<PAGE>

                       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, 1996
                                       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, $.01 par value
--------------------------------------------------------------------------------
                                (Title of Class)

     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 [ ].

     As of March 31, 1997 at 4:00 P.M., the aggregate market value of the voting
stock held by non-affiliates, approximately 2,140,000 Common Stock, $.01 par
value, was approximately $12,840,000 based on the last sale price of $6.00 for
one share of Common Stock on such date. The number of shares issued and
outstanding of the Registrant's Common Stock, as of March 31, 1997 was
3,025,000.


<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 and helmets. The term virtual
reality refers to artificial environments of sight, sound and motion created
with the use of specialized computers and audio-visual equipment. The Company
provides consulting 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 1996, the Company's principal product was its
AT-200 image generator which was sold to customers who manufacture training and
simulation equipment such as Hughes/Link Corporation, Aviation Simulation
Technology, Inc., and Ship Analytics, Inc. In 1994, the Company began adapting
its AT-200 Image Generator and has been selling this product and ancillary
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 units of the EAGLE pursuant to purchase
orders. The Eagle, available in multiple resolution formats, 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 being
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, and Location Based Entertainment Centers ("LBE")and Tourist
Entertainment Centers ("TEC").

         Utilizing the "EAGLE" technology, Tellurian is currently designing
helmets to complement the Eagle for the entertainment market. This new product
is expected to be marketed and sold on two levels. The primary area of marketing
will be for Tellurian to build its own complete game units and use these units
to establish one or more joint ventures (typically a TEC), or revenue share
agreements with owners and operators of either LBE's or TCE's. The second level
will be as a component for other virtual reality game manufacturers.

         In January 1996, Tellurian signed a Technology Transfer Agreement with
Voyager Graphics, Inc. ("Voyager") pursuant to which Tellurian granted Voyager
an irrevocable, exclusive, assignable, fully paid license (the "License") to be
the exclusive supplier of the EAGLE Image Generator in various Asian and
Mid-East countries. In consideration of the License and technology transfer,
Voyager agreed to pay Tellurian $1,500,000. Of such amount, Tellurian has agreed
that Voyager will pay $650,000 to two parties unrelated to Tellurian for these
services in connection with such contract, resulting in a net amount of $850,000
to Tellurian before payments of certain royalties. Management is concerned about
Voyager's ability to meet its financial obligations under this program, since
Voyager is currently more than three months late on a scheduled payment. Please
see the Management Discussion and Analysis section of this filing for further
information on this matter.



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Recent Developments

         Since the completion of Company's initial public offering in November
of 1996 it has actively pursued the creation of an LBE or a TEC that will be
designed to showcase the Tellurian technology. During the first quarter of 1997,
the Company began legal procedures to incorporate two subsidiaries, Cyberport
International, Inc., a Delaware corporation, and Cyberport Niagara Inc., an
Ontario, Canada company, each with a minority shareholder.

         The Niagara subsidiary is 87.5% owned by Tellurian and 12.5% owned by
an unrelated party. It will develop and operate a Tourist Entertainment Center
in Niagara Falls, Ontario, Canada (hereinafter referred to as "Cyberport"). This
center will operate from a 40,000 sq. ft. building which the Niagara subsidiary
leased during April 1997 in what is commonly referred to as the "Casino
District" (also known as "Clifton Hill") of Niagara Falls. Cyberport, which is a
TEC differs from the more common LBE in that the market of a TEC is intended to
be the family vacationer rather than the local, repeat customer. The Company's
plans and objectives for this subsidiary are discussed at greater length in
"Item 6."

         The other newly planned subsidiary, Cyberport International, Inc., will
be 97% owned by the Company with the remaining 3% owned by the same unrelated
party as Cyperport Niagara, Inc. Cyberport International, Inc. will be the owner
of the intellectual properties and intangible assets that, in the opinion of
management, make the Cyberport TEC a concept capable of being franchised.
Cyberport International intends to promote this concept to potential franchisees
with the expectation of collecting franchise fees and royalties from franchise
operators.

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 because of its inability to obtain adequate
funding and disagreements among its shareholders, and it 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 by Quantum and Gustin to TTY for a cash
consideration of $150,000 and royalties to be paid by 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.





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<PAGE>

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 $10,529.50 and an additional $70,000. Of such $80,529.50, $45,529.50
was paid in November, and the balance is due in November of 1997. 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
undergone 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.

         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, and interactivity with other players. Tellurian's "ICE
Falcon" is a prime example of virtual reality entertainment. The unit consists
of a fiberglass cockpit similar to that of an F-16 fighter aircraft, and it is
outfitted with a control stick, throttle, and all the gauges one would expect to
find in the actual jet. Once seated, the player views what appears to be the
outside world via three 27" video monitors. Game play begins when the player
taxis down the runway and takes off. 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 F-16'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 airport, for
example, the computer will create and control a visual image of an attacking
aircraft for the player to destroy. If the player moves in a direction away from
an enemy airport, the player is free to practice his flying skills without being
confronted by an enemy aircraft.

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. The AT-200
provides realtime image generation with high resolution, multi-channel operation
and full color using proprietary hardware and software. As of December 31, 1996,
the Company has built and sold over 250 AT-200 systems.


                                       4
<PAGE>




         The Company currently sells its AT-200 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, 1996 and 1995,
revenues from this category amounted to 5.5% and 31%, respectively, of the
Company's total revenues for each applicable period. The latter group includes
MaxFlight Corp., Ride & Show Engineering, and the Fightertown Entertainment
Centers. During the years ended December 31, 1996 and 1995, revenues from this
group amounted to 0% and 69%, respectively, of the Company's total revenues for
each applicable period.

         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. In July 1996, the Company commenced
delivery of its first production units pursuant to purchase orders.

         Using the EAGLE, the Company is currently developing a class of games
in which a portion of the TEC is themed to a particular time and place. For
example, the Company's "Battle of the Bulge" adventure will be based on the
legendary P-51 Mustang fighter plane of WW II. The following describes this
experience; however, the Company has already been contacted to design other
adventures themed around NASCAR racing, ancient civilizations and undersea
exploration.

         The Battle of the Bulge VR experience will be a theme area within a LBE
or a TCE. Although the size of the area will be flexible, a minimum of 60' x 40'
is recommended in order to gain the full impact of the experience. The
entertainment area will include a Flight Shop where the guests register for the
P-51 experience and can purchase items such as T-shirts, hats, jackets, models,
dog tags, and coffee mugs bearing the P-51 logo. This area is intended to
resemble a WW-II Officers Club with rustic wood tables and counters, and planked
wood floors. The ceiling may be corrugated metal which has been curved to meet
the area of Flight Shop and Briefing Room. Walls can be adorned with maps,
squadron insignias, and pin-up girls with period music (such as Glen Miller)
playing.

