TELLURIAN INC /NJ/, 10QSB, 1998-08-25

TELLURIAN INC /NJ/
10QSB, 1998-08-25
COMPUTER & OFFICE EQUIPMENT

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

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

For the quarter ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

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

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

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

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

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

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

None
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01par value
- --------------------------------------------------------------------------------

(Title of Class)

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
___.

The number of shares issued of the Registrant's Common Stock, as of June 30,
1998 was 4,730,041 shares of common stock.

<PAGE>

INDEX

Page Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets. . . . . . . . . . . . . . . . .. . . . . . . 3
June 30, 1998 (unaudited) and
December 31, 1997

Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . 4
Six and Three Months ended June 30, 1998 (Unaudited)
and June 30, 1997 (Unaudited)

Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . 5
Six Months ended June 30, 1998 (Unaudited)
and June 30, 1997 (Unaudited)

Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . 7

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . 9

PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . 20

SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

EXHIBIT 27. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997

ASSETS ----------- -----------
(Unaudited) (a)
<S> <C> <C>

CURRENT ASSETS:
Cash ................................................................... $ 6,296 $ 187,189
Marketable Securities .................................................. - 0 - 108,912
Accounts Receivable .................................................... 3,581 9,029
Inventories ............................................................ 575,448 662,364
Prepaid Consulting Fees ................................................ 274,331 62,187
, Prepaid Expenses and Other Current Assets ............................. 9,854 23,206
----------- -----------
Total Current Assets ........................................... 869,510 1,052,887
----------- -----------
PROPERTY AND EQUIPMENT- at cost ........................................... 2,553,556 2,688,346
less accumulated depreciation .......................................... -- --

OTHER ASSETS:
Security Deposits ...................................................... 52,229 70,070
Prepaid Consulting Fees ................................................ 73,905 0
Deferred Costs ......................................................... 2,275 92,099
----------- -----------
Total Other Assets ............................................. 128,409 162,169
----------- -----------
$ 3,551,475 $ 3,903,402
=========== ===========
CURRENT LIABILITIES:
Accounts Payable and accrued expenses .................................. $ 573,859 $ 1,953,481
Current Maturities of Long-term debt ................................... 34,953 34,953
Payroll Payable ........................................................ 117,514 0
Payroll Taxes Payable .................................................. 18,260 0
Notes Payable .......................................................... 0 100,000
Notes Payable- other ................................................... 187,500 200,000
Notes Payable--Related Parties ......................................... 200,000 496,736
Interest Payable--Related Parties ...................................... 0 354,980
----------- -----------
Total Current Liabilities ...................................... 1,132,086 3,140,150
----------- -----------
LONG-TERM DEBT - net of current maturities ................................ 116,912 125,630
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock--$.01 par value
Authorized -25,000,000 and 10,000,000 shares, respectively
Issued and Outstanding - 4,730,041 and 3,025,000 shares, respectively 47,300 30,250
Additional Paid-in Capital ............................................. 9,307,795 6,345,162
Accumulated Deficit .................................................... (7,131,391) (5,767,777)
Other Comprehensive Income ............................................. 78,773 29,987
----------- -----------
Total Stockholders' Equity ..................................... $ 2,302,477 $ 637,622
----------- -----------
$ 3,551,475 $ 3,903,402
=========== ===========

</TABLE>

(a) The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that time. The accompanying notes are an integral part
of the financial statements.
Page 3

<PAGE>

TELLURIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Six Months Ended Three Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>

REVENUES $ 154,982 $ 299,616 $ 120,074 $ 218,331

COST OF GOODS SOLD 380,950 162,080 263,020 98,418
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) (225,968) 137,536 (142,946) 119,913
----------- ----------- ----------- -----------

OPERATING EXPENSES:

Research and Development 380,811 397,843 170,822 193,756
Selling 156,651 161,157 55,381 45,901
General and Administrative 555,645 661,210 212,519 288,373
----------- ----------- ----------- -----------
1,093,107 1,220,210 438,722 528,030
----------- ----------- ----------- -----------

LOSS FROM OPERATIONS (1,319,075) (1,082,674) (581,668) (408,117)
----------- ----------- ----------- -----------

OTHER INCOME AND EXPENSES:

Other Income 1,080 50,917 (819) 820
Loss on Sale of Fixed Asset (14,571) 0 0 0
Interest Expense (5,175) (3,694) (1,427) (3,694)
Interest Expense--Related Parties (25,873) (24,598) (12,359) (12,298)
----------- ----------- ----------- -----------
(44,539) 22,625 (14,605) (15,172)
----------- ----------- ----------- -----------

NET LOSS $(1,363,604) ($1,060,049) (596,273) (423,289)
=========== =========== =========== ===========

NET LOSS PER COMMON SHARE $ (0.38) $ (0.35) $ (.15) $ (.14)
=========== =========== =========== ===========

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,577,824 3,025,000 3,959,763 3,025,000
=========== =========== =========== ===========

</TABLE>

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

Page 4

<PAGE>

TELLURIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,363,604) $(1,060,049)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization 157,915 28,986
Accrued Interest on Marketable Securities 0 0
Loss on Sale of Fixed Asset 14,571 0
Changes in Assets and Liabilities
Accounts Receivable 5,448 (234,899)
Inventories 86,916 (91,488)
Prepaid Expenses and Other Current Assets 13,352 (125,099)
Deferred Costs 89,916 50,000
Security Deposits 17,841 (184,990)
Prepaid Consulting Fees 93,951 (38,312)
Accounts Payable and Accrued Expenses (40,539) 965,755
Payroll Payable 117,516 (98,399)
Payroll Taxes Payable 18,260 (28,003)
Consulting Fees Payable 0 (21,594)
Interest Payable--Related Parties 25,788 17,099
Deferred Revenue 0 (24,440)
----------- -----------

NET CASH PROVIDED BY( USED IN) OPERATING ACTIVITIES (762,758) (768,809)
----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES
Sale of Fixed Assets 18,000 0
Purchases of Property and Equipment (55,696) (2,485,240)
Sale of Marketable Securities 108,912 1,975,386
----------- -----------

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 71,216 (509,854)
----------- -----------

NET CASH FROM FINANCING ACTIVITIES:
Repayments of notes payable--other (300,000) 0
Repayment of Long-term Debt (8,718) 0
Proceeds from Issuance of Stock 513,187 0
Proceeds of notes payable 187,500 90,000
Payments of deferred offering costs (19,930) 0
----------- -----------

NET CASH PROVIDED BY FINANCING ACTIVITIES 461,863 90,000
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES 48,786 0
----------- -----------
</TABLE>

Page 5

<PAGE>

<TABLE>

NET CHANGE IN CASH (180,893) (1,188,663)

CASH-- Beginning 187,189 1,761,186
----------- -----------

CASH-- Ending $ 6,296 $ 572,523
=========== ===========
</TABLE>

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 5,175 $ 11,193
Cash Paid for Income Taxes $ 200 $ 150

SCHEDULE OF NON-CASH ACTIVITIES:
Reduction of Trade Payables through issuance of common
stock $699,056
Reduction of Trade Payables through issuance of subsidiary
Series B special shares $640,027
Issuance of Common Stock for Consulting Fees $380,000
Conversion of C. Powers note an accrued interest for stock $613,754
Purchase of Property and Equipment through issuance
of Note Payable $ 72,464

</TABLE>

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

Page 6

<PAGE>

TELLURIAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Unaudited)

NOTE 1--Presentation Basis

The attached summarized financial information does not include all
disclosures required to be included in a complete set of financial statements
prepared in conformity with generally accepted accounting principles. Such
disclosures were included with the financial statements of the Company at
December 31, 1997 which were included in its Form 10-K filing dated April 15,
1998. Such statements should be read in conjunction with the data herein.

