5 million of revenue for the quarter that the Company

had reported, the Company actually had overstated its revenues by almost 20% and had revenues

of $1,233,272 . This information was admitted by Muse in a draft revised 10-QSB for the perio d

ending June 30, 2000 (the "Draft Third Quarter 10-QSB"), which was circulated by Muse' s

controller, Dan Brown, and was prepared for filing on February 2, 2001, but, in fact, never file d

21

with the SEC or disclosed to the public . Under the heading, "RESTATEMENT," the Draft Thir d

Quarter 10-QSB also states :

During an internal review of operating results, it was discoveredthat the Company's Virtual Presence, LTD subsidiary, had notrecognized revenues in compliance with Company policy and incompliance with Statement of Position 97-2 ("SOP 97-2") asamended by Statement of Position 98-9 ("SOP 98-9") during theperiod ending March 31, 2000 and the period ending June 30,2000. In addition, certain expenses were capitalized and notrecognized as period costs . The Company had also incorrectlyclassified a marketable securities investment account as cash . Allrevenue recognition issues, capitalization issues as well as thetreatment of the marketable securities account had been correctedand were reported correctly on the Company's 10-KSB and 10-KSBA filings for the fiscal year ending September 30, 2000 .

The Draft Third Quarter 10-QSB also states that the Company's selling, general an d

administrative expenses were $1,868,837, $301,954 higher than reported to the public in th e

Third Quarter 10-QSB filed with the SEC .

(b) Muse and the Individual Defendants were, thus, using deceptive and

improper accounting methods in order to manipulate the Company's financial results in order t o

create the appearance of rapid revenue growth . These deceptive devices were in violation o f

GAAP and included improperly recognizing as revenue during the quarter on contracts that were

entered into during the quarter but which would not be performed until later periods .

(c) By this time a significant portion (nearly one third) of the Company's cash

had secretly been invested in high-risk securities, including so-called "penny stocks," in a Merril l

Lynch account, which ultimately lost more than 85% of their value . The largest single holding in

the Merrill Lynch account was a bulletin board company whose CEO was an early investor i n

Muse. In fact, the Draft Third Quarter 10-QSB admits that rather than having over $2 .4 million

22

in "cash," the Company had approximately $605,053 in cash and $2,378,213 in "marketabl e

securities." By secretly investing the Company's assets in high-risk securities, defendants put a t

risk the Company's ability to finance its business plan and, in addition, endangered Muse' s

ability to continue to satisfy NASDAQ's minimum net tangible asset listing requirements .

(d) Since June16, 2000, the Merrill Lynch account containing the securities was

placed as collateral for a $1 million line of credit that the Company obtained from a commercia l

bank based in Albuquerque . As part of the agreement with the bank, the securities in the Merril l

Lynch account were to have at all times a market value greater than or equal to $2 million .

52. On September 19, 2000, Muse filed with the SEC a Form SB-2, which was a

Registration Statement for the resale by the "selling stockholders" of 8,082,500 Muse commo n

shares to be sold "from time to time." One of the selling stockholders was a group o f

shareholders who had received a distribution of warrants from Josephthal . The Form SB-2 state s

that "Josephthal held a warrant, which is exercisable into 82,500 shares of our common stock at a

price equal to $3 .90 per share ." According to the Form SB-2, in April 2000, Josephtha l

distributed its warrant to a group of persons and entities, including 7,500 warrants to Willia m

Relyea, who authored the Josephthal Research Report . The Form SB-2 states that "The

Josephthal Group may offer the shares of our common stock that they receive after exercisin g

their respective warrants into shares of our common stock . . . . "

53. On October 16, 2000, as part of AVS's due diligence, the President and CEO o f

AVS, Russell G. Barbour, sent a letter to defendant Clark requesting clarification and additional

information concerning certain financial information provided by Muse to AVS . One such item,

"Cash and cash equivalents," states as follows :

23

Your October 12 letter referred to a decrease of $600,000 withrespect to MUSE's marketable securities position . Is that positionincluded in the balance sheet item "cash and equivalents?" What isthe nature of the marketable securities account? How much of theamount shown as "cash and equivalents" is in the form of cashwhich is immediately available to MUSE without restrictions orconsents of any third parties? If any of the "cash and equivalents"amount is or has been invested in items other than cash, pleasequantify and identify the items .