         Behind the Flight Shop will be a small "Briefing Area," consisting of
wooden benches, a VCR-monitor, and chalk board. The purpose of this area will be
to prepare guests their experience. In addition to receiving instructions on how
to best use the P-51, each guest will be greeted by the "Flight Leader" (a
uniformed employee). Basic introduction to the experience will be handled via
video tape. The Flight Leader will be there to answer questions. The floor of
the Briefing Area will contain planked wood and the walls will have military
aeronautical maps, detailed maps of certain target areas, and silhouettes of
various aircraft (both friendly and foe). A rough wooden door will be the exit
into the "Hanger Area." Around the door can be sand bags, various warning signs,
and a small chalk board with weather conditions over the target area. Sound in
this room may be of muffled "mic chatter," engines starting, and the occasional
signal siren. Since each flight experience will last between four and eight
minutes, the amount of time a guest spends in the "Briefing Area" will be
limited. The size of the "Briefing Area" will be determined by the number of VR
units in the "Hanger Area." When the "Hanger Area" is ready for the guests, a
bare red light bulb will flash above the exit door.



                                       5
<PAGE>


         The "Squadron Leader" will meet the guests as they enter the "Hanger
Area," and escort them to their P-51 aircraft. Each P-51 will be a scale model
of the actual Mustang cockpit. The aircraft will be made of fiberglass and
painted with authentic markings. Each aircraft will have up to two seats (the
pilot's cockpit and a back seat "observer"). The interior of the P-51 will be
equipped with simulated instruments, control stick and throttle. Each cockpit
can be mounted on a two axis platform which provides both guests with motion
cues if desired. The experience will be generally the same: the guests are to
meet and escort B-17 bombers on a raid over enemy territory. Notwithstanding the
recommended installation size and content described above, the Company believes
that there is a large and growing market for the P-51 game product even in
single, free-standing units.

         The Company expects to place 16 stations of P-51 flight simulators at
the Cyberport facility. It is believed that the installation of this equipment
in Niagara Falls, Ontario, Canada will incorporate many of the ancillary
features described above. Because of the importance of the Tellurian experience
in the overall presentation of the Cyberport program, it is currently planned to
dedicate approximately 8,000 square feet of the Cyberport facility to
Tellurian's products.

Backlog

         At December 31, 1996 the Company had a backlog of 32 Eagle units with a
sales value of $160,896. The backlog at the end of 1996 is entirely under the
Fightertown purchase order which dates back before January 1, 1996 and under
which Fightertown did not accept deliveries in 1996. At December 31, 1995, the
Company had a backlog of 32 Eagle units at a sales value of $160,896.

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.

         The company has begun a development project to design and build 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, and surround sound. Management believes that the first working
prototype of its custom designed helmet will be available for evaluation during
the second quarter of 1997.

         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.





                                       6
<PAGE>

Other 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 a variety 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. Location based entertainment operations
which currently utilize the Company's devices are Six Flags (Great Adventure -
Jackson, NJ, Magic Mountain - Los Angeles, CA) and Fightertown - Lake Forest,
CA. Entering the entertainment market is believed to be a natural progression of
the technology and products which the Company has been developing.

         The Company's marketing efforts prior to completion of the 1996 public
offering had been 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 1995, three customers, namely, Ride
& Show Engineering Corp. (a vendor to Six Flags), Virtual Images and Voyager
Graphics accounted for 32%, 21% and 11%, respectively, of the Company's
revenues. During 1996, two principal customers, namely, Voyager and Ship
Analytics Corp. accounted for 76% and 16%, respectively, of the Company's
revenues.

         Due to the specialized nature of sales, significant training is
required before newly hired salespersons are likely to be effective. While the
Company has added an experienced sales person in the Midwest, the Company
intends 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.

         The goal of the Company is to use its products 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. In addition, the Company has
received numerous inquiries 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. These venues will be pursued as
resources permit, but the Company does not consider these avenues to be its
primary market direction.

 Licensing of Tellurian Technology

         Pursuant to an agreement dated as of January 1, 1996 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") to be 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, Sri Lanka
(Ceylon), Syria, Thailand, Turkey, United Arab Emirates, Vietnam, Yemen (Aden
and 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 as the "Intellectual Property"), and the right to grant
sub-licenses to third parties without the consent of 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 



                                       7
<PAGE>

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 Upper  Saddle  River,  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 has 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. As of September 30, 1996, Tellurian has recognized revenues totaling
approximately $660,000 of the above referenced $850,000 from Voyager. In
addition, Voyager purchased certain hardware items valued at approximately
$60,000 in order to allow them to test their applications. Therefore, the total
net amount due Tellurian under this contract is approximately $910,000. As of
December 31, 1996, Tellurian received payments totaling $550,000 of $910,000.

Manufacturing

         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 from Analog Devices Corp. 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 March 1994, Tellurian received a purchase order from Fightertown for
40 EAGLES at a price of $4,888 each. As of December 31, 1996, Tellurian has
delivered eight EAGLES to Fightertown and has a backlog of 32 EAGLES. Tellurian
has agreed with respect to future orders of EAGLE from Fightertown to deliver
EAGLES at a maximum price of $7,500 per EAGLE ($10,000 per EAGLE where certain
improvements to the EAGLE are made) and that Fightertown will receive the best
pricing offered to any Tellurian customers regardless of volume. Further,
Tellurian has agreed to give Fightertown a right of first refusal to participate
with Tellurian in any LBE site or product in which Tellurian wishes to utilize
conventional fighter jet simulation and to not copy Fightertown's method of
operating LBE's.

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 seven engineers 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.


                                       8
<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 produce a 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. Many 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 also intends to establish one or more additional TCE's
and/or LBE's. The Company anticipates significant competition in attempting to
gain entry to 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.

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.


                                       9
<PAGE>

Employees

         Currently, the Company has eighteen full-time employees, including
three executive employees, eight technical and production persons and seven
engineers. The Company believes that its relations with its employees is good.
None of the Company's employees is represented by a union.

Item 2.  Description of Property.

         In January, 1997, the Company entered into a 10 year lease expiring
January, 2007 for approximately 10,000 square feet of space at 300K Route 17
South, Mahwah, NJ 07430. Pursuant to the lease, the Company pays a monthly base
rent of $6,250. The Company believes that suitable additional facilities can be
found on terms satisfactory to the Company.

         The Company is presently evaluating opportunities to sublet the
premises it previously occupied at 15 Industrial Avenue in Upper Saddle River,
New Jersey. Approximately two-thirds of the space is currently sublet. Based on
the projected volume of P-51's needed for the Cyberport Niagara project,
management may choose to retain the remaining space at Industrial Avenue for
warehouse use.

Item 3.  Legal Proceedings

         There are no material legal proceedings pending against the Company.


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

         Not applicable.



                                       10
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                                     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, 1997 at 4:00 P.M. Eastern Standard Time, the last sale price of the
Common Stock and Warrants in the over-the-counter market were $6.00 and $1.625,
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> 
1996
----
Nov. 5, 1996
(first day of trading)
through
December 31, 1996                           7 1/2              5 3/4            4 1/4             2 1/2
</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 of record holders of the Company's
Common Stock, as of March 7, 1997, the record date, was approximately 33.
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 700 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.


Item 6. Managements Discussion and Analysis of Financial or Plan of Operation.

Plan of Operation

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

          I)   increasing  revenues through  marketing  efforts of its new EAGLE
               product;
          II)  developing its virtual reality helmet and motion system;
          III) establishing a virtual reality  showplace for  demonstrations  of
               Tellurian's products; and
          IV)  Establishing TEC's and/or entering into joint ventures or revenue
               sharing  agreements with third parties for the purpose of owning,
               operating and/or having an interest in one or more LBE's or TCE's
               for the sale and/or use of its virtual reality game units.

