TELESCAN INC, 10-K405, 1997-03-31

TELESCAN INC
10-K405, 1997-03-31
COMPUTER PROGRAMMING, DATA PROCESSING, ETC.

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

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

COMMISSION FILE NUMBER: 0-17508

TELESCAN, INC.
(exact name of Registrant as specified in its charter)

DELAWARE 72-1121748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

5959 CORPORATE DRIVE, SUITE 2000
HOUSTON, TEXAS 77036 77036
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281)588-9700

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 PER SHARE
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K
or any amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant on March 24, 1997, based upon the average bid and asked price of
the common stock on NASDAQ Small-Cap Market for such date, was approximately
$26,400,000. The number of outstanding shares of the Registrant's common stock
on March 24, 1997 was 10,738,693.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement related to its 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-K.

<PAGE>
TELESCAN, INC.

FORM 10-K REPORT INDEX
<TABLE>
<CAPTION>
PAGE NO.

<S> <C> <C>
PART I
Item 1. Business .........................................................3
Item 2. Properties ......................................................16
Item 3. Legal Proceedings ................................................16
Item 4. Submission of Matters to a Vote of Security Holders ..............16

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ..........................................17
Item 6. Selected Financial Data ..........................................18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................19
Item 8. Financial Statements and Supplementary Data ......................23
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure ........................23

PART III
Item 10. Directors and Executive Officers of the Registrant ...............24
Item 11. Executive Compensation ..........................................27
Item 12. Security Ownership of Certain Beneficial Owners
and Management ................................................27
Item 13. Certain Relationships and Related Transactions ...................28

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ....................................................29
</TABLE>

<PAGE>
PART I

ITEM 1. BUSINESS

GENERAL

Telescan, Inc. ("Telescan" or the "Company") provides innovative solutions for
online technology, sophisticated data retrieval tools and state-of-the-art
Internet services. The Company develops, markets, and operates major online
networks and Internet sites serving the financial, publishing, entertainment and
technology transfer industries. The Company's products and services, which are
based upon its proprietary online operating system and user software, allow its
customers to electronically access and analyze information through their
personal computer systems.

The Company's primary product lines are the (1) Telescan system of online and
Internet financial services and products provided directly to users as well as
under private label agreements with third parties, which allow sophisticated
investors to obtain financial news and information, perform fundamental and
technical analyses and design personalized searches using current and historical
information on more than 220,000 equities, indices and currencies; (2) Numerous
non-financial third party online and Internet services which are developed and
operated via alliances with third parties in the publishing, entertainment, and
space industries and Computer Sports Network division ("CSN"), which offers
online computer sports games to golf and baseball enthusiasts; and (3) Knowledge
Express Data Systems, L.C. ("KE"), an online database system for the
commercialization and transfer of technology which serves corporations,
government agencies, universities, and research institutions.

The Company's online and Internet service products contain proprietary software
technologies, developed or acquired by the Company, which increase the speed,
power and user friendliness of information retrieval while lowering costs to
users. The Company's proprietary technology employs a host hardware
configuration connected to an intelligent terminal, which is typically a
personal computer. The Company's software enables the user to accomplish a full
text search of databases for complex queries, without requiring the use of
Boolean logic found in traditional database search technologies. It also employs
a proprietary optimal search algorithm to accomplish quantitative analysis. In
addition, the Company has developed graphical interfaces for Windows.

Revenue is generated in the form of online and Internet service fees, fees from
third parties, product sales, contract and advertising revenue. Between 1994 and
1996, the Company's revenues included a large Department of Energy contract
("DOE Contract") which ended in March 1996. The Company has experienced a
significant increase in other revenues over the past three years. The higher
revenue is primarily attributable to increases in the Company's subscriber base
and the expansion of private labeling agreements. This growth, in turn, has
resulted from an increase in the online and Internet services market, the
diversification of the industries in which the Company offers products and the
Company's continued investment in customer acquisition through technology
development and marketing.

The Company's online and Internet revenue is generated from individual
subscribers paying annual subscription fees and recurring monthly usage fees,
together with fees from third parties for providing private label versions of
the Company's database applications. Product revenue is generated from the sale
of online system software, software and service enhancements, major product
upgrades and related educational and training products such as books and
videotapes. The Company's software products generally reflect a common base
technology to which additional features can be added to satisfy the various
needs of the sophisticated user. Accordingly, product revenue primarily consists
of revenue from product enhancements or major upgrades. The Company's contract
revenue is generated from providing contract services to related parties. These
contract services include developing, operating and maintaining online database
systems and providing administrative services.

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The following table summarizes the Company's revenue by product line and type of
revenue (dollars in thousands).

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994
----------------- ----------------- ----------------

PERCENT PERCENT PERCENT
REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ............................. $11,161 81.1% $10,333 73.9% $ 7,721 73.7%
NON-FINANCIAL ......................... 934 6.8 877 6.3 535 5.1
KNOWLEDGE EXPRESS DATA
SYSTEMS, L.C .......................... 862 6.3 2,328 16.6 1,643 15.7
CONTRACT REVENUE FROM
AFFILIATES ............................ 735 5.4 408 2.9 543 5.2
OTHER ................................. 64 0.4 43 0.3 35 0.3
------- ----- ------- ----- ------- -----

TOTAL REVENUE ......................... $13,756 100.0% $13,989 100.0% $10,477 100.0%
======= ===== ======= ====== ======= ======
</TABLE>

The business of the Company has been operated by the Company or its predecessors
since 1983. The Company, which is a Delaware corporation, was incorporated in
1988 under the name "Max Ret, Inc." for the purpose of acquiring or
participating in a business opportunity. In 1989 the Company issued 75% of its
outstanding common stock to acquire all of the outstanding common stock of D.B.
Technology, Inc. (dba Telescan, Inc.) ("DB"), and DB's wholly owned subsidiary,
CSN. After the acquisition of DB and CSN by the Company, DB was merged into the
Company and the Company changed its name from Max Ret, Inc. to Telescan, Inc. In
December 1991, CSN was merged into the Company.

Since its formation, the Company has expanded its online and Internet service
offerings through a series of strategic acquisitions, joint ventures and
partnerships. In June 1990, the Company issued 420,000 shares of its common
stock to T.I.C. Software, Inc. in exchange for assets consisting of license and
contract rights, proprietary software, several full-text, technology-oriented
databases, computers, computer-related equipment and furniture.

In December 1990, the Company entered into a corporate joint venture (as a 50%
owner) in Technology Resource Company, for the purpose of marketing and
operating the Knowledge Express(R) online database system. During 1991, the
corporate joint venture was dissolved and the Company's interests were assigned
to Telescan, L.C., a Texas limited liability company, which has since been
renamed Knowledge Express Data Systems, L.C.. The Company acquired an additional
5.58% ownership interest in March 1993. Telescan acts under contract as the
exclusive system operator of the KE database system and provides development,
maintenance and operation of the system including the uploading of the
databases; programming and development of the systems and end-user software;
system operations; and certain other contract services, all of which are charged
to KE on a profitable basis.

The Company has a 15.05% equity interest in Telebuild, L.C. ("Telebuild"), a
limited liability company formed in 1990 to develop and market online
information systems serving the building and construction industry. Telescan
provides maintenance and operation of the Telebuild information systems,
including the uploading of information; programming and development of the
systems and end-user software; system operations; and certain general and
administrative services, all of which it charges to Telebuild on a profitable
basis.
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INDUSTRY

Online services allow personal computer users to access outside sources of
information and interact with other users via telephone line connections
channeled through a central host computer. The online services industry includes
commercial services targeted exclusively to businesses, such as medical, legal,
financial, credit reporting, marketing, and technical databases, and
consumer-oriented databases offering a wide range of informational, educational,
consumer and entertainment services. The consumer online services market emerged
in the early 1980's when business-oriented, online services markets began to
offer limited services to owners of personal computers. Since that time, both
the consumer and business online services markets have grown dramatically in
breadth of services offered and in market penetration.

Online services typically include information databases and specialized search
and retrieval software maintained by the service provider on a host computer.
Interface software, which is used on the customer's computer, permits users to
access information through the online system. The service provider usually rents
or purchases databases on a non-exclusive basis from third parties and then
further develops such databases for use within the provider's online system.
Customers typically subscribe to an online system for an initial base charge for
which they are granted a license for the interface software needed to access the
online services. Following their subscription, customers are typically charged
in one of two ways. The most common method used by consumer based services is a
periodic subscription fee for which users receive a fixed allotment of time on
the online system, after which they are charged on a per-minute basis. The
second method bills users at varying per minute rates, according to time
actually spent online on the databases. Under both of these methods there are
often additional charges for specific services used within the databases.

In February 1995, the Company announced plans for an Internet website which
would provide access to the Company's online databases and search and retrieval
services. In October 1995, Telescan launched this Internet Supersite for
investors. In February 1996, the Company launched Wall Street City(TM), a new
enhanced financial website, which it has continuously broadened and upgraded. By
March 1997, Wall Street City(TM) was receiving approximately 70,000 hits or
impressions each business day. The Company has devoted significant development
resources in this regard.

Fees for Internet access are similar to online service charges, though lower due
to reduced communication costs. Customers select from several rate plans that
will offer varying levels of information and technical features.

Concurrent with the development of the Company's financial website, it has
launched non-financial Internet sites such as Billboard Online and Adweek Online
in conjunction with their parent, BPI Communications, Inc. and Spacezone in
connection with Warner International Communications. The Company continues to
develop additional non-financial sites and is working on converting certain
online sites to Internet sites.

The Internet also serves as an advertising medium with rates tied to thousands
per hits. Advertising revenues, while not significant in 1996, are expected to
grow with the popularity of the Company's websites.

The industry's dramatic growth in recent years has resulted from a number of key
factors which are expected to contribute to continued growth for years to come.
Some of these key factors include the increasing market awareness of online
services and the Internet; growth in the availability, quality and marketing of
online and Internet products and services; growth in the home and personal
computer markets including mobile "laptop" computing; increased use of modems
for telecommunications; and the development of alternative access
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devices such as dedicated communications terminals. The Company believes that as
the market continues to expand, important competitive factors will be system
performance, product differentiation, quality and quantity of content, user
friendliness, price, customer support and effective marketing techniques.

BUSINESS STRATEGY

The Company's mission is to be a worldwide leader in the development of
sophisticated interactive online information systems and Internet sites for
individuals, businesses, associations and government agencies through the
delivery of superior, cost effective data retrieval technology, customer user
interface programs and communications services. To achieve this mission, the
Company's business strategy is (i) to increase Telescan's customer base and
recurring revenue; (ii) to build revenue by providing private label financial
database access; (iii) to develop additional non-financial information systems;
(iv) to increase usage of its various websites to build advertising revenues;
(v) to continue investing in the development of new technology; and (vi) to
increase current customer usage. There can be no assurance that this strategy
will be effective.

Management believes that the continued investment in customer acquisition and
the resulting increase in recurring revenue is crucial to the future growth of
the Company. This is achieved by creatively marketing its services and
exploiting the Company's existing proprietary software technologies in the
development of new online systems and Internet sites. Joint marketing
relationships with companies selling related products or services and having
large, preexisting customer bases are a major source of growth for the Company.
Additional growth is achieved by entering into mutually beneficial alliances
with associations, publishers and other third parties to jointly develop and
market online systems and Internet sites to service their members' or customers'
specific needs. Typically the Company is responsible for software design,
development and programming services; the partner is responsible for supplying
the data and marketing the service; and the net revenues of the project are
split.

Developing state-of-the-art technology is key to establishing the Company as a
leader in the industry and is important to the long-term growth of the Company.
The Company is continually investing its resources in the development of new
products and services which provide powerful online and Internet capabilities to
sophisticated users in a wide range of industries.

Current customers are a valuable Company asset and are a key component in the
Company's overall business strategy. With customer acquisition costs so high,
maintaining current customer usage is of key importance . Maintaining usage is
accomplished by (i) providing access to an increasing array of comprehensive,
high-quality data coupled with powerful and easy to use search and analytical
tools; (ii) providing free customer training and support to educate existing
customers on the capabilities of the system; and (iii) conducting reactivation
campaigns to encourage inactive subscribers to log back onto the system.

PRODUCTS AND SERVICES

The Company has attempted to develop the market for online services by creating
and marketing products that build and expand upon the Company's base technology
of proprietary operating systems and user software for database applications.
The Company's major product lines include the Telescan system of online
financial databases and software programs, CSN, the KE service and its numerous
third party online and Internet services. In 1996, the Company substantially
expanded its private labeling arrangements under agreements with such major
corporations as American Express, Charles Schwab, Fidelity Investments, NETCOM
and Standard & Poor's. Telescan receives per user fees, fees for providing
"premium" services and/or reports, and development and licensing fees from such
third parties. Certain agreements guarantee minimum monthly payments.
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In addition to service revenue from the Company's Internet sites, the growth of
Wall Street City(TM) has enabled the Company to generate advertising revenues
from this site. Additionally, the Company receives a portion of the advertising
revenues from third party sites.