NOTE 2--Interim Consolidated Financial Statements

The consolidated balance sheet of the Company at June 30, 1998 and the
consolidated statements of operations and cash flows for the three and six
months ended June 30, 1998 and 1997 are unaudited but include all adjustments
which, in the opinion of management, are necessary for the fair presentation of
the Company's financial position and results of operations for the periods then
ended. All such adjustments are of a normal recurring nature. The results of
operations for the interim periods are not necessarily indicative of the results
of operations for a full fiscal year.

NOTE 3--Minority Interest in Subsidiaries

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

1. The vendors transferred Canadian $1,000,000 of payables to Cyberport's
landlord. The landlord was given the right to convert the payables into
restricted shares of the Company's common stock. In March 1998, the
landlord converted the payables into 350,000 shares of common stock.
2. Cyberport issued 915,559 Series B Special Shares at Canadian $1.00 per
share for balance of the monies owed. At June 30, 1998, the value of the
shares issued by Cyberport is shown as a minority interest on the Company's
consolidated balance sheet.

In March 1997 the Company formed a subsidiary, Cyberport Niagara, Inc.,
in the Province of Ontario, Canada, in which the Company holds an 87.5 percent
interest In the fourth quarter of 1997, the Company acquired the balance of the
interest in Cyberport.

On March 24,1997 the Company formed a subsidiary, Cyberport
International, Inc. ("CII") in the state of Delaware in which the Company held a
96 percent interest. In the fourth quarter of 1997, the Company acquired the
balance of the interest in CII.

Page 7

<PAGE>

NOTE 4---Stock Options

In June of 1997 the Company authorized stock options to two
individuals, Michael Hurd and David Turner, President and General Manager of
Cyberport Niagara, Inc, respectively. These options allow Mr. Turner to purchase
500 shares of Cyberport stock for $1.00 (Canadian) per share and allow Mr. Hurd
to purchase 2,000 shares of Cyberport stock at $1.00 (Canadian) per share. Mr.
Turners options vested on July 1, 1997 as did 1,000 of Mr. Hurd's options. The
remaining 1,000 share options for Mr. Hurd vest at the rate of 500 shares on
July 1, 1998 and July 1, 1999 provided he remains on the Board of Directors or
in the employ of Tellurian on those dates. The options expire on June 30, 2007.

No options have been exercised as at June 30, 1998

NOTE 5--Translation of Foreign Currency

The foreign currency financial statements of subsidiaries operating outside the
United States are translated in accordance with the requirements of the
Financial Accounting Standards Board. All income and expense accounts are
translated at average exchange rates; assets and liabilities at current exchange
rates; and stockholders equity at historical rates. Translation adjustments were
accumulated and have been included as a separate component of equity at June 30,
1998.

NOTE 6--Inventories

Inventories consist of the following:

June 30, December 31,
1998 1997
-------- --------
(Unaudited)

Raw materials $234,758 $221,575
Work-in-process 106,800 206,899
Finished Goods 233,890 233,890
-------- --------
$575,448 $662,364
======== ========

NOTE 7--Loss Per Common Share

Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Common stock equivalents have not been
included as their effect would be anti-dilutive.

Page 8

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY

INTRODUCTION

During the first six months of 1998 the Company has only been able to
make limited progress towards meeting its objectives since it has been severely
hampered by a lack of cash. Despite this limitation, the Company has
substantially completed the technical development of its virtual reality helmet
and completed the establishment of a virtual reality showplace for
demonstrations of Tellurian products at Cyberport.
The market for free-standing image generators has proven to be
extremely limited. The development of the data-base to complete the experience
is a skill possessed by a limited number of companies in the industry, but the
majority of the potential customers for Tellurian products are arcades,
restaurants, and other entertainment facilities who rely on their supplier to
deliver a complete, ready to run experience. The Tellurian image generator has
the advantage of being able to display a 360 degree world in which all of the
players can be linked. The competitive edge that Tellurian has is that its'
world can be changed by any of the players and the resulting world is changed
for all of the players. Game software for this type of world must be developed
specifically for that world. Without both the image generator and the database
software, Tellurian has in the past been trying to sell to an extremely limited
market. The Tellurian product which now exists is one which is a free-standing
unit. Further, the completion of the helmet as described herein allows the
experience to be delivered to the end-user requiring very little physical space.
The space issue is also critical to end-users who evaluate the performance of
their investments on a "revenue per square foot basis". This combination should
allow Tellurian to market its products to distributors and large end users of
arcade type games, a market in which it had no access to before these
developments. Unfortunately, this market requires rapid delivery and a
willingness to support product through some form of financing. Revenue sharing
is the most common form of financing required. Thus far, the Company has been
unable to meet either the delivery or the financing demands of this market.

The Virtual Reality Helmet

The virtual reality helmet is critical to the market acceptance of
Tellurian's products since it removes one of the major sources of market
resistance to the Company's virtual reality units--the amount of physical space
required by the viewing screens. The arcade market represents the largest
grouping of potential buyers for the units and these potential buyers are
heavily influenced by the return per square foot of floor space occupied. The
helmet would reduce the square footage needed by approximately 50% while
improving the quality of the sound through the almost complete elimination of
background noise coming from other activities in the facility and significantly
reducing the Company's cost per virtual reality unit. The Tellurian helmet has
been specifically engineered to be driven by the proprietary Tellurian EAGLE
image generator. Management expects that the quality of the experience gained
through use of the helmet coupled with the head motion tracker will be
significantly superior to the experience currently offered in the marketplace
either by Tellurian or by any of its competitors.
Page 9

<PAGE>

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

One of the principal objectives of the pending Offering is to provide
the funding necessary to produce the VR helmet and to allow the Company to
market the product on a "revenue sharing" or partial financing basis. See "Use
of Proceeds."The Company also believes that these sales opportunities will also
provide opportunity for the Company to provide other profitable financing to its
potential and actual customers. While Management believes that this approach
will substantially improve its likelihood of successfully completing these
sales, there can be assurance that the Company will be able to complete sales
and/or revenue sharing agreements in number and a profitability adequate to
cover the continuing costs of promoting the VR product. Management is presently
evaluating the possibility of limiting its marketing efforts to standard units
using the existing databases. Should Management determine that an adequate
market exists for this marketing approach, significant further reductions will
be possible in the level of R&D expenditures.

Cyberport

In late June 1997, the Company was able to begin conducting operations
in its subsidiary, Cyberport Niagara, Inc. and opened a "pay-one-price" TEC.
Although the limited opening of Cyberport was not done early enough to have a
noticeable impact on revenue for the season, Management believed that it was
essential to open the facility in close to final form in order to attract the
various tour operators to view the facility. While Management does not believe
that the flow from the casual tourists in Niagara Falls will provide enough
revenue to ensure the viability of Cyberport, Management believed that the
exposure to the summer tourists and, more importantly, to the tour groups that
conduct summer business in Niagara Falls, was critical to Management's plans to
develop the group tour business for the 1998 and subsequent seasons. The Company
promoted the facility in general and the Tellurian experience extensively since
the 1997 opening. Numerous "free-of-charge" events were run in order to hasten
the awareness of the facility to the tourism industry in the Niagara region.

Page 10

<PAGE>

Efforts concentrated on ensuring strong relationships with group tour operators
and guaranteeing prime exhibit spots in the many tourist information booths in
and around the Niagara area for the 1998 season. As a result, revenues for 1997
were minimal.

Revenue during the six months ended June 30, 1998 did not reach the
objectives in the Company's business plan. While tourism in Niagara seems to be
off dramatically in 1998 compared to 1997, the limited turnout at the Cyberport
facility during June 1998 and July 1998 is nonetheless extremely disappointing.
While Management believes that the marketing programs and overall direction of
Cyberport has been correct, unless Cyberport revenues improve dramatically in
the third quarter, the Company may have no choice but to find an equity partner
in Cyberport or seek some form of protection under the prevailing bankruptcy
reorganization laws of Ontario.

The Company believes that its ability to operate this facility successfully
depends on elements both within and outside its control, including the success
of its own products incorporated into this venture. Also, the Company faces
competition from existing and new entrants into the tourism market in the
Niagara Falls region. See "Business-Competition."