54 . In a letter also dated October 16, 2000, defendant Clark responded to Barbour' s

request for information. The part of the letter concerning the Merrill Lynch account states a s

follows :

The Cash and Equivalents line on the draft balance sheet presentedin the October 12, 2000 letter includes our stock portfolio withMerrill Lynch . The portfolio is made up of blue chip stocks inprimarily high-technology companies . The balance in the accountat September 30, 2000 was approximately $1 .4 million. Thisamount is net of a loss on investment that we previously reportedto you, and is reflected on the Statement of Operations presentedon October 12, 2000. As of Friday, October 13, the balance of theinvestment account was approximately $1 .6 million . Theremainder of Cash and Equivalents was in cash . We haveestablished a line of credit with Merrill Lynch in which we canborrow up to 80% of the market value of the account. We have notborrowed against the line at the present time .

55 . The October 16, 2000 letter demonstrates that defendant Clark was well aware o f

the Merrill Lynch account and the fact that Muse had omitted any mention of its high-risk

investments from its public filings and press releases and, therefore, that Muse's representation s

as to its cash position in its public filings were false . Clark's misrepresentation to Barbour that

the account "is made up of blue chip stocks" - which it was not - was done to placate Barbour

and try to assure that the deal with AVS using inflated Muse stock would be consummated .

Clark also misrepresented that Muse had established a line of credit with Merrill Lynch, as th e

24

account was already the collateral for the Bank of Albuquerque line of credit . As a result of

Clark's assurances and the fact that AVS's management and board of directors were unaware o f

the true financial condition of Muse, on November 9, 2000, the Company consummated the dea l

by issuing 1,929,579 shares of its common stock in exchange for all of the common an d

preferred shares of AVS .

56. On December 8, 2000, Josephthal again reiterated its "buy" recommendation .

57. On December 11, 2000, the Company announced that it had changed its corporat e

headquarters from Albuquerque, New Mexico, to Waltham, Massachusetts, following the AV S

transaction.

58 . In January 2001, Muse hired Samuel A . Longo - a convicted felon - to help them

obtain a desperately-needed $10 million credit facility. According to a January 4, 1995 article in

The Recorder, Longo had been convicted and sentenced to prison for his part in a scheme to

defraud banks and investors out of $17 million . In a memorandum dated January 16, 2001, from

Longo to defendant Clark and Steve Sukman, Longo describes how he provided financia l

information concerning Muse to Pat Romo, Senior Vice President of Bank of Albuquerque, in a n

attempt to secure the credit facility from the bank . According to the memorandum, the financia l

information provided by Muse "represented that the Bank of Albuquerque had provided Mus e

with a $1 million unsecured contract credit facility, and that it was in good standing ."

According to the memorandum, during a meeting with the bank, Romo explained "that the loa n

to Muse was not unsecured, but secured by a custodian trading account at Merrill Lynch . And in

fact, the loan was in default due to Merrill Lynch not managing and reporting to the bank and

Muse in accordance with the Bank's security agreement ."

25

The Truth Begins to Emerge

59 . On January 30, 2001, Muse issued a press release announcing its financial result s

for the fiscal year ending September 30, 2000 . This press release also specifically stated that, a s

of September 30, 2000, the Company held securities which were worth $1,262,603 . This

seemingly innocuous statement about the Company's securities was actually highly significan t

for a number of reasons . First, in that press release, for the first time, the Company disclosed that

during the turbulent market times of the year 2000, it, in fact, held marketable securities . These

securities were far more at risk than the "cash" defendants had falsely represented Muse had

instead of such securities . Second, this passage of the press release was materially misleading i n

that, while it disclosed Muse had approximately $1 .3 million in marketable securities, it failed t o

disclose that the Company had secretly, originally invested $2 million in marketable securitie s

back in October 1999, and thus had already lost more than 35% of its investment by Septembe r

30, 2000, a fact public investors in Muse could not have known. Third, while the press releas e

finally disclosed that Muse had invested in "marketable securities," the press release wa s

misleading in failing to disclose the highly risky nature of those securities, which include d

bulletin board and penny stocks . And, fourth, the statement was additionally misleading because

the press release failed to disclose that as of December 31, 2000 - one month prior to the pres s

release - the value of the Company's marketable securities had shrunk from $1,262,603 t o

$286,206! The ramifications of the steep decline in the value of these securities were significan t

in that, among other things, this meant that Muse was in technical default under its line of credi t

agreement with the Bank of Albuquerque, that it was putting at risk the Company's ability t o

26

finance its business plan, and that it was presently in danger of failing to satisfy NASDAQ' s

minimum net tangible asset listing requirements .

