SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C.  20549


                                   FORM 10-KSB



 [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
        THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

                   For the fiscal year ended December 31, 1997

                                       OR

 [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
                 THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)


           For the transition period from ________ to ________



Commission File Number: 0-21645
-------------------------------



                                 TELLURIAN, INC.
             -----------------------------------------------------
             (Exact name of Registrant as specified in its charter)



          Delaware                                          22-3451918
-------------------------------                     ---------------------------
(State or other jurisdiction of                     (I.R.S. Employer
incorporation or organization                       (Identification No.)



300K Route 17 South
Mahwah, New Jersey                                                 07430
---------------------------------------              ---------------------------
(Address of principal executive offices)                    (Zip Code)



Registrant's telephone number, including area code:       (201) 529-0939
                                                     --------------------------

Securities registered pursuant to Section 12(b) of the Act:

                                      None
                                      ----

Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, $.01par value
                           ---------------------------
                                (Title of Class)

<PAGE>


     Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter  period that the registrant was required to file such reports) , and (2)
has been subject to such filing  requirements  for the past 90 days.  Yes x . No
___.

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].

     As of April 8, 1998 at 4:00 P.M., the aggregate  market value of the voting
stock held by non-affiliates,  approximately  2,709,906,  Common Stock, $.01 par
value, was  approximately  $7,113,503 based on the last sale price of $2.625 for
one share of  Common  Stockon  such  date.  The  number  of  shares  issued  and
outstanding of the Registrant's Common Stock, as of April 8, 1998 was 3,596,605,
without giving effect to the 350,000 shares to be issued in April as part of the
Cyberport creditor settlement (see Item 1).

<PAGE>
                                     PART I,

Item 1.  Description of Business

General

     Tellurian, Inc. ("Tellurian" or the "Company"), a Delaware corporation,  is
engaged in the design,  development  and marketing of virtual  reality  products
which include image generators,  related  software,  helmets and motion systems.
The Company also provide sconsulting services via developing customized software
and  databases for  customers  who purchase its image  generators  and need such
services for specific application requirements.

     Since 1988, the Company has been designing,  building and selling a line of
specialized  computers and ancillary  software which are used to generate visual
images in realtime for use in flight  trainers and other  simulation  equipment.
From 1992 through  1995,  the Company's  principal  product was its AT-200 image
generator  which it sold  tocustomers  who  manufacture  training and simulation
equipment such as Hughes/Link Corporation, Aviation Simulation Technology, Inc.,
and Ship  Analytics,  Inc. In June 1994,the  Company  began  adapting its AT-200
Image  Generator  and selling  this  product  andancillary  software  for use in
virtual  reality   entertainment   devices  to  companies  such  as  Fightertown
Entertainment Centers, Ride & Show Engineering Corp., and MaxFlight Corp.

     In 1994, the Company began designing and engineering a new image generation
product known as the "EAGLE",  a  specialized  computer,  which is  specifically
designed for the virtual reality  entertainment  market. In July 1996, Tellurian
delivered its first  production  units of the EAGLE pursuant to purchase orders.
The Eagle is  available  in multiple  resolution  formats and is faster and less
expensive  to  produce  than the  Company's  previous  products,  the AT-100 and
AT-200.  It is also different from such previous products in that it is tailored
for  entertainment  use.  Each unit is  composed  of  proprietary  hardware  and
software  which when  combined with motion and sound  simulate a  full-immersion
experience.  The "EAGLE" is intended  for use at  amusement/theme  parks,  video
arcades,  Tourist Entertainment Centers ("TEC") and Location Based Entertainment
Centers  ("LBE").  The TEC differs from the LBE in that the market of the TEC is
intended to be the family vacationer rather than the local, repeat customer.

     Utilizing the "EAGLE" technology,  Tellurian has developed a helmet product
to  complement  the Eagle for the  entertainment  market.  This new  product  is
expected to be marketed  and sold on two  levels.  The first level of  marketing
will be for  Tellurian to build its own  complete  game units either for sale or
use in establishing one or more joint ventures, or revenue share agreements with
owners and operators of TEC's or LBE's.  The second level will be components for
other virtual reality game  manufacturers.  The Company is currently  completing
the first game  product to be sold for the  helmet-basedgame.  The helmet is now
being actively offered for sale and delivery within 90 days of order.

                                        2
<PAGE>

     In  March  1997,  Tellurian  formed  Cyberport  Niagara,  Inc.  ("Cyberport
Niagara"),  an  Ontario,  Canada  company,  as a  subsidiary  for the purpose of
establishing a TEC in Niagara Falls,  Ontario.  This 40,000 square foot facility
known as  "Cyberport",  which opened in June 1997 in the casino  district  (also
known as Clifton Hill),  features the latest in Tellurian  technology as well as
an 8,000  square foot  interactive  attraction  leased from the Ontario  Science
Centre,  an Egyptian built replica of the treasures from the tomb of KingTut and
an arcade area.  Tellurian currently owns all of the outstanding common stock in
Cyberport Niagara Inc. However,  as part of a recently completed  refinancing of
Cyberport (see "Recent  Developments"),  912,634 shares of non-voting  preferred
stock  (par  value $1  Canadian)  were  issued by  Cyberport  Niagara to various
creditors in return for the forgiveness of payables owed. In addition, Tellurian
is seeking to raise money to financeits  operations and is attempting to sell up
to a majority  interest in Cyberport to a third party. No assurance can be given
that the Company will be successful in this regard or, if successful,  that such
sale would be on terms satisfactory to the Company.

     Tellurian   also  formed   Cyberport   International,   Inc.,   a  Delaware
corporation,  for the  purpose of  franchising  the  Cyberport  concept to third
parties. This subsidiary which is wholly-owned by Tellurian, is inactive.

Recent Developments
-------------------

     The Company experienced a net loss of approximately $2,709,000 for 1997 and
had a working capital deficit of approximately  $2,106,000 at December 31, 1997.
The Company's  operations require additional financing to sustain the Company as
a going concern.  In this respect,  in February  1998, the Company  completed an
exchange  offering to its existing  warrant  holders  pursuant to which  warrant
holders  tendered 321,605  warrants and  approximately  $603,000 and received in
return 321,605 Units which included 321,605 shares of the Company's Common Stock
and 321,605  Warrants  identical  to those  tendered  pursuant  to the  exchange
offering.  The Company currently has limited cash and such cash was derived from
such exchange offering.

     At December 31,  1997,  the Company had current  liabilities  and long term
debt of  approximately  $3,266,000.  In order to reduce  such debt,  the Company
sought to convert all or a portion of such debt of the Company into  equity.  As
of March 31, 1998, the Company succeeded in converting  approximately $1,400,000
of such  indebtedness  as described  below.  At February 28, 1998,  after giving
effect to such debt conversions and the completion of the exchange offering, the
Company has net tangible assets of approximately  $2,250,000,  a working capital
deficit  of  approximately  $460,000  and  total  liabilities  of  approximately
$1,877,000. Such debt conversions included the following:

     (a) In March 1998, the Company  entered into an agreement with  Interactive
Media Concepts, Inc. pursuant to which Interactive,  a consultant of the Company
which was owed approximately  $56,000,  accepted  Interactive's offer to convert
such indebtedness into 100,000 shares of the Company's Common Stock.

                                        3
<PAGE>
     (b) The Company owed $1,295,527 U.S. (equivalent to $1,865,559 Canadian) to
certain  contractors  in Canada for work done on  improvements  to its Cyberport
facility. These contractors included Newman Bros. Limited, Phoenix Wood Products
Corporation (formerly known as Trigin Management Corporation),  Star Tile Centre
Limited,  EccoElectric  Limited,  DBN  Drywall  &  Acoustics  Limited,  Expoplex
Incorporated  (the  "Cyberport  Creditors").  On March 26, 1998,  the  Cyberport
Creditors agreed to convert $601,083  U.S.(equivalent to $865,559 Canadian) into
865,559 Series B Special Shares plus anadditional 47,075 Series B Special Shares
for goods and services taxes owing at closing (also known as Preferred Stock) of
Cyberport  Niagara. The Cyberport  creditors  also agreedto  assign to Cyberport
Niagra's landlord (also known as 1174757 Ontario Inc.) $694,444U.S.  (equivalent
to  $1,000,000  Canadian)  of  the  Company's  indebtedness.  Contemporaneously,
1174757  Ontario Inc.  entered into an agreement to convert the entiredebt  into
350,000  restricted shares of the Company's Common Stock. The Company alsoagreed
to pay  the  landlord  $36,111  U.S.  ($52,000  Canadian)  in rent  arrears  and
$33,333U.S.  ($48,000  Canadian) in additional  security deposit.  In connection
with suchagreement, the Company granted the Landlord options to purchase 100,000
additionalshares of the Company's Common Stock at an exercise price of $1.75 per
share  betweenApril  1, 1998 and September 30, 1998.  Tellurian also granted the
landlord  security  interests  in certain  simulators  located at the  Company's
Cyberport  facility.  The aforesaid  agreements  concluded  various creditor law
suits that were  initiated  against  the Company  and its  subsidiary  demanding
payment  of  the  aforementioned  debt.  As a  result  of the  above  referenced
settlement, the Company cancelled $34,722 in over accruals.

     Not  withstanding  the foregoing,  the independent  auditors of the Company
have included an explanatory note in its Report of Independent  Certified Public
Accountants  dated March 10, 1998 (except for notes 18 and 19 which is March 31,
1998)  that the  consolidated  financial  statements  of the  Company  have been
prepared  assuming that the Company will continue as a going  concern.  Further,
the explanatory note states that certain matters raise  substantial  doubt about
the Company's ability to continue as a going concern.  In order to continue as a
going  concern,  the Company is dependent  upon the Company  raising  additional
financing,  receiving  substantial  revenues from  operations  and/or  selling a
majority interest in its Cyberport facility.  No assurances can be given thatthe
Company will be successful in its efforts to obtain the necessary cash to remain
as a going concern.

     The  Company's  plan to  continue  as a going  concern  also  includes  the
possible  completion of the two  acquisitions  pursuant to which the Company has
entered into letters of intent which are described below.  Conditions  precedent
to  the  completion  of  such  transactions  include,  without  limitation,  the
completion of due diligence,  the Company maintaining its NASDAQ listing and the
Company   arranging  for  a  public  financing  of  its  equity   securities  of
approximately  $6,000,000.  The Company has had preliminary  discussions  with a
prospective  underwriter  and it  believes  that a letter of intent  for such an
offering can be executed shortly.

                                       4
<PAGE>

     The Company has been  notified by the NASDAQ  Stock Market that it does not
meet the net tangible  assets/market  capitalization/net  income requirement and
that the Company  will  require an  exception  to such  requirement  in order to
maintain its NASDAQ  listing.  In this regard,  the Company has filed  documents
with the NASDAQ Stock Market requesting a written hearing scheduled for the week
of April 6, 1998.  The Company has been advised that the results of such hearing
will not be known until at least the week of April 13,  1998.  If the Company is
not granted an exception, it has the right to request (and intends torequest) an
oral hearing  pursuant to which it will be given the  opportunity to demonstrate
compliance  with the net tangible asset test or reasons why an exception  should
be grantedby the Hearings Committee. No assurances can be given that the Company
will be successful in maintaining  its NASDAQ listing and if  unsuccessful,  the
potential acquisitions  described herein are unlikely to be completed.  Further,
the loss of the Company's  NASDAQ  listing  would make it very  difficult if not
impossible for the Company to rais  additional  financing from private or public
financing and would  materially  adversely effect the liquidity and price of the
Company's securities.

The following describes two letters of intent issued by the Company:

     On April 3, 1998 the  Company  issued  letters  of intent  to  acquire  two
separate  companies,  both  actively  involved  in  the  manufacture,  sale  and
distribution  of various doll and  souvenir  products.  One of these  companies,
headquartered  in New York City, has been in existence for in excess of 10 years
and the other,  headquartered in New Jersey, has been in existence for 25 years.
The letters of intent,  expected to be signed on or about April 15, specifically
prohibit the Company from announcing the names of these companies  without their
written consent which they have not provided as of the date of this filing.

     Under the terms of the letters of intent,  Tellurian would issue a total of
4,000,000  shares of common  stock in return for the assets of these  companies.
Based on financial  statements  provided to Tellurian,  these  companies  have a
total annual revenue for 1997 in excess of $30,000,000  and book value of assets
in excess of $3,000,000.

     Under the terms of the letters of intent,  the Company and the  acquisition
candidates have 30 days to complete their respective  due-diligence research. No
assurance  can be giventhat  this  research  can be  completed  within this time
constraint or that the results of that research, if completed,  will provide the
necessary assurances for all parties to proceed with the merger proposal.

Background
----------

     The Company's  AT-100 and AT-200 image generators were, in part, based upon
developments  by  Ronald  Swallow  hereinafter   referred  to  as  the  "Quantum
flat-shaded technology" while he was a principal in Quantum Graphics Corporation
("Quantum"),  a  corporation  which he had founded in 1987 and which  became 80%
owned by him, Richard Swallow and Charles Powers. The development  activities of
Quantum  became  adversely  affected  due to its  inability  to obtain  adequate

                                       5
<PAGE>
funding  and  by  disagreements  among  its  shareholders.   Quantum  filed  for
protection  under the  Bankruptcy  Act in 1988.  During the course of bankruptcy
proceedings,   an  adversarial  proceeding  was  commenced  by  the  trustee  in
bankruptcy concerning the ownership of the Quantum flat-shaded technology.  As a
result of such adversarial proceeding, an agreement was entered into on November
5, 1991 between the trustee of Quantum,  TTY Graphics,  Inc.  ("TTY"),  and Greg
Gustin("Gustin"),  hereinafter  referred  to as the  "Purchase  Agreement",  the
latter two having been investors or principals in a predecessor of Quantum prior
to its formation.  The agreement  acknowledged that Quantum, TTY and Gustin each
owned an undivided one-third interest in the Quantum flat-shaded  technology and
provided for the sale of the interests  owned  byQuantum and Gustin to TTY for a
cash consideration of $150,000 and royalties to be paidby TTY or Tellurian equal
to  two-thirds  of four percent of revenues  derived from the  licensing  of, or
sales of products  incorporating,  the Quantum  flat-shaded  technology  and one
percent  of  revenues  derived  from the  licensing  of,  or  sales of  products
incorporating,  computer graphics  technology other than the Quantum flat-shaded
technology.  Payment  of the  royalties  was  secured  by a  security  agreement
granting  the  bankruptcy  trustee of Quantum  and Gustin a lien on the  Quantum
flat-shaded  technology  and all revenues,  products,  accounts  receivable  and
contract  rights arising from or related to the  technology,  and providing that
TTY could  not,  except  for  non-exclusive  licenses  sell,  contract  to sell,
encumber or otherwise dispose of the Quantum flat-shaded  technology without the
prior written consent of the trustee of Quantum.  Except for the above mentioned
payment  of  royalties  of  one  percent,  the  foregoing  provisions  were  not
applicable  to the EAGLE,  which is not based upon the  technology of the AT-100
and AT-200.

     TTY  assigned  the  Purchase  Agreement  to  Tellurian  in exchange for the
forgiveness of certain  financing  provided by Tellurian to TTY and a royalty of
one-third of four percent of all sales of Quantum flat-shaded technology up to a
maximum of $500,000.  In August 1996,  TTY agreed to cancel its right to receive
future  royalties in exchange for  Tellurian  agreeing to pay accrued and unpaid
royalties to it of $10,529 and an additional $70,000.  Of such $80,529,  $45,529
was paid in November of 1996, and the balance was due in November 1997 and is in
arrears.  Similarly,  in August  1996,  Gustin  agreed to cancel  his  rights to
receive future royalties under the Purchase  Agreement in exchange for Tellurian
agreeing  to pay him  accrued  and  unpaid  royalties  fixed  at  $5,000  and an
additional $75,000. Such $80,000 has been paid.

Virtual Reality
---------------

     Virtual  Reality is an artificial  environment  of sight,  sound and motion
created with the use of computers. The earliest example of a rudimentary virtual
reality  device  is the  Link  Trainer,  which  was  used to  train  pilots  for
instrument  flying.  With the availability of modern computers,  simulators have
under gone rapid development,  particularly in the presentation of visual scenes
and sound  effects.  Present day  simulators  provide not only motion,  but also
visual  pictures  and sound  effects,  which are  altered  as the  controls  are
manipulated.  Simulators  are  used in  training  ship  pilots  and air  traffic
controllers.

                                       6
<PAGE>

     The hallmark of virtual reality entertainment is its ability to immerse the
user in a fantasy  experience.  The four dimensions to present day VR are sight,
sound, motion,  andinteractivity with other players.  Tellurian's P-51 simulator
at  Cyberport  is a prime  example of virtual  reality  entertainment.  The unit
consists of a fiberglass cockpit similar to that ofa P-51 fighter aircraft,  and
it is outfitted  with a control  stick and a throttle.  Once seated,  the player
views what  appears to be the outside  world via five 27" video  monitors.  Game
play begins with the player  escorting  bombers that are under attack from enemy
fighters. Using only the visual display, the player is able to see a view of the
world which the computer is constantly  creating and changing in response to the
manipulation of the controls by the player.  This continual  interaction between
player and  computer  maintains  the  virtual  reality  of the P-51's  pitch and
direction and allows the player to choose his own adventure. If the player heads
off in the  direction of the enemy's  aircraft,  for example,  the computer will
create and control a visual  image of an  attacking  aircraft  for the player to
destroy-or  bedestroyed  by! If the player moves in a direction  away from enemy
aircraft,  the  player is free to  practice  his  flying  skills  without  being
confronted by an enemy aircraft.

Cyberport Niagara, Inc.
-----------------------

     Cyberport opened a "pay-one-price"  tourist  entertainment  center (TEC) at
the end of June.  Cyberport Niagara is designed for the vacationing  family. The
various  activity rooms contained within the facility have been carefully chosen
to ensure that the amount of time that a person of any tourist age group  spends
is approximately  the same as that of all other tourist age groups.  By having a
balanced  blend of  attractions,  Management  believes that it can attract large
numbers of vacationers to the facility.  The facility is not likely to achieve a
status  capable  of  causing  people  to  plan  vacations  around  it  (such  as
DisneyWorld),  exposure to large  numbers of walking  tourists is  essential  to
marketing  plans.  These groups alone will not support a venture like Cyberport.
However,  in addition to the walking tourist family, bus tour groups are capable
of  providing  large  volumes of  customers  although at some what less of a net
price per  person.  Both the  walking  tourist  and the bus tour  groups  are in
Niagara  Falls in  large  numbers  from  late  spring  through  late  September.
Cyberport  has been  actively  marketing to the tour  operators and has attended
numerous  industry  meetings and  conventions  to further these  activities.  In
addition,  Cyberport has recruited the  assistance of several  individuals  from
Niagara Falls who have had many years of experience in working with the bus tour
companies.

