<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                  FORM 10-KSB

                                   (Mark one)

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

            For the fiscal year ended December 31, 1999
                                OR

|_|  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                  ACT OF 1934

         For the transition period from ____________ to _______________

                           Commission File No. 0-23279

                             CELERITY SYSTEMS, INC.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)


            Delaware                                     52-2050585
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)


        Celerity Systems, Inc.
       122 Perimeter Park Drive
         Knoxville, Tennessee                             37922
----------------------------------------                ----------
(Address of principal executive offices)                (Zip Code)


                    Issuer's telephone number (865) 539-5300

         Securities registered under Section 12(b) of the Exchange Act:



      Title of each Class             Name of each exchange on which registered
      -------------------             -----------------------------------------

         Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, Par Value $.001 Per Share
                     ---------------------------------------
                                (Title of Class)


                     ---------------------------------------
                                (Title of Class)

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

     Check if there is no disclosure of delinquent filers in response to Item
405 of the Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|

     State issuer's revenues for its most recent fiscal year. $85,894

     Aggregate market value of voting stock held by non-affiliates of registrant
as of March 20, 2000: $9,373,560

     Shares of Common Stock outstanding as of March 20, 2000: 7,168,915

     Transitional Small Business Disclosure Format (check one): Yes|_|; No |X|

                       DOCUMENTS INCORPORATED BY REFERENCE

                                 Not applicable


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     Unless otherwise indicated, the information in this annual report on form
10-KSB gives effect to the one-for-two-and-one-half reverse stock split of the
Company's common stock, par value $0.001 per share (the "Common Stock") effected
in August 1997. All references to "Celerity" or the "Company" contained in this
Annual Report refer to the Company and its predecessor, Celerity Systems, Inc.,
a Tennessee corporation.

     This Annual Report on Form 10-KSB contains forward looking statements that
involve certain risks and uncertainties. The Company's actual results could
differ materially from the results discussed in the forward looking statements.
See "Description of Business--Risk Factors--Cautionary Statements Regarding
Forward-Looking Statements."

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

General

     Celerity Systems, Inc. was incorporated in Tennessee in 1993 and was
re-incorporated in Delaware in August 1997. The Company designs, develops,
integrates, installs, operates and supports interactive video and high speed
Internet services hardware and software. In the interactive video and high speed
Internet services areas, the Company seeks to provide solutions, including
products and services developed by the Company and by strategic partners, that
enable interactive video programming and applications to be provided to a wide
variety of market segments. The Company has installed 15 digital video servers
in five countries (China, Korea, Israel, Taiwan and Canada) on several different
network types which accommodate interactive video services. The Company believes
that it has demonstrated the ability to deploy and operate interactive video
systems over these major network types.

Recent Developments

     As of December 31, 1999, the Company had cash on hand of approximately $383
and a negative working capital of approximately $2,748,000. The Company
continued during 1999 and in 2000 to use funds from private financings and
operations for working capital purposes and to pay certain outstanding
obligations. The Company's cash position continues to be uncertain, but since
year-end has improved due to the closing of certain private financings in the
form of convertible debentures and the exercise of warrants to purchase common
stock. The Company also anticipates that its equity line of credit will shortly
become effective. Under the line of credit arrangements, the Company may elect
to draw down up to $5,000,000 aggregate principal amount of debentures with a
maximum drawdown of up to $500,000 per calendar month, through September 30,
2000, subject to the satisfaction of certain conditions, including conditions
relating to the trading volume of the Company's common stock. Between these
debentures and the equity line of credit, the Company expects to have the
working capital required to operate for the next several months.

     The Company is continuing to seek additional sources of capital in order to
repay its obligations and have working capital for an extended period of time.
The Company is also continuing to seek strategic investments from one or more
large or well-known companies in the interactive video services,
telecommunications or high speed Internet industries. The Company believes that
the involvement of such a firm or firms is material to the Company's ability to
grow. There can be no assurance that the Company will be able to obtain any such
required additional funds on a timely basis, or on favorable terms, or at all.


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     The Company also continues to seek buyers for all (or portions) of its
CD-ROM division, either the Mediator or WorkWare segments, or both. However, the
Company has had no success in finding buyers for either or both of these product
segments.

     In January 2000, the Company agreed to a settlement of an outstanding
account receivable from Integrated Network Corporation ViaGate Technologies
related to projects in China. The Company agreed to a $45,000 settlement in lieu
of the $224,000 owed. At this time, there are no significant client accounts
receivable due to the Company.

     The following discussion of the Company's business and, in particular, its
sales and marketing plans, assumes that the Company will continue as a going
concern. Depending upon the amount of proceeds, if any, received by the Company,
and the timing of those proceeds, the Company's ability to continue as a going
concern could be seriously affected.

     The Company during 1999 reduced its workforce to approximately five
employees, due in large measure to its inability to realize sufficient cash flow
from operations. The Company is in arrears in paying compensation to these
employees. The Company will not be able to continue to retain such employees if
it does not obtain additional funds to compensate them.

Interactive Video / High Speed Internet Segment

Industry Overview

     Linear Television and VCR Technology. Until about 30 years ago,
audio-visual home entertainment choices were primarily limited to linear content
(i.e., content that plays in a pre-programmed sequence and which cannot be
controlled by the viewer). In the 1970's, the growing popularity of
videocassette recorders (VCR's) and videocassette tapes provided new choices to
home viewing audiences. VCR and videocassette technology provides viewers with
the ability to view content on demand and to manage content through the use of
pause, resume, fast forward, rewind, and other features. VCR use, however,
entails the inconvenience of leaving home to purchase or rent video cassettes or
choosing from among the often limited content available for recording on
television. Many video stores have only a limited selection of titles,
particularly in areas such as educational content and games, and the most sought
after titles are frequently unavailable. The proliferation of cable television,
satellite television, pay-per-view, and similar technologies has improved linear
television choices, but these technologies do not offer the ability to select
content to be viewed on demand, rather than on a scheduled basis. New
technologies such as digital video disc (DVD) have improved the quality of
stored content, but entail similar inconveniences and limited choices as VCR
technology. New technologies such as Replay and TiVo allow digital recording
from television; however, they have complicated user interfaces and a very
limited range of available content.

     Telecommunications Companies and Broadband Interactive Services. In the
early 1990's, telephone and cable companies and other interested parties, such
as television and motion picture studios, began to experiment with the idea of
providing broadband interactive services. Broadband services are those which run
over a high capacity digital network such as asynchronous digital subscriber
lines (DSL), high speed data lines (T1 and E1), hybrid fiber coaxial cable (HFC)
lines, and fiber to the curb (FTTC) fiber optic lines, as well as wireless
technologies such as satellite and multi-channel, multi-frequency distribution
service (MMDS). These high capacity networks, made possible by breakthroughs in
the ability to convert information from analog to digital form and by improved
data compression technologies, have the ability to deliver vast quantities of
data into a home, hotel, business or other facility. Broadband networks also
have the capacity


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to provide for interactivity between the user and content providers. Industry
sources anticipate that, if broadband networks become widely deployed, they will
usher in a new age of information technology due to the potential quantity and
robustness of content, and the speed, ease of use and interactivity of those
networks.

     Following changes in the regulation of the telecommunications industry in
1992, it was anticipated that the large domestic telephone and cable companies,
and their counterparts abroad, would seek to deploy broadband networks and
interactive services in communities on a widespread basis. The Regional Bell
Operating Companies (RBOCs), for example, successfully sought relief in the
courts to be permitted to become not only network providers for such services,
but content providers as well. Further regulatory changes in 1995 and 1996
reduced the potential cost of deploying broadband networks. A number of
interactive video trials were run by U.S. companies, including Time Warner,
Telecommunications, Inc. (TCI), GTE, Bell Atlantic Corporation and BellSouth
Corporation, which demonstrated that the technology did work, although to varied
degrees. International telecommunications companies, including Telecom Italia,
Korea Telecom, Hong Kong Telecom, Deutsche Telekom and British Telecom,
demonstrated similar results abroad. These trials were generally costly, in part
because they were characterized by "trial approaches" including development and
testing of prototype versions of equipment and alpha and beta versions of newly
developed software, and experiments in pricing, content, menus, navigation and
methodologies. Further, these trials occurred during a period of rapid
technological change and improvement and evolving standards. For example, DSL
equipment, which now typically costs a few hundred dollars per home, typically
cost a few thousand dollars per home in 1993.

     By 1997, activity in the broadband services area had been significantly
reduced, and some companies, such as Bell Atlantic and TCI, had announced
reductions or delays in their deployment plans. Reasons given for such reduction
or delays included a change of focus toward local and long distance competition,
the high cost of deploying large broadband networks, business reorganizations,
delays pending the introduction of lower cost, more functional, or industry
standard technologies and reduced competitive threats from within the industry.
By 1999, however, these companies were beginning to show some renewed interest,
primarily due to competitive DSL providers beginning to penetrate their markets.

Narrowband Interactive Services. Beginning in the 1980's, the proliferation of
home computers and the development of the Internet and Internet service
providers, such as America Online, Prodigy, Compuserve, EarthLink and
MindSpring, have allowed millions of people to access interactive content and
services over telephone lines. Internet content is becoming increasingly rich,
robust, and interesting. Industry sources estimate that United States consumers
spent more than $620 million for Internet services in 1996, and project that
such expenditures will grow to more than $15 billion in 2001, and that the
number of Internet households will grow from an estimated 23.4 million in 1996
to 66.6 million in the year 2000. The Internet has begun to condition consumers,
and younger consumers in particular, to obtaining information, experiencing
content, playing games and shopping in an interactive fashion. However,
telephony based services, which are generically referred to as narrowband
services, have constraints on the quantity of information that can be delivered,
and are currently unable to download large files, such as full length videos, at
a satisfactory quality or speed. Computers tend to be relatively expensive,
compared to television sets, and computers monitor and display technologies are
not optimized for viewing video content. Furthermore, although most people are
comfortable with television as a medium, many people, especially older
consumers, lack experience with computers and may be uncomfortable with, or are
averse to, computer technology.

     Different companies have employed different strategies to address the
shortcomings of narrowband networks in the absence of generally available
broadband networks. For example, WebTV (owned by


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Microsoft) has begun offering enhanced graphics and other features over
narrowband networks with a television rather than a PC interface. In order to
address the need for high speed services, the cable industry has begun deploying
cable modems, and the telephone industry has begun deploying DSL equipment for
high speed access, so that the narrowband services can run at the highest
possible speed on metallic, telephone or cable lines. For example, @Home Network
is deploying as a high speed Internet Service Provider (ISP) on several cable
companies' networks. The Company believes that, despite these and other
initiatives, narrowband networks are unlikely to achieve the combination of
technological accessibility and speed, security, and robustness of transmission
characteristic of broadband systems. The public access methodology in the
Internet and other narrowband networks, coupled with off -the-shelf modems,
makes security, both for privacy of communications and secure commercial
transactions, difficult to achieve. The hardware and software of interactive
broadband systems and the architecture of such networks creates a more secure
environment for such transactions. In addition, although better software,
compression methods and other tools have enabled improvements in narrowband
services, the physical constraints of narrowband networks are substantial
compared to those of broadband networks. Many narrowband lines, especially older
lines in cities (a preferred market segment) cannot run at 56 kilobits per
second (kbps) the highest widely available PC modem rate. This rate does not
compare to 1.5 Megabits to 25 Megabits per second rates provided by broadband
networks.

     The Company's Broadband Interactive Video Services. The Company believes
that the increase in linear viewing alternatives such as direct broadcast
satellite (DBS) have increased consumer demand for more content choices and that
the development of the Internet has increased consumer interest in interactive
content generally. The Company believes that the inherent limitations of
narrowband networks, as compared with broadband networks, create a market
opportunity for a broadband technology, such as the Company's, that offers
superior speed and robustness, combined with a "user friendly" television-based
technology. See "User Experience". In addition, the lack of major deployments by
the RBOCs and other major U.S. telecommunications companies in the broadband
market has, the Company believes, kept many large consumer electronics companies
from actively pursuing plans to supply hardware and software for broadband
networks, thus enhancing the niche market opportunities for the Company. Even if
major domestic telecommunications were to currently undertake such initiatives,
it would take a substantial number of years and a massive capital commitment to
deploy large-scale broadband networks. The Company also believes that advances
in servers, set top boxes, and network equipment enable operators of small scale
broadband networks to now offer interactive video services to their subscribers
at attractive prices. See "Potential Markets B Marketing Strategy."

Basic Interactive Services Configuration

     An interactive video services networks system typically includes the
following components: (i) network equipment, including high speed lines and
switches, for transmission of content; (ii) digital set top boxes, which receive
the content and transmit subscriber requests; (iii) digital video servers, which
store the content and control its transmission over the network; (iv) content
and (v) software which runs user applications and business support applications
such as subscriber billing. See "Products."

     Network Equipment

     High Speed Lines (DSL, T1/E1, HFC, FTTC, satellite, MMDS) connect the
network service provider's central office or head end to subscribers homes,
hospital beds, dormitory rooms or hotel rooms. High-speed networks switching
equipment connects subscribers to content furnished by video information
providers (VIPs), either locally or internationally. There are a large number of
providers of this network


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equipment, including CF Alcatel, BroadBand Technologies, Inc., Ericsson, ViaGate
Technologies, Lucent Technologies, Scientific Atlanta, Inc. and Siemens
Communications.

     Digital Set Top Boxes

     In each subscribers locations, one or more digital set top boxes and remote
control devices are associated with each television set and/or personal computer
that receives interactive video programming. Digital set top boxes feature
high-speed processors, RAM memory, high and low speed output ports and other
computer components.

     Digital Video Servers

     The digital video server is a high-speed computer to which a subscriber is
connected via the network. The basic functions of a digital video server are to
cost effectively (i) store and rapidly retrieve and transmit large amounts of
content, (ii) provide a large number of input/output ports so that subscribers
can access the system quickly and easily retrieve information, (iii) function
with an operating software system to manage user applications, and (iv) provide
business support systems capability to accumulate and provide data for services
such as billing, customer service and content management.

     Content Preparation Equipment

     In order to store content in a digital server, send it over a broadband
network, and interpret the content through a digital set top box, the content
must be encoded (or converted from analog to digital format) and compressed.
Compression standards, primarily Motion Picture Experts Group One and Two (MPEG1
and MPEG2), have been adopted for the preparation and storage of this content.

     Applications and Business Support Software.

     Operators of interactive video systems require two kinds of software in
addition to the operating system software for servers and set top boxes.
Interactive applications software is designed to offer services, such as
shopping, travel, banking, education, medicine, video-on-demand, karaoke and
digital music. Business support systems (BSS) software includes applications
such as customer service, billing, telemarketing, content management, content
provider management, workforce management and similar functions. Applications in
BSS software are available from a number of companies, including Arrowsmith,
EDS, IMAKE, Informix and Strategic Group and the Company anticipates that the
availability of application software, in particular, will increase as broadband
networks proliferate.

Products

     The Company's products for the interactive video services market consist of
products that the Company develops and manufactures and products manufactured by
others that the Company resells and integrates into its systems.

     Products Manufactured By The Company

     Digital Set Top Boxes. The Company has developed a new digital set top box,
the T 6000. The T 6000 is designed to work with many transmission networks and
supports multiple outputs of video, sound and data. The Company believes that
the T 6000's open architecture and array of functionality and connectivity


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make it one of the more advanced of such products in the industry today.
Features include a Pentium or Pentium clone processor, extensive memory, a wide
array of network inputs and system outputs, 2D and 3D graphics and an attractive
consumer design. The set top box also incorporates hardware and software that
can be utilized for home energy management, home security monitoring and
healthcare monitoring.

Digital Video Servers. The Company manufactures two different video servers: (i)
an asynchronous transfer mode (ATM) based server, the CTL 9000, designed to be
used for FTTC, DSL and HFC networks, which is currently deployed in Taiwan and
China; and (ii) a scaled down ATM server, the CTL 7000, used for trials, focus
groups and similar applications, which is currently deployed in Canada. The
Company also intends, subject to funding, to develop a next generation version
of its ATM based digital video server, the CTL 9500, which will have most of the
same functionality as the CTL 9000, but with substantially better cost, size,
reliability and environmental tolerance. These ATM based servers include
improvements in cost per stream, capacity and operating speed over previous
models and are designed to simplify connections to current networks and provide
valuable new features, including variable bit rate, data stream grooming, data
flow improvement and higher bandwidth. The servers are all scalable, enabling
them to be used in small to large-scale deployments. For large-scale
deployments, the servers can be deployed in nodes which can include one or more
servers. The Company has decided not to develop and produce the CTL 8500 digital
video server, a planned analog baseband output device, since analog baseband
servers have experienced sharply decreasing demand at this time.

     The Company has developed its own digital server operating system; know as
Multimedia Interactive eXchange (MIX). MIX is a compact, full featured
comprehensive proprietary operating system and interfaces with standard software
and manages all aspects of the digital server's operations. MIX easily
interfaces with industry standard billing systems and other business support
systems. As a customer inducement, the Company, unlike many of its competitors,
includes the server license for MIX at no additional charge with each digital
video server sold. In addition, the Company's servers work effectively with
other modern application software, such as HTML and Java.

     The Company's digital servers are highly standards compliant and have been
proven to be interoperable with the network and switching equipment of several
major companies, including Alcatel, Nortel and Cisco. The Company has also
successfully integrated its digital video servers with digital set top boxes
made by other companies including Samsung, Tatung, Hyundai and Acorn.

     Products Manufactured and Developed by Others

     Certain products manufactured and developed by others may be provided by
the Company to its customers pursuant to strategic alliances. See" Strategic
Alliances."

     Network Equipment. The Company has strategic arrangements some in the form
of written agreements and some informal, with Nortel, Cisco and ViaGate
Technologies to include their network equipment as part of overall bids for
end-to-end interactive video systems and be included in end-to-end bids by these
companies. Nortel, for example, has done a number of bids which include Celerity
products. The Company intends to enter into similar arrangements with other
network equipment companies. The Company also has an arrangement with Marconi
(formerly Fore Systems Inc.), a leading manufacturing of ATM switches, which has
enabled the Company to utilize Marconi technology and to incorporate Marconi
switches within the companies ATM based servers, such as those deployed in China
and Taiwan.


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     Although the Company manufactures digital video servers, the Company is
seeking to enter into arrangements with other digital video server
manufacturers, such that they will offer the Company's T 6000 digital as part of
end-to-end systems. The Company has tested its digital set top boxes with two
other major digital video servers for such purposes.

     Other Equipment. Interactive video services systems also utilize components
such as digital encoders, digital production studio equipment, digital
production software and other equipment. The Company has entered into certain
arrangements with respect to resale by the Company of digital encoders and is
seeking to enter into additional arrangements with sellers of this kind of
equipment, with a view toward to enabling the Company to offer a complete
end-to-end system to potential customers on a fully integrated basis.

     Other Software. The Company provides a basic video-on-demand application,
which it calls the "Celebrity" user interface and some sample applications, such
as shopping, as part of its server software. However, most system operators will
require a suite of applications upon installation of this type of system, with
the potential of adding additional applications in the future. The Company has
entered into certain arrangements to provide interactive video applications
software and is seeking to enter into additional arrangements to provide
interactive video application software and business support systems software to
the Company's customers. The Company has also entered into an agreement with
Battelle Laboratories in which Battelle is providing home energy management
software which operates on the T6000 digital set top box at no cost to the
Company. Upon the sale of such software, the revenues are shared between the
parties.

Services

     Celerity intends to act as an overall systems integrator for interactive
video projects, which may entail integrating the end-to-end system in Celerity's
facility prior to shipment, on-site integration, or both. The scope of work
required for integration will vary widely, depending upon project size and other
variables. Celerity also offers a number of additional services, including
customer training, documentation, maintenance and support.

Content

     The Company currently does not have arrangements with content owners to
incorporate content including movies, television shows, education materials or
the like into content packages for its customers. However, the Company intends,
subject to funding, to enter into arrangements with content integrators and
content owners so as to be able to offer content as part of end-to-end
solutions.

User Experience

     Current subscribers to interactive video services enjoy a broad scope of
new content and applications. Content available "on demand" is stored on a
digital video server and may be viewed by any subscriber at any time chosen by
the subscriber by the use of a navigation/menu system.