           Marketing of the new EAGLE image generator will be accomplished by
directing efforts towards three different customer groups: (I) the training and
simulation market where Tellurian has been selling its AT-200 unit; (ii)
pursuing the Virtual Reality ("VR") game developer market through trade show
exhibits, advertisements and newsletters; and (iii) pursuing the inter-active
thrill-ride market. The Company intends to expand its current customer list as
several manufacturers move into this new type of themed adventure. Trade shows,
marketing brochures, and personal contacts will be used to gain customers.



                                       11
<PAGE>

Entertainment Centers

         Tellurian intends to utilize the Eagle technology to build its own
complete game units and use these units to establish one or more entertainment
centers to be owned solely by Tellurian or jointly with others. Depending upon
the cash requirements of the center, Tellurian may finance the project by
utilizing its cash resources or Tellurian may enter into joint venture or
revenue sharing agreements with third parties such as existing owners and
operators of LBE's. In some cases, the Company may provide the equipment for the
facility and assist in the designing, developing, construction and theming of
the center.

         The Company had no experience in owning, financing and operating TEC's
or LBE's prior to its involvement in the Cyberport TEC project, but it is likely
to expand its' involvement in such areas. The Company has no other binding
agreements with respect to any of these opportunities and there can be no
assurances that Tellurian will be successful in establishing or entering into
revenue sharing agreements for more LBE's or TEC's and deriving operating
profits from such operations.

         In January 1997, Tellurian began its first efforts towards establishing
Cyberport, a family entertainment center. The location is on the Canadian side
of Niagra Falls. The Canadian government has granted licenses for casino
gambling in the city, and the new center is in the casino/entertainment
district. In addition to providing a portion of the equipment in the facility,
Tellurian is controlling the design, development and construction of this 40,000
sq. ft. facility. The Company hopes to have this facility operating before the
end of the second quarter of 1997.

         The Company has formed a subsidiary corporation, Cyberport
International,Inc. for the express purposes of franchising, managing and
controlling Cyberport and other similar locations presently under consideration.
There can be no assurances that such other facilities will be created.

           To effectively market Tellurian's products, it is planning to have a
complete virtual reality showplace ready for demonstrations at the Niagara
facility late in the second quarter of 1997. The Company's range of VR devices
which includes modern fighter cockpits, dune buggies, spacecraft and full
immersion helmet experiences will eventually be displayed at the game room; but
the centerpiece of the facility will be the sixteen cockpit "Battle of the
Bulge" simulation. The Showplace will consist of approximately 8,000 square feet
in the 40,000 square foot facility in the Casino district of Niagara Falls. The
units will act as a marketing tool for sales, and also as a very controlled
environment for the introduction of new experiences. Although this facility is
expected to be geared to revenue generation, it will allow significant testing
and market response evaluation.

           The Company has estimated the net proceeds from its recently
completed offering together with revenues from operations will be sufficient to
meet the Company's cash requirements for a period of between 12 and 15 months
following the date hereof. However, there can be no assurance that unexpected
future developments will not result in the Company requiring additional
financing and that if required, additional financing will be available to the
Company.




                                       12
<PAGE>

Concern Regarding Voyager Contract

           In January 1996, Tellurian signed a Technology Transfer Agreement
with Voyager pursuant to which Tellurian granted Voyager an irrevocable,
exclusive, assignable, fully paid license (the "License") to be the exclusive
supplier of the EAGLE Image Generator in various Asian and Mid-East countries.
In consideration of the License and technology transfer, Voyager agreed to pay
Tellurian $1,500,000, of which Tellurian has 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. As of
September 30, 1996, Tellurian has recognized revenues totaling approximately
$660,000 of the above referenced $850,000 from Voyager. In addition, Voyager
purchased certain hardware items valued at approximately $60,000 in order to
allow them to test their applications. Therefore, the total net amount due
Tellurian under this contract is approximately $910,000. As of December 31,
1996, Tellurian received payments totaling $550,000.

           Management is concerned about the continued viability of Voyager and
is uncertain about the collection of the remaining $360,000 due under this
agreement. Accordingly, no revenue has been recognized in the fourth quarter of
1996 with regard to this contract. Further, Management has elected to fully
reserve the amounts which had been billed but not collected as of December 31,
1996.

           Should Voyager be unable to complete its financial obligations, its
rights to manufacture and/or distribute under the agreement can be terminated
after written notice of at least 28 days and an opportunity to cure such
default. The Company has advised Voyager that it intends to give notice in the
event Voyager does not make satisfactory payment arrangements in the near
future.

           Under the contract, Tellurian is entitled to receive royalties of 2%
of Voyager's net sales of the products and derivative products sold pursuant to
the License. These royalties are contingent upon the satisfactory completion of
the obligations under the initial contract and the ability of Voyager to bring
products to market. There currently exists significant concern about the ability
of Voyager to meet its financial obligations in order to retain these rights.

Results of Operations

           Tellurian's net sales for the year ended December 31, 1996 were
$819,380, an increase of $342,069 or approximately 72% over the comparable
period of the prior year. Such increase was primarily derived from Tellurian's
license agreement with Voyager. For the year ended December 31, 1996, the
Company's gross profit was $535,373 as compared to $138,091 for the comparable
period of the prior year. Such increase in gross profit is primarily due to
revenues received from Voyager. Revenues derived from the sale of image
generators and ancillary software decreased by $101,042 for the year ended
December 31, 1996 as compared to the comparable period of the prior year. Such
decrease was due to the delay in completing the production of the Company's
EAGLE. As a result of this delay, Tellurian filled purchase orders for EAGLE
with delivery of the AT-200 at prices which are substantially lower than the
normally quoted sales prices for its AT-200.

           Tellurian's research and development activities for the year ended
December 31, 1996 were $688,103, representing an increase of $264,333 over the
comparable period of the prior year. The increase in research and development
activities related to Tellurian's development of the "EAGLE," Tellurian's new
image generator product specifically designed for the virtual reality
entertainment market. Research and development activities include costs of the
Company's product design, quality insurance, engineering support activities and
microcode consulting. Also included in research and development are the costs of
purchasing certain royalty rights for the "flat-shaded" technology.



                                       13
<PAGE>

           Selling, general and administrative expenses for the year ended
December 31, 1996 were $585,121, an increase of $235,491 from the comparable
period of the prior year. The increase in selling, general and administrative
expenses was substantially due to increases in sales payroll and commissions and
the establishment of the reserve for the potential failure to collect the open
billing to Voyager.

           Selling, general and administrative expenses expressed as a
percentage of sales was approximately 71% for the year ended December 31, 1996,
a decrease of approximately 2% from the comparable period of the prior year.
This decrease was due to the increase in sales derived from Voyager.

           For the year ended December 31, 1996, interest expense was $111,333
as compared to $64,356 for the comparable period of the prior year. This
increase was due to the issuance of promissory notes in the amount of $895,000
issued in connection with the Company's private placement.

           Tellurian's net loss for the year ended December 31, 1996 was
$962,410 as compared to $699,665 for the comparable period of the prior year.
The increase in the net loss was primarily due to increased costs in development
of the Eagle and the inability to recognize certain revenues due from Voyager.

