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

                         AMENDMENT NO. 2 TO 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, 2000
                                       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)

<PAGE>

   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: $-0-

   Aggregate market value of voting stock held by  non-affiliates  of registrant
as of March 20, 2001: $9,364,815

   Shares of Common Stock outstanding as of March 20, 2001: 49,812,845

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

                       DOCUMENTS INCORPORATED BY REFERENCE

                                 Not applicable

      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" and  "Forward-Looking  Statements
and Associated Risks."

                                     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.  We design,  develop,  integrate,
install,  operate and support interactive video and high speed Internet services
hardware and software. In the interactive video and high speed Internet services
areas, we seek to provide  solutions,  including products and services developed
by us and by others,  that enable interactive video programming and applications
to be  provided  to a wide  variety  of market  segments.  In 1997 and 1998,  we
installed 16 digital  video  servers in six  countries  (China,  Korea,  Israel,
Taiwan,  based on these  installations,  the US and Canada) on several different
network types which accommodate  interactive video services.  We believe that we
have  demonstrated the ability to deploy and operate  interactive  video systems
over various major network types.

<PAGE>

COMPANY OVERVIEW

      We develop and manufacture digital video servers and digital set top boxes
for the  interactive  television  and high speed Internet  markets.  We also are
seeking to offer a number of enhanced  services such as home energy  management,
and security and  healthcare  monitoring,  and have  identified  several  market
segments for the long-term  deployment  of this  technology:  multiple  dwelling
units ("MDU") housing, hotels, schools,  telephone, cable, and energy companies,
hospitals and assisted living centers, and corporate applications.

      We have targeted the following market segments:

      In the near-term, we believe the MDU marketplace offers a promising outlet
for our  products  with  nearly 34 million  housing  units in the United  States
alone.  We believe  that this market  opportunity  exists due, in part,  to poor
service provided by traditional  cable operators,  and because it is possible to
sign long-term  exclusive  right of entry  contracts with building  owners in 35
states. We recently announced our first three MDU projects for Bala Properties.

      We also believe that the  hospitality  industry is also well suited to our
products.  We recently announced our first large order from a hospitality system
operator,  WIT  Technologies  of Seattle,  Washington,  for a minimum of 500,000
digital  set top boxes  and an  exclusive  arrangement  on all set top boxes and
digital video servers for a period of five years. Market research indicates that
guests are no longer satisfied with cable TV and pay-per-view  alone and instead
are demanding new  services,  such as  interactive  TV and  high-speed  Internet
connections.

      Education  is emerging as a high  priority  under the new  administration.
State and federal governments are spending heavily on education technologies. We
recently  announced  our first sale to a school in the Adena School  District in
Ohio.

      We  also  believe   that  the  intense   competition   among   traditional
telecommunications  companies,  cable  companies,   competitive  local  exchange
carriers (CLECs), long distance carriers, energy companies, and Internet service
providers  (ISPs)  to  provide  a robust  suite of  enhanced  broadband  digital
services  to homes,  schools,  multi  housing,  hospitals,  and the  hospitality
industry provides another emerging opportunity for our products.

      The burgeoning need for extensive but user-friendly services in hospitals,
assisted living facilities also appears to offer great  opportunities for us. In
addition to a demand for  entertainment  programming,  our  services can include
staff and patient training and education, medical monitoring and management.

RECENT DEVELOPMENTS

      As of  December  31,  2000,  we had cash on hand of $10,366 and a negative
working  capital  of  approximately  $1,453,000.   During  1999  and  2000,  our
operations were financed  primarily from the sale of debt and equity securities.
For the  foreseeable  future,  we believe we will  continue  to rely on external
capital to fund our  operations.  Since  December  31,  2000,  we have  received
approximately $2.6 million from the sale of debt and equity securities, of which
approximately $1.25 million is remaining. We believe that we have enough cash to
last for approximately six months.  Thereafter, we will need to raise additional
capital.  We also  anticipate  that our equity  line of credit  will become more
attractive if there is an increase in the share price of our common stock. Under
the line of credit  arrangement,  we may  elect to draw  down up to  $10,000,000
aggregate  principal  amount  of  debentures  with a maximum  drawdown  of up to

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<PAGE>

$500,000  per  calendar  month,   through  October  31,  2001,  subject  to  the
satisfaction of certain conditions, including conditions relating to the trading
volume of our Company's common stock.

      We are continuing to seek additional  sources of capital in order to repay
our  obligations  and to provide for our working  capital  requirements  for the
long-term. We are 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.  We  believe  that the
involvement  of such a firm or firms is material  to our ability to grow.  There
can be no assurance that we will be able to obtain any such required  additional
funds on a timely basis, or on favorable terms, or at all.

      In  February  2001,  we sold  the  assets  of our  CD-ROM  segment  for 20
convertible  preferred  shares of Maxwell  Rand,  Inc.  Since we had written the
assets of this segment down to zero, and the fair value of the shares of Maxwell
Rand  are not  currently  determinable,  no gain or loss on this  sale  has been
recorded.

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

      The following discussion of our business and, in particular, our sales and
marketing plans,  assumes that we will receive sufficient capital to continue as
a going concern.  Depending upon the amount of proceeds, if any, received by us,
and the timing of those  proceeds,  our ability to  continue as a going  concern
could be adversely affected.

OUR PRODUCTS

      Our Company's  products for the interactive  video services market consist
of products that we develop and manufacture and products  manufactured by others
that we resell and integrate into our system.

      PRODUCT MANUFACTURED BY US

      DIGITAL SET TOP BOXES.  We have 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. We believe that the T 6000's
open architecture and array of functionality and connectivity make it one of the
more advanced  products in the industry.  Features include a Pentium  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.

      PRODUCTS MANUFACTURED AND DEVELOPED BY OTHERS

      We also intend to use products manufactured by others, including:

      DIGITAL VIDEO SERVERS.  Previously,  we  manufactured  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 has been deployed in
Taiwan and China;  and (ii) a scaled  down ATM  server,  the CTL 7000,  used for
trials,  focus  groups and  similar  applications,  which has been  deployed  in
Canada.  We  entered  into an  agreement  with nCube in June 2000 to have an OEM
version of their nCube Media Cube 4 digital video server  manufactured for us as
the Celerity CTL 9500, but with substantially better cost, size, reliability and
environmental  tolerance.  These ATM based servers include  improvements in cost

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<PAGE>

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.  As part of our
agreement with nCube, we purchase the Oracle OVS3 operating system software.  In
addition,  our servers  incorporate  or interface with HTML,  Java,  Solaris and
other software systems.

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

      NETWORK EQUIPMENT.  We have certain formal and informal  arrangements with
Nortel,  Cisco,  Extreme  Networks  and ViaGate  Technologies  to include  their
network  equipment  as part of overall  bids for  end-to-end  interactive  video
systems  and in  certain  cases  to be  included  in  end-to-end  bids by  these
companies. Nortel, for example, has done a number of bids which include Celerity
products. We also have an arrangement with Marconi (formerly Fore Systems Inc.),
a leading manufacturing of ATM switches, which has enabled us to utilize Marconi
technology and to  incorporate  Marconi  switches  within our ATM based servers,
such as those deployed in China and Taiwan.

      Although we provide  digital video  servers,  we are seeking to enter into
arrangements with other digital video server manufacturers,  such that they will
offer our T 6000 digital set top box as part of end-to-end systems.

      OTHER   EQUIPMENT.   Interactive   video  services  systems  also  utilize
components  such as  digital  encoders,  digital  production  studio  equipment,
digital  production  software and other equipment.  We have entered into certain
arrangements  with respect to the resale of digital  encoders and are seeking to
enter into additional arrangements with sellers of this kind of equipment,  with
a view toward to enabling us to offer a complete  end-to-end system to potential
customers on a fully integrated basis.

      OTHER SOFTWARE. We provide a basic video-on-demand  application,  which we
call the  "Celerity"  user  interface  and  some  sample  applications,  such as
shopping,  as part of our 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. We have entered
into certain arrangements to provide interactive video applications software and
are seeking to enter into additional  arrangements to provide  interactive video
application software and business support systems software to our customers.  We
have 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 us. Upon the sale of such software,  the revenues will
be shared between the parties.

INTERACTIVE VIDEO / HIGH SPEED INTERNET SEGMENT

      The Company's  products can be adapted over a variety of interactive video
systems. The following is an overview of these interactive video systems:

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<PAGE>

      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  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, Verizon 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.

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<PAGE>

      By 1997,  activity in the broadband  services area had been  significantly
reduced,  and some companies,  such as Verizon and TCI, had announced reductions
or delays in their deployment plans. Reasons given for such reductions 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 and cable modem  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 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.  We believe 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.  We believe 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.  We believe that the inherent limitations of narrowband networks,  as
compared with broadband  networks,  creates a market opportunity for a broadband
technology,  such as the Company's,  that offers  superior speed and robustness,

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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, we believe
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 us. 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.
We also believe 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" and "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  equipment,  including CF Alcatel,  Extreme  Networks,
Inc., Ericsson, ViaGate Technologies,  Lucent Technologies,  Scientific Atlanta,
Inc., Elastic Networks and Siemens Communications.

      DIGITAL SET TOP BOXES

      In each subscriber location,  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.

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      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 Prasara and we anticipate  that the  availability  of
applications  software,  in  particular,  will  increase as  broadband  networks
proliferate.

SERVICES

      We intend to act as an overall systems  integrator for  interactive  video
projects,  which may entail  integrating  the end-to-end  system in our products
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.
We also offer a number of  additional  services,  including  customer  training,
documentation, maintenance and support.

CONTENT

      We intend 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.

      We  anticipate  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, the 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 our 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.  We also  believe  that the  significantly
greater security,  both for transactions and  communications,  available through
broadband  networks  will be more  attractive  to  consumers.  We  believe  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.

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<PAGE>

      Customers  will  typically  be  billed a  monthly  fee for  access  to the
interactive  services,  a rental fee for the set top box and additional fees for
the content and  applications  accessed  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, school or business complex or college campus.

MARKETING STRATEGY

      Our  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.  We believe 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  "Deployments"  and  "Strategic
Alliances." In addition,  the scalability of our servers provides flexibility in
deploying  interactive  video  services  systems  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. We believe
that this scalability would be an attractive feature to potential customers.  We
also  believe  that  our 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 our own digital video server or with others. We
believe that a diversified  marketing  approach  provides us with flexibility in
targeting  emerging markets,  enabling us 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 schools, energy companies, hospitality, hospitals and multi-housing. We
have limited sales and marketing  experience  and there can be no assurance that
it will be successful in implementing  its marketing  plans. See "Risk Factors -
Limited Sales; Limited Marketing and Sales Experience."

      PUBLIC NETWORKS

      We also  believe  there  are  potential  market  opportunities  in  public
networks,  such as those maintained by electric companies,  telephone companies,
cable companies and Internet service providers in North America.

      ELECTRIC COMPANIES.  Domestic electric companies are now being deregulated
and are  subject  to  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  as  protecting  key  customers,  such as  hospitals,  from

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<PAGE>

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 us.

      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. We believe  that 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 our
systems.  Local telephone  companies,  including long distance carriers that are
installing  local telephone  networks,  have installed or plan to install modern
fiber optic networks may be seeking new revenue opportunities to offset the cost
of such installations. We believe 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.

      FOREIGN TELEPHONE  COMPANIES.  Up until this time, most of our 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.  We believe  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  we have  lacked our own
direct sales force,  we have been limited to responding to customer bids and has
made only limited  sales in this  market,  which we believe 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,  we have
found that such projects are  difficult and expensive to perform,  and therefore
we are not actively  marketing  our  services  abroad.  However,  should we find
profitable,  well-funded  projects  outside  the U.S.  where the  Company  has a
reliable  strategic  partner in that  geographic  area, we would entertain doing
such international projects. See "Deployments."

      CABLE  COMPANIES.  The large domestic cable companies are currently served
virtually entirely by Scientific  Atlanta and Motorola.  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 AOL Time-Warner,  COVAD 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.  We believe that 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 networks have the significant advantage

                                       10
<PAGE>

of  relatively  rapid and low cost  deployment,  as it compared  to  large-scale
public  networks and they are well suited to the  scalability  of our 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.  We are  aware of  several
situations 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. Our 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 our interactive video system in a
mid-sized or large hospital as part of a multi-year  power contract.  We believe
that  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.  We believe  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 a 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.  We believe  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.  We are  continuing to look for investors to pay for
the equipping of such buildings and if such investment is obtained, we intend to
move  forward  in the MDU  market.  In  January  and March  2001,  we  announced
contracts with Bala Properties and  In4Structures  to do MDU projects in Arizona
and Texas.