     Another factor critical to Management's plans for Cyberport is inclusion of
educational aspects to the recreational  activity to attract school tours to the
facility in theslower fall to spring periods.  This was done by contracting with
the Ontario Science Centre for exclusive use of the traveling  Science Circus, a
display originally developed to promote science learning in the lesser populated
sectors of Ontario but which,  due to budget  cuts,  was no longer able to leave
Toronto or to be properly staffed. In addition,  the Companywas able to purchase
exhibits of a space  shuttle  cockpit,  Sputnik and a lunar rover when the space
exhibit closed at the Canadian  National Expo.  These exhibits are  interactive,
and  provide  an  interesting  contrast  of  the  old  to the  new  when  placed
immediately before the pyramid opening to the replicas of artifacts found in the
Tomb of Tut.

                                       7
<PAGE>

     Cyberport was unable to do any significant  marketing or advertising  prior
to  itsopening  in summer of 1997.  As a  consequence,  very little  revenue was
generated fromthe abbreviated time it was open. However, by opening the facility
Cyberport was able todevelop  marketing  contacts and has assisted it in booking
student outings for the springseason.  Also,  combined  marketing  programs with
important other local attractions, most notably the Butterfly Museum, have begun
to create bookings for future visits to Cyberport.

     From mid-December thru mid-April  Cyberport is closed.  Cyberport employees
use that time to continue  contacting  the major  hotels and tour  operators  in
Niagara Falls (both Canadian and U.S.  sides) These hotel and tour operators are
key to gaining a share ofthe  organized  tour market.  Cyberport  personnel have
also obtained press and  television  exposure  including a morning  feature on a
Buffalo television station.

     Management  believes  that it will take time and further  financing for the
marketing  efforts of Cyberport to translate into a volume of traffic  necessary
to support Cyberport.  Cyberport's  business is seasonal with the spring through
summer  months  being  the high  seasons.  Publicly  available  statistics  from
attractions  such as the  Butterfly  Museum  demonstrate  that  tourists come to
Niagara Falls in sufficient  number to make Cyberporta  profitable  venture.  In
addition,  the  long-delayed  announcement  of the site  approved for the second
Niagara Falls casino has recently been made.  The  announcement  of that site is
expected to spur  construction  in the Niagara  Falls area,  followed by another
increase in the number of tourists coming to the area. However,  there can be no
assurances  that the Company will be successful in gaining the necessary  market
share in order to make  Cyberport  successful  with the limited  cash  resources
presently at its command.

     The Company believes that its ability to operate this facility successfully
depends on  elements  both  within and  outside of its  control,  including  the
success of its own products  incorporated  into this venture.  In addition,  the
Company faces  competition from existingand new entrants into the tourism market
in the Niagara Falls region.  Most of the competitors  have more experience than
the  Company in  opening  and  managing  tourist  facilities  and most have more
financial  resources  than the  Company.  There can be no  assurances  that this
project will perform successfully.

Products
--------

     Tellurian  has been  designing,  building and selling low cost,  high speed
image generators  since 1988. The first generator,  known as the AT-100 was used
exclusively for flight training  applications.  Since 1992, the Company has been
selling the AT-200  image  generator  which is a second  generation  unit and is
largely used in simulators for training  aircraft pilots and ship captains.  The
AT-200 is currently installed on Flight Trainer Devices("FTD") simulators, ships
handling  training  devices,  and  air  traffic  control  simulators.  TheAT-200
provides  real  time  image  generation  with  high  resolution,   multi-channel
operationand full color using proprietary hardware and software. As of March 31,
1998, the Company had built and sold over 250 AT-200 systems.

                                       8
<PAGE>

     The  Company  currently  offers  for sale  its  image  generation  unit and
ancillary software  (including  performing repairs and maintenance and providing
related  consulting  services) to two types of  customers:  those engaged in the
production  of  training  devices,  and those who  specialize  in  entertainment
devices.  The first category of customers includes such companies as Hughes/Link
Corporation,  Ship Analytics Corp., and Grumman Aerospace Corporation (currently
known  as  Northrop/Grumman  Aerospace  Corporation).  During  the  years  ended
December  31,  1997  and  1996,   revenues  from  this   category   amounted  to
approximately  27% and 16%,  respectively,  of the Company's  total revenues for
each  applicable  period.  The latter group  includes  MaxFlight  Corp.,  Ride &
ShowEngineering,  and the Fightertown  Entertainment  Centers.  During the years
ended  December  31,  1997 and  1996,  revenues  from  this  group  amounted  to
approximately 15%and 0%, respectively,  of the Company's total revenues for each
applicable period. There were no sales of AT-200 units during 1997.

     Tellurian's  most  recently  developed  image  generation  product  is  the
"EAGLE," a system  specifically  designed for the VR entertainment  market.  The
EAGLE,  which is available in multiple  resolution  formats,  is faster and less
expensive  to produce  than the AT-200.  Each unit is  composed  of  proprietary
hardware  and  software  which  combined  with  motion  and sound to  simulate a
full-immersion  experience.  The EAGLE is intended for use at  amusement/  theme
parks, video arcades, TEC's and LBE's.

     The  Company's  marketing  efforts  prior to  completion of the 1996 public
offering   hadbeen   concentrated  on  selling  image   generating   systems  to
manufacturers of trainers and simulators.  The sales and marketing  efforts were
conducted by officers of the  Company.  During 1996,  two  principal  customers,
namely,   Voyager  and  Ship  Analytics   Corp.   accounted  for  76%  and  16%,
respectively,  of the Company's revenues.  These same two companies  represented
38% and 27%, respectively, of the Company's 1997 revenues.


Backlog
-------

     At December 31, 1997, the Company had no backlog.  At December 31, 1996 the
Company  had a backlog of 32 Eagle  units with a sales  value of  $160,896.  The
backlog was entirely under the Fightertown order which dates back before January
1, 1996 and under which  Fightertown did not accept  deliveries in 1995 or 1996.
As of December  31,1997 all of these units have been  delivered.  (See Agreement
with Fightertown.).


Other Products and Services
---------------------------

     Helmets.  There are various manufacturers which produce helmets for virtual
reality  experiences.  Tellurian believes that it is advantageous to utilize the
unique  technologies  of the "EAGLE" in developing  its own line of  proprietary
products  since this  allows it  toutilize  all of the  advantages  of the Eagle
without adding unnecessary cost.

                                       9
<PAGE>

     Upon  completion  of  the  1996  Public  Offering,   the  Company  began  a
development  project to finalize  the design and  building  of a helmet  mounted
visual  system to take  maximum  advantage  of the EAGLE image  generator.  This
device is expected to replace the cumbersome 27" and 35" monitors now being used
on Tellurian's  game units.  When combined with the EAGLE,  the helmet's special
optics and ear phones  will give the  player  stereo  viewing in full color with
surround  sound.  The first working  prototype of the Company's  custom designed
helmet was  completed  in the Fall of 1997.  (See  Management's  Discussion  and
Analysis  and  Results of  Operations.)  Based on the  initial  performance  and
evaluations,   Management   has  decided  to   concentrate   its   resources  on
incorporating the helmet into a game structure and showed that prototype unit at
the important industry trade show (IAPPA) in November 1997.

     The helmet  mounted visual system was displayed and offered for sale at the
IAAPA trade show in November  1997.  While the reaction to the visual system was
extremely  positive,  it was clear that game software had to be completed before
customers would commit to the purchase of these units.  The Company has recently
begun offering the unit with its air battle theme for delivery in 3 to 4 months.
If a customer  wishes to purchase the hardware  with a different VR  experience,
the time  required  to  program  the data  base  would  have to be added to that
delivery  cycle.  Since  several  variations  of the air battle  experience  are
nearing software completion, the Company expects, subject to the availability of
adequate  financing,  to be in full production and delivery of helmet basedunits
late in the second quarter of 1998.

     Consulting  Services.   When  a  customer  purchases  the  Company's  image
generator,  the  Company  provides  the  customer  with a  standard  variety  of
databases and software.  However, from time to time a customer's application may
demand a unique  database and software  for specific  application  requirements.
Upon a customer's  request,  the Company  will build a  customized  database and
software under a separate consulting agreement.



Product Marketing Strategies
----------------------------

     Tellurian's core product line is the computer image generator.  These units
are special purpose computers designed and built by the Company to render images
in  avariety of display  devices,  such as  helmets,  projection  screens and TV
monitors.  The market for these  products  is in both the  training/  simulation
sector  and the  entertainment  sector.  The  Company  is  seeking to market its
products to  distributors  and large users of arcade type games.  Location based
entertainment  operations which currently  utilize the Company's devices are Six
Flags (Great  Adventure - Jackson,  NJ,  Magic  Mountain -  LosAngeles,  CA) and
Fightertown - Lake Forest,  CA.  Entering the  entertainment  market is anatural
progression   of  the  technology  and  products  which  the  Company  has  been
developing.

                                       10
<PAGE>

     Subsequent  to  completion  of the public  offering,  the Company  chose to
concentrate  its efforts on the  completion of the product and game which is now
at the heart of Cyberport.  This game,  which  includes the hardware,  the theme
package,  and the  control  network,  along with the  development  of the helmet
represent the best possible  large volume,  high profit market for the Company's
products.   Management  believes  that  by  concentrating  its  efforts  on  the
displaying of  Tellurian's  products at  Cyberport,  it would be able to develop
sales leads for its products to the  entertainment  market.  While this approach
has  caused the  short-term  sale of small  quantities  of image  generators  to
suffer,  the Company has received,  and is currently  trying to close,  numerous
sales leads as a result of the Cyberport exposure.

     Due to the specialized  nature of sales,  significant  training is required
before newly hired sales persons are likely to be  effective.  While the Company
hopes to add  sales  personnel  in the  future,  it  intends  for the  moment to
continue its primary sales efforts  through the officers based in its New Jersey
facility.  Traditional  trade  magazine  advertising  will be done on a regional
scale, while trade show participation will be done on a national level.

     One of the goals of the Company is to produce  complete  game units for use
in TCE's,  LBE's,  video  arcades,  and theme parks.  The second  market for the
Company's  products  consists of companies  which develop virtual reality games.
Still another  venue for sale of the Company's  products is into the creation of
mobile  entertainment  facilities  which would allow their operators to move the
games to the site of fairs,  sporting  events or association  meetings.  Each of
these  venues will be pursued as  resources  permit,  but the  Company  does not
currently have the resources to properly pursue these markets.


Licensing of Tellurian Technology
---------------------------------

     Pursuant to an agreement dated as of January 1, 1996 (and expiring  January
1, 2001) by and between  Tellurian  and Voyager  Graphics,  Inc.,  a Republic of
China  corporation,   ("Voyager")  Tellurian  granted  Voyager  an  irrevocable,
exclusive,  assignable  fully paid  license  (the  "License")  as the  exclusive
supplier of the EAGLE image generator (the "Product")  within a restricted group
of countries (the "Licensed Territory") and to sell the Products worldwide.  The
Licensed  Territory  consists of Afghanistan,  Australia,  Bahrain,  Bangladesh,
Bhutan,  Burma, China (including Taiwan, Hong Kong and Mainland China),  Cyprus,
India, Indonesia, Iran, Iraq, Japan, Jordan, Kampuchea (Cambodia), Korea(North),
Korea  (South),   Kuwait,   Laos,   Lebanon,   Malaysia,   Maldives,   Marshall,
Mongolia,Nepal,  New Zealand, Oman, Pakistan,  Philippines, Qatar, Saudi Arabia,
Singapore,  SriLanka (Ceylon),  Syria,  Thailand,  Turkey, United Arab Emirates,
Vietnam,  Yemen (Adenand Sana).  The License  includes all the know-how,  patent
rights and copyright  matter,  if any (hereinafter the know how,  copyrights and
patent rights are collectively referred to asthe "Intellectual  Property"),  and
the  right to grant  sub-licenses  to  third  parties  without  the  consent  of

                                       11
<PAGE>

Tellurian.  Tellurian  retains the right to grant  licenses of the  Intellectual
Property to third  parties  outside of the  Licensed  Territory  and to sell the
Products and/or any derivative products (i.e. computer image generators that are
manufactured  based on and by  utilizing  partly the  Intellectual  Property  of
Tellurian,  hereinafter  referred to as the "Derivative  Products")  outside the
Licensed Territory. As part of the License Agreement,  Tellurian was responsible
to provide a classroom  training and production  training  program of a total of
twelve weeks for up to twelve engineers at Tellurian's  facilities in New Jersey
to provide each Voyager engineer with a sound working  knowledge of every aspect
of the computer  image  generator  known as EAGLE and to build ten working units
during the program.

     In consideration of the License and technology transfer,  Voyager agreed to
pay  Tellurian  $1,500,000,  of which  Tellurian  agreed that  Voyager  will pay
$650,000 to two parties  unrelated to Tellurian for their services in connection
with such  contract  resulting in a net amount of $850,000 to  Tellurian,  which
amount has been paid.

     The Company is currently  in  discussion  with Voyager  regarding a further
technology  transfer  license with  certain  aspects of the helmet  product.  No
assurances  can be given  that such  discussions  will  result  in an  agreement
satisfactory to the Company.

Manufacturing of Eagle Units
----------------------------

     The  Company  designs  and  manufactures  its  products  according  to  its
proprietary  designs and  engineering.  The Company  uses vendors to produce the
circuit  boards used in its  products.  The Company  also  purchases  integrated
circuits  (IC) from a  variety  of  sources  and is not  dependent  upon any one
supplier with the exception of its central  processing unit (CPU) for the EAGLE.
The Company  purchases its CPU and does not  anticipate  any supply  problems in
either the short or long term.  Once all the  components  are  assembled  at the
Company,  the products  are  forwarded to another  vendor for  soldering.  After
soldering,   the  completed  boards  are  returned  to  the  Company  for  final
integration into units ready for shipment.

Agreement with Fightertown
--------------------------


     In November  1997,  the Company  entered into a settlement  agreement  with
Fightertown Entertainment, Inc.("Fightertown").  Tellurian had an order and cash
deposit  from  Fightertown  for  several  years  which  was,  at the time it was
received, a vote of confidence in the Tellurian vision as seen at that time. Due
to the Company's  financial  difficulties  prior to the Initial Public  Offering
completed  in November  1996,  Tellurian  was unable to  complete  the EAGLE and
deliver  units to  Fightertown  until late in the second  quarter of 1997.  This
extensive  delay  caused  significant  strain  between the two  companies  which
resulted in  Fightertown  initiating  a law suit in the United  States  District
Court,  Central  District of  California,  against  Tellurian  alleging  various
breaches  of good  faith and  demanding,  among  other  things,  return of their
deposit plus interest on those funds.

                                       12
<PAGE>

     During the third quarter of 1997 and  extending  into  November  1997,  the
Company worked diligently to complete  installation of the first group of EAGLES
that were  shipped  to  Fightertown  and  restore  the  confidence  and  working
relationship that had previously existed between the two companies.  In November
1997,  the  Company  signed a  mutual  release  and  settlement  agreement  (the
"Agreement") with Fightertown Entertainment,  Inc.("Fightertown") to release all
claims the parties have against each other except for obligations created by the
Agreement. The terms of the Agreement included the following:(1) The Company was
required to and did deliver to Fightertown  twenty-five (25) EAGLE units between
November 13, 1997 and January 31, 1998 and relinquish all ownership  interest in
eight AT-200 units currently in Fightertown's  possession.  The Company accepted
all  payments  (i.e.  the  remaining  deposit of  $80,448)  made to date in full
payment of the 25 EAGLES;  (2) Fightertown will have the right to purchase up to
thirty (30)  additional  EAGLE units at any time on or before June 30, 1999 at a
price of $6,000 per unit and delivery terms as specified in the  Agreement;  (3)
The Company agreed to (and has paid)  Fightertown  $20,000 no later than January
31, 1998 for future consulting services regarding the performance of Tellurian's
EAGLES; (4) The Company agrees to pay Fightertown  $67,500 in three installments
of $22,500 on August 15, 1998, August 15, 1999 and August 15, 2000. The payments
are for the prominent use and display of the  Fightertown  name at the Cyberport
facility, Fightertown's expertise in the theming and running of air battle games
and the Company's acknowledgment that the Tellurian flight experience at Niagara
Falls was modeled after  Fightertown's  flight  simulation  experience;  (5) The
Company  agrees not to build a jet fighter  based  experience in which the image
generators are housed in the fuselage  resembling any type of airplane or in any
way  intended  to be used in an  experience  similar to that  which  Fightertown
employs. The Company may offer jet fighters in free standing game units designed
for arcades;  (6) The Company agrees to offer its new virtual reality helmet and
new generation  EAGLE which would employ  textured images to Fightertown for its
own use at a price such that no other  customer is paying a lower price  (except
for a limited  number of  promotional  units sold or placed to  potentially  new
users of these products);  and (7) The Company executed a stipulated judgment in
the amount of $500,000 in favor of Fightertown to be entered against the Company
should the Company fail to comply with any term of this Agreement.  In the event
of a breach of the Agreement,  Fightertown must notify the Company of the breach
and give the Company 15 days to cure the default  before  filing the  stipulated
judgment.

Research and Development
------------------------

     The  Company  is  engaged  and  intends  to  continue  to engage in ongoing
research  and product  development  efforts to expand and enhance the  technical
capabilities,  design  features and range of uses of its  products.  The Company
currently  employs five  engineers/technicians  who are involved in research and
product development.  Due to the increasing  competition and rapid technological
change in the VR  marketplace,  the Company  believes  that it must  continue to
improve and refine its products.  Research and development costs for fiscal 1997
and fiscal 1996 were  $862,031 and  $688,103,  respectively.  See "Note 1 to the
Notes to Consolidated Financial Statements."


                                       13
<PAGE>

Competition
-----------

     The  market  for the  Company's  revenue  producing  activities  is  highly
competitive  and  rapidly  changing,  and the  Company  expects  competition  to
continue to be intense in the foreseeable future. There are two major categories
of competitors for the Company's products. The first are the "high end" (costly)
real time image generators from companies such as Silicon Graphics,  Inc., Evans
& Sutherland,  Inc. and Lockheed Martin Corp.  These real-time image  generators
are  generally  used for  military  training  and  simulation  applications;  as
engineering  and graphics work stations;  and as animation  design tools.  These
costly systems provide photo realistic  images by creating objects from polygons
and  laminating  each  surface  with a texture  pattern  whereas  the  Company's
products producea non-textured polygon image. Although these competitive systems
provide very desirable images,  the Company's  products are  substantially  less
expensive than those of such competitors. The second type of competitors are the
manufacturers of "low end" (less costly) video arcade devices.  These electronic
devices have no computers  and are limited as to the quality and  complexity  of
the images they produce. Management believes that both categories of competitors
will  continue to improve  their  products  in either  price or  performance  as
developments  permit.  The Company believes that its products provide a balanced
approach  the proper mix of image  quality  with  price.  Most of the  Company's
current and  prospective  competitors  have (or will likely have)  significantly
greater  financial,   technical,   manufacturing  and  marketing  resources  and
experience, and a larger installed base, than the Company.

