<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                AMENDMENT NO. 1
                                      TO
                                   FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934


                        Commission File Number 0-28081

                            CONSTELLATION 3D, INC.
            (Exact name of Registrant as specified in its charter)

<TABLE>
                                                 805 Third Avenue
                                                   14/th/ Floor
         Delaware                           New York, New York 10022                   13-4064492
----------------------------------    -----------------------------------         --------------------
<S>                                   <C>                                         <C>
(State or other jurisdiction of         (Address of principal executive             (I.R.S. Employer
incorporation or organization)            offices including zip code)             Identification Number)
</TABLE>

                                (212) 308-3572
                       --------------------------------
                       (Registrant's telephone number,
                             including area code)


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

     Title of each class           Name of each exchange on which registered
   -----------------------       ---------------------------------------------
            None                                       None

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


                        Common Stock, $.00001 Par Value
                       ---------------------------------
                                Title of Class


     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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. [X]  Yes  [_]  No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
<PAGE>

amendment to this Form 10-K. [_]

     The aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the common stock on December 7,
2001 as reported on the NASDAQ National Market, was approximately $32,780,866.
Shares of common stock held by each officer and director, by each person who
owns 5% or more of the outstanding common stock, and by Constellation 3D Trust
LLC, a wholly owned subsidiary of the Registrant, have been excluded in that
such persons may be deemed to be affiliates.  This determination of affiliate
status is not necessarily a conclusive determination for other purposes.

     As of December 7, 2001, the Registrant had 50,713,087 shares of common
stock outstanding, excluding 500,000 shares held by Constellation 3D Trust LLC,
a wholly owned subsidiary of the Registrant.


The Registrant hereby amends its annual report on Form 10-K as follows:

ITEM 1.   BUSINESS

     Except where the context indicates otherwise, references in this Annual
Report on Form 10-K to the "Company" or "C3D" refer to the registrant,
Constellation 3D, Inc., a Delaware corporation.

Factors That May Affect Future Results

     The Company's prospects are subject to certain uncertainties and risks.
Some of the information in this Annual Report or the documents incorporated by
reference in this Annual Report may contain forward-looking statements within
the meaning of the Federal Securities Laws. Forward-looking statements may be
identified by the use of forward-looking language such as "will likely result,"
"may," "believes," "is expected to," "is anticipated to," "is forecasted to,"
"is designed to," "plans to," "predicts," "seeks," "estimates," "projects,"
"intends to" or other similar words. Important factors that could cause actual
results to differ materially from expectations include:

     .  failure to raise sufficient capital to fund business operating plans;

     .  market conditions and demand for new data storage technology;

     .  the Company's competitors' ability to successfully develop new
        technologies to satisfy demand for data storage;

     .  difficulties in achieving sales, gross margin and operating expense
        targets based on competitive market factors;

     .  difficulties in competing successfully in the markets for new products
        with established and emerging competitors;

                                       2
<PAGE>

     .  difficulties with single source supplies, product defects or product
        delays;

     .  difficulties in forming and maintaining successful joint venture
        relationships;

     .  difficulties in negotiating and receiving licensing royalties;

     .  difficulties in obtaining, maintaining and using intellectual property
        protections;

     .  changes in data storage technological protocols and standards;

     .  volatility in interest rates and currency exchange rates;

     .  difficulties in state, federal, foreign and international regulation and
        licensing requirements;

     .  economic and political instability in the foreign countries where the
        Company conducts operations;

     .  litigation actions by directors, employees, investors and others;

     .  limited operation and management history;

     .  dependence on key personnel; and

     .  effects of significant interest, compensation, and consulting charges;
        and

     .  other factors discussed in this Annual Report.

     All of the above factors could cause the Company's actual results to differ
materially from historical results and those presently anticipated by the
Company. The Company's prospects are subject to certain uncertainties and risks.
The Company's future results may differ materially from its current results and
actual results could differ materially from those projected in the forward-
looking statements as a result of certain risk factors. Readers should keep
these factors in mind as well as the other cautionary statements contained in
this Annual Report. READERS SHOULD PAY PARTICULAR ATTENTION TO THE
CONSIDERATIONS DESCRIBED IN THE SECTION OF THIS ANNUAL REPORT ENTITLED
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." Readers should also carefully review the risk factors described in
this Annual Report and other documents the Company files from time to time with
the Securities and Exchange Commission (the "SEC").

Overview

  The Company is a development stage company engaged in a research and
development program to launch the mass-market production of a technology called
Fluorescent Memory Technology (also known as Fluorescent Media Disc and
Fluorescent Memory Card Technology,

                                       3
<PAGE>

FMD and FMC Technology, FMD/C Technology and by other substantially similar
names). The Company's research is directed towards developing data storage
technology products for commercial applications.

     C3D began operations as of October 1, 1999 and has no prior operating
history other than that associated with the acquisition of certain assets of
Constellation 3D Technology Limited, a British Virgin Islands company
("Constellation Tech"), which primarily performed research and development of
three-dimensional technology for the storage of digital information on disc.
However, C3D's subsidiaries were in operation before October 1, 1999, when
Constellation 3D Holdings Limited, an Irish company ("Constellation Holdings"),
or Constellation Tech owned them.

     The Company has no revenue history and therefore has not achieved
profitability.  The Company is an international enterprise headquartered in New
York, New York and has operations in the United States, Israel, the Ukraine and
Russia.

     The Company's mission is to develop state-of-the-art technologies and
products to serve the growing data storage needs of customers in government,
business, education and consumer segments through continuous research and
product innovation. By providing new data storage solutions to the Company's
customers through joint ventures, strategic alliances, and licensing agreements,
the Company intends to have a substantial presence in the removable data storage
market. The potential customers for the Company's technology are located
worldwide and represent a cross section of industries and government agencies.

     The Company's technology is innovative and focuses upon the concept of the
volumetric storage of information. FMD Technology records data on multiple
layers located inside a disk or a card, as opposed to the single or double layer
method available in compact discs and DVDs. The recording, reading and storing
of the information uses fluorescent materials embedded in pits and grooves in
each of the layers.  The fluorescent material emits radiation when excited by an
external light source.  The FMD Technology then decodes the information as
modulations of the intensity of the emitted radiation. The Company's research
has determined that these fluorescent multilayer disks and cards furnish the
user with considerably improved capacity and deliver substantial performance
advantages when compared to the CDs and DVDs currently produced.

                         Company History and Structure

     The Company was incorporated on December 27, 1995 under the name Latin
Venture Partners, Inc. The name of Latin Venture Partners, Inc. changed to C3D
Inc. on March 24, 1999 in anticipation of a transaction with Constellation Tech.
As approved by the necessary number of votes at the Company's Annual Meeting of
Stockholders held on December 27, 1999, the Company changed the Company's name
to Constellation 3D, Inc. effective December 29, 1999. From the Company's
inception on December 27, 1995 until October 1, 1999, the Company has had no
business operations. The Company is a Delaware company, which previously had
been incorporated in the State of Florida. Through the Agreement and Plan of
Merger dated January 9,

                                       4
<PAGE>

2001 and approved by the stockholders on January 30, 2001, Constellation 3D,
Inc., a Florida corporation, reincorporated in Delaware effective February 6,
2001.

     On October 1, 1999, the Company purchased certain assets of Constellation
Tech for total consideration of 29,250,000 shares of the Company's common stock
and the assumption of substantially all liabilities and obligations of
Constellation Tech (the "Acquisition").

     In the Acquisition, the Company acquired the following assets:

     .  Constellation's Tech's then sole existing membership interest in
        TriDStore IP, L.L.C.;

     .  all of the issued and outstanding ordinary shares in Constellation 3D
        Vostok;

     .  99 of the 100 allotted shares of C-TriD Israel Ltd.; and

     .  all of the issued and outstanding shares of common stock of TriD SV,
        Inc.

     TriDStore IP, L.L.C. is a Delaware limited liability company formed on
February 2, 1998, formerly known as OMD Devices, L.L.C. until March 9, 1999.
TriDStore IP, L.L.C. owns a substantial majority of the Company's material
intellectual property which consists mostly of patent registrations and
applications.  See "Risk Factors" located elsewhere in this Annual Report.

     TriD Store Vostok is a Russian company formed on January 15, 1999.  The
Company conducts its Russian operations through TriD Store Vostok. On October 2,
2000, TriD Store Vostok changed its name to Constellation 3D Vostok.

     C-TriD Israel Ltd. is an Israeli company formed on December 2, 1996.  The
Company is now the owner of all outstanding shares of C-TriD Israel Ltd. The
Company conducts its Israeli operations through C-TriD Israel Ltd.  Memde Ltd.
is an Israeli company whose shares are 100% owned by C-TriD Israel Ltd. Memde
Ltd. does not currently conduct any operations.

     TriD SV, Inc. is a Delaware corporation formed on August 10, 1998.  As of
January 31, 2001, TriD SV, Inc. has had no operations.

     On February 8, 2000, the Company formed Constellation 3D Trust LLC, a
Delaware limited liability company that the Company wholly owns. The Company
then issued 10,500,000 (Ten Million Five Hundred Thousand) shares of common
stock to Constellation 3D Trust LLC as a capital contribution and later
cancelled all but 500,000 (Five Hundred Thousand) of said shares. Constellation
3D Trust LLC may use the 500,000 (Five Hundred Thousand) shares to raise debt or
equity capital and contribute the proceeds thereof to the Company, which
proceeds will be used for general corporate purposes. There is no assurance that
the issuance of the shares will result in the raising of any debt or equity
capital.

     On April 7, 2000, the Company formed FMD&E, Inc., a Massachusetts
corporation that the Company wholly owns ("FMD&E"). The Company formed FMD&E
after the Company

                                       5
<PAGE>

decided not to consummate the acquisition of Reflekt Technology, Inc., a
Massachusetts corporation. Since April 2000, FMD&E has been designing
fluorescent multi-layer production equipment. The Company intends to merge FMD&E
into C3D in the second or third quarter of 2001.

  On January 2, 2001, the Company agreed to acquire certain assets of its former
Ukrainian subcontractor, Ladis Ltd., for cash consideration of approximately
$30,000.  Since that date, C3D has continued to conduct its Ukrainian operations
using the equipment and other assets acquired from the former subcontractor.

  On January 29, 2001, the Company formed Velor Incorporated ("Velor"), a
Delaware corporation headquartered in Massachusetts that is 80% owned by the
Company.  Since incorporation, Velor has had no operations.  Velor will engage
in the business of researching and developing solid-state memory products.

                                       6
<PAGE>

                           ORGANIZATIONAL STRUCTURE

                                    OF THE

                       CONSTELLATION 3D, INC. ENTERPRISE
                             AS OF MARCH 20, 2001

<TABLE>
<CAPTION>
                                           ---------------------------
                                                CONSTELLATION 3D, INC.

                                                 (Delaware, USA)
                                               (Headquartered in
                                              New York, New York, USA)
                                           ---------------------------


    100%              100%            100%             100%                100%                   100%                 80%
------------    ---------------    ------------     --------------     ---------------     ----------------     ---------------
<S>             <C>                <C>              <C>                <C>                 <C>                  <C>
 TriDStore IP,    Constellation      C-TriD         TriD SV, Inc.      Constellation         FMD&E, Inc.              Velor
    L.L.C.           3D Vosto      Israel Ltd.       (Delaware,         3D Trust LLC       (Massachusetts, USA)    Incorporated
(Delaware, USA)    (a.k.a 3-D       (Israel)            USA)             (Delaware,                                 (Delaware,
Formerly OMD       Vostok ZAO)                                              USA)                                       USA)
Devices, L.L.C.     (Russia)
------------    ---------------    ------------     --------------     ---------------     ----------------     ---------------


                                      100%
                                   ------------
                                   Memde Ltd.
                                    (Israel)
                                   ------------
</TABLE>

                                       7
<PAGE>

                                   Products


       The Company has developed FMD and FMC Technology and, through licensing
and/or joint ventures, plans to use it to introduce the following products:

       1. First Generation Discs and Cards

          a.   Read Only Memory (ROM) Products

               .    FMD-ROM. The Company anticipates that this class of products
                    will take the form of a disc, with data storage capacities
                    of up to 100 Gigabytes (GB). It should include red laser-
                    based disc/drive units.

               .    FMC ClearCardTM-ROM. The Company anticipates that this class
                    of products will take the form of credit-card-sized card
                    devices, with data storage capacities of up to 10 GB.

          b.   Write Once Read Many Times (WORM) Products

               .    FMD-R (Recordable). The Company anticipates that this class
                    of products will take the form of a disc, with data storage
                    capacities of up to 100 GB. The Company projects that these
                    products will include red laser-based disc/drive units.

               .    FMC ClearCardTM-R (Recordable). The Company anticipates that
                    this product line will be a credit-card-sized card, with
                    data storage capacities up to 10 GB.

       The Company anticipates that the first prototypes of this technology will
be demonstrated by the third quarter 2001, and the Company expects that this
technology will exceed typical ROM capabilities in offering a one-time recording

       The Company anticipates that the first prototypes of this technology will
be demonstrated by the third quarter 2001, and the Company expects that this
technology will exceed typical ROM capabilities in offering a one-time recording
function, allowing the user to choose the data to be stored.

          c.   Rewritable (R/W) Products

               .    FMD-R/W. The Company anticipates that this future line of
                    products will be based on a 120 mm disc with data storage
                    capacities of up to 100 GB.

               .    FMC ClearCardTM-R/W. The Company anticipates that this
                    future line of products to be credit-card-sized cards, with
                    data storage capacities of up to 5 GB.

     The Company anticipates this technology will allow multiple erasing and re-
recording of user-specified data.

                                       8
<PAGE>

     2.   Hybrid ROM-R-R/W Discs and Cards

          The Company believes that the multi-layer structure of the Company's
FMD/C media allows the creation of hybrid memory devices, combining the
advantages of Read-only, Recordable and Rewritable memory.

Distribution and Principal Markets

     The Company does not plan to engage in direct sales and distribution of
FMD/C products by itself. Instead, the Company intends to partner with industry
leaders having a substantial sales and distribution capability within targeted
market segments, such as the PC Market, the Home Consumer Market, Digital
Cinema, and Mobil Computing. The primary exception would be with respect to
market segments that become evident as strategically important to the Company's
overall success, where the Company intends to become more directly involved in
the sales and marketing process.

     The Company expects to receive revenues primarily through licensing,
royalty revenues, and participation in joint ventures for production and
marketing, in accordance with its business model. The Company intends to
establish royalty rates by agreement with joint venture partners and technology
licensees, calculated as a percentage of the licensee's revenue generated -- a
per-unit price, or a flat fee. The Company expects to derive royalties from a
percentage of the value to the licensee that is attributed to the Company's
technology. Early in the product rollout, the Company may partially waive
royalties in order to help speed market introduction of the technology. In
general, the Company expects to set the price at the optimum level to achieve
the highest possible overall revenue return.

     Based on the market penetration of CD and DVD, the Company believes that
sales for 120 mm (CD/DVD-sized) FMD disc will come from 2 primary categories:
the PC Market and Home Consumer Market. A description of these market segments
and others follows.

The PC Market

     Based upon industry analysts, the Company believes there are over 25
million DVD ROM drives installed in PC's. Based upon its limited experience to
date, the Company believes that the market needs storage solutions past the 4.7
GB (or 8.54 GB dual layer) capacity currently offered by DVD-ROM and 4.6 GB
currently offered by DVD-R. The PC Market currently uses Compact Disc Read Only
Memory (CD-ROM), recordable CDs (CD-R), DVD-ROM and DVD recordable formats.

     The home and office personal computer market includes software (ROM) and
personal storage (CD-R and R/W). Based upon statements made by a media recording
association, the Company believes the annual worldwide demand for ROM discs is
well over 3 billion units. In the past 2-3 years, due to the increased size of
software applications, distribution of software has

                                       9
<PAGE>

moved from the floppy disc (holding 1.44 Megabytes (MB)) to the CD (holding 650
MB), and is now starting to move to DVD (holding 4.7 GB).

     The demand for storage in the PC ROM software market continues to grow as
applications such as games and encyclopedias add more multimedia and video
features. These changes have spurred the move from CD-ROM storage to DVD-ROM
storage, with FMD-ROM as the available format for applications requiring over
4.7 GB of capacity.

     This trend is mirrored for recordable media. Based upon statements made by
a media recording association, the Company believes the annual CD-R disc
worldwide demand is 3.7 billion units. CD-R has now in fact become a commodity
product, with bulk prices close to $0.30 per disc and just a few firms, such as
Ritek Corporation and CMC Magnetics, controlling worldwide supply. The DVD-
recordable market is now beginning to increase substantially (despite the format
battles between DVD-R/W, DVD-RW+ and DVD-RAM), and is led by the need for
greater storage capacity in order to record and/or archive video & audio
content. The Company is developing, using current inexpensive red-laser-based
FMD media, discs with a capacity of up to 100 GB, giving a 20-fold increase in
recordable optical storage capacity.

     For removable carriers, the Company plans to develop its FMC ClearCardTM in
various sizes, ranging from around 500 MB to about 10 GB. The Company believes
that these cards will initially service the portable computing market and later
the office and home computer desktop market.

Home Consumer Market

     In the home video market, VHS tape is still the predominant format, but the
use of DVD in the United States and Europe is now occurring faster than many
experts had anticipated.

     Based upon statements made by a consumer electronics association, the
Company believes DVD technology is present in one-third of all U.S. households.
Major movies are now being released primarily or even exclusively in the format,
and old celluloid classics are being digitally re-mastered for DVD release.

     The Company anticipates that its discs and cards will provide a suitable
solution for the distribution of films and other types of recorded information,
portable applications to be used in high-resolution hand-held movie players and
in-car and in-plane entertainment systems.

 . HDTV

     Based upon statements made by a consumer electronics association, and the
Company's limited experience with HDTV technology, the Company believes that one
important and growing market for removable storage carriers is high definition
television, also called HDTV. This high quality television format has been
gradually introduced in the United States, Europe and Asia. Format issues have
hampered the speed of introduction, but the Company believes that certain
federal laws, including the requirement that all television broadcasts be made
digitally by 2006 make it increasingly likely that some form of the HDTV format
will be successful.

                                       10
<PAGE>

     The high pixel rate for HDTV requires relatively large data capacities and
transfer speeds to achieve the high quality definition the format allows.

     Sonic Solutions and Ravisent Technologies Inc. have announced a new format,
called HDVD, which they claim has up to four times the resolution of standard
DVD-Video titles for the HDTV market. However, some industry experts believe
that in order to truly enable the HDTV format, media with over 50 GB memory
capacity will be required.

     The Company believes that it is the only company planning to offer a single
carrier solution for HDTV, and that the Company is therefore well positioned to
be the predominant storage carrier for HDTV playback.

 .  Personal Digital TV Recorders

      Based upon statements made by a media recording association, there are
more than 800 million VCR's installed in homes world wide. The Company further
believes, based upon statements made by a media recording association and its
limited experience, that the market transition for VCR to Personal TV recorders
and Digital Video recorders presents a tremendous opportunity for removeable
optical disc technologies. The Company estimates that the data storage market
needs storage solutions with storage capacities greater than 50 GB for both ROM
and recordable data storage. Currently, the personal digital TV recorder market
uses DVD-R, DVD-RAM and hard disc.

     TiVo Inc. and Replay Networks Inc. currently supply the market for digital
personal television recorders, with units containing hard discs with capacities
up to 30 GB. The Company perceives the biggest problem, even with the recording
of non-high definition television, to be what to do when the disc is full. With
removable FMD-R discs, with expected capacities up to 100 GB, consumers will be
able to record many hours of entertainment and keep the recorded discs for
subsequent replay as desired. In addition, the Company anticipates the FMC-R
ClearCard to offer the same functionality for compressed information. The
Company also anticipates both the FMD-R discs and cards in mobile applications
such as hand-held players.

     As these formats reach mass-market acceptance, the Company anticipates that
they could require the production of large quantities of FMD discs annually.

Digital Cinema

     Based upon statements made by a national association of theatre owners, the
Company believes the digital cinema market consists of approximately 36,000
screens nationwide, and approximately 120,000 worldwide. Based upon the
Company's limited experience in the industry and discussions with various
industry participants, the Company believes about 75% of non-digital screens
will convert to digital within 10 years. The Company believes that this market
requires a single disc with more than 100 GB of capacity and more than 50
megabits per second read speed. Currently, the digital cinema market lacks a
standard format.

                                       11
<PAGE>

     Progress in digital technology is on the verge of making fundamental
changes in the film industry. Leaders in the industry and electronics firms have
been developing a new "electronic cinema" to replace the celluloid movie reel.

     The Company believes that Digital Cinema technology represents enormous
benefits over celluloid reels and projectors in the areas of convenience, unit
costs savings, and quality. The Digital Cinema era will offer advantages such as
the shorter lead-time in bringing films to market and switching times on
changing projectors over from one film to another. The cost of each celluloid
reel is about $2,000.

     The cost savings potential is extremely large when one considers that there
are about 5,000 prints shipped domestically and more worldwide on most major
films. Delivery costs and time only exacerbate the situation. Based upon
statements made by a national association of theater owners, we believe Digital
Cinema could save the industry up to $800 million per year.

     Director George Lucas and Lucasfilm Ltd. are pioneering the transition to
Digital Cinema. Lucasfilm Ltd. financed the first digital projectors to be used
in theaters. In May of 1999, the much anticipated "Star Wars: Episode I - The
Phantom Menace" debuted on Digital Cinema projector.

     The Company believes some hurdles still need to be overcome in the
development of Digital Cinema on a broad scale. These include data storage
capacity and read times -- issues which the Company believes that it is well
positioned to address. The digital cinema industry is one marketplace that the
Company believes will be an early adopter of its technology.