TELESCAN FINANCIAL

WALL STREET CITY(TM). Wall Street City 2.0 is a powerful and comprehensive
financial supersite on the Internet with navigation designed around questions an
investor would ask. It is located at HTTP://WWW.WALLSTREETCITY.COM. This new
version of Wall Street City(TM) is an effective combination of Telescan's most
dynamic, innovative analysis tools built into one supersite. Wall Street
City(TM) provides all levels of investors with remarkable investment features
and information not available anywhere else on the Internet.

The site features:
*Multiple Portfolios - Each user can configure up to seven portfolios
with up to 150 symbols per portfolio.
*Portfolio Scanning - Portfolios can be scanned for end of day technical
and positive breakouts, stock cycle strengths, and comparative rankings.
*ActiveX(TM) Stock Graph with Technical Analysis - Internet Explorer
users with Windows `95 or NT can download a powerful ActiveX control to allow
technical analysis on stock graphs.
*New Search Capabilities - An investor can categorize up to 40 criteria
from a selection of over 280 criteria, under a single stock search, if all the
"Absolute OR" criteria fail.
*Availability for Intranets - Institutions and corporations can provide
information for brokers, financial planners or employees by buying a site
license for their Intranets. With the addition of a CGI program to the Intranet
server, each employee can log onto Wall Street City(TM) Version 2.0 without
using separate ID's and passwords.

Wall Street City(TM) is one of the premier investment analysis products of
Telescan. Recognized as one of the first Internet sites to incorporate a
customizable Java(TM)-enabled stock ticker, Wall Street City(TM) provides a
broad range of services for beginning and intermediate investors with more than
just the basics of quotes, news and fundamentals. It also gives users access to
educational tools, discussion groups, banks and brokers who can help them make
more profitable investment decisions.

TELESCAN INVESTORS PLATFORM(R) 1.2. Telescan Investors Platform(R) ("TIP") is
the MS Windows version of the Company's popular financial research, screening
and analysis software. Introduced in June 1995, TIP offers numerous enhancements
over the Analyzer 3.0 software. Some of the new features are improved charting
capabilities, unique portfolio-based control for greater flexibility and faster
data retrieval, additional database information such as end-of-day quotes for
most major international exchanges, full-text analysts' reports, a Market
Snapshot of major indexes, improved communications options including TCP/IP
access and interactive roundtables, a TOP PICKS screening feature, and expanded
automation tools. Features such as multi-tasking and graphic toolbars that are
inherent in the Windows operating environment make TIP more user-friendly and
lead to its improved data presentation options.

TELESCAN ANALYZER 3.0. This is the most recent DOS-based version of the Telescan
Analyzer product with the capability of accessing other Telescan products, such
as ProSearch and Mutual Fund Search. This product features a graphical user
interface similar to the Microsoft Windows and Apple Macintosh operating
environments. The software allows the user to access the Telescan Database of
over 20,000 stocks, over 7,000 mutual funds, over 80,000 options, 1,000 market
indexes and more than 1,200 futures and commodities contracts. Telescan Analyzer
3.0 helps the investor evaluate stock portfolios and mutual fund

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holdings. Over 80 fundamental and technical indicators such as price, volume,
insider trading, key company facts, volume indexes, trend lines, news releases,
MACD and relative strength are available for analyzing securities. Users can
retrieve historical price and volume charts of up to 23 years of data in less
than 8 seconds. Additional features include multiple graphs per screen, higher
graphics resolution, 28,800 baud modem support, mouse interface and pull down
menus, and enhanced system integration and visual presentation.

PROSEARCH 5.0. ProSearch is a powerful search program that allows the user to
develop custom screening routines to select securities that best meet the
individual's specific investment goals. The program was designed for serious
investors as a tool for identifying stocks to meet virtually any investment
objective as defined by a wide variety of fundamental and technical indicators.
ProSearch allows the user to select up to 40 parameters from a list of over 280
criteria for building a search strategy. Additionally, investors can utilize
composite, weighted indicators (i.e., short/long term value and technical ranks)
fundamental, momentum, and volume ranks for simplified searches that meet one's
specific investment strategies. ProSearch users can test and retest strategies
by searching their historical performance back to 35 months. The program is
shipped with 30 pre-defined search strategies that can also be used for
narrowing the list of potentially profitable investments.

OPTIONS SEARCH. This product is a screening program that allows an investor to
sort through more than 80,000 equity and index options using the Company's
unique scoring system to pick the options that best fit the user's investment
objectives. The investor chooses up to 30 of the 122 screening criteria to
produce a list of the options best suited to their needs.

QUOTELINK. The Company released the QuoteLink quote and news utility during
1992. This product permits users of competing financial analysis software and
spreadsheet programs to download information from the Telescan Database into
such programs. QuoteLink is compatible with all the major competitive programs
such as AIQ, Metastock, Super Charts, OmniTrader, OmniPro, Indigo, Quicken,
Lotus and Excel.

TELESCAN MUTUAL FUND SEARCH. This product is a mutual fund screening program
that allows an investor to sort through more than over 7,000 mutual funds using
the Company's unique scoring system to pick the funds that best fit the user's
investment objectives. The selection criteria are grouped into three main
categories: purchase requirements, performance and consistency characteristics,
and portfolio composition. The investor then chooses up to 30 of the 80
individual criteria contained within the categories to produce a list of the
mutual funds best suited to their needs.

TELESCAN PORTFOLIO MANAGER. Telescan Portfolio Manager is a DOS-based securities
portfolio management program which was developed as a joint venture between the
Company and The Pilot Group, Inc. The program offers a wide variety of report
options and was designed to provide speed and power in a user friendly manner
that forgives many common user mistakes and accepts corrections with ease.

ESEARCH. Built as a complement to the ProSearch program, ESearch adds the
ability to screen for investment candidates based on earnings estimate
information. Earnings estimates are very important to investors in that they are
often a preview of Wall Street's positive or negative perception of a particular
stock.

PRIVATE-LABELED FINANCIAL FACILITIES

AMERICAN EXPRESS. At the end of the third quarter of 1996, the Company announced
an alliance agreement with American Express Financial Direct ("American
Express"), a division of American Express Company, under which Telescan's online
financial services are available as part of American Express' InvestDirect, a
state-of-the-art Internet-based trading and investment research and analysis
service Under the agreement Telescan provides a proprietary assortment of
investment decision support services.

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CYBERACTION. In May 1996, the Company announced an exclusive agreement allowing
CyberAction Ltd. to distribute Telescan's online and Internet products
throughout the fifteen countries comprising the European Union and Switzerland.
This marketing program will launch in 1997.

FIDELITY. In October 1996, the Company announced that Fidelity Investments, one
of the nation's leading providers of financial services, began offering a
customized assortment of Telescan's financial information resources and
analytical tools as part of its newly introduced Windows-based investment
management and trading software package - Fidelity On-line Xpress+(TM).

I.D.E.A. In May 1996, the Company announced an alliance with Independent
Economic Analysis (Holdings) Pte. Limited ("I.D.E.A."), a leading international
provider of independent financial and economic analysis, servicing 1,500 major
trading rooms worldwide. Telescan is developing private-labeled online services
for I.D.E.A. Commencement of services will take place in 1997.

NETCOM. In January 1996, the Company and NETCOM On-line Communication Services,
Inc. ("NETCOM") initiated an arrangement under which NETCOM's over half-million
subscribers were offered access to the Company's financial website.

PHYNET. PhyNet is a financial site that was launched in October 1996 for PhyNet
Information Systems, Inc., a commercial online medical information services
provider. The site is targeted to over 140,000 physicians. This service will
commence in 1997.

SCHWAB. Under the terms of a 1993 agreement, Telescan provides customers of
Charles Schwab & Co. ("Schwab") access to Telescan's data and third party
reports. In 1996, Schwab and Telescan entered into a second agreement under
which the Company provides its financial research and screening software, TIP,
as part of Schwab's electronic trading platform, Streetsmart Pro, that Schwab is
offering at no charge to its most active retail traders.

STANDARD & POOR'S. In July 1996, the Company and Standard & Poor's ("S&P"), a
division of the McGraw-Hill companies, announced the introduction of an online
platform built and hosted by Telescan. The application allows the investment
community to access a suite of S&P's financial information products.

COMPUTER SPORTS NETWORK

GENERAL MANAGER. This program enables fans of APBA major league baseball, a
simulated baseball game which has been in existence since 1951, to compete
nationally on a network of home computers. The Company's product acts as an
online interface to disk-based baseball software, published by APBA, enabling
customers to play interactively. The program includes the ability to draft a
team of major leaguers, trade players, maintain active reserve rosters, and
guide the team through a season of scheduled games.

In September 1996, Telescan announced an agreement with Reality Sports, Inc. to
jointly develop and operate a new online, interactive game, Reality Baseball,
designed for fantasy baseball enthusiasts. This new, Internet league play game
will succeed General Manager in 1997.

THE LINKS TOUR. The Links Tour gaming program allows members to participate in
nationally held computer golf tournaments, which closely follow the pro tour. In
September 1992, the Company entered into a joint agreement with Access Software,
Inc. ("Access") to develop and market an online tournament play interface for
the Links 386 Pro golf game produced by Access. Links 386 Pro is one of the top
rated golf simulation games on the market and has sold in excess of 1 million
copies. The Company provides Access with the data

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structure and format necessary to upload scores and statistics to the CSN Host
Computer; conducts online tournaments; and provides customer support. Access
includes Links Tour subscription information in all Links 386 Pro software sold,
markets the Links Tour to its existing customers and provides its software to
CSN at a distributor discount.

Links users, who are also CSN subscribers, can compete in CSN "sponsored" golf
tournaments on both a regional and national level using the CSN interface. CSN
members are also able to organize and/or join their own private "clubs." Access'
Links 386 Pro provides the graphic golf simulation game and CSN provides the
online national tournament format. CSN plans to introduce a golf tour on the
Internet in 1997.

KNOWLEDGE EXPRESS DATA SYSTEMS, L.C.

Founded in late 1990 as a limited liability partnership with Telescan Inc., now
the majority controlling interest, Knowledge Express Data Systems delivers the
unique information service, KNOWLEDGE EXPRESS(R). This business and its online
database service ( both abbreviated "KE") are tailored to technology transfer
and business development end users in private sector companies, universities and
government research centers. KE implements Telescan's proprietary search
technology to facilitate and accelerate matchmaking between technology sources
and industrial capitalization.

KE customers are typically decision-makers looking for research and invention
sources that may supplement their R&D or product pipelines, commercialization
specialists at technology/ invention sources seeking licensees and market
applications, or researcher/ scientists in search of partners and sponsors.
Revenue sources are through (i) direct billing for online usage, (ii)
third-party royalties for licensed KE database content, and (iii) contracts for
specialized services, as explained below.

(i) KE end users, predominantly from the private sector, pay for access either
via package subscription, transactional billing, or now optionally through
unlimited multiuser site-licensing. The latter option is a new development for
KE, launched in February 1997, and positions this Web-based product as a niche,
business-to-business service. KE has renegotiated its relevant data vendor
contracts, establishing a fixed royalty for unlimited site-license access.

(ii) KE content is a unique combination of proprietary collections of ongoing
research, emerging technology and new invention abstracts, as well as
commercially available information products converted into unique
online-database versions by KE. Examples of the former databases are the
exclusive Knowledge Express University Technologies, Government Technologies,
Company Technologies and Company Needs & Capabilities. The latter databases
include CorpTech(R), BioScan(R), Grants(R), International Business Opportunities
and MicroPatent Alert. In 1997, KE expanded its business base by signing
agreements with both the IBM InfoMarket and NewsNet- NewsFlash services as a
"content provider" for their resale of these databases' under third-party
royalty agreements.

(iii) KE has renewed for 1997 its relationship with the Licensing Executives
Society (U.S.A & Canada) as the exclusive source for the LES Internet Website
and online service serving 7,000 individual and organizational LES members. KE
is also the contractor that exclusively hosts the NASA Tech Briefs(R) ("NTB")
Website, which creates further market recognition for KE as well as generates
revenue sharing from NTB's Web advertisement sales.

THIRD PARTY ONLINE AND INTERNET SERVICES

The Company has continued to expand its business outside the Telescan financial
and sports online services by forming business alliances with institutions,
associations, publishers and other third parties to develop and operate online
databases which have been tailored to meet their members' or customers' needs.

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The Company is responsible for the development and operation of the online
database systems and the partners are responsible for providing data and
marketing the services. Revenues are split after deducting certain costs as
defined in the individual agreements. The Company usually does not receive any
revenue from a project until after the service is launched though it does
receive certain development fees on specific contracts. Development and data
costs are capitalized; miscellaneous costs incurred prior to launch are charged
to expense as incurred.

ADWEEK ONLINE. Adweek Online, a joint effort between the Company and BPI
Communications, L.P. ("BPI"), was launched during September 1995 to provide
easily accessible information to the advertising industry. It offers users
access to full text news and articles from Brandweek, Mediaweek and all six
regional editions of Adweek magazine plus instant access to other advertising
industry information such as Accounts in Review, Accounts Awarded, the Adweek
Client/Brand Directory and details on breaking campaigns. The full searchable
database includes archives dating back to January 1992, and is updated weekly.
The site is located at HTTP://WWW.ADWEEK.COM.