     The Company  believes that its ability to compete  depends on elements both
within and outside its control,  including the success and timing of new product
development by the Company and its competitors,  product  performance and price,
distribution and customer support.  Although the Company believes that it offers
products  with  price and  performance  characteristics  competitive  with other
manufacturers'  products,  there is no assurance that products can be developed,
produced or marketed  successfully  in the future.  In order to be successful in
the future, the Company must continue to respond promptly and effectively to the
challenges of technological change and its competitors' innovations. Performance
in these areas will,  in turn,  depend on the  Company's  ability to attract and
retain  highly  qualified  technical  personnel  in  a  competitive  market  for
experienced and talented computer hardware developers and managers.  There is no
assurance  that the Company will be able to compete  successfully  in its chosen
markets.

     The Company has established  Cyberport and, if financial  resources permit,
may establish one or more additional TCE's and/or LBE's. The Company anticipates
significant  competition  in this market.  While the Company  knows of no single
dominant  company  in this  marketplace,  it is aware  that many  companies  are
currently  planning,  developing  and/or operating similar  businesses.  Most of
these companies have better  financial  resources than the Company and have more
experience in developing these  facilities.  No assurances can be given that the
Company will be able to compete  successfully in this market or that the Company
will be successful in establishing  or entering into revenue sharing  agreements

                                       14
<PAGE>

or financing  agreements  for  Cyberport or other similar  facilities.  Further,
there can be no assurances  that, if the Company is successful in obtaining such
financing, the resulting businesses can be operated at a profit.

Lack of Patent Protection
-------------------------

     The Company does not currently hold any patents and the technology embodied
in the Company's current product line cannot be patented.  The Company relies on
confidentiality agreements with its key employees to the extent it deems such to
be necessary.



Employees
---------

     Tellurian has 12 full-time employees,  including 2 executive  employees,  3
technicaland production persons and 2 engineers at its New Jersey facility and 5
administrative  and sales  personnel at  Cyberport.  It should be noted that the
Cyberport  facility is not  currently  open to the public and that the number of
employees  will  increase  when it reopens  on a full time  basis in April.  The
Company  believes  that its relations  with its  employees is good.  None of the
Company's employees are represented by a union.

Item 2.    Description of Property.
-------    ------------------------

     In January,  1997, the Company commenced a ten year lease expiring January,
2007 for  approximately  10,000  square  feet of space at 300K  Route 17  South,
Mahwah,  NJ.  Pursuant  to the lease,  the Company  pays a monthly  base rent of
$6,250. The Company believes that suitable additional facilities, if needed, can
be found on terms satisfactory to the Company.


     In May 1996,  the Company  entered into a two-year  lease  expiring May 31,
1998 for approximately 7,500 square feet of space at 15 Industrial Avenue, Upper
Saddle River, NJ 07458.  Pursuant to the lease,  the Company pays a monthly rent
of  $5,125.  The  Company  has the  option to renew  the lease for two  one-year
periods at fair market value. The Company does not intend to renew this lease.

     In February 1997, Cyberport entered into a five year lease expiring January
2002 with two five year renewal options for approximately  40,000 square feet of
space at 5781 Ellen Avenue in Niagara Falls, Ontario,  Canada.  Pursuant to this
lease,  Cyberport  pays an average  annual  rental over the life of the lease of
$247,298.  The Company  believes  this space is adequate to house its  Cyberport
operations for the foreseeable future. The Company has an option to purchase the
facility for  $2,160,000 at any time  beginning  January 1, 1998 and ending July
31, 1998. Under the terms of the recent  restructuring of debt at Cyberport (see
"Recent  Developments")  Cyberport  has been  granted a three  month  moratorium
(March, April and May) on its rent payments.  This moratorium requires Cyberport
to make double payments in July, August and September in order to restore itself
to a current rental status.

                                       15
<PAGE>

Item 3.    Legal Proceedings.
-------    ------------------

     In September 1997, both Tellurian and Cyberport were named in legal actions
in Ontario by eight construction firms (namely,  Newman Bros. Limited,  Unistrut
Canada Limited,  Phoenix Wood Products,  Star Tile Centre Limited, Ecco Electric
Limited,  DBN Drywall & Acoustics Limited,  PRW Excavating  Contractors Ltd. and
Expoplex Incorporated) claiming that services performed by them at the site that
houses  Cyberport  have not beenfully  paid for. The amounts  claimed was for an
estimated $1,400,000.


     As of March 31,  1998,  the  Company  has  reached  an  agreement  with the
representatives of the creditor group and Cyberport's landlord which resulted in
aresolution  of  this  matter  in a form  acceptable  to  Management  and to the
creditors.  This  agreement  resulted  in all of the debt being  converted  into
350,000  restricted  shares of  Tellurian  common  stock and  912,634  shares of
Cyberport Series "B" Special Shares  (preferred  stock) with a $1 (Canadian) par
value.  The Company has the right to redeem this  preferred  stock until October
10, 1998 at $1.10  Canadian (  approximately  $.77 U.S.).per  share.  Should the
Company choose not redeem this stock,  the holders of the stockhave the right to
convert the preferred stock into restricted  Tellurian  common shares at therate
of 2.28 shares of  preferred  for each share of common.  This  conversion  right
expireson December 31, 1998. (See "Recent Developments" under Item 1.)

     As of March 31, 1998,  Management is not aware of any other  material legal
proceedings involving the Company or its subsidiaries.


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

           Not applicable.

<PAGE>
                                     PART II


Item 5.    Market Information
-------    ------------------

           The  Company's  Common Stock and Common Stock  Purchase  Warrants are
each quoted as a Small  Cap  issue on the  National  Association  of  Securities
Dealers' Automated Quotation  System  ("NASDAQ")  under the  symbols  "TLRN" and
"TLRNW." As of March 31, 1998 at 4:00 P.M.  Eastern Standard Time, the last sale
price of the  Common  Stock  andWarrants  in the  over-the-counter  market  were
$2.8325 and $.5625, respectively.


     The  following  table  reflects  the  high  and low  sales  prices  for the
Company's Common Stock and Warrants for the periods indicated as reported by the
National  Association  of  Securities  Dealers,  Inc.  ("NASD")  from its NASDAQ
system:

<TABLE>
<CAPTION>

                                                                          Common Stock
                               Common Stock                            Purchase Warrants
                               ------------                            -----------------
                          High              Low                      High             Low
                          ----             ----                      ----            ----
<S>                     <C>             <C>                        <C>               <C> 
1997
First Quarter             6.875            4.750                     3.750            1.375

Second Quarter            6.375            3.500                     1.875             .750

Third Quartr              5.250            2.750                     1.250             .4375

Fourth Quarter            5.875            2.250                     2.000             .5000
                                    --------

1996
November 5
(first day of trading)
through
December 31, 1996          71/2             53/4                       41/4            21/2
</TABLE>


     The over-the-counter market quotations reported above reflects inter-dealer
prices,  without  retail  markup,  markdown or  commission.  Management has been
advised by its transfer agent  (Continental Stock Transfer & Trust Company) that
the  approximate  number ofrecord  holders of the Company's  Common Stock, as of
April 7, 1998, the record date, was approximately  31. However,  the Company has
been advised by J.W. Barclay & Co.,  Inc.,the  Underwriter of its initial public
offering,  that  it has in  excess  of 550  persons  who  beneficially  own  the
Company's  Common Stock as of the above  referenced date. No cash dividends have
been paid by the Company on its Common Stock and no such payment is  anticipated
in the foreseeable future.

As  disclosed  in  Item 1,  the  Company  has been advised by NASDAQ that it may
be inviolation of NASDAQ's  requirements for continued listing.  The Company has
submitted a written  appeal to NASDAQ  indicating  that, as a result of the debt

                                       17
<PAGE>

restructuring  with  the  creditors  of  Cyberport,  the  Company  may now be in
compliance with the requirements of NASDAQ.  As of the date of this filing,  the
Company  has not  heard  the  results  of its  appeal.  Should  the  Company  be
unsuccessful  in this  appeal and any  subsequent  actions  which it may take to
preserve its listing on NASDAQ, the resulting loss of its listing may materially
adversely  affect the  Company's  ability to raise  required  financing  and the
market  value of the  Company's  securities  and the  ability  of  investors  to
liquidate their securities. Further, the Company's securities may become subject
to the "penny stock" rules.


The    Securities    and    Exchange    Commission  has  adopted  "penny  stock"
regulations   which  applies  to  securities  traded   over-the-counter.   These
regulations  generally define "penny stock" to be any equity security that has a
market  price of less than  $5.00 per  share or a warrant  that has an  exercise
price of less than $5.00 per share or an equity  security of  anissuer  with net
tangible  assets of less than  $2,000,000  as  indicated  in  audited  financial
statements,  if the corporation  has been in continuous  operations for at least
three  years.  Subject  to  certain  limited  exceptions,   the  rules  for  any
transaction  involving  a  "penny  stock"  require  the  delivery,  prior to the
transaction,  of a risk  disclosure  document  prepared by the  Commission  that
contains certain information  describing the nature and level of risk associated
with investments in the penny stock market. The broker-dealer also must disclose
the  commissions   payable  to  both  the   broker-dealer   and  the  registered
representative  and  current  quotations  for the  securities.  Monthly  account
statements  must be sent by the  broker-dealer  disclosing the estimated  market
value of each penny stock held in the account or  indicating  that the estimated
market value cannot be determined  because of the unavailability of firm quotes.
In  addition,  the  rules  impose  additional  sales  practice  requirements  on
broker-dealers  who sell such  securities  to  persons  other  than  established
customers and institutional  accredited investors  (generally  institutions with
assets in excess of  $5,000,000).  These  practices  require that,  prior to the
purchase,  the  broker-dealer  determined that transactions in penny stocks were
suitable for the purchaser and obtained the  purchaser's  written consent to the
transaction.  If the Company's  securities  trade below $5.00 per security after
the  Offering,  they  will be a penny  stock  unless  the  Company  has  audited
financial  statements  demonstrating net tangible assets of at least $2,000,000.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell the Company's securities and may affect the ability of purchasers in the
Offering to sell the Company's securities in the secondary market.


                                       18
<PAGE>
Item 6.   Managements Discussion and Analysis of Financial or Plan of Operation.
-------   ----------------------------------------------------------------------

INTRODUCTION

         During 1997 the Company has been able to make progress  towards meeting
its objectives which included:

 * Development of its virtual reality helmet;

 * Establishment of a virtual reality show place for demonstrations of Tellurian
   products; and

 * Establishing a TEC  for  the  purpose  of operating and owning such afacility
   in order to generate revenues.

     The market for  free-standing  image  generators has proven to be extremely
limited.  The development of the data-base to complete the experience is a skill
possessed by a imited number of companies in the  industry,  but the majority of
the potential  customers for Tellurian  products are arcades,  restaurants,  and
other entertainment facilities who rely on their supplier to deliver a complete,
ready to run  experience.  The  Tellurian  image  generator has the advantage of
being  able to  display a 360 degree  world in which all of the  players  can be
linked. The competitive edge that Tellurian has is that its' world can be hanged
by any of the players and the resulting world is changed for all of the players.
Game  software  for this type of world must be developed  specifically  for that
world. Without both the image generator and the database software, Tellurian has
in the past been trying to sell to an extremely  limited  market.  The Tellurian
product which now exists is one which is a  free-standing  experience.  Further,
the  completion of the helmet as described  herein  allows the  experience to be
delivered to the end-user  requiring very little physical space. The space issue
is also critical to end-users who evaluate the performance of their  investments
on a "revenue per square foot basis". This combination should allow Tellurian to
market its products to  distributors  and large end users of arcade type games,a
market in which it had no access to before these developments.



The Virtual Reality Helmet
--------------------------

     The virtual reality helmet (with a disposal liner) is critical to the broad
market  acceptance  of  Tellurian's  products  since it removes one of the major
sources of market resistance to the Company's virtual reality  units--the amount
of physical space requiredby the viewing screens.  The arcade market  represents
by far the largest grouping of otential buyers for the units and these potential
buyers are  heavily  influenced  by there turn per  square  foot of floor  space
occupied. The helmet would reduce the square footage needed by approximately 50%


                                       19
<PAGE>

while improving the quality of the sound through the almost complete elimination
of  background   noise  coming  from  other   activities  in  the  facility  and
significantly  reducing  the  Company's  cost  per  virtual  reality  unit.  The
Tellurian  helmet  has  been  specifically   engineered  to  be  driven  by  the
proprietary Tellurian EAGLE image generator. Management expects that the quality
of the  experience  gained through use ofthe helmet coupled with the head motion
tracker will be significantly  superior to the experience  currently  offered in
the marketplace either by Tellurian or by any of its competitors.

     The helmet is now ready for  introduction  to the  market,  but the Company
needs  approximately  $250,000 of financing to produce and market the  Tellurian
Helmet.  The Company  plans to offer the helmet  based  experience  for delivery
within 4 months from dateof order,  but its ability to do that is subject to the
receipt of sufficient financing. However, the Company cannot be certain that the
design  principles it has decided upon will be  successful  in the  marketplace.
Also,  the Company cannot be sure that the  marketplace  will accept the product
and the pricing which the Company intends to utilize. Management recognizes that
many  competitors are actively engaged in the design and manufacture of products
intended for this use. Many of these  competitors have more experience in helmet
design and  manufacturing  that the Company does, and many of these  competitors
have more  financial  resources to draw upon than the  Company.  There can be no
assurance  that the Company's  design will be  successful,  nor that the Company
will find a ready market and  sufficient  financing for the helmet.  The Company
expects that, if the helmet design is  successful,  this medium will replace the
larger and more expensive  means of delivering the video and audio images to its
customers.  Management believes that, if successful,  the helmet may represent a
significant portion of its future revenue.

Cyberport
---------

     In late June 1997, the Company was able to begin  conducting  operations in
its  subsidiary,  Cyberport  Niagara,  Inc.  Although  the  limited  opening  of
Cyberport was not done early enough to have an noticeable  impact on revenue for
the season,  Management  believes  that it was essential to open the facility in
close to final form in order to attract the various  tour  operators to view the
facility.  While  Management  does not  believe  that the flow  from the  casual
tourists in Niagara Falls will provide enough revenue to ensure the viability of
Cyberport,  Management  believes  that the exposure to the summer  tourists and,
more  importantly,  to the tour groups that conduct  summer  business in Niagara
Falls, was critical to Management's plans to develop the group tour business for
the 1998 and ubsequent seasons. The Company promoted the facility in general and
the  Tellurian   experience   extensively  since  the  1997  opening.   Numerous
"free-of-charge"  events  were run in  order  to  hasten  the  awareness  of the
facility to the tourism industry in the Niagara region.  Efforts concentrated on
ensuring strong  relationships  with group tour operators and guaranteeing prime
exhibit spots in the many tourist  information  booths in and around the Niagara
area for the 1998  season.  As a result,  revenues  for 1997 were  minimal,  but
Management  believes  that  the marketing  programs  and  overall  direction  of

                                       20
<PAGE>

Cyberport is correct.  Management is particularly  encouraged by the sales leads
it has received for Tellurian  products as a result of the  promotional  efforts
done by Cyberport staff.

     The Company believes that its ability to operate this facility successfully
depends on  elements  both  within and  outside of its  control,  including  the
success of its own products  incorporated  into this venture.  Also, the Company
faces  competition from existing and new entrants into the tourism market in the
Niagara Falls region.  Most of the  competitors  have more  experience  than the
Company in opening and managing tourist  facilities and most have more financial
resources  than the Company.  There can be no assurances  that this project will
perform successfully.


     The  Company is  endeavoring  to locate an  investor  desirous of owning an
interestor  a  controlling  interest  in  Cyberport  Niagara.  There  can  be no
assurance  that the  Company  will be  successful  in this  effort  or that,  if
successful,  that the terms and conditions of the sale will be  satisfactory  to
the Company.  Nonetheless, the Company expects that a significant portion of its
future  revenues  are  dependent  upon the  successful  operation  of  Cyberport
facilities.

Voyager
-------

     In 1996,  Tellurian  entered  into a  Technology  Transfer  Agreement  with
Voyager (a Republic of China  corporation)  pursuant to which Tellurian  granted
Voyager  certain  rights in return for a net fee of $850,000 to  Tellurian.  The
Company  has been  contacted  by  Voyager  to  discuss  an  additional  transfer
agreement  dealing with the virtual  reality  helmet  technology.  Management is
evaluating the impact such an agreement would have upon its operations  prior to
making an decision  regarding  its  willingness  to share this  technology  with
Voyager.  Should  Management  decide to enter into  negotiations with Voyager on
this matter,  there can be no assurances  that an agreement  satisfactory to the
Company can be reached.


                                       21
<PAGE>


PLAN OF OPERATION

The Company plans to focus its efforts on the following areas:

 *   Pursuing   the    merger/acquisition   of   companies   offering   products
     and/orservices  complementary to the  entertainment  market presently being
     marketed to by the Company;

 *   Finding and entering  into  join  ventures  or  revenue  sharing agreements
     with third  parties for the purpose of owning,  operating  and/or having an
     interest in one or more  Tourist  Entertainment  Centers  (TEC) or Location
     Based  Entertainment  Centers  (LBE) for the sale and/or use of its virtual
     reality gameunits;

 *   Increasing revenues through  marketing  efforts of its new EAGLE productnow
     on display at its Cyberport facility; and

 *   Marketing its virtual  reality  helmet with head tracking and  establishing
     products utilizing the helmet technology.

     Marketing of the EAGLE image generators and helmets will be accomplished by
directing efforts towards three different customer groups:

 *   The training and  simulation  market where  Tellurian  has been selling its
     AT-200 unit;

 *   The   virtual   reality   game   developer   market   through   trade  show
     exhibits,advertisements and newsletters; and

 *   The interactive thrill ride market.

     The  Company  intends  to expand  its  customer  base  through  trade  show
involvement  at  which it can  demonstrate  its  EAGLE  product  and its  helmet
technology.  Also, the Company is actively  pursuing sales leads  generated from
the market recognition gained from the Cyberport operations. The Company intends
to  continue  its on  goingresearch  and  development  efforts and to expand and
enhance the  technical  capability,  design  features and range of its products.
Tellurian  has  designed and  installed  complete  games units in its  Cyberport
facility and intends to pursue this concept in developing  any future TEC or LBE
locations.  Tellurian has financed the Cyberport  facility utilizing aportion of
the proceeds of its public offering and is now actively seeking investors and/or
lenders to meet the  remaining  capital needs of the venture and to release some
of  Tellurian's  capital  to allow it to pursue  subsequent  opportunities.  The
Company has limited experience in owning,  financing and operating such centers,
and is  dependent in such areas upon third  parties to assist it or  participate
with it in completing such centers. The Company is dependent upon joint ventures


<PAGE>

or revenue sharing agreements with third parties or the sale of up to a majority
interest in Cyberport (or other  financing) in order to establish other TEC's or
LBE's. Management estimates that opening entertainment facilities in addition to
Cyberport  could range in cost from  $1,000,000  to  $2,500,000  dependent  upon
location and the size of facility. The Company anticipates  participating in any
future joint  venture or revenue  sharing  project by providing its equipment to
the entertainment facility and having another party provide most (if not all) of
the financing.  Any cash provided by the Company to a new entertainment facility
would be minimal  unless the  Company  were able to obtain  additional  external
financing or sell up to a majority interest in the Company's Cyberport facility.
Of course,  the amount of financing provided by the Company to any joint venture
or revenue  sharing  agreement would likely increase the Company's joint venture
interest or amount of revenues  that it would be entitled to receive.  There can
be no  assurances  that the Company will be successful in this regard or that it
will be able to derive profits from such operations.