60. That same day, the Company quietly filed with the SEC its Form 10-KSB fo r

fiscal year 2000 (the "10-KSB") . The 10-KSB, which was signed by defendant Clark, reiterate d

the amount of securities listed in the January 2000 press release, and, for the first time, stated :

Since September 30, 2000, the Company's [sic] discoveredadditional significant losses in their marketable securities account .Management believes that such losses may be attributable tocircumstances other than normal market fluctuations . As ofDecember 31, 2000 the account had a market value of $286,207 .

Elsewhere in the 10-KSB, under the heading "Line of Credit," the Company disclosed for th e

first time that: (i) a $1 million line of credit that it obtained from "a commercial bank based i n

Albuquerque" in June 2000 is collateralized by the marketable securities account ; (ii) as part of

the agreement with the Albuquerque bank, the marketable securities were to have at all times a

market value not less than $2 million; and (iii) the Company "is in technical default of the

agreement." The 10-KSB was silent about the Company's known material overstatement of th e

Company's revenues during the second and third quarters of fiscal 2000 .

61 . Following the Company's press release and the issuance of the 10-KSB, the

Company's stock price dropped by over 15% from a closing price of $1 .0313 on January 29 ,

2001, to a closing price of $0 .875 on January 30, 2001 .

62. On February 1, 2001, the Company filed with the SEC an amended Form10-

KSB/A for fiscal year 2000, which was also signed by defendant Clark . The amended 10-KSB/A

again provided no information about the Company's overstatement of revenues and provided n o

new information about the Company's hidden investments . Neither version of the Company' s

27

10-KSB disclosed that the Company had secretly been investing in high-risk securities, including

penny and bulletin board stocks, since October 1999 . Nor did either version of the Company' s

10-KSB disclose that the Company's revenues for both the second and third fiscal quarters o f

2000 had been materially overstated in violation of GAAP .

63 . On February 21, 2001, Muse issued a press release announcing its financial results

for the first fiscal quarter ending December 31, 2000 . Within that press release, Muse agai n

disclosed, among other things, that as of the end of the quarter, the Company's marketabl e

securities were worth only $286,206. In addition, the press release stated that "Nasdaq ha s

decided to review [the Company's] ability to continue to comply with all listing maintenanc e

criteria, including the requirement to maintain net tangible assets of $2,000,000, which th e

Company was not in compliance with as of December 31, 2000." The press release also

announced that "Steve Sukman, Senior Vice President of MUSE Technologies and a member o f

its Board of Directors, has assumed CEO responsibilities . "

64. Also on February 21, 2001, the Company filed its 10-QSB for the first fisca l

quarter ended December 31, 2000 (the "1 Q2001 10-QSB") . The l Q2001 10-QSB reiterated that

the Company had $286,206 in marketable securities, that the securities account was collateral fo r

a line of credit with the Bank of Albuquerque, and for the first time disclosed that the Company

held its secret account of high-risk securities since October 1999 . In this connection, the 1 Q200 1

10-QSB states :

In October 1999, we deposited $2,000,000 in an investmentaccount with a premier investment banking organization . As ofDecember 31, 2000, the value of such account was approximately$300,000. The Bank [of Albuquerque] is currently in control ofsuch funds in connection with the line of credit discussed above .

28

65 . Following this announcement, the price of Muse's common stock dropped by

more than 20%, from a closing price of $0 .71875 per share on February 20, 2001, to a closing

price of $0.5625 per share on February 21, 2001 . Over the next few days, Muse's common stock

traded as low as $0 .25 per share, less than a quarter of the price of the stock prior to January 29 ,

2001, when the truth concerning the Company's secret investments started to emerge .