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 are
automatically convertible into 3,000,000 warrants identical to those 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 Warrants are
exercisable over a period of five years expiring November 8, 2001 at an exercise
price of $6.00 per share. The Company received net proceeds of approximately
$6,200,000 from the offering. The Company believes that the proceeds of such
offering combined with cash from operations will be sufficient to meet its cash
and liquidity needs over the next twelve to fifteen months.

           For the year ended December 31, 1996, net cash of $1,851,540 was used
in operating activities due to the Company's net loss and substantial decreases
in the Company's payables and accrued expenses as well as increases in
inventory.

           For the year ended December 31, 1996, $5,783,829 was provided from
financing activities. The primary sources of this cash were the proceeds of the
initial public offering completed in November of 1996 and certain loans
completed prior to the public offering. These amounts were partially offset by
the repayment of certain notes after the completion of the initial public
offering.

           For the year ended December 31, 1996, net cash of $2,210,233 was used
in investment activities. This is significantly related to the purchase of
marketable securities with cash not required for short-term business operations.

           For the year ended December 31, 1995, net cash of $233,791 was used
in operating activities due to the Company's net loss, reduced by substantial
increases in the Company's payables and decreases in the Company's inventories.

           For the year ended December 31, 1995, $11,214 was used in investment
activities.


                                       14
<PAGE>

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.



                                       15
<PAGE>


                                 TELLURIAN, INC.

                         REPORT ON FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995





                          INDEX TO FINANCIAL STATEMENTS





REPORT OF INDEPENDENT
   CERTIFIED PUBLIC ACCOUNTANTS                                     F-2


BALANCE SHEET                                                       F-3


STATEMENTS OF OPERATIONS                                            F-4


STATEMENTS OF STOCKHOLDERS' EQUITY                                  F-5


STATEMENTS OF CASH FLOWS                                            F-6


NOTES TO FINANCIAL STATEMENTS                                   F-7 - F-21


SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS                    F-22

                                       F-1

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


The Board of Directors and Stockholders of
Tellurian, Inc.


We have audited the accompanying balance sheet of Tellurian, Inc. as at December
31, 1996, and the related statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1996 and 1995. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Tellurian, Inc. as at December
31, 1996 and the results of its operations and cash flows for the years ended
December 31, 1996 and 1995 in conformity with generally accepted accounting
principles.

We have also audited Schedule II of Tellurian, Inc. for the years ended
December 31, 1996 and 1995 included in the 1996 annual report of the Company on
Form 10-K. In our opinion, the schedule presents fairly the information required
to be set forth therein.





                                          MILLER, ELLIN & COMPANY
                                          CERTIFIED PUBLIC ACCOUNTANTS

New York, New York
March 3, 1997

                                       F-2

<PAGE>
                                 TELLURIAN, INC.

                                  BALANCE SHEET

                                DECEMBER 31, 1996


                                     ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                       $  1,761,186
   Marketable securities                                                968,722
   Accounts receivable, net of allowance for
     doubtful accounts of $115,000 (Note 10)                             19,362
   Inventories (Note 2)                                                 287,851
   Prepaid consulting fees (Note 10)                                     74,625
   Prepaid expenses and other current assets                             13,856
                                                                   ------------
              Total current assets                                    3,125,602
                                                                   ------------
PROPERTY AND EQUIPMENT - at cost
   less accumulated depreciation (Note 3)                               206,176
                                                                   ------------

OTHER ASSETS:
   Deferred costs (Note 4)                                               50,000
   Marketable securities                                              1,006,664
   Security deposits                                                     47,750
   Prepaid consulting fees (Note 10)                                     62,187
                                                                   ------------
              Total other assets                                      1,166,601
                                                                   ------------
                                                                   $  4,498,379
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                $     49,754
   Accrued expenses (Note 6)                                             60,020
   Payroll payable                                                       98,399
   Payroll taxes payable                                                 34,494
   Consulting fees payable                                               46,594
   Notes payable - related parties (Note 5)                             496,736
   Interest payable - related parties (Note 5)                          315,306
   Deferred revenue                                                      80,448
                                                                   ------------
              Total current liabilities                               1,181,751
                                                                   ------------

COMMITMENTS AND CONTINGENCIES (Note 10)

STOCKHOLDERS' EQUITY:
   Common stock - $.01 par value (Note 12)
     Authorized - 10,000,000 shares
     Issued and outstanding - 3,025,000 shares                           30,025
   Additional paid-in capital                                         6,345,387
   Accumulated deficit                                               (3,058,784)
                                                                   ------------
              Total stockholders' equity                              3,316,628
                                                                   ------------
                                                                   $  4,498,379
                                                                   ============



     The accompanying notes are an integral part of the financial statements

                                       F-3

<PAGE>
                                 TELLURIAN, INC.

                            STATEMENTS OF OPERATIONS

                                                          YEARS ENDED
                                                          DECEMBER 31,
                                                     1996            1995
                                                  -----------    -----------

REVENUES (Note 11)                                $   819,380    $   477,311

COST OF GOODS SOLD                                    284,007        339,220
                                                  -----------    -----------

GROSS PROFIT                                          535,373        138,091
                                                  -----------    -----------

OPERATING EXPENSES:
   Research and development                           688,103        423,770
   Selling                                            189,429         92,505
   General and administrative                         395,692        257,125
                                                  -----------    -----------

                                                    1,273,224        773,400
                                                  -----------    -----------
LOSS FROM OPERATIONS                                 (737,851)      (635,309)
                                                  -----------    -----------

OTHER INCOME AND EXPENSES:
   Interest income                                     21,087           -
   Other income                                        18,085           -
   Interest expense                                   (50,313)          -
   Interest expense - related parties (Note 5)        (61,020)       (64,356)
   Deferred debt costs                               (152,398)          -
                                                  -----------    -----------

                                                     (224,559)       (64,356)
                                                  -----------    -----------
NET LOSS                                          $  (962,410)   $  (699,665)
                                                  ===========    ===========


NET LOSS PER COMMON SHARE                               $(.53)         $(.48)
                                                        =====          =====


WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES OUTSTANDING                        1,817,708      1,450,000
                                                    =========      =========


PRO FORMA INFORMATION (Note 15):
   Net loss as presented                               N/A       $  (699,665)
   Provision for income tax benefits
     reflecting C corporation status                   N/A              -
                                                  -----------    -----------
   Pro forma net loss                                  N/A       $  (699,665)
                                                  ===========    ===========


     The accompanying notes are an integral part of the financial statements

                                       F-4

<PAGE>
                                 TELLURIAN, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>


                                                                         
                                                                                                                      TOTAL      
                                                COMMON STOCK             ADDITIONAL                                STOCKHOLDERS' 
                                                ------------               PAID-IN           ACCUMULATED              EQUITY       
                                            SHARES         AMOUNT          CAPITAL             DEFICIT             (DEFICIENCY)
                                            ------         ------          -------             -------             ------------
<S>                                         <C>           <C>            <C>                <C>                     <C>          
BALANCE AT January 1, 1995                  1,000,000     $ 10,000       $    15,000        $  (1,396,709)          $ (1,371,709)