      DIGITAL  HOSPITALITY.   Some  hotels,   motels  and  resorts  are  already
considering  upgrading  to a full  digital  interactive  services  solution.  We
anticipate  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. In June 2000, we entered into
agreement with WIT  Technologies  under which WIT will purchase at least 500,000
digital set top boxes and some digital video servers over five years.

      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.

                                       11
<PAGE>

      SCHOOLS.  Improving primary and secondary  education has become a national
priority.  Many  states  and  the  federal  agencies  are  looking  to  advanced
technologies to make a difference.  In March 2001, we announced our first school
system sale in Adena, Ohio.

      CORPORATE.  We believe our 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.

      We  believe  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  2000,  we had one full time  salesperson  for most of the year and
during  the  remainder  of the  year all  sales  and  marketing  was done by our
President and CEO. In our facility in Knoxville,  Tennessee, we have constructed
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. We
utilize  sales and  product  literature  and  information  to  communicate  with
potential customers. We also maintain a Website on the Internet which produces a
significant number of sales leads each month.

      We have 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:  Cisco,  Nortel;  Minerva
(encoders);  Battelle  Laboratories (energy management  software);  Marconi (ATM
switches);  and  ViaGate  Technologies  (network  equipment).  We are  currently
emphasizing the North American market.  In this market, we are actively pursuing
third party distribution  opportunities in the energy,  telephone,  hospitality,
multiple dwelling unit and medical markets. In February 2001, we entered into an
exclusive  arrangement with Kidston  Communications  to market our production in
the education segment.

DEPLOYMENTS

      In 1997 and 1998, we installed sixteen  interactive  digital video servers
in six countries,  consisting of seven servers in Korea,  two in Israel,  one in
Taiwan,  four in China, one in Seattle,  WA and one in Canada. We 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 and Seattle).

      In 1999, we received a purchase order from  Hopkinsville  Electric Service
(HES) in Hopkinsville, Kentucky, for one thousand set top boxes and one CTL 9500
digital video server.  This system is expected to be installed in 2001,  pending
the completion of the Hopkinsville  Electric Services' digital network equipment
and resolution of service disputes with the telco there.

STRATEGIC ALLIANCES

      We believe that  entering  into  strategic  alliances  may give us certain
competitive  advantages,  including  the  ability to (i) reach a larger and more
diverse  group of networks on which to deploy our  products and  services;  (ii)
provide a broader range of products and services;  (iii) provide a series of new

                                       12
<PAGE>

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 our new  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".

      We are 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, we are seeking larger
and better-known strategic partners to make an investment in the Company.

      We have commenced discussions as to certain of these relationships,  while
others  are part of our  strategic  plan,  but all are not yet in  progress.  No
assurance  can be  given  that we will  be  successful  in  entering  into  such
strategic  alliances on acceptable terms or, if any such strategic alliances are
entered into, that we will realize the anticipated  benefits from such strategic
alliances.

      We have entered into strategic alliances with the following companies:

      Nortel  (formerly  Northern  Telecom) has marketed our servers and set-top
boxes to telephone companies and other applications throughout North America and
has one of our servers and some of its set top boxes in its facility in Ottawa.

      We also have strategic alliances with Minerva Systems, Inc. ("Minerva"), a
leading manufacturer of digital MPEG encoders,  although, to date, no sales have
been made pursuant to this arrangement. Our agreements with Minerva provides for
joint marketing, joint referrals and other joint marketing activities.

      We 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 us.  Upon  the  sale of such  software,  the
revenues  will be 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.  Our  agreement  with Marconi  provides for  marketing and technical
cooperation.

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

      Teach Stream is a provider of educational content for our school projects.
We have  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,  our  competitors  include  a  number  of  companies,  many of  which  are
significantly larger than us 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

                                       13
<PAGE>

(for applications like the Internet);  (ii)  manufacturers of very large servers
(e.g.,  massively parallel  processors,  such as those developed by nCube, Diva,
Inc., Hewlett Packard Company, Lucent Technologies 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 us that
target the same niche markets as we do; (iv) manufacturers of set top boxes such
as Pace,  Motorola,  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 server 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.  We compete on the basis of our
demonstrated ability to install digital video systems on each of the major types
of networks  accommodating  interactive  video services and our ability to offer
economically viable solutions based on the scalability of our systems. See "Risk
Factors--Competition" and "--Product Obsolescence; Technological Change."

INTELLECTUAL PROPERTY

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

MANUFACTURING AND MATERIALS

      In 1999, we had a manufacturing agreement with Taylor-White  Manufacturing
in Greeneville,  Tennessee,  to manufacture our T 6000 digital set top boxes. We
did not  build any new T 6000  units in 1999,  but  determined,  for a number of
reasons,  that we  would  be  better  served  to have  our  manufacturing  moved
elsewhere.  In December  1999, we entered into a  manufacturing  agreement  with
Global  PMX  Company,  Limited,  under  which  all T 6000  digital  set  top box
manufacturing  was being done in Global PMX plants in Taiwan and China. This was
a non-exclusive  agreement, but it was the Company's intention that the majority
of these set top boxes be manufactured by Global. We attempted to transition the
manufacture of set top boxes from  Tennessee to Taiwan and T 6000  manufacturing
was expected to begin  commercially in Taiwan during the second quarter of 2000,
however  Global Primax was never able to  satisfactorily  build the product.  In
November  2000, we ended our agreement  with Global Primax and  contracted  with
Nextek,  Inc.,  of  Madison,  Alabama,  to  build T 6000  set top  boxes.  First
production is scheduled for April 2001.

      We used to assemble our own digital  servers in Knoxville,  Tennessee.  As
part of assembling  these digital video servers,  we ordered the component parts
from a number of outside  suppliers.  We now obtain our  servers on an OEM basis
from nCube,  which  manufactures them in Beaverton,  OR. We add some proprietary

                                       14
<PAGE>

components,  such as racks,  ups, front end processors,  etc, in our facility in
Knoxville.  The  disruption  or  termination  of our  sources  of supply for our
interactive  video segment could have a material  adverse effect on our business
and results of operations.  While we are aware of alternative suppliers for most
of these  products and we are actively  investigating  some  alternate  sources,
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

      Our products must  successfully  pass tests at each important stage of the
manufacturing  process.  We  offer  maintenance  and  support  programs  for our
products that provide maintenance, telephone support, enhancements and upgrades.

      We generally warrant our interactive video servers to be free from defects
in  material  and  workmanship  for 90 days  from the  completion  of the  final
acceptance  test. At the end of the warranty  period,  we offer  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."

      We generally warrant our 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

      We have also developed and marketed CD-ROM software  products for business
applications.  In February 1998,  following the  unsuccessful  conclusion of our
efforts to retain a qualified general manager for our CD-ROM segment, we 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 our need to
focus our efforts and resources on the interactive video segment. We reduced our
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. We are
not actively marketing our CD-ROM products, nor are we developing any new CD-ROM
products,  product upgrades or features.  We are continuing to maintain existing
customer  relationships by providing technical support and filling sales orders.
In February  2001, we sold the business to Maxwell Rand for Maxwell Rand shares.
There can be no assurance that we will realize any proceeds from the disposition
of such business. See Note 4 of the "Notes to Financial Statements."

      Our CD-ROM division had two major product groups. Mediator provides access
to CD-ROM towers and changers for Novell,  UNIX and Windows NT clients.  CD Work
Ware 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 into a Novell
network  where  documents  are placed in an on-line  CD-ROM  library that can be
accessed by any network user.

      We  warranted  our  CD-ROM  products  for 30 days after  purchase,  with a
replacement  or repair  option on such CD-ROM  products.  We also  provided  our
CD-ROM  customers  with  access  to a  telephone  help  desk for one year  after
purchase.

                                       15
<PAGE>

EMPLOYEES

      As of  March  20,  2001,  we had 8 full  time  employees,  6 of whom  were
employed full time in the engineering and product  development area, one of whom
fulfilled the marketing and sales function and two of whom fulfilled  management
or  administrative  roles.  Our  employees  are not  represented  by a union  or
governed  by  a  collective   bargaining  agreement  and  we  believe  that  our
relationship  with our employees is good. We also employ a number of contractors
and  consultants  on a  regular  basis.  See  "Risk  Factors  - -  Necessity  of
Attracting and Retaining Employees."

RESEARCH AND DEVELOPMENT COSTS

      Research and  development  costs  amounted to $-0- and $90,498 and for the
years ended December 31, 2000 and 1999, respectively.

RISK FACTORS

      WE ARE SUBJECT TO VARIOUS RISKS WHICH MAY HAVE A MATERIAL  ADVERSE  EFFECT
ON OUR BUSINESS,  FINANCIAL CONDITION AND RESULTS OF OPERATIONS,  AND MAY RESULT
IN A DECLINE IN OUR STOCK PRICE. CERTAIN RISKS ARE DISCUSSED BELOW:

      FORWARD-LOOKING  STATEMENTS AND  ASSOCIATED  RISKS.  THIS FILING  CONTAINS
FORWARD-LOOKING STATEMENTS,  INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS,
(A)  THE  STATUS  OF THE  COMPANY'S  BIDS  AND  RESULTING  PROJECTED  SALES  AND
PROFITABILITY,  (B) THE COMPANY'S GROWTH  STRATEGIES,  (C) ANTICIPATED TRENDS IN
THE COMPANY'S  INDUSTRY,  (D) THE COMPANY'S  FUTURE FINANCING PLANS, AND (E) THE
COMPANY'S ANTICIPATED NEEDS FOR WORKING CAPITAL. IN ADDITION,  WHEN USED IN THIS
FILING,  THE WORDS "BELIEVES,"  "ANTICIPATES,"  "INTENDS," "IN ANTICIPATION OF,"
"EXPECTS,"  AND SIMILAR WORDS ARE INTENDED TO IDENTIFY  CERTAIN  FORWARD-LOOKING
STATEMENTS.  THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON THE COMPANY'S
EXPECTATIONS  AND ARE  SUBJECT TO A NUMBER OF RISKS AND  UNCERTAINTIES,  MANY OF
WHICH ARE BEYOND THE COMPANY'S  CONTROL.  ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THESE  FORWARD-LOOKING  STATEMENTS  AS A RESULT OF CHANGES IN TRENDS IN THE
ECONOMY AND THE COMPANY'S INDUSTRY,  REDUCTIONS IN THE AVAILABILITY OF FINANCING
AND OTHER FACTORS.  IN LIGHT OF THESE RISKS AND  UNCERTAINTIES,  THERE CAN BE NO
ASSURANCE THAT THE FORWARD-LOOKING  STATEMENTS  CONTAINED IN THIS FILING WILL IN
FACT OCCUR.  THE COMPANY DOES NOT UNDERTAKE ANY  OBLIGATION TO PUBLICLY  RELEASE
THE RESULTS OF ANY  REVISIONS TO THESE  FORWARD-LOOKING  STATEMENTS  THAT MAY BE
MADE TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.

      NEED FOR ADDITIONAL FINANCING

      As of December 31, 2000 we had cash and cash  equivalents of approximately
$10,366  and a negative  working  capital  of  approximately  $1,453,000.  Since
December 31, 2000, we have received  approximately $2.6 million from the sale of
debt and equity securities,  of which  approximately $1.25 million is remaining.
We believe  that we have enough cash to last for  approximately  six months,  at
which  time we will need to raise  additional  capital.  We need to obtain  from
external  sources  additional   financing   adequate  to  complete   development
activities  and to  achieve  a level  of  sales  adequate  to  support  our cost
structure in order to alleviate  substantial doubt about our ability to continue
as a going concern. In the absence of additional capital, we will be required to
significantly  curtail or cease our  business  activities,  and our stock  price
would decline.

                                       16
<PAGE>

      HISTORY OF LOSSES AND ACCUMULATED DEFICIT

      We had net losses of $5,287,500  for fiscal 2000 and $5,408,100 for fiscal
1999. We had an accumulated deficit of approximately $32,456,500 at December 31,
2000 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

      We have  significantly  scaled  back our  operations  as a  result  of our
recurring losses, cash flow and working capital problems. 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.
See report of Independent Accountants on page F-1.

      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 are also  continuing  to pursue our sales  efforts and  endeavoring  to
offer  attractive  pricing to close  sales in a timely  manner.  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.