     The Company anticipates that applications will become more robust numerous
and exciting in the future as new content, applications and enhanced technical
capabilities become available. For example, travel reservations and information
could be a possible application for interactive video services. A subscriber
equipped with an ordinary television set or PC, a digital set-top box and a
hand-held remote control or wireless keyboard could select a travel Company,
which would be a video information provider (VIP) on the system, from an
on-screen menu. A typical application might show major geographic areas, such as
Asia, Europe,


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United States and the Caribbean. A subscriber choosing Europe, for example,
would be provided with a further choice among European countries. By choosing a
country, e.g., Spain, a subscriber could be presented a choice among video,
graphic and data content relating to that country, such as general interest
videos and information relating to packaged tours, airline options and hotels.
Similar applications are currently available on narrowband services, such as the
Internet; however, broadband applications such as the Company's products can
accommodate lengthy high quality videos and robust graphics, including
three-dimensional graphics, which cannot currently be as efficiently downloaded
or viewed via a narrowband network. The Company also believes that the
significantly greater security, both for transactions and communications,
available through broadband networks will be more attractive to consumers. The
Company believes that broadband networks could, in the future, also include
applications with an electronic data interchange (EDI) back end, which would
allow the subscriber to ascertain the availability and confirm reservations for
different products and services such as hotel or car rental or airline tickets
on a near-real-time basis, including potentially two-way video conversations
with agents.

     Customers will typically be billed a monthly fee for accessed to the
interactive services, a rental fee for the set top box and additional fees for
the content and applications access although it is anticipated that certain VIPs
will provide applications without a separate charge as means of increasing sales
of products or services.

Potential Markets

     The markets for interactive video systems may be categorized as public or
private networks. Public networks, such as those of telephone companies, cable
companies, energy companies or Internet service providers (ISPs), are
potentially available to all consumers with a given geographical market. Private
networks are those offered in a more limited area, such as a hotel, hospital,
apartment building, business complex or college campus. The Company's products
have also been sold internationally, in both public and private networks.

     Marketing Strategy

     The Company's marketing strategy is to seek customers in each of the
potential emerging markets, to encourage the leading companies and organizations
to adopt this technology and to position itself as a leading provider of
interactive video services within niche markets. The Company believes that it is
important to achieve market penetration at an early stage in the development of
particular niche markets in order to compete successfully in those markets. The
Company is marketing itself based on its demonstrated ability to install digital
video systems on each of the major network types and its potential to provide
end-to-end interactive video solutions. See "Deployment" and "Strategic
Alliances." In addition, the scalability of the Company's servers provides
flexibility in deploying interactive video services systems in varying in size
from systems designed to serve 25 simultaneous users to those capable of serving
many thousands of users in a variety of markets on a cost effective basis. The
Company believes that this scalability would be an attractive feature to
potential customers. The Company also believes that its T 6000 digital set top
box, with its wide range of capabilities to interconnect with many different
networks and many different peripheral and display devices, will allow it to
compete favorably in several different markets, either with the Company's own
digital video server or with others. The Company believes that its diversified
marketing approach provides the Company with flexibility in targeting emerging
markets, enabling it to recognize market opportunities and adapt to perceive
changes in marketing priorities. However, the Company, due to its limited
resources, has determined to focus on those markets where there is greater
interest at this time, while looking for targets of opportunity in its other
niche market segments. The markets which appear most favorable at this time are


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telephone companies, energy companies, hospitality, hospitals and multi-housing.
The Company has limited sales and marketing experience and there can be no
assurance that it will be successful in implementing its marketing plans. See
"Risk Factors B Limited Sales; Limited Marketing and Sales Experience."

     Public Networks

     Potential market opportunities for the Company in public networks are
electric companies, telephone companies, cable companies and Internet service
providers in the North America.

     Electric Companies. Domestic electric companies are now being deregulated
and are subject to in intense competitive pressures and the need to find new
sources of revenue. Many electric companies have installed or are continuing to
install fiber optic lines in communities for remote meter reading and equipment
monitoring purposes. These lines could be used to provide a full menu of video
services. Electric companies are not currently regulated in the same manner as
cable and telephone companies, typically have long standing relationships with
subscribers and often have pole and buried cable rights of way which could give
them a competitive advantage over potential entrants into the interactive video
services market. Electric companies may also see the provision of additional
services as a means to protecting key customers, such as hospitals, from
incursion by other energy companies outside their operating territory, that can
now sell to these customers under the operating principles of the North American
Power Grid System. A number of electric companies in the United States and
Canada have expressed an interest in such deployments and one energy company,
Hopkinsville Electric Service, in Hopkinsville, Kentucky, has ordered a system
from the Company.

     Telephone Companies. There are more than 1300 independent domestic
telephone companies and ten major telephone companies within North America.
Major independent telephone companies include Sprint Corp, Buena Vista Tel. and
Cincinnati Bell Incorporated. In addition, there has arisen an entire new class
of telephone companies called Competitive Local Exchange Carriers (CLECs)
including such successful and growing companies as RCN. As telephone companies
upgrade their backbone networks to fiber optics and begin to deploy high-speed
services to homes, they are ideal candidates to install the Company's systems.
Local telephone companies, including long distance carriers that are installing
local telephone networks, have installed or planning to install modern fiber
optic networks and may be seeking new revenue opportunities to offset the cost
of such installations. The Company believes that independent telephone companies
and CLECs may have more flexible management styles than large telecommunications
companies and may be quicker to commit to strategic decisions, such as providing
interactive video systems to their customers. The Company currently has a server
and set top box under trial with one major U.S. telephone Company.

     Foreign Telephone Companies. Up until this time, all of the Company's
deployments have been for telephone companies outside the United States. Foreign
companies have been more active in deploying interactive video services than
domestic U.S. companies. The Company believes that, in part, this is because in
many countries the telephone Company is owned or supported directly by the
government, which may see the addition of such services, especially public
interest services such as education and health oriented services, as being
beneficial to its citizens. Because of the lack of name recognition and because
the Company has lacked its own direct sales force, the Company has been limited
to responding to customer bids and has made only limited sales in this market,
which is large and rapidly growing. Potential markets are emerging in Europe,
Latin America, Canada and Africa, in addition to existing and merging markets in
Asia. However, the Company has found that such projects are difficult and
expensive to perform, and therefore is not actively marketing its services
abroad. However, should the Company find profitable, well-funded projects
outside the U.S. where the Company has a reliable strategic partner in that
geographic area, the Company would entertain doing such international projects.
See "Deployments."


                                      -9-
<PAGE>

     Cable Companies. The large domestic cable companies are currently not
active in the interactive video services market and do not appear to have a
strong level of interest. Private cable companies and companies wishing to
supplant the local cable company, such as DirecTV, have an interest in deploying
interactive video services, particularly in markets such as the multi-housing
industry.

     Internet Service Providers. There has been a recent move on the part of
major Internet service providers including America On-Line (AOL), Blue Star
Communications and others to install high speed digital networks, either fiber,
DSL, or some combination thereof, in major city markets throughout the U.S. for
the purpose of high-speed Internet access. These new ISPs are very interested in
providing a large profitable array of services to their customers to help
justify the cost of these installations and the cost, on the subscriber's part,
of the monthly service.

     Private Networks

     Many hospitals, apartment/condominium complexes, hotels, resorts, colleges
and universities and businesses have installed or are considering installing
private networks utilizing ATM, DSL, HFC, FTTC, or wireless technologies.
Private networks are limited in geographic size and scope, but could potentially
offer a wide range of interactive video and data services to their customers,
generally on a for-profit basis. Private network have the significant advantage
of relatively rapid and low cost deployment, as it compared to large-scale
public networks and they are well suited to the Company's scale of the
technology solutions.

     Digital Hospitals. Many domestic and foreign hospitals are already wired
with state-of-the-art, high-speed digital networks (such as ATM or Ethernet)
which would be suitable for interactive video services systems, although it is
currently unclear who would fund these systems. The Company is aware of several
projects in which health care providers such as pharmaceutical companies have
expressed a willingness to underwrite some or all of the cost of content shown
on these systems in return for strategic positioning in advertising. The
Company's digital server, set top box and operating system technology could
potentially accommodate an architecture designed to allow patients to view
advertisements targeted to their condition, which could be attractive to
advertisers. Another potential source of funding is energy companies which value
hospitals as high- demand consumers of electric power. A few power companies
have expressed preliminary interest in the idea of installing the Company's
interactive video system in a mid-sized or large hospital as part of a
multi-year power contract. Another potential source of funding is the hospitals
themselves. Interactive systems may be password- and ID-protected, so that the
user is individually identified within the system. The Company believes the
system could be designed to show patients targeted videos containing medical
information or instructions which they would then electronically "sign" prior to
being allowed to view entertainment services. Such as system could be attractive
to hospitals as a means of patient education and to ensure that patients (or
staff) have read and understand instructions and other information, such as
liability warnings.

     Multiple Dwelling Units (MDUs). Many large apartment complexes,
condominiums, gated communities and similar groups of homes, termed Multiple
Dwelling Units or MDUs are now installing modern DSL, ATM, fiber optic, Ethernet
or other network systems during construction or as an upgrade in order to
attract or retain tenants or as a source of revenue. The Company believes that
certain types of MDUs, such as retirement communities, represent particularly
attractive potential markets, since these networks might offer shopping,
education, interactive health and entertainment services to senior citizens or
to consumers who have limited mobility. In 1999, the Company entered into an
agreement to merge with Futuretrak International, Inc, a Company which had
contracts to install services in multiple dwelling units. The merger was ended
by mutual agreement in December 1999, because the companies were not able to
find


                                      -10-
<PAGE>

financing to wire and equip the buildings. The Company is continuing to look for
investors to pay for the equipping of such buildings and upon obtaining such
investment, intends to move forward in the MDU market.

     Digital Hospitality. Some hotels, motels and resorts are already
considering upgrading to a full digital interactive services solution. The
Company anticipates that certain upscale hospitality properties, in particular,
will install digital systems during construction or thereafter upgrade to
digital systems. These digital systems have the potential to offer on-demand
video programming, games, gaming, shopping, health, education and other
services, in addition to high quality pay-per-view programming. The Company
recently received a small order from MInt, a system integrator which intends to
install and operate systems in hotels in the United States.

     Colleges and Universities. Many colleges have begun installing modern
high-speed networks, usually fiber optic, ATM or Ethernet, on their campuses.
Interactive video services provide an opportunity to add entertainment,
educational and information services to these networks both as a source of
revenue to help defray the cost of network installation and for educational
purposes. For example, popular courses could be stored on a server for viewing
by large audiences on a fully interactive basis, with the potential for
interactive test-taking and homework submission. Such a system could also aid
ill or physically handicapped students, those who work part time, absentees and
those who live a significant distance from the college or university.

     Corporate. The Company believes its products and services are well suited
for point of sale (POS) applications in which a server and multiple set top
boxes would be deployed in a large retail environment to provide customers with
detailed information on products and services, including pricing, specials,
training and the like.

     The Company believes that the broadband digital networks represent a
logical extension of Intranets. Business applications, such as training, data
management, communications and public relations, could potentially be
accommodated on broadband digital networks. The availability of such networks in
a corporate campus could also be employed to attract companies to a particular
business complex.

Sales and Marketing

     During 1999, the Company had one full time salesperson for a portion of the
year and during the remainder of the year all sales and marketing was done by
the Company President and CEO. The Company has constructed, in its facility in
Knoxville, Tennessee, an attractive demonstration facility and participates in
trade shows such as the National Association of Broadcasters (NAB), the National
Cable Telecommunications Association (NCTA), Supercomm and the Western Cable
Show. The Company utilizes sales and product literature and information to
communicate with potential customers. In March 2000, the Company hired a Sales
Manager for North America and anticipates that this will assist in increasing
Company sales activities. The Company also maintains a Website on the Internet
which produces a significant number of sales leads each month.

     The Company has entered into arrangements, both formal and informal, with a
wide array of companies with the aim of developing third party sales and
distribution of its products. These parties include the following: Nortel;
Minerva (encoders); Battelle Laboratories (energy management software); Marconi
(ATM switches); Innovacom (encoders) and ViaGate Technologies (network
equipment). The Company has in the past utilized several agents, including
Bescom, Inc. and TeleMedia International, Inc, in Korea, Hanshine International
Ltd., in China and Tadiran Telecommunications, Ltd., in Israel. The Company is


                                      -11-
<PAGE>

currently emphasizing North American markets. In this market, the Company is
actively pursuing third party distribution opportunities in the energy,
telephone, hospitality, multiple dwelling unit and medical markets.

Deployments

     The Company has installed fifteen interactive digital video servers in five
countries, consisting of seven servers in Korea, two in Israel, one in Taiwan,
four in China and one in Canada. The Company has deployed these servers on five
different network technologies including (i) FTTC (China), (ii) HFC (Taiwan),
(iii) high speed data lines, (E1) (Israel), (iv) twisted pair networks using DSL
(Korea) and (v) ATM (Canada). The Company believes it is the only Company to
have implemented interactive video systems on all major network types.

     The Company has also received a purchase order from Hopkinsville Electric
Service (HES) in Hopkinsville, Kentucky, for one thousand set top boxes and one
CTL 9000 digital video server. This system is expected to be installed in the
third or fourth quarter of year 2000, pending the completion of the Hopkinsville
Electric Services' digital network equipment.

Strategic Alliances

     The Company believes that entering into strategic alliances may give it
certain competitive advantages, including the ability to (i) reach a larger and
more diverse group of networks on which to deploy the Company's products and
services; (ii) provide a broader range of products and services; (iii) provide a
series of new and upgraded products and services, such as encoders and
applications software which could be attractive to customers seeking to improve,
upgrade, or extend their systems over an intended period of time; (iv) offer
end-to-end solutions; (v) access resources and information for utilization in
research for product development and design; (vi) test new Company designs for
compatibility with emerging network technologies developed by others in order to
facilitate cooperative arrangements; and (vii) pursue cooperative efforts at
trade shows and other marketing efforts. See "Deployments."

     The Company is actively seeking additional strategic alliances, which are
being managed by the President and CEO. The Company is seeking additional
alliances with (i) network systems providers for technical interconnection and
joint marketing; (ii) hardware manufacturers of real-time encoders,
multiplexers, digital set top boxes, digital video servers and related
equipment; (iii) content acquisition and management companies; (iv) hospitality
and hospital system vendors and distributors; (v) interactive applications
software developers; and (vi) business support systems software developers. In
addition, in order to demonstrate the strength of the relationship and to insure
more comprehensive cooperation, the Company is seeking larger and better-known
strategic partners make an investment in the Company.

     The Company has commenced discussions as to certain of these relationships,
while others are part of the Company's strategic plan, but all are not yet in
progress. No assurance can be given that the Company will be successful in
entering into such strategic alliances on acceptable terms or, if any such
strategic alliances are entered into, that the Company will realize the
anticipated benefits from such strategic alliances. See "Risk Factors-Need For
Strategic Alliances".

     The Company has entered into strategic alliances with the following
companies:


                                      -12-
<PAGE>

     Nortel (formerly Northern Telecom) markets the Company's servers and
set-top boxes to telephone companies and other applications throughout North
America.

     The Company also has strategic alliances with Innovacom, Inc. ("Innovacom")
and Minerva Systems, Inc. ("Minerva"), leading manufacturers of digital MPEG
encoders and Communications Engineering, Inc. ("CEI"), a leading provider of
digital production studios, although, to date, no sales have been made pursuant
to these arrangements. The Company's agreements with Minerva and Innovacom
provide for joint marketing, joint referrals and other joint marketing
activities. The Company's distribution agreement with CEI allows the Company to
bid CEI's systems as part of Company projects.

     The Company has entered into an agreement with Battelle Laboratories in
which Battelle is providing home energy management software which operates on
the T 6000 digital set top box at no cost to the Company. Upon the sale of such
software, the revenues are shared between the parties. There is also provision
in the agreement for joint marketing activities.

     Marconi (formerly Fore Systems, Inc.) is a leading manufacturer of ATM
switches. The Company's agreement with Marconi provides for marketing and
technical cooperation.

     ViaGate Technologies performs joint marketing with the Company related to
ViaGate's network switching equipment.

     The Company has strategic arrangements with such companies to be included
in end-to-end bids by those companies. Nortel, for example has done a number of
bids which Include Celerity products.

Competition

     The interactive video services market is highly competitive and
characterized by changing technology and evolving industry standards. In this
area, the Company's competitors include a number of companies, many of which are
significantly larger than the Company and which have greater financial resources
or which have entered into strategic alliances with such companies. Such
competition includes numerous companies including (i) developers of narrowband
solutions (for applications like the Internet); (ii) manufacturers of very large
servers (e.g., massively parallel processors, such as those developed by nCube,
Sequent Computer Systems, Inc., Hewlett Packard Company, AT&T Corporation and
IBM), which are generally employed for very large deployments such as whole
cities, but which may not be scalable for smaller market opportunities; (iii)
direct competitors to the Company that target the same niche markets as the
Company; (iv) manufacturers of set top boxes such as Pace, General Instrument,
Panasonic, Samsung, Scientific Atlanta, Stellar One and Zenith; and (v)
manufacturers of content preparation equipment such as DiviCom, FutureTel, Vela,
Panasonic, Silicon Graphics and Sony. Direct competitors include SeaChange
Systems, Inc., Concurrent Computer Corporation and DIVA. Competitive factors in
the interactive video services market include completeness of features, product
scalability and functionality, network compatibility, product quality,
reliability and price, marketing and sales resources and customer service and
support. The Company competes on the basis of its demonstrated ability to
install digital video systems on each of the major types of networks
accommodating interactive video services and its ability to offer economically
viable solutions based on the scalability of its systems. See "Risk
Factors--Competition" and "--Product Obsolescence; Technological Change."


                                      -13-
<PAGE>

Intellectual Property

     The Company does not have any patents on its products, but has filed
provisional patent application on a number of its more recent inventions,
primarily those related to the T 6000 digital set top box. The Company regards
the products that it owns as proprietary and relies primarily on a combination
of trade secret laws, non-disclosure agreements, other technical copy protection
methods (embedded coding) and copyright (where applicable) to protect its rights
in and to its products. It is the Company's policy that all employees and third
party developers sign nondisclosure agreements. However, this may not afford the
Company sufficient protection for its know-how on its proprietary products.
Other parties may develop similar know-how and products, duplicate the Company's
know-how and products, or develop patents that would materially and adversely
affect the Company's business, financial condition and results of operations.
Although the Company believes that its products and services do not infringe the
right of third parties and although the Company has not received notice of any
infringement claims, third parties may assert infringement claims against the
Company and such claims may result in the Company being required to enter into
royalty arrangements, pay damages, or defend litigation, any of which could
materially adversely affect the Company's business, financial condition and
results of operations. See "Risk Factors - - Lack of Patent and Copyright
Protection."

Manufacturing and Materials

     In 1999, the Company had a manufacturing agreement with Taylor-White
Manufacturing in Greeneville, Tennessee, to manufacture its T 6000 digital set
top boxes. The Company had no new T 6000 units built in 1999, but determined,
for a number of reasons, that it would be better served to have its
manufacturing moved elsewhere. In December 1999, the Company entered into a
manufacturing agreement with Global PMX Company, Limited, under which all T 6000
digital set top box manufacturing now being done in Global PMX plants in Taiwan
and China. This is a non-exclusive agreement, but it is the Company's intention
that the majority of these set top boxes be manufactured by Global at this time.
The Company has been transitioning the manufacture of set top boxes from
Tennessee to Taiwan and T 6000 manufacturing is expected to begin commercially
in Taiwan during the second quarter of 2000.

     The Company still assembles its own digital servers in Knoxville,
Tennessee. As part of assembling these digital video servers, the Company orders
the component parts from a number of outside suppliers. The Company purchases
certain raw materials, components and sub-assemblies included in the Company's
server products from a limited group of suppliers and does not maintain
long-term supply contracts with its suppliers. The Company relies on four
principal sole source suppliers, Microware, Pacific Micro Devices, CMD
Technologies and Solaris, for integral parts of the Company's digital servers.
The disruption or termination of the Company's sources or supply for its
interactive video segment could have a material adverse effect on the Company's
business and results of operations. While the Company is aware of alternative
suppliers for most of these products and the Company is actively investigating
some alternate sources, both directly and with Global PMX, there can be no
assurance that any supplier can be replaced in a timely manner. See "Risk
Factors - - Dependence on Suppliers; Manufacturing Risks."

Quality Control, Service and Warranties

     The Company's products must successfully pass tests at each important stage
of the manufacturing process. The Company offers maintenance and support
programs for its products that provide maintenance, telephone support,
enhancements and upgrades.


                                      -14-
<PAGE>

     The Company generally warrants its interactive video servers to be free
from defects in material and workmanship for one year from the completion of the
final acceptance test. At the end of the warranty period, the Company offers
maintenance and support programs. In some cases, customers may require a longer
or more extensive warranty as part of the competitive bid process. See "Risk
Factors - - Product Liability and Availability of Insurance."

     The Company generally warrants its digital set top boxes on a similar
basis, but for a period which is the later of 90 days from shipment or 60 days
from installation.