ARTISTS ONLINE. Artists Online, a joint effort of the Company and Artists
OnLine, Ltd., is a global online network launched during March 1996, linking
artists and art buyers on the World Wide Web at HTTP://WWW.ONLINEART.COM. This
unique Internet service enables users to obtain complete information on a
particular artist or gallery, view their works of art, and contact the artist.
The powerful search engine allows users to quickly search for artwork and
artists based on a wide range of criteria including the type of art, style,
media, price, dimension, color and subject matter.

BILLBOARD ONLINE. Billboard Online, a joint effort of the Company and BPI , is a
global online network originally launched as a non-Internet service during April
1994 and then launched on the World Wide Web during December 1995. The site,
located at HTTP://WWW.BILLBOARD.COM, offers articles and charts from the current
issue of Billboard magazine, along with exclusive editorial features and the
opportunity to download Billboard Online software. The online service offers its
users full access to Billboard magazine's vast electronic library of more than
20,000 charts in all music genres back to 1983, and full text articles dating
back to 1991. A new addition, called Amusement Business Online, is expected to
be available in March 1997. This service will provide the user with information
concerning the "live" entertainment industry, to include music concerts, tours
and general outdoors entertainment.

CONSULTANTS ONLINE. This undertaking by the Company and Consultants-On-Line,
Inc. is to develop and operate an online service providing health, safety and
environmental information to consultants and users of consulting services in the
environmental and occupational health and safety industries. The service will
provide users access to business news, Commerce Business Daily, NASA Tech
Briefs, and resumes of consultants. In addition, users will be able to access
databases including Corptech, Federal Research in Progress and Bioscan. The
service is expected to be launched during 1997.

EDITOR AND PUBLISHER'S AMPERSAND. In 1993, the Company and The Editor and
Publisher Company ("E&P") signed an agreement for the development and operation
of databases servicing the newspaper and advertising industries. The agreement
was terminated in 1996. Telescan retains the technology against which a user
will be able to utilize the ProSearch technology to identify demographic regions
and newspapers servicing those regions to facilitate the targeting of
advertising campaigns. The Company expects to use the technology in conjunction
with other parties in the advertising industry.

ENTREPRENEURS ONLINE. In 1993, the Company and Entrepreneurs Online, Inc.
("EOL") entered into an arrangement to develop and operate Entrepreneurs Online
network, an online database linking entrepreneurs and providers of services,
capital and other resources. In 1995, the service was launched and EOL was
acquired by the Company. In 1996, the Company granted a license to Interactive
Ventures, Ltd. ("IV") to use the EOL database in return for fixed payments and
royalty payments. Concurrently, Telescan licensed its search technology to IV
for application in the Direct Public Offerings field.

11
<PAGE>
FLYING SOLO. In September 1996, Telescan launched a website in conjunction with
Flying Solo(R), a weekly newspaper column providing comprehensive informational
services on the Internet about divorce and matters affecting the elderly. The
site is located at HTTP://WWW.FLYINGSOLO.COM.

HOLLYWOOD REPORTER ONLINE. Hollywood Reporter Online (THR Online(TM)), is a
joint effort between the Company and BPI, to develop and operate databases
serving the entertainment industry. It offers users access to the current and
archived issues of Hollywood Reporter magazine. In addition, the users have
access to film reviews and news articles relating to TV, film, and music, as
well as information on current events and industry developments. The Hollywood
Reporter Online service was launched in December 1996. It is located at
HTTP://HOLLYWOODREPORTER.COM.

ON-TV. In January 1997, the Company announced an alliance with View Call America
in which it will provide financial/investment content, research and analysis
tools for the home television-view Internet audience. On-TV will be available in
1997 through Mitsubishi's Diamond Web(TM) TV, Sega's Net Link and Boca
Research's Set-Top Device.

SPACEZONE. Spacezone was launched in 1996 by Telescan and Warner International
Communications Group, Inc. It is a free service providing features including
space-related news, history, entertainment and education. It provided live video
coverage of NASA's first space shuttle mission in 1997 through real-time video
and live audio. It is located at HTTP://SPACEZONE.COM.

OTHER

In addition to its online database services, the Company also performs software
design, development, and programming under contract for third parties and for
related parties. The Company also offers video training tapes, financial books,
and monthly newsletters in conjunction with its Telescan financial products.

The Company's online services employ databases that consist of information
typically obtained from public and private third-party sources, usually on a
non-exclusive basis. Therefore, the Company's business is dependent upon its
ability to obtain and maintain, on an ongoing basis, information for inclusion
in the Company's databases. Acquisition of databases typically involves the
payment by the Company of a one-time fee and/or royalties based on some
combination of user subscriptions and actual database usage. Information
suppliers typically license access to data on a yearly renewable basis, subject
to termination by either party upon 90 to 180 days notice. Government contracts
may often be terminated or renegotiated at the option of the government
entities. The Company also obtains information pursuant to non-exclusive
licenses from private sector information compilers, some of which currently are
or in the future may be direct or indirect competitors of the Company. There can
be no assurance that the Company will be able to renew its current contracts
with data sources, maintain comparable price levels for information acquired, or
negotiate additional contracts with data sources as necessary to maintain
existing products or introduce new products. Termination of the Company's
relationship with one or more of the Company's information suppliers could have
a material adverse effect on the Company's operations if the data became
available through one of the Company's competitors and if the Company was unable
to obtain comparable data through other sources. The Company considers continued
access to databases as a critical factor in the competitiveness of its existing
products and believes that future product development will depend on the
availability of data in specific markets targeted by the Company. However, the
Company does not believe at this time that the loss of any single source of data
would be detrimental to its business.

12
<PAGE>
MARKETING

The Company's online services are sold to customers for an initial licensing fee
followed by monthly charges under either a monthly fixed fee package or on a per
minute basis based upon actual online usage. Internet services are sold on fixed
fee plans which are differentiated by the data and reports that can be accessed.
To attract new subscribers for Telescan, CSN and KE, the Company typically
offers low cost initial trial subscriptions, the cost of which is credited
against the normal fee schedule if the customer continues to subscribe after the
trial period.

The Company's marketing objectives for its online and Internet services are to
increase the number of subscribers, to sell additional products to existing
subscribers and to increase average monthly online use per subscriber. The
channels for increasing the number of subscribers to Telescan Financial include
joint marketing agreements, trade shows and seminars, advertising and direct
sales and word-of-mouth.

The Company's primary market has historically been the sophisticated individual
investor. The Company has significantly increased its individual investor
subscriber base through advertising and marketing arrangements with major
discount brokerage firms including American Express, Fidelity Investments Retail
Services, Quick & Reilly, AccuTrade, and Charles Schwab & Co., Inc. These
marketing arrangements typically call for the brokerage firm to incorporate and
package the Telescan Financial software and a gateway to the Telescan database
into their software products, or to incorporate an application interface in
their software products that allows access to the Telescan database. Typically,
these third parties are responsible for their own marketing programs.

The Company actively seeks additional private labeling relationships for its
financial products. In addition, it pursues other opportunities to employ its
search engines in non-financial markets.

Telescan markets advertising space on Wall Street City(TM) and its other sites
and shares in advertising revenue marketed by affiliates.

Because of the breadth and cost effectiveness of the Company's financial online
systems, the Company targets users of competitors' financial analysis software
packages as a source of online revenue. The Company has an application interface
product facilitating the downloading of information from the Telescan database
to users of competitors' analysis software. The company has continued to
leverage the opportunity to tap the large data downloading market through
cooperative alliances with several major charting software publishers including
AIQ, Metastock, Omega, OmniPro, Indigo, and Nirvana.

MATERIAL CUSTOMERS

Revenue earned under the DOE Contract amounted to 3.3% and 15.1% of consolidated
revenue during the years ended December 31, 1996 and 1995, respectively. The DOE
Contract expired March 31, 1996. KE has been actively working to convert its
subsidized subscribers to paying customers and to expand its non-subsidized
subscriber base in order to minimize the impact of the contract expiration.

PRODUCT DEVELOPMENT

The Company has developed and acquired proprietary software technologies to make
its products easy to use and to achieve efficient searching of extensive
databases using simple, non-Boolean logic search queries. Consequently, the
Company believes that using its proprietary technologies it can deliver superior
online and Internet database services. The Company intends to employ its proven
software technologies in developing additional products serving new markets and
customers.

13
<PAGE>
Telescan's software development staff includes 45 staff programmers who develop
new products and provide maintenance support for existing products. During the
years ended December 31, 1996, 1995 and 1994, the Company spent approximately
$1,900,000, $1,600,000 and $1,200,000, respectively, for software development
activities, all of which was capitalized. All software development costs are
charged to expense until technological feasibility is established, after which
remaining software production costs are capitalized and amortized over periods
ranging from three to five years. The Company also continuously evaluates
opportunities to obtain new products through acquisition.

PROPRIETARY RIGHTS

The Company relies upon a combination of contract provisions and copyrights,
trademarks, and trade secret laws to protect its proprietary rights in its
products. The Company attempts to protect its trade secrets and other
proprietary information through software licenses, nondisclosure agreements with
product development partners, employees and consultants. Although the Company
intends to protect and defend its proprietary rights vigorously, there can be no
assurance that these measures will be successful.

With respect to software technologies which the Company has licensed to third
parties for use in specific applications, the Company has entered into licensing
agreements which are intended to protect the proprietary rights of the Company
in such technologies. The Company seeks to protect the source code of its
products as a trade secret and as an unpublished copyright work.

The Company has filed a patent application with the U.S. Patent and Trademark
Office for its new technology, code-named Sunflower and has filed patent
applications in certain foreign countries. The Company believes that its
products, trademarks and other proprietary rights do not infringe on the
proprietary rights of third parties, and the Company is not aware of any current
infringement claims from third parties. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future features or contents of services or that any
such assertion may not require the Company to enter into royalty arrangements or
result in litigation.

COMPUTER AND NETWORK OPERATIONS

The Company's data center computer system consists of commonly available PC
processors, disk storage devices and telecommunications equipment, operated by a
common operating system which is proprietary to the Company. The Company
typically screens and filters incoming data feeds from third parties, using
specific software routines, in order to detect errors and certain detectable
viruses.

The Company's data center is located at the Company's headquarters facility. The
data center has separate air conditioning units and the equipment room has a
raised floor. The power system includes power conditioning, backup battery, and
full "zero downtime" emergency generator support on site, which is supplied by
the facility owner. Data is regularly backed up and stored off-site, and certain
data is duplicated on separate storage devices within the data center. The
building in which the data center is located has off-hours card key access, card
key access to the Company's offices, separate card key access to the data center
and 24 hour on site security personnel. The Company believes that data center
system redundancy is afforded by the Company's ability to use commonly available
computer processors, storage devices, and communications equipment, including
the Company's non-data center computer systems, in its data center in case of
equipment failure or other emergency. The Company's telecommunications network
consists of the public packet switching networks provided by US Sprint, ADP
Autonet, and MCI. Through these networks, subscribers in hundreds of cities in
the U.S. and Canada can dial a local number to connect to the Company's online
services.

14
<PAGE>
The Company believes that its computer and communications hardware systems are
adequate for existing operations, the Company purchases additional hardware as
required in order to accommodate any significant increases in the customer base
for the Company's existing products and services, and to accommodate additional
products or services.

The Company continually upgrades its computers and peripheral hardware to take
advantage of technological advances. Further, the Company believes that future
hardware and software advances will serve to improve the performance of the
Company's systems. While the Company does not believe that it faces a material
risk due to technological changes, there can be no assurance that the Company's
existing technology will remain viable or that the Company will be able to
achieve technological advances that may be necessary in order for its technology
to remain viable.

COMPETITION

The Company competes with many companies, which operate proprietary and/or
online systems and Internet websites, many of which have significantly greater
financial, technical, and marketing resources than the Company. In addition, a
substantial number of new competitors are entering the online services and
Internet market as a result of the recent growth and the perceived future
opportunities in this market. The Company believes the principal competitive
factors in the online services market include system performance, product
differentiation, quality and quantity of content, user friendliness, price,
customer support and effective marketing techniques. The Company believes that
it competes effectively in these areas. Competitive pressures could result in
reduced market share, price reductions and increased spending on marketing and
product development, which could adversely affect the Company's financial
condition and operating results. However, the Company believes that its business
strategy of building marketing relationships with larger partners and expanding
the range of its online and Internet offerings by entering into alliances with
associations, publishers and other third parties may serve to lessen the impact
of future competitive pressures on the Company.

EMPLOYEES

As of December 31, 1996, the Company had 148 full-time employees, with 31
employed in sales and marketing; 32 in customer service; 17 in computer
operations; 45 in product development and maintenance; and 23 in general
management and administration. None of the Company's employees is represented by
a labor union, and the Company has never experienced a work stoppage.

GOVERNMENTAL REGULATION

The Company is not subject to direct regulation other than regulation generally
applicable to businesses. However, changes in the regulatory environment
relating to the telecommunications and media industries could have an effect on
the Company's business, including regulatory changes which directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional telephone and cable television companies. See
"Competition." In addition, although the Federal government research data
available through the Company's KE online database is intended to be
non-confidential, the Company could be liable if data later determined to be
confidential was disseminated by the Company through its database. The Company
cannot predict the impact, if any, future regulation may have on its business.