      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

      Our ability to successfully manage our growth will substantially depend on
our ability to attract and retain  additional  qualified  management  personnel.
Because of our extreme cash shortage, our ability to attract or retain qualified
personnel has been  hindered.  There can be no assurance that the demands placed
on our personnel by the cash shortage or the growth of our business and the need
for  close  monitoring  of our  operations  and  financial  performance  through
appropriate and reliable  administrative and accounting  procedures and controls
will be met,  or that we will  otherwise  manage  our growth  successfully;  the
failure to do so could have a material  adverse effect on our business,  results
of operations  and financial  condition.  There is significant  competition  for
qualified personnel, and there can be no assurance that we will be successful in
recruiting, retaining or training the management personnel we require.

                                       17
<PAGE>

      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. Our
failure  to retain  the  services  of key  personnel  or to  attract  additional
qualified employees could adversely affect us.

      We  entered  into an  employment  agreement  with Mr. Van Meter in 1997.
Mr. Van Meter's employment agreement expired on January 20, 2000.

      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 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 or  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.

                                       18
<PAGE>

      EFFECT OF PREVIOUSLY ISSUED OPTIONS, WARRANTS AND CONVERTIBLE DEBENTURES

      As of December 31, 2000, options to purchase an aggregate of 37,500 shares
of common stock were outstanding under our 1995 stock option plan. These options
are all  exercisable  at $0.910 per share.  In addition,  options to purchase an
aggregate of 159,483 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  2,822,000  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 we have 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, 2001,  3,275,296 shares would have been issuable upon conversion of
the convertible  debentures and series A preferred stock  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 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.

      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.

      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 are required to pay liquidated damages of
approximately  $26,000  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.


      Substantial  Up-Front Expenses;  Liquidated Damages Provisions and Other
Project Risks

      A  significant  portion of our  revenues  are  expected  to continue to be
derived from substantial  long-term projects which require significant  up-front
expense to us. 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 our 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 us.

                                       19
<PAGE>

      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.

      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 the
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 our products
over  competing  products  and  the  general  acceptance  of  interactive  video
services.  In particular,  we believe 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.

      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

                                       20
<PAGE>

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
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.

                                       21
<PAGE>

      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.

      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 us. 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 not 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.  Due to cash  shortages,  our  company  did not  expend any money in
research and  development  in 2000.  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

                                       22
<PAGE>

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.  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  product  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 our  existing  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 that 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 our 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,

                                       23
<PAGE>

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 we 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 a material  adverse  effect on the  Company.  We cannot  predict  the
effect that future regulation or regulatory changes may have on our business.

      PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE

      The  manufacture  and sale of our  products  entails  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.

      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 sale of our  CD-ROM  segment.  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.

      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.  Our 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.

                                       24
<PAGE>

      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  average  approximately  $5,000 per
month plus utilities and certain other maintenance expenses.

      ITEM 3. LEGAL PROCEEDINGS.

      There is no pending  litigation  against Celerity,  other than a claim for
non-payment of printing expenses. The action was brought on January 30, 2001 and
is pending before Supreme Court of the State of New York, County of New York. In
this action, the plaintiff,  Merrill/New York Company,  has sued the Company for
the non-payment of financial printing fees and is seeking approximately $118,000
in damages,  plus interest and certain costs.  The Company intends to defend the
action vigorously.

      In addition,  certain  creditors have  threatened  litigation if not paid.
Celerity is seeking to make arrangements  with these 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.

      The Company held an annual  meeting of its  shareholders  on September 18,
2001.  The meeting was  adjourned  until  October 17, 2001 in order to allow for
further  solicitation of proxy votes. At the annual  meeting,  the  shareholders
voted to (i) elect the board of directors,  (ii) amend the Company's Certificate
of  Incorporation  to increase the authorized  capital stock of the Company form
15,000,000 shares of common stock to 50,000,000 shares of common stock and (iii)
ratify the appointment of PricewaterhouseCoopers LLP as independent auditors and
accountants  for the Company for the fiscal year ending  December 31, 2000.  The
directors elected at the meeting were:  Kenneth D. Van Meter, Glenn West, Fenton
Scruggs, David Hultquist and Bruce Thompson.

      At the annual meeting, the shareholders re-elected the following directors
named in the following table by the vote set forth in such table.

      Name:                     For:             Against:       Abstain:

      Kenneth D. Van Meter      8,631,361          --           36,230

      Glenn West                8,631,361          --           36,230

      Fenton Scruggs            8,631,361          --           36,230

      David Hultquist           8,631,361          --           36,230

      Bruce Thompson            8,631,361          --           36,230

      At the annual  meeting,  the  shareholders  also  approved  the  following
matters by the vote set forth in such table.

      Matter:                                 For:         Against:     Abstain:

      Increase Authorized Capital Stock       8,460,701    123,705      83,185

      Ratify Independent Accountants Stock    8,598,956     59,250       9,385



                                     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 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

                                       25
<PAGE>

       Fiscal year 2000
       1st Quarter                             $2.4375     $0.5156
       2nd Quarter                             $2.0156     $0.2969
       3rd Quarter                             $1.4062     $0.5625
       4th Quarter                             $0.7031     $0.0469



      As of March 15, 2001 there were approximately 140 holders of record of the
Common Stock.

      We have not paid dividends on our Common Stock since  inception and do not
intend to pay any dividends to our  stockholders in the foreseeable  future.  We
currently intend to retain  earnings,  if any, for the development and expansion
of our  business.  The  declaration  of  dividends  in the future will be at the
election of our Board of Directors  and will depend upon our  earnings,  capital
requirements  and financial  position,  general  economic  conditions  and other
factors our 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  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, our 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,  we  focused  our sales  efforts  in North
America,  and developed and sold the first production units of a new digital set
top box, the T 6000.

      We have continued to focus most of our development and production  efforts
during the twelve  months  ended  December  31, 2000 on our T 6000  product.  In
addition,  we are seeking new projects  using our digital video  servers,  which
could be deployed  with the T 6000 or other  compatible  set top boxes.  We have
produced  our  initial  trial  run of the T  6000  set  top  boxes,  which  were
manufactured by Taylor-White, LLC, of Greeneville, Tennessee. In December, 1999,
we entered into a  manufacturing  agreement  with Global PMX  Company,  Limited,
which  was   terminated  by  us  in  November  2000.  We  then  entered  into  a
manufacturing agreement with Nextek, Inc. under which all T 6000 digital set top
box manufacturing is now being done in their plant in Madison, AL.

      Management has also focused on attempting to obtain the necessary  capital
to maintain our  operations.  We are  continuing  to seek to arrange  financing,
including possible strategic  investment  opportunities or opportunities to sell
some or all of our  assets  and  business,  while  continuing  to  pursue  sales
opportunities.  We have  narrowed our sales  efforts to those which,  we believe
have the best chance of closing in the near term.  We  continue  to  encounter a

                                       26
<PAGE>

longer and more complex sales cycle.

      We had no revenues in 2000. The Company had one interactive video customer
that  represented 50% of our revenues in 1999.  Export sales  represented 35% of
revenues for 1999.

      RESULTS OF OPERATIONS

      YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

      REVENUES.  We had no revenue  for the year ended  December  31,  2000,  as
compared to $85,894 for 1999. The primary reason for this decrease is due to the
lack of  interactive  video sales in 2000.  The low level of  interactive  video
sales is a result of the constrained  sales and marketing  activities  caused by
our cash shortage and delays  associated  with the  production of the T 6000 set
top box.

      COSTS OF REVENUES.  Costs of revenues were $717,775 in 2000 as compared to
$366,495 in 1999. We had a negative gross margin of $717,755 in 2000 as compared
to $280,601 in 1999.  Costs of revenues in 2000 and 1999 were  primarily  due to
the write down of $683,750 and $354,523,  respectively, of obsolete inventory to
net realizable  value. The write down in 2000 was due to inventory  obsolescence
associated  with an agreement with nCUBE  Corporation to manufacture our updated
line of CTL 9000 digital video servers.

      OPERATING  EXPENSES.  Operating  expenses  for  the  twelve  months  ended
December 31, 2000 were $3,666,014, as compared to $4,667,719 for the same period
in 1999. The decrease is due to the  significant  reduction in personnel  costs,
facility costs and related depreciation. Employment decreased from an average of
approximately  thirty  full  time  staff  during  the first  quarter  of 1999 to
approximately  seven  since  that time.  In  January  2000,  we  relocated  to a
significantly less costly facility.  This relocation resulted in the abandonment
of certain leasehold  improvements and the return of furniture  recorded as part
of a capital lease, the impact of which was recorded in 1999.  Additionally,  we
had no bad debt expense in 2000 as compared to  approximately  $215,000 in 1999.
These  decreases  were  partially  offset  by  expenses  for the  engagement  of
consultants  to  assist  us with  investor  relations  and  investment  banking,
non-cash  payments of directors'  fees, and increased  outside  engineering  and
accounting fees. Also, stock-based  compensation was recorded due to the initial
closing of a private offering in which  approximately  $1,787,000 of outstanding
notes,  accounts  payable and wages were  canceled in exchange  for warrants and
common stock at a beneficial conversion rate.

      INTEREST  EXPENSE  AND  INCOME.  Interest  expense  for 2000 was  $930,740
compared  to 1999  which  totaled  $537,865.  Of the  totals  for 2000 and 1999,
$724,291 and $285,235, respectively, were non-cash expenses incurred as a result
of the amortization  through a charge to interest expense of the beneficial debt
conversion features of the 2000 and 1999 placements. Liquidated damages incurred
due to the late filing of certain registration statements resulted in a non-cash
expense of $89,541. Interest income was $6,804 in 2000 versus $686 in 1999. This
increase is the result of the higher  average cash  balances in 2000 compared to
1999 and the interest earned on related overnight investments..

      LOSS FROM CONTINUING  OPERATIONS.  As a result of the above factors,  loss
from  continuing  operations  for the twelve months ended  December 31, 2000 was
$5,322,593 as compared to $5,434,986 for the same period in 1999.

      LIQUIDITY AND CAPITAL RESOURCES

      The  primary  source  of  financing  for us since our  inception  has been
through the issuance of common and preferred stock and debt.

                                       27
<PAGE>

      We had cash  balances on hand of $10,400 as of December  31, 2000 and $383
as of December 31, 1999. Our cash position continues to be uncertain.


      In the first quarter of 2001, we received  gross proceeds from the Line of
Credit Agreement of $1,790,000, $742,000 on the private placement of 74.2 shares
of its Series B Convertible  Preferred Stock and warrants,  and $30,000 from the
issuance of common  stock.  We are looking at several  other options in terms of
improving our cash  shortage.  We are  continuing to seek to arrange  financing,
including possible strategic  investment  opportunities or opportunities to sell
some or all of our  assets  and  business,  while  continuing  to  pursue  sales
opportunities.  We have  granted a  security  interest  in our  property  to our
landlord and granted a security  interest in our personal  property to our legal
counsel. Such security interest may hinder our efforts to obtain financing.  The
lack of sales or a significant  financial  commitment  raises  substantial doubt
about our 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, 2000, we have
an accumulated  deficit of $32,456,505.  We expect to incur operating losses for
the indefinite  future as it continues to develop our technology.  Since January
1,  2001,  we have  received  new  orders  to  install  and  operate  end-to-end
interactive  video systems in 3  multi-family  developments  with a total of 749
units in Texas and Arizona and for the sale of our Digital  Education  System to
an Ohio school system. 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,  2000  we  had a  negative  net  working  capital  of
approximately  $1,453,000.  We had no significant  capital  spending or purchase
commitments  at  December  31,  2000  other  than  certain  facility  leases and
inventory component purchase  commitments required in the ordinary course of its
business.

      We have no existing bank lines of credit.

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

                                       28
<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

     Our executive officers and directors are as follows:

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

      Kenneth D. Van Meter      54      President, Chief Executive Officer
                                        and Chairman of the Board.
      Fenton Scruggs (2)        63      Director
      David Hultquist (1)(2)    38      Director
      Bruce Thompson (1)        71      Director
      Edward Kidston (2)        41      Director

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

(1)   Member of the Audit Committee.

(2)   Member of the Compensation Committee.


      KENNETH  D. VAN  METER:  Mr.  Van Meter has been our  President  and Chief
Executive  Officer since January 20, 1997. He was elected  Chairman of our 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
Verizon,  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.