NASDAQ Listing

The Company has been notified by the NASDAQ Stock Market that it does
not meet the net tangible assets/market capitalization/net income requirement
and that the Company will require an exception to such requirement in order to
maintain its NASDAQ listing. In this regard, the Company has filed documents
with the NASDAQ Stock Market requesting an oral hearing pursuant to which it
will be given the opportunity to demonstrate compliance with the net tangible
asset test or reasons why an exception should be granted by the Hearings
Committee. Such hearing was held on August 14, 1998. While the Company is
hopeful that certain recent debt and minority interest conversions referenced
above coupled with its pending preferred stock and warrant offering were
adequate to satisfy the demands of NASDAQ, no assurances can be given that the
Company will be successful in maintaining its NASDAQ listing and, if
unsuccessful, the public offering described herein is unlikely to be completed.
Further, the loss of the Company's NASDAQ listing would make it very difficult,
if not impossible, for the Company to raise additional financing from private or
public financing and would materially adversely effect the liquidity and price
of the Company's securities and the financial condition of the Company.

Change of Directors and Management

At a Board of Directors meeting on July 20, 1998, the Board received
resignations from the Board of Directors and officer positions signed by Richard
Swallow and Ronald Swallow. The Board agreed to accept these resignations
effective immediately and directed Stuart French, President, to attempt to reach
an amicable arrangement for a continuing relationship with Ronald Swallow in a
consulting and licensing contract which would allow him to continue his research
in a manner beneficial to the Company and which would make his services
available to support existing installations of image generators.

Page 11

<PAGE>

Also, the Company reached a verbal agreement with Michael Hurd, Vice
President, under which Mr. Hurd would agree to accept the position of President
and Chief Executive Officer of the Company effective with the completion of the
public offering intended to raise $6.3 on behalf of the Company. If this
agreement is implemented, Stuart French, current President and Chief Executive
Officer, would voluntarily resign from these positions. Mr. French would
continue to serve on the Board and would assume the full-time position of Vice
President of Sales simultaneous with the implementation of the agreement with
Mr. Hurd.

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 1998 vs. Three and Six Months Ended June 30,
1997

Tellurian and its subsidiary had net sales for the three months ended
June 30, 1998 of $120,074, a decrease of $98,257 or 45% over the comparable
period of the prior year. For the three months ended June 30, 1998, the
Company's gross profit (loss) was ($142,946), a decrease of $262,859 over the
comparable period of the prior year. Such decrease in gross profit is primarily
due to the costs related to the Cyberport Niagara facility during the period
where it was open for business but significantly underloaded compared to its
potential throughput. Also, during the second quarter of 1997 the Company
recognized the last portion of the technology transfer sale to Voyager.

Tellurian and its' subsidiary had net sales for the six months ended
June 30, 1998 of $154,982, a decrease of $144,634 or 48.3% over the comparable
period of the prior year. For the six months ended June 30, 1998, the Company's
gross profit (loss) was ($225,968), a decrease in gross profit of $363,504 over
the comparable period of the prior year. Such decrease in gross profit is
primarily due to the costs related to the Cyberport Niagara facility which was
either closed or dramatically underloaded for most of this period and due to the
loss of margin generated by the last of the Voyager billings in 1997.

Tellurian's research and development ("R&D") activities for the three
months ended June 30, 1998 were $170,822, representing a decrease of $22,934, or
11.8%, over the comparable period for the prior year. The R&D activities related
to Tellurian's concentrated effort to complete the virtual reality helmet and to
develop software for use with that helmet and other versions of virtual reality
products. The R&D staff and expenditures were dramatically reduced during the
second quarter of 1998. Such reductions will become more noticeable in the third
quarter results.

Tellurian's R&D activities for the six months ended June 30, 1998 were
$380,811, representing a decrease of $17,032, or 4.2%, over the comparable
period for the prior year. The R&D activities related to Tellurian's
concentrated effort to complete the virtual reality helmet and to develop
software for use with that helmet and other versions of virtual reality
products.

Page 12

<PAGE>

Selling, general and administrative expenses for the three months ended
June 30, 1998 were $267,900, a decrease of $66,374, or 19.8%, over the
comparable period of the prior year. This decrease is principally due to the
continuing reduction of costs implemented by management partially offset by
increased consulting costs incurred for assistance in finding merger/acquisition
candidates and for assistance in seeking interim financing arrangements.
Discretionary spending for selling, general and administrative expenses staff
and support services have reduced during the first and second quarters of 1998.
Due to termination costs and other costs of unwinding agreements, the full
impact of those charges will not affect the Company results until the fourth
quarter of 1998.

Selling, general and administrative expenses for the six months ended
June 30, 1998 were $712,296, a decrease of $110,071, or 13.4%, over the
comparable period of the prior year. The reason for this decrease is noted in
the above paragraph.

For the three months ended June 30, 1998 interest expense was $13,786,
a decrease of 2,206, or 13.8%, over the comparable period of the prior year.

For the six months ended June 30, 1998 interest expense was $31,048, an
increase of 2,756, or 9.7%, over the comparable period of the prior year.

Tellurian's net loss for the three months ended June 30, 1998 was
$596,273 as compared to a loss of $423,289 for the comparable period of the
prior year. The principal reasons for this increase are described above. In most
cases, the increased costs relates to the Cyberport facility being open for most
of the quarter in 1998 while costs were deferred to a large extent prior to its
opening at the end of the second quarter in 1997.

Tellurian's net loss for the six months ended June 30, 1998 was
$1,363,604 as compared to a loss of $1,060,049 for the comparable period of the
prior year. The principal reasons for this increase are described above. In most
cases, the increased costs relates to the Cyberport facility being open for most
of the quarter in 1998 while costs were deferred to a large extent prior to its
opening at the end of the second quarter in 1997.

While Management has made numerous reductions in costs and continues to
seek out and eliminate any non-essential expenditures, the Company must take
action to generate sales and gross profit in amounts adequate, when compiled
with said cost reductions, to allow the Company to operate profitably.

Page 13

<PAGE>

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

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

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

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

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

Tellurian's net loss for 1997 was $2,708,993 as compared to a loss of
$962,410 for the comparable period of the prior year because of the aforesaid
decreases in sales and increases in costs.

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. 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 in its initial public offering,
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 exercisable at $6.00 per share through
November 5, 2001 at an offering price of $.25 per share. The Company received
net proceeds of approximately $6,200,000 from the offering.

Page 14

<PAGE>

For the year ended December 31, 1997, net cash of $1,107,900 was used
in operating activities. This cash usage, while principally attributable to the
Company's net loss, was somewhat less than the actual loss due to the increase
in accounts payable due to the Company's suppliers. For the year ended December
31, 1996, $1,851,540 was used in operating activities.

For the year ended December 31, 1997, net cash of $864,568 was used in
investing activities. Funds of approximately $2.06 million were provided from
the sale of marketable securities and approximately $2.77 million was used in
the purchase of property and equipment, almost entirely at the Cyberport
facility. For the year ended December 31, 1996, $2,210,233 was used in investing
activities. For the year ended December 31, 1997, $368,484 was provided from
financing activities. The primary sources of this cash were the proceeds of
certain loans completed during the year. For the year ended December 31, 1996,
$5,783,829 was provided from financing activities. The primary source of these
funds from the public offering completed in November of 1996.

For the three months ended June 30, 1998 and 1997, respectively, net
cash of $762,758 and $768,809, respectively was used in operating activities.
The net loss from operations for the period ended June 30, 1998, $1,363,604, was
partially offset by the Company's non-cash depreciation and amortization expense
and a decrease in inventory as well as an increase in payroll due to officers
and any employees.

For the six months ended June 30, 1998 net cash of $71,216 was
generated from investing activities while $509,854 was used in investing
activities in 1997. Funds were generated from the sale of a marketable security
while some expenditures were made to acquire capital equipment necessary for the
continued safe operation of the Company.