Issuance of common stock for cash
  (Note 12)                                   600,000        6,000            94,000                 -                   100,000

Costs relating to issuance of common
  stock for cash                                 -            -               (9,735)                -                    (9,735)

Issuance of warrants in connection with
  private placement (Notes 7 and 12)             -            -                8,000                 -                     8,000

Net loss for the year ended
  December 31, 1995                              -            -                 -                (699,665)              (699,665)
                                           ----------     --------       -----------        -------------           ------------

BALANCE AT December 31, 1995                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 (Notes 7 and 12)                 1,400,000       14,000         7,517,875                 -                 7,531,875

Offering costs in connection with
  initial public offering (Note 12)              -            -           (1,326,728)                -                (1,326,728)

Conversion of promissory notes in
  connection with initial pubic offering
  (Note 12)                                    25,000           25            24,975                 -                    25,000

Issuance of warrants in connection with
  private placement (Notes 7 and 12)             -            -               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     $ 30,025       $ 6,345,387        $  (3,058,784)          $  3,316,628
                                           ==========     ========       ===========        =============           ============
</TABLE>




     The accompanying notes are an integral part of the financial statements

                                       F-5

<PAGE>



                                 TELLURIAN, INC.

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                                  YEARS ENDED
                                                                                                  DECEMBER 31,
                                                                                             1996           1995
                                                                                        -------------   ------------
<S>                                                                                     <C>              <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                             $    (962,410)   $  (699,665)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
       Accrued interest income on marketable securities                                        (6,118)          -
       Depreciation and amortization                                                           17,500         41,611
       Amortization of deferred debt costs                                                    152,398           -
       Changes in assets and liabilities:
         Accounts receivable                                                                 (129,362)        (5,000)
         Allowance for doubtful accounts                                                      115,000           -
         Inventories                                                                         (200,633)        75,981
         Prepaid consulting fees                                                             (136,812)          -
         Prepaid expenses and other current assets                                             (6,045)        (7,811)
         Security deposits                                                                    (46,825)          (925)
         Accounts payable                                                                      20,433        (55,801)
         Accrued expenses                                                                     (84,111)        99,898
         Payroll payable                                                                     (113,903)        79,864
         Payroll taxes payable                                                               (207,255)        89,520
         Consulting fees payable                                                             (209,099)        79,231
         Interest payable - related parties                                                    21,702         63,306
         Deferred revenue                                                                     (76,000)         6,000
                                                                                        -------------    -----------
NET CASH USED IN OPERATING ACTIVITIES                                                      (1,851,540)      (233,791)
                                                                                        -------------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of marketable securities                                                      (1,969,268)          -
   Purchases of property and equipment                                                       (190,965)       (11,214)
   Deferred costs                                                                             (50,000)          -
                                                                                        -------------    -----------
NET CASH USED IN INVESTING ACTIVITIES                                                      (2,210,233)       (11,214)
                                                                                        -------------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock                                                   7,531,875         90,266
   Payments of offering costs                                                              (1,326,728)          -
   Proceeds from issuance of warrants in connection with
     private placement                                                                         22,000          8,000
   Proceeds from notes payable - related parties                                              248,000         53,190
   Repayments of notes payable - related parties                                             (422,185)        (8,635)
   Proceeds from notes payable - other                                                           -             7,000
   Repayments of notes payable - other                                                           (500)        (7,000)
   Proceeds from long-term debt                                                               703,000        192,000
   Repayment of long-term debt                                                               (870,000)          -
   Payments of deferred debt costs                                                           (101,633)       (50,765)
                                                                                        -------------    -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                   5,783,829        284,056
                                                                                        -------------    -----------

NET CHANGE IN CASH                                                                          1,722,056         39,051

CASH AND CASH EQUIVALENTS - beginning                                                          39,130             79
                                                                                        -------------    -----------

CASH AND CASH EQUIVALENTS - ending                                                      $   1,761,186    $    39,130
                                                                                        =============    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid for interest                                                               $      89,631    $      -
   Cash paid for income taxes                                                                    -              -
</TABLE>

     The accompanying notes are an integral part of the financial statements

                                       F-6

<PAGE>

                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995




NOTE 1 - 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.

     Deferred Revenue

     Deferred revenue consists of customer advances which are reflected in
     current liabilities and is expected to be recognized as revenue when the
     finished product is shipped.

     Revenue Recognition

     Sales are recognized when the finished product is shipped.

     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 has classified all of its marketable securities as
     held-to-maturity, and has accounted for these investments at amortized
     cost. Accordingly, no adjustment for unrealized holding gains or losses has
     been reflected in the Company's 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.

                                       F-7

<PAGE>
                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995




NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     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.

     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.

                                       F-8

<PAGE>



                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995




NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Deferred Debt Costs

     Deferred debt costs represent costs incurred in connection with the
     Company's private placement agreement (see Note 7). The costs were to be
     amortized over the respective terms of the promissory notes issued. As the
     promissory notes were repaid from the proceeds of the public offering (see
     Note 12), all incurred costs were charged to operations.

     Deferred debt costs amounted to $152,398 and $-0- for 1996 and 1995,
     respectively.

     Research and Development

     Research and development costs are charged to expense in the period
     incurred. For the years ended December 31, 1996 and 1995, research and
     development costs amounted to $688,103 and $423,770, respectively.

     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.

     In 1995, Tellurian was an "S" corporation for federal and South Carolina
     purposes whereby net income or loss was recorded by the stockholders on
     their individual income tax returns. There were no corporate income taxes
     or deferred income taxes.

     Loss Per Common Share

     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.

                                       F-9

<PAGE>



                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995




NOTE 2 - INVENTORIES

     Inventories at December 31, 1996 consist of the following:

                  Raw materials                                   $  217,663
                  Work-in-process                                     43,942
                  Finished goods                                      26,246
                                                                  ----------
                                                                  $  287,851
                                                                  ==========


NOTE 3 - PROPERTY AND EQUIPMENT

     Property and equipment at December 31, 1996 consists of:

                  Equipment                                       $  135,279
                  Vehicles                                            84,039
                  Computer software                                   29,900
                  Office furniture                                     4,973
                  Leasehold improvements                              21,220
                                                                  ----------
                                                                     275,411
                  Less:  Accumulated depreciation
                           and amortization                           69,235
                                                                  ----------
                                                                  $  206,176
                                                                  ==========

     Depreciation expense amounted to $17,500 and $10,448 for the years ended
     December 31, 1996 and 1995, respectively.


NOTE 4 - DEFERRED COSTS

     Deferred costs represent expenditures made on behalf of Cyberpoint Niagara,
     a Canadian subsidiary, to be formed in March 1997. Deferred costs have been
     classified as a non-current asset as it is management's intention to
     capitalize these expenditures when the corporation is formed.

                                      F-10

<PAGE>

                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995




NOTE 5 - NOTES PAYABLE - RELATED PARTIES

     The Company has borrowed funds from officers and stockholders to finance
     its operations. The notes are due on demand (except as described below) and
     bear interest at the rate of 10% per annum.

     As at December 31, 1996, notes payable amounted to $496,736 and becomes
     payable on demand commencing November 1, 1997. Accrued interest payable at 
     December 31, 1996 amounted to $315,306.