66. During the Class Period, defendants materially misled the investing public ,

thereby inflating the price of Muse stock, by publicly issuing false and misleading statements an d

omitting to disclose material facts necessary to make defendants' statements, as set forth herein,

not false and misleading . These statements and omissions were materially false and misleading

in that they failed to disclose material adverse information and misrepresented the truth about the

Company and its finances, specifically, that : (i) the Company's announced revenues for the

second and third fiscal 2000 quarters had been materially overstated in violation of GAAP ; (ii)

since October 1999, the Company had invested a significant portion of its cash in high-risk

securities, including penny and bulletin board stocks ; (iii) since June 2000, the Company had

pledged these securities as collateral to secure a $1 million line of credit ; and (iv) that those

securities had lost more than 85% of their value, causing the Company to be in default on its loa n

agreement, putting at risk the Company's ability to finance its business plan, and endangerin g

Muse's ability to continue to satisfy NASDAQ's minimum net tangible asset listin g

requirements .

67. As a result of defendants' materially misleading statements and failures to disclose

the truth about Muse and its true financial results, Muse securities traded at artificially inflated

prices during the entire Class Period, until the time the adverse information described above wa s

29

fully disseminated to the securities markets on February 21, 2001 . Plaintiffs and other members

of the Class acquired Muse securities relying upon the integrity of the market price of Mus e

securities and market information relating to Muse, or in the alternative, upon defendants '

misleading statements, and in ignorance of the adverse, undisclosed information known t o

defendants, and have been damaged thereby .

Muse's Financial Statements for the Second and Third Quartersof Fiscal 2000 were Not Prepared in Conformity With GAAP

68. GAAP requires that two conditions be met before revenue may be recognized : (1)

the revenues are realized or realizable, i .e ., collection of the revenues are reasonably assured, an d

(2) the revenues are earned. An entity's revenue-earning activities involve delive ring or

producing goods, rendering services, or other activities that constitute its ongoing major o r

central operations, and revenues are considered to have been earned when the entity has

substantially accomplished what it must do to be entitled to the benefits represented by the

revenues . Generally, the two conditions are met by the time the product is delivered or th e

service is rendered to the customer. See FASB Statement of Financial Accounting Concepts No .

5, paras . 83 and 84. AICPA Statement of Position No . 97-2 governs specifically revenu e

recognition on software contracts . SOP 97-2 does not permit revenue to be recognized unti l

persuasive evidence of an arrangement exists, delivery has occurred, the vendor's fee is fixed o r

determinable and collectibility is probable . In the quarters ended March 31 and June 30 , 2000 ,

Muse violated GAAP, specifically CON5 and SOP 97-2, in recognizing revenue on certain

software contracts prior to delivery under those contracts . In addition, GAAP requires that many

expenses, such as selling and administrative expenses, be recognized during the period in whic h

cash is spent or liabilities are incurred for goods and services that are used up either

30

simultaneously with acquisition or soon thereafter. CON5, par. 86.b. In the quarters ende d

March 31 and June 30, 2000, Muse violated GAAP by failing to expense selling an d

administrative costs in the period in which the cash was spent or liabilities were incurred .

Muse's controller, Dan Brown, in the Draft Second Quarter 10-QSB and the Draft Third Quarte r

10-QSB, concurs that Muse's financial statements for these two quarters violated GAAP .

SCIENTER

69. As alleged herein, defendants acted with scienter in that they knew that the public

documents and statements issued or disseminated in the name of the Company were materiall y

false and misleading; knew that such statements or documents would be issued or disseminated

to the investing public ; and knowingly and substantially participated or acquiesced in the

issuance or dissemination of such statements or documents as primary violations of the federa l

securities laws . As set forth elsewhere herein in detail, defendants, by virtue of their receipt o f

information reflecting the true facts regarding Muse, their control over, and/or receipt and/o r

modification of Muse's allegedly mate rially misleading misstatements and/or their association s

with the Company which made them privy to confidential proprietary information concernin g