For the six months ended June 30, 1998 and June 30, 1997, $461,863 and
$90,000 respectively was provided from financing activities. The primary sources
of this cash were the proceeds of the warrant conversion completed by the
Company and the completion of a new bridge loan arrangement. Details of the
warrant conversion are as follows:

In February 1998, the Company completed an exchange offering to its
existing warrant holders pursuant to which warrant holders tendered 321,605
warrants and approximately $603,000 and received in return 321,605 Units which
included 321,605 shares of the Company's Common Stock and 321,605 Warrants
identical to those tendered pursuant to the exchange offering. The Company
received net proceeds of $490,912 after offering costs of $112,099 from the
exchange offering.

At December 31, 1997, the Company had current liabilities and long term
debt of approximately $3,266,000. In order to reduce such debt, the Company
sought to convert all or a portion of such debt of the Company into equity. As
of June 30, 1998, the Company succeeded in converting approximately $2,100,000
of such indebtedness as described below.

Page 15

<PAGE>

Such debt conversions included the following:

(a) In March 1998, the Company entered into an agreement with
Interactive Media Concepts, Inc. pursuant to Interactive, a consultant
of the Company which was owed approximately $56,000. Further, the
Company had a contractual obligation to Interactive Media which would
have required the Company to pay an additional $88,000 for its services
during 1998. In March, 1998 the Company accepted Interactive's offer to
convert such indebtedness into 100,000 shares of the Company's Common
Stock.

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

(c) The Company has entered into an agreement with the holders
of the Cyberport Niagara Preferred Stock effective June 30, 1998, which
resulted in conversion of that preferred stock into 325,278 shares of
Tellurian Common Stock and $100,000 (US dollars) plus $21,500 legal
fees payable on or before September 15, 1998. The completion of this
transaction resulted in the elimination of the minority interest of
$640,027 previously shown on the Company balance sheet.

Page 16

<PAGE>

(d) The Company has entered into an agreement with Mr. Charles
Powers effective June 30, 1998. Pursuant to such agreement, Mr. Powers
converted his demand note which, together with accrued interest,
represented $713,754 into 345,000 shares of Tellurian Common Stock and
a promissory note in the amount of $100,000 (payable on or before
December 31, 1998) in return for the aforesaid note and accrued
interest. Of the $713,754, $696,966 was owed and outstanding at
December 31, 1997.

(e) The Company has entered into an agreement with Ronald
Swallow and Richard Swallow, former officers and directors of the
Company. Pursuant to such agreement, the Swallows agreed to convert a
note, which they recently purchased from Celia Klimas, representing
$163,750 of debt inclusive of interest, into 100,000 shares of
Tellurian's Common Stock effective June 30, 1998. Of the $163,750,
$154,750 was owed and outstanding at December 31, 1997

During 1997 and 1998, the Company experienced delays in completing the
virtual reality helmet and has suffered from its inability to attract a major
investor to the Cyberport project as planned. These two events, coupled with
limited revenues from sales of the Company's existing products and less than
expected receipts from Cyberport, have caused a continued drain of the Company's
limited capital . As a result, Management has been forced to devote significant
efforts to raising capital in support of the plan of operations. While many
potential investors have been approached about Cyberport, the lack of a
demonstrable financial track record has made it difficult to complete the sale
of any of the Company's Cyberport interest.

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

The Company recently obtained a $250,000 short-term loan. This loan was
made to the Company to assist it in operating while the planned public offering
of preferred stock and warrants is being developed. This loan bears interest at
the rate of 12% per annum. Negotiations are under way to attempt to increase the
availability of funds from this agreement by up to an additional $200,000 in
order to provide the capital necessary to allow the Company to operate while it
proceeds with the Offering. No assurances can be given that the Company will be
successful in obtaining this additional funding on terms and conditions
acceptable to the Company. See "Certain Transactions."

At June 30, 1998, Tellurian had a working capital deficit of $262,576.
The Company is currently meeting its cash requirements from limited cash
generated from operations and the above referenced short-term loan. In light of
the Company's working capital deficit and continued negative operating cash
flows, the Company is dependent upon immediate and substantial additional
revenues from operations, the sale of up to a majority interest in its

Page 17

<PAGE>

Cyberport facility and private or public financing (including the proceeds of
the Offering) to meet its obligations as a going concern.

With respect to a possible sale of up to majority interest in
Cyberport, the Company has held negotiations with various firms interested in
acquiring the Company's Cyberport interest as well as the right to open other
Cyberport licensed facilities. While one of these discussions appears hopeful,
no assurances can be given that any of these negotiations will result in a
change in the Company's ownership interest in Cyberport in the foreseeable
future.

The independent auditors of the Company have included an explanatory
note in its Report of Independent Certified Public Accountants dated March 10,
1998 (except for notes 18 and 19 which is March 31, 1998) that the consolidated
financial statements of the Company for Tellurian's fiscal year ended December
31, 1997 have been prepared assuming that the Company will continue as a going
concern. Further, the explanatory note states that certain matters raise
substantial doubt about the Company's ability to continue as a going concern. In
order to continue as a going concern, the Company is dependent upon the Company
raising additional financing from the proceeds of the Offering, receiving
substantial revenues from operations and/or selling a majority interest in its
Cyberport facility. No assurances can be given that the Company will be
successful in its efforts to obtain the necessary cash to remain a going
concern. In the event that cash generated from the Company's plan of operation
as specified above are insufficient to meet its existing obligations and
on-going expenses (including those of Cyberport Niagara), the Company may need
to seek reorganization protection under applicable bankruptcy laws. Management
believes that the proceeds of the Offering are sufficient for the Company to
operate as a going concern on both a short-term and long-term basis.

PLAN OF OPERATIONS

The Company's plan of operation is as follows:

(1) Complete the Offering of Series 1 Preferred Stock which is essential to the
Company's future since it will provide the liquidity and capital resources
for the Company's operations for at least twelve months including, without
limitation, the cash needed to complete the introduction of the Company's
products to the marketplace.

(2) Redirect the Company's research efforts from the development of the
multi-player, customized game with linked VR image generators to
concentrating these research efforts on the development of new generic
games with widespread appeal to the mass entertainment market.

(3) Concentrate on the marketing and distribution of the Company's single
player units supported by the ability to enter into financing and/or
revenue sharing arrangements.

Page 18

<PAGE>

(4) Support the Company's existing Tellurian customers through its consulting
contract with Ronald Swallow. The Company has entered into an agreement
with Mr. Swallow which provides for him at a fixed cost to Tellurian to
service existing Tellurian customers while providing technical assistance
to any new custom projects the Company may choose to pursue. Pursuant to
this agreement, the Company granted Mr. Swallow a fifteen year
non-exclusive license to market the Company's virtual reality products.

(5) Several of the merger candidates evaluated by the Company during the past
few months were rejected but that the synergy of several of the candidates
was very promising. Upon completion of the Offering, Management intends to
reopen talks where appropriate if the acquisition of such a candidate could
reduce the elapsed time required to gain a large market share in the
arcade/entertainment marketplace. Management also expects to evaluate
acquisition candidates that have the potential to bring immediate and
substantial revenue to the Company if the product/services provided by
those candidates were supported by Tellurian.

(6) An evaluation is to be made at the end of the tourist season (on or about
October 15, 1998) with regard to the need and desirability of continuing to
support the Cyberport facility in Niagara Falls. The Company will seek an
equity partner to purchase up to a majority interest in Cyberport.

(7) Relocate the Company's existing office facility to a smaller less costly
facility as part of an ongoing cost reduction effort.

Management believes that each step in this plan is of vital importance to the
future of the Company.

Page 19

<PAGE>

PART II: OTHER INFORMATION

Item 1. Legal Proceedings: None

Item 2. Changes in Securities None

Item 3. Defaults Upon Senior Securities: None

Item 4. Submission of Matters to a Vote of Security
Holders: None

Item 5. Other Information: None

Item 6. Exhibits and Reports on Form 8-K

Exhibits 10.1 Agreement between Charles Powers and the Company
10.2 Agreement by and among Ronald Swallow, Richard Swallow and the
Company
10.3 Agreement by and among Phoenix Wood Products Corporation, Newman
Bros. Limited and the Company

Item 6(b). During the quarter ended June 30, 1998, no reports were filed or
required to be filed.