      EDWARD A.  KIDSTON:  Mr.  Kidston  graduated  with a BSBA  from  Tri-State
University  in 1981.  Since  graduation,  Mr.  Kidston  has been  employed  with
Artesian of Pioneer  Inc.  serving in numerous  capacities.  In 1995,  he became
President and Chief  Executive  officer of Kidston Family  Companies,  parent to
serveral  wholly  owned  companies,  competing  in the  business of  Hotel/Motel
ownership and management - municipal,  industrial and commercial water treatment
systems - industrial development-  residential,  MDU, and commercial real estate
ownership and management, among others.

      FENTON SCRUGGS:  Dr.  Scruggs,  one of our founders who funded our initial
start-up,  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

                                       29
<PAGE>

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.

      DAVID  HULTQUIST.  Mr.  Hultquist  became one of our  directors in October
2000. Mr.  Hultquist has been President of Capital  Resource  Consultants  since
1999. From 1998 to 1999, Mr. Hultquist served as Chief Operating Officer,  Chief
Financial  Officer and in certain other  positions with the Lanrick Group, a net
worth advisory firm. From 1995 to 1997, Mr.  Hultquist served as Chief Operating
Officer and  Director  of  Strategic  Telecom  Systems.  From 1992 to 1995,  Mr.
Hultquist  served as  Controller  of Global  Telemedia.  From 1986 to 1991,  Mr.
Hultquist  served as  Assistant  Controller  for  Health  Care  REIT,  Inc.  Mr.
Hultquist holds a BBA in Accounting from the University of Toledo.

      BRUCE THOMPSON.  Mr. Thompson became one of our directors in October 2000.
Since 1970, Mr. Thompson has served as President of First Toledo Corporation, an
owner-developer   of  assisted   living   facilities   and  manager  of  limited
partnerships  with  assisted  living  assets.  From  1970 to 1995,  he served as
Chairman and Chief Executive  Officer of Health Care REIT,  Inc., which owns and
finances  operators  of  nursing  and  rehabilitation   centers,  mental  health
facilities,  retirement  and assisted  living  complexes  and allied health care
properties. Mr. Thompson received his B.A. from Yale University and received his
LLB and JD from the  University  of  Virginia  Law  School.  Mr.  Thompson  is a
director of Health Care REIT, Inc.

      Each director  holds office until our annual meeting of  stockholders  and
until his successor is duly elected and  qualified.  Officers are elected by our
Board of Directors and hold office at the  discretion of our 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 our 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 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 our  knowledge,  based  solely on  review of the  copies of such
reports  furnished to us,  during the fiscal year ended  December 31, 2000,  our
officers,  directors,  and greater than ten percent  beneficial  owners complied
with all Section 16(a) filing requirements applicable to them except as follows:

      Kenneth  D. Van Meter has failed to file a Form 4 in  connection  with the
issuance by our company of 118,506 shares of Common Stock in January 2001. These
shares of Common Stock were issued in lieu of cash  compensation  for employment
services  rendered by Mr. Van Meter in December  2000.  Mr. Van Meter  failed to
timely file a form 4 in connection  with the receipt of 229,736 shares of Common
Stock on March 15, 2000.

      David  Hultquist  has  failed  to  file a Form 4 in  connection  with  the
issuance by our company of 35,146 shares of Common Stock in January 2001.  These
shares of Common Stock were issued in lieu of cash  compensation  for consulting
services rendered by Mr. Hultquist in December 2000.

      Fenton Scruggs has failed to file a Form 4 in connection with the issuance
by our company of 42,644  shares of Common  Stock and options to purchase  5,000
shares of Common Stock in January 2001. These shares of Common Stock and options
were issued as director's compensation. Mr. Scruggs failed to timely file a Form
4 in  connection  with the receipt of 2,000 and 87,993 shares of Common Stock on
March 2, 2000 and March 20, 2000, respectively.

                                       30
<PAGE>

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, 2000,  1999,
and 1998 paid to Kenneth D. Van Meter, our Chairman of the Board, President, and
Chief Executive Officer ("Named Executive Officer").  No other executive officer
received  compensation  exceeding $100,000 during the fiscal year ended December
31, 2000.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                        LONG TERM COMPENSATION
                                                        ----------------------

                        ANNUAL COMPENSATION             AWARDS
                        -------------------             ------

NAME AND PRINCIPAL      YEAR   SALARY       BONUS       RESTRICTED   SECURITIES   ALL OTHER
POSITION                ----   ------       -----       STOCK        UNDERLYING   COMPENSATION
------------------                                      AWARD(S)     OPTIONS
                                                        --------     -------      ------------
<S>                     <C>    <C>           <C>          <C>         <C>              <C>
Kenneth D. Van Meter    2000   $278,760(1)    -            -            -               -
Chairman of the Board,  1999   $170,100(2)    -            -            -               -
Chief Executive         1998   $170,100       -                      413,200(3)         -
Officer, and President
</TABLE>

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

        (1) Includes $13,125 voluntarily deferred in 2000 and $96,185 paid in
            common shares of the Company.
        (2) Includes $155,925 voluntarily deferred in 1999.
        (3) Options repriced on December 1, 1998.

      No options were granted to the Named  Executive  Officer during the fiscal
year ended December 31, 2000.

      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, 2000 by the Named Executive Officer.

      AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
NAME                NUMBER OF   VALUE     NUMBER OF SECURITIES                  VALUE OF UNEXERCISED
----                SHARES      REALIZED  UNDERLYING UNEXERCISED                IN-THE-MONEY OPTIONS AT
                    ACQUIRED ON --------  OPTIONS AT DECEMBER 31, 2000          DECEMBER 31, 2000 2000(1)
                    ON                    EXERCISABLE/UNEXEREXERCISABLE         EXERCISED/UNEXERCISABLE
                    EXERCISE              -----------------------------         ------------------------
                    --------
<S>                    <C>         <C>    <C>      <C>                          <C>      <C>
Kenneth D. Van Meter   --          --     413,200  -0-                          -0-      -0-
</TABLE>

-----------

(1) Amount reflects the market value of the underlying shares of Common Stock at
    the  closing  price  reported  on the  Over-the-Counter  Bulletin  Board  on
    December  31, 2000  ($0.0469  per share),  less the  exercise  price of each
    option.

RESIGNATION OF DIRECTOR

      In December 2000 Glenn West  resigned  from the Board of  Directors.  This
vacancy has not been filled.

DIRECTOR COMPENSATION

    Our  policy is for each  outside  director  to  receive  nonqualified  stock
options for 20,000 shares in addition to $2,500 per quarter  through  1999.  For
the year 2000 outside  directors  received  compensation  of $2,000 per quarter,
paid in the form of our common  shares plus options to purchase  5,000 shares at
market  price as of the end of each  quarter  for each full  quarter  in which a
person is a member of our Board.  Directors received compensation in fiscal 2000
for services  rendered  during 1998 and 1999 in the form of common shares of the
Company.

STOCK OPTION PLANS

    On August 10, 1995, the Board of Directors and stockholders adopted our 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 our  employees  and
officers.  In August,  1997, our Board of Directors and the stockholders adopted
our 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 our  employees,  directors,  and  officers.
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 our 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 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.

                                       31
<PAGE>

    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 our Board
of  Directors,  by delivery to us 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 us become  available again for issuance under the Plan
from which they were granted.

    On November 25, 1998,  our Board of  Directors  approved a resolution  which
permitted us to reprice all  outstanding  options to purchase Common Stock which
were held by employees  as of December 1, 1998,  to a price equal to the closing
of our 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, 2000, options to purchase 37,500 shares of Common Stock were
outstanding  under the 1995 Plan at an  exercise  price of $0.910 per share.  At
December  31,  2000,  options to purchase  159,483  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, 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.  Messrs.  Mark  Braunstein,  Donald
Greenhouse  and  Stephen  Portch did not stand for  reelection  to the board and
their terms expired October 17,2000.  On October 17, 2000 our Board of Directors
approved a resolution which extended the period for option exercise from 90 days
to one year for all Board  members  leaving  the Board  for any  reason  between
October 17 and December 31, 2000.

OPTIONS GRANTED OUTSIDE THE PLANS

    In addition to the options which have been granted under the Plans,  we have
previously  granted options outside of the Plans. At December 31, 2000,  options
to purchase  499,200  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;  (ii) options granted to Kenneth Van Meter to purchase
413,200 shares of Common Stock at an exercise  price of $0.688 per share,  (iii)
options  granted to David  Hultquist and Bruce  Thompson,  both directors of the
Company,  to each purchase 20,000 shares of Common Stock at an exercise price of
$0.35 per share,  and (iv)  options  granted to Ed  Kidston,  a director  of the
Company to purchase  20,000 shares of Common Stock at an exercise price of $0.17
per share.

                                       32
<PAGE>

401(K) PROFIT SHARING PLAN

    We had a 401(k) profit sharing plan (the "401(k)  Plan"),  pursuant to which
we, at our discretion  each year,  could make  contributions  to such plan which
match a certain  percentage,  as determined by us, of the contributions  made by
each  employee.  We may elect not to make matching  contributions  to the 401(k)
Plan in any given year. We made no matching  contributions  in fiscal years 1998
or 1999 and terminated the plan during 1999.

EMPLOYMENT AGREEMENTS

    KENNETH VAN METER. Our employment  agreement with Mr. Van Meter, as amended,
expired January 20, 2000. Mr. Van Meter is currently employed by us without such
an agreement. Pursuant to his prior 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.  In May 2000,  our Board of Directors
approved an increase to Mr. Van Meter's base salary for 2000 to $225,000  with a
potential bonus of 200% of such salary.  Retroactive  salary  increases for 1998
and 1999 were also  granted and were paid in shares of common stock in June 2000
($8,505  raise for 1998,  paid as 8,000 shares;  $8,930 raise for 1999,  paid as
10,338  shares).  These  shares were  valued at the closing  price of the common
stock on the Board approval  date.  This issuance was recorded as a compensation
expense in the second quarter of 2000.

    Pursuant to his employment agreement (now expired),  Mr. Van Meter may have,
at the discretion of our 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 was 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.

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

PRINCIPAL STOCKHOLDERS

      The following table sets forth certain  information  known to us regarding
the  beneficial  ownership of our voting  securities as of March 15, 2001 by (i)
each person who is known by us to own of record or beneficially  more than 5% of
the outstanding Common Stock, (ii) each of our directors and the Named Executive
Officer and (iii) all our directors and  executive  officers 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.

NAME OF BENEFICIAL OWNER(1)    NUMBER OF SHARES         PERCENT OF CLASS(2)
---------------------------    BENEFICIALLY OWNED       -------------------
                               ------------------

Kenneth D. Van Meter             1,121,252(3)               2.2%
David Hultquist                    597,000(4)               1.2%
Ed Kidston                       1,608,881                  3.2%
Dr. Fenton Scruggs                 476,074(5)               0.9%
Bruce Thompson                       1,000                  0.0%

                                       33
<PAGE>

All directors and executive      3,824,207                  7.5%
officers as a group
(5 persons)(3)(4)(5)


(1) The  address for Messrs. Van  Meter, Hultquist,  Kidston,  Thompson, and Dr.
    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,  warrants to purchase  78,219  shares of Common
    Stock obtained in the Spring 2000 Placement.  Does not include 21,032 shares
    of  Common  Stock  owned  by Mr.  Van  Meter's  adult  children  to which he
    disclaims beneficial ownership.

(4) Includes  warrants to purchase  125,000  shares of Common Stock  obtained in
    part  consideration for an advance to the Company.  Does not include 200,000
    shares of Common  Stock owned by a trust for the benefit of Mr.  Hultquist's
    children as to which he disclaims beneficial ownership.

(5) Includes  21,591  shares of Common  Stock  which are  subject  to  currently
    exercisable  stock options and warrants to purchase  21,198 shares of Common
    Stock obtained in the Spring 2000 Placement.

                                       34
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
         ----------------------------------------------

    In conjunction with a loan to a third party in mid-1999,  Dr. Fenton Scruggs
transferred approximately 278,000 tradable shares of Common Stock into an escrow
account for our benefit,  the loan was repaid on December 1, 1999; Dr.  Scruggs'
shares were  subsequently  released from escrow.  Dr.  Scruggs was issued 55,583
shares of Common  Stock (20% of the number of shares he placed  into  escrow) in
January 2000 for the use of such shares.  The issuance of these shares  resulted
in an operating  expense of $83,375,  valued using the closing price on the date
of grant, in the three months added March 31, 2000.