Results of Operations

Year Ended December 31, 1997 ("1997") vs. December 31, 1996 ("1996")

     Tellurian's net sales for 1997 were $521,045, a decrease of $298,335 or 36%
over the comparable period of the prior year. Such decrease was primarily due to
the completion of the Voyager consulting  contract at the end of 1996. Also, the
Company's  concentration  on developing  the helmet  display unit and on opening
Cyberport  may  have  negatively   impacted  sales  from  the  image  generation
equipment.  For 1997,  the  Company's  gross  profit was $165,913 as compared to
$535,373 for the  comparable  period of the prior year.  Such  decrease in gross
profit  is  partially  due to the loss of  revenue  from the  completion  of the
Voyager  contract and partially due to the costs related to the operation of the
Cyberport Niagara facility.

     Tellurian's  research and  development  activities  for 1997 were $862,031,
representing an increase of $173,928,  or 25%, over the comparable period of the
prior year.  The  increase in research  and  development  activities  related to
Tellurian's  concentrated  effort to  complete  virtual  reality  helmet  and to
develop  software for use with that helmet and other versions of virtual reality
products.

     Selling,  general and administrative expenses for 1997 were $1,934,319,  an
increase of $1,349,198,  or 230%, over the comparable  period of the prior year.
This  increase  is  principally  due to the  cost of  developing  and  operating
Cyberport  (approximately  $950,000) as well as the  increased  costs related to
becoming a public entity (insurance, professional fees and similar items).

         For 1997 interest expense was $121,186, and increase of 9,853, or 8.7%,
over the comparable period of the prior year.

     Tellurian's  net  loss for 1997 was  $2,708,993  as  compared  to a loss of
$962,410 for the comparable period of the prior year.


                                       23
<PAGE>

Liquidity and Capital Resources

     In  December  1995 and  January  1996,  the  Company  raised  approximately
$675,000 from the sale of promissory  notes and  3,000,000  warrants  which were
automatically  convertible into 3,000,000  warrants  identical to those Warrants
sold in Tellurian's public offering. In June 1996, the Company received proceeds
of  approximately  $149,000 from the sale of its  promissory  notes,  $25,000 of
which  automatically  converted into 25,000 shares of the Company's Common Stock
upon the completion of its public offering in November 1996.

     In November 1996, the Company sold 1,400,000  shares of its Common Stock at
an  offering  price of $5.00 per  share  and  2,127,500  Common  Stock  Purchase
Warrants  at an  offering  price of $.25 per share.  The  Company  received  net
proceeds of approximately $6,200,000 from the offering.

     For the year ended  December  31,  1997,  net cash of  $1,107,900  was used
inoperating activities as a result of the Company's net loss which was partially
offset by substantial  increases in the Company's accounts payable. For the year
ended December 31, 1996, $1,851,540 was used in operating activities.

     For the year ended  December  31,  1997,  net cash of $864,568  was used in
investing  activities.  Funds of approximately  $2.06 million were provided from
the sale of marketable  securities and  approximately  $2.77 million was used in
the  purchase of  property  and  equipment,  almost  entirely  at the  Cyberport
facility. For the year ended December 31,1996,  $2,210,233 was used in investing
activities.

     For the year ended December 31, 1997,  $368,484 was provided from financing
activities.  The primary sources of this cash were the proceeds of certain loans
completed during the year. For the year ended December 31, 1996,  $5,783,829 was
provided from financing  activities.  The primary source of these funds from the
public offering completed in November of 1996.

         During March 1998, the Company  completed a warrant exchange offer. The
offer was made on the following terms:

          1.   Warrant  holders  who  tendered  their  warrants  at  $1.875  per
               tendered warrant received one unit for each warrant tendered.

          2.   Each unit  consisted of one share of the  Company's  common stock
               and one new warrant identical to the tendered warrant.

                                       24
<PAGE>

The  Company  sold a total of  321,605  units  resulting  in gross  proceeds  of
$603,011 and net proceeds of $490,912 after offering costs of $112,099.



In March  1998,  the Company  and  certain of the  vendors of  Cyberport  agreed
to restructure approximately $1,349,000 of accounts payable as follows:

         1. The vendors transferred Canadian $1,000,000  (approximately $700,000
U.S.)of the payables to Cyberport's  landlord.  The landlord was given the right
to convert the payables into restricted  shares of the Company's stock. In March
1998, the landlord converted the payables into 350,000 shares of common stock.

         2.  Cyberport issues 912,634 Series B Special Shares at Canadian  $1.00
per share for the balance of the monies owed.

These  shares are  non-voting  shares  that carry a 12% annual  cumulative  cash
dividend payable quarterly.  The Company has the right to redeem these shares at
any time  prior to October  10,  1998 at a price of  Canadian  $1.10  per  share
including any accrued and unpaid dividends  outstanding at that time. Should the
Company choose not to redeem those shares, the vendors have the right to convert
any or all of those shares into Tellurian common stock at the conversion rate of
2.28 Series B shares for 1 common share.

     During  1997,  the Company  experienced  delays in  completing  the virtual
reality  helmet and has suffered from its inability to attract a major  investor
to the Cyberport project as planned.  These two events, coupled with the limited
revenues  from sales of the Company's  existing  products and less than expected
receipts from Cyberport,  have caused a continued drain of the Company's limited
capital.  As a result,  Management has been forced to devote significant efforts
to raising  capital in support of the plan of  operations.  While many potential
investors  have  been  approached  about  Cyberport,  the lack of a demonstrable
financial  track record has made it difficult to complete the sale of any of the
Company's Cyberport interest.

     Management  believes that the  introductory  marketing costs of the virtual
reality  helmet and the working  capital  required  to be able to meet  expected
delivery  needs will  require  the Company to utilize an  estimated  $250,000 of
capital  beyond that which could be  allocated  to the helmet from the  recently
completed  warrant  conversion  offer.  If  the  Company  is not  successful  in
obtaining  those  funds,  the  introduction  of the helmet  will  be  negatively
impacted and the Company's operating results will be adversely impacted.

     The  Company  recently   negotiated  a  $250,000  short-term  loan  with  a
non-affiliated party. The loan was made to the Company to assist it in operating
while the  recently  completed  public  offering  was in process.  That loan was
repaid from the  proceeds of the  offering as the  Company's  first  priority in
disbursement  of funds.  The Company is presently  negotiating a renewal of that

                                       25
<PAGE>

loan in anticipation of a cash need to complete the helmet,  for working capital
at Cyberport,  and to do the work necessary to pursue the potential acquisitions
that the Company is presently evaluating. It is anticipated that such loan would
bear interest at the rate of 12% per annum and not be  convertible  into capital
stock of the Company.  No assurances  can be given that such  financing  will be
successful.

     At  December  31,  1997,   Tellurian  had  a  working  capital  deficit  of
$2,087,263.  The impact of the warrant exchange offer and the recently completed
debt conversion has significantly reduced, but not eliminated, that deficit. The
Company is currently  meeting its cash  requirements from limited cash generated
from  operations  and limited cash  resources that are left from the proceeds of
Tellurian's  recent  warrant  conversion  offering.  In light  of the  Company's
working capital deficit and continued negative operating cashflows,  the Company
is dependent upon immediate and substantial additional revenues from operations,
the sale of up to a majority  interest in its Cyberport  facility and private or
public financing to meet its obligations as a going concern.


With  respect  to  a  possible  sale  of up to majority  interest in  Cyberport,
the Company has active  negotiations  with various firms interested in acquiring
the Company's  Cyberport  interest as well as the right to open other  Cyberport
licensed  facilities.  No  assurances  can be  given  that the  Company  will be
successful  in its  efforts  to  obtain  the  necessary  cash to  remain a going
concern.  The audited financial statements have been prepared by Management on a
going  concern  basis.  See  "Note  1 in the  Notes  to  Consolidated  Financial
Statements."  In the  event  that  cash  generated  from the  Company's  plan of
operation as specified above are  insufficient to meet its existing  obligations
and on-going expenses  (including those of Cyberport  Niagara),  the Company may
need to seek reorganization protection under applicable bankruptcy laws.

The  Company  has  issued   letters  of intent to merge with two  companies  and
has a  proposal  to  underwrite  a  financing  of  an  estimated  $6,000,000  to
$8,000,000  from an  investment  banking firm.  The Company  believes that these
mergers and the proposed financing  represent the best alternative  available to
the  Company  in order to carry out its  proposed  business  plan.  However,  no
assurances  can be given  that  either  the  proposed  mergers  or the  proposed
financing will be successful.

Item 7.          Financial Statements
-------          --------------------

         The information  required by Item 7, and an index thereto  commences on
page F-1,which pages follow this page.

Item 8.          Changes in and Disagreements with Accountants on Accounting and
-------          ---------------------------------------------------------------
Financial Disclosure.
---------------------

Not applicable.
<PAGE>

                        TELLURIAN, INC. AND SUBSIDIARIES

                   REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996





                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





REPORT OF INDEPENDENT
   CERTIFIED PUBLIC ACCOUNTANTS                                           F-2

CONSOLIDATED BALANCE SHEET                                                F-3

CONSOLIDATED STATEMENTS OF OPERATIONS                                     F-4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS                       F-5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                           F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS                                 F-7 - F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            F-9 - F-27

                                      F-1
<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


The Board of Directors and Stockholders of
Tellurian, Inc.
Mahwah, New Jersey


We have audited the accompanying  consolidated balance sheet of Tellurian,  Inc.
and  Subsidiaries  as  at  December  31,  1997,  and  the  related  consolidated
statements of operations,  comprehensive  operations,  stockholders'  equity and
cash flows for the years  ended  December  31,  1997 and 1996.  These  financial
statements  are the  responsibility  of the  management of  Tellurian,  Inc. 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 consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Tellurian,  Inc. and
Subsidiaries as at December 31, 1997, and the results of its operations and cash
flows  for the  years  ended  December  31,  1997  and 1996 in  conformity  with
generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. The Company experienced a net
loss for the year ended  December 31, 1997 of  approximately  $2,709,000  and at
December 31, 1997 has a deficit  working  capital of  approximately  $2,106,000.
These matters, among others, raise substantial doubt about the Company's ability
to continue as a going  concern.  The  Company  has been  engaged in  continuous
efforts  since June 1997 to formulate a  restructuring  plan as well as to raise
additional capital through the sale of common stock and warrants,  as more fully
discussed  in Notes 18 and 19.  During  March  1998 the  restructuring  plan was
accepted,  and additional funds were raised through a public offering.  However,
to achieve  profitable  operations,  continuation of the business  thereafter is
dependent on the Company's  ability to achieve  sufficient cash flow and to meet
its  restructured  debt  obligations  as well  as its  current  operations.  The
accompanying  consolidated  financial  statements do not include any adjustments
relating to the recoverability and classification of assets and liabilities that
might be necessary should the Company be unable to continue as a going concern.



                                                   MILLER, ELLIN & COMPANY, LLP
                                                   CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
March 10, 1998, except for Notes 18
   and 19 which is March 31, 1998

   
                                   F-2
<PAGE>

                        TELLURIAN, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 1997


                                     ASSETS


CURRENT ASSETS:
   Cash                                                            $    187,189
   Marketable securities                                                108,912
   Accounts receivable, net of allowance for
     doubtful accounts of $-0-                                            9,029
   Inventories                                                          662,364
   Prepaid consulting fees                                               62,187
   Prepaid expenses and other current assets                             23,206
                                                                   ------------
              Total current assets                                    1,052,887
                                                                   ------------

PROPERTY AND EQUIPMENT - at cost
   less accumulated depreciation                                      2,688,346
                                                                   ------------
OTHER ASSETS:
   Security deposits                                                     70,070
   Deferred offering costs                                               92,099
                                                                   ------------
              Total other assets                                        162,169
                                                                   ------------
                                                                   $  3,903,402
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current maturities of long-term debt                            $     34,953
   Note payable - bank                                                  100,000
   Notes payable - other                                                200,000
   Accounts payable and accrued expenses                              1,953,481
   Notes payable - related parties                                      496,736
   Interest payable - related parties                                   354,980
                                                                   ------------
              Total current liabilities                               3,140,150
                                                                   ------------

LONG-TERM DEBT - net of current maturities                              125,630
                                                                   ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Common stock - $.01 par value
     Authorized - 25,000,000 shares
     Issued and outstanding - 3,025,000 shares                           30,250
   Additional paid-in capital                                         6,345,162
   Accumulated deficit                                               (5,767,777)
   Other comprehensive income                                            29,987
                                                                   ------------
              Total stockholders' equity                                637,622
                                                                   ------------
                                                                   $  3,903,402
                                                                   ============

The accompanying notes are an integral part of the consolidated financial
statements

                                      F-3
<PAGE>
<TABLE>
<CAPTION>

                                          TELLURIAN, INC. AND SUBSIDIARIES

                                        CONSOLIDATED STATEMENTS OF OPERATIONS


YEARS ENDED                                                                                 DECEMBER 31,
                                                                                        1997            1996
                                                                                    -------------  ------------
<S>                                                                                 <C>            <C>
REVENUES                                                                            $     521,045  $    819,380

COST OF SALES                                                                             355,132       284,007
                                                                                    -------------  ------------

GROSS PROFIT                                                                              165,913       535,373
                                                                                    -------------  ------------

OPERATING EXPENSES:
   Research and development                                                               862,031       688,103
   Selling                                                                                300,662       189,429
   General and administrative                                                           1,630,637       395,692
                                                                                    -------------  ------------

                                                                                        2,793,330     1,273,224
                                                                                    -------------  ------------
LOSS FROM OPERATIONS                                                                   (2,627,417)     (737,851)
                                                                                    -------------  ------------

OTHER INCOME AND EXPENSES:
   Interest expense                                                                       (71,512)      (50,313)
   Interest expense - related parties                                                     (49,674)      (61,020)
   Interest income                                                                         68,339        21,087
   Deferred debt costs                                                                       -         (152,398)
   Other income (expenses)                                                                (28,729)       18,085
                                                                                    -------------  ------------

                                                                                          (81,576)     (224,559)
                                                                                    -------------  ------------
NET LOSS                                                                            $  (2,708,993) $   (962,410)
                                                                                    =============  ============


NET LOSS PER COMMON SHARE                                                                   $(.90)        $(.53)
                                                                                            =====         =====


WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES OUTSTANDING                                                            3,025,000     1,817,708
                                                                                        =========     =========


The accompanying notes are an integral part of the consolidated financial statements
</TABLE>


                                      F-4
<PAGE>
<TABLE>
<CAPTION>


                                          TELLURIAN, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS





                                                                                             YEARS ENDED
DECEMBER 31,
                                                                                        1997            1996
--------------------------------------------------------------------------------    -------------  ------------
<S>                                                                                 <C>            <C> 
Net loss                                                                            $  (2,708,993) $   (962,410)

Other comprehensive income:
 Foreign currency translation adjustment                                                   29,987          -
                                                                                    -------------  ------------

Comprehensive loss                                                                  $  (2,679,006) $   (962,410)
                                                                                    =============  ============































The accompanying notes are an integral part of the consolidated financial statements

</TABLE>


                                      F-5
<PAGE>
<TABLE>
<CAPTION>


                        TELLURIAN, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                                                                                       TOTAL
                                                                          ADDITIONAL                    OTHER          STOCKHOLDERS'
                                                    COMMON STOCK            PAID-IN      ACCUMULATED    COMPREHENSIVE  EQUITY
                                                  SHARES       AMOUNT       CAPITAL      DEFICIT        INCOME         (DEFICIENCY)
<S>                                             <C>         <C>           <C>            <C>             <C>          <C>

BALANCE AT January 1, 1996 ..................   1,600,000   $    16,000   $   107,265    $(2,096,374)    $     --     $(1,973,109)

Issuance of common stock and warrants in
  connection with initial public offering ...   1,400,000        14,000     7,517,875           --             --       7,531,875

Offering costs in connection with
  initial public offering ...................        --            --      (1,326,728)          --             --      (1,326,728)

Conversion of promissory notes in
  connection with initial public offering ...      25,000           250        24,750           --             --          25,000

Issuance of warrants in connection with
  private placement .........................        --            --          22,000           --             --          22,000

Net loss for the year ended December 31, 1996        --            --            --         (962,410)          --        (962,410)
                                              -----------   -----------   -----------    -----------    -----------   -----------

BALANCE AT December 31, 1996 ................   3,025,000        30,250     6,345,162     (3,058,784)          --       3,316,628

Foreign currency translation adjustment .....        --            --            --             --           29,987        29,987

Net loss for the year ended December 31, 1997        --            --            --       (2,708,993)          --      (2,708,993)
                                              -----------   -----------   -----------    -----------    -----------   -----------

BALANCE AT December 31, 1997 ................   3,025,000   $    30,250   $ 6,345,162    $(5,767,777)   $    29,987   $   637,622
                                              ===========   ===========   ===========    ===========    ===========   ===========



                                      The accompanying notes are an integral part of the consolidated financial statements
</TABLE>