15
<PAGE>
ITEM 2. PROPERTIES

The Company's principal executive offices, as well as its principal marketing,
computer operations, and product development activities, are located in leased
facilities in Houston, Texas, consisting of a total of approximately 51,500
square feet. The Knowledge Express Data Systems, L.C. subsidiary maintains a
marketing and administrative office of approximately 7,400 square feet in
Berwyn, Pennsylvania, which is leased. The current aggregate monthly rental for
these facilities is approximately $ 62,000. The leases for Houston and Berwyn
facilities will expire in 2007 and 1999, respectively. The Company believes that
its facilities are adequate for its present needs and that suitable space will
be available to accommodate its anticipated future needs. The Company has a five
year option for 15,179 square feet of contiguous office space plus the right of
first refusal for an additional 20,103 square feet of contiguous office space.

ITEM 3. LEGAL PROCEEDINGS

In 1986, a stockholder of Telescan, Inc. (predecessor business to D.B.
Technology, Inc.) filed suit in the 269th District Court in Texas against the
Company, certain stockholders of the Company, and others. The suit sought to set
aside the 1986 merger of D.B. Technology and Telescan, Inc., money damages from
all defendants, and sums due under alleged promissory notes. The case went to
trial in October 1989 and judgment was rendered in favor of the defendants on a
directed verdict including an order for the plaintiff to pay certain court costs
and certain attorney's fees of Telescan, Inc. Subsequent to an appeal by the
stockholder in the Texas Court of Appeals 14th Judicial District, the appellate
court remanded the case to trial court. At the conclusion of presentation of
evidence, the case was submitted to the jury by means of questions in order to
determine issues of liability and damages. Based on a lack of evidence which
would impose liability upon Telescan, Inc., no questions were submitted which
asked the jury to determine whether or not the Company bears any liability to
any plaintiff. A hearing on pending matters including entry of Judgment, was
held April 10, 1995. At the hearing the court ruled that plaintiffs take nothing
other than the payment, with interest, of $40,000 in promissory notes in favor
of plaintiff Investa, Inc. and Hoggett which notes preceded the merger. The
defendants were awarded attorney's fees and court costs. The plaintiffs have
appealed and oral argument was made on June 25, 1996 before the Texas Court of
Appeals, 14th Judicial District. The court's decision is pending. Management
does not believe that any material adverse outcome is reasonably possible nor
probable and thus, no qualified disclosure as to a range of reasonable possible
loss or accrual in the financial statements of probable loss have been made.

During June 1996, the Company and a publisher verbally agreed to cancel their
agreement to develop and operate an online service. As of December 31, 1996, the
Company had capitalized $500,000 in software development and data costs related
to its development effort under the agreement which began August 1, 1993. The
Company has had discussions with other parties interested in developing such an
online system and currently believes that the asset's net realizable value is
not impaired.

From time to time the Company is involved in certain other legal actions arising
in the ordinary course of business. It is the opinion of management that such
litigation will be resolved without a material effect on the Company's financial
position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of 1996, there were no matters submitted to a vote of
the security holders, through solicitation of proxies or otherwise.

16
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's common stock trades on the NASDAQ Small-Cap Market tier of The
NASDAQ Stock Market under the symbol "TSCN." The following table sets forth, for
the periods indicated, the high and low closing bid prices for the common stock
as reported by the NASDAQ Small-Cap Market. The bid prices reflect inter-dealer
quotations, do not include retail markups, markdowns or commissions and do not
necessarily represent actual transactions.

Common Stock Prices
-----------------
High Low
------- -------
1995:
Quarter ended March 31 ... $ 6.25 $ 4.00
Quarter ended June 30 .... 5.87 4.37
Quarter ended September 30 7.25 5.75
Quarter ended December 31 8.75 5.75

1996:
Quarter ended March 31 ... $ 8.31 $ 6.50
Quarter ended June 30 .... 9.12 6.87
Quarter ended September 30 8.12 5.00
Quarter ended December 31 7.62 4.75

On March 24, 1997, the last closing price of the Company's common stock as
reported by the NASDAQ Small-Cap Market was $4.25. As of March 24, 1997, the
Company had approximately 300 stockholders of record.

DIVIDEND POLICY

The Company has never declared a cash dividend on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business, and therefore, does not anticipate paying any cash dividends in the
foreseeable future. The declaration of dividends, if any, in the future would be
subject to the discretion of the Board of Directors, which may consider factors
such as the Company's results of operations, financial condition, capital needs
and acquisition strategy, among others. See "Item 7 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".

17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below for the five-year
period ended December 31, 1996, have been derived from the audited historical
consolidated financial statements of the Company. The historical consolidated
financial data include the results of operations of acquired businesses from
their dates of acquisition. The selected data should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Company's consolidated financial statements and the notes
thereto.

<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
(in thousands, except per share data)

<S> <C> <C> <C> <C> <C>
Revenue ........................................................ $ 13,756 $ 13,989 $ 10,477 $ 6,950 $ 4,219
Cost of services and products .................................. 8,549 7,769 6,489 3,722 2,189
Marketing, general & administrative ............................ 8,403 7,143 6,425 3,265 2,177
Interest expense, net .......................................... 83 65 42 21 21
Minority interest in loss (income) of subsidiaries(1) .......... 345 (226) (152) 70 --
Equity in loss of joint venture (2) ............................ -- -- -- (43) (123)
-------- -------- -------- ------- -------
Net loss ....................................................... $ (2,934) $ (1,214) $ (2,631) $ (31) $ (291)
======== ======== ======== ======= =======
Net loss per common share ...................................... $ (0.28) $ (0.12) $ (0.28) $ (0.00) $ (0.05)
======== ======== ======== ======= =======
Weighted average common and
common equivalent shares
outstanding .................................................. 10,615 9,777 9,480 7,591 6,438
======== ======== ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
BALANCE SHEET DATA: DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ 454 $ 2,143 $ 1,369 5,174 $ 1,401
Total assets 11,466 10,859 8,317 10,047 4,202
Total long-term obligations 488 488 603 312 75
Total stockholders' equity 7,964 7,965 6,022 8,617 3,607
</TABLE>
- -------------------------------------------------
(1) Reflects minority interest in Knowledge Express Data Systems, L.C. in 1994
and 1993.

(2) Reflects recognition of income and losses of Knowledge Express Data Systems,
L.C., of which the Company is currently a 55.58% owner.

18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes, and "Item 6 - SELECTED
FINANCIAL DATA" included elsewhere in this Annual Report.

RESULTS OF OPERATIONS

OVERVIEW

Telescan provides innovative solutions for online technology, sophisticated data
retrieval tools and Internet services. The Company develops, markets, and
operates major online networks and Internet sites serving the financial,
publishing, entertainment and technology transfer industries. The Company's
products and services, which are based upon its proprietary online operating
system and user software, allow its customers to electronically access and
analyze information through their personal computer systems.

The Company's primary product lines are the (1) Telescan system of online and
Internet financial databases and software tools which allow sophisticated
investors to obtain financial news and information and to design a variety of
sophisticated searches and perform fundamental and technical analyses using
current and historical financial information on more than 220,000 equities,
indices and currencies; (2) Numerous non-financial third party online and
Internet services which are developed and operated via alliances with third
parties in the publishing, entertainment, and space industries and CSN, which
offers online computer sports games to golf and baseball enthusiasts; and (3)
KE, an online database system for the commercialization and transfer of
technology serving corporations, government agencies, universities, and research
institutions. The Company owns 55.58% of KE and acts under contract as the
exclusive system operator.

Revenue is generated in the form of online and Internet service fees, fees from
third parties, product sales, contract and advertising revenue. Between 1994 and
1996, the Company's revenues included a large DOE Contract which ended in March
1996. The Company has experienced a significant increase in other revenues over
the past three years. The higher revenue is primarily attributable to increases
in the Company's subscriber base and the expansion of private labeling
agreements. This growth, in turn, has resulted from an increase in the online
and Internet services market, the diversification of the industries in which the
Company offers products and the Company's continued investment in customer
acquisition through technology development and marketing.

The Company's online and Internet revenue is generated primarily from individual
subscribers paying annual subscription fees and recurring monthly usage fees.
The Company also derives a significant amount of its revenue from third parties
for providing private label versions of its data and search technology. In 1996,
the Company substantially expanded its private labeling arrangements under
agreements with such major corporations as American Express, Charles Schwab,
Fidelity Investments, NETCOM and Standard & Poor's. Telescan receives per user
fees, fees for providing "premium" services and/or reports, and development and
licensing fees from such third parties. Certain agreements guarantee minimum
monthly payments. For example, under one agreement signed in 1995, the Company
was guaranteed a minimum of $500,000 of online revenue within 12 months after
the software bundle was released. Some of these companies initiated significant
marketing programs in the fourth quarter of 1996 which are continuing. Telescan
expects to derive a substantial increase in revenue from these agreements in the
future.

The Company's online and Internet operating expenses primarily include
telecommunications costs, royalties and data costs, customer service expenses,
amortization of software development and amortization of capitalized data.

19
<PAGE>
Product revenue is primarily generated from the sale of online system software,
software and service enhancements, major product upgrades and related
educational and training products such as books and videotapes. The Company's
software products generally reflect a common base technology to which additional
features can be added to satisfy the needs of the more sophisticated user.
Accordingly, product revenue principally represents revenue from product
enhancements or major upgrades. During 1995, the first version of Telescan
Investor's Platform(R) for Windows software was released and generated a
significant increase in product revenue. In 1996, the Company had fewer product
releases, most significantly the release of ProSearch 5.0.

Product costs are variable in nature and include production, duplication,
royalties and distribution costs. Due to the variable nature of these costs,
increases or decreases in product revenue typically do not impact the gross
margin rate. The gross margin rate is more significantly affected by the mix of
in-house product sales versus the sale of products subject to royalties.
Consequently, in periods of lower relative sales of Telescan products, the gross
margin rate will be lower, as is the case when comparing 1996 margins to 1995
margins.

The Company's contract revenue from affiliates is generated from providing
contract services to affiliated companies which include developing, operating
and maintaining online database systems as well as providing general and
administrative services. KE revenue decreased in 1996 primarily due to the
expiration in March 1996 of the DOE Contract awarded to KE in April 1994. Under
the terms of the contract, the Company was responsible for the development,
marketing and operation of an online service enabling technology transfer among
universities, federal laboratories, and small to medium sized businesses. In
exchange, the DOE subsidized online services for up to 1,200 subscribers,
pursuant to which $452,000, and $2,114,000 of contract revenue and $156,000 and
$934,000 of gross margin was recognized by the Company during 1996 and 1995,
respectively. To counter the impact of the expiration of the Contract, KE has
been actively working to expand its subscriber base. To date KE has not
generated sufficient subscribers to offset operating costs, resulting in
operating losses. Management will continue to closely monitor the operating
results of KE, and will make modifications, if necessary, to optimize KE's
operating results. See Item 13 - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."

1996 COMPARED TO 1995

Total revenue decreased $233,000 from $13,989,000 for the year ended December
31, 1995, to $13,756,000 for the year ended December 31, 1996. Service revenue
decreased $123,000 or 1% from $11,196,000 for fiscal 1995 to $11,073,000 for
fiscal 1996 as increased revenue from online and Internet services, inclusive of
third party private label revenues were more than offset by the $1,662,000
decrease in revenue from the DOE Contract. Product revenue decreased $437,000,
or 18%, from $2,385,000 in 1995 to $1,948,000 in fiscal 1996. Product revenue
was higher in 1995 due to more releases in 1995 including the major release of
TIP for Windows during the year. This was partially offset by the release of
ProSearch 5.0 in 1996. Contract revenue earned from affiliates increased
$327,000 or 80% as Telebuild development activities increased significantly.

20
<PAGE>
For the year ended December 31, 1996, total cost of revenue increased from
$7,769,000 in fiscal 1995 to $8,549,000 in fiscal 1996, a $780,000, or 10%
increase. For the year ended December 31, 1996, the Company earned a gross
margin on its service revenue of $3,625,000 compared to $4,619,000 for the
comparable period of 1995. The gross margin as a percentage of service revenue
was 33% for the year ended December 31, 1996, as compared to 42% for 1995. The
increase in total costs and the decrease in the gross margin for service revenue
is primarily attributable to higher amortization of costs of $359,000,
principally associated with TIP and higher royalty and data costs of $600,000.

For the year ended December 31, 1996, the Company earned a gross margin on its
product revenue of $764,000 compared to $1,128,000 for the comparable period of
1995. Product gross margin as a percentage of product revenue decreased from 47%
to 39% reflecting a lower percentage of Company software sales to total product
sales in 1996 than in 1995.

Marketing expenses decreased 4% from $3,284,000 for the year ended December 31,
1995 to $3,166,000 for the year ended December 31, 1996.

General and administrative expenses increased $1,378,000, or 36%, from
$3,859,000 for the year ended December 31, 1995 to $5,237,000 for the year ended
December 31, 1996. The increase reflects $383,000 higher compensation expense,
an increase in KE costs of $338,000 attributable to a decrease in expense
absorbed by the DOE Contract, increased rent of $259,000, depreciation of
$168,000, consulting fees of $153,000 and legal fees of $138,000.