    In December 1999, David Hultquist, who subsequently became a director of the
Company in October 2000,  purchased  400,000  shares of Common Stock at the then
current market price. We previously  registered  400,000 of such shares. We also
entered into a loan arrangement with Mr.  Hultquist.  Such arrangement  provides
that in  connection  with  loans  made  thereunder,  we issued  him a warrant to
purchase up to 200,000  shares of Common Stock at the then current  market price
which expires December 31, 2001.

    We also entered  into a  consulting  agreement  with Mr.  Hultquist  for his
services payable in shares of Common Stock (calculated  monthly at a price equal
to the  average  for the most  recent  five  trading  days less  20%),  plus the
issuance of one share of Common Stock per each dollar of fees.

Deferred Payments and Cash Loans to the Company

    Several persons  affiliated with us have permitted us to defer paying them
certain  amounts we owe to them.  Mr. Van Meter has  permitted the deferral of
compensation  payments,  $70,875  in 1998,  $204,515  in 1999 and  $18,750  in
2000. Mr. West permitted the deferral of payments of contractor  fees,  $2,500
in  1998  and  $30,000  in  1999.  Mr.  Smith  permitted  the  deferral  of an
aggregate of compensation  payments,  $14,219 in 1998 and $73,149 in 1999. Mr.
Smith  also  permitted  the  payment  deferral  of  $25,000  owed  to  him  in
connection  with his  relocation in 1998. Mr.  Chambers,  a former officer and
employee of the Company,  permitted the deferral of  compensation  payments of
$22,969 in 1998 and $54,687 in 1999.  As of  December  31,  1999,  a total of,
$1,130.245  of  compensation  and fees was  deferred  by  current  and  former
officers and employees, including the amounts noted above.

    Several  persons  affiliated  with us have made cash loans to the Company.
Mr. Van Meter loaned us an aggregate of $550,000  during 1998 and aggregate of
$17,219  during 1999 and made no loans to us during 2000.  Dr.  Scruggs loaned
the  Company  $100,000  in  1998.  Mr.  Hultquist,  a member  of our  Board of
Directors,  loaned us $70,000 in the first  quarter of 2000  (which was repaid
in cash) and $125,000 in the second quarter of 2000 which remains outstanding.

    Except  for the loans  from Mr.  Hultquist  and  approximately  $147,000  of
compensation  owed to former  employees,  none of the amounts owed  described in
this  section  remain  outstanding  due  to  such  persons'  investments  in the
transactions described in the following section.

Private Placements Reducing Indebtedness

    In October  1998,  we  consummated  a private  placement  (the "1998 Royalty
Placement") of $450,000,  aggregate principal amount, 7% Notes due 1999 and 2001
("Royalty Notes") in which subscribers were also entitled to received  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.  Each of
Messrs.  Van Meter and Smith and Dr.  Scruggs,  purchased  Royalty  Notes by the
cancellation of our  indebtedness or canceling our obligation to pay them money,

                                       35
<PAGE>

the  payment  of which was then being  deferred.  The  amounts of Royalty  Notes
purchased  were $50,000,  $25,000 and $100,000 for Van Meter,  Smith and Scruggs
respectively.  William  Chambers,  then and officer of the Company,  purchased a
Royalty Note in the Royalty Private Placement for $50,000.

    In the second quarter of 2000, we consummated a private  placement of Common
Stock and warrants to purchase  Common Stock (the  "Spring 2000  Placement")  in
exchange for which we canceled some of our outstanding  debt,  including Royalty
Notes, and deferred payments of monies owed by some of our creditors,  including
some of our current and former officers,  directors and employees. All investors
in the private  offering  received  shares of our Common Stock with an aggregate
value equal to the amount of debt canceled  (calculated  at the average  closing
bid price of our Common  Stock on the OTC  bulletin  board for the five  trading
days prior to our  acceptance  of the  respective  subscription  agreement  less
twenty  percent) plus warrants to purchase Common Stock at the rate of one share
for each five dollars of debt  canceled.  Investors in the spring 2000 Placement
included Mr. Van Meter ($390,647);  Mr. Smith ($96,352); Dr. Scruggs ($109,991);
Mr. Chambers ($130,889); and Mr. West ($40,481).

    We believe that each of the above referenced  transactions was made on terms
no less  favorable  to us than could have been  obtained  from and  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 us than could
be obtained from an unaffiliated third party, and will be approved by a majority
of our  directors,  including a majority of our  independent  and  disinterested
directors who have access at our expense to our legal counsel.

 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)

                                       36
<PAGE>

 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)
 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)

                                       37
<PAGE>

 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)
 10.27      Lease,  dated  December  17,  1999,  between  Andy Charles  Johnson,
            Raymond  Perry  Johnson,  Tommy  F.  Griffin.  and  the Company. (8)
 10.28      Amendment to the Line of Credit Agreement between Celerity and GMF
            Holdings, Inc. dated October 16, 2000.(12)
 10.29      Purchase Agreement,  dated June 22, 2000, between the Company and
            WIT Technologies Inc.(14)
 10.30      Manufacuring  Service Agreement,  dated January 4, 2001, between the
            Company and Nextek, Inc.(15)
 10.31      Broadband Services Agreement, dated January 4, 2001, between the
            Company and DeserScape L.P.(16)

 -----------

(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.
(12) Filed as an Exhibit to the Form 8-K filed August 31, 2000.
(13) Filed as an Exhibit to the Form 8-K filed April 5, 2000.
(14) Filed as an Exhibit to the Form 8-K filed July 11, 2000.
(15) Filed as an Exhibit to the Form 8-K filed December 27, 2000.
(16) Filed as an Exhibit to the Form8-K filed January 10, 2001.


                                       38

<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,  1999 and 2000,  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 of America.  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 of America,  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 a working  capital deficit of $1,452,589
and has  suffered  recurring  losses  from  operations  and net  operating  cash
outflows 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 of this uncertainty.

/s/ PricewaterhouseCoopers LLP

 PricewaterhouseCoopers LLP

March 14, 2001, except as to Note 16 for which
  the date is March 30, 2001
Knoxville, Tennessee

                                      F-1

<PAGE>

<TABLE>
<CAPTION>
 CELERITY SYSTEMS, INC.
 Balance Sheets
 December 31, 2000 and 1999
<S>                                                                                     <C>                  <C>
                                                                                          2000             1999
                                                                                        --------------  ---------------
 Assets

    Cash                                                                                $      10,366   $          383
    Accounts receivable                                                                             -           31,500
    Other receivables                                                                               -           28,000
    Inventory, net                                                                            400,157          854,353
    Prepaid expenses                                                                                -           24,000
                                                                                        --------------  ---------------
         Total current assets                                                                 410,523   $      938,236

 Property and equipment, net                                                                  100,375          104,686
 Debt offering costs, net of accumulated amortization of $257,263
   and $134,894 respectively                                                                   41,215           76,629
 Other assets                                                                                  56,930          109,186
                                                                                        --------------  ---------------
      Total assets                                                                      $     609,043   $    1,228,737
                                                                                        ==============  ===============

 Liabilities, Redeemable Preferred Stock and Stockholders' Deficit

 Accounts payable                                                                      $      684,103   $      984,341
 Accrued wages and related taxes                                                              187,642        1,209,639
 Accrued interest                                                                             151,499          224,622
 Other accrued liabilities                                                                    176,925          309,513
 Notes payable                                                                                 92,943          557,252
 Current maturities of long-term debt and capital lease obligations                           570,000          401,173
                                                                                        --------------  ---------------

      Total current liabilities                                                             1,863,112        3,686,540

 Long-term debt and capital lease obligations, less current maturities                        530,425          904,280
                                                                                        --------------  ---------------

      Total liabilities                                                                     2,393,537        4,590,820

 Commitments and contingencies (Notes 3, 8, 10, 11 and 15)                                          -                -

 Series A redeemable convertible preferred stock, $.01 par value;
 authorized 50 shares; 13.715 and 0 shares issued and outstanding at
 December 31, 2000 and 1999, respectively (aggregate
 liquidation value at December 31, 2000 of $140,300)                                          168,357                -

 Common stock, $.001 par value, 50,000,000 shares authorized,
   24,640,649 issued and 24,303,285 outstanding, and 6,269,521
   issued and 5,932,157 outstanding at December 31, 2000
   and 1999, respectively                                                                      24,641            6,270
 Additional paid-in capital                                                                30,407,547       23,695,245
 Treasury stock, at cost, 337,364 shares at December 31, 2000 and 1999                       (227,500)        (227,500)
 Accumulated deficit                                                                      (32,157,539)     (26,836,098)
                                                                                        --------------  ---------------
      Total stockholders' deficit                                                          (1,952,851)      (3,362,083)
                                                                                        --------------  ---------------

      Total liabilities, redeemable preferred stock and stockholders' deficit           $     609,043   $    1,228,737
                                                                                        ==============  ===============
</TABLE>


 The accompanying notes are an integral part of these financial statements

                                      F-2
<PAGE>

<TABLE>
<CAPTION>
CELERITY SYSTEMS, INC.
 Statements of Operations

For the years ended December 31, 2000 and 1999

<S>                                                                       <C>                <C>
                                                                                2000             1999
                                                                          ---------------  ----------------
Revenues                                                                  $            -   $        85,894
Cost of revenues                                                                 717,755           366,495
                                                                          ---------------  ----------------
                                                                                (717,755)         (280,601)
Operating expenses                                                             3,666,014         3,582,245
Loss on disposal of fixed assets                                                       -         1,085,474
                                                                          ---------------  ----------------
     Loss from operations                                                     (4,383,769)       (4,948,320)

   Interest expense                                                             (930,740)         (537,865)
   Other (expense) income                                                         (8,084)           51,199
                                                                          ---------------  ----------------
     Loss from continuing operations                                          (5,322,593)       (5,434,986)

   Discontinued operations:
    Income on disposal of discontinued CD-ROM segment (Note 4)                    35,094            26,830

                                                                          ---------------  ----------------
      Net loss                                                                (5,287,499)       (5,408,156)

 Amortization of beneficial conversion feature of Series A redeemable
 convertible preferred stock (Note 11)                                            33,942                 -

 Accretion of redeemable preferred stock (Note 11)                               298,966                 -
                                                                          ---------------  ----------------
      Net loss  applicable to common stockholders                         $   (5,620,407)  $    (5,408,156)
                                                                          ===============  ================

   Basic and diluted loss per common share (Note 13):

      Loss from continuing operations                                     $        (0.49)  $         (1.07)

      Discontinued operations                                                          -              0.01
                                                                          ---------------  ----------------
      Net loss per share                                                  $        (0.49)  $         (1.06)
                                                                          ===============  ================
</TABLE>





 The accompanying notes are an integral part of these financial statements

                                      F-3
<PAGE>

<TABLE>
<CAPTION>

 CELERITY SYSTEMS, INC.
 Condensed Statement of Stockholders' Equity
 For the years ended December 31, 2001 and 1999
                                                                                                                      Total
                                                        Shares of      Common     Additional    Treasury  Accumulated Stockholders'
                                                        Common Stock   Stock-   Paid-In Capital  Stock     Deficit    Deficit
                                                        ------------   ------   ---------------  -------   ---------- -------------
<S>                                                     <C>            <C>         <C>         <C>        <C>           <C>

 Balances, December 31, 1998                            4,748,847      $4,749      $22,626,174 $(227,500) $(21,427,942) $  975,481
 Exercise of employee stock options                        28,800          29            2,851                               2,880
 Issuance of common stock                                 200,000         200           39,800                              40,000
 Issuance of convertible debentures with beneficial
    conversion feature                                                                 375,935                             375,935
 Issuance of common stock warrants                                                     111,605                             111,605
 Conversion of accounts and notes payable to
    common stock                                         438,015          438          379,734                             380,172
 Conversion of convertible debentures to
    share of common stock                                853,859          854          159,146                             160,000
 Net loss                                                      -                                            (5,408,156) (5,408,156)
                                                     -----------    ---------       ----------  ---------   ----------- -----------
 Balances, December 31, 1999                           6,269,521        6,270       23,695,245  (227,500)  (26,836,098) (3,362,083)