CD-ROM Segment

     The Company has also developed and marketed CD-ROM software products for
business applications. In February 1998, following the unsuccessful conclusion
of the Company's efforts to retain a qualified general manager for its CD-ROM
segment, the Company decided to scale back the segment to a maintenance mode of
operations. The decision was also based on the continued decline in the
segment's revenues and the Company's need to focus its efforts and resources on
the interactive video segment. The Company reduced its personnel in the CD-ROM
segment to zero full time employees, with the sales, manufacture and support of
existing CD-ROM customers, including the U.S. Navy, under the management of the
Vice President of Engineering and Operations. The Company is not actively
marketing its CD-ROM products, nor is it developing any new CD-ROM products,
product upgrades or features. The Company is continuing to maintain existing
customer relationships by providing technical support and filling sales orders.
The Company intends to sell or wind down its CD-ROM business. There can be no
assurance that the Company will realize any proceeds from the disposition of
such business. See Note 4 of the "Notes to Financial Statements."

     The Company's CD-ROM division has two major product groups. Mediator
provides access to CD-ROM towers and changers for Novell, UNIX and Windows NT
clients. CD WorkWare is a group of electronic document storage and imaging tools
which provide information management, indexing and search capabilities. This
product allows mainframe or minicomputers to print, scan, or tape transfer
output onto a Novell network where documents are placed in an on-line CD-ROM
library that can be accessed by any network user.

     The Company warrants its CD-ROM products for 30 days after purchase, with a
replacement or repair option on such CD-ROM products. The Company also provides
its CD-ROM customers with access to a telephone help desk for one year after
purchase.

Employees

     As of March 20, 2000, the Company had 6 full time employees, 4 of whom were
employed full time in the engineering and product development area, one of whom
fulfilled the marketing and sales function and one of whom fulfilled management
or administrative roles. The Company's employees are not represented by a union
or governed by a collective bargaining agreement. See "Risk Factors - -
Necessity of Attracting and Retaining Employees."

Research and Development Costs

     Research and development costs amounted to $912,045 and $90,498 and for the
years ended December 31, 1998 and 1999, respectively.


                                      -15-
<PAGE>

RISK FACTORS

     AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. THE RISK FACTORS CONTAINED HEREIN SHOULD BE CONSIDERED CAREFULLY BY
POTENTIAL INVESTORS IN EVALUATING THE COMPANY AND ITS BUSINESS PROSPECTS BEFORE
PURCHASING THE SECURITIES OFFERED HEREBY.

     CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

          Certain statements included or incorporated by reference into this
Form 10-KSB constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and include statements made in
press releases and oral statements made by our officers, directors or employees
acting on our behalf. All such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, our history of losses and need for additional financing, market
demand for our products, the ability to recruit additional personnel and other
factors referenced in this Form 10-KSB and in the company's filings with the
Securities and Exchange Commission. In addition to statements which explicitly
describe such risks and uncertainties, you are urged to consider statements
labeled with the terms "believes," "belief," "expects," "plans," "anticipates"
or "intends," to be uncertain and forward-looking.

     NEED FOR ADDITIONAL FINANCING

          As of December 31, 1999 we had cash and cash equivalents of
approximately $383 and a negative working capital of approximately $2,748,000.
The Company's cash position since year-end has improved due to the closing of
certain private financings in the form of convertible debentures and the
exercise of warrants to purchase common stock. However, the Company is dependent
upon the receipt of additional financings in order to continue as a viable
entity.

          In the third quarter of 1999, effective September 30, 1999, we entered
into a $5,000,000 Line of Credit Agreement with GMF Holdings and the May Davis
Group. Pursuant to the Line of Credit Agreement we may issue and sell to GMF
Holdings up to $5,000,000 principal amount of 4% Convertible Debentures during a
period beginning on the effective date of a registration statement covering our
common stock underlying the Convertible Debentures and ending September 30,
2000. Also in the fourth quarter of 1999 we sold $110,000 aggregate principal
amount of 4% Convertible Debentures and $204,980 aggregate principal amount of
8% Convertible Debentures in a private offering. In the first quarter of 2000 we
sold $610,000 aggregate principal amount of 8% Convertible Debentures in a
private offering and warrants of $75,000 were converted.

          The net proceeds from such financings have been and are intended to be
applied to our outstanding obligations and working capital.

          We will not be able to continue operations without additional
financing. The receipt of any additional net proceeds will be applied to our
working capital needs and outstanding obligations. We cannot assure you that
such additional financing will be available when needed on acceptable terms, or
at all.


                                      -16-
<PAGE>

     HISTORY OF LOSSES AND ACCUMULATED DEFICIT

          We had net losses of $6,955,800 for fiscal 1998 and $5,408,100 for
fiscal 1999. We had an accumulated deficit of approximately $21,428,000 at
December 31, 1998 and $26,836,100 at December 31, 1999. We cannot assure you
that we will continue as a going concern or ever operate profitably. We may
experience fluctuations in future operating results as a result of a number of
factors, including delays in digital video product enhancements and new product
introductions. We cannot assure you that we will be able to develop commercially
successful products or that we will recognize significant revenues from such
products.

     ABILITY TO CONTINUE AS A GOING CONCERN

          The report of our independent accountants with respect to our December
31, 1999 financial statements contains an explanatory paragraph regarding the
uncertainty resulting from our recurring losses, cash flow and working capital
problems. We have also significantly scaled back our operations as a result of
these factors. The lack of sales or a significant financial commitment raises
substantial doubt about our ability to continue as a going concern or to operate
our business on a full-scale basis. There can be no assurance that we will ever
receive the funds necessary for us to continue as a going concern or to operate
our business on a full-scale basis.

     LIMITED SALES; LIMITED MARKETING AND SALES EXPERIENCE

          We have limited resources and limited experience in marketing and
selling our products. Our sales efforts are currently being supervised by our
President. We cannot assure you that we will be able to establish and maintain
adequate marketing and sales opportunities or make arrangements with others to
perform such activities.

          We have not received any material new orders, other than an order in
September 1998 for $96,000 and an order in January 1999 for $1,253,000 ($13,000
of which has been recognized through 1999) for interactive video projects since
June 1997. We have discontinued our CD-ROM segment of operations, although we
have continued to receive small orders in 1999.

          Achieving market penetration will require significant efforts to
create awareness of and demand for, our products. Accordingly, our ability to
expand our customer base will depend upon our marketing efforts, including our
ability to establish an effective internal sales organization or strategic
marketing arrangements with others. Our failure to successfully develop
marketing and sales opportunities will have a material adverse effect on our
business. Further, we cannot assure you that such development will lead to sales
of our current or proposed products.

     NECESSITY OF ATTRACTING AND RETAINING EMPLOYEES

          Upon consummation of our initial pubic offering in November 1997, we
intended, subject to the availability of funds, to hire approximately 50
employees (in addition to our more than 60 then current employees) for
engineering, product development and operations; sales and marketing; and
management and administrative staff. Due, in large measure, to our inability to
realize sufficient cash flow from operations, we have been unable to implement
our hiring plans. Due in large measure to our inability to realize sufficient
cash flow from operations, our workforce has been reduced to approximately five
employees, which includes the departure of the Vice President of Sales and
Marketing in October 1998, the Controller in January 1999, the


                                      -17-
<PAGE>

Vice President of Business Development in June 1999 and the Vice President of
Engineering in September 1999.

          In 1998, we hired approximately 30 additional staff, but based on the
lack of new sales in the interactive video area and our heavy requirement for
cash related to the development and initial manufacture of the T 6000 digital
set top box, we were required to do a layoff of a small number of employees and
a larger number left us voluntarily, especially during the final six months of
1998, resulting in a reduction of approximately 45 staff from its peak number in
July 1998.

          We are in arrears in paying compensation to our employees and will not
be able to continue to retain them if we do not obtain additional funds to pay
them.

     DEPENDENCE ON KEY PERSONNEL

          Our success depends to a significant extent on the performance and
continued service of senior management, particularly Kenneth D. Van Meter and
Dennis Smith. In addition, senior officers (with the exception of Mr. West, who
is on an extended leave of absence) joined us in 1997 and 1998 and do not have
long-standing relationship with us. Our failure to retain the services of key
personnel or to attract additional qualified employees could adversely affect
us.

          We have entered into employment agreements with Messrs. Van Meter and
West. Mr. Van Meter's employment agreement expired on January 20, 2000. Mr.
West's employment agreement expires May 1, 2000 and has been amended to provide
for a voluntary leave of absence continuing through the end of the term of his
employment agreement. Mr. Smith's employment may be terminated by him or by us
at any time.

     DELISTING FROM THE NASDAQ SMALLCAP MARKET; TRADING ON THE OTC BULLETIN
BOARD; PENNY STOCK

          On October 25, 1999 we were notified by Nasdaq that our common stock
was delisted from trading on the Nasdaq SmallCap Market effective October 21,
1999. The delisting followed a Nasdaq panel's determination that we did not meet
the $1.00 per share bid price and $2,000,000 net tangible assets requirements
for maintenance on the Nasdaq SmallCap Market. The panel also cited the
explanatory paragraph in our auditor's report on our December 30, 1998 financial
statements regarding substantial doubt about our ability to continue as a going
concern going and determined that the our proposed merger with FutureTrak
International, Inc., (which has since been terminated) constituted a reverse
merger, requiring us to comply with more stringent initial listing requirements.
The panel was of the opinion that we failed to present a definitive plan for
continued listing on the Nasdaq SmallCap Market within a reasonable period and
to sustain compliance with those requirements over the long term.

          As a result of the delisting, there may be a limited release of the
market prices of our common stock and limited news coverage of the Company. The
delisting may also restrict investors' interest in our securities and materially
adversely affect the trading market and prices for such securities and our
ability to issue additional securities or to secure additional financing.

          In addition low price stocks are subject to the additional risks of
federal and state regulatory requirements and the potential loss of effective
trading markets. In particular, as long as the trading price of our common stock
is less than $5.00 per share, which it currently is, the common stock is subject
to Rule


                                      -18-
<PAGE>

15g-9 under the Securities Exchange Act of 1934 which, among other things,
requires that broker/ dealers satisfy special sales practice requirements. These
requirements include making individualized written suitability determinations
and receiving purchasers' written consent, prior to any transaction.

          If our securities are deemed penny stocks under the Securities
Enforcement and Penny Stock Reform Act of 1990, this would require additional
disclosure in connection with trades of our securities. Such disclosure includes
the delivery of a disclosure schedule explaining the nature and risks of the
penny stock market.

          The foregoing requirements could severely limit the liquidity of our
securities and materially adversely affect our ability to issue additional
securities or to secure additional financing.

     SHARES ELIGIBLE FOR FUTURE SALE

          Other than certain shares held by affiliates of the Company,
substantially all of our shares of common stock are freely transferable without
restriction or further registration under the Securities Act. The remaining
shares are "restricted securities" as that term is defined in Rule 144 under the
Securities Act. These restricted securities may be sold pursuant to Rule 144,
other than shares of common stock underlying certain options, warrants and
convertible securities which may be sold under Rule 144 pursuant to Rule 701
under the Securities Act or if "cashless exercise" provisions are utilized in
connection with their exercise. The sale of a substantial number of shares of
common stock or the availability of common stock for sale could adversely affect
the market price of the common stock.

     EFFECT OF PREVIOUSLY ISSUED OPTIONS, WARRANTS AND CONVERTIBLE DEBENTURES

          As of December 31, 1999, options to purchase an aggregate of 24,500
shares of common stock are outstanding under our 1995 stock option plan. These
options are all exercisable at $0.688 per share. In addition, options to
purchase an aggregate of 207,920 shares of common stock are outstanding under
our 1997 stock option plan. These options are exercisable at prices ranging from
$0.688 to $2.938 per share, although a majority of such options are exercisable
at $0.688 per share. We also have additional outstanding options and warrants to
purchase approximately 1,700,000 shares of common stock. The exercise price of
certain warrants may be lower since the holders of such warrants have certain
anti-dilution rights, although the Company has not made any adjustments.

          The foregoing is in addition to shares which are issuable upon
conversion of certain convertible debentures. Based on the market price of the
common stock on March 20, 2000, 1,181,833 shares would have been issuable upon
conversion of the convertible debentures outstanding as of such date, of which
some are currently convertible at a 25% discount to the market price of the
common stock and the remainder of which are currently convertible at the
debenture holders option of either a 35% discount to the highest bid price for
the common stock for five trading days preceding conversion or at fixed price
of $0.75 per share or $0.50 per share. Subsequent to such date, the Company
has issued approximately $600,000 face amount of convertible debentures.
Such debentures are currently convertible at the debenture holders option of
either a 25% discount to the to the highest bid price for the common stock for
five trading days preceding conversion or at fixed price of $1.50 per share.

          Additional shares are issuable for interest and liquidated damages due
on the Convertible Debentures and as a result of the triggering of anti-dilution
provisions of other instruments and agreements.


                                      -19-
<PAGE>

          The outstanding options, warrants and convertible debentures may
hinder future financings, since the holders of such securities may be expected
to exercise them at a time when we will otherwise be able to obtain equity
capital on more favorable terms. The existence or exercise of the outstanding
options, warrants and convertible debentures and subsequent sale of the common
stock issuable upon such exercise could adversely affect the market price of our
securities.

     OBLIGATIONS IN CONNECTION WITH THE ISSUANCE OF CONVERTIBLE DEBENTURES

          We are obligated to register the underlying common stock issuable upon
conversion of our convertible debentures under various registration rights
agreements. We did not timely fulfill our registration obligations in respect to
some of the convertible debentures. We will be required to pay liquidated
damages in the form of increased interest on the convertible debentures as a
result of our failure to timely file such registration statement and have it
declared effective by the Securities and Exchange Commission.

          In addition, we agreed to obtain (within 90 days following the
issuance of the convertible debentures) stockholder approval, for the possible
issuance upon conversion of the convertible debentures of shares of common stock
representing in excess of 19.99% of the outstanding shares of common stock on
the date that certain convertible debentures were issued. We will not timely
obtain such approval with respect to some of the convertible debentures.
Although such stockholder approval requirement is no longer required since the
Nasdaq SmallCap Market adjustment rules are no longer applicable to the Company
we may be required to pay liquidated damages in the form of increased interest
on the convertible debentures as a result of our failure to timely obtain
stockholder approval.

     CONTROL BY MANAGEMENT

          Our officers and directors beneficially own approximately 13.8% of the
common stock. As a result of such ownership, management may have the ability to
control both the election of the directors and the outcome of issues submitted
to a vote of stockholders.

     LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS

          Our Certificate of Incorporation includes provisions to eliminate, to
the extent permitted by law, the personal liability of directors for monetary
damages arising from a breach of their fiduciary duties as directors. Our
Certificate of Incorporation also includes provisions to the effect that
(subject to certain exceptions) we shall indemnify and upon request shall
advance expenses to any director in connection with any action related to such
a breach of their fiduciary duties as directors to the extent permitted by law.
In addition, our Certificate of Incorporation requires that we indemnify any
director, officer, employee or agent of the Company for acts which such person
conducted in good faith.

          As a result of such provisions, stockholders may be unable to recover
damages against the directors and officers for actions taken by them which
constitute negligence, gross negligence, or a violation of their fiduciary
duties. This may reduce the likelihood of stockholders instituting derivative
litigation against directors and officers. This may also discourage or deter
stockholders from suing directors, officers, employees and agents of the Company
for breaches of their duty of care, even though such action, if successful,
might otherwise benefit the Company and stockholders.


                                      -20-
<PAGE>

     RISKS APPLICABLE TO FOREIGN SALES

          For the years ended December 31, 1997 and 1998, substantially all of
our interactive video revenues were derived from projects in foreign countries
from foreign sales. However, nearly all of our current proposals are for
projects in North America. In 1999 none of our revenues were from foreign sales.

          It may be difficult to enforce agreements against foreign-based
customers. We may also face difficulties in collecting payments from foreign
customers. Other risks applicable to foreign sales include the difficulty and
expense of maintaining foreign sales distribution channels, barriers to trade,
potential fluctuations in foreign currency exchange rates, political and
economic instability, unavailability of suitable export financing, tariff
regulations, quotas, shipping delays, foreign taxes, export restrictions,
licensing requirements, changes in duty rates and other United States and
foreign regulations. In addition, we may experience additional difficulties in
providing prompt and cost effective service for our products in foreign
countries. Finally, we believe that potential sales opportunities have been
adversely affected by the current Asian general economic downturn. We do not
carry insurance against any of these risks.

     SUBSTANTIAL UP-FRONT EXPENSES; LIQUIDATED DAMAGES PROVISIONS AND OTHER
PROJECT RISKS

          A significant portion of our revenues have been and are expected to
continue to be, derived from substantial long-term projects which require
significant up-front expense to the Company. There can be no assurance that
revenues will be realized until the projects are completed or certain
significant milestones are met. For example, suppliers and developers for
long-term interactive video projects, such as the Korean, Israeli, Taiwanese and
Chinese projects in which we participated, are required to reach certain
milestones prior to the Company's receipt of significant payments. Our failure,
or any failure by a third-party with which we may contract, to perform services
or deliver interactive video products on a timely basis could result in a
substantial loss to the Company.

          We have had difficulty in meeting delivery schedules, which has
resulted in customer dissatisfaction. In addition, difficulty in completing a
project could have a material adverse effect on our reputation, business and
results of operations. In many instances, we are dependent on the efforts of
third parties to adequately complete our portion of a project and, even if our
digital video servers perform as required, a project may still fail due to other
components of the project supplied by third parties.

     CONSEQUENCES OF FIXED PRICE CONTRACTS AND COMMITMENTS

          We have entered into and may in the future enter into fixed price
agreements for the sale of our products and services. Pricing for such
commitments is made based upon estimates of development and production effort
and estimates of future product costs. We bear the risk of faulty estimates,
cost overruns and inflation in connection with these commitments. Therefore, any
fixed price agreement can become unprofitable and could materially adversely
affect the Company.

          We reserved approximately $673,000 for the year ended December 31,
1996 for potential losses on uncompleted contracts. We completed our deliveries
on the contracts in the first quarter of 1998, exhausting the reserves
established in 1996 and incurring additional costs of approximately $190,000. We
cannot assure you that these type of risks will not continue to negatively
affect our margins and profitability.


                                      -21-
<PAGE>

     COMPETITION

          The interactive video industry is highly competitive. Many of the
companies with which we currently compete or may compete in the future have
greater financial, technical, marketing, sales and customer support resources,
as well as greater name recognition and better access to customers, than
ours. In addition, certain of such competitors have entered into strategic
alliances which may provide them with certain competitive advantages. We can not
assure you that we will be able to compete successfully with existing or future
competitors.

     UNCERTAIN MARKET ACCEPTANCE

          We are engaged in the design and development of interactive video
products. As with any new technology, there is a substantial risk that the
marketplace may not accept the technology utilized in our products. Market
acceptance of our products will depend, in large part, upon our ability to
demonstrate the performance advantages and cost-effectiveness of their products
over competing products and the general acceptance of interactive video
services. In particular, the Company believes that widespread deployment of
interactive video systems will depend on a number of factors, including:

          - decreases in the cost per subscriber;

          - the "user-friendliness" of such systems, particularly set top boxes
          and remote controls which are relatively easy to understand and use;
          and

          - improvements in the quantity and quality of interactive services
          available.

          Although recent developments have reduced the cost per subscriber and
we anticipate that such costs will continue to decrease as interactive video
systems are more widely deployed, the current cost per subscriber may make the
system too expensive for a number of potential network operators. We cannot
assure you that they will be able to market their technology successfully or
that any of their current or future products will be accepted in the
marketplace.


                                      -22-
<PAGE>

     NEED FOR STRATEGIC ALLIANCES

          We believe that there are certain potential advantages to entering
into one or more strategic alliances with major interactive network or product
providers. Although we have entered into certain of such alliances, we are
actively seeking to enter into more of such alliances. Certain of our
competitors and potential strategic allies may have entered into or may enter
into agreements which may preclude such potential allies from entering into
alliances with us. We cannot assure you that we will be successful in entering
into any such strategic alliances on acceptable terms or, if any such strategic
alliance is entered into, that they will realize the anticipated benefits from
such strategic alliance.

     DEPENDENCE ON SUPPLIERS; MANUFACTURING RISKS

          We rely primarily on outside suppliers and subcontractors for
substantially all of our parts, components and manufacturing supplies. Certain
materials are currently available only from one supplier or a limited number of
suppliers. We do not maintain long-term supply contracts with our suppliers. The
disruption or termination of our supply or subcontractor arrangements could have
a material adverse effect on our and results of operations. Our reliance on
third parties involves significant risks, including reduced control over
delivery schedules, quality assurance, manufacturing yields and cost, the
potential lack of adequate capacity and potential misappropriations of our
Company's intellectual property. In addition, vendor delays or quality problems
could also result in lengthy production delays.