The net loss for 1996 was $2,934,000, or $0.28 per share versus a loss of
$1,214,000, or $0.12 per share in 1995. Summarizing the above, the increase in
the net loss resulted from higher operating costs on slightly lower revenues.

1995 COMPARED TO 1994

Total revenue increased $3,512,000, or 34%, from $10,477,000 for the year ended
December 31, 1994, to $13,989,000 for the year ended December 31, 1995. Service
revenue increased $3,041,000, or 37%, from $8,155,000 for the year ended
December 31, 1994 to $11,196,000 for the year ended December 31, 1995, primarily
due to continued growth in the number of online customers. Product revenue
increased $606,000, or 34%, from $1,779,000 in 1994 to $2,385,000 in fiscal
1995, primarily due to the 1995 release of Telescan Investor's Platform(R) for
Windows. Contract and license revenue increased $635,000, or 30%, from
$2,099,000 to $2,734,000, primarily due to the DOE Contract, which commenced
April 1, 1994 and ended March 31, 1996. A $200,000 license fee was earned
pursuant to an agreement with a major financial services institution, whereby
the Company's financial software would be included in a new software bundle
released during 1996.

For the year ended December 31, 1995, total cost of revenue increased from
$6,489,000 in fiscal 1994 to $7,769,000 in fiscal 1995, a $1,280,000, or 20%,
increase. This increase is primarily attributable to the increase in revenue
discussed above. As a percentage of total revenue, cost of revenue decreased
from 62% to 56% primarily due to the higher margin TIP software released in 1995
coupled with the below cost pricing of the 1994 Analyzer sales.

21
<PAGE>
For the year ended December 31, 1995, the Company earned a gross margin on its
service revenue of $4,619,000 compared to $3,228,000 for the comparable period
of 1994. Gross margin as a percentage of service revenue remained relatively
constant at 42% and 40% for the years ended December 31, 1995 and 1994.

For the year ended December 31, 1995, the Company earned a gross margin on its
product revenue of $1,128,000 compared to $175,000 for the comparable period of
1994. Product gross margin as a percentage of product revenue increased from 10%
to 47% primarily due to the higher margin TIP software released in 1995 coupled
with the below cost pricing of the 1994 Analyzer sales.

Marketing expenses increased 4% from $3,169,000 for the year ended December 31,
1994 to $3,284,000 for the year ended December 31, 1995 primarily as a result of
the Company's continuing commitment to customer acquisition. The increase
includes an additional $213,000 in marketing personnel salaries and $118,000 of
additional commission expense directly related to the 34% increase in product
sales discussed above. These increases were offset by a decrease in advertising
and sales promotion expenses of $342,000, which is a result of the postponement
of major 1995 advertising activities until the release of TIP at the end of the
second quarter.

General and administrative expenses increased 19% from $3,256,000 for the year
ended December 31, 1994 to $3,859,000 for the year ended December 31, 1995,
primarily due to increased salary expense of approximately $394,000 and
increased depreciation and amortization expense of approximately $168,000. The
net loss for the year was $1,214,000.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, the Company had cash and cash equivalents aggregating
$792,000, which represents an $1,004,000 decrease from the prior year. Net cash
used by operating activities was $625,000 for the year ended December 31, 1996
compared to cash provided by operations of $551,000 for the year ended December
31, 1995. This $1,176,000 decrease in cash provided by operations was primarily
due to higher losses for 1996, adjusted for non-cash items, including
$2,173,0000 of depreciation and amortization during 1996.

The Company's primary capital needs are for (1) the continued investment in
technology through its software development activities, (2) the purchase of
computers and communications equipment and (3) the purchase of capitalized data.
During the year ended December 31, 1996, the Company invested $1,873,000 in
software development costs and acquired property and equipment totaling
$1,217,000 (including $452,000 of property and equipment financed by debt or
long-term capital leases), and acquired data amounting to $139,000. The Company
estimates that it may invest an additional $1 million in capital expenditures
over the next twelve months.

The Company believes that the existing cash on hand, cash generated from
expected improvements in operations, proceeds from long term capital leasing and
borrowings will be adequate to fund its working capital and other cash
requirements over the next twelve months. The Company believes that in the event
of a shortfall it would be able to sell additional shares of common stock
sufficient to provide adequate funds. The Company has no current plans to sell
additional shares.

TRANSTERRA TRANSACTION. In June 1995, the Company entered into a Stock Purchase
Agreement with TransTerra Company ("TransTerra"), whereby TransTerra agreed to
purchase $5 million of restricted common stock in four equal installments over a
nine month period. The number of shares of common stock issued for each
installment was calculated based upon the average market price of the common
stock over the preceding quarter. In connection with this agreement, the Company
granted certain registration rights to TransTerra. During 1995, pursuant to the
terms of this agreement, 427,998 shares of restricted common stock were issued
for total consideration of $2.5 million. An additional 173,459 shares were
issued in January 1996 in exchange

22
<PAGE>
for the third installment of $1,250,000. In March 1996, 168,337 shares were
issued for the final installment of $1,249,000.

Aggregate revenue from the Company's financial operations accounted for
approximately 81% and 74% of the Company's total revenue for the year ended
December 31, 1996 and 1995, respectively. A downturn in the equity markets could
cause a reduction in this revenue, which could have an adverse effect on the
Company's financial position and results of operations. However, the Company
believes that the effect of such adverse market conditions would be lessened by
alliances with third parties to develop and operate online databases and
Internet sites outside the Company's primary market.

SEASONALITY

The Company does not believe that seasonality has a discernible effect on the
Company's aggregate results of operations, which is influenced by an array of
other diverse factors, including general economic and stock market conditions,
new product releases, and the existence or absence of significant contracts.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are filed pursuant to Item 14 (a)1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

23
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

The Company's directors and executive officers are as follows:

<TABLE>
<CAPTION>
Name Age Position
------------------------ -------- --------------------------------------------------
<S> <C> <C>
David L. Brown 56 Director, Chairman and Chief Executive Officer
Richard K. Carlin 41 Director, Vice Chairman and Chief Technology
Officer
Luiz V. Alvim 66 Executive Vice President and Chief Operating
Officer
Roger C. Wadsworth 49 Director and Senior Vice President
Ronald Warren 50 Chief Financial Officer
Joseph F. Frantz II 33 Vice President
Daniel C. Hollander 40 Vice President
Danny E. Hoover 49 Vice President
William T. Melton 60 Vice President
Neil S. Waldman 40 Vice President
G. Robert Friedman 52 Director
Ronald W. Hart, Ph.D. 55 Director
Burt H. Keenan 58 Director
Russell I. Pillar 31 Director
William D. Savoy 32 Director
Stephen C. Wood 45 Director
</TABLE>
Each director holds office until the next annual meeting of stockholders or
until his successor has been elected and qualified. The Compensation Committee
and Audit Committee of the Board of Directors is composed of Messrs, Hart,
Friedman, Keenan, Pillar, Savoy, and Wood.

David L. Brown, Chairman of the Board and CEO, has served as a director of the
Company since 1989. Mr. Brown is co-author of CYBER-INVESTING: CRACKING WALL
STREET WITH YOUR PERSONAL COMPUTER, a book on computerized investing, published
by John Wiley & Sons, Inc. From 1978 to 1986, Mr. Brown was president and, from
1978 to 1986 and from 1992 to 1993, a director of Time Energy Systems, Inc., a
public company, which changed its name to ACR Group, Inc. He has served as
chairman of the U.S. Science and Technology Commission for the Emerging Leaders
Summit Conference series with the USSR. For the past nine years, he has served
as a director of the Alliance for Aging Research, based in Washington, D.C. He
has also served as chairman of the New Millennium Committee of the Planetary
Society, a group based in Pasadena, California, which supports space
exploration. He has served as chairman of the Advisory Board of the Southwest
Council of Public CEOs and on the boards of several banks and financial
institutions. Mr. Brown began his career in the space program at NASA, where he
headed the team of engineers who designed the landing gear for the first lunar
module. Mr. Brown holds a B.S. degree in mechanical engineering from the
University of Pittsburgh and an M.B.A. from the University of Houston.

24
<PAGE>
Dr. Richard K. Carlin, Vice Chairman of the Board and Chief Technology Officer,
was one of the founders of Telescan and has served as a director of the Company
since 1989. From 1988 to April 1990, Dr. Carlin served as the director of
Technology Information Center, a subsidiary of Maxwell Communications, where he
managed the development and maintenance of a technology transfer online
database. From 1983 to 1988, he was with D.B. Technology, Inc., the predecessor
to the Company. From 1981 to 1983, Dr. Carlin was assistant professor at
Rockefeller University. Dr. Carlin holds a B.S. degree in biophysical sciences
from the University of Houston and a Ph.D. in biochemistry, also from the
University of Houston.

Luiz V. Alvim was appointed Chief Operating Officer in May 1996. He was named
Executive Vice President and "Acting" Chief Operating Officer of Telescan in
March 1996, after having served as the Company's Director of Financial Research
and Chairman of the International Committee since 1994. Mr. Alvim has spent most
of his career as an executive in the banking industry. From 1953 until 1977, Mr.
Alvim was the Director of Special Operations at A. Schulman, Inc. From 1977
through 1980, he served as Vice President and General Manager of Blackwell
Plastics, Inc., and from 1980 through 1987, Mr. Alvim served as President of
Intergulf, Inc. During 1987, Mr. Alvim joined Telescan as the Special Assistant
to the CEO where he served until 1988 when he joined PanAtlantica SA. as
Executive Vice President and Chief Operating Officer. Mr. Alvim returned to
Telescan during 1994. Mr. Alvim holds a Masters degree in Civil Engineering from
the University of Porto in Portugal.

Roger C. Wadsworth, Senior Vice President, has served as a director since 1989.
From 1988 to 1990, Mr. Wadsworth served as President of the Company. From 1983
to 1988, Mr. Wadsworth was employed as vice-president of Information Management
Services, Inc., in Houston, Texas, where he provided management services to
investment vehicles such as limited partnerships and joint ventures. From 1979
to 1983 he served as co-owner of D. Russell Smith Associates, a restaurant and
tenant finish general contractor. Mr. Wadsworth holds a B.B.A. from the
University of Houston.

Ronald Warren was appointed Chief Financial Officer of Telescan in October 1996.
From 1986 to 1996, Mr. Warren served as Vice President and Chief Financial
Officer of CogniSeis Development, Inc., a multinational company that developed
and sold computer software, hardware and systems to a worldwide customer base.
From 1975 to 1985 Mr. Warren held various financial management positions at
Sonat Offshore Drilling, Inc., a large international drilling contractor,
including Treasurer and Controller. Mr. Warren holds M.B.A. and B.A. degrees
from Hofstra University and is a Certified Public Accountant.

Joseph F. Frantz II, Vice President of the Company since May 1995, previously
held the positions of Computer Operations Manager, End-User Software Product
Manager and Senior Programmer. Mr. Frantz joined the Company in 1987 as a
Technical Support Representative. Mr. Frantz holds a B.S. in Applied Mathematics
from the University of Houston and a M.S. in Management Computing and Systems
from Houston Baptist University.

Daniel C. Hollander was appointed Vice President of Retail Sales in November
1996. Prior to the appointment, he held the position of Director of Client
Services. Before joining the Company in March 1995, Mr. Hollander served as
Regional Technology Manager for Ernst & Young and Manager of Information Systems
Support for Ericsson Radio Systems. Mr. Hollander holds a B.S. in Civil
Engineering from Ohio State University.

Danny E. Hoover, Vice President of the Company since September 1996, previously
held the positions of Manager of Development, Manager of Windows Development,
and Senior Windows Programmer. Before joining the Company in 1992, Mr. Hoover
was employed as Operations Manager for Praxis Incorporated, a supervisory
control automation company in Houston, Texas. Mr. Hoover holds a B.S. in
Electrical Engineering from Texas A&M University.

25
<PAGE>
William T. Melton, Vice President of the Company since January 1995, previously
held the position of Manager of Project Development. Before joining the Company
in October 1993, Mr. Melton served as a Project Manager with International
Business Machines, Inc., having previously served in other sales positions as a
30-year employee of that company. Mr. Melton holds both a B.S. in Business
Administration and an M.B.A. from the University of Arkansas.

Neil S. Waldman, Vice President of the Company since May 1995, previously held
the position of Director of Institutional Sales. Before joining the Company in
1993, Mr. Waldman was employed as Manager Business Development for IDD
Information Services, Inc. where he was instrumental in the introduction of
three new products for the investment management and brokerage communities. From
1989 to 1991 Mr. Waldman served as Vice President of Sales and Marketing for
Vista Computer, Inc. where he directed sales and marketing for the developer of
integrated software solution targeted at international commodities traders. Mr.
Waldman holds a B.S. in Business Administration from Northeastern University.