                                      F-6
<PAGE>
<TABLE>
<CAPTION>


                                          TELLURIAN, INC. AND SUBSIDIARIES

                                        CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                             YEARS ENDED
                                                                                            DECEMBER 31,
                                                                                    ----------------------------
                                                                                        1997            1996
--------------------------------------------------------------------------------    -------------   ------------
<S>                                                                                 <C>             <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                         $  (2,708,993)  $   (962,410)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
       Deferred costs                                                                      50,000           -
       Accrued interest income on marketable securities                                    (3,912)        (6,118)
       Depreciation and amortization                                                      231,442         17,500
       Amortization of deferred debt costs                                                   -           152,398
       Loss on sale of property and equipment                                               8,954           -
       Loss on sale of marketable securities                                               12,388           -
       Changes in assets and liabilities:
         Accounts receivable                                                              125,333       (129,362)
         Allowance for doubtful accounts                                                 (115,000)       115,000
         Inventories                                                                     (374,513)      (200,633)
         Prepaid consulting fees                                                           74,625       (136,812)
         Prepaid expenses and other current assets                                         (9,350)        (6,045)
         Security deposits                                                                (22,320)       (46,825)
         Accounts payable                                                               1,710,814       (384,836)
         Consulting fees payable                                                          (46,594)      (209,099)
         Interest payable - related parties                                                39,674         21,702
         Deferred revenue                                                                 (80,448)       (76,000)
                                                                                    -------------   ------------
NET CASH USED IN OPERATING ACTIVITIES                                                  (1,107,900)    (1,851,540)
                                                                                    -------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of property and equipment                                            48,000           -
   Purchases of property and equipment                                                 (2,770,566)      (190,965)
   Sale of marketable securities                                                        2,062,998           -
   Purchases of marketable securities                                                    (205,000)    (1,969,268)
   Deferred costs                                                                            -           (50,000)
                                                                                    -------------   ------------
NET CASH USED IN INVESTING ACTIVITIES                                                    (864,568)    (2,210,233)
                                                                                    -------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from note payable - bank                                                      100,000           -
   Proceeds from notes payable - other                                                    200,000           -
   Proceeds from long-term debt                                                           264,764        703,000
   Repayment of long-term debt                                                           (104,181)      (870,000)
   Payments of deferred offering costs                                                    (92,099)          -
   Payments of offering costs                                                                -        (1,326,728)
   Proceeds from issuance of warrants in connection with private placement                   -            22,000
   Proceeds from notes payable - related parties                                             -           248,000
   Repayments of notes payable - related parties                                             -          (422,185)
   Proceeds from issuance of common stock                                                    -         7,531,875
   Repayments of notes payable - other                                                       -              (500)
   Payments of deferred debt costs                                                           -          (101,633)
                                                                                    -------------   ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                 368,484      5,783,829
                                                                                    -------------   ------------
EFFECT OF EXCHANGE RATE CHANGES                                                            29,987           -
                                                                                    -------------   ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS                                                (1,573,997)     1,722,056
CASH AND CASH EQUIVALENTS - beginning                                                   1,761,186         39,130
                                                                                    -------------   ------------
CASH AND CASH EQUIVALENTS - ending                                                  $     187,189   $  1,761,186
                                                                                    =============   ============

                The accompanying notes are an integral part of the consolidated financial statements

</TABLE>
                                      F-7
<PAGE>
<TABLE>
<CAPTION>


                                          TELLURIAN, INC. AND SUBSIDIARIES

                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                     (CONTINUED)







                                                                                             YEARS ENDED
                                                                                            DECEMBER 31,
                                                                                     --------------------------
                                                                                        1997            1996
--------------------------------------------------------------------------------     ------------  ------------
<S>                                                                                  <C>           <C>   


SCHEDULE OF NON-CASH ACTIVITIES:

   Conversion of long-term debt into common stock                                     $     -        $   25,000
                                                                                      ==========     ==========



SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

   Cash paid for interest                                                             $   81,517     $   89,631
   Cash paid for income taxes                                                               -              -






                The accompanying notes are an integral part of the consolidated financial statements

</TABLE>
                                       F-8
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 1 - GOING CONCERN

     The  accompanying  consolidated  financial  statements  have been  prepared
     assuming  the  Company  will  continue  as a  going  concern.  The  Company
     experienced   a  net  loss  for  the  year  ended   December  31,  1997  of
     approximately  $2,709,000 and at December 31, 1997 has a deficit in working
     capital of approximately  $2,106,000.  These matters,  among others,  raise
     substantial  doubt  about the  Company's  ability  to  continue  as a going
     concern.

     Management's  plan includes the raising of additional  capital  through the
     public sale of common stock and warrants (Note 18) and the formulation of a
     restructuring  plan with a majority of its trade  creditors of its Canadian
     subsidiary  (Note 19).  The  unaudited  pro forma effect of these items are
     presented in Note 20.

     During March 1998 the restructuring  plan was accepted and additional funds
     were raised as contemplated by the public offering.  However,  continuation
     of the business thereafter is dependent on the Company's ability to achieve
     sufficient  cash  flow to  achieve  profitable  operations  and to meet its
     restructured debt obligation as well as its current operations.

     The  accompanying  consolidated  financial  statements  do not  include any
     adjustments   relating  to  the   recoverability   and   classification  of
     liabilities  that  might be  necessary  should  the  Company  be  unable to
     continue as a going concern.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Organization and Line of Business
     ---------------------------------

     Tellurian,   Inc.   ("Tellurian"),   a  South  Carolina  corporation,   was
     incorporated   on  August  10,  1988  for  the  purpose  of  designing  and
     manufacturing  real  time  image  generation  equipment  for  training  and
     simulation.  Tellurian also provides  consulting and parts/repair  services
     related to computer image generator technology. These operations constitute
     a single  business  segment.  Tellurian  sells its image  generators to two
     types of entities,  those which are  interested in training and  simulation
     and those which specialize in entertainment devices and games.

     In January 1996, Tellurian formed a wholly-owned subsidiary in the State of
     Delaware (the "Company") and merged Tellurian into such corporation on July
     2, 1996. Pursuant to the merger, the holders of all of the shares of common
     stock  of  Tellurian  exchanged  their  1,600,000  shares  outstanding  for
     1,600,000 shares of the Company on a pro rata basis.

     In March 1997,  the Company  formed a  wholly-owned  subsidiary,  Cyberport
     Niagara, Inc. ("Cyberport") in the province of Ontario,  Canada.  Cyberport
     operates a tourist entertainment center in Niagara Falls,  Ontario,  Canada
     which  opened in late June 1997.  In addition, the Company  formed a second
     wholly-owned  subsidiary,   Cyberport   International,   Inc.,  a  Delaware
     corporation. This corporation is inactive and has no assets.

                                      F-9
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Basis of Consolidation
     ----------------------

     The consolidated  financial statements for the year ended December 31, 1997
     include the  accounts of the Company and its  subsidiary.  All  significant
     intercompany transactions have been eliminated in consolidation.

     Revenue Recognition

     Sales are recognized when the finished  product is shipped or when services
are performed.

     Cash Equivalents
     ----------------

     The Company  considers all investments  with an original  maturity of three
months or less on their acquisition date to be cash equivalents.

     Marketable Securities
     ---------------------

     The   Company   classified   all   of   its   marketable    securities   as
     held-to-maturity,  and accounted for these  investments at amortized  cost.
     Accordingly,  no  adjustment  for  unrealized  holding  gains or losses was
     reflected in the Company's consolidated  financial statements.  At December
     31, 1996, the Company's  held-to-maturity  securities consisted of treasury
     bills  with  contractual  maturities  from six  months to two years and the
     carrying  amount  of  these  investments  approximated  market  value.  The
     treasury  bills were sold in 1997.  At December  31,  1997,  the  Company's
     held-to-maturity  securities  consisted of a certificate of deposit with an
     original maturity of one year. The certificate matures in April 1998.

     Concentrations of Credit Risk
     -----------------------------

         Accounts Receivable
         -------------------

         The Company  sells  primarily to aviation  training  and  entertainment
         entities  throughout the United States.  It is the Company's  policy to
         require a substantial  deposit prior to  commencement of production for
         specific orders with the balance due upon completion.

         Cash
         ----

         The Company  maintains cash balances in its banks which, at times,  may
exceed the limits of the Federal Deposit Insurance Corp.

                                      F-10
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Use of Estimates in the Preparation of Financial Statements
     -----------------------------------------------------------

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

     Inventories
     -----------

     Inventories  are stated at the lower of cost or market.  Cost is determined
using the first-in, first-out method.

     Property and Equipment
     ----------------------

     Property and equipment is stated at cost.  Depreciation is calculated using
     the  straight-line  method over the  estimated  useful lives of the assets.
     Leasehold improvements are amortized over the life of the lease.

     Expenditures  for  repairs  and  maintenance  are  charged  to  expense  as
incurred.

     Deferred Offering Costs
     -----------------------

     Deferred  offering  costs  represent  costs  incurred  in the  filing  of a
     registration  statement  on  Form  SB-2  for  the  purpose  of  registering
     securities for sale to the holders of its warrants.  Such costs are charged
     to additional paid-in capital when the registration is complete.

     Deferred Debt Costs
     -------------------

     Deferred  debt costs  represented  costs  incurred in  connection  with the
     Company's 1996 private placement  agreement.  The costs were amortized over
     the  respective  terms of the promissory  notes issued.  All the promissory
     notes were repaid from the proceeds of the public offering.

     Deferred  debt  costs  amounted  to $-0- and  $152,398  for 1997 and  1996,
respectively.

     Research and Development
     ------------------------

     Research and development costs, related to present and future products, are
     charged to expense in the period incurred.  Research and development  costs
     amounted to $862,031 and $688,103 for 1997 and 1996, respectively.

     Advertising Costs
     -----------------

     Advertising  costs  are  charged  to operations when incurred.  Advertising
     costs amounted to $73,399 and $-0- for 1997 and 1996, respectively.

                                      F-11
<PAGE>

                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Translation of Foreign Currency
     -------------------------------

     The foreign currency  financial  statements of divisions  operating outside
     the United States are translated in accordance with the requirements of the
     Financial  Accounting  Standards Board. All income and expense accounts are
     translated at average exchange rates;  assets and  liabilities,  at current
     exchange rates; and stockholders' equity at historical exchange rates.

     Income Taxes
     ------------

     The Company  adopted SFAS No. 109,  "Accounting  for Income  Taxes,"  which
     requires the use of the liability  method of  accounting  for income taxes.
     The liability  method measures  deferred  income taxes by applying  enacted
     statutory  rates in effect at the  balance  sheet  date to the  differences
     between the tax bases of assets and liabilities and their reported  amounts
     in  the  financial  statements.   The  resulting  deferred  tax  assets  or
     liabilities are adjusted to reflect changes in tax laws as they occur.

     Loss Per Common Share
     ---------------------

     The Company  adopted SFAS No. 128,  "Earnings Per Share" which  establishes
     new  standards  for  computing  and  presenting  earnings  per  share.  The
     statement also requires  restatement of all prior period earnings per share
     data presented.

     Net loss per common share is based on the weighted average number of common
     shares outstanding during the period. The weighted average number of shares
     outstanding has been adjusted to reflect the recapitalization in connection
     with the private placement as if it had occurred as of the beginning of the
     period for which loss per share is presented. Common stock equivalents have
     not been included as their effect would be antidilutive.

     Recently Issued Pronouncements
     ------------------------------

     SFAS No.  130,  "Reporting  Comprehensive  Income,"  requires  an entity to
     report  comprehensive  income and its components in a full set of financial
     statements and is effective for fiscal years  beginning  after December 15,
     1997. Comprehensive income is the change in equity of a business enterprise
     during a period from transactions and other events and  circumstances  from
     nonowner sources. The Company has elected to adopt SFAS No. 130 in 1997.

     American  Institute of Certified Public  Accountants  Statement of Position
     No. 96-1,  "Environmental  Remediation  Liabilities,"  establishes specific
     criteria for the recognition and measurement of  environmental  remediation
     liabilities.  The  adoption  of  the  statement  in  1997  did  not  have a
     significant  effect on the  Company's  financial  condition  or  results of
     operations.

                                      F-12
<PAGE>

                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 3 - INVENTORIES

     Inventories at December 31, 1997, consist of the following:

                  Raw materials                                      $  221,575
                  Work-in-process                                       206,899
                  Finished goods                                        233,890
                                                                     ----------
                                                                     $  662,364
                                                                     ==========
NOTE 4 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>


     Property and equipment at December 31, 1997, consists of:


                                                                                             Estimated
                                                                                          Useful Lives
<S>                                                                 <C>                   <C> 
         Display and entertainment units                             $     661,275            7 Years
         Equipment                                                         234,444            7 Years
         Vehicles                                                           44,415            5 Years
         Computer software                                                  62,863            5 Years
         Office furniture                                                   67,010            7 Years
         Leasehold improvements                                          1,901,686         5 to 10 years
                                                                     -------------
                                                                         2,971,693
         Less:  Accumulated depreciation and amortization                  283,347
                                                                     -------------
                                                                     $   2,688,346
                                                                     =============
</TABLE>

     Depreciation  expense  amounted to $231,442  and $17,500 for 1997 and 1996,
respectively.


NOTE 5 - NOTE PAYABLE - BANK

     In March 1997, the Company  entered into an agreement with a bank to borrow
     up to a  maximum  of  $100,000.  The note is due on  March  25,  1998  with
     interest charged at 8.38% per annum and is  collateralized by a certificate
     of deposit in the amount of $105,000 maturing on April 1, 1998.

     Interest on the note amounted to $1,080 for 1997.

                                      F-13
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 6 - NOTE PAYABLE - OTHER

     The note bears  interest at  the rate of 12% per annum  compounded  monthly
     and is due on demand. The Company borrowed an additional $50,000 in January
     1998 and the note was repaid in March 1998.

     The note is secured by the  Company's  accounts  receivable,  inventory and
proceeds from the sale or offering of securities.

     Interest on the note was not accrued as the funds were received on December
31, 1997 and such amount was deemed to be immaterial.


NOTE 7 - LONG-TERM DEBT

     Long-term debt at December 31, 1997, consists of the following:

         Promissory  note  payable to a  Canadian  bank in  irregular  principal
           installments  totalling  $50,000  Canadian per year through  December
           2001 and $29,714 Canadian in 2002 plus interest at three percent (3%)
           above the prime rate as  charged  by the Bank Of Canada.  The note is
           secured by all of the tangible assets of
           Cyberport.                                                $  160,583

         Less: Current maturities                                        34,953
                                                                     ----------

                                                                     $  125,630
                                                                     ==========

     Interest on long-term  debt  amounted to $9,363 and $-0- for 1997 and 1996,
respectively.

     Maturities at December 31, 1997 are payable as follows:

                   Year Ended
                  December 31,                                    Amount

                         1998                                     $   34,953
                         1999                                         34,953
                         2000                                         34,953
                         2001                                         34,953
                         2002                                         20,771
                                                                  ----------

                                                                  $  160,583
                                                                  ==========

                                      F-14

<PAGE>

                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996



NOTE 8 - NOTES PAYABLE - RELATED PARTIES

     The Company has borrowed  funds from officers and  stockholders  to finance
     its operations. The notes are due on demand commencing November 1, 1997 and
     bear interest at the rate of 10% per annum.

     Notes payable amounted to $496,736 and accrued interest payable amounted to
     $354,980 at December 31, 1997.

     Interest expense charged to operations  amounted to $49,674 and $61,020 for
     1997 and 1996, respectively.


NOTE 9 - FINANCIAL INSTRUMENTS

     The amounts at which cash, accounts receivable,  accounts payable, advances
     on line of credit,  notes  payable - related  parties  and notes  payable -
     other are presented in the balance sheet  approximate  their fair value due
     to their short maturities.

     The amount at which long-term debt is presented approximates its fair value
     as its interest rate is comparable to other similar types of debt.


NOTE 10 - INCOME TAXES

     Company  operations  are located in the United States and Canada (in 1997).
     As such,  loss before  provision  for income  taxes and the  provision  for
     income taxes are generated from domestic and foreign sources.

<TABLE>
<CAPTION>

                                                                        December 31,         December 31,
                                                                            1997                 1996
                                                                        -------------        -------------
<S>                                                                     <C>                  <C> 

         Loss before provision for income taxes                         $  (2,708,993)        $  (962,410)
                                                                        =============         ===========

         The components of the provision for income taxes by taxing
           jurisdiction are as follows:

                  Federal                                               $        -            $      -
                  State                                                          -                   -
                  Foreign                                                        -                   -
                                                                        -------------         -----------
                                                                        $        -            $      -
                                                                        =============         ===========
</TABLE>

                                      F-15
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996





NOTE 10 - INCOME TAXES (CONTINUED)

     The major  component of the deferred tax asset at December 31, 1997,  is as
follows:

                  Net operating loss carryforwards                 $  1,468,561

                  Less:  Valuation allowance                         (1,468,561)
                                                                   ------------

                                                                   $       -  
                                                                   ============

     A 100% valuation  allowance is being provided at December 31, 1997 as it is
uncertain if the above items would be utilized.

     A  reconciliation  of the Company's income tax expense computed at the U.S.
federal  statutory  tax rate of 35% and the  provision  for income  taxes are as
follows:

                                                             YEARS ENDED
                                                             DECEMBER 31,
                                                    ---------------------------
                                                         1997            1996
                                                    -----------      ----------


         Income tax credit at statutory rate        $  (887,701)    $  (336,844)
         State income tax credits                      (126,815)        (48,120)
         Foreign income taxes                          (454,045)           -
         Net operating loss carryforwards             1,468,561         384,964
                                                     ----------      ---------- 

                                                     $      -        $      -
                                                     ===========     ==========

     At  December  31,  1997,   the  Company  had  unused  net  operating   loss
carryforwards of approximately $3,671,400 expiring in 2011 and 2012.


                                      F-16
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 11 - COMMITMENTS AND CONTINGENCIES

     Lease
     -----

     All of the Company's operations take place in leased facilities.

     In April 1995,  the Company  entered  into a five year lease for its office
     and manufacturing  facility.  In May 1996, the Company terminated the lease
     and moved to a new facility (first facility) entering into a two year lease
     expiring  in May 1998.  The  Company is also  responsible  for its share of
     operating expenses (as defined). In November 1996, the Company entered into
     a ten year lease for a second facility effective January 1, 1997, and moved
     to such new  facility.  The  Company is also  responsible  for its share of
     operating  expenses  (as  defined).  In  addition,  the  Company  is  still
     responsible  for the rent and  operating  expenses  for the first  facility
     under the two year lease expiring in May 1998.

     The Company also sublets a portion of the first facility under the May 1998
     lease and receives approximately $1,400 per month.

     In February 1997,  Cyberport entered into a five year lease for its tourist
     entertainment center in Niagara Falls,  Ontario,  Canada. The lease expires
     in January 2002 and the average annual rental over the life of the lease is
     approximately  $263,000.  Cyberport,  at its sole option, may purchase this
     facility for  $3,000,000  Canadian at any time from January 1, 1998 to July
     31, 1998.

     Future minimum lease payments are as follows:

                    Year Ending
                   December 31,

                       1998                                    $    325,022
                       1999                                         340,537
                       2000                                         344,276
                       2001                                         344,276
                       2002                                          97,440
                    Thereafter                                      300,000
                                                               ------------
                                                               $  1,751,551
                                                               ============

     Rent  expense  amounted  to $298,689  and  $62,574 net of rental  income of
$31,124 and $18,085 for 1997 and 1996, respectively.

                                      F-17
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

     Employment Agreements
     ---------------------

     In November 1996, the Company entered into  employment  agreements with two
     of its principal officers covering four year terms ending in November 2000.
     The agreements provide for annual salaries  aggregating  $192,000 which are
     payable as follows:

                         1998                                  $   192,000
                         1999                                      192,000
                         2000                                      160,000

     In  addition,  the  agreements  provide  for  bonuses  to be  paid  at  the
     discretion of the board of directors from a bonus pool equal to ten percent
     (10%) of pre-tax income beginning in the year ended December 31, 1997.

     Compensation under the agreements amounted to $192,000 and $32,000 for 1997
     and 1996,  respectively.

     Consulting Agreements
     ---------------------

     In connection with its initial public offering,  the Company entered into a
     financial consulting agreement with its underwriter for the period November
     6, 1996 to November 5, 1998 (see Note 13). Consulting fees of $149,250 were
     paid in November  1996 and the fees are being  amortized  over the two year
     period.  Consulting  expense  amounted  to $74,625 and $12,438 for 1997 and
     1996, respectively.