 Issuance of common stock                              1,700,000        1,700        1,058,300                           1,060,000
 Issuance of common stock warrants                                                      75,589                              75,589
 Issuance of common stock warrants with                                                202,800                             202,800
 Series A Preferred
 Exercise of common stock warrants                       177,500          178          135,923                             136,101
 Exercise of employee stock options                       87,500           87           51,844                              51,931
 Issuance of convertible debentures with beneficial
      conversion feature                                                               651,104                             651,104
 Issuance of common stock as payment of certain
 consulting and directors' fees, payroll and accounts
 payable items                                           814,255          814          942,440                             943,254
 Conversion of notes, accounts, wages and
 related payroll taxes to shares of common
 stock and warrants to purchase 357,464 shares
 of common stock                                       1,503,738        1,504        1,781,908                           1,783,412
 Conversion of accounts payable to common stock          383,586          384          207,706                             208,090
 Conversion of convertible debentures to
 shares of common stock                                9,009,096        9,009        1,597,599                           1,606,608
 Conversion of convertible preferred stock to
 shares of common stock                                4,695,453        4,695          272,113                             276,808
 Issuance of convertible preferred stock with
 beneficial conversion feature                                                          33,942                 (33,942)          -
 Accretion of preferred stock to liquidation value                                    (298,966)                           (298,966)

 Net loss                                                                                                   (5,287,499) (5,287,499)

                                                     -----------    ---------        ----------  ----------  ----------  ----------
 Balances, December 31, 2000                          24,640,649      $24,641     $30,407,547   $(227,500) (32,157,539)$(1,952,851)
                                                     ===========    =========      ==========   ========== ===========  ===========



The accompanying notes are an integral part of these financial statements

-------------------------------------------------------------------------
</TABLE>
                                      F-4
<PAGE>


<TABLE>
<CAPTION>
 CELERITY SYSTEMS, INC.
 Statements of Cash Flows
 For the years ended December 31, 2000 and 1999
<S>                                                                                   <C>                  <C>
                                                                                           2000                 1999
 Cash flows from operating activities:
    Net loss                                                                          $ (5,287,499)        $ (5,408,156)
    Adjustments to reconcile net loss to net
      cash used in operating activities:
        Depreciation and amortization                                                      280,187              665,418
        Loss on disposal of fixed assets                                                         -            1,085,474
        Provision for inventory obsolescence                                               683,750              354,523
        Noncash interest expense related to beneficial
          conversion feature of debt                                                       712,550              285,235
        Noncash interest expense related to notes payable                                   22,234                    -
        Noncash stock-based compensation                                                   259,534                    -
        Noncash operating expense related to consulting fees                               578,125                    -
        Noncash operating expense related to payroll
           and directors' fees                                                             365,129                    -
        Changes in current assets and liabilities:
           Accounts receivable                                                              31,500              248,815
           Prepaid expenses                                                                 24,000               39,150
           Inventory                                                                      (229,554)              (2,265)
           Accounts payable                                                                (43,728)             542,700
           Other current liabilities                                                      (413,053)             950,245
                                                                                     --------------        -------------
             Net cash used in operating activitities                                    (3,016,825)          (1,238,861)

 Cash flows from investing activities:
    Purchase of fixed assets                                                               (48,567)                   -
    Issuance of short-term note receivable                                                       -              (50,000)
    Collection of short-term note receivable                                                     -               22,000
    Investments in other assets                                                                  -              (20,900)
                                                                                     --------------        -------------
             Net cash used in investing activitities                                       (48,567)             (48,900)

 Cash flows from financing activities:
    Proceeds from short-term borrowings                                                    200,000              677,253
    Payments on short-term borrowings                                                     (100,000)            (125,000)
    Proceeds from long-term debt                                                         1,634,980              914,980
    Principal payments on long-term debt and capital lease obligations                     (90,000)             (28,719)
    Proceeds from issuance of common stock                                               1,060,000               40,000
    Proceeds from exercise of common stock warrants                                        136,101                    -
    Proceeds from exercise of common stock options                                           2,775                2,880
    Proceeds from Series A preferred stock offering, net of offering costs                 369,000                    -
    Financing and debt issue costs                                                        (137,481)            (211,523)
                                                                                     --------------        -------------
             Net cash provided by financing activitities                                 3,075,375            1,269,871

 Net increase (decrease) in cash and cash equivalents                                        9,983              (17,890)
 Cash and cash equivalents, beginning of year                                                  383               18,273
                                                                                     --------------        -------------

 Cash and cash equivalents, end of year                                              $      10,366         $        383
                                                                                     ==============        =============

</TABLE>


 The accompanying notes are an integral part of these financial statements

                                      F-5
<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  and in  February,  2001  completed  the sale of this segment
        (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  Company  had no  revenues  in  2000.  The  Company  had  one
        interactive  video customer that  represented  approximately  50% of the
        Company's revenues in 1999. Export sales represented 35% of revenues for
        1999.


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.
        Inventory is assessed each quarter for obsolescence and as to a lower of
        cost of market analysis.

               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 all
        risks and rewards of ownership of the related products has passed to the
        buyer.

               The Company  records  sales for services  upon the  completion of
        training,  ratably over the life of any maintenance or support agreement
        and in the current period for any access or rental fees.

               In December 1999, the Securities and Exchange  Commission ("SEC")
        issued  Staff   Accounting   Bulletin  No.  101,  or  SAB  101,  Revenue
        Recognition  in  Financial  Statement,  which  provides  guidance on the
        recognition,   presentation  and  disclosure  of  revenue  in  financial
        statements  filed with the SEC. SAB 101 outlines the basic criteria that
        must be met to recognize  revenue and provides  guidance for disclosures
        related to revenue recognition policies. It was effective for the fourth
        fiscal quarter of fiscal years  beginning  after December 15, 1999. This
        statement did not have a material impact on the Company.

               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

                                      F-6
<PAGE>

        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 are related to private
        placements  in 2000 and 1999,  are being  amortized  on a straight  line
        basis over the term of the related debt. Amortization expense related to
        these costs was $204,894 and $134,894 in 2000 and 1999 respectively.

               RESEARCH AND DEVELOPMENT  COSTS - Research and development  costs
        are  expensed as incurred and amounted to $-0- and $90,498 for the years
        ended  December  31,  2000 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,  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 12 of the  financial
        statements.

               In April 2000, the Financial  Accounting  Standards  Board issued
        FASB  Interpretation  No. 44 (FIN 44) which clarifies the application of
        Accounting  Principles  Board Opinion 25 for certain  transactions.  The
        interpretation  addresses  many issues  related to granting or modifying
        stock options  including  changes in  accounting  for  modifications  of
        awards  (increased  life,  reduction of exercise  price,  etc.).  It was
        effective July 1, 2000 but certain  conclusions  cover  specific  events
        that occurred  after either  December 15, 1998 or January 12, 2000.  The
        effects  of  applying  the  interpretation  are  to be  recognized  on a
        prospective basis from July 1, 2000. The adoption of FIN 44 did not have
        a material impact on the Company.

               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.

               FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of cash
        and cash equivalents,  accounts receivable, accounts payable and accrued
        expenses  approximates fair value because of the short maturity of those
        instruments.   The  carrying  value  of  the  Company's  long-term  debt
        approximates  fair  value  because it bears  interest  at rates that are
        similar  to  current  borrowing  rates  for loans of  comparable  terms,
        maturity and credit risk that are available to the Company.

               IMPACT  OF SFAS  133 - In June  1998,  the  Financial  Accounting
        Standards  Board  (FASB)  issued  SFAS 133,  Accounting  for  Derivative
        Instruments  and  Hedging  Activities  and in July 1999  issued SFAS 137
        which  deferred  the  effective  date of SFAS 133, as it pertains to the
        Company,  to fiscal year 2001.  This  Standard is not expected to have a
        material impact on the Company.

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  shortages.  These factors taken together
        with  the  lack  of  sales  and the  absence  of  significant  financial
        commitment  raises  substantial  doubt  about the  Company's  ability to
        continue as a going concern.

                                      F-7
<PAGE>

               In the first quarter of 2001, the Company received gross proceeds
        from private  placements of  convertible  debt totaling  $1,790,000  and
        Series B  Convertible  Preferred  Stock  totaling  $742,000 and received
        $30,000 from the issuance of common stock. These funds should enable the
        Company to produce  inventory for its orders and to operate for the next
        few months,  however,  additional financing will be necessary to sustain
        our operations  and achieve our business plan. the additional  financing
        will be  necessary  to sustain our  operations  and achieve our business
        plan.  The Company is  attempting to obtain such  additional  financing.
        Management is also actively seeking one or more strategic  investors.The
        Company has also signed  contracts to deploy its end-to-end  interactive
        television system in three  multi-family  properties  totaling 749 units
        and has received an order to provide its Digital  Education System to an
        Ohio  school.  However,  there can be no  assurance as to the receipt or
        timing  of  revenues  from  operations  including  revenues  from  these
        contracts or that management  will be able to find a strategic  investor
        or secure the additional  financing  necessary to sustain  operations or
        achieve its business plan.

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 segment
        had revenues of $70,070 and $174,209 in 2000 and 1999, respectively.  In
        February,  2001 the Company sold the assets of its CD-ROM segment for 20
        preferred shares of the buyer, which are convertible to common shares on
        a scheduled basis over a two-year period. As the Company had written the
        assets of this segment down to zero, and the fair value of the shares of
        the buyer is not  currently  determinable,  no gain or loss on this sale
        was recorded.

5.  INVENTORY

               Inventory at December 31, 2000 and 1999, consists of:
<TABLE>
<CAPTION>
                                                          2000                  1999
        <S>                                               <C>                   <C>
        Raw materials                                     $1,120,004            $  924,890
        Finished goods                                        34,440                   -0-
                                                          ----------            ----------
                                                           1,154,444               924,890
        Reserve for inventory obsolescence                  (754,287)              (70,537)
                                                          -----------           -----------
                                                          $  400,157            $  854,353
                                                          ==========            ==========
</TABLE>



               During 2000 and 1999,  the  Company  wrote  inventory  down to an
        estimated net realizable value. This write down amounted to $683,750 and
        $354,523 in 2000 and 1999, respectively.  The write down in 2000 came as
        the  result of an  agreement  with  another  entity to  manufacture  the
        Company's updated line of digital video servers.



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, 2000 and 1999, are as follows:

<TABLE>
<CAPTION>
                                                          2000                  1999
        <S>                                               <C>                   <C>
        Property and equipment                            $ 272,304             $ 223,737
        Accumulated depreciation                           (171,929)             (119,051)
                                                          ----------            ----------
               Property and equipment, net                $ 100,375             $ 104,686
                                                          =========             =========
</TABLE>


               As  part of the  downsizing  efforts  during  1999,  the  Company
        negotiated  to release its 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

                                      F-8
<PAGE>

        recorded a loss in 1999 on disposal  related to these  assets as well as
        certain computer equipment totaling $1,085,474.  Depreciation expense in
        2000 and 1999 was $52,877 and $507,205, respectively.

7.  INCOME TAXES

               The tax  effects  of  temporary  differences  giving  rise to the
        Company's  deferred  tax assets  (liabilities)  at December 31, 2000 and
        1999, are as follows:


                                            2000               1999
        Current:
          Accrued wages                     $      --          $  459,000
          Inventory reserve                     286,000            26,000
          Relocation reserve                       --              84,000
          Other                                  56,000            23,000
                                              ---------         ---------
                                                342,000           592,000
        Valuation allowance for net
        current deferred tax assets            (342,000)         (592,000)
                                              ----------        ----------

          Total net current
          deferred tax asset                $      --          $     --
                                              ==========       ===========

        Noncurrent:
          Net operating loss and
           research credit carryfowards     $ 10,717,000       $8,429,000
          Stock based compensation               879,000          937,000
          Property and equipment                  (5,000)          26,000
                                            -------------      ----------
                                              11,591,000        9,392,000
        Valuation allowance for net
        noncurrent deferred tax assets       (11,591,000)      (9,392,000)
                                            -------------      -----------


          Total net noncurrent deferred
          tax asset                         $         --       $       --
                                            ============       ==========


               As a result of significant  historical pretax losses,  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 2000 and 1999,  income tax expense  allocated to  discontinued
        operations was $13,000 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:

                                              2000            1999


        Computed "expected" tax (benefit)     $(1,798,000)    $(1,839,000)
        State income tax (benefit),
         net of federal income tax benefit       (209,000)       (216,000)
        Change in valuation allowance           1,949,000       2,005,000
        Permanent differences and other            58,000          50,000
                                              -----------     -----------

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


               At December 31, 2000, the Company has  approximately  $28,150,000
        of net operating loss carryforwards which in certain circumstances could
        become  limited due to a change of control.  These amounts are available
        to reduce the Company's  future  taxable  income and expire in the years
        2010 through 2015.

                                      F-9
<PAGE>

8.  COMMON STOCK WARRANTS

               The Company estimates the fair value of each warrant at the grant
        date using the Black-Scholes option pricing model.