G. Robert Friedman was appointed as a director of the Company in April 1996. He
has practiced law since his admission to the State Bar of Texas in 1969 and is
board certified in Personal Injury and Civil Trial Law by the Texas Board of
Legal Specialization. Mr. Friedman is a founding partner of Friedman & Gold, a
civil trial practice, personal injury, products liability, premises liability,
negligence, maritime and medical malpractice firm. Mr. Friedman is a member of
the Board of Directors of the Texas Trial Lawyers Association, a member of the
Board of Governors of The Association of Trial Lawyers of America, a Faculty
Member of The Association of Trial Lawyers of America National College of
Advocacy and current President of the Southern Trial Lawyers Association. Mr.
Friedman has delivered numerous lectures and seminars and is widely published in
his field of legal specialization. Mr. Friedman holds a B.A. from the University
of Houston and a J.D., with honors, from the University of Texas.

Dr. Ronald W. Hart has been a Distinguished Scientist in Residence for the Food
and Drug Administration, Public Health Service, since 1992. From 1980 to 1992,
he was the Director for the National Center for Toxicological Research, Food and
Drug Administration, Public Health Service, Department of Health and Human
Services in Jefferson, Arkansas. From 1987 to 1993, Dr. Hart served on the Board
of Directors of First Commercial Bank Corporation of Little Rock, Arkansas. Dr.
Hart has received over 30 awards and recognition for his research and
administrative accomplishments and is an internationally recognized scientist
and science manager holding the position of distinguished professor at a number
of universities and colleges, including Cairo University, Cairo, Egypt; Gangzou
University, Gangzou, China; Moscow State University, Moscow, Russia. Dr. Hart
also serves as a professor at the University of Arkansas for Medical Sciences
and the University of Tennessee Center for Health Sciences. Dr. Hart has
published over 500 manuscripts on various topics, including research management
and administration and is a fellow of the American College of Toxicology,
American Association for the Advancement of Science, and the Gerontology Society
of America. Dr. Hart received his B.A. in 1967 from Syracuse University, an M.S.
in 1970, and a Ph.D. in 1971 at the University of Illinois, Urbana. Dr. Hart has
been a director since 1990.

Burt H. Keenan has been an associate with Chaffe & Associates, Inc., an
investment banking firm located in New Orleans, Louisiana, since 1987. Prior to
1987, Mr. Keenan was the Chairman and Chief Executive Officer of Offshore
Logistics, Inc., a publicly held oil and gas service company operating a fleet
of marine service vessels and helicopters worldwide. Mr. Keenan received his
bachelor and masters degrees in business administration from Tulane University.
Mr. Keenan has been a director since 1989.

26
<PAGE>
Russell I. Pillar was appointed to the Board of Directors in February 1997.
Since October 1991, Mr. Pillar has served as the Managing Partner of Critical
Mass, a private investment partnership that provides capital, management, and
strategic planning advisory services to companies in the information,
technology, communications, and new media entertainment. Mr. Pillar served as
the President, Chief Executive Officer and Director of Precision Systems, Inc.
from December 1993 through October 1996. Mr. Pillar is part of the investor
group which recently bought Prodigy, Inc. from IBM and Sears. He is a director
of Prodigy, Inc., Paracel, Inc., Project X, Inc. and Summa Four. Mr. Pillar
graduated Phi Beta Kappa, cum laude from Brown University with an A.B. in East
Asian Studies where he was a Japan Airlines International Scholar and a Harold
T. Wilson Award winner. He was a national finalist in the Rhodes Scholarship
Competition and served as an International Scholarship Fellow at Keio
University, Tokyo, Japan, where he concentrated in comparative economics,
government, and culture.

William D. Savoy currently serves as Vice President of Vulcan Ventures
Incorporated, a venture capital fund controlled by Paul G. Allen, co-founder of
Microsoft Corporation. Vulcan is a significant stockholder of the Company. From
1987 until November 1990, Mr. Savoy was employed by Layered, Inc., a company
controlled by Mr. Allen, and became its President in 1988. Mr. Savoy has served
as President for Vulcan Northwest Inc., a company wholly-owned by Mr. Allen,
from November 1990 until the present. He also represents Mr. Allen in a wide
variety of other personal financial transactions. Mr. Savoy holds a B.S. in
Computer Science, Accounting and Finance from Atlantic Union College. Mr. Savoy
was appointed as a director of the Company in March 1993.

Stephen C. Wood is currently President and Chief Executive Officer of Wireless
Services Corporation based in Bellevue, Washington. Until May, 1996, Mr. Wood
was President and CEO of Notable Technologies, Inc. From 1993 through 1994, Mr.
Wood served as Vice President of Information Broadcasting for McCaw Development
Corporation, located in Kirkland, Washington. Until February 1993, he was
President of Starwave Corporation, a company he formed in 1991 with Microsoft
Corporation co-founder Paul G. Allen to develop and market data and information
products. From 1986 through 1991, Mr. Wood served in several executive positions
at Asymetrix Corporation, a software development and marketing firm founded by
Paul G. Allen. From 1980 until 1985, Mr. Wood was in charge of building a
microcomputer software development organization for Datapoint Corporation in
Austin, Texas, after serving in Research & Development and marketing positions.
Mr. Wood began his career in 1976 when he became the sixth employee of Microsoft
Corporation, where he was General Manager from 1977 to 1980. Mr. Wood holds a
B.S. in Computer Engineering from Case Western Reserve University and an M.S. in
Electrical Engineering from Stanford University. Mr. Wood is a member of the
Board of Directors of CyberAction Limited, a Bermuda-based company that markets
online services internationally, including services licensed from Telescan.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item appears in the section entitled "Executive
Compensation" in the Company's Proxy Statement relating to the 1997 Annual
Meeting of Shareholders, which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item appears in the section entitled "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement relating to the 1997 Annual Meeting of Shareholders, which information
is incorporated herein by reference.

27
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item appears in the section entitled "Certain
Relationships and Related Transactions" in the Company's Proxy Statement
relating to the 1997 Annual Meeting of Shareholders, which information is
incorporated herein by reference.

28
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report:
<TABLE>
<CAPTION>
PAGE
1. FINANCIAL STATEMENTS. ----
<S> <C>
Independent Auditor's Report................................................................ 34
Consolidated Balance Sheets as of December 31, 1996 and 1995................................ 35
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994........................................................ 36
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994........................................................ 37
Consolidated Statements of Cash Flows for the years ended
December 31,1996, 1995 and 1994......................................................... 38
Notes to Consolidated Financial Statements................................................. 39

2. FINANCIAL STATEMENT SCHEDULES.
Independent Auditor's Report on Schedule.................................................... 50
Schedule I - Valuation and Qualifying Accounts.............................................. 51
</TABLE>

All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or notes thereto.

3. EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 ** Restated Certificate of Incorporation of Registrant. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).

3.2 ** Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant. (Incorporated by reference to the Company's Form S-1
dated September 14, 1993 (Registration No. 33-52182)).

3.3 ** By-laws of the Registrant. (Incorporated by reference to the Company's
Form S-1 dated September 14, 1993 (Registration No. 33-52182)).

4.1 ** See Exhibits 3.1 through 3.4 for provisions of the Certificate of
Incorporation and By-laws of the Registrant defining rights of holders
of Common Stock of the Registrant. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).

4.2 ** Asset Purchase Agreement dated June 30, 1990, between TIC Software,
Inc. and the Registrant which sets forth certain registration rights of
TIC Software, Inc. (Incorporated by reference to the Company's Form S-1
dated September 14, 1993 (Registration No. 33-52182)).

29
<PAGE>
4.3 ** Exhibits to Asset Purchase Agreement dated June 30, 1990, between
TIC Software, Inc. and the Registrant which set forth certain
registration rights of TIC Software, Inc. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).

4.4 ** Assignment of Agreement between Jacob Sobotka, Marvin Deuell,
Raymond C. Wicker and the Registrant which sets forth certain
registration rights of those parties, effective as of January 1, 1992.
(Incorporated by reference to the Company's Form S-1 dated September
14, 1993 (Registration No. 33-52182)).

4.5 ** Assignment of General Partnership interest between New World
Technologies, a Texas general partnership, and the Registrant which
sets forth certain registration rights effective as of January 1, 1992.
(Incorporated by reference to the Company's Form S-1 dated September
14, 1993 (Registration No. 33-52182)).

4.6 ** Registration Rights Agreement between Vulcan Ventures Incorporated
and the Registrant dated May 20, 1992. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).

4.7 ** Form of Redeemable Warrant Certificate issued by the Registrant to
Vulcan Ventures Incorporated to purchase 600,000 shares of Common Stock
of the Registrant at $3.25 per share dated May 20, 1992. (Incorporated
by reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).

4.8 ** Form of Registration Rights Agreement between Sanders Morris Mundy Inc.
and the Registrant dated May 20, 1992. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).

4.9 ** Form of Registration Rights Agreement between the Registrant and 47
private investors dated August 5, 1992. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).

4.10 ** Form of Redeemable Warrant Certificate issued by the Registrant to
47 private investors to purchase, in the aggregate, 1,200,000 shares of
Common Stock of the Registrant at $3.25 per share dated August 5, 1992.
(Incorporated by reference to the Company's Form S-1 dated September
14, 1993 (Registration No. 33-52182)).

4.11 ** Form of Registration Rights Agreement between the Registrant and
Sanders Morris Mundy Inc. dated August 5, 1992. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).

4.12 ** Form of Warrant Certificate issued by the Registrant to Sanders Morris
Mundy Inc. to purchase 120,000 shares of Common Stock of the Registrant
at $1.75 per share dated August 5, 1992. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).

4.13 ** Form of Warrant Certificate issued by the Registrant to Sanders Morris
Mundy Inc. to purchase 120,000 shares of Common Stock of the Registrant
at $3.25 per share dated August 5, 1992. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).

30
<PAGE>
4.14 ** Form of Registration Rights Agreement between the Registrant and G.
Robert Friedman dated May 24, 1990. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).

4.15 ** Registration Rights Agreement between TransTerra Company and the
Registrant dated June 28, 1995. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995.)

10.1 ** Amended Stock Option Plan. Incorporated by reference to Exhibit 4.1 to
the Company's Post-Effective Amendment No. 1 to Form S-8 (File No.
33-63172) as filed with the Commission on February 2, 1994. (1)

10.2 ** 1995 Stock Option Plan. (Incorporated by reference to Exhibit 99.1 to
the Company's Registration Statement on Form S-8 (File No. 33-94514)).
(1)

10.3 ** Regulations of Telescan (TRC), L.C. effective January 1, 1992 by and
between the Registrant and The Radnor-Houston Joint Venture.
(Incorporated by reference to the Company's Form S-1 dated September
14, 1993 (Registration No. 33-52182)).

10.4 ** First Amendment to Regulations of Knowledge Express, L.C. (formally now
Telescan (TRC), L.C.) entered into effective July 23, 1992, by and
between the Registrant and The Radnor-Houston Joint Venture.
(Incorporated by reference to Amendment No. 1 to the Company's Form S-1
dated January 8, 1993).

10.5 ** Regulations of Telebuild, L.C. entered into effective July 31, 1992, by
and among the Registrant, JST Technology Center, Inc. and Friedman
Interests, Inc. (Incorporated by reference to Amendment No. 2 to the
Company's Form S-1 dated February 1, 1993).

10.6 ** Employment Agreement by and between the Company and David L. Brown
dated March 10, 1994. (Incorporated by reference to Post-Effective
Amendment No. 1 to the Company's Form S-1 dated August 11, 1994). (1)

10.7 ** Stock Purchase Agreement between the Company and TransTerra Company
dated June 28, 1995. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1995.)

10.8 ** Office Lease Agreement between the Registrant and Chevron U.S.A., Inc.
dated November 8, 1995. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the annual period ending December 31,
1995)

21 * Subsidiaries of the Registrant.

23 * Consent of Independent Public Accountants.

27 * Financial Data Schedule.
- --------------
* Indicates documents filed herewith.
** Indicates documents incorporated by reference from the prior filing
indicated.
(1) Management contracts or compensation plans or arrangements.

31
<PAGE>
(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the last quarter of fiscal 1996

32
<PAGE>
SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF HOUSTON, STATE OF
TEXAS, ON MARCH 28, 1997.

TELESCAN, INC.

BY: /S/ DAVID L. BROWN
David L. Brown,
Chief Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE
INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ DAVID L. BROWN Chairman of the Board, Chief Executive March 28, 1997
David L. Brown Officer and Director (Principal Executive
Officer)

/S/ DR. RICHARD K. CARLIN Vice Chairman of the Board, March 28, 1997
Dr. Richard K. Carlin Chief Technology Officer

/S/ RONALD WARREN Chief Financial Officer (Principal March 28, 1997
Ronald Warren Financial Officer and Principal
Accounting Officer)

/S/ ROGER C. WADSWORTH Senior Vice President and Director March 28, 1997
Roger C. Wadsworth

/S/ G. ROBERT FRIEDMAN Director March 28, 1997
G. Robert Friedman

/S/ DR. RONALD W. HART Director March 28, 1997
Dr. Ronald W. Hart

/S/ BURT H. KEENAN Director March 28, 1997
Burt H. Keenan

/S/ RUSSELL I. PILLAR Director March 28, 1997
Russell I. Pillar

/S/ WILLIAM D. SAVOY Director March 28, 1997
William D. Savoy

/S/ STEPHEN C. WOOD Director March 28, 1997
Stephen C. Wood
</TABLE>
33
<PAGE>
INDEPENDENT AUDITOR'S REPORT

Board of Directors and Stockholders
Telescan Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of Telescan, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telescan, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and cash flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted accounting principles.