Page 20

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

TELLURIAN, INC.
---------------------------
(Registrant)

Dated: August 19, 1998
---------------------------
/s/ Stuart French, President

----------------------------
/s/ Michael Hurd, Chief
Financial and Accounting
Officer

Page 21

Exhibit 10.1

AGREEMENT made as of this 29th day of July, 1998 by and
between TELLURIAN, INC. ("Tellurian") with an office at 300K, Route 17 South,
Mahwah, New Jersey 07430 and CHARLES H. POWERS, ("Powers") with an office at
P.O. Box 6525, Florence, South Carolina 29502.

W I T N E S S E T H :
--------------------

WHEREAS, Tellurian owes Powers $713,754 inclusive of principal and
interest as of June 30, 1998; and

WHEREAS, Powers has indicated his willingness to convert all
of such indebtedness except $100,000 of principal into 345,000 shares of
Tellurian's Common Stock and to receive a $100,000 promissory note due the
earlier of December 31, 1998 or the completion of a public offering wherein
Tellurian grosses at least $3,000,000 of additional financing; and

WHEREAS, Tellurian's Board of Directors has approved the
aforementioned transaction.

NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:

1. Powers and Tellurian agree that Tellurian is indebted to
Powers in the amount of $713,754 inclusive of principal of $346,736 and accrued
and unpaid interest of $367,018 through June 30, 1998.

2. Powers agrees to accept a $100,000 promissory note in the
form annexed hereto as Exhibit A and 345,000 shares of Tellurian's Common Stock
in full payment of all prior indebtedness (inclusive of principal and accrued
and unpaid interest) owed by Tellurian to Powers. In the event that the note is
not paid in full by September 30, 1998, it will accrue interest at the rate of
12% per annum compounded quarterly and payable at its maturity.

3. This agreement shall become effective as of June 30, 1998
and the promissory note shall be dated as of June 30, 1998 for purposes of
computing any future accrued interest.

4. Tellurian shall deliver the Common Stock to Powers within
thirty days of the execution of this Agreement. The promissory note in the form
annexed hereto as Exhibit A shall be delivered to Powers contemporaneously with
the execution of this Agreement.

5. Powers agrees not to sell or otherwise transfer the 345,000
shares of Tellurian's Common Stock from the date hereof until the close of
business on July 31, 2000.

<PAGE>

6. The parties have not made any representations or warranties
with respect to the subject matter hereof not set forth herein. This Agreement,
together with any instruments executed simultaneously hereof, constitutes the
entire agreement between the parties with respect to the subject matter hereof.
All understandings and agreements heretofore had between the parties with
respect to the subject matter hereof are merged in this Agreement, which fully
and completely expresses their agreement.

7. This Agreement may not be changed, modified, extended,
terminated or discharged orally, but only by an agreement in writing, which is
signed by all of the parties to this Agreement.

8. The parties agree to execute any and all such other and
further instruments and documents, and to take any and all such further actions
reasonably required to effectuate this Agreement and the intent and purposes
hereof.

9. All notices or other communications required or permitted
hereunder shall be in writing and shall be mailed by Registered or Certified
Mail, Return Receipt Requested, postage prepaid, as follows:

To Powers: To the Address listed at the beginning of
this Agreement.

To the Company: To the address listed at the beginning of
this Agreement

Copy to: Lester Morse P.C.
111 Great Neck Road., Suite 420
Great Neck, NY 11021

or in each case to such other address as shall have last been furnished by like
notice. If mailing by Registered or Certified Mail is impossible due to an
absence of postal service, notice shall be in writing and personally delivered
to the aforesaid address. Each notice or communication shall be deemed to have
been given as of the date so mailed or delivered, as the case may be.

10. This Agreement shall be construed and enforced in
accordance with the internal laws of the State of New Jersey, without giving
effect to the principles of conflicts of law.

<PAGE>

11. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their heirs, executors, administrators,
personal representatives and successor.

IN WITNESS WHEREOF, the undersigned has executed this Agreement this
29th day of July, 1998.

/S/ Charles H. Powers
-----------------------
CHARLES H. POWERS

TELLURIAN, INC.

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

<PAGE>

PROMISSORY NOTE

$100,000 June 30, 1998

For value received, the undersigned, Tellurian, Inc. ("Obligor"),
hereby promises to pay to the order of Charles H. Powers ("Powers") with a
mailing address at P.O. Box 6525, Florence, South Carolina 29502, or at such
other place as may be designated from time to time in writing by Powers, the
principal sum of One Hundred Thousand ($100,000) dollars together with interest
in arrears, if any, from and including October 1, 1998 through the payment date
of the Note, on the unpaid principal balance hereunder, computed daily, at the
rate of twelve (12%) percent per annum compounded quarterly. Interest shall be
calculated on the basis of the actual number of days elapsed over a year of 360
days. All payments received by Powers hereunder shall be applied first to costs
of collection, if any, then to interest and the balance to principal. Principal
and interest shall be payable in lawful money of the United States of America.

Principal and accrued interest shall be due and payable at the earlier
of December 31, 1998, or upon the completion of a public or private financing of
at least $3,000,000 for the benefit of the Obligor.

This Promissory Note may be prepaid at any time, without premium or
penalty, in whole or in part. Any prepayment of principal shall be accompanied
by a payment of accrued interest in respect of the principal being prepaid.

If this Promissory Note is not paid in accordance with its terms,
Obligor shall pay to Powers, in addition to principal and accrued interest
thereon, all costs of collection of the principal and accrued interest,
including, but not limited to, reasonable attorneys' fees, court costs and other
costs for the enforcement of payment of this Promissory Note.

No waiver of any obligation of Obligor under this Promissory Note shall
be effective unless it is in writing signed by Powers. A waiver by Powers of any
right or remedy under this Promissory Note on any occasion shall not be a bar to
exercise of the same right or remedy on any subsequent occasion or of any other
right or remedy at any time.

Any notice required or permitted under this Promissory Note shall be in
writing and shall be deemed to have been given on the date of delivery, if
personally delivered to the party to whom notice is to be given, by certified
mail, return receipt requested, postage prepaid, and addressed to the addressee
at the address of the addressee set forth herein, or to the most recent address,
specified by written notice, given to the sender pursuant to this paragraph.

This Promissory Note is delivered in and shall be enforceable in
accordance with the laws of the State of New Jersey, and shall be construed in
accordance therewith, and shall have the effect of a sealed instrument.

Obligor hereby expressly waives presentment, demand, and protest,
notice of demand, dishonor and nonpayment of this Promissory Note, and all other
notices or

<PAGE>

demands of any kind in connection with the delivery, acceptance, performance,
default or enforcement hereof, and hereby consents to any delays, extensions of
time, renewals, waivers or modifications that may be granted or consented to by
the holder hereof with respect to the time of payment or any other provision
hereof.

In the event any one or more of the provisions of this Promissory Note
shall for any reason be held to be invalid, illegal or unenforceable, in whole
or in part or in any respect or in the event that any one or more of the
provisions of this Promissory Note operate or would prospectively operate to
invalidate this Promissory Note, then and in any such event, such provision(s)
only shall be deemed null and void and shall not affect any other provision of
this Promissory Note and the remaining provisions of this Promissory Note shall
remain operative and in full force and effect and in no way shall be affected,
prejudiced, or disturbed thereby.

OBLIGOR: TELLURIAN, INC.

(Corporate Seal)

By:___________________________
/s/ Stuart French, President

Exhibit 10.2

AGREEMENT made as of this 11th day of August, 1998 by and
between TELLURIAN, INC. ("Tellurian") with an office at 300K, Route 17 South,
Mahwah, New Jersey 07430, RONALD SWALLOW residing at 64 Manor Drive, Ramsey, New
Jersey 07446, ("Ronald") and RICHARD SWALLOW residing at 316 W. College Avenue,
Heartsville, South Carolina 29550 ("Richard"). Ronald and Richard are
collectively referred to as the Swallows.