Muse, participated in the fraudulent scheme alleged herein. Specifically, during the Class Period ,

defendants, as a result of their positions as the senior-most members of the Company' s

management with direct responsibility for the Company's finances and operations, knew or wer e

reckless in failing to know, that the Company had materially overstated its revenues during th e

second and third quarters of fiscal 2000, that the Company had secretly invested a significant

portion of its cash in high-risk securities, that the Company had pledged these securities a s

collateral to secure a $1 million line of credit, that these securities ultimately lost more than 85 %

31

of their value, that the Company had put at risk its ability to finance its business plan, and that th e

Company's ability to satisfy NASDAQ's minimum net tangible asset requirements had been

severely compromised . Moreover, during the Class Period, Muse's Controller, Dan Brown ,

circulated draft revised quarterly statements for the second and third quarters of fiscal 2000 -

which were never filed with the SEC or disclosed to the public - that described the Company' s

improper revenue recognition and failure to disclose the Company's secret account at Merril l

Lynch. Defendants also knew about these secret investments because, among other things, (a )

they were provided with monthly Merrill Lynch account statements ; and (b) they entered into a

one million dollar line of credit with the Bank of Albuquerque, which was a significan t

transaction for the Company (and publicized by the Company as such), in which they pledged the

securities in the Merrill Lynch account to the bank as collateral .

70. Defendants knew or were reckless in not knowing that the investments in th e

Merrill Lynch account were speculative securities with risks greater or different than ordinary

market risks and certainly with risks far greater than holding onto the Company's money a s

"cash," as defendants had represented the nature of the Company's investments to the public .

Indeed, notwithstanding the fact that the Merrill Lynch account statements showed defendant s

what securities Muse held, as set forth above, defendants eventually admitted in the Company' s

10-KSB, filed on January 30, 2001, that (i) they had discovered significant losses in thei r

marketable securities account by September 30, 2000, notwithstanding the fact that prior to

January 30, 2000, the Company never even disclosed that it had invested in "marketabl e

securities" (as opposed to "cash") ; and (ii) that by January 30, 2001, defendants had "discovere d

32

additional significant losses in their marketable securities account ." Moreover, management

acknowledged in the 10-KSB that the losses occurred under unusual circumstances .

71 . Defendants, because of their positions as the highest-ranking officers of th e

Company, knew or were reckless in not knowing that Muse had entered into a significant

contract with Manchester University on or about March 27, 2000, that the contract would not be

performed until at least August 2000, and that revenue for the entire contract had been

improperly booked in the quarter ended March 31, 2000, in violation of GAAP .

72 . During the Class Period, Muse consummated the AVS merger using artificiall y

inflated Muse stock as currency. Muse used more than 1 .9 million shares of the Company' s

common stock to acquire AVS. By using its artificially inflated shares, Muse was able to make

this acquisition for fewer shares than it otherwise could have had Muse shares been trading a t

their proper level . The ability to make this acquisition for less value provided another powerful

motive for defendants to engage in their scheme to inflate artificially the market price of Mus e

securities .

73 . During the Class Period, Muse used its stock to entice favorable coverage from

Josephthal, in general, and Josephthal's analyst William Relyea, in particular . The ability to

obtain favorable coverage from a highly reputable securities firm was another powerful motive

for defendants to engage in their scheme to inflate the market p rice of Muse securities .

74. Defendants either knew or recklessly disregarded the true facts concerning the

Company's investments in high-risk securities, in that such investments constituted a materia l

portion of the Company's assets . For the quarter ended December 31, 1999, the $2 million

invested in high-risk securities constituted approximately 25% of the "cash" listed as an asset i n

33

the quarter's financial statements and approximately 18% of the Company's total assets as o f

December 31, 1999. For the quarter ended March 31, 2000, that $2 million represented over

30% of the Company's reported "cash" and approximately 20% of the Company's total reporte d

assets. For the quarter ended June 30, 2000, the $2 million was over 80% of the Company' s

reported "cash" and almost 30% of the total reported assets . In addition, as a result of their

positions with the Company and the fact that they received periodic account statements from

Merrill Lynch, the facts support a strong inference that the Individual Defendants were directl y

involved in the decision to invest a material amount of the Company's assets in the high-ris k

securities and that they monitored the results of that investment .