     Interest expense charged to operations amounted to $61,020 and $64,356 for
     the years ended December 31, 1996 and 1995, respectively.


NOTE 6 - ACCRUED EXPENSES

     Accrued expenses at December 31, 1996 consist of:

                  Royalties (Note 10)                             $   35,000
                  Interest and penalties on unpaid
                    payroll taxes                                     20,698
                  Others                                               4,322
                                                                  ----------
                                                                  $   60,020
                                                                  ==========

                                      F-11

<PAGE>



                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995


NOTE 7 - LONG-TERM DEBT

     Long-term debt consisted of 8% promissory notes totalling $895,000 issued
     in connection with the Company's private placement of securities.

     Subsequent to the completion of the public offering in November 1996, as
     provided by their terms, notes totalling $870,000 were repaid and one
     $25,000 note was converted into 25,000 shares of common stock.

     Interest amounted to $50,313 and $-0- for 1996 and 1995, respectively.


NOTE 8 - FINANCIAL INSTRUMENTS

     The amounts at which cash and cash equivalents, accounts receivable,
     accounts payable, notes payable related parties and other current
     liabilities are presented in the balance sheet approximate their fair value
     due to their short maturities.


NOTE 9 - INCOME TAXES

     All Company operations are located in the United States. As such, loss
     before provision for income taxes and the provision for income taxes are
     generated from domestic sources.

                                                                      1996
                                                                  ----------- 
         Loss before provision for income taxes                   $  (962,410)
                                                                  ===========

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

                  Federal                                          $      -
                  States                                                  -
                                                                   ----------- 
                                                                   $      -
                                                                   ===========
                                      F-12

<PAGE>

                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995





NOTE 9 - INCOME TAXES (CONTINUED)

     The major components of deferred tax asset at December 31, 1996 are as
     follows:

                Net operating loss carryforwards                  $   338,964
                Allowance for doubtful accounts                        46,000
                                                                  -----------
                                                                      384,964

                Less:  Valuation allowance                           (384,964)
                                                                  -----------
                                                                  $      -
                                                                  =========== 

     A 100% valuation allowance is being provided at December 31, 1996 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 for
     1996 are as follows:

                Income tax credit at statutory rate                 $  (336,844)
                State income tax credits                                (48,120)
                Net operating loss carryforwards                        384,964
                                                                    -----------
                                                                    $      -
                                                                    ===========

     The above information is not presented for 1995 as Tellurian was an S
     corporation.

     At December 31, 1996, the Company had unused net operating loss
     carryforwards of approximately $847,000 expiring in 2011.

                                      F-13

<PAGE>

                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995





NOTE 10 - 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.

     Future minimum lease payments are as follows:

                   Year Ending
                   December 31,
                   ------------

                       1997                          $   141,625
                       1998                              100,625
                       1999                               75,000
                       2000                               75,000
                       2001                               75,000
                    Thereafter                           375,000
                                                     -----------
                                                     $   842,250
                                                     ===========

     Rent expense amounted to $62,574 and $70,018 net of rental income of
     $18,085 and $-0- for 1996 and 1995, respectively.

                                      F-14

<PAGE>

                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995



NOTE 10 - 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:

                         1996                          $    32,000
                         1997                              192,000
                         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 $32,000 in 1996.

     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 12). 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 $12,438 in 1996.

                                      F-15

<PAGE>

                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995


NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

     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.

     In October 1995, the Company assigned proceeds received under the agreement
     and granted a security interest to a stockholder (see Note 5).

     The contract was substantially completed in October 1996 at which time
     amounts were due to the Company. As of March 3, 1997, the Company has not
     received any additional payments and it is the opinion of management that
     the Company will 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.

                                      F-16

<PAGE>

                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995


NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

     Technology Agreement (Continued)

     In May 1995, the Company entered into an agreement to pay 15% of the
     amounts received from the technology agreement to an unrelated corporation.
     Such fee amounted to $10,650 for the year ended December 31, 1995.

     Consulting fee income amounted to $71,000 for the year ended December 31,
     1995 under the old agreement.

     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 (see Note 12) 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 11 - REVENUES

     Revenues for the years ended December 31, consist of:

                                                  1996           1995
                                             -------------   ------------

        Real time image generators             $  166,386      $  267,428
        Consulting fees                           598,245         169,558
        Parts and repairs                          54,749          40,325
                                               ----------      ----------

                                               $  819,380      $  477,311
                                               ==========      ==========

                                      F-17

<PAGE>

                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995


NOTE 11 - REVENUES (CONTINUED)

     As of December 31, the following is a summary of information by geographic
     area:

                                                     1996           1995
                                                 ----------      ---------
            Revenues

            United States                        $  197,760      $ 379,311
            Republic of China                       621,620         71,000
            Canada                                     -            27,000
                                                 ----------      ---------

                                                 $  819,380      $ 477,311
                                                 ==========      =========

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

                                                     1996           1995
                                                 ----------      ----------

            Customer A                                75.9%          31.8%
            Customer B                                16.0%          20.5%
            Customer C                                -   %          10.7%


NOTE 12 - 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.

                                      F-18

<PAGE>

                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995




NOTE 12 - STOCKHOLDERS' EQUITY (CONTINUED)

     Common Stock

     On March 24, 1995, in connection with its private placement, the Company
     increased its authorized common stock from 10,150 shares to 10,000,000
     shares and changed the par value from $1.00 per share to $.01 per share. In
     addition, the Company issued 1,000,000 shares of $.01 par value common
     stock to replace the 10,150 shares of $1.00 par value common stock that
     were previously outstanding. All share data and per share amounts have been
     adjusted to reflect this transaction. In March 1995, the Company completed
     a private placement of 600,000 shares of its $.01 par value common stock
     for $100,000, including 150,000 shares sold to principals and an employee
     of the underwriter.

     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.

     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, 1996 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.

                                      F-19

<PAGE>



                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995


NOTE 13 - 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.

     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.

     On June 1, 1996, the Company granted non-qualified stock options to
     purchase 300,000 shares of its common stock at an exercise price of $5.00
     per share at any time on or after July 1, 1997 until June 1, 2006, the
     expiration date of such options.

                                      F-20

<PAGE>

                                 TELLURIAN, INC.

                          NOTES TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1995


NOTE 14 - 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 $33,691 in 1996.


NOTE 15 - PRO FORMA INFORMATION

     Pro forma net loss has been presented to show results of operations
     assuming the Company filed its income tax returns as a C corporation. If
     the Company was a C corporation, there would be no current income taxes and
     deferred income taxes would consist solely of an asset for net operating
     loss carryforwards offset by a 100% valuation allowance.


NOTE 16 - 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 in 1996. If the
     Company had elected to recognize expense in 1996 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:

                                            As Reported            Pro forma
                                            -----------            ---------
              Net loss                      $  (962,410)         $  (1,228,660)

              Loss per share                       (.53)                  (.68)

     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%; a risk free interest rate
     of 6.5%; and an expected holding period of three years.

                                      F-21

<PAGE>
                                 TELLURIAN, INC.