          To obtain manufacturing resources, we may contract for manufacturing
by third parties or may seek to enter into joint venture, sublicense, or other
arrangements with another party which has established manufacturing capability.
Alternatively, we may choose to pursue the commercialization of such products on
our own. We cannot assure you that, either on our own or through arrangements
with others, we will be able to obtain such arrangements on acceptable terms.

     RELIANCE ON KEY CUSTOMERS

          Our interactive video services revenues to date have been derived
almost exclusively from five telecommunications customers, none of whom have
placed a new order with us since June 1997. The lack of new projects and major
customers has had and may continue to have, a material adverse effect on the
Company.

     LACK OF PATENT AND COPYRIGHT PROTECTION

          Although we have filed a provisional patent application with respect
to certain technology, we hold no patents and have not generally filed patent
applications. Our methods of protecting our proprietary knowledge may not afford
adequate protection. We cannot assure you that any patents applied for will be
issued, or, if issued, that such patents would provide them with meaningful
protection from competition.


                                      -23-
<PAGE>

          In Asia and third world countries, in which we do business and have
had license agreements, the unauthorized use of technology, whether protected
legally or not, is widespread. It is possible that our technology will be
subject to theft and infringement. Furthermore, in accordance with our current
business plan, it will be necessary for us to make our intellectual property
available to vendors, customers and other companies in the industry, making it
even more difficult to protect our technology.

     RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT

          Technology-based industries, such as ours, are characterized by an
increasing number of patents and frequent litigation based on allegations of
patent infringement. From time to time, third parties may assert patent,
copyright and other intellectual property rights to technologies that are
important to the Company. While there currently are no outstanding infringement
claims pending by or against us, we cannot assure you that third parties will
not assert infringement claims against us in the future, that assertions by such
parties will not result in costly litigation, or that they will prevail in any
such litigation. In addition, we cannot assure you that we will be able to
license any valid and infringed patents from third parties on commercially
reasonable terms or, alternatively, be able to redesign products on a
cost-effective basis to avoid infringement. Any infringement claim or other
litigation against or by us could have a material adverse effect on the Company.

     NO ASSURANCE OF TECHNOLOGICAL SUCCESS

          Our ability to commercialize their products is dependent on the
advancement of our existing technology. In order to obtain and maintain a
significant market share we will continually be required to make advances in
technology. We cannot assure you that our research and development efforts will
result in the development of such technology on a timely basis or at all. Any
failures in such research and development efforts could result in significant
delays in product development and have a material adverse effect on the Company.
We cannot assure you that we will not encounter unanticipated technological
obstacles which either delay or prevent us from completing the development of
our products.

          We believe there are certain technological obstacles to be overcome in
order to develop future products. These obstacles include the lack of an
electronic data interchange server interface (used for real-time exchange of
data between servers) and enhancements in the ability to access and utilize
information stored on remote servers. In certain cases, we will be dependent
upon technological advances which must be made by third parties. We cannot
assure you that they or such third parties will not encounter technological
obstacles which either delay or prevent us from completing the development of
our future products. Such obstacles could have a material adverse effect on the
Company.

     PRODUCT OBSOLESCENCE; TECHNOLOGICAL CHANGE

          The industries in which we operate is characterized by unpredictable
and rapid technological changes and evolving industry standards. We will be
substantially dependent on our ability to identify emerging markets and develop
products that satisfy such markets. We cannot assure you that we will be able to
accurately identify emerging markets or that any products we have or will
develop will not be rendered obsolete as a result of technological developments.

          We believe that competition in our business may intensify as
technological advances in the field are made and become more widely known. Many
companies with substantially greater resources than ours are engaged in the
development of products similar to those proposed to be sold by the Company.


                                      -24-
<PAGE>

Commercial availability of such products could render our products obsolete,
which would have a material adverse effect on the Company.

          From time to time, we may announce new products or technologies that
have the potential to replace our existing products offerings. We cannot assure
you that the announcement or expectation of new product offerings by us or
others will not cause customers to defer purchases of existing Company products,
which could materially adversely affect the Company.

     EFFECT OF INDUSTRY STANDARDS AND COMPATIBILITY WITH EQUIPMENT AND SOFTWARE

          The interactive video industry is currently characterized by emerging
technological standards. Widespread commercial deployment of our products will
depend on determinations by the industry as to whether such products will be
compatible with the infrastructure equipment and software which comprise those
standards. Failure to comply substantially with industry standards in a timely
manner, either as they exist at a given time or as they may evolve in the
future, could have a material adverse effect on the Company. In some cases, to
be compatible with industry standards, we may need to obtain the cooperation of
its suppliers, partners and competitors, which we cannot assure.

     ERRORS AND OMISSIONS; SOFTWARE AND HARDWARE BUGS

          Certain of our products consist of internally developed software and
hardware component sets, purchased software from third parties and purchased
hardware components. Additionally, we outsource substantially all of the
manufacturing of our products, including the installation and configuration of
certain hardware and software components. There is a substantial risk that these
components will have or could develop certain errors, omissions or bugs that may
render our products unfit for the purposes for which they were intended. While
there are no such known errors, omissions or bugs, we cannot assure you that
such errors, omissions or bugs do not currently exist or will not develop in our
current or future products. Any such error, omission or bug found in our
products could lead to delays in shipments, recalls of previously shipped
products, damage to the Company's reputation and other related problems which
would have a material adverse effect on the Company.

     GOVERNMENT REGULATION

          The Federal Communications Commission and certain state agencies
regulate certain of our products and services and certain of the users of such
products and services. We are also subject to regulations applicable to
businesses generally, including regulations relating to manufacturing. In
addition, regulatory authorities in foreign countries in which we sell or may
sell our products may impose similar or more extensive governmental regulations.

          We rely upon and contemplate that they will continue to rely upon, our
corporate partners or interactive video system sponsors to comply with
applicable regulatory requirements. We cannot assure you that such regulations
will not materially adversely affect us by jeopardizing the projects in which we
are participating, by imposing burdensome regulations on the users of the
products, by imposing sanctions that directly affect us, or otherwise. Changes
in the regulatory environment relating to the industries in which we compete
could have an adverse effect on the Company. We cannot predict the effect that
future regulation or regulatory changes may have on our business.


                                      -25-
<PAGE>

     PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE

          The manufacture and sale of our products entail the risk of product
liability claims. In addition, many of the telephone, cable and other large
companies with which we do or may do business may require financial assurances
of product reliability. At the present time we do not maintain product liability
insurance.

     VARIABILITY OF QUARTERLY OPERATING RESULTS

          Variations in our revenues and operating results occur from time to
time as a result of a number of factors, such as the number of interactive video
projects in which we are engaged, the completion of work or achievement of
milestones on long-term projects and the timing and progress of our product
development efforts. The timing and realization of revenues is difficult to
forecast, in part, because our sales and product development cycles for
interactive video products can be relatively long and may depend on factors such
as the size and scope of our projects.

          We have not received material new orders, other than an order in
September 1998 for $96,000 and an order in January 1999 for $1,253,000 ($13,200
of which has been recognized through the third quarter of 1999) for interactive
video projects since June 1997, although we received orders for CD-ROM
products during 1999. Furthermore, as a result of a variety of other factors,
including the introduction of new products and services by competitors and
pricing pressures and economic conditions in various geographic areas where
our customers and potential customers do business, our sales and operating
results may vary substantially from year to year and from quarter to quarter.

          The variation in sales and operating results may be expected to
increase as a result of the scaling back of our CD-ROM operations. In addition,
the timing of revenue recognition for revenue received from long term projects
under our accounting policies may also contribute to significant variations in
our operating results from quarter to quarter.

     LACK OF DIVIDENDS

          We have never paid any dividends on our common stock. We anticipate
that, for the foreseeable future, any earnings that may be generated from
operations will be used to support internal growth and that dividends will not
be paid to stockholders.

     ANTI-TAKEOVER EFFECTS ASSOCIATED WITH THE ISSUANCE OF "BLANK CHECK"
PREFERRED STOCK AND DELAWARE LAW.

          Our Certificate of Incorporation authorizes our Board of Directors to
issue up to 3,000,000 shares of "blank check" preferred stock. The Board of
Directors, without stockholder approval, may fix all the rights of the preferred
stock. The issuance of such stock could, among other results, negatively affect
the voting power of the holders of common stock.

          Under certain circumstances, the issuance of the preferred stock would
make it more difficult for a third party to gain control of the Company,
discourage bids for the common stock at a premium, or otherwise adversely affect
the market price of the common stock. Such provisions may discourage attempts to
acquire the Company. In addition, certain provisions of Delaware law may also
discourage third party attempts to acquire control of the Company.


                                      -26-
<PAGE>

          We have no current arrangement, commitment or understanding with
respect to the issuance of our preferred stock. We cannot assure you, however,
that we will not, in the future, issue shares of preferred stock.

     NON-CASH CHARGES

          As a result of our issuance of convertible debentures and warrants, in
the first and fourth quarters of fiscal 1999, we were required to reflect the
difference between the aggregate conversion price of all of the convertible
debentures and the current fair market value (on the date of issuance of the
convertible debentures) of the shares underlying the convertible debentures as a
discount on the convertible debentures and as additional paid in capital. This
discount of $375,935 is being amortized as a non-cash interest expense over a
90-day period (the period between the date of issuance of the convertible
debentures and the date the convertible debentures first become exercisable).

     GENERAL ECONOMIC CONDITIONS

          The industry in which we compete relies in part upon consumer
confidence and the availability of discretionary income. Both of these can be
adversely affected during a general economic downturn. In addition, potential
customers may not be willing or able to commit funds to interactive video
projects during such a downturn.

     POSSIBLE VOLATILITY OF STOCK PRICES

          The market prices of equity securities of computer technology and
software companies have experienced extreme price volatility in recent years for
reasons not necessarily related to the individual performance of specific
companies. Accordingly, the market price of the common stock may be highly
volatile. The market price of the common stock may be significantly affected or
may fluctuate substantially due to factors such as the following:

          -- announcements by the Company or its competitors concerning
          products, patents, technology and governmental regulatory actions;

          -- other events affecting computer technology and software companies
          generally; and

          -- general market and economic conditions.


     ITEM 2.  DESCRIPTION OF PROPERTY

          In December 1999, Celerity entered into a lease for a facility with
approximately 7,420 square feet of combined office and warehouse space at 122
Perimeter Park Drive, Knoxville, Tennessee. The term of the lease is from
January 15, 2000 to January 14, 2003, with an option to renew for two additional
three-year periods. Monthly lease payments will average approximately $5,000 per
month plus utilities and certain other maintenance expenses.


                                      -27-
<PAGE>

     ITEM 3. LEGAL PROCEEDINGS.

          There is no pending litigation against Celerity, other than a claim
for approximately $6,000 and claims of Celerity's prior landlord. The Company
entered into a written lease agreement with its prior landlord dated November
25, 1997, which was amended on April 1, 1998. The lease was terminated by the
landlord as a result of the Company's breach, effective January 29, 1999.
Pursuant to an agreement between the Company and the landlord, the Company
acknowledged breach of the lease due to its failure to pay the required rental
amount. The agreement provided that any time after February 20, 1999, the
landlord could cause its counsel to (a) file a detainer warrant or complaint and
(b) submit the answers and agreed judgments executed by the Company if the
parties did not enter into a written agreement regarding the portion of the
previously leased premises which the Company occupied. The Company is in
negotiations with the landlord to settle its outstanding obligations. No
assurance can be given as to the successful conclusion of these negotiations. In
addition, certain creditors have threatened litigation if not paid. Celerity is
seeking to make arrangements with creditors. There can be no assurance that any
claims, if made, will not have an adverse effect on Celerity. See "Description
of Business."

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

          There were no matters submitted to a vote of stockholders during the
fourth quarter of the fiscal year ended December 31, 1999.


                                      -28-
<PAGE>

                                     PART II

     ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Market Information.

          The Common Stock ceased trading on the Nasdaq SmallCap Market on
October 21, 1999. The Company's Common Stock is currently traded on the OTC
Bulletin Board under the symbol "CLRT".

          The following table sets forth, for the fiscal periods indicated, the
high and low bid prices of a share of Common Stock for the last eight quarterly
periods. Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.

                                              High     Low
                                             ------   ------
           Fiscal year 1998
                1st Quarter................  $4.375   $1.375
                2nd Quarter................  $3.875   $1.312
                3rd Quarter................  $2.500   $0.938
                4th Quarter................  $2.688   $0.656

           Fiscal year 1999
                1st Quarter................  $1.625   $0.750
                2nd Quarter................  $1.125   $0.406
                3rd Quarter................  $1.500   $0.375
                4th Quarter................  $0.719   $0.125

          As of March 20, 2000 there were approximately 101 holders of record of
the Common Stock.

          The Company has not paid dividends on the Common Stock since inception
and does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to retain earnings, if any, for the
development and expansion of its business. The declaration of dividends in the
future will be at the election of the Board of Directors and will depend upon
the earnings, capital requirements and financial position of the Company,
general economic conditions and other factors the Board of Directors deems
relevant.

     ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

          The Following discussion should be read in conjunction with the
financial statements and notes thereto and other financial information appearing
elsewhere in this Annual Report on Form 10-KSB. Statements in this Management's
Discussion and Analysis or Plan of Operation and elsewhere in this Annual Report
that are not statements of historical or current fact constitute
"forward-looking statements." Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors including those set forth under
"Description or Business-Risk Factors" that could cause the actual results of
the Company to be materially different from the historical results or from any
future results expressed or implied by such


                                      -29-
<PAGE>

forward-looking statements. In addition to statements which explicitly describe
such risks and uncertainties, prospective investors are urged to consider
statement labeled with the terms "believes," "belief," "expects," "intends,"
"anticipates," or "plans" to be uncertain and forward-looking.

     Overview

          Prior to 1998, the Company's major activity was selling digital video
servers in the interactive video services market. All sales were in Korea,
Israel, Taiwan and China. However, beginning in 1998, the Company has focused
its sales efforts in North America, and developed and sold the first production
units of a new digital set top box, the T 6000.

          The Company has continued to focus most of its development and
production efforts during the twelve months ended December 31, 1998 and,
although on a much more limited basis, through 1999 on the T 6000, while also
seeking new projects for the Company's digital video servers, which could be
deployed with the T 6000 or other compatible set top boxes. The Company has
produced its initial trial run of the T 6000 set top boxes, which were
manufactured by Taylor-White, LLC, of Greeneville, Tennessee (Taylor-White").
The Company sold 13 of these trial run boxes to Northern Telecom ("Nortel") in
September 1998 for use in their demonstration facility in Ottawa, Canada. In
addition, Nortel purchased a CTL 7000 digital video server. In December, 1999,
the Company entered into a manufacturing agreement with Global PMX Company,
Limited, under which all T 6000 digital set top box manufacturing is now being
done in Global PMX plants in Taiwan and China.

          Management has also focused on attempting to obtain the necessary
capital to maintain the Company's operations. The Company is continuing to seek
to arrange financing, including possible strategic investment or opportunities
to sell some or all of the Company's assets and business, while continuing to
pursue sales opportunities. The Company has narrowed its sales efforts to those
which, the Company believes, have the best chance of closing in the near term.
With the departure of the Company's Vice President of Sales and Marketing in
October 1998, through 1999, the Company's sales efforts were supervised by its
President. In March 2000, the Company hired a Sales Manager for North America.
The Company continues to encounter a longer and more complex sales cycle and to
realize fewer sales than previously anticipated. The Company has not received
any material new orders since June 1997 (other than an order in September 1998
for $96,000 and an order in January 1999 for $1,253,000 of which $13,000 has
been recognized through 1999). Although the T 6000 is in production, the Company
continues to add and improve functionality and may be required to do so for
certain deployments. However, management believes that the Company is now better
positioned to become an important participant in many of its key market
segments. There can be no assurance that this will be the case. Because of the
Company's long-term sales cycle, period-to-period comparisons set forth below
may not be meaningful and may not necessarily be indicative of the results that
may be expected for future periods.

          In connection with the Company efforts to arrange financing, including
possible strategic investments, the Company, on April 27, 1999, entered into a
Letter of Intent to merge with FutureTrak International, Inc., a technology firm
based in Pompano Beach, Florida, which specializes in the multi-dwelling unit
marketplace. On August 10, 1999, the companies announced the execution of a
definitive merger agreement which contemplated the merger of FutureTrak into a
wholly-owned subsidiary of the Company. However, on December 7, 1999, the
companies terminated the merger agreement. The Company originally determined to
merge with FutureTrak primarily because FutureTrak planned to focus on the
business of providing satellite television and other services to multi housing
unit projects and Celerity believed that its


                                      -30-
<PAGE>

technology was well suited for such projects. The merger was terminated
primarily because efforts to obtain necessary funding for the planned activities
of the merged companies had not proven successful.

          In February 1998, following the unsuccessful conclusion of the
Company's efforts to retain a qualified general manager for its CD-ROM segment,
the Company decided to scale back the segment to a maintenance mode of
operations. The decision was also based on the continued decline in the
segment's revenues, and the Company's need to focus its efforts and resources on
the interactive video segment. The Company then developed a formal plan of
disposal which became effective in May 1998, and the Company now accounts for
the CD-ROM segment as a discontinued operation. The Company is actively seeking
a buyer for the segment which had a net loss from operations of approximately
$114,000 for the twelve months ended December 31, 1998 and a loss (gain) on
disposal of the segment of approximately $22,000 and $(27,000) for the same
periods in 1998 and 1999, respectively. There can be no assurance that the
Company will realize any proceeds from the disposition of the segment. Due to
the discontinued status of the segment, the remainder of management's discussion
of the Company's financial results does not include the CD-ROM segment.

          The Company has indefinitely postponed any continued research and
development efforts related to the CTL 8500 digital baseband server, aimed at
the analog hospitality and cable market, and the CTL 10000, aimed at larger
system deployments. Future research and development efforts are being delayed
indefinitely. The Company has continued limited development on its CTL 7000 and
CTL 9000 digital video servers and software to add functionality and reduce
costs.

          The Company has one interactive video customer that represented 56% or
the Company's revenues in 1998 and approximately 50% in 1999. Export sales
represented 56% and 35% of revenues for 1998 and 1999, respectively. Sales to
Chinese companies represented 56% of total revenues in 1998.

     Results of Operations

     Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

          Revenues. The Company had revenues of $85,894 for the year ended
December 31, 1999, as compared to $814,159 for the same period in 1998. Primary
reasons for this difference were the constrained marketing activities due to the
Company's cash situation and lack of interactive video sales as a result. Sales
of interactive video services in 1998 were to Beijing Telecom Authority (BTA) in
China and to Nortel in Canada.

          Costs of Revenues. Costs of revenues were $366,495 in 1999 as compared
to $879,280 in 1998. The Company had a gross loss of $280,601 in 1999 as
compared to $65,121 for the same period in 1998. Costs of revenues in 1999 were
primarily due to the write down of $354,523 of obsolete inventory to net
realizable value. The remainder of costs in 1999 were greatly reduced from 1998
due to the Company having virtually no revenue in the second, third and fourth
quarters of 1999. The majority of the costs of revenue for the twelve months
ended December 31, 1998 was due to the completion of the Company's BTA project
and the recognition of the related costs on the project of approximately
$594,000, which had been capitalized over the life of the project. The remainder
of costs for 1998 were related to the Company's efforts to complete projects for
which revenue had previously been recognized.

          Operating Expenses. Operating expenses for the twelve months ended
December 31, 1999 were $4,667,719, as compared to $6,810,757 for the same period
in 1998. The decrease is due to the


                                      -31-
<PAGE>

significant reduction in personnel costs. The Company during 1999 reduced its
workforce to approximately five employees, due in large measure to its inability
to realize sufficient cash flow from operations.

          Interest Expense and Income. Primarily due to the Company's issuance
of private placements in October and November of 1998 and during the first and
fourth quarters of 1999, interest expense for 1999 was $537,865, as compared to
$35,056 in 1998. Of the total for 1999, $285,235 was a non-cash expense incurred
as a result of the amortization through a charge to interest expense of the
beneficial debt conversion features of the 1999 placements. Interest income was
$686 in 1999 versus $90,219 in 1998. This decrease is a result of the reduced
cash resources available during the latter part of 1998 and throughout 1999.

          Loss from continuing operations. As a result of the above factors,
loss from continuing operations for the twelve months ended December 31, 1999
was $5,434,986 as compared to $6,820,715 for the same period in 1998.

     Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

          Revenues. The Company had revenues of $814,159 for the year ended
December 31, 1998, as compared to $2,716,939 for the same period in 1997.
Primary reasons for this difference were the lack of interactive video sales due
to the weak Asian economy, discontinuance of the Company's CD-ROM division and
constrained marketing activities due to the Company's cash situation. Sales of
interactive video services in 1998 were to Beijing Telecom Authority (BTA) in
China and to Nortel in Canada.

          Costs of Revenues. Costs of revenues were $879,280 in 1998 as compared
to $2,972,328 in 1997. The Company had a gross loss of $65,121 in 1998 as
compared to $255,389 for the same period in 1997. Costs of revenues in 1998 were
related to the completion of the BTA project and the cost of the initial T 6000
production units sold to Nortel. The costs of revenues in 1997 were primarily
due to the Company's efforts to complete long-term projects and the costs of
production design and tooling for several major vendors, including Taylor-White,
Knoxville Industrial Design, Philips and Lambda, to prepare for T 6000 initial
production.

          The decrease in costs of revenues was primarily due to the fact that
the Company had virtually no revenue during the second, third, and fourth
quarters of 1998, and therefore had few costs associated with revenues for those
quarters. The majority of the costs of revenue for the twelve months ended
December 31, 1998 was due to the completion of the Company's BTA project and the
recognition of the related costs on the project of approximately $594,000, which
had been capitalized over the life of the project. The remainder of the costs
for 1998 were related to the Company's efforts to complete projects for which
revenue had previously been recognized.

          Operating Expenses. Operating expenses for the twelve months ended
December 31, 1998 were $6,810,754, as compared to $3,158,909 for the same period
in 1997. As mentioned previously, operating expenses were significantly greater
in all areas during 1998 due to the Company's efforts to achieve better
performance and prepare for anticipated future growth. The majority of the
increase consisted of an increase in operating wages expenses and associated
payroll taxes and other employee benefits due to the hiring of additional
personnel early in 1998. Another component of the increase in operating expenses
was an increase in facility rental expense during 1998 as compared to the same
period in 1997 with the Company's move to a new facility. The Company also began
developing more sophisticated marketing materials and incurred


                                      -32-
<PAGE>

expenses for other marketing efforts in 1998. Expenses incurred for the use of
contractors, consultants, and recruiting efforts also increased in the 1998
period due to the Company's increased need for quality personnel.

          The Company also recognized $2,544,775 in non-cash compensation
expense during the twelve month period ended December 31, 1997 due to the fact
that it had granted stock options at an exercise price below the initial public
offering of $7.50 per share in the IPO. There were no similar expenses in 1998.

          Interest Expense and Income. Due to the Company's repayment of debt in
late 1997, following receipt of proceeds from the IPO, interest expense for 1998
was $35,056, as compared to $664,687 in 1997. Interest income was similar at
$90,219 in 1998 versus $79,958 in 1997.

          Loss from continuing operations. As a result of the above factors, net
loss from continuing operations before extraordinary item for the twelve months
ended December 31, 1998 was $6,820,715 as compared to $6,543,802 for the same
period in 1997.

     Liquidity and Capital Resources

          The primary source of financing for the Company since its inception
has been through the issuance of common and preferred stock and debt and related
accrued interest.

          In November 1997, the Company consummated the IPO in which 2,000,000
shares of Common Stock were sold at a purchase price of $7.50 per share. The
Company realized net proceeds of approximately $12,386,800 from the IPO, of
which approximately $5,446,000 was used to pay its outstanding debt and related
accrued interest.

          In August 1998, the Company's President loaned the Company $55,000 on
a short term basis for working capital needs. In September 1998, one of the
Company's directors loaned the Company an additional $100,000 for working
capital uses. In October 1998, the Company amended its 401(k) plan to allow
participants in the plan to invest in the Company's common stock. The Company's
President allocated the entirety of his investments into the Company's common
stock in the approximate amount of $136,000 and the plan purchased 155,028
shares on his behalf. Some additional employees purchased substantially smaller
amounts through their 401(k) plan under this program. The Company has used these
proceeds for working capital. In October and November 1998, the Company received
aggregate gross proceeds of $450,000 from a private placement. Such proceeds
included cancellation of $150,000 of indebtedness to a director and the
President of the Company (see above). Each investor in the private placement
received a seven percent promissory note with a principal amount equal to the
amount of the investment with a term of one, two, or three years. Principal and
interest are payable by the Company at maturity. In addition, each investor
received the right to a royalty payment of fifty cents per $100,000 invested
(pro rated for lesser investments), for each T 6000 digital set top box sold
during a period of up to five years following the closing. The $450,000 received
represents the entire amount received in the private placement. Investors in the
private placement included certain directors and officers of the company, as
well as outside investors. The funds were used for general operating expenses of
the Company.

          The Company had cash balances on hand as of December 1999 of
approximately $380. The Company's cash position continues to be uncertain. In
efforts to control cash outflow, the Company's officers have elected to defer
portions of their salaries since August of 1998 and until such time as the
financial position of the Company will allow those deferrals to be repaid. The
Company's President has not taken any salary since the July 1998 pay period and
the Company is in arrears in paying compensation to its


                                      -33-
<PAGE>

employees. The Company has lost employees either voluntarily or involuntarily
since the second half of 1998 due to its financial position and has
significantly scaled back its operations.

          The Company raised $600,000 between January 1999 and March 1999 and
$314,980 between October 1999 and December 1999 in private placements of
interest bearing convertible debentures. In addition to the private placements
of convertible debentures issued in 1999, in September 1999 the Company entered
into an equity line of credit that it anticipates will shortly become effective.
Under the line of credit arrangements, the Company may elect to draw down up to
$5,000,000 aggregate principal amount of debentures with a maximum drawdown of
up to $500,000 per calendar month, through September 30, 2000, subject to the
satisfaction of certain conditions, including conditions relating to the trading
volume of the Company's common stock.

          In the first quarter of 2000, the Company received gross proceeds from
a private placement of convertible debt totaling $610,000 and $75,000 from the
exercise of 1999 common stock warrants. The Company is looking at several other
options in terms of improving its cash situation. The Company is continuing to
seek to arrange financing, including possible strategic investment or
opportunities to sell some or all of the Company's assets and business, while
continuing to pursue sales opportunities. The Company has granted a security
interest in its property to its landlord and has granted a security interest in
its personal property to one of its legal counsel. Such security interests may
hinder the Company's efforts to obtain financing. The Company also continues to
seek buyers for the CD-ROM division, either the Mediator of WorkWare segments,
or both. There can be no assurance that the Company will be able to obtain any
such required additional funds from any source on a timely basis, on favorable
terms, or at all. The lack of sales or a significant financial commitment raises
substantial doubt about the Company's ability to continue as a going concern or
to resume a full-scale level of operations.

          Since its inception in January, 1993 and through December 31, 1999,
the Company has an accumulated deficit of $26,836,098. The Company expects to
incur operating losses for the indefinite future as it continues to solidify its
technology and achieve some sales success. The Company is also continuing to
pursue its sales efforts and endeavoring to offer attractive pricing to close
sales in a timely manner. Since January 1, 1999, the Company has received new
interactive service orders from Hopkinsville Electric Service, and Optelecom.
There can be no assurance, however, as to the receipt or timing of revenues from
operations, including, in particular, revenues from products currently under
development.

          As of December 31, 1999 the Company had a negative net working capital
of approximately $2,748,000. The Company had no significant capital spending or
purchase commitments at December 31, 1999 other than certain facility leases and
inventory component purchase commitments required in the ordinary course of its
business.

          The Company has no existing bank lines of credit.

Impact of Year 2000

          The Year 2000 issue is the result of computer programs being written
using two digits instead of four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software or facilities or
equipment containing embedded micro-controllers may recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing potential disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. Through January 2000, the Company
has not


                                      -34-
<PAGE>

experienced significant or material malfunctions in its information technology
(IT) systems as the result of Year 2000. The Company believes it could
experience minor malfunctions of its IT systems and Non-IT business systems not
previously detected but that these minor malfunctions will not have a material
impact on the Company's results of operations or financial condition. As
discussed below, the Company's continued Year 2000 compliance in calendar 2000
is in part dependent on the continued Year 2000 compliance of third parties.
Through January 2000, the Company's key vendors and customers have not reported
any significant Year 2000 compliance problems and the Company's financial
results have not been negatively impacted by Year 2000 failures of third
parties. However, because the Company's continued Year 2000 compliance in
calendar 2000 is in part dependent on the continued Year 2000 compliance of
third parties, there can be no assurance that the Company's efforts alone have
resolved all Year 2000 issues or that key third parties will not experience Year
2000 compliance failures as calendar year 2000 progresses. Based upon its
efforts to date, the Company believes that all mission critical hardware and
software has been vendor verified and tested as Year 2000 compliant. The Company
does not expect the activities of the Year 2000 readiness program to have a
material adverse effect on the ongoing business operations of the Company.

ITEM 7. FINANCIAL STATEMENTS.

     The Financial Statements and Notes thereto can be found beginning with
"Index to Financial Statements," following Part III of this Annual Report on
Form 10-KSB.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable


                                      -35-
<PAGE>

                             PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

EXECUTIVE OFFICERS AND DIRECTORS

          The executive officers and directors of the Company are as follows:

            NAME              AGE                   POSITION
            ----              ---                   --------

Kenneth D. Van Meter          53        President, Chief Executive Officer and
                                        Chairman of the Board
Dennis K. Smith               49        Vice-President of Engineering
                                        and Operations
Glenn West                    37        Director
Fenton Scruggs(1)             63        Director
Donald Greenhouse(1)(2)       64        Director
Stephen Portch(1)(2)          49        Director
Mark Braunstein(2)            51        Director

-----------
(1)  Member of the Audit Committee.

(2)  Member of the Compensation Committee.

          KENNETH D. VAN METER. Mr Van Meter has been the President and Chief
Executive Officer of the Company since January 20, 1997. He was elected Chairman
of the Board on March 25, 1997. From May 1995 to January 1997, Mr. Van Meter
served as Sr. Vice President, Operations, for Tele-TV Systems, a limited
partnership owned by Bell Atlantic Corporation ("Bell Atlantic"), NYNEX, and
Pacific Telesis, which was engaged in providing systems, software, and services
for its three parents in the interactive digital services industry. From June
1994 to May 1995, Mr. Van Meter was President of Bell Atlantic Video Services
Interactive Multimedia Platforms, a wholly-owned subsidiary of Bell Atlantic.
From April 1993 to June 1994, Mr. Van Meter was Vice President of Bell Atlantic
Video Services. Prior to joining Bell Atlantic, from 1991 to 1993, Mr. Van Meter
was Vice President and General Manager for Thomas Cook Limited, a travel
services company. From 1989 to 1991, Mr. Van Meter was Group Vice President for
two divisions of National Data Corporation ("NDC"). From 1984 to 1989, Mr. Van
Meter was Director and General Manager of two businesses for Sprint Corp.,
United Business Communications (shared tenant services), and the Meeting Channel
(2-way digital video teleconferencing). Mr. Van Meter holds an MBA with highest
honors in management and marketing from the University of Georgia, and a B.S.
with high honors in Chemistry from West Virginia University.

          GLENN WEST. Mr. West, a founder of the Company, has served as
Executive Vice-President, Director of Technology and a member of the Board of
Directors since the Company's inception in 1993. Prior to founding the Company,
from 1987 to 1993, Mr. West served as Senior Systems Engineer for Data Research
and Applications, a software company. Mr. West is on a voluntary leave of
absence from employment with


                                      -36-
<PAGE>

the Company, but is providing consulting services to the Company through the end
of the term of his employment agreement. See "Item 10. Executive
Compensation--Employment Agreements."

          DENNIS K. SMITH. Mr. Smith joined the Company and shortly thereafter
was elected Vice President of Operations in October 1997. He was also elected
Vice President of Engineering in September 1999. Prior to joining the Company,
Mr. Smith was a Director of the Transmission Products Division of DSC
Communications Corporation, where he worked from 1995 to 1997. Mr. Smith was the
owner of DKS Systems, a consulting firm, from 1989 to 1995. Mr. Smith holds an
M.S. and B.S. in Electrical Engineering from the University of Texas at Austin
and has done post-graduate work in Computer Science at Southern Methodist
University in Dallas, Texas.

          FENTON SCRUGGS. Dr. Scruggs, a founder of the Company, funded the
initial start-up of the Company, and has been a member of the Company's Board of
Directors since the Company's inception in 1993. Dr. Scruggs is a Board
Certified Pathologist from Chattanooga, Tennessee, who has been in private
practice since 1969. Dr. Scruggs received his undergraduate degree from the
University of Virginia in 1959 and his graduate degree from the University of
Tennessee in 1962. Dr. Scruggs completed his residency at Memphis Methodist
Hospital and was a General Medical Officer in the U.S. Air Force from 1963 to
1965.

          DONALD GREENHOUSE. Mr. Greenhouse has been a member of the Company's
Board of Directors since 1995. Mr. Greenhouse also served as interim Chief
Executive Officer of the Company from August 1996 until January 1997. Mr.
Greenhouse is President and Chief Executive Officer of Seneca Point Associates,
Inc., a consulting firm founded by him in November 1989. Mr. Greenhouse has
approximately 40 years of management experience in manufacturing, technology and
service industries. Seneca Point Associates, Inc. is a non-traditional
consulting firm engaged by clients nationally to fill full-time senior
management positions.

          STEPHEN PORTCH. Dr. Portch has been a member of the Company's Board of
Directors since December 1, 1997. Dr. Portch has been Chancellor of the
University System of Georgia since 1994. He oversees 30,600 employees, a $3.65
billion dollar budget and 206,000 students. Previously, Dr. Portch was Senior
Vice President of the University of Wisconsin System. Dr. Portch holds a Ph.D.
and M.A. from Pennsylvania State University, and he received his B.S., with
honors, from the University of Reading (England).

          MARK BRAUNSTEIN. Dr. Braunstein has been a member of the Company's
Board of Directors since January 8, 1998. Since February 1991, Dr. Braunstein
has been the Chairman and Chief Executive Officer of Patient Care Technologies,
Inc., which is in the clinical information systems business.

          Each director holds office until the Company's annual meeting of
stockholders and until his successor is duly elected and qualified. Officers are
elected by the Board of Directors and hold office at the discretion of the Board
of Directors. There are no family relationships between any of the directors or
executive officers of the Company.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who beneficially own more than ten percent of a registered class of the
Company's equity securities, to file with the Securities and Exchange Commission
(the "Commission") initial reports of ownership and reports of changes in
ownership of Common Stock and


                                      -37-
<PAGE>

the other equity securities of the Company. Officers, directors, and persons who
beneficially own more than ten percent of a registered class of the Company's
equities are required by the regulations of the Commission to furnish the
Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based solely on review of the copies of such reports furnished to the
Company, during the fiscal year ended December 31, 1999, all Section 16
filing requirements applicable to its officers, directors, and greater than
ten percent beneficial owners were complied with, except that a Form 5 has not
yet been filed by Dennis Smith.

ITEM 10. EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

     The following table sets forth the annual and long-term compensation for
services in all capacities for the fiscal years ended December 31, 1999, 1998
and 1997 paid to Kenneth D. Van Meter, the Company's Chairman of the Board,
President, and Chief Executive Officer and Dennis Smith, the Company's Vice
President of Engineering and Operations (Messrs. Van Meter and Smith, are
together the "Named Executive Officers"). No other executive officer received
compensation exceeding $100,000 during the fiscal year ended December 31, 1999.


<TABLE>
<CAPTION>
                                   SUMMARY COMPENSATION TABLE

                                                                      LONG TERM
                                                                 COMPENSATION AWARDS
                                                                -----------------------
                                   ANNUAL COMPENSATION          RESTRICTED   SECURITIES          ALL
                                ---------------------------        STOCK     UNDERLYING         OTHER
NAME AND PRINCIPAL POSITION     YEAR     SALARY       BONUS       AWARD(S)     OPTIONS       COMPENSATION
---------------------------     ----     ------       -----     -----------  ----------      ------------
<S>                             <C>     <C>          <C>           <C>        <C>              <C>
Kenneth D. Van Meter            1999    $170,100(1)       -           -             -             -
  Chairman of the Board,        1998    $170,100(2)       -           -       413,200(6)          -
  Chief Executive Officer,      1997    $154,731     71,810(5)        -       413,200             -
  and President

Dennis K. Smith                 1999    $131,250(3)       -           -         7,500             -
  Vice President of             1998    $125,000(4)       -           -        36,500(6)          -
  Engineering and               1997           -          -           -             -             -
  Operations
</TABLE>

----------
(1)  Includes $155,925 voluntarily deferred in 1999.

(2)  Includes $70,875 voluntarily deferred in 1998.

(3)  Includes $73,149 voluntarily deferred in 1999.

(4)  Includes $14,583 voluntarily deferred in 1998.

(5)  Includes $17,864 paid in the first quarter of 1998, $26,973 which was due
     to be paid on January 20, 1999, but has not been paid, and $26,973 which
     was due to be paid on January 20, 2000, but has not been paid.

(6)  Options repriced on December 1, 1998.


                                      -38-
<PAGE>

     The following table sets forth certain information concerning options
granted to the Named Executive Officers during the fiscal year ended
December 31, 1999.

                        OPTION GRANTS IN LAST FISCAL YEAR

                                       Individual Grants
                                       -----------------
                   Number of    Percentage of
                   Securities   Total Options
                   Underlying     Granted to        Exercise or
                    Options     Individuals in       Base Price    Expiration
Name                Granted       Fiscal Year        per Share        Date
----              -----------   --------------      -----------    ----------

Dennis K. Smith      7,500          100%               $0.656        9/13/09


     The following table sets forth certain information concerning the number
and value of securities underlying exercisable and unexercisable stock options
as of the fiscal year ended December 31, 1999 by the Named Executive Officers.



<PAGE>

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

<TABLE>
<CAPTION>

                       NUMBER OF                  NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                         SHARES                    UNEXERCISED OPTIONS       IN-THE-MONEY OPTIONS AT
                      ACQUIRED ON    VALUE        AT DECEMBER 31, 1999        DECEMBER 31, 1999(1)
NAME                   EXERCISE     REALIZED    EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
----                   --------     --------    -------------------------   -------------------------
<S>                      <C>          <C>          <C>         <C>             <C>          <C>
Kenneth D. Van Meter      --           --          413,200        -0-           -0-          -0-

Dennis K. Smith           --           --           20,167     23,833           -0-          -0-

</TABLE>

-----------
(1)  Amount reflects the market value of the underlying shares of Common Stock
     at the closing price reported on the Nasdaq SmallCap Market on December 31,
     1999 ($0.609 per share), less the exercise price of each option.

DIRECTOR COMPENSATION

    Beginning in 1998, the Company's policy is for each outside director to
receive nonqualified stock options for 20,000 shares in addition to $2,500 per
quarter. Directors did not receive compensation in fiscal 1999. This
compensation is accruing and the Company intends to pay it to the directors in
the future.

STOCK OPTION PLANS

    On August 10, 1995, the Board of Directors and stockholders adopted the
Company's 1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan provides for
the grant of options to purchase up to 178,929 shares of Common Stock to
employees and officers of the Company. In August, 1997, the Board of Directors
and the stockholders adopted the Company's 1997 Stock Option Plan (the "1997
Plan," and, together with the 1995 Plan, the "Plans"). The 1997 Plan provides
for the grant of options to purchase up to 200,000 shares of Common Stock to
employees, directors, and officers of the Company. Options granted under the
Plans may be either "incentive stock options" within the meaning of Section 422A
of the Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified
options.

    The Plans are administered by the Board of Directors which serves as the
stock option committee and which determines, among other things, those
individuals who receive options, the time period during which the options may be
partially or fully exercised, the number of shares of Common Stock issuable upon
the exercise of each option, and the option exercise price.

    The exercise price per share of Common Stock subject to an incentive stock
option may not be less than the fair market value per share of Common Stock on
the date the option is granted. The per share exercise price of the Common Stock
subject to a non-qualified option may be established by the Board of Directors,
but may not be less than 85% of the fair market value of the Common Stock on the
date of the grant. The


                                      -39-
<PAGE>

aggregate fair market value (determined as of the date the option is granted) of
Common Stock for which any person may be granted incentive stock options which
first become exercisable in any calendar year may not exceed $100,000. No person
who owns, directly or indirectly, at the time of the granting of an incentive
stock option to such person, more than 10% of the total combined voting power of
all classes of capital stock of the Company (a "10% Stockholder") shall be
eligible to receive any incentive stock options under the Plan unless the
exercise price is at least 110% of the fair market value of the shares of Common
Stock subject to the option, determined on the date of grant.