        1996 WARRANTS

               In the  second  quarter  of 1996,  the  Company  sold  units in a
        private placement offering to outside investors. In connection with this
        placement,  the agent  received  warrants to purchase  35,556  shares of
        common stock at $10.31 per share.  The 1998,  1999 and 2000  convertible
        debenture  issuances  triggered the antidilution  provisions of the 1996
        warrant  agreement.  An additional  11,952 warrants have been issued and
        the exercise price has been lowered to $7.72.  These warrants  expire in
        July 2002.

        1997 WARRANTS

               In August 1997, the Company issued  warrants to purchase  320,000
        shares  of  common  stock at $3.00  per  share in  connection  a private
        placement.  The 1998, 1999 and 2000 convertible debenture issuances also
        triggered the antidilution  provisions of the 1997 warrant agreement. An
        additional  70,240  warrants have been issued and the exercise price has
        been lowered to $2.46. These warrants expire in August 2001. Pursuant to
        the terms of the 1996 and 1997 warrants,  additional  shares were issued
        and the exercise  price of all related  warrants was lowered.  The total
        value of the  warrants  remained  constant in each case.  Therefore,  no
        accounting entry was required.

               In November 1997, the Company issued warrants to purchase 200,000
        shares of common stock at $9.00 per share in connection with its initial
        public offering. These warrants expire in November 2002.

        1999 WARRANTS

               In the first  quarter  1999,  the Company  placed  $600,000 of 9%
        convertible debentures (Note 10). In connection with this placement, the
        agent  received  warrants to purchase  100,000 shares of common stock at
        $1.00 per share.  The Company  recorded loan cost and additional paid in
        capital for the  $36,605  fair value of these  warrants to be  amortized
        over the life of the related debt.

               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 which were repriced
        to $0.94 per share in April  2000.  The fair value of the  warrants  was
        estimated on the date of grant using the  Black-Scholes  option  pricing
        model with the following assumptions:  risk-free interest rate of 7.00%,
        espected dividends of zero,  volatility of 188.09% and expected lives of
        up to three years. The Company recorded loan cost and additional paid in
        capital  for the $16,300  for the fair value of the  repricing  of these
        warrants  to be  amortized  over the  life of the  related  debt.  These
        warrants expire in April 2003.



               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  to be  amortized  over the life of the related
        debt. These warrants expire in September 2002.

               In December 1999, the Company issued warrants to purchase 200,000
        shares of common stock at $0.20 per share in  connection  with a private
        placement. These warrants were exercised in January, 2000.

        2000 WARRANTS

               In the  first  half of  2000,  the  Company  issued  warrants  to
        purchase 357,464 shares of common stock at prices ranging from $0.744 to
        $1.625 in connection with a private  placement of common stock (Note 9).
        These warrants  expire at various dates between April and June 2003. The
        fair value of the first half of 2000  warrants is  estimated on the date
        of grant using the Black-Scholes option pricing model with the following
        assumptions:  risk-free  interest rate of 6.53%,  expected  dividends of
        zero, volatility of 70.19% and expected lives of up to three years.

               In April  2000,  the  Company  received  $195,000  in  short-term
        financing  from an individual  who later became a member of the Board of
        Directors  (Note  10).  In  connection  with this note,  the  individual
        received a warrant  to  purchase  125,000  shares of common at $0.20 per
        share. The Company allocated $59,291 of the net proceeds to the warrants

                                      F-10
<PAGE>

        based on their  relative  fair  value by  recording  debt  discount  and
        additional  paid in capital.  These  warrants  expire in April 2002. The
        fair value of the April 2000  warrants is estimated on the date of grant
        using  the  Black-Scholes   option  pricing  model  with  the  following
        assumptions:  risk-free  interest of 7.00%,  expected dividends of zero,
        volatility of 188.09% and expected lives of up to two years.

               In  August  2000,  the  Company  placed   $410,000  of  series  A
        convertible  preferred  stock. In connection  with this  placement,  the
        agent  received  warrants to purchase  360,000 shares of common stock at
        $0.70 per share.  The $202,800 fair value of these warrants was recorded
        as a cost of the offering.  These  warrants  expire in August 2002.  The
        fair value of the August 2000 warrants is estimated on the date of grant
        using  the   Black-Sholes   option  pricing  model  with  the  following
        assumptions:  risk-free  interest rate of 7.00%,  expected  dividends of
        zero, volatility of 175.95% and expected lives of up to five years.

9.  ACCOUNTS, NOTES AND WAGES CONVERSION

               In the first half of 2000,  the Company  converted  $1,783,412 of
        outstanding notes, accounts payable and wages into common stock upon the
        initial closing of a private offering. Investors in the private offering
        received  1,503,738 shares of the Company's common stock,  calculated at
        the  average  closing  bid price of the  common  stock for the five days
        immediately prior to acceptance of the investor's subscription agreement
        less  twenty  percent.  In  addition,  investors  received  warrants  to
        purchase  common  stock at the rate of one warrant for each five dollars
        of liabilities converted (Note 8).


10. NOTES PAYABLE, LONG TERM DEBT AND EQUITY LINE OF CREDIT

        NOTES PAYABLE

               In 1999, the Company's President advanced $27,252 to the Company.
        This note was  non-interest  bearing.  Also  during  1999,  $30,000  was
        advanced  from an inventory  supplier to fund  purchases  required for a
        specific  customer  order.  This note was due, plus 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.  At December 31,
        2000 and 1999, $-0- and $557,252 was outstanding, respectively. The fair
        value of the  warrants was  determined  using the  Black-Scholes  option
        pricing model with the following assumptions: risk-free interest rate of
        7.00%,  expected  dividends of zero,  volatility of 188.09% and expected
        lives of up to two years.

               In April 2000, the Company  received  $195,000 from an individual
        who later became a member of the Company's Board of Directors.  The note
        is due in April 2002 and bears  interest  at 9%. In  addition,  warrants
        were issued with a fair value of $59,291.  The unamortized debt discount
        associated with these warrants is $37,507 and is shown as a reduction of
        the $125,000 note outstanding at December 31, 2000.

               In  2000,  the  Company  also  received  a  $5,000  loan  from an
        individual  which is  outstanding  at  December  31,  2000.  The note is
        non-interest bearing.

        LONG TERM DEBT

               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,  $300,000 were converted into common stock upon the closing of a
        private  offering in the first half of 2000 (included in note 9) and the
        remainder are due in October 2001. At December 31, 2000 and 1999,  there
        was  $150,000  and  $450,000   outstanding   of  these  royalty   notes,
        respectively.

               In January, 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.  The Company is currently in default
        as it relates to the amounts due in 2001. At December 31, 2000, $290,000
        of the  debentures  had  converted to shares of common stock and $10,000
        had been redeemed. At December 31, 2000 and 1999, there was $300,000 and
        $430,000 outstanding of these 9% debentures, respectively.

                                      F-11
<PAGE>

               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 for the 4% debentures
        or  $0.50  per  share  for  the  8%  debentures.  The  Company  filed  a
        Registration  Statement  that  became  effective  within  90 days of the
        Closing  Date 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. At December 31, 2000, $265,381 of the debentures had converted
        to shares of common  stock.  At December  31,  2000 and 1999,  there was
        $49,599 and $204,980 outstanding of these debentures, respectively.


               The Company  issued  $629,980  aggregate  principal  amount of 8%
        convertible debentures in the first quarter of 2000. The Debentures have
        a term of three  years and are  convertible  into the  Company's  common
        stock at a price,  at the option of the holder,  equal to either (I) 75%
        of the  average  closing  bid  price of the  common  stock  for the five
        trading days immediately preceding conversion,  or (ii) $1.50 per share.
        Celerity may redeem the debentures at a redemption  price of 125% of the
        principal amount, plus accrued interest.  All outstanding  principal and
        interest is subject to mandatory  conversion three years after issuance.
        At December 31, 2000, $449,900 of the debentures had converted to shares
        of common stock and $180,080 remained outstanding.

        EQUITY LINE OF CREDIT

               Effective September 30, 1999, the Company entered into $5,000,000
        Line of Credit  Agreement.  Pursuant to the Line of Credit Agreement the
        Company  could 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. The amount of the
        drawdown is subject to the satisfaction of certain conditions, including
        conditions  relating to the trading volume of the Company's common stock
        and is limited to a maximum of $500,000 per calendar  month.  During the
        period  ended  September  30, 2000,  the Company had issued  $550,000 of
        these  debentures.  On October 16, 2000 the  agreement was renewed for a
        term ending October 31, 2001 and the maximum amount of debentures  which
        may be issued was  increased  to a cumulative  $10,000,000.  Between the
        renewal date and December 31, 2000,  the Company has issued  $455,000 of
        additional debentures.

               The Company issued  $1,005,000  aggregate  principal amount of 4%
        convertible  debentures in the second and fourth  quarters of 2000 under
        this  agreement.  The  debentures  have a term  of  four  years  and are
        convertible into the Company's common stock at a price, at the option of
        the holder,  equal to 75% of the average closing bid price of the common
        stock for the five trading days  immediately  preceding  conversion.  At
        December 31, 2000, $705,000 of the debentures had converted to shares of
        common stock and $300,000 remain outstanding.

        BENEFICIAL CONVERSION FEATURES OF DEBT

               The Company  recognized a beneficial  conversion  feature for the
        various  convertible  debentures  issued in 2000 and 1999 as discount on
        the  convertible  debentures  and as additional  paid-in  capital.  This
        discount of $651,104 and $375,935  for 2000 and 1999  respectively,  has
        been  amortized as a non-cash  interest  expense over the period between
        the date of issuance  of the  convertible  debentures  and the date they
        first become convertible.

                                      F-12
<PAGE>

        CAPITAL LEASE OBLIGATIONS

               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 were 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
        agreed to a final settlement  totaling  $240,000 with the lessor in June
        2000.  At  December  31,  2000  and  1999,  $150,000  and  $201,173  was
        outstanding, respectively.


               The maturities of the Company's long-term debt as of December 31,
        2000, are as follows:

        2001                            $  570,000
        2002                                79,599
        2003                               180,080
        2004                               300,000
                                        ----------
                                         1,129,679
                  Less debt discount       (29,254)
                  Less current portion    (570,000)
                                        -----------

        Total long-term debt and
         capital lease obligations      $  530,425
                                        ==========

11. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK

               In August 2000, the Company consummated a private placement of 41
        shares of Series A redeemable  convertible preferred stock, resulting in
        net proceeds of approximately $369,000. In addition warrants with a fair
        value of $200,000 were issued to the  placement  agent and were recorded
        as a cost of the  offering.  The  Company  used  the  APB 14  allocation
        methodology   to   determine   relative   fair  value  of   warrants  in
        determination of the discount on the debt to be recorded. The fair value
        of  the  warrants  was   estimated  on  the  date  of  grant  using  the
        Black-Scholes  option  pricing  model  with the  following  assumptions:
        risk-free interest rate of 7.00%, expected dividends of zero, volatility
        of 175.95% and expected lives of up to five years.

               The preferred stock is convertible into shares of common stock at
        a  conversion  price  equal to the lesser of (i) $1.40 per share or (ii)
        75% of the average  closing  bid price of the common  stock for the five
        trading days immediately preceding the date of conversion. The preferred
        stock  became  convertible  no earlier than 90 days from its issuance or
        the date of  effectiveness of a registration  statement  registering the
        common stock into which the preferred stock is  convertible.  All shares
        of preferred stock outstanding on August 31, 2002 convert into shares of
        common  stock as if holders of such shares had  delivered  a  conversion
        notice effective at such date. At December 31, 2000, $272,850 face value
        of the preferred stock had converted to shares of common stock.

               The holders of two-thirds of the Preferred  Stock can require the
        Company  to  redeem  their  shares  upon  the  occurrence  of any of the
        following  events:  (a) a merger where the Company is not the  surviving
        entity,  (b) a sale of all or substantially of the the Company's assets,
        (c) failure to  maintain an  effective  registration  statement,  or (d)
        failure to comply with certain other covenants . The amount payable upon
        such  redemption  ranges  from  liquidation  value to a premium of up to
        120%. The Company,  at its option,  can redeem the Preferred  Stock upon
        payment of 125% of the liquidation  value. In 2000, the Company accreted
        the carrying value of its Preferred  Stock to 120% of liquidation  value
        by increasing the accumulated deficit by $298,966.

               Each share of Preferred  Stock has a  liquidation  preference  of
        $10,000 plus an amount representing 6% per annum accrued since issuance.
        The Preferred Stock does not pay a dividend.