W I T N E S S E T H :

WHEREAS, Tellurian has an employment agreement dated as of
November 8, 1996 with Ronald (the "Employment Agreement"); and

WHEREAS, Tellurian and Ronald desire to terminate the
Employment Agreement with certain exceptions; and

WHEREAS, Tellurian and Ronald desire to enter into certain
agreements whereby he will provide consulting services to Tellurian and certain
repairs and maintenance to Tellurian customers who have purchased Virtual
Reality products from it; and

WHEREAS, Ronald desires to obtain a license to develop Virtual
Reality products and to license such developed products from Tellurian; and

WHEREAS, the Swallows purchased from Celia Klimas a $150,000
promissory note payable by Tellurian together with accrued unpaid interest (the
"Note"); and

WHEREAS, the Swallows desire to convert the Note into 100,000
shares of Tellurian's Common Stock and contemporaneously grant options to
purchase the aggregate of 100,000 shares of Tellurian's Common Stock to Michael
Hurd (50,000 shares and Peter Colgan 50,000 shares).

NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:

1. Tellurian and Ronald hereby terminate the Employment
Agreement, except for Article VIIIA. Ronald agrees that he shall not directly or
indirectly induce or attempt to influence any employee of Tellurian to terminate
his employment with Tellurian and shall not directly or indirectly as a
principal, partner, officer, agent or employee, consultant or otherwise compete
against the Company or be financially interested in any business operating in
the continental United States which is involved in any product or service which
is a part of Tellurian's present activities, (including, without limitation,
those activities of Tellurian's subsidiaries) as of the date hereof except as
described herein as a sublicensee of Tellurian. Such covenant not to compete
shall be for a period of fifteen years from the date hereof. Except as set forth
herein, during the fifteen year term of this

<PAGE>

agreement, Ronald shall not use for his personal benefit, or disclose,
communicate or divulge to, or use for the direct or indirect benefit of any
person, firm, association or company other than Tellurian, any material referred
to herein or any information regarding the business methods, business secrets,
or other knowledge or processes used or developed by Tellurian or any names and
addresses of customers or clients or any other confidential information relating
to or dealing with the business operations or activities of Tellurian made known
to Ronald or learned or acquired by Ronald while in the employ of Tellurian.

As consideration for such termination, Ronald will receive the
(i) sum of $27,000 as severance pay (at his option, in cash or kind) due within
ten days of Tellurian's completion of its proposed public offering which is on
file with the Securities and Exchange Commission (File No. 333-56793), and (ii)
right to use Tellurian Virtual Reality equipment currently in Ronald's
possession (which equipment has a fair market value of approximately $50,000)
for his further development of Virtual Reality products to be owned by Tellurian
and licensed to Ronald on a non-transferable basis for a period of fifteen years
from the date hereof. Such equipment shall also be used for the continued
research and support of existing Tellurian customers as described in paragraph 3
below.

2. Ronald acknowledges that he shall not sell Tellurian
virtual reality products (including, without limitation, image generators and
helmets) and virtual reality products developed by Ronald outside of the United
States or in violation of Tellurian's agreement with Fightertown dated November
1997. Further, Tellurian can seek equitable relief, specific performance and/or
damages against Ronald in case of breach of the provisions of this paragraph.

3. Ronald agrees to accept telephone inquiries from Tellurian
customers experiencing problems with Tellurian Virtual Reality systems and
provide support to those customers at standard billing rates to be invoiced by
him for his sole benefit. Tellurian is not responsible for the collection or
billing of these accounts. All such financial arrangements are between Ronald
and the customers. However, Ronald will not deny telephone assistance to any
customer unless said customer has unpaid bills that are at least 15 days past
due. Assuming the duties of Ronald are carried out faithfully and to the best of
his abilities, Tellurian will relinquish title to the $50,000 worth of materials
described in paragraph 1 herein at the end of the five year consulting period.
Failure to carry out the duties described herein would cause the immediate
return to Tellurian of the $50,000 described herein that has been loaned to him.

4. The Swallows agree that they will not sell or otherwise
transfer their Tellurian Common Stock beneficially owned by them from the date
hereof until September 30, 2000 without the prior written consent of J.W.
Barclay & Co., Inc. The foregoing shall not apply to the 100,000 shares of
Common Stock to be received by Richard and/or Ronald upon conversion of the Note
and the possible exercise of options granted by them to Michael Hurd and Peter
Colgan as described herein.

<PAGE>

5. Ronald agrees to provide consulting services to Tellurian
with regard to its virtual reality products and systems upon Tellurian's
request, to support the existing and future Tellurian customer base with respect
to answering questions that they have with respect to Tellurian virtual reality
products purchased by them and to repair and maintain Tellurian virtual reality
products purchased by existing and future customers of Tellurian as described in
paragraph 3. These consulting services will be provided by Ronald for a period
of five years expiring on the close of business on August 7, 2003. In
consideration of the above referenced consulting services, including those
described in paragraph 3 herein, Tellurian agrees to pay Ronald or his assignee
the following, (i) the sum of $70,000 to be paid within 10 days of the closing
of Tellurian's abovementioned public offering; (ii) the sum of $35,000 to be
paid on March 31, 1999; (iii) the sum of $35,000 to be paid on June 30, 1999;
and (iv) the sum of $35,000 to be paid on September 30, 1999. In the event
Ronald fails to comply with the material terms and conditions of this Agreement,
Tellurian may terminate the payments. It is understood that although the
consulting fees are paid on an accelerated basis over the course of
approximately one year, the consulting period is for a term of five years from
the date of this Agreement until the close of business on August 7, 2003 and in
this respect, the payments are earned by Ronald over the five year term of this
Agreement. In this respect, all paid but unearned payments are refundable to
Tellurian in the event that Ronald breaches the material terms of this
Agreement. In the event that any uncontested payment is not made in accordance
with the aforesaid terms, Tellurian shall have fifteen days after the actual
receipt of notice to cure the default. In the event that the default remains
uncured for the aforesaid fifteen days, then the amount payable to Ronald or his
assignee shall include a penalty of 1% of the principal amount due per day
commencing on the 16th day following actual receipt by Tellurian of notice.

6. The Swallows hereby grant Michael Hurd (or in the event of
his death, Stuart French) an irrevocable transferable proxy to vote their
Tellurian Common Stock beneficially owned by them for the maximum period
permitted by Delaware Corporation Law. Such proxy shall terminate upon the
Swallows sale or other transfer of Tellurian Common Stock (solely as it applies
to the Tellurian shares that are sold or transferred, but not with respect to
their other Common Stock) in the event that paragraph 4 of this Agreement is
complied with.

7. Tellurian hereby grants limited licensing rights to the
Swallows intended to allow him to continue in the development and sale of
virtual reality products.
They are granted:

* The right to continue doing research using
the same principles of image generation that
Tellurian has been working on during
Ronald's tenure with Tellurian;

* The right to sell new systems and
replacement parts and services to existing
Tellurian customers (with the exception of
the customers listed on Schedule A;

* The right to use any terms (such as "Eagle")
which refer to the product and which are
within Tellurian's rights to use;

<PAGE>

* The right to grant sublicenses of Tellurian
virtual reality products;

* The right to work for a company that has a
previously established position in the
virtual reality arena; and

* The right to enter partnerships and
corporations and raise capital in any manner
deemed appropriate by Ronald provided such
arrangements acknowledge the ownership and
other rights of Tellurian as described
herein and Ronald's limited licensing rights
in any product or technology developed by
him.