    No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution and, during the lifetime of an optionee, the
option will be exercisable only by the optionee or a representative of such
optionee. In the event of termination of employment other than by death or
disability, the optionee will have no more than three months after such
termination during which the optionee shall be entitled to exercise the option,
unless otherwise determined by the stock option committee. Upon termination of
employment of an optionee by reason of death, such optionee's options remain
exercisable for one year thereafter to the extent such options were exercisable
on the date of such termination. Under the 1997 Plan, upon termination of
employment of an optionee by reason of total disability (as defined in the 1997
Plan) such optionee's options remain exercisable for one year thereafter.

    Options under the 1995 Plan must be issued within 10 years from August 10,
1995, the effective date of the 1995 Plan. Options under the 1997 Plan must be
issued within 10 years from August 6, 1997, the effective date of the 1997 Plan.
Incentive stock options granted under the Plans cannot be exercised more than 10
years from the date of grant. Incentive stock options issued to a 10%
Stockholder are limited to five-year terms. Payment of the exercise price for
options granted under the Plans may be made in cash or, if approved by the Board
of Directors of the Company, by delivery to the Company of shares of Common
Stock already owned by the optionee having a fair market value equal to the
exercise price of the options being exercised, or by a combination of such
methods. Therefore, an optionee may be able to tender shares of Common Stock to
purchase additional shares of Common Stock and may theoretically exercise all of
such optionee's stock options with no additional investment other than the
purchase of the original shares.

    Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the Plan from which they were granted.

    On November 25, 1998, the Board of Directors of the Company approved a
resolution which permitted the Company to reprice all outstanding options to
purchase Common Stock which were held by employees of the Company as of December
1, 1998, to a price equal to the closing of the Company's Common Stock reported
on the Nasdaq SmallCap Market on December 1, 1998. Such closing price on
December 1, 1998 was $.688 per share.

    At December 31, 1999, options to purchase 24,500 shares of Common Stock were
outstanding under the 1995 Plan at an exercise price of $0.688 per share. Of
such optionees, Dennis Smith, an officer of the Company, had options to purchase
12,500 shares of Common Stock (4,167 of which have been exercised). At December
31, 1999, options to purchase 207,920 shares of Common Stock were outstanding
under the 1997 Plan at exercise prices ranging from $0.688 to $2.938 per share,
although a majority of such options are exercisable at $0.688 per share. Options
granted to directors of the Company under the 1997 Plan consist of: (i) options
granted to Mark Braunstein, Donald Greenhouse and Fenton Scruggs to each
purchase 20,000 shares of Common Stock, respectively, at an exercise price of
$2.125 per share; (ii) options granted to Stephen Portch to purchase 20,000
shares of Common Stock at an exercise price of $2.625 per share; (iii) options
granted to Mark Braunstein and Fenton Scruggs to each purchase 851 shares of
Common Stock,


                                      -40-
<PAGE>

respectively, at an exercise price of $2.938 per share; (iv) options granted to
Stephen Portch and Donald Greenhouse to each purchase 1,333 shares of Common
Stock, respectively, at an exercise price of $1.875; and (v) options granted to
Stephen Portch and Donald Greenhouse, Mark Braunstein and Fenton Scruggs to each
purchase 1,538 shares of Common Stock, respectively, at an exercise price of
1.625 per share. Dennis Smith, an officer of the Company, has options to
purchase 8,000 shares of Common Stock at an exercise price of $0.688 per share
and options to purchase 7,500 shares of Common Stock at an exercise price of
$0.656.

OPTIONS GRANTED OUTSIDE THE PLANS

    In addition to the options which have been granted under the Plans, the
Company has previously granted options outside of the Plans. At December 31,
1999, options to purchase 483,200 shares of Common Stock were outstanding,
including: (i) options granted to Donald Greenhouse, a director of the Company
to purchase (x) 14,000 shares of Common Stock at an exercise price of $0.10 per
share (all of which have been exercised) and (y) 26,000 shares of Common Stock
at an exercise price of $1.38 per share; and (ii) options granted to Kenneth Van
Meter to purchase 413,200 shares of Common Stock at an exercise price of $0.688
per share.

401(K) PROFIT SHARING PLAN

    The Company has a 401(k) profit sharing plan (the "401(k) Plan"), pursuant
to which the Company, at its discretion each year, may make contributions to
such plan which match a certain percentage, as determined by the Company, of the
contributions made by each employee. The Company may elect not to make matching
contributions to the 401(k) Plan in any given year. The Company made no matching
contributions in fiscal years 1998 or 1999.

EMPLOYMENT AGREEMENTS

    The Company has entered into an employment agreement with Mr. Van Meter, as
amended, which expired on January 20, 2000. Mr. Van Meter is currently employed
by the Company without an employment agreement. Pursuant to his employment
agreement, Mr. Van Meter received an annual base salary of $162,000. The
employment agreement provided for the annual review of Mr. Van Meter's salary;
Mr. Van Meter received a 5% raise as of January 20, 1998. Pursuant to his
employment agreement, Mr. Van Meter may have, at the discretion of the Board of
Directors, received an annual incentive bonus equal to up to 99% of Mr. Van
Meter's base salary if he and the Company reached certain milestones. Up to
two-thirds of such incentive bonus were to be awarded and paid within thirty
days following the end of each calendar year and up to the remaining one third
of such bonus was to be awarded at the end of each calendar year and vest in two
equal installments on the first and second anniversaries of the date of the
award. In July 1997, Mr. Van Meter purchased 15,000 shares of Common Stock for
nominal consideration plus the cancellation of certain anti-dilution rights and
received options to purchase 183,200 shares of Common Stock at $1.38 per share
and options to purchase 230,000 shares of Common Stock at $3.00 per share. Such
options were repriced on December 1, 1998 at an exercise price of $0.688 per
share. Additionally, during 1997, Mr. Van Meter received reimbursement of
approximately $37,272 for expenses incurred as a result of his relocation.

    The Company has entered into an employment agreement with Mr. West which
expires on May 1, 2000. Pursuant to his employment agreement, Mr. West received
a base salary of $148,954 in 1998. Such base salary is subject to increase at
the discretion of the Board of Directors based upon, among other things, the
performance of the Company and the performance, duties, and responsibilities of
Mr. West. The employment agreement also provides that Mr. West will not compete
with the Company for two years after the


                                      -41-
<PAGE>

termination of his employment. A state court, however, may determine not to
enforce such non-compete clause as against public policy. The employment
agreement is terminable by the Company for cause upon the occurrence of certain
events, or upon physical or mental disability or incapacity. As of January 1,
1999, Mr. West's employment agreement was amended to provide, among other
things, for his taking a voluntary leave of absence from his employment with the
Company. Such leave of absence will continue through the end of the term of his
employment agreement. During his leave of absence, Mr. West will not receive
compensation as an employee of the Company, but will be available to provide
consulting services to the Company for up to 20 hours per month, for a monthly
retainer of $2,500. The Company may require Mr. West to provide consulting
services for up to an additional 20 hours per month at a rate of $200 per hour
for such services.

    Pursuant to an employment agreement with the Company, Dennis Smith is
receiving a salary of $125,000 per annum. In 1998, he received reimbursement of
approximately $30,000 for expenses incurred as a result of his relocation and is
eligible each year during his employment to receive, at the discretion of the
Board of Directors, a bonus of up to twenty five percent (25%) of his annual
salary. Mr. Smith did not receive a bonus in 1998 or 1999. In connection with
his employment, Mr. Smith received options to purchase 24,000 shares of Common
Stock at an exercise price of $7.00 per share and options to purchase 12,500
shares of Common Stock at an exercise price of 0.78 per share. All of such
options were repriced on December 1, 1998 to an exercise price of $0.688 per
share. Mr. Smith's employment with the Company may be terminated by either him
or the Company at any time.

    In November 1998, the Board of Directors of the Company resolved that in the
event of an acquisition of the Company, Mr. Smith would be guaranteed his salary
for one year following the acquisition.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

PRINCIPAL STOCKHOLDERS

    The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's voting securities as of
March 20, 1999 by (i) each person who is known by the Company to own of record
or beneficially more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors and the Named Executive Officers and (iii) all directors and
executive officers of the Company as a group. Unless otherwise indicated, each
of the stockholders listed in the table below has sole voting and dispositive
power with respect to the shares beneficially owned by such stockholder.

                                  NUMBER OF SHARES
                                  BENEFICIALLY       PERCENT OF
NAME OF BENEFICIAL OWNER(1)       OWNED                CLASS(2)
---------------------------       ----------------   ----------
Kenneth D. Van Meter...........     573,228(3)          7.6%
Glenn West.....................      91,318             1.3%
Dennis K. Smith................      21,367             0.3%
Dr. Fenton Scruggs.............     302,044(4)          4.2%
Donald Greenhouse(5)...........      40,291(6)          0.6%
Stephen Portch.................      14,291(7)          0.2%
Dr. Mark Braunstein............      14,129(8)          0.2%

All directors and executive
officers as a group (7 persons)
(3)(4)(6)(7)(8).................  1,056,688            13.8%


                                      -42-
<PAGE>

----------
(1)  The address for Messrs. Van Meter, West, Smith, Greenhouse, Portch, and
     Drs. Braunstein and Scruggs is c/o Celerity Systems, Inc., 122 Perimeter
     Park Drive, Knoxville, Tennessee 37922.

(2)  Shares of Common Stock are deemed outstanding for purposes of computing the
     percentage of beneficial ownership if such shares of Common Stock underlie
     securities which are exercisable or convertible within 60 days of the date
     of this Form 10-KSB .

(3)  Includes 413,200 shares of Common Stock which are subject to currently
     exercisable stock options. Does not include 10,000 shares of Common Stock
     owned by Mr. Van Meter's adult children to which he disclaims beneficial
     ownership.

(4)  Includes 14,129 shares of Common Stock which are subject to currently
     exercisable stock options.

(5)  Mr. Greenhouse is the father of David Greenhouse who is the Vice President
     of AWM Investment Company, Inc. Mr. Greenhouse disclaims beneficial
     ownership of any shares owned by such fund.

(6)  Represents 40,291 shares of Common Stock which are subject to currently
     exercisable stock options.

(7)  Represents 14,291 shares of Common Stock which are subject to currently
     exercisable stock options.

(8)  Represents 14,129 shares of Common Stock which are subject to currently
     exercisable stock options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     In August 1998, Mr. Van Meter lent $55,000 to the Company for payroll, and
Dr. Scruggs lent $100,000 to the Company for general purposes. In October 1998,
the Company consummated a private placement (the "Royalty Private Placement") in
which holders who subscribed for notes bearing 7% interest were entitled to
receive royalties of $0.50 for each $100,000 invested (pro rated for lesser
investments) for each set top box sold over a period of five years or the total
notes placed. Thereafter, Dr. Scruggs converted his $100,000 short term note to
a $100,000 three-year term note in the Royalty Private Placement. Likewise, Mr.
Van Meter converted $50,000 of his $55,000 short term note in the Royalty
Private Placement. The remaining $5,000 is due to Mr. Van Meter as a note.
Dennis Smith, who was owned $25,000 as part of his relocation, elected to
convert such amount in the Royalty Private Placement. William Chambers, a former
officer of the Company, elected to purchase a $50,000 note in the Royalty
Private Placement.

     In January 1999, Mr. Van Meter lent the Company $22,252.64 for payment of
certain payables of the Company. In addition, the Company owes Mr. Van Meter
$16,775 for unreimbursed expenses.

     The Company believes that each of the above referenced transactions was
made on terms no less favorable to the Company than could have been obtained
from an unaffiliated third party. Furthermore, any future transactions or loans
between the Company and officers, directors, principal stockholders or
affiliates and, any forgiveness of such loans, will be on terms no less
favorable to the Company than could be obtained from an unaffiliated third
party, and will be approved by a majority of the Company's directors, including
a majority of the Company's independent and disinterested directors who have
access at the Company's expense to the Company's legal counsel.


                                      -43-
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.


EXHIBIT NO.                        DESCRIPTION
-----------                        -----------

3.1            Certificate of Incorporation of Celerity Systems, Inc.(1)

3.2            By laws of Celerity Systems, Inc.(1)

4.1            Form of Underwriter's Warrant (1)

4.2            1995 Stock Option Plan (1)

4.3            1997 Stock Option Plan (1)

4.4            Form of Stock Certificate (1)

4.5            Form of Bridge Warrant (1)

4.6            Form of 1996 Warrant (1)

4.7            Form of Hampshire Warrant (1)

4.8            Form of 1995 Warrant (1)

4.9            Letter Agreement dated July 15, 1997, between the Company and
               Mahmoud Youssefi, including exhibits (1)

4.10           Letter Agreement, dated July 11, 1997, between the Company
               and Dr. Fenton Scruggs (1)

4.11           Form of 9% Convertible Debenture (3)

4.12           Form of 7% Promissory Note (3)

4.13           Form of Registration Rights Agreement, between the Company and
               each of RNI Limited Partnership, First Empire Corporation, Greg
               A. Tucker and Michael Kesselbrenner (3)

4.14           Form of Warrant issued April 27, 1999 (4)

4.15           Shareholders Agreement, dated August 10, 1999, between Celerity
               Systems, Inc., FutureTrak Merger Corp. and certain parties listed
               therein. (5)

4.16           Registration Rights Agreement, dated September 30, 1999, between
               the Company and GMF Holdings. (6)

4.17           Form of Debenture in connection with Line of Credit Agreement,
               dated September 30, 1999. (6)

4.18           Form of Warrant issued September 30, 1999 (9)

4.19           Form of 4% Convertible Debenture due 2002 between the Company and
               each of John Bridges, John Faure, Loni Spurkeland, Robert Dettle,
               Michael Genta, Lennart Dallgren.(9)

4.20           Form of 8% Convertible Debenture due 2002 between the Company and
               each of Richard T. Garrett, W. David McCoy, Dominick Chirarisi,
               Gilda R. Chirarisi, Joseph C. Cardella, Carl Hoehner. (9)

4.21           Form of 8% Convertible Debenture due 2003 between the Company and
               John Bolliger. (9)

4.22           Form of Registration Rights Agreement, between Celerity and each
               of John Bridges, John Faure, Loni Spurkeland, Robert Dettle,
               Michael Genta, Lennart Dallgren. (9)

4.23           Form of Registration Rights Agreement, between Celerity and each
               of Richard T. Garrett, W. David McCoy, Dominick Chirarisi, Gilda
               R. Chirarisi, Joseph C. Cardella, Carl Hoehner. (9)

4.24           Form of Registration Rights Agreement, between Celerity and John
               Bolliger. (9)

4.25           Form of 8% Convertible Debenture due 2003 between the Company and
               each of Sui Wa Chau, Qinu Guan, Peter Chenan Chen, K&M Industry,
               Inc., Michael Dahlquist, Denise and Vernon Koto and Rance Merkel.
               (10)

4.26           Form of Registration Rights Agreement, between Celerity and each
               of Sui Wa Chau, Qinu Guan, Peter Chenan Chen, K&M Industry, Inc.,
               Michael Dahlquist, Denise and Vernon Koto and Rance Merkel. (10)

10.1           Employment Agreement, dated January 7, 1997, as amended, between
               the Company and Kenneth D. Van Meter (1)


                                      -44-
<PAGE>

10.2           Employment, Non-Solicitation, Confidentiality and Non-Competition
               Agreement, dated as of May 1, 1996, between the Company and Glenn
               West (1)

10.3           Termination Agreement, dated as of April 5, 1997, between the
               Company and Mahmoud Youssefi (1)

10.4           [Reserved]

10.5           Letter Agreement, dated March 13, 1997, between the Company and
               William Chambers (1)

10.6           Letter Agreement, dated July 24, 1997, between the Company and
               Mark. C. Cromwell (1)

10.7           Exclusive OEM/Distribution Agreement, dated March 10, 1995,
               between the Company and InterSystem Multimedia, Inc.(1)

10.8           Purchase Order Agreement, dated June 26, 1995, between Tadiran
               Telecommunications Ltd. and the Company (1)

10.9           License Agreement, dated as of September 26, 1996, between the
               Company and En Kay Telecom Co., Ltd.(1)

10.10          License Agreement, dated as of February 21, 1997, between the
               Company and En Kay Telecom Co., Ltd.(1)

10.11          Remarketer Agreement, dated as of June 15, 1997, between the
               Company and Minerva Systems, Inc.(1)

10.12          Memorandum of Understanding, dated April 25, 1996, between
               Integrated Network Corporation and the Company (1)

10.13          Letter of Agreement, dated March 31, 1993, between the Company
               and Herzog, Heine & Geduld, Inc. and Development Agreement
               attached thereto (1)

10.14          Subcontract Agreement, dated June 26, 1997, between Unisys
               Corporation and the Company (1)

10.15          Lease Agreement for Crossroad Commons, dated November 25, 1996,
               as amended, between Lincoln Investment Management, Inc., as
               attorney in fact for the Lincoln National Life Insurance Company,
               and the Company (1)

10.16          Lease Agreement, dated November 25, 1997, between Centerpoint
               Plaza, L.P. and the Company (2)

10.17          Letter Agreement, dated October 3, 1997, between Dennis Smith and
               the Company (2)

10.18          Letter Agreement, dated January 8, 1998, between James Fultz and
               the Company (2)

10.19          Amendment to Employment, Non-Solicitation, Confidentiality and
               Non-Competition Agreement, dated January 1, 1999, between the
               Company and Glenn West (3)

10.20          Form of Subscription Agreement, between the Company and each of
               RNI Limited Partnership, First Empire Corporation, Greg A. Tucker
               and Michael Kesselbrenner (3)

10.21          Form of Subscription Agreement, between the Company and each of
               Donald Alexander, Leo Abbe, Centerpoint Plaza, L.P., William
               Chambers, Fenton Scruggs, Dennis Smith, Kenneth Van Meter, George
               Semb and Rodney Conard (3)

10.22          Form of Royalty Agreement, between the Company and each of Donald
               Alexander, Leo Abbe, Centerpoint Plaza, LP, William Chambers,
               Fenton Scruggs, Dennis Smith, Kenneth Van Meter, George Semb and
               Rodney Conard (3)

10.23          Agreement and Plan of Merger, dated August 10, 1999, between
               Celerity Systems, Inc., FutureTrak Merger Corp. and FutureTrak
               International, Inc. (5)

10.24          Line of Credit Agreement, dated September 30, 1999, between GMF
               Holdings, May Davis Group and the Company. (6)

10.25          Termination Agreement, dated December 7, 1999, between the
               Company, FutureTrak Merger Corp. and FutureTrak International,
               Inc. (7)

10.26          Manufacturing Agreement, dated November 30, 1999, between the
               Company, Primax Electronics, Ltd and Global Business Group, Ltd.
               (8)


                                      -45-
<PAGE>

10.27          Lease, dated December 17, 1999, between Andy Charles Johnson,
               Raymond Perry Johnson, Tommy F. Griffin. and the Company. (8)

23.1           Consent of PricewaterhouseCoopers, LLP (11)

27             Financial Data Schedule (11)

----------
(1)  Filed as an Exhibit to the Registration Statement on Form SB-2
     (Registration No. 333-33509).

(2)  Filed as an Exhibit to the Form 10-KSB for the year ended December 31,
     1997.

(3)  Filed as an Exhibit to the Form 10-KSB/A for the year ended December 31,
     1998.

(4)  Filed as an Exhibit to the Registration Statement on Form S-3 (Registration
     No. 333-81099).

(5)  Filed as an Exhibit to the Form 8-K filed September 14, 1999.

(6)  Filed as an Exhibit to the Form 8-K filed October 8, 1999.


(7)  Filed as an Exhibit to the Form 8-K filed December 8, 1999.

(8)  Filed as an Exhibit to the Form 8-K filed January 5, 2000.

(9)  Filed as an Exhibit to the Registration Statement on Form S-3 filed
     February 15, 2000.

(10) Filed as an Exhibit to the Form 8-K filed March 23, 2000.

(11) Filed herewith.



                                      -46-
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors
Celerity Systems, Inc.

In our opinion, the accompanying balance sheets and the related statements of
operations, changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Celerity
Systems, Inc. (the "Company") at December 31, 1998 and 1999, and the results
of its operations and its cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility  of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome on this uncertainty.