               On the date of issuance of the  Preferred  Stock,  the  effective
        conversion price was at a discount to the price of the common stock into
        which the Preferred  Stock is  convertible.  The  beneficial  conversion
        feature was  reflected  as a dividend  over the 90 day period  until the
        stock was convertible.  The Company recorded a $33,942 dividend relative
        to the beneficial conversion feature.

                                      F-13
<PAGE>


12. 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 37,500 and 24,500 were
        outstanding  at December 31, 2000 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
        options to purchase  159,483 and 207,920  shares  outstanding  under the
        1997 plan at December 31, 2000 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.

               The Company has also granted  options to members of the Company's
        Board and to members of  management  which are outside the 1995 and 1997
        plans.  There were  499,200 and 483,200 of these  options  which  remain
        outstanding at December 31, 2000 and 1999,  respectively.  These options
        generally vest over 3 years and expire ten years from date of grant.

<TABLE>
<CAPTION>
                                                      2000                                1999
                                                      --------------------------------    -------------------------------------
                                                        Options      Weighted-Average     Options    Weighted-Average
                                                                     Exercise Price                  Exercise Price
        <S>                                            <C>              <C>                <C>          <C>
        Outstanding at beginning of year               715,620          $  0.89            742,120      $  0.78
        Granted                                        143,763             0.76             30,000         0.66
        Exercised                                      (87,500)            0.59            (28,800)        0.10
        Forfeited                                      (75,700)            0.69            (27,700)        0.74
                                                       --------                            --------

        Outstanding at end of year                     696,183          $  0.93            715,620      $  0.89
                                                       =======                             =======

        Options exercisable at year end                507,407          $  0.90            574,458      $  0.78

</TABLE>

               The  weighted-average  fair value per option  granted  during the
        year was $0.62 and $0.49 for the years ended December 31, 2000 and 1999,
        respectively.

               The following table summarizes information about stock options at
        December 31, 2000:

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

         December 31, 2000

         $ 0.17                   20,000              9.86               --
         $ 0.35                   40,000              9.80               --
         $ 0.66                   22,500              8.70             7,425
         $ 0.69                  413,400              6.42           413,334
         $ 0.91                   37,500              9.59               --
         $ 1.25                   46,263              9.59               --
         $ 1.38                   26,000              6.26            26,000
         $ 1.63                    6,152              7.50             4,122
         $ 1.88                    2,666              7.41             1,786
         $ 2.13                   60,000              7.02            40,200
         $ 2.63                   20,000              7.01            13,400
         $ 2.94                    1,702              7.35             1,140
</TABLE>

               The Company  recorded no compensation  expense related to options
        granted in 2000 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 granted 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:

                                      F-14
<TABLE>
<CAPTION>
                                2000                                            1999
                                As                                              As
                                Reported               Pro Forma                Reported             Pro Forma
        <S>                    <C>                    <C>                       <C>                  <C>


        Net loss               $  (5,287,499)         $  (5,377,256)            $  (5,408,156)       $  (5,560,882)
        Net loss per share     $       (0.49)         $       (0.50)            $       (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
        assumptions used for grants in 2000 and 1999; risk-free interest rate of
        6.77% in 2000 and 6.36% in 1999, volatility between 26% and 449% in 1999
        and 168% and 200% in 2000 and expected lives from five to ten years.


13. 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
        17,079,077  and  1,079,457 at December 31, 2000 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:

                                                    2000          1999
        Loss
          Basic and diluted:
            Loss available to common stockholders   $(5,620,407)  $(5,408,156)

        Shares
          Basic and diluted:
            Weighted-average common shares
            outstanding                               11,465,200     5,108,954
                                                    ============= ============


14. CASH FLOWS

        Supplemental disclosure of cash flow information for the years ended
        December 31, 2000 and 1999, is as follows:

                                                    2000          1999

           Cash paid during the year for:
           Interest                                 $ 849         $ 252,630

        Noncash investing and financing activities:

                                      F-15
<PAGE>


        2000

               The Company issued  1,197,841 shares of common stock with a value
        of $1,167,642 as payment for certain  consulting  and  directors'  fees,
        payroll and accounts payable items.

               Employees  exercised  common stock  options for 73,500  shares of
        common stock through forgiveness of $50,531 of wages payable.

               The Company converted  $1,783,412 of notes,  accounts,  wages and
        related payroll taxes into 1,503,738 shares of common stock and warrants
        to purchase 357,464 shares of common stock.

               The Company  converted  $1,606,608 of the convertible  debentures
        into 9,009,096 shares of common stock.

               The Company  converted  $276,808 of Series A Preferred Stock into
        4,695,453 shares of common stock.

        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.


15. COMMITMENTS AND CONTINGENCIES


               The  Company is a defendant  in a lawsuit  brought by a financial
        printer for  non-payment of expenses.  The action was brought on January
        30, 2001 and is pending  before  Supreme Court of the State of New York,
        County of New York.  In this action,  the  plaintiff,  Merrill/New  York
        Company,  has sued the Company for the non-payment of financial printing
        fees and is seeking approximately $118,000 in damages, plus interest and
        certain costs. The Company intends to defend the action vigorously.

               In addition,  certain creditors have threatened litigation if not
        paid.  Celerity is seeking to make  arrangements  with these  creditors.
        There can be no  assurance  that any claims,  if made,  will not have an
        adverse effect on Celerity.

               The Company leases office space under an operating lease.  Future
        minimum  lease  payments  by  year,  and in the  aggregate,  under  this
        noncancelable operating lease at December 31, 2000, are as follows:



                2001                                  60,000
                2002                                  60,000
                2003                                   2,500
                                                    --------

                                                    $122,500
                                                    ========

               Rent  expense for  operating  leases was $56,354 and  $371,367 in
        2000 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. In June 2000,  the Company  reached a
        settlement  with the Landlord  and,  upon payment of $175,000,  has been
        fully released from all liability under the lease.

               The Company has been fully accrued on its books the amount of any
        potential loss described in Note 15.

                                      F-16
<PAGE>

               At March 20,  2001 the Company  had issued  49,812,845  shares of
        common stock with $426,247  aggregate  principal and interest  amount of
        convertible  debentures and Series A Preferred  Stock  outstanding.  The
        Company would be obligated to issue an aggregate of 3,275,296  shares of
        common stock if all holders of the  outstanding  Convertible  Securities
        were to issue  conversion  notices,  based  upon  the  five day  average
        closing  price of  $.1735  as of March 20,  2001,  discounted  to 75% of
        market price, or $.1301. Accordingly,  sufficient shares of common stock
        are not  available  for  issuance  upon  conversion  of the  convertible
        securities or upon exercise of outstanding  options and warrants.  While
        the  Company  intends  to  schedule  a  stockholders  meeting as soon as
        possible to obtain  approval for an increase in the number of authorized
        shares of common stock, it cannot  currently  satisfy its obligations in
        respect to the issuance of  additional  shares of common  stock.  To the
        extent the Company is unable to issue shares as required,  it will be in
        breach of its obligations under the terms of the outstanding convertible
        securities  agreements,  and will incur liability for liquidated damages
        of approximately $6,000 per month.

16.  SUBSEQUENT EVENTS

               In the first quarter of 2001,  the Company  consummated a private
        placement  of 23  shares of Series B  Redeemable  Convertible  Preferred
        Stock  resulting in net proceeds of  approximately  $230,000.  The Stock
        provides  for  preferential  dividends  at an  annual  rate  of 8%.  The
        preferred  stock  is  convertible  into  shares  of  common  stock  at a
        conversion price equal $0.025 per share, subject to availability, at any
        time  during  the two  years  following  execution  of the  subscription
        agreements.  Should there be an insufficient  number of shares of common
        stock  available  at  the  time  the  preferred  stock  is  offered  for
        conversion,  the  conversion  period  shall be extended by the number of
        days  between  the  closing  date  and the  date  common  shares  become
        available.  Two years from the original  issuance date the Company shall
        offer to redeem such preferred  shares then outstanding at a price equal
        to the original  issuance price plus accrued  dividends.  The beneficial
        conversion  feature of $98,000 will be reflected as a dividend  over the
        two year period until the stated  redemption date.  Warrants to purchase
        one share of common  stock for each two  shares of common  stock  issued
        upon  conversion  of this  tranche  of  Series B  Preferred  Stock  were
        included. These warrants are exercisable for a two year period following
        the  first  date  that  the  last  share  of  the  Series  B  Redeemable
        Convertible  Preferred  Stock is converted into common stock and have an
        exercise price of $0.10 per share. The company allocated $132,000 of the
        proceeds to the warrants  based on their  relative fair value.  The fair
        value of the  warrants  was  estimated  on the date of grant  using  the
        Black-Scholes  option  pricing  model  with the  following  assumptions:
        risk-free interest rate of 7.00%, expected dividends of zero, volatility
        of 219.79% and expected lives of up to three years.

               Also in the first quarter of 2001, the Company issued  $1,790,000
        principal  amount of 4% convertible  debentures under its Equity Line of
        Credit Agreement resulting in net proceeds of approximately  $1,633,000.
        The  Company   recognized  a  beneficial   conversion  feature  for  the
        convertible  debentures as a discount on the convertible  debentures and
        as  additional  paid-in  capital.  This  discount  of  $717,985  will be
        amortized as a non-cash  interest expense over the five year period from
        the date of issuance to the stated redemption date of the debentures.


               The Company also consummated an additional  private  placement of
        51.2 shares of Series B Redeemable Convertible Preferred Stock resulting
        in gross proceeds of approximately  $512,000.  The beneficial conversion
        feature of $512,000  will be reflected  as a dividend  over the two year
        period  until  the  stated   redemption  date.  The  stock  provies  for
        preferential  dividends at an annual rate of 8%. The preferred  stock is
        convertible  into  shares of common  stock at a  conversion  price equal
        $0.025 per share,  subject to  availability,  at any time during the two
        years following execution of the subscription  agreements.  Should there
        be an  insufficient  number of shares of common  stock  available at the
        time the  preferred  stock is offered  for  conversion,  the  conversion
        period  shall be extended by the number of days between the closing date
        and the date common shares become available. Two years from the original
        issuance  date the Company shall offer to redeem such  preferred  shares
        then  outstanding  at a price equal to the original  issuance price plus
        accrued dividends.


               The Company also received  $30,000 from the issuance of 1,000,000
        shares of its common stock.

                                      F-17
<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.

                                                              February 12, 2002

/s/ Kenneth D. Van Meter        President and Chief Executive
------------------------------  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  February 12, 2002
------------------------------  Officer and Chairman of the
Kenneth D. Van Meter            Board
                                (Principal Executive Officer)
                                (Principal Financial Officer)

/s/ Edward Kidston              Director                       February 12, 2002
------------------------------
Edward Kidston


/s/ Fenton Scruggs              Director                       February 12, 2002
------------------------------
Fenton Scruggs


/s/ David Hultquist             Director                       February 12, 2002
------------------------------
David Hultquist


<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)
4.27       Securities  Purchase  Agreement,   dated  August  31,  2000,  between
           Celerity and the Investors specified therein.(11)
4.28       Registration Rights Agreement dated August 31, 2000, between Celerity
           and the Investors specified therein.(11)
4.29       Form of Warrant issued March 31, 2000.(13)
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)


                                       40
<PAGE>


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)
10.27      Lease,  dated  December  17, 1999,  between Andy Charles  Johnson,
           Raymond Perry Johnson, Tommy F. Griffin. and the Company. (8)
10.28      Amendment to the Line of Credit Agreement between Celerity and GMF
           Holdings, Inc. dated October 16, 2000.(12)
10.29      Purchase Agreement,  dated June 22, 2000, between the Company and WIT
           Technologies Inc.(14)
10.30      Manufacuring  Service Agreement,  dated January 4, 2001, between the
           Company and Nextek, Inc.(15)
10.31      Broadband Services Agreement, dated January 4, 2001, between the
           Company and DeserScape L.P.(16)


-----------

                                       41
<PAGE>

(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 as an Exhibit to the Form 8-K filed March 23, 2000.
(12) Filed as an Exhibit to the Form 8-K filed August 31, 2000.
(13) Filed as an Exhibit to the Form 8-K filed April 5, 2000.
(14) Filed as an Exhibit to the Form 8-K filed July 11, 2000.
(15) Filed as an Exhibit to the Form 8-K filed December 27, 2000.
(16) Filed as an Exhibit to the Form8-K filed January 10, 2001.