Mobile Computing

     In this growing arena, the Company is targeting:

     .  Wireless Digital Telephone Market;

     .  Personal Digital Assistants;

     .  Electronic books;

     .  GPS systems;

     .  Digital Cameras and Digital Video Cameras

     The Company believes that personal digital assistants, also called PDAs,
and cell phones are on a quick path of convergence. The key participants in the
wireless digital telephone market are the service providers such as ATT Corp.,
Sprint Communications Company, L.P., Verizon, and MCI WorldCom, Inc., and the
equipment vendors such as Nokia Corp., Ericsson LM Telephone Co., and Motorola
Inc.

                                       12
<PAGE>

     The Company anticipates third generation (3G) mobile telephone networks as
an evolutionary step up from today's second-generation digital mobile systems.
The Company also anticipates that 3G media telephones and communicators will
have multimedia messaging capabilities which will include still imaging, video
calls and video streaming, wireless Internet browsing and speech. The Company
anticipates that users will have their own personal, mobile, multi-media
communications service.

     All of these enhanced features will demand greater data storage capacity
and performance. This demand, however, must be balanced with mobility. As a
result, storage media must be of a compact nature to serve this market. The
Company has recognized the value of this 3G technology and the Company intends
to capitalize on it, by partnering with the companies that are instrumental in
developing 3G technology.


 . Personal Digital Assistants

     The Company believes that the PDA market represents a market segment with
vast potential for FMD/C technology. The Company expects that as more
functionality ranging from multimedia applications to personal communications is
built into PDAs, the PDA unit's demand for digital storage will grow
substantially.

     Based upon its limited experience in the industry and statements made by a
market research firm, the Company believes the use of smart hand held mobile
computing devices will grow substantially. Palm, Inc., a majority-owned
subsidiary of 3Com Corporation, is the leading global provider of hand-held
computing devices. Psion PLC, Sony Corporation and Microsoft Corporation, in
conjunction with Sharp Electronics Corp., Hewlett Packard Company and others,
are other significant participants in this segment.

 . Memory Used in Mobile Computing

     The combined market for all hand-held devices requiring data storage is in
the hundreds of millions of units. The Mobile Computing Market requires high
capacity, small size and low power usage.

     The most common memory storage carrier in the mobile computing market is
flash memory. Currently, flash memory is limited to around 500 MB per unit and
can cost about $2,000 per GB. Flash memory is a R/W technology that enables the
user to continuously operate the unit without the frequent change of storage
media. It is designed specifically to address the storage requirements of
emerging applications in the consumer electronics and industrial/communications
markets such as digital cameras, personal digital assistants, portable digital
music players, digital video recorders and smart phones, communications routers
and switches and wireless communications base stations. SanDisk Corporation
dominates the flash memory market, and Sony Corporation has now entered it with
its Memory Stick product.

     IBM Corp. introduced its new hard disc based microdrive PCMCIA card in a
second mobile computing data storage carrier.

                                       13
<PAGE>

     Last, DataPlay, Inc. is developing a compact DVD-technology-based optical
data carrier for use in hand-held devices.

     The Company believes that its recordable FMC ClearCard will seriously
compete with flash memory, hard disc microdrives and DVD-technology-based
carriers. The Company projects that its 5 GB FMC-R will cost significantly less
per unit to produce in volume and could thereby retail for lower prices. The
Company hopes to obtain a significant portion of these markets.

Corporate Data Storage, Internet Streaming, Video On Demand and Video Archiving

 . Corporate Data Storage

     As companies store and analyze more data on transactions, customers, and
operational and financial parameters, the corporate sector represents a
substantial and growing portion of the demand for data storage. Applications
such as storage area networks, data warehousing, supercomputing, Internet
streaming and data mining are projected to require ever-greater capacity in
order to handle the volume of data to be processed.


 . Internet Streaming and Video on Demand

     As users of the Internet -- both corporate and individual - move toward
high-bandwidth connection (via optical fiber channels, ADSL (Asynchronous Data
Subscriber Line) and cable modems), very large amounts of video data will be
transferred from server to end-user. The Company believes that at both ends,
high capacity data storage carriers will be required. The Company anticipates
that the Internet server and corporate recipient markets will use its products.

 . Video Archiving

     The market requires terabytes of storage at a cost lower than that of a
random array of inexpensive discs (also known as RAID). Major vendors such as
Oracle Corporation, IBM Corp., EMC Corp. and SAP AG provide video archiving
solutions. Movie studios and broadcast corporations have data archiving capacity
requirements of up to several Petabytes (1,000 TB, also known as PB).

     The Company anticipates that a 100 GB FMD-ROM and FMD-R discs will greatly
ease the burden on providers of corporate data storage and video archiving
storage facilities, both in terms of cost and size of facility.

     IBM Corp. and EMC Corp. are the main technology providers in this field
with RAID, optical jukeboxes or tape systems. The Company believes that 100 GB
FMD-R discs can be produced in volume for significantly lower prices per unit
than those other technologies.

                                       14
<PAGE>

                             Intellectual Property

     Through the Company's wholly owned subsidiary TriDStore IP, L.L.C., as of
February 8, 2001, the Company owns the following U.S. patents:

     .  U.S. Patent No. 5,847,141, entitled "Photochromic Material for Electro-
        Optic Storage Memory," which issued on December 8, 1998 and which
        expires on December 22, 2015. This patent covers photochromically
        modified pyridones, which are useful in three dimensional, stable,
        optical memory storage devices.

     .  U.S. Patent No. 5,936,878, entitled "Polymeric Photo-Chromic
        Composition," which issued on August 10, 1999 and which expires on
        December 12, 2017. This patent covers the use of photochromically-
        modified spiropyrans in three dimensional, stable, optical memory
        storage devices.

     .  U.S. Patent No. 5,945,252 entitled "Photochemical Generation of Stable
        Fluorescent Amines from Peri-Phenoxiderivatives of Polycyclic P-
        Quinones," which issued August 31, 1999 and which expires on December
        11, 2017. This patent covers the use of photochromically modified
        polycyclic quinones in three dimensional, stable, optical memory storage
        devices.

     .  U.S. Patent No. 5,982,740, entitled "Dry Bonded Digital Versatile Disc,"
        which issued on November 9, 1999 and which expires on November 25, 2017.
        This patent covers a disc for storing digital information comprising a
        plurality of adhesively bonded sub discs.

     .  U.S. Patent No. 6,009,065, entitled "Optical Pickup for 3-D Data Storage
        Reading from the Multilayer Fluorescent Optical Disk," which issued on
        December 28, 1999 and which expires on December 4, 2017. This patent
        covers an optical pickup capable of reading binary optical information
        from a multilayer fluorescent disk.

     .  U.S. Patent No. 6,027,855, entitled "Photo-Chemical Generation of Stable
        Fluorescent Derivatives of Rhodamine B," which issued on February 22,
        2000 and which expires on December 12, 2016. This patent covers a method
        for optically recording information in a three-dimensional memory system
        having an active medium which includes a Rhodamine B compound.

     .  U.S. Patent No. 6,039,898, entitled "Optical Memory Device and Method
        for Manufacturing Thereof," which issued on March 21, 2000 and which
        expires on October 22, 2017. This patent covers a method of making an
        optical memory device comprising one or more layers, each having a
        patterned surface with spaced regions for receiving o fluorescent
        material capable of recording and transmitting data.

     .  U.S. Patent No. 6,071,671 entitled "Fluorescent Optical Memory," which
        issued on June 6, 2000 and which expires on October 6, 2017. This patent
        covers a method for

                                       15
<PAGE>

          making an optical 3-D memory device having a plurality of layers, each
          carrying fluorescent material that can be reversibly rendered non-
          fluorescent by electromagnetic radiation for storing and recovering
          data.

     .    U.S. Patent No. 6,080,288, entitled "System for Forming Nickel
          Stampers Utilized in Optical Disc Production," which issued on June
          27, 2000 and which expires on May 29, 2018. This patent covers a
          system for electro depositing a metal layer on a substrate using a
          rotary jet planarizer.

     .    On July 24, 2001 the Official LETTERS PATENT no.6,265,140 (Silver
          Halide Material for Optical . . . Treatment hereof) was issued to
          assignee TRID Store, Inc.

     As of February 8, 2001, the Company owns more than 70 additional pending
U.S. regular, U.S. provisional, Patent Cooperation Treaty and foreign patent
applications covering compositions, methods, and apparatus which relate to its
Fluorescent Media Technology. The Company is in the process of preparing and
filing other patent applications. In addition, Velor Incorporated, an 80% owned
subsidiary of the Company has pending two U.S. provisional patent applications
and expects to make additional patent applications in the near future.

     The Company cannot assure that any of its patent applications will result
in the issuance of patents, or, if the applicable regulatory agency issues
patents, that they will be of sufficient scope and strength to provide
meaningful protection of the Company's technology or any commercial advantage to
the Company, or that no one will challenge, invalidate or circumvent the
Company's patents in the future. Moreover, the Company cannot assure that its
competitors, many of whom have substantial resources and have made substantial
investments in competing technologies, do not presently have or will not seek
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell the Company's products either in the U.S. or in other
countries.

     The Company intends to rely on a combination of patents, trade secrets,
copyrights and trademarks to protect its intellectual property rights. The
Company cannot assure, however, that competitors will not independently develop
substantially equivalent proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
Nevertheless, the Company intends to enforce its intellectual property rights
whenever the Company becomes aware of any infringement or violation of its
rights.

     The Company's success and ability to compete will depend in part upon its
ability to protect its proprietary technology and other intellectual property.
The Company has filed numerous patent applications to protect technology,
inventions and improvements, which the Company believes are significant to the
development of the Company's business and protectable under applicable patent
laws. However, the Company may sell its patented products in foreign countries
where the Company does not apply for patent protection, or, if the Company does
apply, where the applicable regulatory body does not grant a patent.  In those
countries where the Company does not obtain patents, there is a risk that
competitors may be able to reverse engineer the Company's products and undermine
the Company's ability to compete in those markets. In addition, there are
foreign countries whose intellectual property laws are not enforceable or, if

                                       16
<PAGE>

enforceable, are enforceable to a lesser extent than the intellectual property
laws of the United States. If the Company markets its patented products in such
countries, there is a risk of piracy or reverse engineering by competitors that
may undermine the Company's ability to compete.

     The Company does not believe that it infringes any patents or infringes,
dilutes or otherwise violates intellectual property of others. However, the
Company cannot assure that current and potential competitors and other third
parties have not filed or will not file applications for patents, or that the
applicable regulatory body has not issued or will not issue, patents or other
proprietary rights relating to devices, apparatus, materials or processes which
the Company uses or proposes to use.

               Competitive Conditions and Methods of Competition

     The Company's Fluorescent Media Disc and Card Technology will compete with
a variety of existing and future data storage technologies. While hard disk
drives are the most common form of mass data storage and CDs and DVDs are the
most common removable data storage carriers, these are not the only storage
media available to consumers. A variety of options exist, each with unique price
and performance characteristics to meet specific requirements.



Existing Competitive Technologies

 .  Removable Mass Storage Devices

     The Company believes that the trend of processing sensitive data on desktop
PCs instead of on mainframe computers has made removable mass storage solutions
increasingly important and that floppy diskettes, which have been the most
commonly used removable storage devices, often are insufficient for certain
data-intensive applications. For these applications, high capacity removable
mass storage devices offer advantages. Removable mass storage devices, which are
particularly suitable for secondary storage applications like data backup and
archiving, rather than as a primary form of on-line storage, come in many forms,
such as tape cartridges, Compact Disc Read Only Memory (CD-ROMs) and recordable
CDs (CD-R) and DVDs (DVD-R).

 .  Tape Drives

     The magnetic tape drive, including floppy discs, was one of the first
computer storage technologies, and early mainframe computers commonly used it.
However, its inability to randomly access or write data like disk drives makes
it much slower than newer data storage technologies. Therefore, new technologies
have replaced it as the primary storage device in most computer applications.
However, due to its high storage capabilities and low cost-to-megabyte ratio, it
is still very much in use as a storage medium for archiving large amounts of
data. Additionally, recent advances in tape technology, such as digital audio
tape cartridges, have also made tape a preferred technology for backing up
network servers and other critical data.

                                       17
<PAGE>

 .  Optical Disc Drives

     Optical Disc Drives, which include CD drives, DVD drives, and magneto-
optical drives, came onto the public scene in the mid 1980s and have gained
mainstream acceptance.

     The Company anticipates that the advent of re-writable optical discs will
make the optical disc drive an increasingly important segment of the data
storage industry. In ODDs, such as CDs, DVDs, and MOs, light from a
semiconductor laser focuses onto the storage layer to perform writing or
reading. The disc substrate or a thick overcoat protects the storage layer,
making this technology well suited for removable media. CD-ROM drives are by far
the most widely used ODDs and are the computer industry's standard for
distribution of software products. They are typically used to distribute large
databases and documents that require only periodic access. Read/Write drives, on
the other hand, are used almost exclusively for archival storage where it is
important that the data cannot be changed or erased after being written, as in
the case of financial record storage.

     CD Audio is the primary means of music distribution worldwide, and DVD
video is fast becoming the leading distribution method for film and video
content.

 .  Magnetic Disk Drives

     One of the original data storage media, some view magnetic disk drives
(commonly known as hard drive/disc) as the most reliable source of storage
media. Despite the advent of alternate technologies, magnetic storage remains
dominant, particularly where mass storage is concerned. Magnetic disk heads fly
on a slider approximately one ten-millionth of a meter over the surface of the
storage medium. The writing process creates small magnetic domains, and the read
process detects the magnetic fields of these domains. One can overwrite the
information indefinitely.


 .  Magneto-Optical Disks

     Magneto-optical, or MO, disk systems combine the technology of traditional
magnetic media, like hard disk drives, with optical disc technology.  It is
anticipated that there is the possibility that MO technology will allow users to
store hundreds of megabytes of data on a disk that looks similar to a
traditional 3.5-inch floppy disk and typically comes in a 3.5-inch or 5.25-inch
form factor. MO disks have many advantages. They provide relatively high data
densities. One can change the data stored on them at will, and such data are
resistant to magnetic fields, unlike a traditional floppy or hard disk. The
disadvantage of MO technology is that, because of the relatively high intensity
of the magnetic field created with the combined use of the read/write head and
laser, the two rotations required for writing data make them twice as slow as
hard disk drives during write operations.

 .  Personal Computer Cards

                                       18
<PAGE>

     PC Cards use the Personal Computer Memory Card International Association
standard, and can be either storage or Input/Output cards. By virtue of being
compact, highly reliable, light-weight and requiring low power, they are storage
media for battery-powered notebook and palmtop computers, hand-held personal
digital assistants and personal communicator devices. Due to their diminutive
size, these "memory cards" make transporting data relatively easy. One can use
them for program storage or data interchange between systems. A significant
deterrent to the widespread use of PC cards is their high cost relative to hard
disk drives. The Company believes that manufacturers can produce the Company's 1
to 10 GB ClearCardsTM at a lower cost than PC Cards of equivalent performance
levels enabling the Company's joint ventures and licensees to sell those
ClearCards at prices below those comparable PC Cards.

 .  Flash Memory

     Based upon publication reports, the Company believes flash memory, a
rewritable memory based on semi-conductors, will be a $10 billion a year market
in 2000. The maximum storage per unit is approximately 500 MB. While flash
memory represents an extremely large market, its value per byte is relatively
low. The Company believes that its storage products offer much more compelling
value per byte than current offerings.

Competitive Technologies in Development

     In addition to the existing storage devices, there are some comparable data
storage technologies in the research and development phase, some of which might
never be commercially used.

 .  Blue Laser Optical Disc Technology

     Efforts by Royal Phillips Electronics and Sony Corporation to produce
higher storage capacities based on reflective technologies have centered on the
introduction of blue lasers. However, the Company believes that blue lasers are
not likely to be available to consumers for several years. In addition, the
Company projects that FMD Technology will be able to take advantage of the blue
laser technology on multiple layers rather than a single layer in case of DVD.

 .  Future Magnetic Hard Disk Drives

     The achievable area density of magnetic recording has grown about 60% per
year during the last decade. Devices with an area density of 4 GB per square
inch are in production, and area densities of 20 GB per square inch have been
created. However, the magnetic domains become unstable at a physical and
technical limit called the super-paramagnetic limit. Therefore, further growth
in area density is limited, although it is not certain where this limit puts an
end to the further density increase of magnetic memory. Furthermore, many
magnetic memory carriers are not easily removable, are not easily disposable and
are relatively expensive.

                                       19
<PAGE>

 .  Holographic Storage

     The introduction of commercial lasers sparked interest in enabling 3
dimensional storage using holographic technology. However, attempts at
commercialization so far failed primarily due to lack of suitable storage
materials for media manufacturing.

 .  Near Field Drives

     In near field recording, a device focuses onto the front surface of the
storage medium, thereby avoiding some problems with distortions of the focused
beam in the protected layer. Near field drives can achieve high density, but at
high cost, as the medium remains exposed to dust and remains vulnerable to
crashes of the drive head. Thus, the Company believes that this technology is
not suitable for portable devices. The storage capacity is limited, because in
near field optics, data is stored in a thin layer at the surface.

 .  Atomic Force Microscopy

     In the field of probe-based storage, scientists are fabricating tiny
silicon cantilevers one one-hundred thousandth of a meter long and three ten
millionths of a meter thick, with an even smaller silicon probe tip that is
eight billionths of a meter in diameter. The tip rests on a rotating plastic
disk. To store data, heat from an electric pulse through the tip momentarily
softens the surface of the plastic, and the slight force that the tip exerts on
the plastic pokes a tiny depression. As the tip is pulled across the tip on
playback, there is detection of its dip into the pit. Researchers report that
this technique can reliably read and write data at a density of 64 gigabits per
square inch and have developed the basics for a read only system holding a CD's
worth of data on a disk the size of a penny.

 .  Scanning Tunneling Microscopy

     Scanning Tunneling Microscopy reportedly has the potential to store as many
as one million GB per square inch, although the Company does not expect
consumers to see commercial usage of this technique in the foreseeable future.
The technique involves moving xenon on a nickel surface with a scanning
tunneling microscope. As attempted, this process required a temperature, in
Fahrenheit, of nearly 460 degrees below zero and several hours to complete.

Key Trends and Major Competitors in the Market

     The exponential growth of devices using data storage technology - for
consumer, business, and entertainment applications -- and their associated
storage requirements represent a prime opportunity for the Company's FMD/C
Technology.  The following is a sample of the trends and rapid growth of the
data storage industry as it has impact on more and more aspects of daily life.

     .    In the PC market, memory-hungry consumer applications ranging from
          computer games to database applications require consumers to upgrade
          frequently. Eight years

                                       20
<PAGE>

          ago, many considered an 80 MB hard drive to be excessive -- today a
          hard drive of that size could not accommodate mainstream operating
          systems such as MS Windows.

     .    The storage requirements of enterprise computing applications such as
          data warehousing solutions doubles almost annually.

     .    Hand-held devices, including PDAs and mobile phones, are expected to
          demand multi-gigabyte capacities in the next few years in order to
          store rich multimedia content.

     .    The entertainment industry, as it moves to higher resolution standards
          in applications such as Digital Cinema and HDTV, will require minimum
          data storage capacities of up to 100 GB per movie -- the Company
          believes that it is currently the only company that has the capacity
          in the near future to provide a single disc solution for these
          entertainment applications.

     The standard removable memory media in production today is the reflective
optical disc. Companies involved in the production of Compact Disk Read Only
Memory (CD ROM), recordable CDs (CD-R), CD-RW, DVD-ROM, DVD-R and DVD-RW discs
include Royal Phillips Electronics, Sony Corporation and Discovision Associates
for CD and several industry consortiums for DVD (Royal Phillips Electronics,
Sony Corporation, Pioneer Corporation, Hitachi, Ltd., Matsushita Electronics
Co., Ltd., Mitsubishi Electric, Time Warner Inc., Toshiba Corporation, and
Thomson Corporation).  Based upon statements of industry analysts and the
Company's limited experience, the Company believes these firms license the basic
technology behind the format and the production of discs and in total generate
approximately $0.15 per disc manufactured and approximately 3%-4% of the sale
price for each drive.

     Over 500 firms worldwide manufacture optical discs with the majority of
discs being produced by larger firms that also own the disc's content, including
Time Warner Inc., Sony Corporation, BMG Entertainment. Large independent
replicators of pre-recorded content inclu de Panasonic, Technicolor, Cinram
International, Inc., Disctronics Manufacturing, Inc., and in the recordable
market (CD-R, CD-RW, DVD-R, DVD-RW) Ritek Corporation and CMC Magnetics.

     Drive/Player manufacturers include, among others, Denon Digital, LLC, LG,
Hitachi, LTD., Victor Company of Japan, LTD., Kenwood Corporation, Panasonic,
Royal Phillips Electronics, Pioneer Corp., LiteOn IT Corp., Sharp Electronics
Corp., Sony Corporation, Thomson Corporation and Toshiba Corporation.

     Content owners include software producers, music labels and movie studios.
All major studios are now supporting the open DVD-Video format with over 4,200
titles available in North America.

                                       21
<PAGE>

Methods of Competition and Certain Challenges

     Given the licensing and joint venture development aspects of the Company's
business model, the Company has established corporate goals and strategies that
will guide the process. These goals include:

     .    the identification of key strategic market segments,

     .    the creation of marketable products demanded by these segments,

     .    the development of business relationships with best-in-class partners
          in these segments,

     .    the establishment of FMD/C as an industry standard for the next
          generation of removable optical data storage, and

     .    the creation of strong brand awareness and recognition of the
          Company's technology.

     The Company is intent on bringing its products to market as quickly as
possible, and the Company will focus on markets where the Company can expect to
gain a significant market share and thereby achieve the maximum return for each
marketing dollar spent, both financially and strategically. The Company intends
to leverage its experience within these segments to cross over from specific
niche markets into broader mainstream markets.