PricewaterhouseCoopers LLP



March 10, 2000
Knoxville, Tennessee


<PAGE>

CELERITY SYSTEMS, INC.
Balance Sheets
December 31, 1998 and 1999

<TABLE>
<CAPTION>

                                                                             1998             1999
<S>                                                                      <C>              <C>
 Assets

   Cash                                                                  $     18,273     $        383
   Accounts receivable, less allowance for doubtful accounts
       of $436,472 in 1998                                                    280,315           31,500
   Other receivables                                                               --           28,000
   Inventory, net                                                           1,206,611          854,353
   Prepaid expenses                                                            63,150           24,000
                                                                         ------------     ------------
        Total current assets                                                1,568,349          938,236

Property and equipment, net                                                 1,697,367          104,686
Debt offering costs, net of accumulated amortization of $134,894                   --           76,629
Other assets                                                                       --          109,186
                                                                         ------------     ------------

     Total assets                                                        $  3,265,716     $  1,228,737
                                                                         ============     ============

Liabilities and Stockholders' Equity (Deficit)

Accounts payable                                                         $    821,814     $    984,341
Accrued wages and related taxes                                               626,389        1,209,639
Accrued interest                                                                5,250          224,622
Other accrued liabilities                                                     161,890          309,513
Notes payable                                                                   5,000          557,252
Current maturities of long-term debt and capital lease obligations            271,937          401,173
                                                                         ------------     ------------

     Total current liabilities                                              1,892,280        3,686,540

Long-term debt and capital lease obligations, less current maturities         397,955          904,280
                                                                         ------------     ------------

     Total liabilities                                                      2,290,235        4,590,820

Common stock, $.001 par value, 15,000,000 shares authorized,
     4,748,847 issued and 4,411,483 outstanding, and 6,269,521
     issued and 5,932,157 outstanding at December 31, 1998
     and 1999, respectively                                                     4,749            6,270
Additional paid-in capital                                                 22,626,174       23,695,245
Treasury stock, at cost, 337,364 shares at December 31, 1998 and 1999        (227,500)        (227,500)
Accumulated deficit                                                       (21,427,942)     (26,836,098)
                                                                         ------------     ------------
     Total stockholders' equity (deficit)                                     975,481       (3,362,083)
                                                                         ------------     ------------

     Total liabilities and stockholders' equity (deficit)                $  3,265,716     $  1,228,737
                                                                         ============     ============
</TABLE>


The accompanying notes are an integral part of these financial statements

<PAGE>

CELERITY SYSTEMS, INC.
Statements of Operations
For the years ended December 31, 1998 and 1999

<TABLE>
<CAPTION>
                                                                  1998             1999
<S>                                                            <C>             <C>
Revenues                                                       $   814,159     $    85,894
Cost of revenues                                                   879,280         366,495
                                                               -----------     -----------
        Gross loss                                                 (65,121)       (280,601)
Operating expenses                                               6,810,757       4,667,719
                                                               -----------     -----------
        Loss from operations                                    (6,875,878)     (4,948,320)

   Interest expense                                                (35,056)       (537,865)
   Interest income                                                  90,219             686
   Other income                                                         --          50,513
                                                               -----------     -----------
        Loss from continuing operations                         (6,820,715)     (5,434,986)
Discontinued operations (Note 4):
   Loss from operations of discontinued CD-ROM segment            (113,559)             --
   Income (loss) on disposal of discontinued CD-ROM segment        (21,573)         26,830
                                                               ===========     ===========
        Net loss                                               $(6,955,847)    $(5,408,156)
                                                               ===========     ===========

Basic and diluted loss per common share (Note 11):
   Loss from continuing operations                             $     (1.60)    $     (1.07)
   Discontinued operations                                           (0.03)           0.01
                                                               ===========     ===========
   Net loss per share                                          $     (1.63)    $     (1.06)
                                                               ===========     ===========
</TABLE>


 The accompanying notes are an integral part of these financial statements

<PAGE>

CELERITY SYSTEMS, INC.
Statement of Changes in Stockholders' Equity (Deficit)
For the years ended December 31, 1998 and 1999

<TABLE>
<CAPTION>

                                                                                    Additional
                                                                     Common           Paid-In        Treasury        Accumulated
                                                                      Stock           Capital         Stock             Deficit
<S>                                                                <C>             <C>             <C>              <C>
Balances, January 1, 1998                                          $      4,442    $ 22,399,692    $   (227,500)    $(14,472,095)

Issuance of stock to employee benefit plan                                  156         135,766              --               --
Exercise of employee stock options                                           47           4,796              --               --
Conversion of accounts and notes payable to stock                           104          85,920              --               --
Net loss                                                                                                              (6,955,847)
                                                                   ------------    ------------    ------------     ------------
Balances, December 31, 1998                                               4,749      22,626,174        (227,500)     (21,427,942)

Exercise of employee stock options                                           29           2,851              --               --
Issuance of common stock                                                    200          39,800
Issuance of convertible debentures with beneficial
   conversion feature                                                                   375,935
Issuance of warrants to purchase 450,000 shares of common stock                         111,605
Conversion of accounts and notes payable to common stock                    438         379,734
Conversion of convertible debentures to common stock                        854         159,146              --               --
Net loss                                                                                                              (5,408,156)

                                                                   ------------    ------------    ------------     ------------
Balances, December 31, 1999                                        $      6,270    $ 23,695,245    $   (227,500)    $(26,836,098)
                                                                   ============    ============    ============     ============
</TABLE>


 The accompanying notes are an integral part of these financial statements

<PAGE>

CELERITY SYSTEMS, INC.
Statements of Cash Flows
For the years ended December 31, 1998 and 1999

<TABLE>
<CAPTION>
                                                                               1998            1999
<S>                                                                        <C>             <C>
Cash flows from operating activities:
   Net loss                                                                $(6,955,847)    $(5,408,156)
   Adjustments to reconcile net loss to net
        cash used by operating activities:
            Depreciation and amortization                                      515,233         665,418
            Loss on disposal of fixed assets                                    41,197       1,085,474
            Noncash interest expense related to beneficial
                 conversion feature of debt                                         --         285,235
            Noncash stock based compensation                                    17,205              --
            Warranty reserve                                                  (235,000)             --
            Provision for doubtful accounts receivable                         152,129              --
            Provision for inventory obsolescence                              (273,544)        354,523
            Changes in current assets and liabilities:
                Accounts receivable                                            594,793         248,815
                Prepaid expenses                                                40,189          39,150
                Inventory                                                      111,998          (2,265)
                Costs in excess of billings on uncompleted contracts            20,963              --
                Accounts payable                                                15,509         542,700
                Other current liabilities                                      478,289         950,245
                                                                           -----------     -----------
                    Net cash used in operating activities                   (5,476,886)     (1,238,861)

Cash flows from investing activities:
   Purchases of property and equipment                                        (879,494)             --
   Issuance of other receivables                                                    --         (50,000)
   Collection of other receivables                                                  --          22,000
   Maturity of short-term instruments                                        1,229,788              --
   Investments in other assets                                                      --         (20,900)
                                                                           -----------     -----------
                    Net cash provided by (used in) investing activities        350,294         (48,900)

Cash flows from financing activities:
   Proceeds from short-term borrowings                                              --         677,253
   Principal payments on short-term borrowings                                      --        (125,000)
   Proceeds from long-term debt                                                450,000         914,980
   Principal payments on long-term debt and capital lease obligations          (38,875)        (28,719)
   Proceeds from issuance of common stock                                      140,765          40,000
   Proceeds from exercise of common stock options                                   --           2,880
   Financing and debt issue costs                                                   --        (211,523)
                                                                           -----------     -----------
                    Net cash provided by financing activities                  551,890       1,269,871

Net decrease in cash and cash equivalents                                   (4,574,702)        (17,890)
Cash and cash equivalents, beginning of year                                 4,592,975          18,273
                                                                           -----------     -----------

Cash and cash equivalents, end of year                                     $    18,273     $       383
                                                                           ===========     ===========
</TABLE>


 The accompanying notes are an integral part of these financial statements

<PAGE>

CELERITY SYSTEMS, INC.

Notes to Financial Statements


1.   Organization and Nature of Business

     Celerity Systems, Inc. (the "Company"), a Delaware corporation, designs,
     develops, integrates, installs, operates and supports interactive video
     services hardware and software ("interactive video"). The Company also
     designed, developed, installed, and supported CD-ROM software products for
     business applications. In February, 1998 the Company began to scale back
     the CD-ROM segment to a maintenance mode of operations (Note 4). In the
     interactive video services area, the Company seeks to provide solutions,
     including products and services developed by the Company and by strategic
     partners, that enable interactive video programming and applications to be
     provided to a wide variety of market niches. The sales of interactive video
     products are principally made on a contract basis. The majority of the
     Company's remaining CD-ROM customer base is in the security brokerage
     industry and in U.S. Government applications.

     The Company has one interactive video customer that represented 56% of the
     Company's revenues in 1998 and approximately 50% in 1999. Export sales
     represented 56% and 35% of revenues for 1998 and 1999, respectively. Sales
     to Chinese companies represented 56% of total revenues in 1998.

2.   Summary of Significant Accounting Policies

     Cash and Cash Equivalents - The Company considers all highly liquid debt
     instruments with an original maturity of three months or less when
     purchased as cash equivalents. The Company places its temporary cash
     investments principally in bank repurchase agreements, money market
     accounts and certificates of deposit with one bank. The Company does not
     obtain collateral on its investment or deposit accounts.

     Accounts Receivable - The Company does not require collateral or other
     security to support customer receivables.

     Inventory - Inventory is stated at the lower of cost or market, with cost
     being determined using the first-in, first-out (FIFO) method.

     Revenue Recognition - Long-term contracts related to the Company's
     interactive video segment are accounted for under the percentage of
     completion method as these contracts extend over relatively long periods of
     time. The Company measures the percentage complete by contract based upon
     the costs incurred to date in relation to the total estimated costs for
     each contract. Costs are charged to contracts as incurred based upon
     material costs, hours dedicated to the contract, and allocations of
     overhead costs based on predetermined overhead rates.

      The Company records sales of products not under contract when the related
     products are shipped.

     Property and Equipment - Property and equipment are stated at cost.
     Depreciation is computed using the straight-line method over the estimated
     useful lives of the underlying assets, generally five years. Routine repair
     and maintenance costs are expensed as incurred. Costs of major additions,
     replacements and improvements are capitalized. Gains and losses from
     disposals are included in income. The Company periodically evaluates the
     carrying value by considering the future cash flows generated by the
     assets. Management believes that the carrying value reflected in the
     financial statements is fairly stated based on this criteria.

     Debt offering Costs - Debt offering costs, which consist of debt offering
     costs related to private placements in 1999, are being amortized on a
     straight line basis over the term of the related debt. In 1999,
     amortization expense related to these costs was $134,894.

<PAGE>

     Research and Development Costs - Research and development costs are
     expensed as incurred and amounted to $912,045 and $90,498 for the years
     ended December 31, 1998 and 1999, respectively. These amounts are included
     in operating expenses in the accompanying statements of operations.

     Income Taxes - The Company accounts for income taxes using the asset and
     liability method is used, whereby deferred tax assets and liabilities are
     determined based upon the differences between financial reporting and tax
     bases of assets and liabilities and are measured using the enacted tax
     rates and laws that will be in effect when the differences are expected to
     reverse.

     Stock Based Compensation - On January 1, 1996, the Company adopted SFAS
     123, Accounting for Stock Based Compensation. As permitted by SFAS 123, the
     Company has chosen to apply APB Opinion No. 25, Accounting for Stock Issued
     to Employees (APB 25) and related interpretations in accounting for its
     Plans. The pro forma disclosures of the impact of SFAS 123 are described in
     Note 10 of the financial statements.

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

     Impact of SFAS 133 - In June 1998, the Financial Accounting Standards Board
     (FASB) issued SFAS 133, Accounting for Derivative Instruments and Hedging
     Activities, which was effective for fiscal quarters of fiscal years
     beginning after June 15, 2000. This Standard will have no material impact
     on the Company.

     Reclassifications - Certain amounts in the 1998 financial statements have
     been reclassified to conform to the 1999 presentation.

3.   Going Concern

     The Company's financial statements have been prepared on a going concern
     basis, which contemplates the realization of assets and the settlement of
     liabilities and commitments in the normal course of business. The Company
     has had recurring losses and continues to suffer cash flow and working
     capital problems. Additionally, the lack of sales or a significant
     financial commitment raises substantial doubt about the Company's ability
     to continue as a going concern.

     In addition to the private placement of convertible debentures issued
     during 1999, (Note 9) effective September 30, 1999, the Company entered
     into $5,000,000 Line of Credit Agreement. Pursuant to the Line of Credit
     Agreement the Company may issue and sell up to $5,000,000 principal amount
     of 4% Convertible Debentures during a period beginning on the effective
     date of a registration statement covering the common stock underlying the
     Convertible Debentures and ending September 30, 2000. At December 31, 1999
     the registration had not been filed and no advances had been made to the
     Company. The registration will be effective with the filing of this
     Form 10-KSB.

     In the first quarter of 2000, the Company received gross proceeds from a
     private placement of convertible debt totaling $610,000 and $75,000 from
     the exercise of 1999 common stock warrants. In addition, the Company is
     attempting to obtain additional financing. The Company also received
     purchase orders in 1999 totaling approximately $1.2 million in revenues to
     the Company through 2000 and into 2001. Finally, management is seeking a
     buyer for its discontinued CD-ROM segment and is actively seeking one or
     more strategic investors.

4.   Discontinued Segment

     In February 1998, the Company decided to scale back its CD-ROM segment to a
     maintenance mode of operations. The Company developed a formal plan of
     disposal that became effective in May 1998. The Company is actively seeking
     a buyer for the segment which had revenues of $460,955 and $174,209 in 1998
     and 1999, respectively. The Company believes the most valuable assets for
     sale are the segment's

<PAGE>

     customer list and product source code which have no recorded value.
     Inventory of $48,465 is available for sale and the Company continues to
     sell the inventory as existing customers request such merchandise.
     Management cannot determine which assets will remain at the time of
     disposal and has written down to an estimated net realizable value the
     related furniture, equipment and inventory.

5.   Inventory

     Inventory at December 31, 1998 and 1999, consists of:

                                                1998             1999

       Raw materials                         $   774,257     $   924,890
       Finished goods                            502,891             -0-
                                             -----------     -----------
                                               1,277,148         924,890
       Reserve for inventory obsolescence        (70,537)        (70,537)
                                             -----------     -----------
                                             $ 1,206,611     $   854,353
                                             ===========     ===========

     During 1999 the Company wrote inventory down to an estimated net realizable
     value. This write down amounted to $354,523.

6.    Property and Equipment

     Substantially all property and equipment of the Company is comprised of
     computers and computer-related equipment, therefore, all property and
     equipment is included in one category entitled "Property and equipment,
     net." Cost and related accumulated depreciation for December 31, 1998 and
     1999, are as follows:

                                             1998            1999

          Property and equipment         $ 2,811,861     $   223,737

          Accumulated depreciation        (1,114,494)       (119,051)
                                         -----------     -----------
          Property and equipment, net    $ 1,697,367     $   104,686
                                         ===========     ===========

     As part of the downsizing efforts during 1999, the Company negotiated to
     release it's current facility and relocate to a smaller site. This
     relocation took place in January 2000. As result of this relocation certain
     leasehold improvements were abandoned and furniture recorded as part of a
     capitalized lease was returned. The Company has recorded a loss on disposal
     related to these assets as well as certain computer equipment totaling
     $1,085,474. Depreciation expense in 1998 and 1999 was $515,233 and
     $507,205, respectively.

<PAGE>

7.    Income Taxes

     The tax effects of temporary differences giving rise to the Company's
     deferred tax assets (liabilities) at December 31, 1998 and 1999, are as
     follows:

<TABLE>
<CAPTION>

                                                                 1998                      1999
<S>                                                           <C>                      <C>
Current:
     Allowance for doubtful accounts                          $   166,000              $        --
     Accrued wages                                                223,000                  459,000
     Inventory reserve                                             26,000                   26,000
     Relocation reserve                                                --                   84,000
     Other                                                         35,000                   23,000
                                                              -----------              -----------
                                                                  450,000                  592,000
Valuation allowance for net current deferred tax assets          (450,000)                (592,000)
                                                              -----------              -----------
          Total net current deferred tax asset                $        --              $        --
                                                              ===========              ===========
Noncurrent:
     Net operating loss and research credit carryfowards      $ 6,690,000              $ 8,429,000
     Stock based compensation                                     966,000                  937,000
     Property and equipment                                      (127,000)                 (26,000)
                                                              -----------              -----------
                                                                7,529,000                9,392,000
Valuation allowance for net noncurrent deferred tax assets     (7,529,000)              (9,392,000)
                                                              -----------              -----------

          Total net current deferred tax asset                $        --              $        --
                                                              ===========              ===========
</TABLE>


     As a result of the significant pretax losses in fiscal 1998 and 1999,
     management can not conclude that it is more likely than not that the
     deferred tax asset will be realized. Accordingly, a valuation allowance has
     been established against the total net deferred tax asset.

     In 1998 and 1999, income tax benefit (expense) allocated to discontinued
     operations was $51,000 and $(10,000) respectively. The Company recorded a
     full valuation allowance for this item.

     The Company's income tax benefit differs from that obtained by using the
     federal statutory rate of 34% as a result of the following:

<TABLE>
<CAPTION>
                                                                           1998            1999
<S>                                                                    <C>             <C>
      Computed "expected" tax (benefit), continuing operations         $(2,319,000)    $(1,839,000)
      State income tax (benefit), net of federal income tax benefit       (275,000)       (214,000)
      Change in valuation allowance                                      2,597,000       2,005,000
      Permanent differences                                                 25,000              --
      Other                                                                (28,000)         48,000
                                                                       -----------     -----------

                                                                       $        --     $        --
                                                                       ===========     ===========
</TABLE>


     At December 31, 1999, the Company has approximately $22,000,000 of net
     operating loss carryforwards. These amounts are available to reduce the
     Company's future taxable income and expire in the years 2010 through 2014.

<PAGE>

8.   Common Stock Warrants

     In June and July 1996, the Company sold units in a private placement
     offering to outside investors. The 60 units consisted of one 10% Note in
     the principal amount of $50,000, 7,111 shares of common stock and warrants
     to purchase 2,625 shares of common stock. Additionally, the agent received
     warrants to purchase 35,556 shares of common stock at $10.31 per share. In
     November 1996, the Company issued an additional 867 warrants for each unit
     held by the outside investors in connection with the Company's default on
     previously outstanding investor debt and subsequent conversion of the
     principal to common stock. The warrants issued to the agent were increased
     to 38,852 in connection with the default and the exercise price was
     decreased to $9.44.

     In October and November 1998, the Company agreed to issue $86,024 in common
     stock at a 20% discount. This triggered the antidilution provisions of the
     1996 warrant agreements. An additional 29 warrants were issued for each
     unit and the exercise price was lowered to $8.39. All warrants issued in
     the 1996 placement will expire on the third anniversary of the closing of
     the initial public offering. The warrant issued to the agent was further
     increased to 39,184 in connection with the 1998 antidilution and the
     exercise price was decreased to $9.36. These will expire five years from
     the date of grant.

     In the Spring of 1999, the Company issued $600,000 of convertible
     debentures which had conversion features at a 25% discount to the market
     price on the date of conversion. In the Fall 1999, the Company issued
     $314,980 of convertible debentures which had conversion features at a 35%
     discount to the market price on the date of conversion. This triggered the
     antidilution provisions of the 1996 warrant agreements. An additional 476
     warrants were issued for each unit and the exercise price was lowered to
     $7.39. The warrant issued to the agent was further increased to 44,510 in
     connection with the 1999 antidilution and the exercise price was decreased
     to $8.24.

     In August 1997, the Company sold 20 units, each consisting of a 10% Note in
     the principal amount of $100,000 and warrants to purchase 16,000 shares of
     common stock at $3.00 per share. In connection with this placement, the
     Company entered into stock repurchase agreements with one of the Company's
     former officers and with a director. The Company paid $0.50 per share for a
     combined total of 320,000 shares held by the two individuals, using a
     portion of the funds from the private placement. The previously mentioned
     1998 discounted stock issuance also triggered the antidilution provisions
     of the 1997 warrant agreement. However, no adjustment was necessary under
     the agreement. The 1999 convertible debenture issuance also triggered the
     antidilution provisions of the 1997 warrant agreement. An additional 2,320
     warrants were issued for each unit and the exercise price was lowered to
     $2.62.

     In January and February and March 1999, the Company placed $600,000 of 9%
     convertible debentures (Note 9). In connection with this placement the
     agent received warrants to purchase 100,000 shares of common at $1.00 per
     share. The Company recorded loan cost and additional paid in capital for
     the $36,605 fair value of these warrants.

     In June 1999, the Company received $500,000 in bridge financing. In
     connection with this placement the agent received warrants to purchase
     100,000 shares of common at $1.50 per share.

     In October and November 1999, the Company placed $110,000 and $204,980 of
     4% and 8% convertible debentures, respectively. In connection with these
     placements, the agent received warrants to purchase 250,000 shares of
     common stock at $0.586 per share. The Company recorded loan cost and
     additional paid in capital for the $75,000 fair value of these warrants.