Specifically excluded from these rights are:

* Any use of the Tellurian name except where
it is needed to identify Ronald as in
"Ronald Swallow, formerly of Tellurian,
Inc.";

* Any rights which Tellurian cannot grant,
such as, but not limited to, rights ceded to
Voyager and rights ceded to Fightertown USA;

* The right to sell the Tellurian technology
to a third party either on a cash or royalty
basis or to grant sublicenses without our
consent;

* The right to work for a new company or an
existing company that has no previous
experience in making and/or marketing
virtual reality products if such action can
reasonably be assumed to interfere with
Tellurian's right to own any virtual reality
developments made by Ronald and to be
licensed to him;

* The right to make statements, whether verbal
or written, which can be construed to be
detrimental to Tellurian in its continued
endeavors; and

* The right of Ronald to transfer any of the
specific rights granted hereunder for Ronald
to any entity (including, without
limitation, an entity controlled by him)
without the consent of Tellurian except as
provided hereunder.

8. Tellurian will make inventory items available to Ronald at
a price not exceeding 10% above original cost or less if management chooses to
lower the price for any reason. Ronald will make any product or service which
Tellurian wishes to buy from

<PAGE>

them available to Tellurian at 10% above documented cost or less if Ronald
chooses to lower said price. Each party will treat orders from the other with
the same priority and same sequence for attention as any other orders received
from third-party customers.

9. Effective June 30, 1998, the Swallows hereby convert the
entire principal and accrued unpaid interest of the Note into 100,000 shares of
Tellurian's Common Stock. 50,000 shares shall be issued in the name of Richard
Swallow and 50,000 shares shall be issued in the name of Ronald Swallow. The
Swallows represent that they are the legal owner of the Note and that such Note
has not been sold or otherwise transferred or encumbered.

10. Ronald hereby grants Peter Colgan an option to purchase
50,000 shares of Tellurian's Common Stock at an exercise price of $.10 per
share. Such option shall be exercisable at any time from the date hereof until
September 30, 1999. In consideration of the grant of such option, Mr. Colgan has
agreed to pay Ronald the sum of $.001 per share. A form of option between Ronald
as seller and Hurd as buyer is attached hereto as Exhibit B.

11. Richard hereby grants Michael Hurd an option to purchase
50,000 shares of Tellurian's Common Stock at an exercise price of $.10 per
share. Such option shall be exercisable at any time from the date hereof until
September 30, 1999. In consideration of the grant of such option, Mr. Hurd has
agreed to pay Richard the sum of $.001 per share. A form of option between
Richard as seller and Hurd as buyer is attached hereto as Exhibit C.

12. Tellurian specifically acknowledges that Ronald may assign
any or all of the payments due him under this agreement to a third party of his
choice. Tellurian agrees that upon receipt of an assignment form in form and
substance like the sample assignment included as Exhibit D of this agreement, it
will make payments to the party designated in that assignment. Further,
Tellurian acknowledges that the act of becoming an assignee under this agreement
shall not obligate the assignee to Tellurian in any way nor will Tellurian have
any rights of replevin against the assignee if Ronald fails to comply with any
portion of this agreement. Tellurian may pursue any recovery action for payments
made to the assignee on behalf of Ronald solely against Ronald.

13. The parties have not made any representations or
warranties with respect to the subject matter hereof not set forth herein. This
Agreement, together with any instruments executed simultaneously hereof,
constitutes the entire agreement between the parties with respect to the subject
matter hereof. All understandings and agreements heretofore had between the
parties with respect to the subject matter hereof are merged in this Agreement,
which fully and completely expresses their agreement.

14. This Agreement may not be changed, modified, extended,
terminated or discharged orally, but only by an agreement in writing, which is
signed by all of the parties to this Agreement.

15. The parties agree to execute any and all such other and
further

<PAGE>

instruments and documents, and to take any and all such further actions
reasonably required to effectuate this Agreement and the intent and purposes
hereof.

16. All notices or other communications required or permitted
hereunder shall be in writing and shall be mailed by Registered or Certified
Mail, Return Receipt Requested, postage prepaid, as follows:

To Powers: To the Address listed at the beginning of
this Agreement.

To the Company: To the address listed at the beginning of
this Agreement

Copy to: Lester Morse P.C.
111 Great Neck Road., Suite 420
Great Neck, NY 11021

17. This Agreement shall be construed and enforced in
accordance with the internal laws of the State of New Jersey, without giving
effect to the principles of conflicts of law.

18. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their heirs, executors, administrators,
personal representatives and successor.

IN WITNESS WHEREOF, the undersigned has executed this
Agreement this 11th day of August, 1998.

/S/ Ronald Swallow
----------------------
RONALD SWALLOW

/S/ Richard Swallow
----------------------
RICHARD SWALLOW

TELLURIAN, INC.

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

<PAGE>

On the Stationery of Tellurian, Inc.

SECTION 7
SCHEDULE A

The following is a listing of Tellurian customers which meet the criteria of
this agreement, as relating to Section 7.

Voyager Graphics
Voyager Simulation
Ship Analytics
AST
ATC
ATS
Peter Kiener
Servos & Simulation
Bob Paige
Tony Curelasian, "Virtual Warehousing"
SimCom
Frasca

<PAGE>

EXHIBIT B

OPTION TO PURCHASE COMMON STOCK

AGREEMENT made as of the 11th day of August, 1998 between Ronald
Swallow, residing at 64 Manor Drive, Ramsey, New Jersey 074466 ("Seller") and
Peter Colgan residing at 5 Sherwood Gate, Oyster Bay, New York ("Buyer").

W I T N E S S E T H:

WHEREAS, Seller desires to grant Buyer an option to purchase 50,000
shares of Common Stock of Tellurian, Inc. ("Tellurian") from his personal
holdings (the "Common Stock"); and

WHEREAS, Buyer desires to purchase an option to purchase said 50,000
shares of Tellurian's Common Stock.

NOW, THEREFORE, it is agreed to as follows:

1. Grant of Option. In consideration of the sum of $50 (equal to $.001)
per exercisable share) to be paid within five (5) days from the date hereof,
Seller grants to Buyer the option to purchase 50,000 shares of Common Stock of
Tellurian from his personal holdings. This option may be exercised in whole or
in part and from time-to-time during the exercise period of this option.
Simultaneous with receipt of the $50 referred to above, Seller will deliver to
Lester Morse P.C., as Escrow Agent, the Common Stock together with properly
executed stock powers with signature guaranteed by a commercial bank or a member
of the New York Stock Exchange, to be held in escrow by Lester Morse P.C. This
option granted to Buyer shall be protected against dilution of the interest
represented by the underlying shares of Common Stock to the same extent as
Seller is protected against dilution.

2. Purchase Price. The purchase price of the stock is $.10 per share
(or an aggregate of $5,000 in the event this option is exercised in full)
payable by certified check, bank check or money order made payable to the Seller
at the time provided in paragraph 4.

3. Exercise of Option. The option must be exercised by the Buyer on or
before September 30, 1999, by notice in writing, mailed on or before such date
by registered or certified mail, return receipt requested, postage prepaid, to
Seller at the address indicated herein, with a copy to Lester Morse P.C. Notice
shall be deemed given and the option exercised on the date on which the notice
is mailed to Seller or sent by facsimile transmission, as provided below. Notice
of exercise of option shall also be deemed proper if sent for delivery via
overnight courier service (i.e. Federal Express, UPS, Express Mail) with payment
of the purchase price made to Lester Morse P.C., as provided in paragraph 4.

4.Completion of Sale. Contemporaneously with the giving of notice of the

<PAGE>

exercise of the option, Buyer shall deliver to Escrow Agent the purchase price.
Seller hereby authorizes Lester Morse P.C. to release the stock and stock powers
from escrow and to deliver same to Buyer upon the mailing of the purchase price
by Lester Morse P.C. to Seller by registered or certified mail, return receipt
requested, postage prepaid, to Seller's address as indicated herein.

5. Failure to Exercise Option or Complete Sale. If Buyer fails to
exercise its option in accordance with paragraph 3, Lester Morse P.C. shall
immediately return the stock certificates and stock powers to the Buyer upon the
expiration of such option.

6. Notice. Except as otherwise provided herein, all notices required to
be given to any party to this Agreement shall be given to the parties at the
addresses and fax numbers specified herein, or such other addresses and fax
numbers as the party may notify the other party in writing.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.