     The exploitation of key market segments will coincide with development
milestones relating to FMD/C technology. The Company will focus first on
creating relationships regarding ROM products, followed by WORM and then R/W and
hybrid ROM-R-R/W products. Exceptions to this strategy may occur, such as the
possible determination during the ROM phase of certain key strategic
relationships regarding WORM and R/W drives and media.

     Potential roadblocks to the introduction of FMD/C technology include:

     .    the willingness of content and application providers to accept the new
          media standards and to release valuable content for the media,

     .    acceptance, by media and drive manufacturers, of the royalty pricing
          scheme, and

     .    creation of a critical mass of initial partners able to ensure broad
          acceptance and adoption of the technology and its associated
          standards.


                    Risks Pertaining to Foreign Operations

     See the description of risks pertaining to the Company's foreign operations
in section "Risk Factors" elsewhere in this Annual Report.

                                       22
<PAGE>

                                   Employees

     As of February 1, 2001, the Company had 92 workers, including 22 in the
research and development office in Israel, 35 in the research and development
office in Moscow, 23 in the Ukraine and five in management, finance and
administration and seven in research and development in the United States. None
of the Company's employees are covered by a collective bargaining agreement.


                                 Risk Factors

     The Company's prospects are subject to certain uncertainties and risks.
This Annual Report on Form 10-K also contains certain forward-looking statements
within the meaning of the Federal Securities Laws. The Company's future results
may differ materially from its current results and actual results could differ
materially from those projected in the forward-looking statements as a result of
certain risk factors, including but not limited to those set forth below, other
one-time events and other important factors disclosed previously and from time
to time in the Company's other filings with the SEC. Risks and uncertainties
which either the Company does not know about or the Company currently believes
are immaterial may also materially impair the Company's business operations.

     If any of the following risks occur, the Company's business, results of
operations, financial position or cash flows could be materially adversely
affected.  In that event, the trading price of the Company's common stock could
decline, which in turn may cause the loss of all or part of a stockholder's
investment.

Business Related Risks

The Company has no history of revenue, and expects to continue to incur
operating losses until such time as its First Generation products achieve
commercial acceptance.

     As a research and development company, the Company has no revenue history
and therefore the Company has not achieved profitability. The Company expects to
continue to incur operating losses for the foreseeable future. The Company
incurred a net loss of $20,247,205 for the year ended December 31, 2000,
$4,866,687 for the year ended December 31, 1999 and $3,191,902 for the year
ended December 31, 1998. The Company has never generated profits, and there is
no assurance that, in the future, the Company will be profitable on a quarterly
or annual basis. In addition, over the next twelve months, the Company plans to
increase operating expenses in order to fund research and development and
increase administration resources. However, the Company anticipates receiving
revenues at the earliest by the first quarter of 2002. Nevertheless, it is
possible that the Company's revenues may never be sufficient to recognize a
profit.

                                       23
<PAGE>

The Company will need to raise additional capital to sustain operations. The
Company cannot assure that it can continue to raise sufficient capital to fund
operations for the foreseeable future.

  The Company believes that it has sufficient working capital and available
lines of credit to sustain operations for the next twelve months. However,
because the Company is a research and development company in the data storage
technology field, the Company continually expends large amounts of capital over
short periods of time. The Company cannot assure that any revenues generated in
the future, if any, will be sufficient to finance the complete cost of its
research and development.  The Company will require additional funds before the
Company can achieve positive cash flow from operations. Future capital
requirements and profitability depend on many factors, such as the timely
success of product development projects, the timeliness and success of joint
venture and corporate alliance strategies and marketing efforts. The Company is
actively in the process of raising additional capital. Terms on which the
Company may raise additional capital may include restrictions that could make
payments of existing debts difficult, create difficulties in obtaining future
financings, limit the Company's options for changing the business and cause
substantial cash flow problems. The Company cannot assure that additional
financing or additional funds will be available when the Company needs them or,
if available, on terms acceptable to the Company. If adequate funds are not
available, the Company may not be able to continue. Any additional stock or
convertible debt financing which the Company obtains, if any, could result in
substantial dilution to stockholders.

The Company has a limited operating history that began in 1997 and may encounter
difficulties typical to new operations.

  Some of the Company's subsidiaries began operating in January 1997, when they
continued to perform research and development of three-dimensional technology
for the storage of digital information on disc that some of the Company's
present scientists had begun in 1995.

  Since the Company is a new operation, the Company may encounter problems,
expenses, difficulties, complications, and delays typical to new operations.
Primarily, there is the risk that the Company may not be able to transform the
technology that the Company developed into commercially profitable products.
Also, there is the risk that once another company or the Company introduces the
products into the market place, the market will not accept or adopt the
Company's products.

The Company conducts operations in countries with a recent history of economic
and political instability, and this instability may have a material adverse
impact on the Company's financial condition.

  In addition to the Company's activities in the United States, the Company
conducts business operations in Israel, the Ukraine and Russia.  In recent
history, these three nations have experienced significant economic and political
instability. It is possible that present or future economic or political
instability in these nations will have a material adverse impact on the
Company's ability to conduct business or on the Company's financial condition.

                                       24
<PAGE>

Economic instability in the foreign nations in which the Company operates might
result from or lead to inflation, high interest rates and social unrest, which
could adversely affect the Company's operations and performance.

  Economic instability may encompass unstable price levels such as inflation,
unstable interest levels or rates, such as fluctuation of capital, and social
unrest that could adversely affect the Company's operations and performance.

  The rate of inflation in Israel, Russia and the Ukraine has not materially
adversely affected the Company's financial condition.  It is impossible to
predict whether the rate of inflation in Israel, Russia or the Ukraine will
materially adversely affect the Company's future financial condition. However,
the Company believes that it is possible that such adverse effects might result
in the future. On numerous occasions in the past, high rates of inflation have
occurred in Israel, Russia and the Ukraine. High inflation may reoccur in the
future, causing insecurity and uneasiness in the local populace in general,
including the Company's employees. In these situations, there is often concern
about the increasing cost of living and attempts to keep pace with it. This
situation by itself might adversely affect the Company's performance. Whenever
the currency exchange rate does not proportionally match inflation, as it has
happened as a matter of governmental policy in such countries as Israel and
Russia, generally there is an increase in the costs to the Company in U.S.
dollars. Such increases in costs might materially adversely affect the Company's
financial condition. Presently, the Company does not have a hedging policy for
protection against changes in the dollar costs of the Company's activities.

  Changes and fluctuations in interest rates might affect the Company's
operations in Israel, Russia and the Ukraine. The changes in interest rates
might create either investment or disinvestment that might affect the economy of
an entire country, and thus also the Company's employees. Because the Company
finances most of the Company's non-U.S. operations in U.S. dollars, and since
the Company expects that this financing will continue in the future, the Company
believes that local interest rate fluctuations will not have a material adverse
impact on the Company's financial condition.

  The economic situation in Israel, Russia and the Ukraine might eventually
develop into extended social unrest. Such social unrest might materially
adversely affect the financial performance of the Company's local, as well as
the Company's overall, operations.

Political instability in the foreign nations in which the Company operates might
result from or lead to military confrontation, frequent changes in national
governments, terrorism and corruption which could adversely affect the Company's
operations and performance.

  The Company does not possess political risk or other insurance to protect
against business interruption losses caused by political acts.

  Israel's physical security and integrity have been at risk since Israel's
inception as a modern nation.  Israel and Syria have attempted to restart peace
negotiations.  However, there is no formal peace between Israel and Syria or
Lebanon.  Additionally, there are conflicts between Israel and Iraq and between
Israel and Iran. Israel and the Palestinian Authority have been

                                       25
<PAGE>

conducting negotiations regarding the legal status of the West Bank, Gaza Strip
and Jerusalem, the current Israeli capital. In connection with those
negotiations and their results, violent activity occurred, and is expected to
reoccur. Therefore, to the extent that the Company has operations in Israel,
there is a risk that the political instability will have an adverse impact on
the Company's ability to conduct business. It is highly unlikely, but possible,
that Israel's compulsory military service obligation for its citizens, which
lasts until an individual is 45 years of age, could disrupt the scheduled work
of the Israeli research and development facility. This obligation could delay
the commercial launch of the planned volumetric storage product line and
materially adversely affect the Company's results of operations and financial
condition.

  Russia's significant political and economic instability could have a material
adverse effect on the results of the Company's operations and the market price
of the Company's stock. Russia has incurred significant debt, which it may fail
to repay on a timely basis. Russian currency, the ruble, has encountered foreign
exchange volatility. The Russian government has experienced frequent political
instability and change, including wars inside Russia, acts of terrorism, power
struggles among government officials and among big commercial enterprises.  In
recent years, the Russian former president replaced prime ministers frequently,
and parties with radical positions regarding intervention of the government in
the economy, like the Communist Party, have gained in influence.  The Company
does not believe that these activities have had a materially adverse effect on
the Company.  However, in the future, such factors may have a material adverse
effect on the Company's operations. Difficulties in protecting and enforcing the
Company's rights and future changes to local laws and regulations could
adversely affect the Company's ability to conduct operations in Russia.

  Additional strains on the local operations might result from other factors,
such as the delay of Moscow banks in acknowledging wire transfers of funds into
Russia. These delays can range from a day to a week or longer. Also, Moscow
banks often charge very expensive and somewhat arbitrary fees for wire
transfers.

  Like Russia, the Ukraine has experienced significant political and economic
change.  The Ukrainian economy is less developed than that of Russia and is
susceptible to most of the same economic risks as Russia, including governmental
debt defaults or restructurings, currency restrictions, foreign exchange
volatility and political instability.  Economic or political instability in the
Ukraine might have a material adverse impact on the Company's ability to conduct
business or on the Company's financial condition.

The Company does not enter into derivative transactions to hedge market risk in
Russia, Israel or the Ukraine, and market fluctuation may adversely affect the
Company's Ukrainian, Israeli and Russian operations.

  The Company cannot provide any assurance that future developments in each
respective country will not generally have an adverse effect on the Company's
financial condition. Therefore, the Company does not anticipate that the Company
will enter into derivative transactions, such as foreign currency forward or
option contracts, to hedge against known or forecasted market changes.

                                       26
<PAGE>

The Company may require additional technology in order to successfully develop
and license the Company's technology.

  The Company believes that it has developed a substantial amount of technology
for the Company's products. Nevertheless, if the Company cannot develop the
additional technology that the Company needs in order to be able to sell the
products, the Company may have to purchase technology from others.  The Company
cannot promise or accurately forecast whether the Company will succeed in
performing these acquisitions.

The Company depends upon, and could become unable to maintain or attract,
knowledgeable and experienced personnel vital to the Company's financial
success.

  In order to succeed, the Company depends upon its ability to attract and
retain highly qualified technical and management personnel, including experts in
the field of data storage technology and the sciences underlying such
technology.  These individuals are in high demand and are often subject to
competing offers.   The Company faces competition for such personnel from other
companies, research and academic institutions, government entities and other
organizations.  The Company cannot assure that it will be able to attract and
retain other qualified personnel the Company needs for the business.
Furthermore, the Company does not currently maintain "key man" insurance for any
personnel.

Provisions of corporate law and the Company's certificate of incorporation could
deter takeover attempts.

  The provisions of the corporate law of the Company's state of incorporation
and the Company's certificate of incorporation could make it more difficult for
a third party to acquire control of the Company, even if the change of control
would benefit the stockholders.

The Company cannot assure that it will be able to successfully protect the
Company's Fluorescent Memory Technology and enforce the Company's intellectual
property rights.

  Although the Company intends to rely on trade secret, trademark, copyright and
other intellectual property laws to protect the Company's Fluorescent Memory
Technology, the Company currently relies almost entirely on patent laws for
protection.  While the Company intends to vigorously enforce the Company's
intellectual property rights, the Company cannot assure that the steps taken to
protect the Fluorescent Memory Technology and to enforce the rights will be
successful.  Through the Company's wholly owned subsidiary, TriDStore IP,
L.L.C., as of February 8, 2001, the Company individually held nine U.S. patents,
more than fifty U.S. and foreign regular patent applications, thirteen pending
U.S. provisional patent applications and fourteen international patent
applications pursuant to the Patent Cooperation Treaty.  In addition, the
Company's 80% owned subsidiary, Velor Incorporated has pending two U.S.
provisional patent applications.  The Company cannot assure that it will timely
exercise the right to convert provisional or PCT patent applications into
regular or international patent applications or that patent authorities will
issue patents for any regular or international patent applications.

                                       27
<PAGE>

  The Company expects to develop trade secrets and may seek patent or copyright
protection for trade secrets. The Company cannot assure that it will develop
trade secrets or seek patent or copyright protection for any or all of them.
The Company has entered into and intends to enter into confidentiality and non-
disclosure agreements to protect one or more trade secrets, which the Company or
the Company's employees or independent contractors may develop, but the Company
cannot assure that it will do so or that the appropriate parties will maintain
the confidentiality necessary to protect the Company's trade secrets.  A failure
to maintain one or more trade secrets could have a material adverse financial
impact on the Company.

  The Company may offer products in the U.S. and in foreign countries based on
the patented Fluorescent Memory Technology.  However, certain countries in the
Pacific Rim and elsewhere may not offer the same degree of intellectual property
protection that the U.S., European Community and Japan afford. Therefore, the
Company may be unable to enforce the Company's patent rights in those
jurisdictions, even if the Company was able to obtain intellectual property
rights.

  The Company has filed intent to use trademark applications with the U.S.
Patent and Trademark Office for the trademarks "CLEARCARD" and "CONSTELLATION
3D".  The Company cannot assure that these applications will mature into
registrations or that the Company will even use these marks.  Furthermore, the
Company acquired the internet domain names "C-3D.NET," "C-TRID.COM," "C-
TRID.NET", "C3DINC.COM", "CONSTELLATION3D.COM", and "CONSTELLATION3D.NET".
Currently, the Company maintains its web site at http://www.c-3d.net.

  The Company cannot guarantee that any patents, copyrights, trade secrets,
trademarks or domain names that the Company developed or obtained will provide
sufficient value or protection.  Furthermore, the Company cannot assure that
other parties will not challenge the validity or that other parties will not
assert affirmative defenses to infringement or dilution.  If another party
succeeds in developing data storage technology comparable to Fluorescent Memory
Technology without infringing, diluting, misusing, misappropriating or otherwise
violating the Company's intellectual property rights, the Company's financial
condition may materially suffer.

Due to potential intellectual property claims and litigation that parties may
initiate against the Company, the Company may suffer economic losses and become
unable to research, develop or license the sale or manufacture of the
technology.

  As it is typical in the data storage industry, other parties may in the future
notify the Company of claims that may be infringing, diluting, misusing,
misappropriating or otherwise violating the Company's intellectual property
rights.  It is impossible to predict the outcome of such potential claims, and
the Company cannot assure that the relevant authorities will resolve the
potential claims in the Company's favor.  The Company also cannot assure that an
unfavorable resolution of a claim will not have a material adverse effect on the
Company's business or financial results.  In particular, there has been
significant litigation in the data storage industry relating to infringement of
patents and other intellectual property rights.  The Company cannot assure that
future intellectual property claims will not result in litigation.  If another
party

                                       28
<PAGE>

were to establish infringement, dilution, misuse, misappropriation or any other
intellectual property rights violation, the Company or the Company's joint
ventures might have to pay substantial damages, or courts might enjoin the
Company from developing, marketing, manufacturing and selling the infringing
products in one or more countries. In addition, the costs of engaging in
intellectual property litigation can be substantial regardless of outcome. If
the Company seeks licensure for intellectual property that the Company cannot
otherwise lawfully use, the Company cannot assure that it will be able to obtain
such licensure on satisfactory terms.

The Company might not own intellectual property that the Company believes it
owns or that the Company needs in order to successfully research, develop and
license the Company's technology.

  In the future, a court, patent office or other authority may deem one of the
Company's employees or contractors and not the Company to be the legal owner of
one or more patents, patent applications or other intellectual property, which
is material to protecting the Company's data storage technology.  The Company
typically requires that the Company's employees and contractors assign to the
Company all right, title and interest in and to the intellectual property that
was developed for the Company.  However, the Company cannot assure that it will
obtain legal ownership of one or more licenses to use the intellectual property,
which an authority deems to be the property of the Company's employee or
contractor, on satisfactory terms.  The Company's failure to obtain the legal
ownership of, or one or more licenses to use, the intellectual property may have
a material adverse effect on the Company's business or financial results.

The Company may eventually face inherent business risk of exposure to product
liability claims, which may have a material adverse impact on the Company's
financial condition.

  The Company does not presently have product liability insurance.  Currently,
the Company's technology is not mass manufactured and the Company does not
expect that anyone will mass manufacture the Company's technology in the
immediate future.  Possible future product liability lawsuits may affect the
reputation of the Company's future products and services or otherwise diminish
the Company's financial results even though the Company may obtain product
liability insurance.  The Company may protect itself against product liability
claims by contractually requiring the joint ventures and licensees:

  .   to have continuous quality control inspections, detailed training and
      instructions in the manufacture of the Company's products;

  .   to indemnify the Company for damages caused by tortuous acts or
      omissions of the joint venture or licensee; or

  .   to obtain and maintain adequate product liability insurance.


   If injured persons bring product liability suits, the Company cannot assure
that any existing product liability insurance of a joint venture or any existing
indemnification by joint ventures will adequately cover the liability claims.
In addition, the Company cannot assure that

                                       29
<PAGE>

product liability insurance will be available to the joint ventures in
sufficient amounts and at acceptable costs.

The Company may be unable to obtain sufficient components on commercially
reasonable or satisfactory terms, which may have a material adverse impact on
the Company's financial condition.

  It is common in the data storage technology manufacturing and assembly
industry for certain components to be available only from a few or sole-source
suppliers. However, the Company cannot assure that the key components for future
products will be available from a number of source suppliers.  Therefore, the
Company and joint ventures and licensees may experience difficulty in obtaining
a sufficient supply of key components on a timely basis. The Company intends to
develop relationships with qualified manufacturers with the goal of securing
high-volume manufacturing capabilities, thus controlling the cost of current and
future models of the Company's future products.

  The Company cannot assure that it will be able to obtain a sufficient supply
of components on a timely basis or on commercially reasonable terms or realize
any future cost savings.  The same supply and cost problems could adversely
affect the Company's sales of products.  The inability to obtain sufficient
components and equipment, to obtain or develop alternative sources of supply at
competitive prices and quality or to avoid manufacturing delays, could prevent
joint ventures from producing sufficient quantities of the Company's products to
satisfy market demand.  Additionally, in the case of a component purchased
exclusively from one supplier, joint ventures could become unable to produce any
quantity of the affected products until the component becomes available from an
alternative source.  These problems could cause delays to product shipments,
thereby increasing the joint venture's material or manufacturing costs or
causing an imbalance in the inventory levels of certain components.  Moreover,
difficulties in obtaining sufficient components may cause joint ventures and
licensees to modify the design of the Company's products to use a more readily
available component.  These design modifications may result in product
performance problems.  Any or all of these problems could result in the loss of
customers, provide an opportunity for competing products to achieve market
acceptance and otherwise adversely affect the Company's business and financial
results.

The Company may become financially dependent on one or a small number of
customers.

  Because the Company is a research and development company, the Company has not
developed a customer base for its products.  The Company intends to establish
joint ventures and licensing arrangements with strategic partners to market and
sell Fluorescent Memory Technology. In the future, it is possible that the
Company, the joint ventures and licensees will have sales to one or a small
number of customers which equal ten percent or more of the Company's
consolidated revenues.

                                       30
<PAGE>

The Company's officers spend time on projects that bear no relation to the
Company's activities.

  Some of the Company's officers, notably Michael Goldberg and Lev Zaidenberg,
serve as directors, officers and employees of other companies.  While the
Company believes that the officers will be devoting adequate time to effectively
manage the Company, the Company cannot assure that their other positions will
not negatively impact their duties and that the impact will not have a material
adverse effect on the Company's financial condition. The Company believes that
the other company positions of the Company's officers do not raise actual or
potential conflicts of interest that could interfere with the carrying out of
their respective duties at the Company.

The Company's expected products may be subject to various legal and regulatory
controls.

  The Company is unaware of any particular electrical, telecommunication,
environmental, health or safety laws and standards that will apply to the
Company's products. While the Company does not anticipate special regulations of
the Company's products, the Company cannot assure that it will not have to
comply with laws and regulations of domestic, international or foreign
governmental or legal authorities. Compliance with these laws and regulations
could have a material adverse affect on the Company.  The Federal Communications
Commission (FCC) regulates computer hardware that contains or utilizes magnetic
forces to store information.  If the FCC in the future chooses to regulate
fluorescent-based computer storage devices, such as the Company's products,
compliance with those regulations could have a material adverse effect on the
Company's financial condition.

The Company faces intense competition in the data storage technology industry.

  The Company estimates that there are approximately 14 enterprises currently
researching, developing or producing other types of data storage technology,
which the Company considers to be the Company's material competitors.  The data
storage technology industry is fiercely competitive, and a number of the
Company's competitors, such as EMC Corporation, Iomega Corporation and Seagate
Technology, Inc. have already established their names, brands, products and
technologies in the marketplace.  The Company expects that some competitors will
continue to have significant market shares.  The Company's competitors may
further increase their market shares through mergers, acquisitions and research
and development.

  While the Company believes that Fluorescent Memory products and joint venture
and licensing strategies will result in competitive advantages, the Company
cannot assure that it will obtain or maintain any of such advantages over time.
Furthermore, the Company cannot assure that a competitor will not invent a
superior technology, or that the Company's products and services will be able to
penetrate the data storage market. Many of the Company's current and potential
competitors have or may have advantages such as greater financial, personnel,
marketing, sales and public relations resources. Existing or future competitors
may develop or offer products that provide significant performance, price,
creative or other advantages over products that the Company offers.

                                       31
<PAGE>

Risks Related to the Company's Common Stock

The market price of the Company's common stock may fluctuate significantly.