     In March   1998,  the Company  entered into a consulting  agreement  with a
     corporation  whereby such  corporation  would  provide  various  consulting
     services for an eighteen (18) month period.  Terms of the agreement include
     the following:

         1. A monthly fee of $5,000.
         2. The  issuance of 150,000  shares of common  stock.  Such shares were
              issued in March 1998.

     Settlement Agreement
     --------------------

     In November  1997,  the  Company  signed a mutual  release  and  settlement
     agreement  (the   "Agreement")   with   Fightertown   Entertainment,   Inc.
     ("Fightertown"),  a  customer.  The  terms  of the  Agreement  include  the
     following:

     1.  The Company must deliver to Fightertown twenty-five (25) Eagle units 
            based on a delivery schedule in the Agreement.
     2.  Fightertown will have the right to purchase up to thirty (30)additional
            Eagle units at any time on or before June 30, 1999 at a price 
            and delivery terms as specified in the Agreement.


                                      F-18
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

     Settlement Agreement (Continued)
     --------------------

     3.  The Company  agrees to pay  Fightertown  $20,000 no later than  January
         31, 1998 for future  consulting  services as defined in the  Agreement.
         Such amount was paid on January 30, 1998.
     4.  The Company agrees to pay Fightertown  $67,500 in three installments of
         $22,500 on August 15, 1998,  August 15, 1999 and August 15,  2000.  The
         payments  are for the use and  display of the  Fightertown  name at the
         Cyberport  facility and for Fightertown's  expertise in the theming and
         running of air battle games.
     5.  The  Company is  executing  a  stipulated  judgment in  the  amount  of
         $500,000  in favor of  Fightertown  to be entered  against the  Company
         should the Company fail to comply with any term of this Agreement.

     Technology Agreement
     --------------------

     In January 1996,  the Company  entered into an agreement with a Republic of
     China corporation  ("ROC") which replaces an earlier agreement entered into
     in 1995 with a different Republic of China corporation.  There have been no
     modifications  to the old  agreement  other  than the  customer  name.  The
     purpose of this agreement is to provide  training,  advice and consultation
     in relation to computer image generator technology.  The agreement provides
     for a fee of $1,500,000 payable as follows:

         4%   upon signing the agreement
        16%   upon the  completion  of the first prototype of the computer image
              generator  
        10%  upon  delivery  of the  design  data  package
        40%  upon completion of the training  program 
        20%  90 days after completion of the training program 
        10% 180 days after completion of the training program

     Of  the  agreed  fee of  $1,500,000,  the  Company,  pursuant  to  separate
agreements,  has agreed that ROC will pay $650,000 to two  unrelated  parties as
follows:

     1.  $500,000 to ROC's  parent  company in  consideration  of  the  parent's
         services  and  expenses  incurred  in  negotiating  the  agreement  and
         establishing ROC.

     2.  $150,000  to  an  unrelated   corporation  in   consideration  of  such
         corporation's  contribution  to the  development  of  software  for the
         computer image generator technology.

     As compensation for the license  granted,  the Company will receive royalty
     payments at the rate of 2% of the sales value of the products or derivative
     products sold by such  corporation  using the technology,  payable annually
     for a period of five years from the date of the agreement.  In return,  the
     Company  agrees not to market such  products  within a restricted  group of
     countries as defined in the agreement.

                                      F-19
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996



NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

     Technology Agreement (Continued)
     --------------------

     In October 1995, the Company assigned proceeds received under the agreement
and granted a security interest to a stockholder.

     The  contract  was  substantially  completed  in October 1996 at which time
     amounts were due to the Company.  As of March 3, 1997,  the Company had not
     received any additional  payments and it was the opinion of management that
     the  Company  would not receive any  payments in the future.  As such,  the
     Company provided a reserve in allowance for doubtful  accounts equal to the
     recorded balance owed of $105,000. In addition,  the Company did not record
     any other future amounts owed under the agreement.

     During the second quarter of 1997, the Company  received a partial  payment
     of the amount owed and negotiated a payment schedule for the balance.  Such
     balance was fully repaid as of August 31, 1997.

     Royalties
     ---------

     In connection  with the acquisition of technology  rights,  the Company was
     obligated  to pay  royalties  based upon  revenues at a rate of 4% of image
     generator  sales  and 1% of  other  revenue,  as  defined.  Such  agreement
     stipulates  that the royalties  paid shall not exceed  $1,500,000.  Royalty
     expense amounted to $8,573 for the year ended December 31, 1995.

     In July and August  1996,  the  Company  has  entered  into  agreements  to
     terminate  two-thirds of all future  royalty  payments as of the respective
     dates of the  agreements.  These  agreements  call for  total  payments  of
     $150,000 as well as a payment of $10,529 for unpaid royalties as follows:

     1.  $88,029  within ten business days from the closing of the Company's  
         public  offering but no later than  March 31, 1997.  These amounts were
         paid in November 1996.

     2.  $72,500 will be due and payable one year after the initial payments. 
         $37,500 of this amount was paid in 1996.

NOTE 12 - MAJOR CUSTOMERS

     As of December 31, revenues from major customers are as follows:

                                                      1997           1996
                                                     ------        --------

         Customer A                                  38.0%           75.9%
         Customer B                                  26.7%           16.0%
         Customer C                                  15.4%             -

                                      F-20
<PAGE>

                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996



NOTE 13 - BUSINESS SEGMENT DATA

     The Company's operations are conducted through two business segments, Image
Corporation Equipment and the Entertainment Center.

<TABLE>
<CAPTION>

     Net sales of each segment are as follows:

                                                                             Years Ended
                                                                             December 31,
                                                                       ------------------------
                                                                          1997         1996
                                                                       -----------  -----------
<S>                                                                    <C>          <C> 
         Image generation equipment:
             United States                                             $   271,324  $   197,760
             Republic of China                                             198,000      621,620
                                                                       -----------  -----------

                                                                           469,324      819,380
         Entertainment center - Canada                                      51,721         -
                                                                       -----------  -----------

                                                                       $   521,045  $   819,380
                                                                       ===========  ===========

     Operating loss of each segment is as follows:

                                                                             Years Ended
                                                                             December 31,
                                                                     --------------------------
                                                                          1997         1996
                                                                     -------------  -----------

         Image generation equipment                                  $  (1,562,269) $  (737,851)
         Entertainment center                                           (1,068,168)        -
                                                                     -------------  -----------

         Operating loss of segments                                     (2,630,437)    (737,851)
         Other expenses                                                    (25,709)    (134,313)
         Interest expense - net of interest income                         (52,847)     (90,246)
                                                                     -------------  -----------

                                                                     $  (2,708,993) $  (962,410)
                                                                     =============  ===========

</TABLE>

                                      F-21

<PAGE>

                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996




NOTE 13 - BUSINESS SEGMENT DATA (CONTINUED)

     Identifiable assets of each segment at December 31, 1997 are as follows:

         Image generation equipment                               $   1,558,587
         Entertainment center                                         2,081,616
                                                                  -------------

         Identifiable assets                                          3,640,203
         General corporate assets                                       263,199
                                                                  -------------

                                                                  $   3,903,402
                                                                  =============

     Identifiable  assets  by  segment  are  those  assets  that are used in the
     operation of each segment.  General  corporate assets consist of marketable
     securities, prepaid consulting fees and deferred offering costs.


NOTE 14 - STOCKHOLDERS' EQUITY

     Initial Public Offering
     -----------------------

     In November  1996,  the Company  completed its initial  public  offering by
     filing a  registration  statement on Form SB-2 under the  Securities Act of
     1933, as amended.  The Company offered  1,400,000  shares of $.01 par value
     common stock and 2,127,500  five-year warrants (including the underwriter's
     over-allotment  option) to purchase 2,127,500 shares of its common stock at
     $6.00 per share. The Company raised  $6,205,147,  which was net of offering
     costs of  $1,326,728.  In  addition,  450,000  shares  were sold by certain
     existing stockholders for $2,250,000 before offering costs. The Company did
     not receive any proceeds from the sale of these shares.

     Common Stock
     ------------ 

     On November 17, 1997, the Company  increased its authorized common stock to
     25,000,000 shares at a par value of $.01 per share.

     Warrants
     --------

     On December  27, 1995 and January 22, 1996,  the Company  issued a total of
     3,000,000  warrants to purchase  3,000,000 shares of its common stock at an
     exercise  price of $6.00 per share.  The warrants were issued in connection
     with the subordinated  promissory notes and were valued at $.01 per warrant
     amounting  to $30,000.  Such  amount was  credited  to  additional  paid-in
     capital.  In  addition,  the Company  issued  300,000  warrants to purchase
     300,000 shares of its common stock at $6.00 per share for $6,000.


                                      F-22
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

     Warrants (Continued)
     --------

     On June 27,  1996,  an  agreement  was  signed  cancelling  300,000  of the
     warrants. In addition,  upon the completion of the initial public offering,
     the balance of the warrants (3,000,000) automatically converted to warrants
     identical to those sold to the public.

     Outstanding warrants at December 31, 1997, are as follows:

    Outstanding                    Exercise                     Exercise
     Warrants                        Price                       Period
   ------------                    ---------               -------------------

     5,127,500                       $6.00                 November 6, 1996 -
                                                            November 5, 2001

     No warrants were exercised during 1996 nor 1997.


NOTE 15 - STOCK OPTION PLAN

     On June 1, 1996,  the  Company  adopted a Stock  Option  Plan (the  "Plan")
     covering  400,000  shares of common stock  (subject to  adjustment to cover
     stock  splits,  stock  dividends,   recapitalizations   and  other  capital
     adjustments)   for   employees,   including   officers  and  directors  and
     consultants  of the Company.  The Plan  provides that options to be granted
     under  the  Plan  will  be  designated   as  incentive   stock  options  or
     non-incentive  stock  options  by the  board of  directors  or a  committee
     thereof,  which also will have  discretion  as to the persons to be granted
     options,  the number of shares  subject to the options and the terms of the
     options.  Options  designated  as incentive  stock  options are intended to
     receive incentive stock option tax treatment pursuant to Section 422 of the
     Internal Revenue Code of 1986, as amended.

     The Plan provides that all options granted  thereunder shall be exercisable
     during a period of no more than 10 years from the date of grant (five years
     for options granted to holders of 10% or more of the outstanding  shares of
     common stock),  depending upon the specific stock option agreement and that
     the option  exercise  price for  incentive  stock options shall be at least
     equal to 100% of the fair market value of common stock on the date of grant
     (110% for  options  granted to  holders  of 10% or more of the  outstanding
     shares of common  stock),  but in no event  less  than the  initial  public
     offering price of the Company's  proposed public offering.  Pursuant to the
     provisions of the Plan, the aggregate fair market value  (determined on the
     date of grant) of the shares of the common stock for which  incentive stock
     options  are  first  exercisable  under  the terms of the Plan by an option
     holder during any one calendar year cannot exceed $100,000.

                                      F-23
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996



NOTE 15 - STOCK OPTION PLAN (CONTINUED)

     Currently,  the Plan  provides  that if the  employment  of an  optionee is
     terminated  other than by reason of death,  disability or retirement at age
     65, any options  granted to the optionee  will  immediately  terminate.  If
     employment  is  terminated by reason of disability or retirement at age 65,
     the optionee may, within one year from the date of termination in the event
     of termination  by reason of  disability,  or three months from the date of
     termination  in the event of termination by reason of retirement at age 65,
     exercise  the  option  (but not after the  normal  termination  date of the
     option).  If employment  is  terminated by death,  the person or persons to
     whom the optionee's  rights under the option are transferred by will or the
     laws of descent and  distribution  have similar  rights of exercise  within
     three months after such death (but not after the normal termination date of
     the option).

     Options are not transferable  otherwise than by will or the laws of descent
     and distribution and during the optionee's lifetime are exercisable only by
     the  optionee.  Shares  subject to options which expire or terminate may be
     the subject of future options. The Plan will terminate in 2006.

     Outstanding stock options are as follows:
<TABLE>
<CAPTION>


                                                 Outstanding    Exercise
                                                   Options        Price                Exercise Period
                                                 ----------     ---------       -----------------------------
<S>                                              <C>            <C>             <C> 

         December 31, 1997
                                                    300,000       $     5.00     July 1, 1997 - June 1, 2006
                                                     40,000       $     5.25     January 1, 1998 - June 1, 2006
         December 31, 1996
                                                    300,000       $     5.00     July 1, 1997 - June 1, 2006
</TABLE>


     No options were exercised during 1996 nor 1997.

     The  Plan  was  cancelled  on March  2,  1998  and  concurrently,  the 1998
     Incentive and Non-Statutory Stock Plan ("New Plan") was created (subject to
     stockholder  approval).  The New Plan has  substantially the same terms and
     conditions  as  the  Plan  and  no  options  can  be  exercised  until  the
     stockholders approve the New Plan.


NOTE 16 - RETIREMENT BENEFITS

     On January 1, 1996, the Company  established a simplified  employee pension
     plan   covering   substantially   all   employees   who  meet   eligibility
     requirements.  Retirement  costs  amounted to $-0- and $33,691 for 1997 and
     1996, respectively.

                                      F-24
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


NOTE 17 - ACCOUNTING FOR STOCK-BASED COMPENSATION

     The Company has adopted  the  disclosure-only  provisions  of SFAS No. 123,
     "Accounting  for   Stock-Based   Compensation,"   but  applies   Accounting
     Principles Board Opinion No. 25 and related  interpretations  in accounting
     for the stock options  granted.  No expense was recognized.  If the Company
     had elected to recognize expense for the stock options granted based on the
     fair value at the date of grant  consistent  with the method  prescribed by
     SFAS No. 123,  net loss and loss per share  would have been  changed to the
     pro forma amounts indicated below:
<TABLE>
<CAPTION>


                                       Year Ended December 31, 1997            Year Ended December 31, 1996
                                       As Reported         Pro Forma           As Reported         Pro Forma
<S>                                   <C>               <C>                   <C>              <C> 

         Net loss                     $  (2,708,993)    $   (2,779,685)       $  (962,410)      $  (1,228,660)

         Loss per share                        (.90)              (.92)              (.53)               (.68)
</TABLE>

     The fair value of the stock  options used to compute pro forma net loss and
     loss per share  disclosures  is the  estimated  present value at grant date
     using the Black-Scholes  option-pricing  model with the following  weighted
     average  assumptions:  expected volatility of 5% to 19%; risk free interest
     rates of 6% to 6.5%; and an expected holding period of three years.


NOTE 18 - PUBLIC OFFERING (UNAUDITED)

     In December 1997,  the Company filed a registration  statement on Form SB-2
     under  the  Securities  Act  of  1933,  as  amended,  for  the  purpose  of
     registering  securities  for sale to the holders of its warrants.

     Pursuant to the  registration  statement,  the Company's tender offer is on
     the following terms:

     1. Warrant holders who tender their warrants at $1.875 per tendered warrant
        will receive one unit for each warrant tendered.

     2. Each unit  consists of one share of the  Company's  common stock and one
        new warrant identical to the tendered warrant.

     The offering was completed in March 1998.  The  Company  sold  a  total  of
     321,605 units for $490,912, net of offering costs of $112,099.

                                      F-25
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996




NOTE 19 - RESTRUCTURING OF CYBERPORT ACCOUNTS PAYABLE

     In March 1998,  Cyberport  and certain of its vendors agreed to restructure
     approximately  $1,349,000  ($1,314,000  at  December 31, 1997  of  accounts
     payable as follows:
 

     1.  The  vendors  transferred   Canadian  $1,000,000  of  the  payables  to
         Cyberport's  landlord.  The landlord was given the right to convert the
         payables into restricted shares of the Company's common stock. In March
         1998, the landlord converted the payables into 350,000 shares of common
         stock.

     2.  Cyberport  issued  912,634  Series B  Special  Shares  ("Series  B") at
         Canadian $1.00 per share for the balance of the monies owed. Additional
         shares  will be issued for any goods and  services  tax found  owing on
         closing.

     The Series B shares  have  certain  rights  and  conditions  including  the
     following:

     1.  The shares are non-voting

     2.  A preferred 12% annual  cumulative  cash  dividend, payable  quarterly,
         with the first payment due on June 30, 1998

     3.  Cyberport has the right to redeem any and all of the shares at any time
         prior to  October  10,  1998 at a price of  Canadian  $1.10  per share.
         The payment will include any accrued and unpaid  dividend payments that
         are outstanding at such time

     For the period  October 11, 1998 to December 31,  1998,  the vendors have a
     right to convert all  unredeemed  Series B shares into common  stock of the
     Company at a conversion rate of 2.28 to 1.

                                      F-26
<PAGE>
                        TELLURIAN, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996



NOTE 20 - UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

The  following  unaudited  pro  forma,   condensed,  consolidated  balance sheet
assumes the  consummation  of a proposed public offering on December 31, 1997 of
the  Company's  tender  offer of 321,605  units  consisting  of common stock and
warrants  and the  restructuring  of certain  trade  payables  of the  Company's
wholly-owned Canadian subsidiary into convertible  non-voting Series B shares of
the Canadian subsidiary.

The financial  information presented herein does not purport to be indicative of
what would have  occurred had both  transactions  actually  been made as of such
date or of results which may occur in the future.

     The unaudited pro forma condensed consolidated balance sheet of the Company
at December 31, 1997 assume the following:

<TABLE>
<CAPTION>

     1.  The consummation of the public offering occurred on December 31, 1997
     2.  The restructuring of certain accounts payable of Cyberport, the  Company's wholly-owned Canadian subsidiary, 
         occurred on December 31, 1997

                                                          Company,
                                                             As                    Pro Forma
                                                          Reported                Adjustments      Pro Forma
<S>                                                   <C>                         <C>              <C> 
         Current assets                                $    1,052,887    (3)      $   490,910      $   1,543,797

         Property and equipment                             2,688,346                    -             2,688,346

         Other assets                                         162,169                    -               162,169
                                                       --------------             -----------      -------------

                                                       $    3,903,402             $   490,910      $   4,394,312
                                                       ==============             ===========      =============


         Current liabilities                           $    3,140,150    (1)      $  (699,056)     $   1,803,111
                                                                         (2)         (637,983)
         Long-term debt                                       125,630                    -               125,630

         Stockholders' equity                                 637,622    (1)          699,056          2,465,571
                                                                         (2)          637,983
                                                                 -       (3)          490,910               -
                                                       --------------             -----------      -------------

                                                       $    3,903,402             $   490,910      $   4,394,312
                                                       ==============             ===========      =============
</TABLE>


     (1) To record  assignment  of  payables  to landlord  and  conversion  into
         350,000 shares of common stock
     (2) To record issuance of Series B shares to vendors and assume  conversion
         into  common  stock of the  Company
     (3) To  record  the  consummation  of the proposed  public  offering net of
         deferred offering costs

                                      F-27

<PAGE>
                                    PART III

Item 9.  Directors, Executive Officers, 
-------  ------------------------------
   Promoters and Control Persons; Compliance With Section 16(a) of the Exchange
   ----------------------------------------------------------------------------
   Act.
   ----

(a)      Identification of Directors
---      ---------------------------

         The names,  ages and principal  occupations  of the  Company's  present
directors,  andthe date on which their term of office commenced and expires, are
as follows:

                                            First
                                 Term of    Became       Principal
Name                       Age   Office     Director (2) Occupation
---------                  ---   --------   ------------------------------

Dr. Ronald Swallow          63     (1)      1988        Chairman of the
                                                        Board and Chief
                                                        Executive Officer
                                                        of the Company

Stuart French              52      (1)      1995        President of the
                                                        Company

Dr. Richard Swallow        59      (1)      1988        Faculty Member
                                                        and Director of
                                                        Information Service
                                                        at Coker College,
                                                        Hartsville, SC



Peter Colgan               63      (3)      l998        Senior Vice President
                           ---------

                                                        Computer Horizons Corp.