                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS




<TABLE>
<CAPTION>



                COLUMN A                         COLUMN B            COLUMN C            COLUMN D           COLUMN E
----------------------------------------    ------------------  ------------------  -----------------   ------------
                                                BALANCE AT           ADDITIONS                              BALANCE
                                                 BEGINNING          CHARGED TO                              END OF
                                                  OF YEAR           OPERATIONS          DEDUCTIONS           YEAR
                                                  -------           ----------          ----------           ----

               Description
               -----------
<S>                                              <C>               <C>                  <C>                <C>     
Allowance for doubtful accounts

   Year ended December 31, 1995                  $    -            $      -             $    -             $      -


   Year ended December 31, 1996                       -                115,000               -                 115,000
</TABLE>

                                      F-22

<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, and the date on which their term of office commenced and expires, are
as follows:
<TABLE>
<CAPTION>

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

<S>                         <C>       <C>      <C>             <C>                                           
Dr. Ronald Swallow          62        (1)      1988            Chairman of the Board and 
                                                                  Chief Executive Officer
                                                                  of the Company.

Stuart French               51        (1)      1995            President of the Company

Dr. Richard Swallow         57        (1)      1988            Vice President of the Company
                                                                  and Professor at Coker College

Michael Hurd                50        (1)      1997            Vice President and Chief
                                                                 Financial and Accounting
                                                                 Officer of the Company

</TABLE>
----------

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


 (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. Richard Swallow is
Vice President of Program Management and the Secretary of the Company. Michael
Hurd is Vice President of Finance and Administration and Chief Financial and
Accounting Officer 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.

(c)      Business Experience

         Dr. Ronald Swallow has been the Chief Executive Officer and Chairman of
the Board 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 of the
Company and its predecessor under the same name since March 1995 and President
of the Company since October 1993. From January of 1996 until March of 1997 he
served as the Chief Financial Officer and Tellurian and as 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.



                                       16
<PAGE>

         Dr. Richard Swallow has been a director of Tellurian and its
predecessor under the same name since its inception in 1988. He was elected Vice
President of Program Management in March of 1997. 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 Coker College in Hartsville, South Carolina,
where he is currently on leave from his position as 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.

         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 Officer in March 1997. 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 Big 8 public
accounting firm.

         The Company does not currently have any audit or compensation
committees of the Board of Directors. 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. 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 the filing
date of this Form 10-KSB, Barclay has not designated any director.

         Directors are elected at the annual meeting of stockholders and hold
office until the following annual meeting. 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.


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 "Item 1."





                                       17
<PAGE>


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

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
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 ownership and 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. Dennis Giunta filed late a
Form 4 for the month of November 1996. Jericho Limited and Imafina S.A.,
formerly principal security holders of the Company, filed late a Form 3 in
November 1996.






                                       18
<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, 1996, 1995 and 1994 to
Tellurian's Chief Executive Officer, Dr. Ronald Swallow and Stuart French,
President.
<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                     Salary        Bonus       sation         Award(s)             of            Payouts         sation
 Position           Year         ($)          ($)          ($)           ($)             Options(1)          ($)         ($)(2)(5)
----------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>       <C>              <C>         <C>              <C>           <C>                 <C>        <C>   
Dr. Ronald
 Swallow,           1996      108,000         -0-         -0-              -0- (1)        73,000             -0-         19,436
Chief Executive 
Officer (3)         
                    ---------------------------------------------------------------------------------------------------------------

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

                    1994      108,000         -0-         -0-              -0-              -0-              -0-          4,200
----------------------------------------------------------------------------------------------------------------------------------

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

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

                    1994       84,000         -0-        13,420            -0-              -0-              -0-          4,200
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(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.



                                       19
<PAGE>


(3)  During 1994 and 1995, the Company accrued salaries for Dr. Swallow of
     $22,000 and $43,143, respectively. As of December 31, 1996, Dr. Swallow is
     owed accrued salary and expense reimbursement totaling $17,400.

(4)  Stuart French earns other annual compensation in the form of a sales
     commission which is reflected in column (e). During 1994, 1995 and 1996,
     the Company accrued salaries and commissions of $1,420, $9,614 and $23,359
     respectively. During 1994, Mr. French also received payment of $2,000
     toward prior years accrued salaries. As of December 31, 1996, Mr. French is
     owed accrued salary and expense reimbursement totaling $45,098.

(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.

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

Employment Agreements

         As of November 8, 1996, the Company entered into employment agreements
with Dr. Ronald Swallow and Stuart French. The ageements 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 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 fullest extent
permitted by applicable law. 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 Plan".

         The Board of Directors has authorized the creation of a 401(K) program
to begin in 1997 in order to provide a retirement planning vehicle for its
employees. As employees of the Company, both Mr. Swallow and Mr. French will be
eligible to participate in this program once created. This program is intended
to replace the SEP program discussed in Note (5) above.

Stock Option 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 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



                                       20
<PAGE>

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 stock 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.

         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 stock 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 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 options to 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 and Dr. Richard Swallow received options to
purchase 73,000 shares, 150,000 shares, 27,000 shares, respectively. Two other
persons (not employees) received options to purchase 25,000 shares each. As of
February 28, 1997, the Company has also granted options to purchase 45,000
shares to current employees at prices ranging from $5.25 to $6.50. Including in
these options is an option to Michael Hurd allowing him to purchase 40,000
shares at $5.25. These options vest on July 1, 1997 but are not exercisable
until July 1, 1998. The Company has agreed with J.W. Barclay, the managing
underwriter of the Company's Initial Public Offering, 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.


                                       21
<PAGE>


         Options Grants Table - The following table provides information with
respect to individual grants of stock options by Tellurian  during fiscal 1996 
to each of the executive officers named in the preceding summary compensation 
table.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------

                                                                                                      Potential
                                                                                                  Realized Value at
                                                                                                   Assumed Annual
                                                                                                Rates of Stock Price
                                                                                                    Appreciation
                                                                                                   for Option Term
                                     Individual Grants                                                   (2)
--------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------
<S>                     <C>                <C>               <C>              <C> <C>          <C>              <C>    

       (a)               (b)                (c)              (d)                (e)              (f)            (g)

                                           % of
                      Number of            Total
                      Securities          Options
                      Underlying        Granted to
                       Options           Employees         Exercise
                       Granted           in Fiscal          Price           Expiration
      Name               (#)             Year (1)           ($/Sh)             Date             5% ($)        10% ($)
--------------------------------------------------------------------------------------------------------------------------
Dr. Ronald              73,000             32.7              5.00             6/1/06           229,220          581,810
Swallow
--------------------------------------------------------------------------------------------------------------------------


Stuart French          150,000             67.3              5.00             6/1/06           471,000       1,195,500
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

N/A - not applicable

(1)  The % of Total Options Granted to Employees in Fiscal Year' is based upon
     options granted to Tellurian employees only and excludes options granted to
     non-employees.

(2)  The potential realizable value of each grant of options assumes that the
     market price of Tellurian's Common Stock appreciates in value from the date
     of grant to the end of the option term at annualized rates of 5% and 10%,
     respectively, after subtracting out the applicable exercise price.







                                       22
<PAGE>



         Aggregated Option Exercises and Fiscal Year-End Option Table - The
following table provides information with respect to each exercise of stock
options during fiscal 1996 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>             <C>       <C>


Dr. Ronald Swallow             -0-                       -0-                 73,000 / 0               82,125 / -0-
--------------------------------------------------------------------------------------------------------------------------



Stuart French                  -0-                       -0-                150,000 / 0              168,750 / -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, 1996 was $6.125.