  The stock market in general and the market for shares in technology companies
in particular have recently experienced extreme price fluctuations, which have
often been unrelated to the operating performance of the affected companies. The
Company believes that the principal factors that may cause price fluctuations
are:

  .  fluctuations in the Company's financial results;

  .  fluctuations in the Company's product development timetables;

  .  general conditions and development in the technology industries and the
     worldwide economy;

  .  conditions and expectations regarding the data storage markets;

  .  sales of the Company's common stock into the marketplace;

  .  the number of market makers for the Company's common stock;

  .  announcements of technological innovations or new or enhanced products by
     the Company or the Company's competitors;

  .  a shortfall in revenue, gross margin, earnings or other financial results
     from operations or changes in analysts' expectations;

  .  developments in the Company's relationships with the Company's suppliers
     and potential customers; and

  .  significant operating and interest charges as a result of the Company's
     need to obtain future financing or services.

  The Company cannot be certain that the market price of the Company's common
stock will not experience significant fluctuations in the future, including
fluctuations that are adverse and unrelated to the Company's performance.  The
sales of a substantial number of shares of the Company's common stock could
adversely affect the market price of the Company's common stock by introducing a
large number of sellers to the market. Given the potential for fluctuations in
the price of the Company's shares, these sales could cause the market price of
the Company's common stock to decline.

                                       32
<PAGE>

Investors who need immediate or future income should refrain from the purchase
of the Company's common stock.

     The Company does not intend to pay dividends to the holders of the
Company's outstanding common stock in the foreseeable future. Investors who need
immediate or future income by way of dividends from their investment should
refrain from the purchase of the Company's common stock.

The market price of the Company's common stock may decrease if a large number of
shares are sold in the future.

     Future sales of the Company's common stock in the public market, or the
issuance of shares of common stock upon the exercise of stock options and
warrants or otherwise, could adversely affect the market price of the Company's
common stock and impair the Company's ability to raise capital through the sale
of equity or equity-related securities. As of January 31, 2001, the following
number of shares of common stock are issued or issuable:

<TABLE>
        <S>                                                                 <C>
        Issued and outstanding/(1)/...................................      43,192,775
        Issuable upon exercise of outstanding warrants whether
            or not currently exercisable/(2) (4) (5)/.................       6,251,922
        Issuable upon exercise of outstanding stock options
            whether or not currently exercisable......................       6,124,617
        Issuable upon conversion of convertible loans/(3)/............         319,913
</TABLE>


(1) Excluding 500,000 shares of the Company's common stock owned by
    Constellation 3D Trust LLC, one of the Company's wholly owned subsidiaries.

(2) Currently exercisable at exercise prices ranging from $0.001 to $15.13 per
    share.

(3) A loan of $4,000,000 provided by Sands Brothers Venture Capital Associates
    LLC convertible at $17.65 per share and a loan of $1,000,000 provided by
    Constellation 3D Technology Limited convertible at $10.72 per share.

(4) Includes 3,450,000 shares underlying the warrants evidenced by agreements
    with Sands Brothers & Co., Ltd. ("Sands Brothers"), which are in dispute.
    See "Legal Proceedings" and "Management Discussion and Analysis of Financial
    Condition and Results of Operations."

(5) Does not include adjustment warrants issued in connection with certain
    equity financings.

     As of January 31, 2001, of the 43,192,775 issued and outstanding shares
identified in the table above, 30,116,106 are restricted securities (i.e.,
excluding 500,000 shares of the Company's common stock owned by Constellation 3D
Trust LLC, one of the Company's wholly-owned subsidiaries) within the meaning of
Rule 144 under the Securities Act of 1933 (the "Securities Act"), and may not be
sold in the absence of registration under the Securities Act unless an

                                       33
<PAGE>

exemption from registration is available. Such restricted securities are
eligible for sale in the public market subject to compliance with Rule 144. In
addition, other exemptions may be available for sales of such restricted
securities held by non-affiliates.

     The Company cannot predict the effect, if any, that market sales of shares
of common stock, or the availability of such shares of common stock for sale,
will have on the market price of the shares of common stock prevailing from time
to time. Nevertheless, sales of substantial amounts of shares of common stock in
the public market, or the perception that such sales could occur, could
adversely affect prevailing market prices for the shares of common stock and
could impair the Company's ability to raise capital through an offering of the
Company's equity securities.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
          OF OPERATIONS

     The Company's actual results may differ materially from historical results
and those the Company presently anticipates. When readers consider forward-
looking statements and Factors that May Affect Future Results, readers should
keep that in mind as well as the other cautionary statements in this Annual
Report, including the "Risk Factors" and "Factors That May Affect Future
Results" included elsewhere in this Annual Report.

                                   Overview

     Constellation 3D, Inc. ("C3D"), formerly known as C3D Inc., is an
international enterprise headquartered in New York, New York.  With operations
in the United States, Israel, the Ukraine and Russia, the Company researches and
develops its proprietary technology ("Fluorescent Memory" or "Fluorescent Memory
Technology")

     The Company plans to continue its focus on research and development of its
data storage technology and to develop strategic alliances, joint ventures and
licensing arrangements with established companies in the data storage industry.
The Company expects that its operating expenses will increase significantly
during the foreseeable future as the result of its plans to:

     .  increase expenditures on marketing and business development by hiring
        additional staff, hosting demonstrations of the Company's technology to
        potential strategic partners, continually obtaining information about
        the market size and growth parameters to update the market analysis,
        updating industry pricing and cost trends, and monitoring new
        technological developments in the industry;

     .  enhance existing capabilities of products by increasing the levels of
        research and development expenditures and capital;

     .  increase expenditures on administration, by expanding the current
        management team, to provide the overall management of the parent company
        as well as the subsidiaries;

                                       34
<PAGE>

     .  increase monthly expenditures on professional fees for patent
        registration, licensing and joint venture agreements; and

     .  establish research and development facilities with initial manufacturing
        capabilities in the United States by hiring additional staff and
        transferring equipment and personnel.

     .  In addition, the Company anticipates incurring additional expenses with
        respect to industrialization of its first generation of products.

      The Company must raise additional funds as a result of the planned
significant increase in its operating expenditures. The Company does not expect
to receive revenues for the foreseeable future and expects to continue to incur
operating losses.  The Company is currently exploring additional financing
alternatives, including the possibility of private equity or debt offerings.

     Although the Company's existing debt securities contain no such
restrictions, the signing of future financing agreements could result in
restrictions being placed on dividends, interest and principal payments, or any
other covenant restrictions that could make payments of such debts difficult,
create difficulties in obtaining further financings, limit the flexibility of
changes in the business, and cause substantial liquidity problems. There can be
no assurance, however, that such financing will be available or, if it is, that
it will be available on terms acceptable to the Company.

     On February 8, 2000, C3D formed Constellation 3D Trust LLC, a Delaware
limited liability company. C3D then issued 10,500,000 shares of common stock to
Constellation 3D Trust LLC as a capital contribution and later cancelled all but
500,000 of said shares. Constellation 3D Trust LLC intends to use the shares to
raise debt or equity capital and contribute the proceeds thereof to C3D, which
proceeds shall be used for general corporate purposes.  There is no assurance
that the issuance of the shares will result in the raising of any debt or equity
capital. For the purposes of the Company's consolidated financial statements,
the net issuance of the 500,000 shares of common stock are not considered to be
issued or outstanding because the common stock has remained under the control of
C3D and the intention is to cancel the shares if no financing transaction is
completed.

     On August 22, 2000, the Company issued a warrant to purchase 10,000 shares
of common stock jointly to Reflekt Technology, Inc., a Massachusetts corporation
("Reflekt") and Vladimir Schwartz, President, sole director and sole stockholder
of Reflekt ("Schwartz") in exchange for certain patents, which Reflekt or
Schwartz owned in whole or in part.  The warrant is exercisable beginning August
22, 2001 at an exercise price of $11.25 per share and terminates on August 22,
2004.

     On January 2, 2001, the Company agreed to acquire certain assets of its
former Ukrainian subcontractor, Ladis Ltd., for cash consideration of
approximately $30,000.  Since that date, C3D has continued to conduct its
Ukrainian operations using the equipment and other assets acquired from the
former subcontractor.

                                       35
<PAGE>

     On January 29, 2001, the Company formed Velor Incorporated ("Velor"), a
Delaware corporation headquartered in Massachusetts that is 80% owned by the
Company.  Since incorporation, Velor has had no operations.  Velor will engage
in the business of researching and developing solid-state memory products.

     On January 30, 2001, at the annual meeting of stockholders of the Company,
the stockholders approved the redomicile of the Company's place of incorporation
from Florida to Delaware by merging the Company with and into its newly-created
wholly-owned subsidiary Constellation 3D, Inc., a Delaware corporation. On
February 6, 2001, Articles of Merger were filed with the Florida Secretary of
State and a Certificate of Merger was filed with the Delaware Secretary of
State, which formally resulted in the redomicile of the Company to the State of
Delaware.

     On February 12, 2001, the Company and Plasmon Plc ("Plasmon") entered into
an agreement to jointly manufacture the process for mass production of FMD
media. Under the agreement, Plasmon and the Company would collaborate to create
an FMD media production process for adoption by the optical disc manufacturing
industry.

     On December 1, 1999, the Company entered into a Placement Agency Agreement
and Warrant Agreement dated December 1, 1999 (the "Agency Agreement" and
"Warrant Agreement" respectively) with Sands Brothers & Co., Ltd. ("Sands
Brothers") which obligates Sands Brothers to raise through the placement of the
Company's securities, on a best efforts basis, a minimum of $4.0 million (the
"Minimum Amount") and, as amended on March 23, 2000, a maximum of $120.0 million
for the Company. By the face of the March 23, 2000 amendments to the Agency and
Warrant Agreements, the Company was to issue to Sands Brothers warrants to
purchase 1,050,000 shares at an exercise price of $3.67 per share for the
Minimum Amount of securities sold, and warrants to purchase 600,000 shares for
each $1.0 million of the Company's securities sold up to $25.0 million (the
"Additional Placement Agent Warrants") at an exercise price equal to a 40%
discount to the average of the bid price of the Company's common stock for the
120 day period prior to any closing, but in no event less than $5.00 per share.
On March 24, 2000, Sands Brothers raised $4 million for the Company pursuant to
the Agency and the Warrant Agreement from Sands Brothers Venture Capital
Associates LLC, an affiliate of Sands Brothers. The $4 million investment in the
Company was made through a subordinated convertible debenture due on September
24, 2001. Pursuant to the provisions in the Agency Agreement, the Company issued
to Sands Brothers warrants (the "Warrants") to purchase 1,050,000 and 2,400,000
shares of common stock at the prices of $3.67 and $15.13, respectively. In
connection with the issuance of the subordinated convertible debenture, the
Company entered into a registration rights agreement with Sands Brothers Venture
Capital Associates LLC (the "Registration Rights Agreement").

      On March 23, May 16, May 31, June 28, and August 3 of the year 2000, the
Company amended the Placement Agency Agreement, Warrant Agreement and Warrant
Certificate No. SB-2. Among other results of the amendments, Sands Brothers is
no longer the Company's exclusive financing source and is not entitled to any
fees or stock warrants with respect to financing sources, which it has not
brought to the Company.

                                       36
<PAGE>

     The Company contends that the Warrants and all provisions in the Agency
Agreement, and all documents related thereto which call for the issuance of the
Warrants to Sands Brothers are no longer enforceable, because Sands Brothers
failed to satisfy its obligations under such documents. Sands Brothers claims
that the Company is in breach of the Company's obligation to register the shares
underlying the Warrants and by such failure to register, claims that it has been
damaged, at a minimum, in the amount of $32,128,125, less the exercise price of
the Warrants. Although the Company is unable to determine the ultimate outcome
of this dispute, an adverse resolution thereof would have an adverse effect on
the Company's business and financial condition. See "Legal Proceedings" for an
expanded discussion.

     The Company has a limited operating history upon which to base an
evaluation of its business. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets such as the data storage market.
These risks include, but are not limited to, rapid technological change,
inability to manage growth, competition from more established companies,
dependence on suppliers, internal system problems and the inability to obtain
sufficient financing and an unproven business record.

Results of Operations for the Year Ended December 31, 2000 Compared to the Year
Ended December 31, 1999

     The Company's reported financial condition and results as of and for the
year ended December 31, 2000, includes all amounts for the parent company, C3D,
and C3D's three wholly-owned operating subsidiary companies, C-TriD Israel Ltd.,
an Israeli company ("C-TriD"), Constellation 3D Vostok, a Russian company
("Vostok"), and FMD&E, Inc., a Massachusetts company ("FMD&E"). The Company's
reported financial condition and results of operations for the comparative year
ended December 31, 1999, include the combined earnings of C-TriD and Vostok for
the full 1999 year, the earnings of the predecessor company, Constellation Tech
for the nine months ended September 30, 1999, together with the earnings of C3D
after October 1, 1999, the date on which the Company completed the acquisition
of certain assets.

     Revenue. The Company generated no revenue for the years ended December 31,
2000 and 1999.

     Research and Development Expenses. The Company incurred research and
development expenses of $4,658,082 for the year ended December 31, 2000,
compared with $2,413,239 for the year ended December 31, 1999 for an increase of
$2,244,843, or about 93%. Research and development expenses consist primarily of
expenses incurred for the development of the data storage technology, including
compensation of technical staff and contractors, materials consumed in the
development process, and professional fees for patent registration of
intellectual property. The significant costs were payroll for staff and
contractors, which amounted to $2,812,642 for the year ended December 31, 2000,
compared with $1,366,002 for the year ended December 31, 1999. The increase was
primarily due to the hiring of additional staff with greater qualifications, and
the expansion of the Company's contractual relationships

                                       37
<PAGE>

with current subcontractors. Professional fees were $405,849 for patent
registration for the year ended December 31, 2000, compared with $556,432 for
the year ended December 31, 1999. The decrease in patent registration was due to
the Company's proprietary Fluorescent Memory Technology becoming more proven and
patentable during the same period last year. Materials consumed amounted to
$421,608 for the year ended December 31, 2000, compared with $64,155 for the
year ended December 31, 1999. The increase in material was due to purchase of
various materials required at the current stage of development of the Company's
products. Travel expenses amounted to $433,310 for the year ended December 31,
2000, compared with $26,706 travel expenses for the year ended December 31,
1999. The increase in travel costs is due to the travel of research and
development staff between the Company's geographical locations. General and
administrative costs associated with research and development facilities were
$584,673 for the year ended December 31, 2000, compared with $399,944 for the
year ended December 31, 1999.

     General and Administrative Expenses. General and administrative expenses
consist of management compensation, rent, professional fees, telephone, travel
and other general corporate expenses. General and administrative expenses were
$4,369,384 for the year ended December 31, 2000, compared with $1,986,392 for
the year ended December 31, 1999 for an increase of $2,382,992, or about 120%.
The Company paid substantially more for management and facilities for the year
ended December 31, 2000, than it did for the year ended December 31, 1999.
Payroll expenses and management fees relating to general and administrative
activities were $881,756 for the year ended December 31, 2000, compared with
$466,034 for the year ended December 31, 1999. The rise in compensation expenses
was due to the increase in the size and compensation of the management team
compared to the year ended December 31, 1999 and a non-cash compensation charge
of $36,321 for the grant of options to non-executive directors during the year
ended December 31, 2000, compared with no such charge for the year ended
December 31, 1999. Professional fees were $1,650,022 for the year ended December
31, 2000, compared with $564,486 for the year ended December 31, 1999. The
increase was for legal support for the Company's legal and accounting work
required for the preparation of the publicly filed statements and reports, and
general corporate matters. Office and maintenance charges were $716,034 for the
year ended December 31, 2000, compared with $527,091 for the year ended December
31 1999. The increase in office and maintenance charges relates to the increased
activity of the New York office for the year ended December 31, 2000, compared
to the year ended December 31, 1999, when the corporate office in New York had
just opened in the fourth quarter of 1999. Travel and accommodation expenses
were $287,730 in the year ended December 31, 2000, compared with $303,443 for
the year ended December 31, 1999. Consulting fees amounted to $518,980 for the
year ended December 31, 2000, compared with $111,623 for the year ended December
31, 1999 including a non-cash compensation charge of $320,464 for the grant of
options to non-employee consultants during the year ended December 31, 2000,
compared with no such charge for the year ended December 31, 1999. Stockholder
relations expenses and filing fees were $314,862 for the year ended December 31,
2000, compared with $13,715 for the year ended December 31, 1999.

     Marketing. Marketing expenses consisted of compensation to employees and
consultants and travel expenditures for demonstrations of the Company's
technology to potential strategic partners. Marketing expenses were $5,686,926
for the year ended December 31, 2000, compared

                                       38
<PAGE>

to $97,635 for the year ended December 31, 1999, when the Company had just begun
to demonstrate its technology. Most of the expenses for the year ended December
31, 2000, $5,209,586, were compensation expenses relating to marketing and
business development. The compensation expense consisted of $4,293,000 and
$512,671 in non-cash stock-based compensation due to the grant of 450,000 and
195,000 options, respectively, to a non-employee consultant and $403,915 in
payroll and consulting fees for the year ended December 31, 2000, compared with
no such expenses for the year ended December 31, 1999. The compensation charge
relating to the grant of stock options represents the relative fair value
ascribed to the options measured using the Black-Scholes option-pricing model.
The Company reflected the effects of the compensation expense related to the
grant of stock options as an increase to additional paid-in capital in the
statement of stockholders' equity. Travel and accommodation expenses for product
demonstrations and exhibits were $371,414 for the year ended December 31, 2000,
compared with $97,635 for the year ended December 31, 1999. The Company incurred
$36,543 in expenses relating to media exposure for the year ended December 31,
2000, compared to no expenses for the year ended December 31, 1999. General and
administrative costs associated with marketing were $69,383 for the year ended
December 31, 2000, compared with no general and administrative expenses for the
year ended December 31, 1999.

     Interest Expense, net. The Company recorded net interest expense of
$5,433,399 for the year ended December 31, 2000, compared with $305,833 for the
year ended December 31, 1999 for an increase of $5,127,566, or 1,677%. The
interest expense included $2,566,185 for the amortization of the financing cost
associated with detachable warrants issued in connection with the issuance of
subordinated convertible debt and the convertible line of credit during the year
ended December 31, 2000, compared to no such expense for the year ended December
31, 1999. The Company recorded an interest expense of $120,000 for the
beneficial conversion feature on the subordinated convertible debt issued during
the year ended December 31, 2000, compared with $125,000 for the year ended
December 31, 1999.  During the year ended December 31, 2000, a stockholder loan
and two convertible notes were converted into common stock. The original
conversion terms were amended to reduce the conversion price and the Company
issued warrants relating to the stockholder loan and both convertible debts. The
value ascribed to the warrants and the modification of the conversion terms for
accounting purposes was $1,783,000, which was recorded as an interest expense
and as an addition to paid-in capital of stockholders equity. The Company also
recorded an interest expense of $500,000 related to commission charged on the
subordinated convertible debt issued during the year ended December 31, 2000,
compared with $100,000 for the year ended December 31, 1999. Interest expenses,
excluding noncash charges, relating to the line of credit, stockholder loans and
subordinated convertible debt amounted to $633,795 for the year ended December
31, 2000, compared to $88,129 for the year ended December 31, 1999. Interest
revenue was generated through short-term deposits and amounted to $169,581
during the year ended December 31, 2000, compared with $7,296 for the year ended
December 31, 1999.

     Taxes. The Company has generated inter-company taxable income to date and
therefore has incurred $99,414 for the year ended December 31, 2000, compared
with $63,588 for the year ended December 31, 1999 for an increase of $35,826, or
about 56%.  Israeli and Russian subsidiaries, C-TriD and Vostok, incurred taxes
due to their treatment of inter-company advances as taxable revenue. The Company
has not generated any taxable income to date and

                                       39
<PAGE>

therefore has not paid any federal income taxes since inception. The Company has
fully reserved deferred tax assets created primarily from net operating loss
carryforwards and deferred start-up costs because management is unable to
conclude that future realization is likely.

Results of Operations for the Year Ended December 31, 1999 Compared to the Year
Ended December 31, 1998

     The Company's reported earnings from operations as of and for the year
ended December 31, 1999, include the combined earnings of the two operating
subsidiaries, C-TriD and Vostok, for the full 1999 year, the earnings of the
predecessor company, Constellation Tech, for the nine months ended September 30,
1999, together with the earnings of C3D after October 1, 1999, the date on which
the Company completed the acquisition of certain assets. The reported earnings
for the year ended December 31, 1998 are that of the predecessor company,
Constellation Tech.

     Revenue. The Company generated no revenue in the years ended December 31,
1999 and 1998.

     Research and System Development Expenses. Research and development expenses
consist primarily of expenses incurred for the development of the data storage
technology, including compensation of technical staff and contractors, materials
consumed in the development process, and professional fees for intellectual
property. The Company incurred research and development expenses of $2,413,239
for the year ended December 31, 1999, compared with $1,534,948 for the year
ended December 31, 1998 for an increase of $878,291, or about 57%. The
significant costs were payroll for staff and contractors which amounted to
$1,366,002 for the year ended December 31, 1999, compared with $965,114 for year
ended December 31, 1998. The increase in payroll expenditures was due to the
increase in staff levels for the year compared with the year ended December 31,
1998. Professional fees were $556,432 for patent preparation and filing for the
year ended December 31, 1999, compared with $312,612 for the year ended December
31, 1998. The increase in patent costs was due to the expanded coverage in scope
and geography of the Company's Fluorescent Memory Technology. Materials consumed
amounted to $64,155 for the year ended December 31, 1999, compared with $139,565
for the year ended December 31, 1998. This decrease was due to the reduction of
new materials required as the Company's products went from prototypes to a
demonstrable product in 1999. Travel expenses amounted to $26,706 for the year
ended December 31, 1999, compared with $17,242 travel expenses for the year
ended December 31, 1998. General and administrative costs associated with
research and development facilities were $399,944 for the year ended December
31, 1999, compared with $100,415 for the year ended December 31, 1998. The
increased general and administrative expenses reflects the start-up of Vostok,
the Russian subsidiary formed in early 1999, compared to the year ended December
31, 1998 when Vostok had yet to be formed.