9.   Notes Payable, Long Term Debt and Capital Lease Obligations

     Notes payable include $27,252 advanced from the Company's President on a
     non-interest bearing short-term basis. These funds were used for working
     capital purposes. During 1999 $30,000 was advanced from an inventory
     supplier to fund purchases required for a specific customer order. This
     note is due, plus

<PAGE>

     interest of $15,000, upon receipt of the funds from the specified customer.
     Also, bridge financing was obtained in the amount of $500,000. This
     financing had a term of 120 days and provided for interest of $100,000.

     In April 1998, the Company incurred capital lease obligations of
     approximately $259,000 for certain equipment. Monthly payments of principal
     and interest of $9,541 are due through 2001 with $82,628 past due at
     December 31, 1999. The equipment was returned to the lessor as part of the
     relocation of the Company's facilities (Note 6). The Company is still in
     negotiations with the lessor. No assurance can be given as to the
     successful conclusion of these negotiations.

     In October and November 1998, the Company placed $450,000 of 7% notes. Each
     note holder is entitled to royalties of fifty cents per $100,000 invested
     (pro rated for lesser investments) for each T 6000 set top box sold during
     a period of up to five years. Of the total notes placed, $200,000 were due
     in 1999 and the remainder are due through October 2001. The Company is
     currently in default as it relates to the amounts due in 1999. Negotiations
     are being held with certain holders of these notes to cure the default
     status. Interest is paid in full on the maturity date. Four individuals,
     three members of management and one director, were among those investors.
     Of the total, $200,000 is related to these individuals.

     In January and February and March 1999, the Company sold $600,000 in a
     private placement offering to outside investors. Investors in the private
     placement received 9% convertible debentures with a principal amount equal
     to the amount of the investment and a term of two years. The debentures are
     convertible into the Company's common stock at a price equal to the lesser
     of (i ) 75% of the average closing bid price of the common stock for the
     five days immediately preceding the date of conversion, or (ii) four times
     the five-day average closing bid price for the five days immediately
     preceding the date of closing. The Company may redeem the debentures at
     prices that range from 115% to 125% of the principal amount, plus accrued
     interest. The debentures are subject to mandatory conversion upon maturity.
     At December 31, 1999 $160,000 of the debentures had converted to shares of
     common stock and $10,000 had been redeemed. The Company recorded debt
     discount and additional paid in capital for the $229,650 fair value of the
     beneficial conversion feature.

     In November and December 1999, the Company sold $314,980 in a private
     placement offering to outside investors. Investors in the private placement
     received 4% convertible debentures with a principal amount of $110,000 and
     8% convertible debentures with a principal amount of $204,980, both with a
     term of three years. The debentures are convertible into the Company's
     common stock at a price equal, at the Debenture holders option, either, (i
     ) 65% of the average closing bid price of the common stock for the five
     days immediately preceding the date of conversion, or (ii) $0.75 cents per
     share or $0.50 per share. The Company is obligated to file a Registration
     Statement and use its best efforts to assure that the Registration
     Statement is effective within 90 days of the Closing Date. In the event
     that the Registration Statement is not effective within 90 days the Company
     will pay damages to the Debenture holder in the amount of 2% for each month
     the Registration Statement is not effective after the 90 day period. The
     Company has the right to redeem in part or in full any outstanding
     debentures at 135% of the principal amount, plus accrued interest. The
     debentures are subject to mandatory conversion upon maturity. The Company
     recorded debt discount and additional paid in capital for the $146,285 fair
     value of the beneficial conversion feature.

     The Company recognized the difference between the aggregate conversion
     price of all the convertible debtentures issued in 1999 and the current
     fair market value (on the date of issuance of the convertible
     debentures) of the shares underlying the convertible debentures as
     discount on the convertible debentures and as additional paid-in
     capital. This discount of $375,935 is being amortized as a non-cash
     interest.

     The maturities of the Company's long-term debt and capital lease
     obligations as of December 31, 1999, excluding debt discount of $90,700,
     are as follows:

          2000                                                $  401,173
          2001                                                   680,000
          2002                                                   314,980
                                                              ----------
                                                               1,396,153
          Less current portion                                  (401,173)
                                                              ----------
          Total long-term debt and capital lease obligations  $  994,980
                                                              ==========

<PAGE>

10.   Stock Options

     The Company established a stock option plan in 1995 to provide additional
     incentives to its officers and employees. Eligible persons are all
     employees employed on the date of grant. Management may vary the terms,
     provisions and exercise price of individual options granted, with both
     incentive stock options and non-qualified options authorized for grant. In
     1995, the Board of Directors approved the issuance of up to 178,929 options
     to acquire common shares of which 71,400 and 24,500 were outstanding at
     December 31, 1998 and 1999, respectively. In 1997 the Company established
     an additional stock option plan under which 200,000 options to acquire
     common shares were reserved for issuance. There were 187,520 and 207,920
     shares outstanding under the 1997 plan at December 31, 1998 and 1999,
     respectively.

     Options granted under these plans subsequent to the 1997 initial public
     offering generally vest over three years and expire ten years from the date
     of grant.

     During 1997, the Company granted options to acquire 26,000 common shares to
     a member of the Company's Board and 499,200 to members of management
     outside the 1995 and 1997 plans. The 483,200 options which remain
     outstanding at December 31, 1999 are fully vested and expire ten years from
     date of grant.

<TABLE>
<CAPTION>

                                                       1998                       1999
                                             -------------------------   -------------------------
                                             Options  Weighted-Average   Options  Weighted-Average
                                                          Exercise                    Exercise
                                                           Price                        Price
<S>                                           <C>         <C>             <C>         <C>
      Outstanding at beginning of year        637,200     $   2.30        742,120     $   0.78
      Granted                                 192,420         1.02         30,000         0.66
      Exercised                               (46,600)        0.10        (28,800)        0.10
      Forfeited                               (40,900)        1.21        (27,700)        0.74
                                             --------     --------       --------     --------
      Outstanding at end of year              742,120     $   0.78        715,620     $   0.89

      Options exercisable at year end         534,600     $   0.69        574,458     $   0.78

      Weighted-average fair value per
           option granted during the year     192,420     $   0.65         30,000     $   0.49
</TABLE>

     The following table summarizes information about stock options at
     December 31, 1998 and 1999:

<TABLE>
<CAPTION>
                                   Options Outstanding              Options Exercisable
                             -------------------------------   ------------------------------
                                           Weighted-Average
                                Number         Remaining          Number     Weighted-Average
      Exercise Prices         Outstanding   Contractual Life    Outstanding    Exercise Price

      December 31, 1998
<S>                             <C>              <C>             <C>             <C>
      $ 0.10                    47,600           6.65            47,600          $ 0.10
      $ 0.69                   620,342           9.21           457,800          $ 0.69
      $ 1.13                       200           9.92                --              --
      $ 1.38                    26,200           8.21            26,200          $ 1.38
      $ 1.63                     3,076           9.33                --              --
      $ 2.13                    40,000           9.00                --              --
      $ 2.94                     1,702           9.42                --              --
      $ 4.90                     3,000           7.25             3,000          $ 4.90

<PAGE>

      December 31, 1999

      $ 0.10                    14,000           6.97            14,000          $ 0.10
      $ 0.66                    30,000           9.71                --              --
      $ 0.69                   555,000           7.56           504,554          $ 0.69
      $ 1.13                       100           8.93                33          $ 1.13
      $ 1.38                    26,000           7.26            26,000          $ 1.38
      $ 1.63                     6,152           8.50             2,030          $ 1.63
      $ 1.88                     2,666           8.41               879          $ 1.88
      $ 2.13                    60,000           8.03            19,800          $ 2.13
      $ 2.63                    20,000           8.01             6,600          $ 2.63
      $ 4.90                     1,702           8.35               562          $ 2.94
</TABLE>


     The Company recorded no compensation expense related to options granted in
     1998 and 1999, as the exercise price of the options was equal to the fair
     market value of the Company's common stock at grant dates. Had compensation
     cost for the options grants been determined based on the fair value at the
     grant dates for awards under the Plan consistent with the method of SFAS
     123, the Company's net loss would have been adjusted to the pro forma
     amounts indicated below at December 31:

<TABLE>
<CAPTION>
                                       1998                           1999
                                As                             As
                             Reported        Pro Forma       Reported        Pro Forma
<S>                        <C>             <C>             <C>             <C>
     Net loss              $(6,955,847)    $(7,098,413)    $(5,408,156)    $(5,560,882)
     Net loss per share    $     (1.63)    $     (1.67)    $     (1.06)    $     (1.09)

</TABLE>

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes option-pricing model with the following weighted-average
     assumptions used for grants in 1998 and 1999; risk-free interest rate of
     6.00% in 1998 and 6.36% in 1999, expected dividends of zero in 1998 and
     1999, volatility of 42.5% in 1998 and 57.4% in 1999, and expected lives up
     to ten years.

11.  Loss Per Share

     Basic and diluted loss per share were computed by dividing net loss
     applicable to common stock by the weighted average common shares
     outstanding during each period. Potential common equivalent shares of
     454,411 and 1,079,457 at December 31, 1998 and 1999, respectively, are not
     included in the computation of per share amounts in the periods because the
     Company reported a loss from continuing operations.

     Following is a reconciliation of the numerators and denominators of the
     basic and diluted earnings per share:

<TABLE>
<CAPTION>
                                                              1998           1999
<S>                                                       <C>            <C>
      Loss
          Basic and diluted:
              Loss available to common stockholders       $(6,955,847)   $(5,408,156)
                                                          ===========    ===========

      Shares
          Basic and diluted:
              Weighted-average common shares outstanding    4,260,327      5,108,954
                                                          ===========    ===========
</TABLE>

<PAGE>

12.  Cash Flows

     Supplemental disclosure of cash flow information for the years ended
     December 31, 1998 and 1999, is as follows:

                                             1998         1999

      Cash paid during the year for:
      Interest                             $ 29,806     $ 252,630


     Noncash investing and financing activities:

     1998

     The Company converted $68,820 in accounts and notes payable into $86,024
     common stock. The difference was recorded as a noncash expense.

     The Company reclassified $278,870 of inventory to equipment.

     The Company incurred capital lease obligations of $258,770 for equipment.

     1999

     The Company converted $380,172 in accounts payable into common stock at
     face value.

     In 1999, $160,000 of the convertible debentures were converted into common
     stock.

13.  Commitments and Contingencies

     The Company leases office space and certain equipment under operating
     leases. Future minimum lease payments by year, and in the aggregate, under
     noncancelable operating leases with initial or remaining terms of one year
     or more at December 31, 1999, are as follows:


                    2000             $ 59,503
                    2001               62,003
                    2002               60,501
                    2003                2,500
                    Thereafter              0
                                     --------
                                     $184,507
                                     ========

     Rent expense for operating leases was $572,437 and $371,367 in 1998 and
     1999, respectively.

     The Company entered into a written lease agreement dated November 25, 1997,
     which was amended on April 1, 1998. The lease was terminated by the
     landlord as a result of the Company's breach, effective January 29, 1999.
     Pursuant to an agreement between the Company and the landlord, the Company
     acknowledged breach of the lease due to its failure to pay the required
     rental amount, and the landlord agreed to forego its right to immediate
     possession of the premises until February 20, 1999 if the Company performed
     certain acts. The agreement provided that any time after February 20, 1999,
     the landlord could

<PAGE>

     cause its counsel to (a) file a detainer warrant or complaint and (b)
     submit the answers and agreed judgments executed by the Company if the
     parties did not enter into a written agreement regarding the portion of the
     previously leased premises currently occupied by the Company. The Company
     is still in negotiations with the Landlord. No assurance can be given as to
     the successful conclusion of these negotiations.












<PAGE>

                                    SIGNATURE

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

 CELERITY SYSTEMS, INC.

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

/s/ Kenneth D. Van Meter   President and Chief Executive          March 23, 2000
-------------------------  Officer
Kenneth D. Van Meter

     In accordance with the Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant in the capacities and
on the dates indicated.

        SIGNATURE                      TITLE                           DATE
        ---------                      -----                           ----

/s/ Kenneth D. Van Meter   President and Chief Executive          March 23, 2000
------------------------   Officer and Chairman of the Board
Kenneth D. Van Meter       (Principal Executive Officer)
                           (Principal Financial Officer)


/s/ Glenn West             Director                               March 27, 2000
------------------------
Glenn West


/s/ Fenton Scruggs         Director                               March 24, 2000
------------------------
Fenton Scruggs


/s/ Donald Greenhouse      Director                               March 27, 2000
------------------------
Donald Greenhouse


/s/ Stephen Portch         Director                               March 27, 2000
------------------------
Stephen Portch


/s/ Mark Braunstein        Director                               March 24, 2000
------------------------
Mark Braunstein


<PAGE>

                                  EXHIBIT INDEX


EXHIBIT NO.                        DESCRIPTION
-----------                        -----------

3.1            Certificate of Incorporation of Celerity Systems, Inc.(1)

3.2            By laws of Celerity Systems, Inc.(1)

4.1            Form of Underwriter's Warrant (1)

4.2            1995 Stock Option Plan (1)

4.3            1997 Stock Option Plan (1)

4.4            Form of Stock Certificate (1)

4.5            Form of Bridge Warrant (1)

4.6            Form of 1996 Warrant (1)

4.7            Form of Hampshire Warrant (1)

4.8            Form of 1995 Warrant (1)

4.9            Letter Agreement dated July 15, 1997, between the Company and
               Mahmoud Youssefi, including exhibits (1)

4.10           Letter Agreement, dated July 11, 1997, between the Company and
               Dr. Fenton Scruggs (1)

4.11           Form of 9% Convertible Debenture (3)

4.12           Form of 7% Promissory Note (3)

4.13           Form of Registration Rights Agreement, between the Company and
               each of RNI Limited Partnership, First Empire Corporation, Greg
               A. Tucker and Michael Kesselbrenner (3)

4.14           Form of Warrant issued April 27, 1999 (4)

4.15           Shareholders Agreement, dated August 10, 1999, between Celerity
               Systems, Inc., FutureTrak Merger Corp. and certain parties listed
               therein. (5)

4.16           Registration Rights Agreement, dated September 30, 1999, between
               the Company and GMF Holdings. (6)

4.17           Form of Debenture in connection with Line of Credit Agreement,
               dated September 30, 1999. (6)

4.18           Form of Warrant issued September 30, 1999 (9)

4.19           Form of 4% Convertible Debenture due 2002 between the Company and
               each of John Bridges, John Faure, Loni Spurkeland, Robert Dettle,
               Michael Genta, Lennart Dallgren.(9)

4.20           Form of 8% Convertible Debenture due 2002 between the Company and
               each of Richard T. Garrett, W. David McCoy, Dominick Chirarisi,
               Gilda R. Chirarisi, Joseph C. Cardella, Carl Hoehner. (9)

4.21           Form of 8% Convertible Debenture due 2003 between the Company and
               John Bolliger. (9)

4.22           Form of Registration Rights Agreement, between Celerity and each
               of John Bridges, John Faure, Loni Spurkeland, Robert Dettle,
               Michael Genta, Lennart Dallgren. (9)

4.23           Form of Registration Rights Agreement, between Celerity and each
               of Richard T. Garrett, W. David McCoy, Dominick Chirarisi, Gilda
               R. Chirarisi, Joseph C. Cardella, Carl Hoehner. (9)

4.24           Form of Registration Rights Agreement, between Celerity and John
               Bolliger. (9)

4.25           Form of 8% Convertible Debenture due 2003 between the Company and
               each of Sui Wa Chau, Qinu Guan, Peter Chenan Chen, K&M Industry,
               Inc., Michael Dahlquist, Denise and Vernon Koto and Rance Merkel.
               (10)

4.26           Form of Registration Rights Agreement, between Celerity and each
               of Sui Wa Chau, Qinu Guan, Peter Chenan Chen, K&M Industry, Inc.,
               Michael Dahlquist, Denise and Vernon Koto and Rance Merkel. (10)

<PAGE>

10.1           Employment Agreement, dated January 7, 1997, as amended, between
               the Company and Kenneth D. Van Meter (1)

10.2           Employment, Non-Solicitation, Confidentiality and Non-Competition
               Agreement, dated as of May 1, 1996, between the Company and Glenn
               West (1)

10.3           Termination Agreement, dated as of April 5, 1997, between the
               Company and Mahmoud Youssefi (1)

10.4           [Reserved]

10.5           Letter Agreement, dated March 13, 1997, between the Company and
               William Chambers (1)

10.6           Letter Agreement, dated July 24, 1997, between the Company and
               Mark. C. Cromwell (1)

10.7           Exclusive OEM/Distribution Agreement, dated March 10, 1995,
               between the Company and InterSystem Multimedia, Inc.(1)

10.8           Purchase Order Agreement, dated June 26, 1995, between Tadiran
               Telecommunications Ltd. and the Company (1)

10.9           License Agreement, dated as of September 26, 1996, between the
               Company and En Kay Telecom Co., Ltd.(1)

10.10          License Agreement, dated as of February 21, 1997, between the
               Company and En Kay Telecom Co., Ltd.(1)

10.11          Remarketer Agreement, dated as of June 15, 1997, between the
               Company and Minerva Systems, Inc.(1)

10.12          Memorandum of Understanding, dated April 25, 1996, between
               Integrated Network Corporation and the Company (1)

10.13          Letter of Agreement, dated March 31, 1993, between the Company
               and Herzog, Heine & Geduld, Inc. and Development Agreement
               attached thereto (1)

10.14          Subcontract Agreement, dated June 26, 1997, between Unisys
               Corporation and the Company (1)

10.15          Lease Agreement for Crossroad Commons, dated November 25, 1996,
               as amended, between Lincoln Investment Management, Inc., as
               attorney in fact for the Lincoln National Life Insurance Company,
               and the Company (1)

10.16          Lease Agreement, dated November 25, 1997, between Centerpoint
               Plaza, L.P. and the Company (2)

10.17          Letter Agreement, dated October 3, 1997, between Dennis Smith and
               the Company (2)

10.18          Letter Agreement, dated January 8, 1998, between James Fultz and
               the Company (2)

10.19          Amendment to Employment, Non-Solicitation, Confidentiality and
               Non-Competition Agreement, dated January 1, 1999, between the
               Company and Glenn West (3)

10.20          Form of Subscription Agreement, between the Company and each of
               RNI Limited Partnership, First Empire Corporation, Greg A. Tucker
               and Michael Kesselbrenner (3)

10.21          Form of Subscription Agreement, between the Company and each of
               Donald Alexander, Leo Abbe, Centerpoint Plaza, L.P., William
               Chambers, Fenton Scruggs, Dennis Smith, Kenneth Van Meter, George
               Semb and Rodney Conard (3)

10.22          Form of Royalty Agreement, between the Company and each of Donald
               Alexander, Leo Abbe, Centerpoint Plaza, LP, William Chambers,
               Fenton Scruggs, Dennis Smith, Kenneth Van Meter, George Semb and
               Rodney Conard (3)

10.23          Agreement and Plan of Merger, dated August 10, 1999, between
               Celerity Systems, Inc., FutureTrak Merger Corp. and FutureTrak
               International, Inc. (5)

10.24          Line of Credit Agreement, dated September 30, 1999, between GMF
               Holdings, May Davis Group and the Company. (6)

10.25          Termination Agreement, dated December 7, 1999, between the
               Company, FutureTrak Merger Corp. and FutureTrak International,
               Inc. (7)

<PAGE>

10.26          Manufacturing Agreement, dated November 30, 1999, between the
               Company, Primax Electronics, Ltd and Global Business Group, Ltd.
               (8)

10.27          Lease, dated December 17, 1999, between Andy Charles Johnson,
               Raymond Perry Johnson, Tommy F. Griffin. and the Company. (8)

23             Consent of PricewaterhouseCoopers, LLP (11)

27             Financial Data Schedule (11)

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(1)  Filed as an Exhibit to the Registration Statement on Form SB-2
     (Registration No. 333-33509).

(2)  Filed as an Exhibit to the Form 10-KSB for the year ended December 31,
     1997.

(3)  Filed as an Exhibit to the Form 10-KSB/A for the year ended December 31,
     1998.

(4)  Filed as an Exhibit to the Registration Statement on Form S-3 (Registration
     No. 333-81099).

(5)  Filed as an Exhibit to the Form 8-K filed September 14, 1999.

(6)  Filed as an Exhibit to the Form 8-K filed October 8, 1999.


(7)  Filed as an Exhibit to the Form 8-K filed December 8, 1999.

(8)  Filed as an Exhibit to the Form 8-K filed January 5, 2000.

(9)  Filed as an Exhibit to the Registration Statement on Form S-3 filed
     February 15, 2000.

(10) Filed as an Exhibit to the Form 8-K filed March 23, 2000.

(11) Filed herewith.