James Lin                  46      (3)      1998        President, Asian
                           ---------                    International Management

(1)      Directors are elected at the annual meeting of stockholders and hold
         office until thefollowing annual meeting.

(2)      Tellurian, Inc., a South Carolina corporation, reincorporated in
         Delaware in 1996 via a merger of itself into a corporation formed in
         January 1996 under the same name.

(3)       Elected at a Board of Directors meeting on March 2, 1998


<PAGE>

(b)      Identification of Executive Officers.
---      -------------------------------------

     Dr. Ronald Swallow is Chairman of the Board and Chief Executive  Officer of
the  Company.  Stuart  French  is  President  of the  Company.  Michael  Hurd is
Vice-President  of  Administration  and Finance and Chief Financial and Security
Officer of the Company. Dr.Richard Swallow is Secretary of the Company.

     The  terms of all  officers  expire  at the  annual  meeting  of  directors
following the annual stockholders  meeting.  Subject to their contract rights to
compensation,  if any, officers may be removed, either with or without cause, by
the Board of Directors,  and a successor elected by a majority vote of the Board
of Directors, at any time.


(c)      Business Experience
---      -------------------

     Dr. Ronald Swallow has been the Chief  Executive  Officer,  Chairman of the
Boar and Vice  President-Engineering  of Tellurian and its predecessor under the
same  name  since  1988.  Dr.  Swallow  has a  Bachelor  of  Science  degree  in
Engineering  Physics,  a Masters degree in Electrical  Engineering and a Ph.D in
Biophysics, all from the University of Illinois.

     Stuart French has served as a member of the Board of Directors  since March
1995,  President of the Company since  October  1993,  and prior thereto was the
Vice  President of Operations  and Marketing from August 1991. Mr. French joined
the Company after the sale of Flightmatic Corp. which he owned and operated from
1987 through 1991. Flightmatic was a flight simulation company manufacturing and
selling low cost general aviation training equipment.  Previously,  he spent ten
years at Grumman  Aerospace as a Business  Development  Manager for US Air Force
contracts.  After  receiving a BS degree in Marketing from New England  College,
Mr. French was a pilot in the US Navy.

     Dr.  Richard  Swallow has been a director of Tellurian and its  predecessor
under the same name since its  inception in 1988.  From 1988 to October 1993 Dr.
Swallow also held the position of President.  Since 1973, Dr. Swallow has been a
member of the faculty and staff of Choker College in Hartsville, South Carolina,
where he is currently the Director of Information Services. Dr. Swallow received
his Ph.D. degree in Zoology from the University of Missouri in 1968, his Masters
of Science  degree from the  University of Missouri in June 1966 and Bachelor of
Science degree from the University of Illinois in June 1963.

     Peter Colgan  joined the Board of Directors on March 2, 1998. He has served
as the Senior Vice  President of Computer  Horizons  Corp.  since 1977.  He is a
graduate  of City  College  of New York with an  accounting  major and holds his
Master of Business Administration from New York University.

                                       28
<PAGE>

     James G.H. Lin joined the Board of  Directors  on March 2, 1998.  He is has
been the President of Asian  International  Management  since 1992. Mr. Lin is a
graduate of National  Chuang Hsin  University  in Taiwain and holds his MBA from
North Texas State University with a major in Accounting.

     Michael Hurd joined the Company in February 1997 and was elected a director
and Vice  President  of  Administration  and  Finance  and Chief  Financial  and
Accounting  in March 1997.  Mr. Hurd resigned from his position as a director of
the Company in March  1998.  Mr.  Hurd has a BBS degree in  Accounting  from New
Hampshire College and has been a Certified Public Accountant in New Jersey since
1973. Since 1985, he served in various officer  capacities for Bobst Group Inc.,
a Swiss  machinery  manufacturing  and sales  company with revenues in excess of
$200  million.  Previously,  Mr.  Hurd was a  partner  in a  printing  machinery
manufacturing  and sales  company  in New  Jersey.  Prior to that,  he served in
various  positions with the consulting  group of a then Big 8 public  accounting
firm.

     In March 1998,  the Company  established an Audit  Committee  consisting of
Messrs. Colgan and Lin.

     Pursuant to an underwriting  agreement dated November 5, 1996, J.W. Barclay
& Co., Inc.  ("Barclay"),  the  representative  of the Company's  initial public
offering,  has the right to  designate  one person to attend  board of Directors
meetings until November 8,2001. Such person shall be entitled to attend all such
meetings and to receive all notices and other  correspondence and communications
sent by the  Company to members of its Board of  Directors.  The  Company  shall
reimburse  the designee of Barclay for his  out-of-pocket  expenses  incurred in
connection with his attendance at such meetings.  As of March 31, 1998,  Barclay
has not designated any person.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

     Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended  (the
"ExchangeAct"),  requires the Company's officers and directors,  and persons who
own  more  than ten  percent  of a  registered  class  of the  Company's  equity
securities,  to file  reports  of  ownershipand  changes in  ownership  with the
Securities and Exchange Commission (the "Commission").  Officers,  directors and
greater  than  ten  percent   stockholders  are  required  by  the  Commission's
regulations  to furnish the Company with copies of all Section  16(a)forms  they
file. To Management's knowledge, no officer, director or person owning more than
10% of the Company's  Common Stock filed any reports late during its fiscal year
ended December 31, 1997.


                                       29
<PAGE>

Bankruptcy of Quantum Graphics Corporation

     On March 16, 1987, Dr. Ronald Swallow founded and served as Chairman of the
Board  and  principal  stockholder  of  Quantum  Graphic  Corporation,  an image
generator research and development private company which owned certain rights to
a prototype of the AT-100. Dr. Richard Swallow was also a founder and a director
of Quantum.  On April 12, 1988,  Quantum,  as a result of its inability to raise
sufficient funding and due to disagreements  among Quantum  stockholders,  filed
for  bankruptcy  protection in the Western  District of Texas,  Austin  Division
under Chapter 11, which was  converted  into a Chapter 7 filing on May 12, 1988.
On May 27, 1988,  the Chapter 7 filing was  dismissed and on May 31, 1988, a new
Chapter  7  filing  was made  with the  Court  and the  case was  closed  by the
Bankruptcy  Court on April 19, 1995. In November,  1991,  the  Bankruptcy  Court
confirmed  the  sale of the  technology  relating  to the  AT-100  prototype  to
TTY Graphics, Inc. ("TTY"). See "Business-Background."

Limitation of Directors' Liability; Indemnification

     Pursuant to  Tellurian's  By-Laws,  Tellurian  must, to the fullest  extent
permitted by the General  Corporation  Law of the State of Delaware (the "GCL"),
as  amended  from time to time,  indemnify  all  persons  (e.g.,  directors  and
officers)  whom  it may  indemnify  pursuant  thereto  and to  advance  expenses
incurred in defending any proceeding for which such right to  indemnification is
applicable,  provided that, if the GCL so requires,  the indemnitee must provide
Tellurian with an undertaking to repay all amounts  advanced if so determined by
a final judicial decision.  Tellurian's  Certificate of Incorporation contains a
provision  eliminating,  to the full  extent  permitted  by  Delaware  law,  the
personal liability of Tellurian's directors for monetary damages for breach of a
fiduciary  duty.  By virtue of this  provision,  under  current  Delaware law, a
director of Tellurian  will not be  personally  liable for monetary  damages for
breach of his  fiduciary  duty as a director,  except for  liability for (I) any
breach of his duty of loyalty to Tellurian or to its stockholders,  (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii)  dividendsor  stock  purchases or  redemptions  that are
unlawful  under Delaware law and (iv) any  transaction  from which he derives an
improper  personal  benefit.  This  provision  of  Tellurian's   Certificate  of
Incorporation  pertains  only to breaches of duty by directors as directors  and
not in any other corporate capacity such as officers,  and limits liability only
for  breaches of  fiduciary  duties  under  Delaware  corporate  law and not for
violations of other laws such as the federal securities laws. As a result of the
inclusion  of such  provision,  stockholders  may be unable to recover  monetary
damages against  directors for actions taken by them that constitute  negligence
or gross negligence or that are in violation of their fiduciary duties, although
it may be possible to obtain  injunctive or other equitable  relief with respect
to such actions.  The inclusion of this provision in Tellurian's  Certificate of
Incorporation  may have the effect of  reducing  the  likelihood  of  derivative
litigation  against  directors,  and may  discourage  or deter  stockholders  or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action if successful,  might otherwise have benefitted
Tellurian and its stockholders.


                                       30
<PAGE>

     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors,  officers or  controlling  persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion ofthe  Commission,  such  indemnification  is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.



                                       31
<PAGE>

Item 10. Executive Compensation
-------- ----------------------

The following table sets forth the amount of all compensation  paid by Tellurian
for services rendered during the years ended December 31, 1997, 1996 and 1995 to
Tellurian's  Chief  Executive  Officer,  Dr. Ronald  Swallow and Stuart  French,
President. No other  executive  officers earned $100,000 or more in salaries and
bonuses during 1997.

<TABLE>
<CAPTION>

         SUMMARY COMPENSATION TABLE

                                                                                Long Term Compensation
                                                                         ------------------------------------------
                              Annual Compensation                           Awards                  Payouts
                                                                                                   
            (a)           (b)          (c)        (d)       (e)          (f)          (g)          (h)         (I)
                                                           Other                                               All
            Name                                           Annual    Restricted                               Other
            and                                           Compen-       Stock       Number         LTIP      Compen-
         Principal                               Bonus     sation     Award(s)        of         Payouts     sation
          Position       Year     Salary ($)      ($)       ($)          ($)        Options        ($)      ($)(2)(5)
======================== ------- ------------- -------- ---------- ------------ ------------- ----------- ==========
<S>                      <C>       <C>          <C>      <C>        <C>          <C>           <C>        <C>
Dr. Ronald               1997      108,000        -0-     -0-           -0-         -0-           -0-            -0-
Swallow,
                         ------- ------------ --------- --------- ------------- ------------- ----------- ==========
Chief Executive
Officer(3)               1996      108,000        -0-     -0-           -0- (1)    73,000         -0-         19,436
                         ------- ------------ --------- --------- ------------- ------------- ----------- ==========

                         1995      108,000        -0-     -0-           -0-         -0-           -0-         4,200
=======================  ------- ------------ --------- --------- ------------- ------------- ----------- ==========

Stuart French            1997       84,000        -0-    12,000         -0-         -0-           -0-           -0-
President (4)
                         ------- ------------ --------- --------- ------------- ------------- ----------- ==========
                                                                                              
                         1996       84,000        -0-    23,359         -0- (1)    150,000         -0-        14,200
                         ======= ============ ========= ========= ============= ============= =========== ==========

                         1995       84,000        -0-    13,814         -0-         -0-           -0-          4,200
=======================  ======= ============ ========= ========= ============= ============= =========== ==========

</TABLE>

<PAGE>

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

(1)     Does not include shares issued in connection with the Company's 
        reincorporation in Delaware.  See "Certain Transactions."

(2)     Includes the value of car leases paid by the Company at a rate of
        approximately $350 per month.

(3)    During 1997,  the Company  accrued  salaries for Dr. Swallow of $0. As of
       December  31,  1997,  Dr.  Swallow  was owed  accrued  salary and expense
       reimbursement  totaling  $4,500.  This  amount  was  paid  subsequent  to
       year-end.

(4)    Stuart  French  earns other  annual  compensation  in the form of a sales
       commission  which is  reflected  in column  (e).  During  1995,  1996 and
       1997, the Company accrued salaries and commissions of $9,614, $23,359 and
       $12,000,  respectively.  As  of  December  31,  1997,  Mr.French was owed
       accrued salary and expense reimbursement totaling $18,996.

(5)    During 1996 the Company  created a SEP program for employees who had been
       with the Company  for at least three years prior to the end of 1996.  The
       cost of this  program in 1996 was $33,691,  of which  Ronald  Swallow was
       credited with $15,236 and Stuart French was credited with $10,000.

       No contributions were made in 1997.

Since inception, the Company has not granted stock appreciation rights.


                                       32
<PAGE>
Employment Agreements


     As of November 8, 1996, the Company entered into employment agreements with
Dr. Ronald Swallow and Stuart French. The agreements provide for annual salaries
of $108,000 and  $84,000,  respectively,  and for Mr.  French to receive a sales
commission of five percent.  The agreements provide for a term of four years and
a continuation of their current compensation  arrangements with salary increases
based upon  profitability  of the  Company's  operations to be determined at the
discretion  of  disinterested  board  members.  Commencing in 1997 and each year
thereafter,  the  Company  will  after  the  completion  of its year end  audit,
establish  a bonus  pool for  executive  officers  and  will  make  annual  cash
contributions  to such pool of an amount equal to 10% of pre-tax profits for the
prior year.  The board of directors  will have the sole  discretion  to allocate
bonuses among such officers.  The employment agreements contain covenants not to
compete  during  the  term  of the  agreements  and  for a  period  of one  year
thereafter,  including  continuation of half salary ($54,000 for Mr. Swallow and
$42,000 for Mr.  French) during the  post-employment  one year period covered by
the  covenant  not to compete  and  indemnification  against  liabilities  as an
officer  and  director  of  the  Company  to the  full  estextent  permitted  by
applicable law. No assurance can be given that such  non-competeclauses  will be
enforceable  under  applicable  State laws. In June 1996, the Board of Directors
granted Dr. Ronald Swallow and Stuart French  options to purchase  73,000 shares
and 150,000  shares,  respectively,  of the Company's  Common Stock.  See "Stock
Option  Plans".  During 1998,  the Board of Directors  approved a resolution  to
modify the  contract  of Dr.  Swallow by  agreeing  to allow him to  continue to
design and manufacture  image  generation  equipment if (a) the Company chose to
terminate  his  contract;  and (b) he agreed to forfeit  one-half  of the salary
continuation  benefit to which he would  otherwise have been entitled.  To date,
the contract itself has not been amended.

     In 1997, the Board of Directors authorized the creation of a 401(K) program
in  order to  provide  a  retirement  planning  vehicle  for its  employees.  As
employees of the Company,  both Mr.  Swallow and Mr. French would be eligible to
participate  in this program.  However,  since the Board  authorization  for the
creation of the 401(K) program, the Company has taken no action to implement the
program  (other than  filing  same with the  Internal  Revenue  Service)  and no
contributions  have  been  made  by the  Company  to  this  program  nor are any
contemplated in the future.

Stock Option Plans

        1996 Plan
        ---------

     The Company has adopted a Stock  Option  Plan  covering  400,000  shares of
Common Stock  (subject to  adjustment to cover stock  splits,  stock  dividends,
recapitalizations  and  other  capital  adjustments)  for  employees,  including
officers and directors and consultants of the Company.  The 1996 Plan (the "1996
Plan")  provides that options to be granted under the Plan will be designated as
incentive stock options or non-incentive stock options by the Board of Directors
or a committee thereof,  which also will have discretion as to the persons to be

                                       33
<PAGE>

granted  options,  the number of shares  subject to the options and the terms of
the  options.  Options  designated  as incentive  stock  options are intended to
receive  incentive  stock  option tax  treatment  pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended.

     The Plan provides that all options granted  thereunder shall be exercisable
during a period of no more than 10 years from the date of grant  (five years for
incentive  stockoptions  granted to  holders  of 10% or more of the  outstanding
shares of common stock),  depending upon the specific stock option agreement and
that the option  exercise  price for  incentive  stock options shall be at least
equal to 100% of the fair  market  value  of  Common  Stock on the date of grant
(110% for options granted to holders of 10% or more of the outstanding shares of
Common Stock),  but in no event less than the initial  public  offering price of
the Company's proposed public offering.  Pursuant to the provisions of the Plan,
the aggregate fair market value  (determined on the date of grant) of the shares
of the Common  Stock for which  incentive  stock  options are first  exercisable
under the terms of the Plan by an option  holder  during any one  calendar  year
cannot exceed $100,000.

     Currently,  the Plan  provides  that if the  employment  of an  optionee is
terminated  other than by reason of death,  disability  or retirement at age 65,
any incentive  stockoptions granted to the optionee will immediately  terminate.
If employment is terminated by reason of disability or retirement at age 65, the
optionee  may,  within  one year from the date of  termination,  in the event of
termination  by  reason  of  disability,  or  three  months  from  the  date  of
termination,  in the event of  termination  by reason of  retirement  at age 65,
exercise the incentive stock option (but not after the normal  termination  date
of the option).  If employment is terminated by death,  the person or persons to
whom the optionee's  rights under the incentive  stock option are transferred by
will or the laws of descent and  distribution  have  similar  rights of exercise
within three months after such death (but not after the normal  termination date
of the option).  Any termination  provisions of non-statutory stock options will
be fixed by the board of directors or a committee thereof.

     Options are not transferable  otherwise than by will or the laws of descent
and distribution and during the optionee's  lifetime are exercisable only by the
optionee. Shares subject to options which expire or terminate may be the subject
of future  options.  The Plan provides that no new options may be granted by the
Board of  Directors  of the  Company  after June 1, 2006.  In 1996,  the Company
granted  non-qualified  stock  optionsto  purchase  300,000 shares of its Common
Stock at an  exercise  price of $5.00 per share  over a term of ten  years.  Dr.
Ronald Swallow,  Stuart French,  Richard Swallow , Steven Morse and Lester Morse
received  options to purchase  73,000  shares,  150,000  shares,  27,000 shares,
25,000  shares and 25,000  shares,  respectively.  The Company has also  granted
options to  purchase  40,000  shares to Michael  Hurd  allowing  him to purchase
shares at $5.25 per  share.  These  options  vested on July 1, 1997 but were not
exercisable  until January 1, 1998.  All options  granted by the Company were in
connection  with services  rendered to the Company.  The Company has agreed with
J.W. Barclay, the managing underwriter of the Company's Initial Public Offering,

                                       34
<PAGE>

that it will not grant the remaining available options to purchase 55,000 shares
to 5% or greater  shareholders  for a period of three years,  ending November 8,
1999 without the consent of said firm. In March 1998,  all  outstanding  options
granted  under the 1996 Plan were  terminated  and are available for grant under
the Plan.