     General and Administrative Expenses. General and administrative expenses
consist of management compensation, rent, professional services, telephone
expense, travel and other general corporate expenses. General and administrative
expenses were $1,986,392 for the year ended December 31, 1999, compared with
$1,660,477 for the year ended December 31, 1998 for an increase of $325,915, or
about 20%. This increase reflected the hiring of additional management,
increased facilities charges and expansion of operations. Payroll expenses and

                                       40
<PAGE>

management fees relating to general and administrative expenses were $466,034 in
the year ended December 31, 1999, compared with $690,066 for the year ended
December 31, 1998. The decrease was due to the reduction of a management
contract from $400,000 for the year ended December 31, 1998 to $100,000 for the
year ended December 31, 1999. Office and maintenance charges consisting of
expenditures on rent, general maintenance, and communications were $527,091 for
the year ended December 31, 1999, compared with $491,322 for the year ended
December 31, 1998. Travel and accommodation expenses were $303,443 for the year
ended December 31, 1999, compared with $327,355 for the year ended December 31,
1998. Professional fees were $564,486 for the year ended December 31, 1999,
compared with $56,180 for the year ended December 31, 1998, the majority of
which were related to legal support for the Company's financing transactions and
the preparation of the previously filed registration statement. Consulting fees
amounted to $111,623 for the year ended December 31, 1999, compared with no
consulting fees for the year ended December 31, 1998. Stockholder relations
expenses and filing fees were $13,715 for the year ended December 31, 1999,
compared with no stockholder relations expenses for the year ended December 31,
1998 when the Company was still private.

     Marketing. Marketing expenses consisted of travel expenditures for
demonstrations of the Company's technology to potential strategic partners.
Travel and accommodation expenses for product demonstrations and exhibits were
$97,635 for the year ended December 31, 1999, compared with no expenses for the
year ended December 31, 1998.

     Interest and other charges. The Company has recorded net interest expense
of $305,833 for the year ended December 31, 1999, compared to net interest
income of $6,985 for the year ended December 31, 1998 for an increase of
interest expenses of $312,818, or 4,478%. Interest income and expense consisted
of bank overdrafts, stockholder loans and subordinated convertible debt. The
Company recorded an interest expense of $125,000 for the beneficial conversion
feature on the subordinated convertible debt issued during the year ended
December 31, 1999, compared with no expense for the year ended December 31,
1998. The Company also recorded an interest expense of $100,000 related to the
commission charged on the subordinated convertible debt issued during the year
ended December 31, 1999, compared with no such expense for the year ended
December 31, 1998. Interest expenses, excluding noncash charges, relating to
stockholder loans and subordinated convertible debt amounted to $88,129 for the
year ended December 31, 1999, compared to no expense for the year ended December
31, 1998.

     Income Taxes. The Company has generated inter-company taxable income to
date and therefore has paid $63,588 for the year ended December 31, 1999,
compared with $3,462 for the year ended December 31, 1998. The taxes were
incurred in the Israeli and Russian subsidiaries, C-TriD and Vostok, due to
their treatment of inter-company advances as taxable revenue. The Company has
not generated any taxable income to date and therefore has not paid any federal
income taxes since its inception. Deferred tax assets created primarily from net
operating loss carryforwards and deferred start-up costs have been fully
reserved as management is unable to conclude that future realization is more
likely than not.

                                       41
<PAGE>

Liquidity and Capital Resources

     As of December 31, 2000, the Company's cash position was $8,728,600 and its
working capital was $3,836,732, compared to a cash position of $2,030,139 and a
working capital deficit of $1,415,276 as of December 31, 1999.

     Since inception, the Company has financed its operations from capital
contributions, stockholder loans, subordinated convertible debt, and borrowings
from a line of credit. During the year ended December 31, 2000, the Company
received net proceeds of $11,544,519 from the sale of common stock, proceeds of
$4,000,000 from the issuance of subordinate convertible debt, and $1,000,000
from borrowings on the convertible line of credit. This compares with net
proceeds of $3,100,000 from the issuance of subordinate convertible debt and
advances from stockholder of $1,541,490 for the year ended December 31, 1999.
During the year ended December 31, 2000, convertible notes in the aggregate
amount of $2,912,480 and loans payable in the aggregate amount of $1,402,163
were converted into common stock of the Company. This compares with the
conversion of $1,014,725 in convertible notes payable and $241,490 of loans
payable during the year ended December 31, 1999.

     Net cash used in operating activities was $9,494,023 for the year ended
December 31, 2000, including a net loss of $20,247,205 and an increase in
payables of $656,369. This compares with net cash used in operating activities
of $3,719,345 for the year ended December 31, 1999, including a net loss of
$4,866,687 and an increase in payables of $844,441. For the year ended December
31, 2000, the Company recorded non-cash expenses of $5,162,456 relating to the
issuance of stock options to non-employee consultants, a charge of $120,000 for
the beneficial conversion feature on convertible debt issued during the period,
charges of $1,783,000 for the modification of conversion prices and issuance of
warrants on the conversion of debt, and $2,566,185 for the amortization of the
deferred interest from the issuance of detachable warrants issued during the
period. This compares with non-cash transactions of $28,750 relating to the
issuance of common stock for services to non-employee consultants and a charge
of $125,000 for the beneficial conversion feature on convertible debt for the
year ended December 31, 1999. The Company plans to increase its operating
expenditures in the future in order to expand its operations. The Company has
not generated any revenues to date and does not anticipate cash flow from
operations to be sufficient to fund its cash requirements until late in the year
2002.

     The Company incurred net capital expenditures of $257,872 for the year
ended December 31, 2000, compared with net capital expenditures of $65,581 for
the year ended December 31, 1999. These expenditures were primarily for
laboratory equipment associated with the Company's continued research and
development.

     Based on its existing working capital resources and available lines of
credit, the Company anticipates that it will be able to fund operations for the
next twelve months. The Company's capital requirements depend on several
factors, including the success and progress of research development programs,
the resources devoted to developing products, the extent to which products
achieve market acceptance, and other factors. The Company has a commitment to
pay the $4 million subordinated convertible debenture issued to Sands Brothers
Venture Capital Associates LLC by the due date of September 24, 2001. The
Company also has commitments to

                                       42
<PAGE>

pay consultants and employees, under contract, for a minimum of $287,500 for the
year ended December 31, 2001 and $75,000 for the year ended December 31, 2002.

     The Company currently has no commitments for any credit facilities such as
revolving credit agreements or lines of credit that could provide additional
working capital except for: (i) an agreement with Constellation Tech, the
Company's majority stockholder, to provide the Company with a credit line of
$6,000,000 out of which the Company borrowed $1,000,000 as of December 31, 2000;
and (ii) a firm offer of an equity line from an affiliate of a major investor of
at least $25 million which is available to the Company at the Company's option
through April 30, 2001 The Company's capital requirements depend on several
factors, including the success and progress of research and development
programs, the resources devoted to developing products, the extent to which
products achieve market acceptance and other factors. The Company anticipates
that it will require substantial additional financing to fund the Company's
working capital requirements in future years. There can be no assurance,
however, that additional funding will be available or, if available, that it
will be available on terms acceptable to the Company. If adequate funds are not
available, the Company may not be able to continue. There can be no assurance
that the Company will be able to raise additional cash if the Company's cash
resources are exhausted. The Company's ability to arrange such financing in the
future will depend in part upon the prevailing capital market conditions as well
as the Company's business performance. The Company believes that with the cash
on hand and its available equity line, the Company has sufficient resources to
fund its operations for the next year.

     The Company has been in the development stage since its inception. The
Company has had no operating revenue to date, has accumulated losses of
$30,918,539 and will require additional working capital to complete the
Company's business development activities and generate revenue adequate to cover
operating and further development expenses.

     Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). The statement establishes accounting and
reporting standards requiring that every derivative instrument (including some
types of derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS 133, as amended by SFAS No. 137
defining SFAS No. 133's effective date, is effective for fiscal years beginning
after June 15, 2000, and must be applied to instruments issued, acquired, or
substantively modified after December 31, 1997. The Company does not expect the
adoption of SFAS 133 to have a material effect on its financial position or
results of operations.

     In March 2000, the Financial Accounting Standards Board released
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"). FIN 44

                                       43
<PAGE>

addresses certain practice issues related to Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"). FIN 44 applies only
to companies that have chosen not to adopt SFAS 123, Accounting for Stock-Based
Compensation, for transactions with employees. Among other issues, FIN 44
clarifies (a) the definition of an employee for purposes of applying APB 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions in FIN 44 cover specific events that occur
after either December 15, 1998 or January 12, 2000. To the extent that FIN 44
covers events occurring during the periods after December 15, 1998 or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
FIN 44 are recognized on a prospective basis from July 1, 2000. The Company's
adoption of FIN 44 did not have a material effect the Company's financial
position or results of operations.

     During the fourth quarter of 2000, the Financial Accounting Standards Board
issued Emerging Issues task Force (EITF) 00-27 "Application of EITF No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingency Adjustable Conversion Ratios, to certain Convertible Instruments"
("EITF No. 00-27"). EITF No. 00-27 requires the remeasurement of the original
issue discount on convertible debt with characteristics similar to the
convertible debt issued by the Company during years ended December 31, 2000 and
1999. This accounting change required the value of the warrants issued with the
convertible debt to be included in calculating the beneficial conversion value.
The adoption of EITF No. 00-27 did not have a material effect on the Company's
financial position or results of operations.

Recent Sales of Unregistered Securities

     The information below relates to the Company's sales, during the year ended
December 31, 2001, of securities that were not registered under the Securities
Act of 1933. The share amounts and prices per share have been adjusted to give
retroactive effect to the change in the price per share of the common stock
resulting from the three-for-one forward split of the Company's common stock
that took effect on January 18, 2000.  In the aggregate, as of February 15,
2001, 6,213,876 shares of the Company's common stock purchased in the sales
listed below have been registered by the Company for resale by selling
stockholders on Form S-1 and Form S-3.

     During December 2000, the Company granted warrants to purchase 375,000 and
100,000 shares of the Company's common stock to Focus Partners LLC and Focus
Tech Investments Inc., both non-employee consultants of the Company who provide
services, at an exercise price of $10.1531 to $14.6656 per share respectively.
The warrants to purchase the Company's common stock vest over 12 months and
expire in 2003 through 2005. In connection with the issuance, the Company
recorded a non-cash compensation expense to general and administrative expenses
of $277,880, representing the fair value of the warrants granted.

     On November 11, 1999 the Company issued $500,000 in principal amount of 8%
convertible subordinated debentures due October 31, 2001 to Wilbro Nominees
Limited

                                       44
<PAGE>

("Wilbro"). The original conversion terms provided that the notes would be
converted at the price of the lesser of (A) the average market price of the
common stock over a period of twenty (20) trading days preceding any applicable
date of conversion (the "Conversion Date") less a discount of 20%, or (B) the
average market price of the common stock over a period of twenty (20) days
preceding any applicable Conversion Date (such price being referred to herein as
the "Initial Conversion Price"), provided that, in the event of (A) above, no
discount shall apply unless such average market price of the Common Stock is at
least $5.00 per share. On the date of issuance, the Company recorded interest
expense of $125,000 for the value ascribed to the beneficial conversion feature.

     In order to induce Wilbro to convert its debentures into common stock, the
Company agreed to: (i) amend the then applicable conversion price, which ranges
from $8.68 to $16.77, to $11.00 (ii) offer Wilbro 15,000 common stock purchase
warrants.  On October 12, 2000, an aggregate of $500,000 in principal amount and
accrued interest of $44,507 of the debentures was converted by Wilbro into
49,500 shares of common stock at a conversion price of $11.00 per share.  As a
result of the amendment of the conversion price, the Company recognized an
additional interest expense of $18,000 based on the excess of the fair value of
the common stock transferred in excess of the fair value of the common stock
issuable pursuant to the original conversion terms. The Company also recognized
an addition to paid in capital of stockholders' equity.  Wilbro also received
one-year warrants to purchase 15,000 shares of common stock at an exercise price
of $10.1531. The fair value ascribed to the warrants was approximately $35,000.
Such amount was recorded as an interest expense and as an addition to paid-in
capital of stockholders' equity.

     On September 12, 2000, the Company entered into the Common Stock Investment
Agreement with Jacqueline Hershkovitz. According to the Common Stock Investment
Agreement, J. Hershkovitz purchased, for aggregate cash consideration of
$150,000: (1) 14,774 shares of common stock at a price of $10.15313 per share,
(2) adjustment warrants to purchase a number of shares of common stock pursuant
to a certain formula set forth in the written agreement, (3) five year warrants
to purchase 5,910 shares of common stock at an exercise price of $14.6656 per
share, and (4) one year warrants to purchase 7,387 shares of common stock at an
exercise price of $10.15313 per share. The adjustment warrants, the five year
warrants and the one year warrants had a fair market value of $42,424, $38,526
and $26,644, respectively.

     The adjustment warrants were issued to Ms. Hershkovitz as an inducement to
purchase the 14,774 shares of common stock of the Company and provide J.
Hershkovitz certain investment value protection in case the market price of the
Company's common stock declined below $11.68. The adjustment warrants were
exercisable until September 12, 2005 and had an exercise price of $0.0. The
adjustment warrants were exercisable into such number of shares as is derived by
subtracting 14,774 from the quotient of (i) 172,500 divide by (ii) the average
of the 20 lowest daily trades for a share of common stock during the period
starting 15 trading days after the day on which a registration statement
covering the initial shares was first declared effective by the commission and
ending on the 50/th/ trading day thereafter.

     On February 14, 2001, J. Hershkovitz exercised adjustment warrants to
purchase 19,704 shares of the Company's common stock for no additional
consideration, which shares were

                                       45
<PAGE>

valued at $136,696 based upon the market price of the Company's common stock on
February 14, 2001. All the shares issued pursuant to the exercise of the
adjustment warrants were treated as adjustments to the initial investments and
were recorded in the stockholders' equity section as a credit to common stock,
for the par value of the shares, and a debit to additional paid in capital.

     Pursuant to a Term Sheet dated October 15, 1998, Agrotec Ltd./Formula
Ventures Ltd.,  loaned $600,000 to Memory Devices (MD) (1996) Ltd., a subsidiary
of Constellation 3D Holdings Limited.  Pursuant to a Loan Conversion Rights
Agreement, dated December 2, 1998, the principal and interest on the $600,000
loan was convertible into preferred shares of the Company at a price equal to
75% of a calculated share value. The share value was the quotient of (i) the
lowest valuation of the Company used in a financing of the Company between
December 2, 1998 and the conversion date over (ii) the issued and outstanding
share capital of the Company, on a fully diluted basis. In the event that a
financing did not occur, the valuation of the Company, was required to be agreed
upon by the parties. The parties agreed upon a conversion price of $1.79. On
July 1, 1999, Constellation Tech acquired all the assets of Constellation 3D
Holdings Limited, including the stock of Memory Devices (MD)(1996) Ltd.

     On September 12, 2000, an aggregate principal of $600,000 plus accrued
interest of approximately $81,574 on the debt was converted by Formula Ventures
L.P., FV-PEH L.P., and Formula Ventures (Israel) L.P. into 380,000 shares of the
Company's common stock at the conversion price of $1.79 per share.  Since the
debt was converted pursuant to the original conversion terms, the Company did
not recognize an additional interest expense.

     On August 31, 2000, the Company sold 197,026 shares of the Company's common
stock for an aggregate consideration of $2,000,426 ($1,920,409, net of financing
costs, ) to a group consisting of the following seventeen investors: I. Nahori,
Y. Hershkovitz, O. Ackerman, T. Barak, Z. Korech, T. Edri, O. Ron, E. Miro, A.
Shilontchik, Y. Peleg, A. Ben-Ami, G. Altshuler, Koor Underwriters and Issuers
Ltd., Menorah Gaoon Investment Ltd., Shalom and Yafa Bilgori, The Hebrew
University Employee Fund, and S. Tov, collectively called Koor's Investors. In
connection with this equity financing, the Company issued the following warrants
to Koor's Investors: (1) five-year warrants to purchase 78,813 shares of the
Company's common stock at the initial exercise price of $14.6656 per share, (2)
adjustment warrants to purchase a number of shares of common stock pursuant to a
certain formula set forth in the written agreement, and (3) one-year warrants to
purchase 98,513 shares of common stock at the initial exercise price of
$10.15313 per share. The adjustment warrants, the five year warrants and the one
year warrants had a fair market value of $578,397, $659,733 and $519,357,
respectively.

     The adjustment warrants were issued to the Koor's investors as an
inducement to purchase the 197,026 shares of common stock of the Company and
were intended to provide the Koor's investors certain investment value
protection in case the market price of the Company's common stock declined below
$11.68.  The adjustment warrants were exerciseable until August 31, 2005 and had
an exercise price of $0.0.  The adjustment warrants were exercisable into such
number of shares as is derived by subtracting 197,026 from the quotient of (i)
2,300,490 over (ii) the average of the 20 lowest daily trades for a share of
common stock during the period starting

                                       46
<PAGE>

15 trading days after the day on which a registration statement covering the
initial shares is first declared effective by the commission and ending on the
50/th/ trading day thereafter.

     On February 14, 2001, the Koor's investors were issued 262,856 shares of
the Company's common stock upon the exercise of all of its adjustment warrants,
which shares were valued at $1,823,564 based upon the market price of the
Company's common stock on February 14, 2001.   All the shares issued pursuant to
the exercise of the adjustment warrants were treated as adjustments to the
initial investments and were recorded in the stockholders' equity section as a
credit to common stock, for the par value of the shares, and a debit to
additional paid in capital

     In connection with the sale of the foregoing securities to Koor's
Investors, the Company paid Koor Underwriters and Issuers Ltd. a placement fee.
Koor's Underwriters and Issuers Ltd received $80,017 (4% of the $2,000,426
purchase price) as a placement commission and five-year warrants to purchase
295,539 shares of the Company's common stock at a price of $14.6656. The Company
also paid a 17% Value Added Tax on the cash payments. The warrants had a fair
value of $2,473,917.  The placement commission and the warrants were accounted
for as a cost of financing. Accordingly, the proceeds of the sale were recorded
net of the placement commission.

     On August 23, 2000, the Company entered into the Common Stock Investment
Agreement with Halifax Fund, L.P., a private fund organized under the laws of
the Cayman Islands, providing for a $5 million equity financing through a sale
of 492,459 shares of the Company's common stock to Halifax Fund, L.P. In
connection with this equity financing, the Company issued the following warrants
to Halifax Fund, L.P.: (1) five-year warrants to purchase 196,984 shares of the
Company's common stock at the initial exercise price of $14.6656 per share, (2)
adjustment warrants to purchase a number of shares of common stock pursuant to a
certain formula set forth in the written agreement, and (3) one-year warrants to
purchase 246,229 shares of common stock at the initial exercise price of
$10.15313 per share.

     On September 19, 2000, the Company entered into a Letter Agreement with
Halifax Fund, L.P., amending the Common Stock Investment Agreement of August 23,
2000. According to the Letter Agreement, Halifax Fund, L.P., provided to the
Company an additional $5,000,000 equity financing in consideration for the same
number of shares and warrants as purchased by it in connection with the first
$5,000,000 financing described above. Therefore, Halifax Fund, L.P. has
purchased in the aggregate (1) 984,918 shares of the Company's common stock, (2)
adjustment warrants to purchase a number of shares of common stock pursuant to a
certain formula set forth in the written agreement, (3) five-year warrants to
purchase 393,968 shares of the Company's common stock, and (4) one-year warrants
to purchase 492,458 shares of the Company's common stock for a total
consideration of $10 million.  The adjustment warrants, the five year warrants
and the one year warrants had a fair market value of $3,135,118, $3,295,723 and
$2,593,432, respectively.

     The adjustment warrants were issued to the Halifax as an inducement to
purchase the 984,918 shares of common stock of the Company and the adjustment
warrants were intended to provide Halifax Fund, L.P. certain investment value
protection in case the market price of the

                                       47
<PAGE>

Company's common stock declined below $11.68. The adjustment warrants were
exercisable until September 19, 2005 and had an exercise price of $0.0. The
adjustment warrants were exercisable into such number of shares as is derived by
subtracting 984,918 from the quotient of (i) 1,150,000 over (ii) the average of
the 20 lowest daily trades for a share of common stock during the period
starting 15 trading days after the day on which a registration statement
covering the initial shares is first declared effective by the commission and
ending on the 100th trading day thereafter.

     On April 26, 2001, Halifax Fund, L.P., Epicenter Venture Finance Ltd. and
Winnburn Advisory Group exercised their adjustment warrants, which were granted
pursuant to sales of common stock and conversions of debt to common stock of the
Company on August 23, 2000 and September 19, 2000 and were issued an additional
1,885,150 shares of common stock for no additional consideration.  Of the
1,885,150 shares of common stock issued, 444,846 were part of an inducement to
convert debt to equity.  The Company recognized $2,380,000 of interest expense
representing fair market value of the common stock issued.  The remaining
balance of shares were accounted for as a cost of raising equity in the
statement of stockholders' equity.

     In connection with the sale of the foregoing securities to Halifax Fund,
L.P., the Company paid placement fees to the Shemano Group and Koor Underwriters
and Issuers Ltd.  The Shemano Group, Inc., received $500,000 (5% of the
$10,000,000 purchase price) as a placement commission and five-year warrants to
purchase 400,000 shares of the Company's common stock at an exercise price of
$14.4456 per share. The Shemano warrants had a fair value of $3,346,183.  The
Koor Underwriters and Issuers Ltd. received $200,000 (2% of the $10,000,000
purchase price) as a placement commission and five-year warrants to purchase
200,000 shares of the Company's common stock at an exercise price of $14.4456
per share. The Koors Underwriters warrants had a fair value of $1,673,091.  The
placement commission and the warrants were accounted for as a cost of financing.
Accordingly, the proceeds of the sale were recorded net of the placement
commission.