                                       23
<PAGE>



Director Compensation

         It should be noted that Directors of the Company do not currently
receive cash compensation for their services as directors, although each
director has been granted stock options under the Company's Stock Option Plan
and are receiving compensation as employees of the Company. See "Stock Option
Plan." The Board of Directors has the right to compensate its directors in their
capacity as directors in the future. The following table provides information in
tabular form with respect to compensation of directors during fiscal 1996:

<TABLE>
<CAPTION>

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

                             Cash Compensation                               Security Grants
-------------------------------------------------------------------------------------------------------------------
                                                                                               Number of
                             Annual                      Consulting                            Securities
                             Ret.         Meeting        Fees/Other        Number of           Underlying
Name                         Fees ($)     Fees ($)       Fees ($)          Shares (#)          Options/SARs
            (a)                   (b)           (c)      (1)    (d)        (2)     (e)         (3)     (f)
-------------------------------------------------------------------------------------------------------------------
<S>                               <C>            <C>             <C>               <C>              <C>   
Dr. Ronald Swallow               -0-            -0-             -0-               -0-               73,000
-------------------------------------------------------------------------------------------------------------------

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

Dr. Richard Swallow               -0-           -0-             -0-               -0-               27,000
-------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Does not include compensation paid as employees of the Company. See
     "Summary Compensation Table" for a description of Dr. Ronald Swallow and
     Stuart French compensation programs.

(2)  Does not include shares issued in connection with the reincorporation of
     the Company in Delaware. See "Item 2."

(3)  These options were granted as part of their total compensation as officers,
     employees, and directors of the Company. The Board made no specific
     designation as the individual amount allocations with regard to these
     services.





                                       24
<PAGE>


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) dividends or 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 benefited
Tellurian and its stockholders.

         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 of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.



                                       25
<PAGE>



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

                  The following table sets forth certain information as of March
31, 1997 (except as otherwise noted below) 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, 1997 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)               297,908                9.8

Dr. Richard Swallow(3)(5)               109,481                3.6

Stuart French(3)(6)                      49,261                1.6

Michael Hurd (3)(7)                           0                  0
All officers and directors
 as a group (4 persons)(7)(8)           456,650               15.0

Mary Elizabeth
  Huggins Trust (9)                     430,049               14.2
John A. Bruno (10)                      265,000                8.3
-------------

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

(2)  Based upon 3,025,000 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)  Does not include options to purchase 73,000 shares, which options become
     exercisable at $5.00 per share commencing July 1, 1997.




                                       26
<PAGE>



(5)  Does not include options to purchase 27,000 shares, which options become
     exercisable at $5.00 per share commencing July 1, 1997.

(6)  Does not include options to purchase 150,000 shares, which options become
     exercisable at $5.00 per share commencing July 1, 1997.

(7)  Does not include options to purchase 40,000 shares, which options become
     exercisable at $5.25 per share commencing July 1, 1998.

(8)  Does not include options to purchase 290,000 shares, which options become
     exercisable at $5.00 per share commencing July 1, 1997.

(9)  Trust set up by Charles H. Powers, a founder and former shareholder,
     officer and director of the Company, for the benefit of his granddaughter,
     with Jane Powers Huggins as Trustee. The Trustee's address is 2419 West
     Sumter, Florence, SC 29572.

(10) The address for Mr. Bruno is c/o J.W. Barclay & Co., Inc., One Battery Park
     Plaza, 3rd Floor, New York, NY 10004. John A. Bruno, is a principal of
     Barclay, a registered broker-dealer, which beneficially owns 85,065 shares
     of Common Stock of the Company as of December 31, 1996. Michael J. Wills
     and John C. Cioffeletti, who are also principals of Barclay, beneficially
     own 125,000 and 105,000 shares of the Company's Common Stock, respectively,
     as of December 1996. Mr. Bruno does not affirm the existence of a group and
     none of the shares owned by Barclay or Messrs. Wills or Cioffeletti are
     included in the table above as beneficially owned by Mr. Bruno. The
     information contained in this Form 10-KSB with respect to Mr. Bruno is
     derived from a Schedule 13-G filed by Mr. Bruno on February 14, 1997.


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 this Form 10-KSB 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, Cioffoletti and 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 therefore, 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 May 31, 1996, Mr. Powers was owed approximately $752,000, inclusive of
interest at a rate of 10% per annum. Such $752,000 includes $470,505 of
principal and $281,693, of accrued and unpaid interest (including $127,460 of
interest accumulated between January 1, 1994 and May 31, 1996).



                                       27
<PAGE>

From January 1, 1994 until May 31, 1996, the Company has repaid Powers a total
of $100,000, which payment was made in January 1996. In June 1996, Tellurian
entered into agreements with Mr. Powers which provided that upon his receipt
from Tellurian of $121,200 in reduction of outstanding indebtedness, Tellurian's
remaining indebtedness owing to him will not be payable until November 1, 1997.
To help secure repayment of such $121,200, Tellurian granted to Mr. Powers a
security interest in its contract with Voyager (such security interest being
limited to receive all payments from the income stream under the contract up to
$121,100) and assigned to him Tellurian's right to receive $121,200 of payments
required to be made under Tellurian's agreement with Voyager. As of December 31,
1996, Tellurian has paid Mr. Powers $121,200. As of December 31, 1996, the
Company owes Mr. Powers approximately $660,000.

         Since inception, Ronald Swallow, Richard Swallow, their family members
and Stuart French have made various cash loans to Tellurian that are repayable
upon demand together with interest at the rate of 10% per annum. As of December
31, 1996, Tellurian owed $152,544 (inclusive of interest) to family members of
Doctors Ronald and Richard Swallow.

         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 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 completes 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 of the
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.

         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 deduction of certain compensation to
the Placement Agent of such offering, J.W. Barclay & Co., Inc., of $26,250. Of
the $175,000 of Notes, (i) $150,000 was repaid on November 8, 1996, and (ii)
$25,000 was converted into 25,000 shares of the Company's Common Stock on
November 8, 1996.

         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.


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

                                       28
<PAGE>

(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 the Registrant'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

   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
         Gustin and the Registrant

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



                                       29
<PAGE>

   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

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

   11    Earnings per share - See notes to financial statements

   21    Subsidiaries of Registrant - None during 1996

   27    Selected Financial Data*

----------

*    Filed herewith.

(b)  Reports on Form 8-K

         During the three months ended December 31, 1996, a Form 8-K was not
filed or required to be filed.




                                       30
<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, 1997


         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/ Dr. Ronald Swallow          Chairman of the Board,
--------------------------      Chief Executive Officer         April 14, 1997
Dr. Ronald Swallow              
              

/s/ Stuart French               President  and Director         April 14, 1997
--------------------------      
Stuart French


/s/ Dr. Richard Swallow          Vice President                  April 14, 1997
--------------------------       and Director
Dr. Richard Swallow


/s/ Michael Hurd                 Vice President of
--------------------------       Administration and
Michael Hurd                     Finance and Chief
                                 Accounting Officer and                     
                                 Director                      April 14, 1997



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