1998 Plan. The Board of Directors  adopted a revised stock incentive plan at its
meeting of  March 2, 1998.  The revised plan is identical  to the original  plan
described above in all aspects with the following exceptions:

        1. The  total  number of  options  was  increased  to  750,000  from the
           original 600,000.

        2. The minimum price to per share was changed from the $5 minimum price
           to the fair market value  of the stock on the date of grant.

     In  addition,  the  Board  issued  585,000  options  to  various  officers,
employees  and  consultants  to the Company.  These  options are  non-qualified,
ten-year options  exercisable at $2.625 per share. The Board also authorized the
issuance of 25,000 options to David Turner, general manager of the Cyberport if,
in the opinion of  operating  management,  such option was  merited.  Management
subsequently chose to issue those options. The options for Mr. Turner are issued
under the same  conditions as the other 585,000  options  referenced  earlier in
this paragraph.

In April,  as part of an agreement to defer rent due on the  Cyberport  facility
for  three months, the Board agreed to issue 100,000 options at a price of $1.75
to the  landlord  in Niagara  Falls. With that  agreement,  the total  number of
options outstanding is 710,000.


                                       35
<PAGE>

     Aggregated Option Exercises and Fiscal Year-End Option Table - Thefollowing
table provides information with respect to each exercise of stock options during
fiscal 1997 by each of the executive  officers  named in the  preceding  summary
compensation table and the fiscal year-end value of unexercised options.


<TABLE>
<CAPTION>

                                     AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR -END OPTION VALUES



       (a)                    (b)                       (c)                       (d)                       (e)
                           Number of
                                                                               Securities                 Value of
                                                                               Underlying               Unexercised
                                                                              Unexercised               In-the-Money
                                                                               Options at                 Options
                             Shares                                            FY-End (#)              at FY-End ($)
                          Acquired on                  Value
                            Exercise                Realized (1)              Exercisable/              Exercisable/
       Name                   (#)                       ($)                 Unexercisable(1)          Unexercisable(1)
------------------- ------------------------- ------------------------- ------------------------- -------------------------
<S>                 <C>                       <C>                       <C>                       <C> 
Dr. RonaldSwallow
                              -0-                       -0-                 73,000 / 0                -0-
------------------- ------------------------- ------------------------- ------------------------- -------------------------


Stuart French                 -0-                       -0-                150,000 / 0                -0-
------------------- ------------------------- ------------------------- ------------------------- -------------------------

</TABLE>

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

(1)       The aggregate  dollar  values in column (c) and (e) are  calculated by
          determining the difference between the fair market value of the Common
          Stock  underlying the options and the exercise price of the options at
          exercise or fiscal year end, respectively. Tellurian's last sale price
          at the close of  business on  December  31,1997  was $3.00.  Since the
          exercise price of these options is in excess of $3.00,  the  value  of
          the options is zero.

                                       36
<PAGE>
Director Compensation

     The directors of the Company do not currently receive cash compensation for
their services as directors,  although certain directors have been granted stock
options under the Company's Stock Option Plan and are receiving  compensation as
employees of the Company.  See "Stock Option  Plans." The Board of Directors has
the right to  compensateits  directors  in their  capacity as  directors  in the
future.
     In March  1997  Michael  Hurd was  elected  to the Board of  Directors  and
received  options to  purchase  40,000  shares of  Tellurian  stock at $5.25 per
share.  In June 1997, he received  options to purchase 1,000 shares of Cyberport
Niagara stock  atapproximately  $.72 per share and further options of 500 shares
vesting  on July 1,  1998and  500 shares  vesting on July 1, 1999 under  certain
restrictive  conditions.  The option price on these shares is also approximately
$.72 per share.  There are currently  10,000  shares of Cyberport  Niagara stock
outstanding. Mr. Hurd resigned from the Board on March 2, 1998 in order to allow
the Company to comply with the NASDAQ requirementthat at least two Board members
be independent of Company operations.


                                       37
<PAGE>

Item 11.    Security Ownership of Certain Beneficial Owners and Management.
--------    ---------------------------------------------------------------

     The  following  table sets forth certain  information  as of March 31, 1998
(except as otherwise  noted below) after giving  effect to 350,000  shares to be
issued  in  April  1998 as  described  under  item 1  regarding  the  beneficial
ownership of the  Company's  Common Stock by all persons known by the Company to
be  beneficial  owners of more  than 5% of its  Common  Stock and all  executive
officers  and  directors,  both  individually  and as a group.  For  purposes of
calculating the amount of beneficial  ownership and the respective  percentages,
the number of shares of Common  Stock which may be  acquired by a person  within
sixty days of March 31, 1998 are considered outstanding, but shall not be deemed
to be  outstanding  for the purpose of computing the  percentage of Common Stock
owned by any other person.

                                     Amount
                                     and Nature              Approximate
Name and Address of                  of Beneficial             Percent
Beneficial Owner (1)                 Ownership (1)            of Class (2)
--------------------                  --------------          ------------
Dr. Ronald Swallow (3)(4)              370,908                    11.0%

Dr. Richard Swallow(3)(5)              136,481                     4.1%

Stuart French(3)(6)                    249,261                     6.0%

Michael Hurd (3)(7)                    200,000                     4.8%

All officers and directors
 as a group (6 persons)(7)(8)          956,650                    32.8%


1174757 Ontario Inc. (9)               450,000                    11.1%

Mary Elizabeth
  Huggins Trust (10)                   430,049                    10.9%

Jericho Limited
c/o InterTrust Management
S.A. P.O. Box 3292
126 rue de la
Pelisserie 1211 Geneva 3
Switzerland (11) (12)                2,200,000                    35.8%

Imafina S.A.
c/o Hubert Hendrickx
4 Route de Beaumont
CH 1701 Fribourg
Switzerland (11) (13)                  800,000                    16.9%

                                       38
<PAGE>

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

(1)  Unless otherwise  indicated below, all shares are owned  beneficially and
     of record.

(2)  Based upon 3,946,605 shares outstanding without giving effect to the 
     issuance of shares under the Company's outstanding Warrants and Stock
     Options.

(3)  The address for Dr. Ronald Swallow, Stuart French,  Dr. Richard Swallow and
     Michael Hurd is c/o Tellurian,  Inc. at 300K Route 17 South,  Mahwah, NJ
     07430.

(4)  Includes options to purchase 73,000 shares.

(5)  Includes options to purchase 27,000 shares.

(6)  Includes options to purchase 200,000 shares.

(7)  Includes options to purchase 200,000 shares.

(8)  Includes options to purchase 500,000 shares.

(9)  Includes options to purchase 100,000 shares.

(10) Trust  set  up  by  Charles  H.  Powers,  a  founder  and  former 
     shareholder,  officer  anddirector of the Company,  for the benefit of
     his granddaughter,  with Jane PowersHuggins as Trustee.  The Trustee's
     address is 2419 West Sumter, Florence, SC29572.

(11) Represents  Common  Stock  issuable  upon  exercise  of  Warrants.  See
     "Warrant Holders."

(12) The beneficial  owner of Jericho  Limited is Louis Carlos  Santa Maria. The
     directors of Jericho Limited are Louis Carlos SantaMaria, and Jane
     Borgognon.

(13) The beneficial owner and sole officer and director of Imafina S.A. is
     Hubert Hendrickx.


                                       39
<PAGE>

Item 12.    Certain Relationships and Related Transactions.
--------    -----------------------------------------------

     Effective  July 2, 1996,  Tellurian,  Inc., a South  Carolina  corporation,
reincorporated  in Delaware  under the same name by merging itself into a wholly
owned subsidiary  formed for that purpose on January 25, 1996. All references in
Certain Transactions to the "Company" or "Tellurian" include Tellurian,  Inc., a
South  Carolina  corporation,   unless  the  context  indicates  otherwise.  The
following  discussion regarding the issuances of shares gives retroactive effect
to such merger.

     In March 1995, Tellurian completed a private placement of 600,000 shares of
its common  stock for a purchase  price of  $100,000.  Investors  in the private
placement were Dennis Giunta (200,000 shares),  Joseph Defalco (125,000 shares),
Matthew Langden (125,000 shares),  John Bruno (45,000 shares),  John Cioffoletti
(45,000  shares),  Michael Wills  (45,000  shares) and Douglas  Spinosa  (15,000
shares). Messrs. Bruno,  Cioffolettiand Wills are principals, and Mr. Spinosa is
an employee of J.W. Barclay & Co., Inc.

     In March 1995, Dr. Ronald Swallow and Dr. Richard Swallow  transferred from
their  holdings,  without  payment  therefor,  an aggregate of 152,710 shares of
Tellurian  to nine  non-affiliated  persons  including  49,261  shares to Stuart
French,  and subsequently,  they transferred  100,000 shares to Charles Power, a
founder of the Company.

     Since the inception of  Tellurian,  Charles  Powers has advanced  monies to
Tellurian  for  working   capital   purposes  and  the  acquisition  of  certain
technological licensing rights from TTY relating to Tellurian's image generator.
As of December 31, 1997, Mr. Powers was owed approximately  $694,200,  inclusive
of  interest  at a rate of 10% per annum.  Such  $694,200  includes  $346,736 of
principal and $347,464 of accrued and unpaid interest . Previously,  the Company
has repaid  Powers a total of  $221,200.  This loan is payable upon demand after
November 1, 1997.  However,  as of March 31,  1998,  Mr.Powers  has not demanded
payment.  The Company is seeking either an extension ofthese  obligations to Mr.
Powers or the conversion of these obligations into restrictedcommon stock in the
Company.  However,  no assurances can be given that Mr. Powerswill agree to this
extension or conversion,  or that any extension or conversion granted will be on
terms and conditions acceptable to the Company.

     From inception  through the  completion of the initial  public  offering in
November 1996, Sophia Swallow,  Richard Swallow, Celia Klimas, Stuart French and
Sandra  Swallow made  various  cash loans to Tellurian  and were repaid from the
proceeds of theinitial public offering  $25,000,  $72,600,  $28,000,  $8,160 and
$18,000,  respectively,   inclusive  of  accrued  interest.  Subsequent  to  the
completion of the public offering in November 1996, Celia Klimas loaned $150,000
to the Company and the Company agreed to pay her interest at the rate of 10% per
annum. As of March 31,1998,  Tellurian owed Ms. Klimas the principal of her loan
plus accrued interest therein.

     Tellurian  completed a Private Placement of securities for an aggregate sum
of $750,000 between  December 1995 and January 1996,  consisting of (i) $192,000

                                       40
<PAGE>

in principal  amount of  unsecured  and  subordinated  8%  Promissory  Notes due
December 27, 1997 and $528,000 in principal amount of unsecured and subordinated
8%  Promissory  Notes due  January  22,  1998,  with such  Notes  providing  for
accelerated  payment upon the  completion  of the Offering,  and (ii)  3,000,000
Common Stock Purchase warrants sold at a price of $.01 per warrant. Each warrant
entitles the holder  thereof to purchase one share of Common Stock at a price of
$6.00 per share,  subject to adjustment,  at any time for a period of five years
from the date of  issuance.  The  Warrants  provided  that in the event that the
Company   completed  an  initial   public   offering,   the  warrants  shall  be
automatically exchanged for Warrants identical to those sold to the public. This
exchange  became  effective  on  November  8, 1996,  the  completion  date ofthe
Company's public  offering.  As compensation for its services as placement agent
of such private  placement.  J. W. Barclay & Co.,  Inc. was paid a commission of
$75,000 and an expense  allowance of $22,500 and was issued 300,000 Common Stock
Purchase  Warrants for a cash  consideration of $6,000.  On June 27, 1996, J. W.
Barclay & Co., Inc. returned the 300,000 Warrants to the Company and the Company
agreed to pay $6,000 to J. W. Barclay & Co.,  Inc.  upon the  completion  of the
Company's Public Offering in November of 1996.

     On June 27, 1996, the Company issued its promissory  notes in the principal
amount of $175,000 to three non-affiliated  persons and received net proceeds of
approximately  $148,000 after  incurring  commissions  and other expenses to the
Placement Agent,  J.W. Barclay & Co., Inc. On November 8, 1996, the closing date
of  Tellurian's  initial  public  offering,  $150,000 was repaid and $25,000 was
converted into 25,000 shares of the Company's Common Stock.

     In  March of 1998 the  Company  entered  into a  consulting  contract  with
Carousel  Consulting.  Under  the terms of this  contract,  the  Company  issued
150,000  shares of common  stock to Carousel  and agreed to pay $5,000 per month
for continued  consulting services by Carousel.  Carousel has agreed to actively
search for  merger/acquisition  candidates on behalf of Tellurian and to provide
general consulting to the Company onan "as-needed" basis.

     In  March  of 1998  the  Company  reached  an  agreement  with  Interactive
Mediaunder  which  Interactive  Media  agreed  to accept  100,000  shares of the
Company'scommon  stock in  return  for  outstanding  amounts  owed for  services
provided by  Interactive  and for payment on services to be provided  during the
year 1998. At December 31, 1997, the Company owed Interactive Media $56,000. The
Company's obligation for 1998 would have been an additional $70,000.

     Management  believes that all  transactions  with  officers,  directors and
shareholders  of the Company (and  affiliated  companies)  were made on terms no
less favorable to the Company than those available from unaffiliated parties. It
is intended that any future transactions with officers, directors and affiliates
of the Company will be made on terms no less favorable to the Company than those
available from unaffiliated parties.

                                       41
<PAGE>


Item 13.   Exhibits and Reports on Form 8-K.
--------   ---------------------------------

(a)(1)(2)  Financial Statements/Schedules.
           -------------------------------

     A list of the Financial  Statements and Financial Statement Schedules filed
as a part of this Report is set forth in Item 7, and appears at Page F-1 of this
Report; which list is incorporated herein by reference and follows Item 8.

(a)(3)  Exhibits
        --------

           All  exhibits  have been  previously  filed and are  incorporated  by
reference  from  theRegistrant's  Form  SB-2  Registration  Statement  (File no.
333-9741) unless otherwise noted below.

 2       Agreement and Plan of Merger; Certificate of Ownership and Merger
         (Delaware); Articles of Merger (South Carolina)

 3(a)    Articles of Incorporation of Registrant

 3(b)    By-Laws of Registrant

 4(a)    Specimen of Common Stock

 4(b)    Form of Warrant Agreement (including form of Warrant)

 4(c)    Form of Underwriter's Warrant

10(a)    Indemnification Agreement dated October 10, 1995 between Charles 
         Powers and the Registrant and an amendment thereto dated June 17,  1996

10(b)    Assignment of Contract Rights dated October 9, 1995 between Charles
         Powers and the Registrant and an amendment thereto dated June 17, 1996

10(c)    Employment Agreement dated November 8, 1996 between Dr. Ronald Swallow
         and the Registrant *

10(d)    Employment Agreement dated November 8, 1996 between Stuart French and 
         the Registrant *

10(e)    Lease for Facilities in Mahwah, New Jersey

10(f)    Transfer Technology Agreement dated January 1, 1996 between Voyager 
         Graphics, Inc. and the Registrant


                                       42
<PAGE>

10(g)    Agreement dated November 14, 1994 between TTY Graphics, Inc., Voyager
         Simulation Ltd. and the Registrant.

10(h)    Letter Agreement dated May 26, 1995 between the Registrant and TTY
         Graphics,  Inc.  and  amendment thereto dated July 17, 1996.

10(i)    Agreement dated November 5, 1991 by and  among  Greg Gustin,  Pat Lowe
         as  Trustee  for  the  Estate  of  Quantum  Graphics,  Inc.  and  TTY
         Graphics, Inc.

10(j)    Assignment Agreement dated as of November 5, 1991 between TTY Graphics,
         Inc. and the Registrant

10(k)    Letter Agreement dated August 1, 1996 and August 2, 1995 between Greg
         Gusting and the Registrant

10(l)    Agreement dated July 23, 1996 between TTY Graphics, Inc. and the
         Registrant

10(m)    1996 Incentive and Non-Statutory Stock Option Plan

10(n)    Promissory Note dated December 27, 1995, issued to Imafina S.A.

10(o)    Promissory Note dated January 22, 1996 issued to Jericho Limited

10(p)    Form of Convertible Promissory Note dated June 27, 1996 issued to
         Andrew Nicoletta, Karen Bulavinetz and Alec McDonald

10(q)    Form of Non-Convertible Promissory Note dated June 27, 1996 issued to
         Andrew Nicoletta,  Karen Bulavinetz and Alec McDonald

10(r)    Common Stock Purchase Warrants dated December 27, 1995 issued to
         Imafina S.A.

10(s)    Common Stock Purchase Warrants dated January 22, 1996 issued to Jericho
         Limited.

10(t)    Letter dated March 19, 1996 between Eye Wonder Studios and the
         Registrant

10(u)    Consulting  Agreement  dated November 5, 1996 with J.W.  Barclay & Co.,
         Inc. 

10(v)    Merger and  Acquisition  Agreement dated November 5, 1996 with J.W.
         Barclay & Co., Inc.

10(w)    Letter Agreement between the Registrant and Charles Powers

10(x)    Letter Agreement between the Registrant and Fightertown

                                       43
<PAGE>


10(y)    Letter Agreement between the Registrant, Voyager Graphics Inc., Voyager
         Simulation Company, Ltd. and TTY Graphics, Inc.

10(z)    Agreement dated Mfarch 25, 1998 by and among Cyberport Niagara, Inc.,
         Tellurian Inc. and 1174757 Ontario, Inc.**

10(aa)   Agreement  dated March 26, 1998 by and among Cyberport, Tellurian and
         Cyberport creditors**

11       Earnings per share - See notes to financial statements

21       Subsidiaries of Registrant - None

23       Consent of Miller Ellin & Co.

27       Selected Financial Data*

* Filed herewith.
**incorporated by reference into the registrants form 8-K dated March 25, 1998

(b)        Reports on Form 8-K
           -------------------
           During the three months  ended  December 31, 1997, a Form 8-K was not
           filed or required to be filed.



                                       44
<PAGE>
                                   SIGNATURES

     Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                                            TELLURIAN, INC.



                                                   By: /s/ Stuart French
                                                   -----------------------------
                                                   Stuart French, President

Dated:                                             Mahwah, New Jersey
April 14, 1998

           Pursuant to the requirements of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated:

           Signatures                 Titles                      Date

/s/ Ronald Swallow            Chairman of the Board,        April 14, 1998
----------------------------  Chief Executive Officer  
Dr. Ronald Swallow

/s/ Stuart French             President and Director        April 14, 1998
----------------------------  of the Company    
Stuart French
                              

/s/ Richard Swallow           Secretary and Director        April 14, 1998
----------------------------
Dr. Richard Swallow


/s/ Michael Hurd              Vice President of             April 14, 1998
----------------------------  Administration and
Michael Hurd                  Finance and Chief
                              Financial and Accounting
                              Officer

/s/ Peter Colgan              Director                      April 14,1998
----------------------------
Peter Colgan                  

/s/ James Lin                 Director                      April 14,1998
----------------------------
James Lin


                                       45