     On August 23, 2000, the Company entered into a certain Loan Agreement with
Constellation 3D Technology Limited, a British Virgin Islands company
("Constellation Tech") and an affiliate of the Company, pursuant to which
Constellation Tech agreed to open a credit line of up to $6,000,000 for the
Company expiring on February 23, 2001. The credit line was amended to extend the
availability until December 31, 2001. The interest rate for each withdrawal will
be the interest rate of three-month LIBOR plus 3%. Constellation Tech has the
right to convert the loan amount into equity at a price per share of 90% of the
average closing price of the Company's common stock for the 12 trading days
prior to August 23, 2000, which was $10.72.

     In connection with this credit line, Constellation Tech received a three-
year warrant (the "Signing Warrant') to purchase 20,000 shares of the Company's
common stock, which warrant had an exercise price of $11.50 and is exerciseable
from August 23, 2000 to August 23, 2003.

     In connection with the credit line, Constellation Tech also had the right
to receive a three-year warrant to purchase 10,000 shares of the Company's
common stock upon each withdrawal made by the Company from this credit line.
The exercise price of such warrants is

                                       48
<PAGE>

equal to $11.50. The Company withdrew $1,000,000 on August 23, 2000 and
therefore received a total of 30,000 warrants on such date. The fair value
ascribed to the 30,000 warrants was approximately $117,000 and was be recorded
as deferred financing cost and is to be amortized as interest expense over the
remaining term of the credit line. The Company made no additional withdrawals
under the credit line.

     Up to one year from the Company's last withdrawal from the credit line,
Constellation Tech has the right (the "Right'') to purchase up to 103,306 shares
of common stock per $1,000,000 of principal extended. The right has an exercise
price of $9.648 and the Right may only be exercised if the aggregate exercise
price is at least $2,000,000. The Right expires one year from the day of the
last withdrawal. The fair value ascribed to the Right was approximately
$763,000, and was recorded as deferred financing cost and amortized to interest
expense over the term of the credit line. At December 31, 2000, the Company has
utilized $1,000,000 of this credit facility.

     Constellation Tech is a related party.  Constellation Tech currently has
the power to vote 26,089,283 shares of common stock of the Company, representing
40.9% of our issued and outstanding shares of common stock. See "Item 12.
Security Ownership of Certain Beneficial Owners and Management."

     On December 24, 1999 the Company issued $1,600,000 in principal amount of
8% subordinated debentures due October 31, 2001 to Winnburn Advisory
("Winnburn"). The original conversion terms provided that the notes would be
converted at the price of the greater of (A) the average market price of the
common stock over a period of twenty (20) trading days preceding any applicable
date of conversion (the "Conversion Date"), or (B) $16.67.

     In order to induce Winnburn to convert its debentures into common stock,
the Company agreed to: (i) amend the then applicable conversion price, $16.67,
to $10.1531; and (ii) offer Winnburn 83,048 and 66,439 common stock purchase
warrants.  On August 23, 2000, an aggregate of $1,600,000 and accrued interest
of $86,399 of was converted by Winnburn into 166,097 shares of common stock.  As
a result of the amendment of the conversion price, the Company recognized an
additional interest expense of $650,000 based on the excess of the fair values
of the common stock transferred over the fair value of the common stock issuable
pursuant to the original conversion terms. The Company also recognized an
addition to paid-in capital of stockholders' equity.  Winnburn also received
one-year warrants to purchase 83,048 shares of common stock at an exercise price
of $10.1531 per share and five-year warrants to purchase 66,439 shares of common
stock at an exercise price of $14.6656 per share.  The fair value ascribed to
the warrants was approximately $590,000. Such amount was recorded as interest
expense and as an additional paid-in capital of stockholders' equity.

     On October 29, 1999 and November 18, 1999, the Company borrowed $300,000
and $1,000,000, respectively, from Epicenter Venture Finance Limited
("Epicenter"). The aggregate $1,300,000 loan had an annual interest rate of 10%.
The loan was scheduled to mature on the earlier of July 31, 2000 or upon the
Company securing various levels of financing.

                                       49
<PAGE>

     In order to induce Epicenter to convert its loan into common stock, the
Company agreed to offer Epicenter: (i) the right to convert the note into common
stock at a conversion rate of $10.1531 per share, and (ii) 55,241 common stock
purchase warrants.  On August 23, 2000, the principal amount of $1,300,000 plus
interest of $102,163 on the loan was converted by Epicenter into 138,102 shares
of common stock. The shareholder also received one-year warrants to purchase
69,051 shares of common stock at an exercise price of $10.1531 per share and
five-year warrants to purchase 55,241 shares of common stock at an exercise
price of $14.6656 per share. The fair value ascribed to the warrants was
approximately $490,000. Such amount was recorded as interest expense and as an
additional paid-in capital of stockholders' equity.

     On August 22, 2000, in consideration of the assignment of patents to the
Company by Mr. Schwartz, the Chief Technology Officer of the Company at the
time, and Reflekt Technology, Inc., a Massachusetts corporation, of which Mr.
Schwartz is the President, sole director and sole stockholder, the Company
granted jointly to Mr. Schwartz and Reflekt Technology, Inc. a warrant to
purchase 10,000 shares of the Company's common stock. The patents were valued by
the Company's officers based upon the patents' perceived benefit to the Company
and the projected cost of independently developing comparable patented
technology for use in the Company's products.

     The warrant has an exercise price of $11.25 per share and is exerciseable
until August 22, 2004. The fair value ascribed to the warrants was approximately
$56,000. Such amount was recorded as a non-cash compensation charge to
operations.

     The nature of the patents assigned to the Company are as follows:

     U.S. Patent No. 5,982,740, (issued on November 9, 1999). This patent covers
     -------------------------
     a disc for storing digital information comprising a plurality of adhesively
     bonded sub discs.

     U.S. Patent No. 6,080,288, (issued on June 27, 2000). This patent covers a
     -------------------------
     system for electro depositing a metal layer on a substrate using a rotary
     jet planarizer.

     U.S. Patent No. 6,086,728 (issued on July 11, 2000).
     -------------------------
     This patent covers the cross flow metalizing of compact discs.

     U.S. Patent No.  5,803,968 (issued on September 8, 1998)
     --------------------------
     This patent covers a compact disc spin coater.

     U.S. Patent No. 5,673,195 (issued on September 30, 1997)
     -------------------------
     This patent covers a compact disc tracking system and method.

     U.S. Patent No. 5,518,599 (issued on May 21, 1996)
     -------------------------
     This patent covers cross flow metalizing of compact discs.

     On August 18, 2000, the Company granted Blank Rome Comisky & McCauley LLP a
warrant to purchase 5,555 shares of the Company's common stock in order to
reduce the amount of the Company's outstanding legal fees due to Blank Rome
Comisky & McCauley LLP by Fifty

                                       50
<PAGE>

Thousand Dollars ($50,000.00). Blank Rome Comisky & McCauley LLP has served as
the Company's legal counsel. The warrant currently is exercisable at a price of
$0.001 per share and will terminate on July 31, 2005.

     On August 17, 2000, the Company entered into a Common Stock Investment
Agreement pursuant to which the Company sold to TCO Investment, Inc ("TCO")
25,000 shares of the Company's common stock for an aggregate of $250,000.  The
Company also issued TCO adjustment warrants as an inducement to purchase the
25,000 shares of common stock of the Company and provide TCO certain investment
value protection in case the market price of the Company's common stock declined
below $11.68.  The adjustment warrants were exerciseable until August 17, 2005
and had an exercise price of $0.0.  The fair value ascribed to the adjustment
warrants was approximately $73,391.

     On February 14, 2001, TCO was issued 30,583 shares of the Company's common
stock upon the exercise of adjustment warrants, which shares were valued at
$212,170 based upon the Company's common stock on February 14, 2001. All the
shares issued pursuant to the exercise of the adjustment warrants were treated
as adjustments to the initial investments and were recorded in the stockholders'
equity section as a credit to common stock, for the par value of the shares, and
a debit to additional paid in capital.

     As an inducement for TCO to purchase 25,000 shares of common stock, on
August 18, 2000, the Company issued Guldborg International and Farpell Inc., the
principals of TCO, five-year warrants to purchase 15,000 and 10,000 shares of
the Company common stock, respectively.  The warrants have an exercise price of
$11.50 and expire on August 18, 2005. The aggregate fair value ascribed to the
warrants was $190,875.  The placement commission and the warrants were accounted
for as a cost of financing. Accordingly, the proceeds of the sale were recorded
net of the placement commission.

     On May 11, 2000 the Company granted options to a non-employee consultant
who provided business development services to purchase 450,000 shares of the
Company's common stock at an exercise price of $5.00 per share when the fair
value was $14.50. The option to purchase the shares vested on June 30, 2000 and
will expire in May 2005. In connection with the issuance, the Company recorded a
non-cash compensation charge to operations of $4,293,000, representing the fair
value of the issuance. This amount is included in the marketing expense for the
year ended December 31, 2000.

     On August 22, 2000, the Company issued options to purchase 390,000 shares
of common stock to Vladimir Schwartz, the Chief Technology Officer of the
Company at the time, as compensation for services. Of the total grant, 140,000
options vest immediately and 250,000 options vest after one year from the date
of the grant. The exercise price is $11.25 per share, which was the market price
at the time of grant, and expires on August 22, 2004. The fair market value of
the options was $2,563,143. Consistent with APB 25, accounting treatment for
employee stock options, the option grant did not result in an accounting charge.

     On November 9, 2000 the Company granted options to three directors of the
Company to purchase 5,000 shares each of the Company's common stock at an
exercise price of $1.00 per share. The option to purchase the shares vests on
May 26, 2001 and will expire in May 2006. In

                                       51
<PAGE>

connection with the issuance, the Company recorded a non-cash compensation
expense of $36,321 with an offsetting credit to additional paid in capital,
representing the fair value of the issuance. Compensation expense will be
recorded over the vesting period.

     During the fourth quarter of 2000, the Company granted options to non-
employee consultants who provide services to purchase 215,000 shares of the
Company's common stock at an exercise price of $6.25 per share. The options to
purchase the Company's common stock vests over the next four years and will
expire in December 2005. In connection with the issuance, the Company recorded a
non-cash expense to operations of $555,255, representing the fair value of the
options granted. The non-cash expense amount is represented as $512,671 in
marketing expenses and $42,584 in general and administrative expenses for the
year ended December 31, 2000. Compensation expense will be recorded over the
vesting period.

     On December 1, 1999, the Company entered into a Placement Agency Agreement
and Warrant Agreement dated December 1, 1999 (the "Agency Agreement" and
"Warrant Agreement" respectively) with Sands Brothers & Co., Ltd. ("Sands
Brothers") which obligates Sands Brothers to raise through the placement of the
Company's securities, on a best efforts basis, a minimum of $4.0 million (the
"Minimum Amount") and, as amended on March 23, 2000, a maximum of $120.0 million
for the Company. By the face of the March 23, 2000 amendments to the Agency and
Warrant Agreements, the Company was to issue to Sands Brothers warrants to
purchase 1,050,000 shares at an exercise price of $3.67 per share for the
Minimum Amount of securities sold, and warrants to purchase 600,000 shares for
each $1.0 million of the Company's securities sold up to $25.0 million (the
"Additional Placement Agent Warrants") at an exercise price equal to a 40%
discount to the average of the bid price of the Company's common stock for the
120 day period prior to any closing, but in no event less than $5.00 per share.
Pursuant to the Agency Agreement and Warrant Agreement, on March 24, 2000, Sands
Brothers raised $4 million for the Company from Sands Brothers Venture Capital
Associates LLC, an affiliate of Sands Brothers. The $4 million investment in the
Company was made through a subordinated convertible debenture due on September
24, 2001. Pursuant to the provisions in the Agency Agreement, the Company issued
to Sands Brothers warrants (the "Warrants") to purchase 1,050,000 and 2,400,000
shares of common stock at the prices of $3.67 and $15.13, respectively.   As of
the date of settlement, the Company valued the warrants issued to Sands Brothers
at an aggregate of $10,137,700 and valued the warrants that Sands Brothers
retained at an aggregate of $706,593.

     Both sets of warrants, if enforceable by their terms, expire on December 1,
2004. Such Warrants are in dispute. See "Legal Proceedings" and "Management
Discussion and Analysis of Financial Condition and Results of Operations."

     Unless more specifically indicated otherwise, the Company estimated the
fair value of each warrant which was valued at the grant date by using the Black
Scholes option-pricing model with the following weighted average assumptions
used for grants during the year ended December 31, 2000: no dividend yield;
expected life equal to the term to maturity of the subject warrant; expected
volatility of 80%; and risk-free interest rates of 5.76% to 6.26%.

                                       52
<PAGE>

     Unless indicated otherwise, the purpose of each of the foregoing sales was
to raise additional capital for the Company and each of the foregoing sales of
securities was to a person who is not affiliated with the Company.  Except as
set forth above, no compensation expense was recorded for the sale of equity
securities set forth in this Item.

     Except as more specifically described elsewhere, the initial sale and
initial issuance of the foregoing securities were believed to be exempt from
registration under the Securities Act by virtue of Section 4(2) thereof and
Regulation D as transactions not involving any public offering. The recipients
represented their status as accredited investors at the time of subscription and
their intention to acquire securities for investment purposes only and not with
a view to distribution thereof. Appropriate legends were affixed to stock
certificates, warrant certificates and debentures issued in such transactions
and all recipients had adequate access to information about the Company. In the
transactions where securities were exchanged or converted for other securities,
we claim exemption from registration pursuant to Section 3(a)(9) of the
Securities Act, for an exchange of securities with an existing security holder
exclusively, where no commission or other renumeration is paid for soliciting
such exchange.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference is made to the financial statements listed under the heading
"Financial Statements" of Item 14 herein, which financial statements are
incorporated herein by reference in response to this Item 8.

                                       53
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth, as of December 7, 2001, information
regarding the beneficial ownership of the common stock by each person known by
the Company to own beneficially more than five percent (5%) of the issued and
outstanding common stock, based upon filings pursuant to Section 13(d) or (g)
under the Securities Exchange Act of 1934; each of the Company's directors and
named executive officers; and the directors and executive officers as a group.

     For purposes of this table, a beneficial owner of shares of the Company's
common stock includes any person who, directly or indirectly, has or shares
voting power which includes the power to vote, or to direct the voting of, such
shares of the Company's common stock; has or shares investment power which
includes the power to dispose, or to direct the disposition of, such shares of
the Company's common stock; and/or has the right to acquire the shares of the
Company's common stock within 60 days.


<TABLE>
<CAPTION>
                                                                                                        Percent of
                                                                                                           Class
                                                               Amount and                                Assuming
                                                               Nature of                                   Full
          Name and Address of                                  Beneficial          Percent of            Conversion
            Beneficial Owner                                   Ownership          Class /(1)/          By TIC /(2)/
---------------------------------------------               -----------------    ------------         -------------
<S>                                                         <C>                  <C>                  <C>
TIC Target Invest Consulting , LLC /(3)/                     31,366,891 /(4)/       40.9%/(5)/           33.0%

Andre Khayam/(6)/                                            31,366,891 /(4)/       40.9%/(5)/           33.0%

Professor Eugene Levich/(7)/                                 26,542,883/(8)/        41.6%                27.9%

Leonardo Berezowsky/(7)/                                     26,240,633/(9)/        41.2%                27.6%

Lev Zaidenberg/(7)/                                          26,180,433/(10)/       41.1%                27.5%

Constellation 3D Technology Limited /(11)/                   26,089,283 /(12)/      40.9%                27.4%

United European Enterprises Ltd. /(13)/                      26,089,283 /(12)/      40.9%                27.4%

Constellation Group Investments Inc. /(14)/                  26,089,283 /(12)/      40.9%                27.4%

Markus Banzer /(15)/                                         26,089,283 /(12)/      40.9%                27.4%

Hubert Buchel /(16)/                                         26,089,283 /(12)/      40.9%                27.4%

Criterion Treuunternehmen reg. /(17)/                        26,089,283 /(12)/      40.9%                27.4%
</TABLE>

                                       54
<PAGE>

<TABLE>
<CAPTION>
                                                                                                        Percent of
                                                                                                           Class
                                                               Amount and                                Assuming
                                                                Nature of                                  Full
          Name and Address of                                  Beneficial         Percent of            Conversion
            Beneficial Owner                                   Ownership          Class /(1)/          By TIC /(2)/
---------------------------------------------               ----------------     ------------         -------------
<S>                                                         <C>                  <C>                  <C>
The Palladin Group, L.P. /(18)/                              7,782,898 /(19)/       12.2%                 8.9%

Halifax Fund L.P. /(20)/                                     4,598,111/(21)/         7.2%                 4.8%

Michael Goldberg/(7)/                                          518,300/(22)/          *                    *

Ronen Yaffe/(7)/                                               330,000/(23)/          *                    *

Val Mandel/(7)/                                                  5,045/(24)/          *                    *

Stuart Garawitz/(7)/                                             5,000/(25)/          *                    *

Joseph Shefet/(7)/                                               5,000/(26)/          *                    *

All directors and executive officers as a group             28,128,473/(27)/        44.1%                29.6%
</TABLE>

_______________________________________

*   Beneficial ownership of less than 1%.

(1)  Calculated on the basis of 63,759,850 shares of common stock. The
     63,759,850 shares represent  (i) 50,713,087 shares issued and outstanding
     as of December 7, 2001, i.e., excluding 500,000 shares held by
     Constellation 3D Trust LLC since Constellation 3D Trust LLC is the
     Company's wholly-owned subsidiary, and (ii) 13,046,763 shares issuable upon
     the exercise of warrants or conversion of notes which are exercisable or
     convertible within 60 days of December 7, 2001.

(2)  Calculated on the basis of 95,126,741 shares of common stock. The
     95,126,741 shares represent  (i) 50,713,087 shares issued and outstanding
     as of December 7, 2001, i.e., excluding 500,000 shares held by
     Constellation 3D Trust LLC since Constellation 3D Trust LLC is the
     Company's wholly-owned subsidiary, (ii) 13,046,763 shares issuable upon the
     exercise of warrants or conversion of notes which are exercisable or
     convertible within 60 days of December 7, 2001 and (iii) 31,366,891 shares
     of common stock issued to TIC Target Invest Consulting, LLC upon conversion
     of the Note as described in footnote (4) below.

(3)  The business address of TIC Target Invest Consulting, LLC is Churer Strasse
     35, Ch-9470 Buchs, SG, Switzerland.

(4)  TIC Target Invest Consulting, LLC ("TIC") currently possess investment
     power and Constellation 3D Technology Limited ("Con Tech") currently
     possesses voting power with respect to 26,089,283 shares of common stock of
     the Company (the "Designated Securities"). In

                                       55
<PAGE>

     addition, TIC is the beneficial owner of 31,366,891 shares of our common
     stock as a result of its right to acquire the Note and Option within 60
     days, and convert the outstanding principal and interest of the Note into
     our common stock. The 31,366,891 share figure assumes the outstanding
     principal and interest the potential conversion of the maximum amount of
     principal and interest under the Note is $20,263,012. See "Potential Change
     of Control - The TIC Target Invest Consulting, LLC Financing Arrangement."

(5)  Assumes that TIC retains the Designated Securities and does not receive the
     Conversion Shares. See footnote (4) and "Potential Change of Control - The
     TIC Target Invest Consulting, LLC Financing Arrangement."

(6)  Mr. Khayam is the sole managing member of TIC Target Invest Consulting ,
     LLC. Mr. Khayam's business address is Churer Strasse 35, Ch-9470 Buchs, SG,
     Switzerland.

(7)  The business address of such person is 230 Park Avenue, Suite 453, New
     York, New York 10169.

(8)  Professor Levich is the Chairman of the Company's Board of Directors, the
     Company's Chief Executive Officer and President and a director and/or
     executive officer of Constellation 3D Technology Limited, United European
     Enterprises Ltd. and/or Constellation Group Investments Inc. Certain
     members of Professor Levich's family are among the beneficiaries of the
     Alex-L Foundation. See footnote (12). 26,542,883 shares represent
     26,089,283 shares for which Constellation 3D Technology Limited has voting
     power over, 3,600 shares owned by Professor Levich, and 450,000 shares of
     common stock issuable upon the exercise of options, which are exercisable
     within 60 days of December 7, 2001.

(9)  Mr. Berezowsky is the Company's Senior Vice President of Finance, Chief
     Financial Officer, member of the Board of Directors, and an executive
     officer of Constellation Group Investments Inc. and Constellation 3D
     Technology Limited. Mr. Berezowsky and certain members of his family are
     among the beneficiaries of the Lediligi Foundation.  See footnote (12).
     26,240,633 shares represent 26,089,283 shares and warrants for which
     Constellation 3D Technology Limited has voting power over, 1,350 shares
     owned by Mr. Berezowsky, and 150,000 shares of common stock issuable upon
     the exercise of options, which are exercisable within 60 days of December
     7, 2001.

(10) Mr. Zaidenberg is a member of the Company's Board of Directors, Director of
     Business Development, and a director and/or executive officer of
     Constellation 3D Technology Limited, United European Enterprises Ltd.
     and/or Constellation Group Investments Inc.  Certain members of Mr.
     Zaidenberg's family are among the beneficiaries of the Lion & Heart
     Foundation. See footnote (12). 26,180,433 shares represent 26,089,283
     shares and warrants for which Constellation 3D Technology Limited has
     voting power over, 1,150 shares owned by Mr. Zaidenberg, and 90,000 shares
     of common stock issuable upon the exercise of options, which are
     exercisable within 60 days of December 7, 2001.