HEIN + ASSOCIATES LLP
HOUSTON, TEXAS
FEBRUARY 14, 1997

34
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

DECEMBER 31,
--------------
1996 1995
---- ----
ASSETS

CURRENT ASSETS:
Cash and cash equivalents ........................... $ 792 $ 1,796
Accounts receivable, net of allowance
of $104 and $80, respectively ....................... 1,616 1,265
Receivable from affiliates .......................... 342 311
Prepaid expenses .................................... 369 416
Inventory ........................................... 107 190
Other current assets ................................ 218 201
-------- --------
TOTAL CURRENT ASSETS ........................... 3,444 4,179

Property and equipment, net of
accumulated of $2,469 and $1,682,
respectively ........................................ 2,626 2,260
Software development costs, net ..................... 4,182 3,173
Software technology rights, net ..................... 246 76
Capitalized data costs, net ......................... 656 826
Other assets ........................................ 312 345
======== ========
TOTAL ASSETS ................................... $ 11,466 10,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable .................................... $ 1,987 $ 1,463
Accrued liabilities ................................. 446 221
Current portion of long-term debt
and capital lease obligations ....................... 420 315
Amounts due to stockholders and
affiliates .......................................... 137 37
-------- --------
TOTAL CURRENT LIABILITIES ..................... 2,990 2,036

Long-term debt ......................................... 237 175
Capital lease obligations .............................. 251 313

Minority interest in subsidiary ........................ 24 370
Commitments and contingencies (Notes 5 and 9) .......... -- --

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
10,000,000 shares
authorized; none issued ............................ -- --
Common stock, $.01 par value; 15,000,000
shares authorized; 10,733,114 and
10,242,506 shares issued and outstanding
in 1996 and 1995, respectively ..................... 107 102
Additional paid-in capital ......................... 17,385 14,457
Accumulated deficit ................................ (9,528) (6,594)

TOTAL STOCKHOLDERS' EQUITY .................... 7,964 7,965
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 11,466 10,859
======== ========

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

35
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ---------- -----------
Revenue:
Service $ 11,073 $ 11,196 $ 8,155
Products 1,948 2,385 1,779
Contract revenue earned from
affiliates 735 408 543
--------- --------- ---------
Total revenue 13,756 13,989 10,477
---------- ---------- -----------
Costs and expenses:
Cost of service 7,365 6,512 4,885
Cost of revenue - products 1,184 1,257 1,604
Marketing expenses 3,166 3,284 3,169
General and administrative expenses 5,237 3,859 3,256
Interest expense, net 83 65 42
---------- ---------- -----------
Total costs and expenses 17,035 14,977 12,956
---------- ---------- -----------
Loss before minority interest in loss
(income) of subsidiary (3,279) (988) (2,479)
Minority interest in loss (income) of
subsidiary 345 (226) (152)
=========== ========== ===========
Net loss $ (2,934) $ (1,214) $ (2,631)
=========== ========== ===========
Net loss per common share $ (0.28) $ (0.12) $ (0.28)
=========== ========== ===========
Weighted average common and common
equivalent shares outstanding 10,615 9,777 9,472
=========== ========= ==========

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

36
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID - IN ACCUMULATED STOCKHOLDERS'
---------------------
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1994 ........................ 9,445 $ 94 $ 11,272 $(2,749) $ 8,617
Issuances of common stock
under stock option plan .......................... 55 1 90 -- 91

Stock issuance costs ............................. -- -- (55) -- (55)
Net loss ......................................... -- -- -- (2,631) (2,631)

BALANCE - DECEMBER 31, 1994 ...................... 9,500 95 11,307 (5,380) 6,022
Issuances of common stock
under stock option plan .......................... 280 3 618 -- 621
Issuance of common stock
for acquired business ............................ 44 -- 232 -- 232
Other issuances of
common stock ..................................... 428 4 2,355 -- 2,359

Other ............................................ (10) -- (55) -- (55)
Net loss ......................................... -- -- -- (1,214) (1,214)
------- ---- -------- ------- -------
BALANCE - DECEMBER 31, 1995 ...................... 10,242 102 14,457 (6,594) 7,965
Issuances of common stock
under stock option plan .......................... 75 1 152 -- 153
Other issuance of common
stock ............................................ 416 4 2,776 2,743
Net loss ......................................... -- -- -- (2,934) (2,934)
======= ==== ======== ======= =======
BALANCE - DECEMBER 31, 1996 ...................... 10,733 $107 $ 17,385 $(9,528) $ 7,964
======= ==== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.

37
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
( IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................... $(2,934) $(1,214) $(2,631)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Minority interest in (loss) income of
subsidiary ........................................................ (345) 226 152
Depreciation and amortization ..................................... 2,173 1,552 1,153
Provision for doubtful accounts ................................... 68 106 67
Changes in assets and liabilities, net of
effects of acquired businesses:
Receivables and advances .......................................... (449) (409) (469)
Other current assets .............................................. 113 (162) (105)
Accounts payable .................................................. 524 382 156
Other current liabilities ......................................... 225 70 115
------- ------- -------
Net cash provided (used) by
operating activities ............................................. (625) 551 (1,562)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net ........................... (765) (450) (693)
Additions to software development costs ............................ (1,873) (1,566) (1,245)
Additions to capitalized data costs ................................ (139) (262) (301)
Other .............................................................. (39) (22) (21)
------- ------- -------
Net cash used by investing activities ............................ (2,816) (2,300) (2,260)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuances of common stock ............................ 2,683 2,925 36
Payments on notes payable and capital
lease obligations .................................................. (346) (292) (104)
Advance from affiliates ............................................ 100 -- --
Other .............................................................. -- (44) --

Net cash provided (used) by
financing activities ............................................... 2,437 2,589 (68)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................................ (1,004) 840 (3,890)

CASH AND CASH EQUIVALENTS:
Beginning of year .................................................. 1,796 956 4,846
======= ======= =======
End of year ........................................................ $ 792 $ 1,796 $ 956
======= ======= =======
</TABLE>

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

38
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Telescan, Inc., and its majority owned subsidiaries ("Telescan" or
the "Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company's consolidated statements of operations
include the results of Knowledge Express Data Systems, L.C. ("KE").

NATURE OF BUSINESS. The Company is an industry leader in providing
innovative solutions for online technology, data retrieval and Internet
services. The Company develops, markets, and operates major online networks
serving the financial, publishing, home design and building, entertainment and
technology transfer industries. The Company's products and services, which are
based upon its proprietary online operating system and user software, allow its
customers to electronically access and analyze information through their
personal computer systems.

The Company's primary products are the Telescan system of online and
Internet financial databases and software tools, which offer current and
historical financial news and information as well as search and analytical tools
provided directly by the Company and under private label arrangements with third
parties; Computer Sports Network ("CSN"), which offers online computer sports
games; third party online and Internet services which are developed and operated
via alliances with third parties in the publishing, entertainment, and home
design and building industries; and KE, which is an online database system for
the commercialization and transfer of technology serving corporations,
government agencies, universities, and research institutions. The Company owns
55.58% of KE and acts under contract as the exclusive system operator.

SIGNIFICANT RISKS AND UNCERTAINTIES. 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, the disclosed amounts of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.

CONCENTRATION OF CREDIT RISK. The Company markets its products to a
diverse customer base, and as such does not have any significant concentrations
of credit risk. The Company maintains deposits in banks which may exceed the
amount of federal deposit insurance available. Management periodically assesses
the financial condition of the institutions and believes that any possible
deposit loss is minimal.

INVENTORIES. Inventories are carried at the lower-of-cost or market,
determined on the specific identification method.

EQUIPMENT. Equipment is recorded at cost and depreciated over the
estimated useful life of the related assets. Equipment under capital lease is
amortized over the shorter of the lease term or its estimated useful life.
Depreciation and amortization expense is determined principally on the
straight-line method. The estimated useful lives of the Company's equipment is
as follows:

Computer and other equipment 5 years
Furniture and fixtures 7 years
Other 5 years

39
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

SOFTWARE DEVELOPMENT COSTS. Costs incurred in the research,
design and development of software are charged to expense until technological
feasibility is established, after which remaining software production costs are
capitalized and amortized on a product-by-product basis based upon the greater
of the ratio of current gross revenues for such product to total anticipated
revenues or the straight-line basis over periods of three to five years. The
Company has interpreted "technological feasibility" as the completion of a
working model. Amortization of software development costs is included in cost of
revenue-products in the accompanying consolidated statements of operations and
totaled $864,000, $505,000, and $371,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Accumulated amortization totaled $2,975,000 and
$2,121,000 at December 31, 1996 and 1995, respectively. Amortization of
capitalized software development costs begin when the related product is
available for general release to customers. The Company periodically reviews
software development costs to assess impairment. Amounts impaired are charged to
expense as identified.

SOFTWARE TECHNOLOGY RIGHTS. The Company has acquired rights to
certain core software technologies. These rights are recorded at cost and are
amortized over a period of five years. Amortization of software technology
rights is included in cost of revenue-products in the accompanying consolidated
statements of operations and totaled $80,000, $55,000, and $55,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Accumulated amortization
totaled $258,000 and $178,000 at December 31, 1996 and 1995, respectively.

CAPITALIZED DATA COSTS. Costs incurred to acquire data are
capitalized and amortized on a straight-line basis over three to five years.
Capitalized data costs include actual costs to acquire the data plus personnel
costs specifically related to loading the purchased data and performing the
required programming. Amortization of capitalized data costs is included in cost
of revenue-products in the accompanying consolidated statements of operations
and totaled $309,000, $266,000, and $195,000 for the years ended December 31,
1996, 1995 and 1994, respectively. Accumulated amortization totaled $1,132,000
and $823,000 at December 31, 1996 and 1995, respectively. The Company
periodically reviews capitalized data costs to assess impairment. Amounts
impaired are charged to expense as identified.

DIRECT-RESPONSE ADVERTISING COSTS. The Company expenses
direct-response advertising costs in the period in which the costs are incurred.

GOODWILL. Goodwill, totaling $278,000 and $277,000 at December
31, 1996 and 1995, respectively, represents the cost in excess of the fair value
of the net assets of companies acquired and is being amortized on the
straight-line basis over periods ranging from five to fifteen years. Accumulated
amortization totaled $81,000 and $29,000 at December 31, 1996 and 1995,
respectively. Goodwill amortization totaled approximately $52,000 and $14,000
for the years ended December 31, 1996 and 1995, respectively.

EQUITY INVESTMENTS. The Company accounts for its investments in
less than majority-owned entities, using the equity method of accounting
provided its ownership is not less than 20 percent. The Company discontinues
recognition of losses on such investments once the Company's investment has been
reduced to zero, provided the Company is not committed to fund the operations of
the joint venture and is not contingently liable for obligations of such joint
ventures. The company accounts for investments in entities in which its
ownership is less than 20 percent, on the cost method.

40
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

REVENUE RECOGNITION.. The Company recognizes service revenue when
the service is provided. Software license fee revenue is recognized at the time
of shipment unless significant future obligations remain. In these instances,
revenue is not recognized until obligations have been satisfied or are no longer
significant. Product revenue is recognized when the product is shipped. Revenue
and costs related to the Company's "cost plus" contracts are recognized as the
services are performed or the expenses incurred. Revenue and costs related to
the Company's fixed price contract are recognized on the
percentage-of-completion method.

INCOME TAXES. The Company accounts for income taxes on the
liability method as prescribed by Statement of Financial Accounting Standards
No. 109.

EARNINGS PER SHARE. Earnings per share is computed based on the
weighted average number of common and common equivalent shares outstanding. For
periods in which a net loss occurred, common equivalent shares are not included
in the weighted average number of common and common equivalent shares
outstanding, as their inclusion would be anti-dilutive. During the periods
presented, common equivalent shares consisted of warrants and options to acquire
common stock.

CONSOLIDATED STATEMENTS OF CASH FLOWS. For purposes of the
consolidated statements of cash flows, the Company considers all highly liquid
debt instruments with a remaining maturity of three months or less at the date
of purchase and mutual funds readily convertible to cash, to be cash
equivalents. The effects of non-cash transactions related to the acquisition
discussed in Note 3 and certain other non-cash transactions are excluded from
the statement of cash flows. Supplemental disclosures of cash flow information
are as follows:

YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
Interest paid ........................... $ 75,000 $ 66,000 $ 42,000
Common stock issued to purchase
software technology rights ........... $249,000 -- --
Acquisition of property and equipment
financed by debt or long-term
capital leases ....................... $452,000 $256,000 $545,000
======== ======== ========

41
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

RECENT ACCOUNTING PRONOUNCEMENTS. The Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". This statement was effective beginning in
1996. The adoption of this pronouncement in 1996 did not have a material impact
on the financial statements.

The FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation". This statement allows companies to choose to adopt the
statement's new rules for accounting for employee stock-based compensation
plans. For those companies who choose not to adopt the new rules, the statement
requires disclosures as to what earnings and earnings per share would have been
if the new rules had been adopted. Management adopted the disclosure
requirements of this statement in 1996.