FIRST COUNT

Vio lations of Section 10(b) of the Exchange ActAnd SEC Rule lOb -5 Promulgated Thereunder

75 . Plaintiffs repeat and reallege each and every allegation contained in the above

paragraphs, as if fully set forth herein . This claim is asserted against all defendants .

76 . During the Class Period, the defendants, and each of them, carried out a plan ,

scheme and course of conduct which was intended to and, throughout the Class Period, did : (i)

deceive the investing public, including plaintiffs and other Class members, as alleged herein ; (ii )

artificially inflate and maintain the market price of Muse securities ; and (iii) cause plaintiffs and

other members of the Class to acquire Muse securities at inflated prices . In furtherance of this

unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set

forth herein.

77. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make th e

34

statements made not misleading; and (c) engaged in acts, practices and a course of busines s

which operated as a fraud and deceit upon the acquirers of the Company's securities in an effort

to maintain artificially high market prices for Muse securities in violation of Section 10(b) of th e

Exchange Act and SEC Rule I Ob-5 . All defendants are sued either as primary participants in th e

wrongful and illegal conduct charged herein and/or as controlling persons as alleged below .

78. In addition to the duties of full disclosure imposed on defendants as a result o f

their making of affirmative statements and reports, or participation in the making of affirmativ e

statements and reports to the investing public, defendants had a duty to promptly disseminate

truthful information that would be material to investors in compliance with the integrated

disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C .F.R. § 210 .01 et

sue.) and S-K (17 C .F .R. § 229 .10 et M.) and other SEC regulations, including accurate and

truthful information with respect to the Company's operations and performance so that the market

prices of the Company's publicly traded securities would be based on truthful, complete an d

accurate information.

79. Muse and the Individual Defendants, individually and in concert, directly an d

indirectly, by the use of means and instrumentalities of interstate commerce and /or of the mails ,

engaged and participated in a continuous course of conduct to conceal adverse material

information about the Company's financial results, business, operations, and future outlook a s

specified herein . Muse and the Individual Defendants employed devices, schemes and artifice s

to defraud, while in possession of material adverse non-public information, and engaged in acts ,

practices, and a course of conduct as alleged herein in an effort to assure investors of Muse' s

value, which included the making of, or the participation in the making of, untrue statements o f

35

material facts and omitting to state material facts necessary in order to make the statements made

about the Company's finances in the light of the circumstances under which they were made, not

misleading, as set forth more particularly herein, and engaged in transactions, practices and a

course of business which operated as a fraud and deceit upon acquirers of Muse securities durin g

the Class Period.

80. The Individual Defendants' primary liability, and controlling person liability ,

arises from the following facts, among others : (i) the Individual Defendants were high-level

executives at the Company during the Class Period and were members of the Company's

management team ; (ii) the Individual Defendants, by virtue of their responsibilities and activitie s

as senior officers of the Company, were privy to and participated in the drafting, reviewin g

and/or approving some or all of the misleading statements, releases, reports and other publi c

representations of and about Muse, and the Individual Defendants signed some or all of the

Company's public filings with the SEC (as specified above), which public filings contained th e

allegedly materially misleading statements ; (iii) the Individual Defendants knew, or had acces s

to, the material adverse non-public information about Muse's financial condition which were no t

disclosed by, among other things, their access to, and receipt of, Muse's periodic financial report s

and the Merrill Lynch account statements; and (iv) the Individual Defendants were aware of the

Company's dissemination of information to the investing public which they knew or recklessly

disregarded was materially false and misleading.

81 . The defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed t o

ascertain and to disclose such facts, even though such facts were available to them. Such

36

defendants' material misrepresentations and/or omissions were done knowingly or recklessly and

for the purpose and effect of concealing Muse's true financial condition from the investing publi c

and supporting the artificially inflated price of its stock. As demonstrated by defendants '

statements throughout the Class Period, if they did not have actual knowledge of th e

misrepresentations and omissions alleged, defendants were grossly reckless in failing to obtain

such knowledge by deliberately refraining from taking those steps necessary to discover whethe r

those statements were false or misleading .

82. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market prices of Muse securities

were artificially inflated during the Class Period. In ignorance of the fact that market prices o f

Muse's publicly-traded securities were artificially inflated, and relying directly or indirectly on

the false and misleading statements made by defendants, or upon the integrity of the market price

at which the securities traded, and the truth of any representations made to appropriate

government agencies published to the investing public, at the times at which any statements wer e

made, and/or on the absence of material adverse information that was known to or recklessly

disregarded by defendants but not disclosed in public statements by defendants during the Clas s

Period, plaintiffs and the other members of the Class acquired Muse securities during the Clas s

Period at artificially high prices and were damaged thereby .

83 . At the time of said misrepresentations and omissions, plaintiffs and the othe r

members of the Class were ignorant of their falsity, and believed defendants' public statements t o

be true . Had plaintiffs and the other members of the Class known of the true nature and make-up

of the financial condition of the Company and the noncompliance with federal law, which wer e

37

not disclosed by defendants, plaintiffs and the other members of the Class would not hav e

purchased or otherwise acquired their Muse securities during the Class Period, or, if they had

acquired such securities during the Class Period, they would not have done so at the artificially

inflated prices which they paid .

84. By virtue of the foregoing, defendants have violated Section 10(b) of th e

Exchange Act, and SEC Rule lOb-5 promulgated thereunder .

85 . As a direct and proximate result of defendants' wrongful conduct, plaintiffs and

the other members of the Class suffered damages in connection with their acquisition of th e

Company's securities during the Class Period .

SECOND COUN T

Violation Of Section 20(a) Of The Exchange ActAgainst All of The Defendant s

86 . Plaintiffs repeat and reallege each and every allegation contained in the above

paragraphs, as if fully set forth herein. This claim is asserted against all of the defendants .

87. The defendants acted as controlling persons of Muse and its employees within the

meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their executiv e

positions and/or Board membership, as alleged above, the Individual Defendants had the powe r

to influence and control and did influence and control, directly or indirectly, the decision-makin g

of the Company, including the content and dissemination of the various statements which

plaintiffs contend are false and misleading . The Individual Defendants were provided with o r

had unlimited access to copies of the Company's internal reports, securities account statements ,

press releases, public filings and other statements alleged by plaintiffs to be misleading prior t o

38

A

and/or shortly after these statements were issued and had the ability to prevent the issuance of the

statements or cause the statements to be corrected .

88 . In particular, the Individual Defendants had direct involvement in, and control of ,

the day-to-day operations of the Company and therefore, are presumed to have had the power t o

control or influence the particular transactions giving rise to the securities violations as alleged

herein, and exercised the same .

89. By virtue of their positions as controlling persons of Muse, the Individua l

Defendants are liable pursuant to Section 20(a) of the Exchange Act. Similarly, by virtue of it s

position as a controlling person of the Individual Defendants, Muse is liable for the wrongful act s

of the Individual Defendants pursuant to Section 20(a) of the Exchange Act. As a direct and

proximate result of the Individual Defendants' wrongful conduct, plaintiffs and the other

members of the Class suffered damages in connection with their acqusition of the Company' s

securities during the Class Period.

WHEREFORE, plaintiffs pray for relief and judgment, as follows :

(a) Determining that this action is a proper class action, and certifying th e

Court-appointed Lead Plaintiffs as Class representatives under Rule 23 of the Federal Rules o f

Civil Procedure ;

(b) Awarding compensatory damages in favor of plaintiffs and the other Clas s

members against all defendants, jointly and severally, for all damages sustained as a result o f

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;

(c) Awarding plaintiffs and the Class their reasonable costs and expense s

incurred in this action, including counsel fees and expert fees ; and

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(d) Such other and further relief as the Court may deem just and proper.

PLAINTIFFS DEMAND A TRIAL BY JURY

Dated: November 30, 2001

By their attorneys ,

Thomas G. Shapiro (BB #454680)SHAPIRO HABER & URMY LLP75 State StreetBoston, MA 02109(617) 439-393 9

Plaintiffs' Liaison Counsel

WOLF POPPER LLPMarian P . RosnerChet B. WaldmanCarl L. Stine845 Third AvenueNew York, NY 10022(212) 759-4600

Plaintiffs' Lead Counse l

I HEREBY CERTIFY THAT A TRUE COPY OF TlE ABOVEDOCUMENT WAS SERVE D uponATTORIp OF RECORDFOR EACH OTHER P

.0~1

F ti

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