(11) The business address of Constellation Group Investments Inc. is 235 West
     76th Street, Suite 8D, NY, NY 10023.

(12) Constellation 3D Technology Limited, a British Virgin Islands company, has
     voting power over 26,089,283 shares of common stock, which were assigned to
     TIC Target Invest Consulting, LLC. Please see footnote (4).  United
     European Enterprises Ltd., a Nevis company, owns approximately 55.5% of the

                                       56
<PAGE>

     voting shares of Constellation 3D Technology Limited.  Constellation Group
     Investments Inc., a British Virgin Islands company, owns approximately
     54.9% of the voting shares of United European Enterprises Ltd.  Alex-L
     Foundation, the Lion & Heart Foundation and Lediligi Foundation, three
     Liechtenstein trusts, have beneficial ownership of all of the voting shares
     of Constellation Group Investments Inc.  Markus Banzer, Hubert Buchel and
     Criterion Treuunternehmen reg., are the respective sole trustees of the
     foregoing trusts.  No individual, trust or business entity controls the
     three trustees. Certain members of Professor Eugene Levich's family are
     among the beneficiaries of the Alex-L Foundation. Certain members of Lev
     Zaidenberg's family are among the beneficiaries of the Lion & Heart
     Foundation. Leonardo Berezowsky and certain members of his family are among
     the beneficiaries of the Lediligi Foundation.  Please see the chart set
     forth below for an illustration of the foregoing ownership structure.

(13) The business address of United European Enterprises Ltd. is 56 Mazah Street
     Tel Aviv, Israel 55905

(14) The business address of Constellation Group Investments is c/o Euro-
     American Trust and Management Services Limited, P.O. Box 3161 Road Town,
     Tortola, British Virgin Islands.

(15) The business address of Mr. Banzer is Gr. Bongert 9, Triesen,
     Liechtenstein.

(16) The business address of Mr. Buchel person is Salums 63, Gamprin,
     Liechtenstein.

(17) The business address of Criterion Treuunternehmen reg. is Austr. 49, Vaduz,
     Liechtenstein.

(18) The business address of The Palladin Group, L.P. is 195 Maplewood Avenue,
     Maplewood, New Jersey 07040.

(19) The Palladin Group L.P. acts as investment manager to Halifax Fund L.P.,
     DeAM Convertible Arbitrage Fund Ltd. and Gleneagles Fund Company. In such
     capacity, The Palladin Group L.P. shares voting power and investment power
     on 7,782,898 shares of common stock of the Company with these entities.
     The 7,782,898 shares of common stock include (a) 4,598,111 shares owned by
     Halifax Fund L.P. (see footnote 21 below), (b) 1,632,787 shares owned by
     DeAM Convertible Arbitrage Fund Ltd all of which are issuable upon the
     exercise of warrants or conversion of notes which are exercisable or
     convertible within 60 days of December 7, 2001, and (c) 1,552,000 shares
     owned by Gleneagles Fund Company, 837,714 of which are issuable upon the
     conversion of warrants which are exerciseable within 60 days of December 7,
     2001. Palladin expressly disclaims beneficial ownership of and pecuniary
     interest in all of the shares of our common stock owned by Halifax, DeAm
     and Gleneagles.

(20) The business address of Halifax Fund, L.P. is c/o The Palladin Group, L.P.
     195 Maplewood Avenue, Maplewood, New Jersey 07040.

(21) The 4,598,111 shares include (a) 2,931,445 shares of common stock issued
     and outstanding, (b) 1,666,666 shares issuable upon the exercise of
     warrants which are exerciseable within 60 days of December 7, 2001.

(22) Mr. Goldberg is the Company's Secretary, Director of Legal Affairs, and
     member of the Company's Board of Directors. 518,300 shares represent
     143,300 shares of common stock issued and outstanding and 375,000 shares of
     common stock issuable upon the exercise of options, which are exercisable
     within 60 days of December 7, 2001.

                                       57
<PAGE>

(23) Mr. Yaffe is the Company's Treasurer. The 330,000 shares include 330,000
     shares of common stock issuable upon the exercise of options, which are
     exercisable within 60 days of December 7, 2001.

(24) Mr. Mandel is a member of the Company's Board of Directors.  The 5,045
     shares include 5,000 shares of common stock issuable upon the exercise of
     options, which are exercisable within 60 days of December 7, 2001 and (ii)
     45 shares owned by his wife.

(25) Mr. Garawitz is a member of the Company's Board of Directors. The 5,000
     shares include 5,000 shares of common stock issuable upon the exercise of
     options, which are exercisable within 60 days of December 7, 2001

(26) Mr. Shefet is a member of the Company's Board of Directors. The 5,000
     shares include 5,000 shares of common stock issuable upon the exercise of
     options, which are exercisable within 60 days of December 7, 2001

(27) The 28,128,473 shares include (a) 149,100 shares of common stock owned by
     Messrs. Levich, Zaidenberg, Berezowsky, and Goldberg total, (b) 1,810,045
     shares of common stock issuable upon the exercise by Messrs. Levich,
     Zaidenberg, Berezowsky, Goldberg, Yaffe, Garawitz and, Mandel and Shefet of
     options which are exercisable within 60 days of December 7, 2001, (c) 45
     shares owned by Mr. Mandel's wife, (d) 26,089,283 shares of common stock
     over which TIC Target Invest Consulting LLC has direct or indirect
     investment power and Constellation 3D Technology Limited, United European
     Enterprises Ltd., Constellation Group Investments Inc., and the trustees of
     certain trusts have direct or indirect voting  power. See footnotes (4)
     (12), and (e) 80,000 shares of common stock owned by Craig Weiner, the
     Company's General Counsel, all of which are issuable upon the exercise of
     options, which are exercisable within 60 days of December 7, 2001.

Potential Change of Control

The TIC Target Invest Consulting, LLC Financing Arrangement

     As of November 17, 2001, the Company entered into a loan agreement (the
"Company Loan Agreement") and an option agreement (the "Option Agreement") with
Con Tech, Con Tech entered into a loan agreement (the "TIC Loan Agreement") and
security agreement (the "Security Agreement") with TIC, and the Company, Con
Tech and TIC entered into Assignment Agreement (the "Assignment Agreement") and
a Security Holders Agreement (the "Security Holders Agreement").

     Pursuant to the Company Loan Agreement and the Option Agreement, Con Tech
is required to loan the Company (the "Company Loan") $15 million by
approximately December 31, 2001, subject to certain conditions including the
funding of the TIC Loan (described below). Con Tech also has the right to lend
the Company up to an additional $5 million at any time on or prior to November
16, 2002. The Note (the "Note") issued pursuant to the Company Loan Agreement
will bear interest at a rate of 8% per annum, which interest compounds annually
and is payable upon the conversion or maturity of the Note. To secure its
performance under the Company Loan Agreement, the Company has agreed to give Con
Tech a $1,250,000 security deposit for a period of eighteen months.

                                       58
<PAGE>

     Pursuant to the Option Agreement, on November 19, 2002 the unpaid principal
and accrued interest amount of the Note shall automatically be converted into
shares of common stock of the Company at a conversion rate of $0.646 per share
(the "Note Conversion Rate"). If Con Tech assigns the Option Agreement to TIC or
another party, the holder of the Note shall, from the 45th business day after
the initial funding under the Company Loan Agreement, have the right to, and, as
of November 19, 2002, be required to convert the unpaid principal and interest
amount of the Note into shares of common stock of the Company at the Note
Conversion Rate.

     The Company projects that, in connection with a $15 million loan under the
Company Loan Agreement, it will receive proceeds of approximately $13.7 million,
net of investment banking, legal and other fees and expenses.

     Pursuant to the TIC Loan Agreement, TIC is required to loan Con Tech $15
million by approximately December 31, 2001, subject to certain conditions (the
"TIC Loan"). TIC also has the right to lend Con Tech up to an additional $5
million at any time on or prior to November 16, 2002, which funds are required
to be used to further fund the Company Loan. The TIC Loan will bear interest at
a rate of 8% per annum, which interest compounds annually and is payable upon
the maturity of the TIC Loan on October 1, 2006. To secure the performance of
its obligations under the TIC Loan, Con Tech has granted TIC a security interest
in the Company Loan Agreement, the Note and the Option Agreement.

     In order to further induce TIC to enter into the TIC Loan Agreement, Con
Tech assigned to TIC all of its beneficial interests in the Company, 26,089,283
shares of common stock of the Company (the "Designated Securities"), pursuant to
the Assignment Agreement. The Assignment Agreement provides that TIC may not
sell, assign or otherwise transfer ownership of such Designated Securities to
anyone other than Con Tech but may make economic use of the Designated
Securities. In addition, pursuant to the Assignment Agreement, TIC granted Con
Tech an irrevocable proxy to vote the Designated Securities in Con Tech's
discretion.

     The Assignment Agreement further provides that TIC shall, after January 18,
2002, have the right to, and, as of November 18, 2002, have the obligation to
transfer the Designated Securities back to Con Tech (the "Reassignment"). If and
when the Designated Securities are transferred by TIC to Con Tech: (i) Con Tech
shall transfer and assign to TIC the Company Loan and all related agreements,
rights, benefits, obligations, liabilities and indemnities of Con Tech
(including, without limitation, the Note) and the Option Agreement; and (ii) the
TIC Loan shall be cancelled and Con Tech shall be released from all liabilities
under the Note.

     If TIC fails to assign the Designated Securities back to Con Tech, the
Assignment Agreement provides that the TIC Loan shall be cancelled and TIC will
pay Con Tech a cash sum that approximates, as of November 18, 2002, the market
value of the number of shares that constitutes the difference between the: (i)
the Designated Securities; and (ii) the shares then issuable upon conversion of
the Note.

                                       59
<PAGE>

     In connection with the TIC Loan Agreement, the Company granted TIC certain
registration rights with respect to the Designated Securities and shares
issuable upon conversion of the Note.

     The Security Holders Agreement contains a number of agreements between the
Company, Con Tech and TIC relating to the future governance of the Company, the
future sale of common stock of the Company and certain corporate actions of the
Company. With respect to corporate governance, Con Tech agreed to vote all of
its capital stock of the Company and the Company agreed to take all such action
as may be necessary to: (i) maintain seven directors on the Company's Board of
Directors; and (ii) elect and appoint two representatives designated by TIC to
the Company's Board of Directors. Similarly, TIC agreed to vote all of its
capital stock of the Company and the Company agreed to take all such action as
may be necessary to: elect and appoint two representatives designated by Con
Tech to the Company's Board of Directors.

     With respect to future sales of common stock, TIC and Con Tech granted each
other co-sale rights with respect to certain transfers of common stock of the
Company.

     With respect to corporate actions, until the first anniversary of the
conversion of the Note pursuant to the Option Agreement, the Company has agreed
not to, without the prior consent of a majority of the independent directors of
the Company, undertake the following:

o    issue any series of preferred stock;

o    sell, transfer, assign, lease, convey or liquidate or otherwise dispose of
     encumber all or substantially all of its assets;

o    consolidate or merge with or into any other person; o redeem or repurchase
     any shares of common stock;

o    invest in any person not engaged in a business related to the business of
     C3D;

o    issue any shares of common stock or capital stock at a price less than 80%
     of its market price; or

o    enter into any transaction with an affiliate on non-arms length terms and
     conditions.

     The Security Holders Agreement defines an independent director to be a
director who is neither an employee or officer of the Company, affiliate or
director of TIC or Con Tech, nor a stockholder of TIC or Con Tech.

     The Security Holders Agreement provides that the co-sale rights and the
voting rights shall terminate when either TIC or Con Tech beneficially own less
than 10% of the outstanding common stock of C3D. The Security Holders Agreement
further provides that the entire agreement shall terminate on the later to occur
of: (i) November 18, 2002; and (ii) the date TIC and its affiliates own less
than 10% of the outstanding common stock of C3D.

                                       60
<PAGE>

     Historically, Con Tech has had voting control of C3D. Con Tech has
generally had the ability to direct the election of all of our directors and,
directly or indirectly, generally direct C3D's affairs. If TIC either: (i)
acquires the Note and converts it into common stock; or fails to assign the
Designated Shares back to Con Tech by November 18, 2002, Con Tech shall cease to
own an absolute majority of the outstanding common stock of C3D.

     Accordingly, the Company may undergo a change in control and a new person
or group of persons may be able to, directly or indirectly, direct the election
of a majority of the Company's directors and direct the affairs of the Company.
Assuming (i) TIC advances the maximum principal amount (i.e. $20 million) on
December 7, 2001, (ii) no amounts are required to be withheld under the Note for
federal income tax purposes and (iii) interest accrues thereon from December 7,
2001 until February 5, 2002 (sixty days from December 7 2001), approximately
$263,012 of interest would accrue and be payable on the Note on February 7,
2001. Assuming the conversion of the Note on February 7, 2001, TIC would be the
beneficial owner of 31,366,891 shares of common stock, as set forth in the table
above. Based on calculations made in accordance with Rule 13-3(d) of the Act and
there being 95,126,741 shares of common stock issued and outstanding (including,
as outstanding for purposes of determining such number of issued and outstanding
shares, the 31,366,891 shares of common stock issued), represents approximately
33.0% of the outstanding shares of common stock.

     If TIC advances the maximum principal amount (i.e. $20 million) and
interest were to accrue until November 19, 2002, approximately $1,551,781 of
interest would accrue and be payable on the Note on November 19, 2002. Assuming
the conversion of the Note November 17, 2002, TIC would be the beneficial owner
of 33,361,890 shares of common stock (the "Conversion Shares"), which, based on
calculations made in accordance with Rule 13-3(d) of the Act and there being
97,121,740 shares of common stock issued and outstanding (including, as
outstanding for purposes of determining such number of issued and outstanding
shares, the 33,361,890 shares of common stock issued), represents approximately
34.4% of the outstanding shares of common stock.

Constellation 3D Technology Limited

     On October 1, 1999, the Company purchased certain assets of Constellation
3D Technology Limited ("Con Tech") for total consideration of 29,250,000 shares
of common stock and the Company's assumption of certain liabilities and
obligations of Con Tech (the "Acquisition").

     In the Acquisition, the Company acquired the following assets:

o    Con Tech's then sole existing membership interest in TriDStore IP, L.L.C.;

o    all of the issued and outstanding ordinary shares of Constellation 3D
     Vostok;

o    99 ordinary shares of the 100 ordinary shares then allotted of C-TriD
     Israel Ltd.; and

o    all of the issued and outstanding shares of common stock of TriD SV, Inc.

                                       61
<PAGE>

       TriDStore IP, L.L.C. is a Delaware limited liability company formed on
February 2, 1998, formerly known as OMD Devices, L.L.C., until March 9, 1999.
TriDStore IP, L.L.C. owns a substantial majority of the material intellectual
property owned by the Company, which consists mostly of patent registrations and
applications.

       TriD Store Vostok is a Russian company formed on January 15, 1999.  The
Company conducts its Russian operations through TriD Store Vostok. On October 2,
2000, TriD Store Vostok changed its name to Constellation 3D Vostok.

       C-TriD Israel Ltd. is an Israeli company formed on December 2, 1996.  The
Company is the record owner of 99 of 100 allotted ordinary shares but is the
beneficiary of all 100 allotted ordinary shares, one of which is held in trust
for the Company by Rapids Trusts Ltd., an Israeli trust. The Company conducts
its Israeli operations through C-TriD Israel Ltd.

       TriD SV, Inc. is a Delaware corporation formed on August 10, 1998.  As of
January 31, 2001, TriD SV, Inc. has had no operations.




                                       62
<PAGE>

Ownership Structure of Constellation 3D Technology Limited

<TABLE>
<S>                                               <C>                                           <C>
Beneficiaries:  Certain family members            Beneficiaries:  Certain family members        Beneficiaries: Leonardo Berezowsky
of Professor Eugene Levich                        of Lev Zaidenberg                             and certain of his family members
                                                                              |                                                   |
                            |                                                 |                                                   |
                            |                                                 |                                                   |
                            |                                                 |                                                   |
Trustee:  Marcus Banzer     |                      Trustee:  Hubert Buchel    |                  Trustee:  Criterion Treuunter-   |
          |                 |                                 |               |                            nehmen Reg             |
          |                                                   |                                               |                   |
Alex - L Foundation Trust                         Lion & Heart Foundation Trust                  Ledilig/Foundation Trust --------
          |                                                                                                   |
          --------------------------------    Constellation Group Investments Inc.  ---------------------------
                                                                   54.9%
                                                              |
                                               United European Enterprise Ltd.
                                                                   55.5%
                                                              |
                                             Constellation 3D Technology Limited
                                                                   67.4%
                                                              |
                                                     Constellation 3D, Inc.
</TABLE>

                                       1
<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     1. The following financial statements of the Registrant and the Report of
Independent Certified Public Accountants thereon are included herewith in Item 8
above:

<TABLE>
<CAPTION>
                                                                                      Page
<S>                                                                                <C>
Report of Independent Certified Public Accountants...............................      F-1
Report of Independent Public Accountants.........................................      F-2
Consolidated Balance Sheets......................................................      F-3
Consolidated Statements of Operations............................................      F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit)..............      F-5
Consolidated Statements of Cash Flows............................................      F-7
Notes to Financial Statements....................................................      F-9
</TABLE>

     2. Consolidated financial statement schedules and Report of Independent
Accountants in those schedules are included as follows:

Not Applicable.
        3.  Exhibits:

<TABLE>
<CAPTION>
       Number                                                 Description
       ------                                                 -----------
<S>            <C>
       2.1(1)  Asset Purchase Agreement by and between C3D Inc., Constellation 3D Technology Limited, TriD
               Store, Inc., and TriD IP S.A., dated as of October 1, 1999.
       2.2(9)  Agreement and Plan of Merger by and between Constellation 3D, Inc., a Florida corporation,
               and Constellation 3D, Inc., a Delaware corporation, as of January 9, 2001.
       3.1(9)  Certificate of Incorporation of Constellation 3D, Inc., a Delaware corporation.
       3.2(9)  Bylaws of Constellation 3D, Inc., a Delaware corporation.
       4.1(8)  Loan Conversion Rights Agreement, dated December 2, 1998, by and between Argotec Ltd./
               Formula Ventures Ltd. and Constellation 3D Holdings Limited.
       4.2(8)  Letter Agreement converting the outstanding loan in the amount of $600,000 to common stock,
               dated September 12, 2000, between Formula Ventures, L.P. and Constellation 3D, Inc.
       4.3(1)  Investor's Rights Agreement, dated August 10, 1999, by and between C3D Inc. and Seattle
               Investments LLC.
       4.4(2)  Purchase Agreement, dated as of November 11, 1999, by and between Wilbro Nominees Limited and
               C3D Inc.
       4.5(2)  Registration Rights Agreement, dated November 11, 1999, by and between Wilbro Nominees
               Limited and C3D Inc.
</TABLE>

                                       1
<PAGE>

<TABLE>
<S>            <C>
       4.6(10) Letter Agreement, dated October 19, 2000, regarding shares of common stock and warrants owned
               by Wilbro Nominees Limited.
       4.7(2)  Subscription Agreement, dated November 29, 1999, by and between C3D Inc. and MBA-on-Demand,
               L.L.C.
       4.8(2)  Purchase Agreement, dated as of December 24, 1999 between Winnburn Advisory and C3D Inc.
       4.9(2)  Registration Rights Agreement, dated as of December 24, 1999, by and between Winnburn
               Advisory and C3D Inc.
       4.10(8) Letter Agreement converting 8% Series C Convertible Note to common stock, dated August 23,
               2000, by and between Winnburn Advisory and Constellation 3D, Inc.
       4.11(8) Letter Agreement converting 8% Series C Convertible Note for $300,000 to common stock, dated
               August 23, 2000, by and between Epicenter Venture Finance Ltd. and Constellation 3D, Inc.
       4.12(8) Letter Agreement converting 8% Series C Convertible Note for $1,000,000 to common stock,
               dated August 23, 2000, by and between Epicenter Venture Finance Ltd. and Constellation 3D,
               Inc.
       4.13(8) Finder's Agreement, dated July 13, 2000, between Constellation 3D, Inc. and The Shemano
               Group, Inc.
       4.14(8) Letter Agreement concerning warrant registration instructions, dated September 18, 2000,
               between The Shemano Group, Inc. and Constellation 3D, Inc.
       4.15(5) Common Stock Investment Agreement, dated as of August 23, 2000, among Constellation 3D, Inc.
               and Halifax Fund, L.P.
       4.16(5) Registration Rights Agreement, entered into as of August 23, 2000, between Constellation 3D,
               Inc. and Halifax Fund, L.P.
       4.17(5) Common Stock Purchase Warrant No. W1 to Purchase Shares of $.001 par value Common Stock of
               Constellation 3D, Inc., dated August 23, 2000, issued to Halifax Fund, L.P.
       4.18(7) Amended and Restated Common Stock Purchase Warrant No. W2 to Purchase Shares of $.001 par
               value Common Stock of Constellation 3D, Inc., dated September 19, 2000, issued to Halifax
               Fund, L.P.
       4.19(5) Common Stock Optional Warrant No. OW1 to Purchase Optional Units of Constellation 3D, Inc.,
               dated August 23, 2000, issued to Halifax Fund, L.P.
       4.20(7) Amended and Restated Common Stock Optional Warrant No. OW2 to Purchase Optional Units of
               Constellation 3D, Inc., dated September 19, 2000, issued to Halifax Fund, L.P.
       4.21(5) Common Stock Adjustment Warrant No. AW1 to Receive Shares of $.001 par value Common Stock of
               Constellation 3D, Inc., dated August 23, 2000, issued to Halifax Fund, L.P.
</TABLE>