SELLER: BUYER:

/S/ Ronald Swallow /S/ Peter Colgan
- ---------------------- ---------------------------
RONALD SWALLOW PETER COLGAN

- ---------------------- ---------------------------
Fax No. Fax No.

<PAGE>

EXHIBIT C

OPTION TO PURCHASE COMMON STOCK

AGREEMENT made as of the 11th day of August, 1998 between Richard
Swallow, residing at 316 W. College Avenue, Heartsville, South Carolina 29550
("Seller") and Michael Hurd residing at 300 K, Route 17 South, Mahwah, New
Jersey 07430 ("Buyer").

W I T N E S S E T H:

WHEREAS, Seller desires to grant Buyer an option to purchase 50,000
shares of Common Stock of Tellurian, Inc. ("Tellurian") from his personal
holdings (the "Common Stock"); and

WHEREAS, Buyer desires to purchase an option to purchase said 50,000
shares of Tellurian's Common Stock.

NOW, THEREFORE, it is agreed to as follows:

3. Exercise of Option. The option must be exercised by the Buyer on or
before September 30, 1999, by notice in writing, mailed on or before such date
by registered or certified mail, return receipt requested, postage prepaid, to
Seller at the address indicated herein, with a copy to Lester Morse P.C. Notice
shall be deemed given and the option exercised on the date on which the notice
is mailed to Seller or sent by facsimile transmission, as provided below. Notice
of exercise of option shall also be deemed proper if sent for delivery via
overnight courier service (i.e. Federal Express, UPS or Express Mail) with
payment of the purchase price made to Lester Morse P.C., as provided in
paragraph 4.

<PAGE>

4. Completion of Sale. Contemporaneously with the giving of notice of
the exercise of the option, Buyer shall deliver to Escrow Agent the purchase
price. Seller hereby authorizes Lester Morse P.C. to release the stock and stock
powers from escrow and to deliver same to Buyer upon the mailing of the purchase
price by Lester Morse P.C. to Seller by registered or certified mail, return
receipt requested, postage prepaid, to Seller's address as indicated herein.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.

SELLER: BUYER:

/S/ Richard Swallow /S/ Michael Hurd
- ---------------------- --------------------
RICHARD SWALLOW MICHAEL HURD

843-332-8022 201-529-0049
- ---------------------- --------------------
Fax No. Fax No.

<PAGE>

EXHIBIT D

FORM
OF
IRREVOCABLE ASSIGNMENT
OF
COLLECTION RIGHTS
- --------------------------------------------------------------------------------

Ronald Swallow and Richard Swallow, both being parties known to
Tellurian, Inc., do hereby direct Tellurian, Inc. to make any and all payments
due to Ronald Swallow (by virtue of paragraph 5 of the August 11, 1998 document
entitled "AGREEMENT") to the benefit and attention of Richard Swallow. Said
payments shall be made payable to Richard Swallow and mailed to him at the
following address: 316 W. College Avenue, Heartsville, South Carolina 29550.

This Agreement shall remain in full force and effect unless revoked in
writing by both Richard Swallow and Ronald Swallow and acknowledged in writing
by a duly authorized representative of Tellurian, Inc.

Dated: August 11, 1998
-------------------------
Richard Swallow

-------------------------
Ronald Swallow

Exhibit 10.3

AGREEMENT

BETWEEN:

TELLURIAN, INC, a company
incorporated under the laws of
the State of Delaware, one of the
United States of American

Hereinafter referred to as "Tellurian"

OF THE FIRST PART

-AND-

PHOENIX WOOD PRODUCTS CORPORATION
and NEWMAN BROS. LIMITED, as Trustees

Hereinafter referred to as "the Trustees"

OF THE SECOND PART

Whereas the parties have agreed as herein provided to the conversion of
Series "B" Special Shares held by the Trustees in Cyberport Niagara Inc. for
common stock in Tellurian effective June 30th, 1998;

AND WHEREAS this agreement outlines the terms and conditions for the
exchange.

NOW IN CONSIDERATION of the sum of One Dollar ($1.00) and other
consideration, the parties hereto agree as follows:

1. The Trustees shall endorse Share Certificate No. 1-B in the amount of
912,634 Series "B" Shares in Cyberport Niagara Inc. in favour of Tellurian.

2. The Trustees shall exchange the said Shares of Cyberport Niagara Inc. with
Tellurian in exchange for:

a. 325,278 shares of Tellurian;

b. $180,000.00 payable on or before September 15th, 1998;

c. a letter from solicitors duly authorized and knowledgable in the
field of publicly traded

<PAGE>

securities, duly qualified to practice law in the State of New
York, in respect of the laws of New York, the State of Delaware
and the federal laws of the United States of America, that in the
opinion of the said attorney:

i. Tellurian, Inc. is duly incorporated and organized and is
validly existing as a corporation under the laws of the
State of Delaware;

ii. The authorized capital of the corporation consists of
25 million shares of common stock, which shares are
being publicly traded on NASDAQ;

iii. The 325,278 Tellurian Shares have been validly issued
and are recorded in the books and records of the
corporation as being owned by the Trustees herein;

iv. That there is presently no restriction in trading the
said Tellurian stock on the open market beyond August
5th, 1999;

v. The transfer of Tellurian Shares has been duly
authorized, executed and delivered by Tellurian.

3. Within seven (7) days of signing this Agreement, Tellurian shall deposit with
the Trustees an irrevocable authorization and direction to the underwriters,
directing the said underwriters to forward the sum of One Hundred and Eighty
Thousand Dollars ($180,000.00 Canadian) to Broderick and Associates in Trust to
satisfy the obligation contained in paragraph 2 above.

4. Upon Tellurian delivering the shares and furnishing the documentation, the
obligation of Cyberport Niagara Inc., and Tellurian Inc. as contained in the
Agreement between Cyberport Niagara Inc., Tellurian, Inc. and the beneficiaries
of the Trust entered into in March, 1998, shall be amended accordingly.

Dated at Niagara Falls, Ontario, this 12 day of August, 1998

SIGNED, SEALED AND DELIVERED )
in the presence of ) TELLURIAN, INC.
)
)
) -------------------
) /s/ Stuart French, President
) I have the authority to bind the Corporation
)
) PHOENIX WOOD PRODUCTS
) CORPORATION
)
) ---------------------
) /s/ William Diggon, President
) I have the authority to bind the Corporation

</TABLE>

<PAGE>

) NEWMAN BROS. LIMITED
)
) Per:
)
) ----------------------------
) /s/ David Bennett, President
) I have the authority to bind the Corporation

</TABLE>

<PAGE>

Stationery of Tellurian, Inc.

Attachment to agreement

I, Stuart French, President of Tellurian, Inc. have signed the attached
agreement dated August 12, 1998 between Tellurian and Phoenix Wood Products
Corporation and Newman Brothers Limited, as Trustees because it is clear to me
that the document sets forth the agreed intent of the parties. As discussed by
telephone with Bill Diggon, our concern is that the form of the agreement may
not be acceptable under US law and SEC regulations. Since some of the parties to
the agreement are not available until next week, we have agreed to sign the
document with the proviso that both parties agree to redraft the document in
form as soon as possible.

-----------------------------
/s/ Stuart French

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,296
<SECURITIES> 0
<RECEIVABLES> 3,581
<ALLOWANCES> 0
<INVENTORY> 575,448
<CURRENT-ASSETS> 869,510
<PP&E> 2,927,579
<DEPRECIATION> 374,023
<TOTAL-ASSETS> 3,551,475
<CURRENT-LIABILITIES> 1,132,086
<BONDS> 0
<COMMON> 47,300
0
0
<OTHER-SE> 2,255,177
<TOTAL-LIABILITY-AND-EQUITY> 3,551,475
<SALES> 154,982
<TOTAL-REVENUES> 154,982
<CGS> 380,950
<TOTAL-COSTS> 1,093,107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,048
<INCOME-PRETAX> (1,363,604)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,363,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,363,604)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)

</TABLE>