MAJOR CUSTOMERS. Revenue earned under the KE contract with the
DOE Contract amounted to 3.3%, 15.1%, and 13.7% of consolidated revenue during
the years ended December 31, 1996, 1995, and 1994, respectively. The DOE
Contract expired March 31, 1996.

RECLASSIFICATIONS. Amounts in prior years' consolidated financial
statements have been reclassified whenever necessary to conform with the current
year's presentation.

2. EQUIPMENT

A summary of property and equipment at December 31, 1996 and 1995 is
as follows:

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

Computer and other equipment $ 4,463,000 $ 3,519,000
Furniture and fixtures 558,000 370,000
Other 74,000 53,000
-------------- --------------
5,095,000 3,942,000
Accumulated depreciation (2,469,000) (1,682,000)
============== ==============
$ 2,626,000 $ 2,260,000
============== ==============

Depreciation and amortization expense was approximately $851,000, $679,000,
and $511,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

42
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. ACQUISITION

During September 1995, the Company acquired all of the outstanding capital
stock of Entrepreneurs On-line, Inc. ("EOL"), for total consideration of
$230,000, consisting of 43,774 restricted shares of the Company's common stock.
This transaction has been accounted for under the purchase method of accounting.
The operating results of EOL have been included in the Company's consolidated
financial statements since the date of acquisition. Pro Forma information is not
presented, as the impact of the 1995 and 1996 EOL operating results on the
consolidated total is immaterial. EOL operates an online database which links
entrepreneurs and providers of services, capital and other resources.

In June, 1996, the Company purchased Op/Com Partners, Ltd. ("Op/Com") for
38,000 shares of the Company's common stock for technology rights. The
acquisition was accounted for on the purchase method of accounting and the
entire purchase price of $249,000, the fair value of the shares issued, was
assigned to software technology rights. At the time of the acquisition G. Robert
Friedman owned 33.9% of Op/Com.

4. RELATED PARTY TRANSACTIONS

The Company has receivables from and payables to officers, stockholders,
joint ventures and affiliates. The balances are generally due on demand and are
noninterest bearing. At December 31, 1996 and 1995, the net amounts due from
officers, stockholders, joint ventures and affiliates amounted to $316,000 and
$315,000 respectively. Included in these amounts at December 31, 1995 is $44,000
in legal expenses paid by the Company on behalf of certain officers/stockholders
in connection with litigation discussed in Note 9. These advances were repaid
during 1996.

The Company has provided computer hardware, programming, systems
maintenance, data loading, telecommunications and certain administrative
services to KE and Telebuild, L.C. ("Telebuild"), a limited liability company
formed in 1990. As of December 31, 1996 and 1995, corresponding amounts due the
Company from Telebuild totaled $452,000 and $307,000, including costs and
profits in excess of amounts billed and included in other current assets of
$111,000 and $40,000, at December 31, 1996 and 1995, respectively. The Company
owns 55.58% of KE and 15.05% of Telebuild. GRF Interests, Inc., a company
controlled by G. Robert Friedman ("Friedman"), a significant stockholder of the
Company, owns 30% of KE. Friedman Interest, Inc., also controlled by Friedman,
and JST Technology Center, Inc. ("JST"), own 48.25% and 28.75% respectively of
Telebuild. JST is owned 93.98% by the Brown Family Partnership and 6.02% by an
unrelated party. The Brown Family Partnership is owned by David L. Brown, the
Company's Chairman and Chief Executive Officer, Scott L. Brown, current
President of Telebuild, and other members of the Brown family.

43
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. RELATED PARTY TRANSACTIONS (CONT.)

Contract service revenue earned from affiliates for the years ended
December 31, 1996, 1995 and 1994 are as follows:

1996 1995 1994
----------- ----------- -----------

Telebuild, L.C. $735, 000 $ 408,000 $ 514,000

Brown/Friedman Partnership --- --- 29,000
----------- ----------- -----------
$735,000 $ 408,000 $ 543,000
=========== =========== ===========

During 1996, the Company entered into a marketing, license and
revenue sharing agreement with Cyberaction. Two of the directors of Cyberaction
are on the board of directors of the Company.

5. LONG -TERM OBLIGATIONS

CAPITAL LEASES. Future minimum lease payments under capital
leases at December 31, 1996, together with the present value of the minimum
lease payments, are as follows:

YEAR ENDING DECEMBER 31

1997 $ 206,000
1998 182,000
1999 91,000
-------------
Total minimum lease payments 479,000
Amount representing interest (59,000)
-------------
Present value of minimum lease
payments 420,000
Current portion capital lease obligations (169,000)
-------------

Long-term capital lease obligations $ 251,000
=============

Property and Equipment under capital lease at December 31, 1996 and 1995
totaled $877,000 and $765,000, with related accumulated depreciation of $428,000
and $283,000, respectively.

EQUIPMENT NOTE. At December 31, 1995, the Company had a $17,000
note payable to a bank The note bore interest at 7.8% and was collateralized by
equipment. The debt was retired in 1996.

44
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. LONG -TERM OBLIGATIONS (CONT.)

LINE OF CREDIT. The Company has a $500,000 revolving line of
credit with a bank to fund equipment purchases. Borrowings under this line bear
interest at Wall Street Prime, are collateralized by the equipment purchased,
and are due in 36 equal monthly installments following the draw. At December 31,
1996 and 1995, $488,000 and $310,000 respectively were outstanding under this
equipment line.

Future payments under this equipment line of credit are as
follows:

YEAR ENDING DECEMBER 31,

1997 $ 251,000
1998 140,000
1999 97,000
---------------
488,000
Current portion of long-term debt (251,000)
---------------
$ 237,000
===============

OPERATING LEASES. The Company has commitments to lease office space and
equipment under noncancelable operating leases. Rent expense under operating
leases totaled $798,000, $581,000, and $373,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
Future minimum lease payments are as follows:

YEAR ENDING DECEMBER 31,

1997 $ 900,000
1998 883,000
1999 797,000
2000 663,000
2001 359,000
Thereafter 3,990,000
==============
$ 7,592,000
==============

45
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. STOCKHOLDERS' EQUITY

TRANSTERRA TRANSACTION. In June 1995, the Company entered into a Stock
Purchase Agreement with TransTerra Company ("TransTerra"), whereby TransTerra
agreed to purchase $5 million of restricted common stock in four equal
installments over a nine month period. The number of shares of common stock
issued for each installment was calculated based upon the average market price
of the common stock over the preceding quarter. In connection with this
agreement, the Company granted certain registration rights to TransTerra. During
1995, pursuant to the terms of this agreement, 427,998 shares of restricted
common stock were issued for total consideration of $2.5 million. An additional
173,459 shares were issued in January 1996 in exchange for the third installment
of $1,250,000. In March 1996, 168,337 shares were issued for the final
installment of $1,248,614.

WARRANTS. During 1995, the Company issued 157,500 shares of common stock
upon the exercise of various stock purchase warrants at exercise prices ranging
from $1.75 to $3.00 per share. As of December 31, 1995, warrants to acquire
67,500 shares of common stock at an exercise price of $3.00 per share were
outstanding. During 1996, the remaining warrants were exercised.

The holders of any preferred stock which might be issued shall have such
rights, preferences and privileges as may be determined by the Company's Board
of Directors.

7. INCOME TAXES

At December 31, 1996, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $12,183,000, which expire in years 2000
through 2010.

Deferred tax assets and liabilities as of December 31, 1996 consisted of
the following:

Deferred tax assets -
Net operating loss carryforwards $ 4,630,000
Less: Valuation allowance (2,388,000)
------------
Deferred tax asset, net 2,242,000

Deferred tax liability - accumulated
depreciation and amortization (2,242,000)
============
--
============

46
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. STOCK OPTION PLAN

The Company's stock option plans (the "Plan") for officers, directors and
key employees authorizes the grant of options to purchase a maximum of 1,425,000
shares of common stock. The Plan provides for the issuance of incentive stock
options or nonstatutory stock options, as defined by the Internal Revenue Code.
Pursuant to the terms of the Plan, the exercise price of incentive stock options
must equal the greater of $1.50 or the fair market value of the Company's common
stock on the date of grant. The exercise price of nonstatutory options may be
any amount equal to or greater than $1.50 per share. The vesting period of each
grant is determined by the Compensation Committee of the Board of Directors.

Transactions with regard to incentive options issued pursuant to the Plan
are as follows:

SHARES AVERAGE
UNDER PRICE
OPTION PER SHARE
------------- -------------

Balance - January 1, 1994 603,900 $ 1.84
Granted 183,373 $ 7.96
Canceled (12,108) $ 6.03
Exercised (56,725) $ 1.61
-------------
Balance - December 31, 1994 718,440 $ 3.35
Granted 148,395 $ 4.91
Canceled (39,148) $ 5.27
Exercised (122,763) $ 1.67
-------------
Balance - December 31, 1995 704,924 $ 3.87
Granted 190,535 $ 7.26
Canceled (52,998) $ 6.33
Exercised (74,812) $ 2.04
=============
Balance - December 31, 1996 767,649
=============

At December 31, 1996, options to purchase a total of 416,425 shares of
common stock were exercisable at prices ranging from $1.50 to $8.44 per share.

During 1996, options for 5,000 shares of the Company's common stock were issued
at an option price of $8.37 under a separate non-qualified stock option
agreement.

SFAS 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on fair value. Fair value is generally determined
under an option pricing model using the criteria set forth in SFAS 123.

47
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. STOCK OPTION PLAN (CONT.)

The Company applies APB Opinion 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related Interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its stock option plans. Had
compensation expense for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss and loss
per common share would have been increased to the pro forma amounts indicated
below:

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

$ $
Net loss As reported (2,934,000) (1,214,000)
$ $
Pro forma (3,417,000) (1,412,000)

$ $
Net loss per common share As reported (0.28) (0.12)
$ $
Pro forma (0.32) (0.14)

9. CONTINGENCIES

48
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. CONTINGENCIES (CONT.)

During June 1996, the Company and a publisher verbally agreed to cancel
their agreement to develop and operate an online service. As of December 31,
1996, the Company had capitalized $500,000 in software development and data
costs related to its development effort under the agreement which began August
1, 1993. The Company has had discussions with other parties interested in
developing such an online system and currently believes that the asset's net
realizable value is not impaired.

49
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON SCHEDULE

Stockholders and Board of Directors
Telescan, Inc.
Houston, Texas

We have audited the consolidated financial statements of Telescan, Inc. and
subsidiaries as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996. Our audits for such years also
included the financial statement schedule of Telescan, Inc. and subsidiaries,
listed in Item 14(a)2, for each of the years in the three-year period ended
December 31, 1996. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to report on this schedule based
on our audits. In our opinion, such a financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
herein.

HEIN + ASSOCIATES LLP
HOUSTON, TEXAS
FEBRUARY 14, 1997

50
<PAGE>
TELESCAN, INC.
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DEDUCTIONS:
ADDITIONS ACCOUNTS
BALANCE AT CHARGED TO WRITTEN BALANCE
BEGINNING OF COSTS AND OFF AGAINST AT END
DESCRIPTION YEAR EXPENSES ALLOWANCE OF YEAR
- ----------- ------------ ---------- ----------- -------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994:

Allowance for Doubtful
Accounts $52,000 $67,000 $(21,000) $98,00
======= ======= ========= =======

DECEMBER 31, 1995:

Allowance for Doubtful
Accounts $98,000 $106,000 $(124,000) $80,000
======= ======== ========== =======

DECEMBER 31, 1996:
Allowance for Doubtful
Accounts $80,000 $68,000 $(44,000) $104,000
======= ======= ========= ========
</TABLE>

SUBSIDIARIES
NAME STATE OF INCORPORATION
- --------------------------------------------------- ----------------------
Knowledge Express Data Systems, L.C. (55.58% owner) Texas

Board of Directors and Stockholders
Telescan, Inc.

We consent to incorporation by reference in the registration statements (Nos.
33-63172 and 33-94514) on Form S-8 of Telescan Inc. of our report dated February
14, 1997 relating to the consolidated balance sheets of Telescan, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows and related
schedules for each of the years in the three-year period ended December 31,
1996, which report appears in the December 31, 1996 annual report on Form 10-K
of Telescan, Inc.

/s/ HEIN + ASSOCIATES LLP
Hein + Associates LLP
Certified Public Accountants
Houston, Texas
March 31, 1996

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 792
<SECURITIES> 0
<RECEIVABLES> 1,720
<ALLOWANCES> 104
<INVENTORY> 107
<CURRENT-ASSETS> 3,444
<PP&E> 5,095
<DEPRECIATION> 2,469
<TOTAL-ASSETS> 11,466
<CURRENT-LIABILITIES> 2,990
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 7,857
<TOTAL-LIABILITY-AND-EQUITY> 11,466
<SALES> 1,948
<TOTAL-REVENUES> 13,756
<CGS> 1,184
<TOTAL-COSTS> 11,798
<OTHER-EXPENSES> 5,237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,934)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,934)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,934)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)

</TABLE>