                                       2
<PAGE>

<TABLE>
<CAPTION>
       Number                                                 Description
       ------                                                 -----------
<S>            <C>
       4.22(7) Amended and Restated Common Stock Adjustment Warrant No. AW2 to Receive Shares of $.001 par
               value Common Stock of Constellation 3D, Inc., dated September 19, 2000, issued to Halifax
               Fund, L.P.
       4.23(7) Letter Agreement for Additional Investment, dated September 19, 2000, by and between Halifax
               Fund, L.P. and Constellation 3D, Inc.
       4.24(8) Common Stock Investment Agreement, dated August 31, 2000, among Constellation 3D, Inc. and
               Koor's Investors.
       4.25(8) Letter Amendment to the Common Stock Investment Agreement and Related Agreements, dated
               October 18, 2000, by and between Constellation 3D, Inc. and Koor Underwriters and Issuers Ltd.
       4.26(8) Registration Rights Agreement, dated August 31, 2000, by and between Constellation 3D, Inc.
               and Koor's Investors.
       4.27(8) Common Stock Purchase Warrant No. W1 to Purchase Shares of $.001 par value Common Stock of
               Constellation 3D, Inc., dated August 31, 2000, issued to Koor's Investors.
       4.28(8) Common Stock Optional Warrant No. OW1 to Purchase Optional Units of Constellation 3D, Inc.,
               dated August 31, 2000, issued to Koor's Investors.
       4.29(8) Common Stock Adjustment Warrant No. AW1 to Receive Shares of $.001 par value Common Stock of
               Constellation 3D, Inc., dated August 31, 2000, issued to Koor's Investors.
       4.30(8) Warrant Agreement, dated August 18, 2000, by and between Constellation 3D, Inc. and Blank
               Rome Comisky & McCauley LLP.
       4.31(8) Common Stock Investment Agreement, dated September 12, 2000, among Constellation 3D, Inc. and
               Jacqueline Hershkovitz.
       4.32(8) Registration Rights Agreement, dated September 12, 2000, between Constellation 3D, Inc. and
               Jacqueline Hershkovitz.
       4.33(8) Common Stock Purchase Warrant No. W1 to Purchase Shares of $.001 par value Common Stock of
               Constellation 3D, Inc., dated September 12, 2000, issued to Jacqueline Hershkovitz.
       4.34(8) Common Stock Optional Warrant No. OW1 to Purchase Optional Units of Constellation 3D, Inc.,
               dated September 12, 2000, issued to Jacqueline Hershkovitz.
       4.35(11)Common Stock Adjustment Warrant No. AW1 to Receive Shares of $.001 par value Common Stock of
               Constellation 3D, Inc., dated September 12, 2000, issued to Jacqueline Hershkovitz.
       4.36(8) Contract for Capital Raising, dated August 18, 2000, between Koor Underwriters and Issuers
               Ltd. and Constellation 3D, Inc.
       4.37(8) Common Stock Investment-Term Sheet to purchase up to $250,000 in common stock, dated August
               17, 2000, by and between TCO Investment Inc. and Constellation 3D, Inc.
       4.38(8) Amendment and Supplement to Common Stock Investment-Term Sheet, dated August 18, 2000, by and
               between TCO Investment Inc. and Constellation 3D, Inc.
</TABLE>

                                       3
<PAGE>

<TABLE>
<CAPTION>
       Number                                                 Description
       ------                                                 -----------
<S>            <C>
       4.39(6) Securities Purchase Agreement, dated March 23, 2000, by and between Constellation 3D, Inc.
               and Sands Brothers Venture Capital LLC.
       4.40(6) Registration Rights Agreement dated as of March 24, 2000 by and between Constellation 3D,
               Inc. and Sands Brothers Venture Capital LLC.
       4.41(6) 10% Subordinated Convertible Debenture, dated March 24, 2000, made by Constellation 3D, Inc.
               to Sands Brothers Venture Capital Associates LLC.
       4.42(2) Warrant dated November 11, 1999 issued to Moorwood Investment Limited.
      10.1(1)  Rental Contract, Unprotected According to the Tenants' Protection Law (Various Instructions)
               of 1968 as Drafted into the Tenants' Protection Law (Consolidated Version) of 1972, made and
               signed in Tel Aviv on March 25, 1997.
      10.2(2)  Rental Contract, Unprotected According to the Tenants' Protection Law (Various Instructions)
               of 1968 as Drafted into the Tenants' Protection Law (Consolidated Version) of 1972, made and
               signed in Tel Aviv on February 8, 1998.
      10.3(1)  Agreement N. 356/181298 on the rent of office premises, dated December 18, 1998 between
               MACHMIR Co., Ltd. as "Lessor" and ZAO "TriD Store Vostok" as "Renter."
      10.4(1)  Optima Services Agreement (Member), dated April 23, 1999, by and between Omni Offices Inc.
               and C3D Inc.
      10.5(1)  The Rent Agreement, No. 5/8, dated July 5, 1999, between MSU Science Park as "Lessor" and ZAO
               "TriD Store Vostok" as "Tenant."
      10.6(1)  Attachment No. 1 to The Rent Agreement, No. 5/8, dated July 5, 1999, between MSU Science Park
               as "Lessor" and ZAO "TriD Store Vostok" as "Tenant."
      10.7(2)  Sublease Agreement, dated November 18, 1999, by and between Harex Global Corporation, as
               lessor, and C3D Inc., as lessee.
      10.8(3)  Agreement N. 356A/291299 on the rent of the office premises, dated December 29, 1999 between
               MACHMIR Co., Ltd. as "Lessor" and ZAO "TriD Store Vostok" as "Renter."
      10.9(3)  The Rent Agreement of office premises No. 5/2, dated January 5, 2000, between MSU Science
               Park as "Lessor" and ZAO "TriD Store Vostok" as "Renter."
      10.10(8)  Agreement of Unprotected Tenancy According to Law for Tenant Protection (Miscellaneous
               Instructions) 5728-1968 as Integrated into Law for Tenant Protection (Consolidated Version)
               5732-1972 as Drawn and Signed in Holon on the 30th of August 2000, between Sadav (1988)
               Building and Investment Ltd. and C3D Israel Ltd.
      10.11(1) Employment Agreement dated July 15, 1998, by and between Memory Devices (M.D.) (1996) Ltd.
               and Ronen Yaffe.
</TABLE>
                                       4
<PAGE>

<TABLE>
<CAPTION>

       Number                                                 Description
       ------                                                 -----------
<S>            <C>
      10.12(2) Letter of Intent, dated December 20, 1999, by and between Toolex International N.V. and C3D
               Inc.
      10.13(2) Co-Invention Agreement, dated December 20, 1999, by and between Toolex International N.V. and
               C3D Inc.
      10.14(9) Constellation 3D, Inc. 1999 Stock Option Plan.
      10.15(9) Amendment to the 1999 Stock Option Plan of Constellation 3D, Inc.
      10.16(3) Stock Option Agreement, dated December 27, 1999, made by and between C3D Inc. and Michael L.
               Goldberg, Esquire.
      10.17(8) Contract for Services, dated May 11, 2000, between Constellation 3D, Inc. and Greenland
               Investments, Inc.
      10.18(8) Stock Option Agreement, dated August 22, 2000, made by and between Constellation 3D, Inc. and
               Vladimir Schwartz.
      10.19(8) Warrant Agreement, dated August 22, 2000, by and among Constellation 3D, Inc., TriD Store IP,
               LLC, Reflekt Technology, Inc., and Vladimir Schwartz.
      10.20(3) Placement Agency Agreement, dated December 1, 1999, by and between Sands Brothers & Co., Ltd.
               and C3D Inc.
      10.21(3) Amendment No. 1 to Placement Agency Agreement, dated December 22, 1999 by and between Sands
               Brothers & Co., Ltd. and C3D Inc.
      10.22(6) Amendment No. 2 to Placement Agency Agreement, dated March 7, 2000, by and between Sands
               Brothers & Co., Ltd. and C3D Inc.
      10.23(6) Amendment No. 3 to Placement Agency Agreement, dated March 23, 2000, by and between Sands
               Brothers & Co., Ltd. and C3D Inc.
      10.24(4) Amendment No. 4 to Placement Agency Agreement, dated May 16, 2000, by and between Sands
               Brothers & Co., Ltd. and Constellation 3D, Inc.; Amendment No. 2 to Warrant Agreement dated
               May 16, 2000, between Constellation 3D, Inc. and Sands Brothers & Co., Ltd.
      10.25(4) Amendment No. 5 to Placement Agency Agreement, dated May 31, 2000, by and between Sands
               Brothers & Co., Ltd. and Constellation 3D, Inc.; Amendment No. 3 to Warrant Agreement, dated
               May 31, 2000, between Constellation 3D, Inc. and Sands Brothers & Co., Ltd.; Amendment No. 1
               to Warrant Certificate No. SB-2, dated May 31, 2000, between Constellation 3D, Inc. and Sands
               Brothers & Co., Ltd.
      10.26(4) Amendment No. 6 to Placement Agency Agreement, dated June 28, 2000, by and between Sands
               Brothers & Co., Ltd. and Constellation 3D, Inc.
      10.27(4) Amendment No. 7 to Placement Agency Agreement, dated August 3, 2000, by and between Sands
               Brothers & Co., Ltd. and Constellation 3D, Inc., Amendment No. 4 to Warrant Agreement, dated
               August 3, 2000, by and between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.,
               Amendment No. 2 to Warrant Certificate No. SB-2, dated August 3, 2000, between Constellation
               3D, Inc. and Sands Brothers & Co., Ltd.
</TABLE>

                                       5
<PAGE>

<TABLE>
<CAPTION>
       Number                                                 Description
       ------                                                 -----------
<S>             <C>
      10.28(3)  Warrant Agreement, dated December 1, 1999, by and between Sands Brothers & Co., Ltd. and C3D,
                Inc.
      10.29(6)  Amendment No. 1 to Warrant Agreement, dated March 23, 2000, by and between Sands Brothers &
                Co., Ltd. and C3D, Inc.
      10.30(6)  Warrant Certificate, No. SB-1, dated as of March 24, 2000, issued to Sands Brothers & Co.,
                Ltd.
      10.31(6)  Warrant Certificate, No. SB-2, dated as of March 24, 2000, issued to Sands Brothers & Co.,
                Ltd.
      10.32(8)  Loan Agreement, dated August 23, 2000, by and among Constellation 3D Technology Limited and
                Constellation 3D, Inc.
   10.32.1(11)  Amendment to Loan Agreement, dated March 11, 2001, by and among Constellation 3D Technology
                Limited and Constellation 3D, Inc.
      10.33(8)  Convertible Note, dated August 28, 2000, by and between Constellation 3D Technology Ltd. and
                Constellation 3D, Inc.
      10.34(11) Lease of Corporate Apartment by and between Constellation 3D, Inc. as tenant and Related
                Broadway L.L.C. as landlord dated October 29, 2000.
      10.35(11) Lease of Space by and between Constellation 3D, Inc. as tenant and Cummings Property L.L.C.
                effective November 15, 2000.
      10.36(11) Employment Agreement by and between Constellation 3D, Inc. and Craig Weiner.
      10.37(11) Employment Agreement by and between Constellation 3D, Inc. and Raymond Peter Tellini.
      16.1(8)   Auditor's Resignation Letter dated October 20, 2000
      21.1(11)  Subsidiaries of Constellation 3D, Inc.
</TABLE>
----------------

(1)  Incorporated by reference to exhibits filed with Registration Statement on
     Form 10 filed November 12, 1999.

(2)  Incorporated by reference to exhibits filed with Registration Statement on
     Form 10/A No. 1 filed December 27, 1999.

(3)  Incorporated by reference to exhibits filed with Registration Statement on
     Form 10/A No. 2 filed January 14, 2000.

(4)  Incorporated by reference to exhibits filed with Form 10-Q filed August 14,
     2000.


                                       6
<PAGE>

(5)  Incorporated by reference to exhibits filed with Form 8-K filed August 25,
     2000.

(6)  Incorporated by reference to exhibits filed with Form 10-K/A filed March
     31, 2000.

(7)  Incorporated by reference to exhibits filed with Form 8-K filed October 6,
     2000.

(8)  Incorporated by reference to exhibits filed with Form S-1 filed October 20,
     2000.

(9)  Incorporated by reference to Appendices filed with the Definitive Proxy
     Statement filed January 16, 2001.

(10) Incorporated by reference to exhibits filed with Form S-3 filed February 7,
     2001.

(11) Incorporated by reference to exhibits filed with Form 10-K filed April 2,
     2001.

4.   Reports on Form 8-K

     The following reports on Form 8-K have been filed with the SEC during the
fourth quarter:

     On October 6, 2000 a report on Form 8-K was filed disclosing the amendment
of the Common Stock Investment Agreement with Halifax Fund, L.P. dated September
19, 2000 in connection with an additional financing of $5,000,000, pursuant to
which Halifax Fund, L.P. purchased another 492,459 shares of the Company's
common stock at a price of $10.1531 and received warrants to purchase common
stock.

                                       7
<PAGE>

                                                          Constellation 3D, Inc.
                                                   (A Development Stage Company)



                                               Consolidated Financial Statements
                                               ---------------------------------

                                    Years ended December 31, 2000, 1999 and 1998
                                         and from inception (September 25, 1997)
                                                       through December 31, 2000
<PAGE>

                             CONSTELLATION 3D, INC.
                         (A Development Stage Company)

Index to Financial Statements

<TABLE>
<S>                                                                                                                              <C>
------------------------------------------------------------------------------------------------------------------------------------
Index to Consolidated Financial Statements

Report of Independent Certified Public Accountants.............................................................................  F-1

Report of Independent Public Accountants.......................................................................................  F-2

Consolidated Financial Statements

     Balance Sheets as of December 31, 2000 and 1999...........................................................................  F-3

     Statements of Operations for the years ended December 31, 2000, 1999 and 1998, and the period from September 25, 1997
      (inception) to December 31, 2000.........................................................................................  F-4

     Statement of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2000, 1999 and 1998...............  F-5

     Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998, and the period from September 25, 1997
      (inception) to December 31, 2000.........................................................................................  F-7

Notes to Consolidated Financial Statements.....................................................................................  F-9
</TABLE>
<PAGE>

Report of Independent Certified Public Accountants


Board of Directors and Stockholders of
Constellation 3D, Inc.

We have audited the accompanying consolidated balance sheet of Constellation 3D,
Inc. (a development stage company) and its subsidiaries ("the Company") as of
December 31, 2000 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year ended December 31,
2000 and for the period from September 25, 1997 (inception) through December 31,
2000.  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 audit. We did not audit the consolidated financial
statements of the Company for the period from inception (September 25, 1997) to
December 31, 1999. Such statements are included in the cumulative inception
(September 25, 1997) to December 31, 2000 totals of statements of operations and
cash flows and reflect a net loss of 35% of the related cumulative total. Those
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts for the period from inception
(September 25, 1997) to December 31, 1999 included in the cumulative totals, is
based solely upon the report of the other auditors.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above, present fairly, in all
material respects, the financial position of Constellation 3D, Inc. (a
development stage company) and its subsidiaries at December 31, 2000, and the
results of their operations and their cash flows for the year then ended and for
the period from inception (September 25, 1997) through December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.



BDO Seidman LLP
New York, New York

February 21, 2001 (except for Note 11(c) which is as of March 11, 2001 and Note
11(d) which is as of March 29, 2001)

                                      F-1
<PAGE>

Report of Independent Public Accountants


Board of Directors and Stockholders of
Constellation 3D, Inc.

We have audited the accompanying consolidated balance sheets of Constellation
3D, Inc. (a development stage company) and its subsidiaries ("the Company") as
of December 31, 1999, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the years ended December 31, 1999 and
1998, the period from inception (September 25, 1997) through December 31, 1997,
and the period from inception (September 25, 1997) through December 31, 1999.
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 in accordance with auditing standards generally accepted
in Israel, which do not differ in any material respects from auditing standards
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Constellation 3D,
Inc. (a development stage company) and its subsidiaries at December 31, 1999,
and the results of their operations and their cash flows for the years ended
December 31, 1999 and 1998, the period from inception (September 25, 1997)
through December 31, 1997 and the period from inception (September 25, 1997)
through December 31, 1999 in conformity with generally accepted accounting
principles in the United States.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in the development stage and has generated
no operating revenue to date and will need to raise additional working capital
for future development costs. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


BDO International
Tel-Aviv, Israel


February 22, 2000, (except for Note 11 which
is as of March 24, 2000)

                                      F-2
<PAGE>

                             CONSTELLATION 3D, INC.
                         (A Development Stage Company)
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    December 31,         December 31,
                                                                                        2000                 1999
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                  <C>
ASSETS

Current Assets
 Cash and cash equivalents                                                          $  8,728,600         $  2,030,139
 Prepaid and other                                                                       245,372              150,989
---------------------------------------------------------------------------------------------------------------------
Total Current Assets                                                                   8,973,972            2,181,128

Furniture and Equipment, net                                                             426,293              241,100
---------------------------------------------------------------------------------------------------------------------

Total Assets                                                                        $  9,400,265         $  2,422,228
=====================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities
 Accounts payable and accrued expenses                                              $  1,924,773         $  1,268,404
 Due to related parties                                                                  267,283              360,711
 Convertible Line of Credit, net of discount of $312,968                                 720,278                    -
 Current portion of convertible notes payable, net of discount of                      2,224,906              650,577
  $1,880,847 and $0
 Due to shareholder                                                                            -            1,316,712
---------------------------------------------------------------------------------------------------------------------

Total Current Liabilities                                                              5,137,240            3,596,404
Convertible Notes Payable                                                                      -            2,105,480

Other Long Term Liabilities                                                               39,237               39,969
---------------------------------------------------------------------------------------------------------------------

Total Liabilities                                                                      5,176,477            5,741,853
---------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies

Stockholders' Equity (Deficit)
 Preferred stock, no par value; 10,000,000 shares authorized, 0 issued and
  outstanding                                                                                  -                    -
 Common stock, $.00001 par value; 100,000,000 shares authorized, 43,192,775
  and 41,001,609 issued and outstanding                                                      432                  410
 Additional paid in capital                                                           35,141,895            7,351,299
 Deficit accumulated during the development stage                                    (30,918,539)         (10,671,334)
---------------------------------------------------------------------------------------------------------------------

Total Stockholders' Equity (Deficit)                                                   4,223,788           (3,319,625)
---------------------------------------------------------------------------------------------------------------------

Total Liabilities and Stockholders' Equity (Deficit)                                $  9,400,265         $  2,422,228
=====================================================================================================================
</TABLE>


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

                                      F-3
<PAGE>

                             CONSTELLATION 3D, INC.
                          (A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                  Cumulative Amounts
                                                    From Inception
                                                 (September 25, 1997)                   Year Ended December 31,
                                                                           -----------------------------------------------
                                              Through December 31, 2000          2000             1999             1998
--------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                          <C>                <C>              <C>
OPERATING EXPENSES
 Research and development                           $ 10,097,976            $  4,658,082      $ 2,413,239      $ 1,534,948
 General and administrative                            9,083,440               4,369,384        1,986,392        1,660,477
 Marketing                                             5,784,561               5,686,926           97,635                -
--------------------------------------------------------------------------------------------------------------------------

Total operating expenses                              24,965,977              14,714,392        4,497,266        3,195,425
--------------------------------------------------------------------------------------------------------------------------

OTHER EXPENSES
 Interest expense (income), net                        5,786,098               5,433,399          305,833           (6,985)
 Taxes                                                   166,464                  99,414           63,588            3,462
--------------------------------------------------------------------------------------------------------------------------


Net loss                                            $(30,918,539)           $(20,247,205)     $(4,866,687)     $(3,191,902)
==========================================================================================================================


Net loss per share - basic and
 diluted                                                                    $      (0.49)     $     (0.15)     $     (6.80)
==========================================================================================================================

Weighted average number of shares of
 common stock outstanding - basic
 and diluted                                                                  41,644,812       32,148,978          469,275
==========================================================================================================================
</TABLE>


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

                                      F-4
<PAGE>

                             CONSTELLATION 3D, INC.
                         (A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                             Deficit
                                                 Common Stock                              Accumulated
                                            --------------------       Additional           During the
                                               Shares     Amount    Paid-in Capital      Development Stage     Total
-----------------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>        <C>                  <C>                <C>
Balance, December 31, 1997                          600  $    -       $        3            $ (2,612,745)   $(2,612,742)

Issuance of common stock for cancellation
 of shareholders advances, December 27,
 1998                                         3,749,400      37        4,888,500                       -      4,888,537

Recapitalization, December 27, 1998          25,464,000     255             (255)                      -              -

Net Loss                                              -       -                -              (3,191,902)    (3,191,902)
-----------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1998                   29,214,000     292        4,888,248              (5,804,647)      (916,107)

Debt settlement through the issuance of
 common stock - April 1, 1999                    36,000       -          241,490                       -        241,490

Common stock issued in connection with
 reverse acquisition - October 1, 1999       11,109,765     112          953,093                       -        953,205

Conversion of notes payable - October 22,
 1999                                           608,835       6        1,014,719                       -      1,014,725

Sale of common stock for cash (net of
 issuance cost of $24,995) November 1, 1999      25,509       -           99,999                       -         99,999

Issuance of common stock for services
 November 8, 1999                                 7,500       -           28,750                       -         28,750

Beneficial conversion discount of
 convertible debt - November 11, 1999                 -       -          125,000                       -        125,000


Net loss                                              -       -                -              (4,866,687)    (4,866,687)
-----------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1999                   41,001,609     410        7,351,299             (10,671,334)    (3,319,625)

Deferred interest relating to issuance of
 detachable warrants - March 24, 2000                 -       -        3,880,000                       -      3,880,000

Beneficial conversion discount of
 convertible debt - March 24, 2000                    -       -          120,000                       -        120,000

Noncash stock-based compensation relating
 to issuance of stock options to
 consultant - May 11, 2000                            -       -        4,293,000                       -      4,293,000

Issuance of common stock for cash - August
 17, 2000                                        25,000       -          250,000                       -        250,000

Warrants issued relating to legal services
 rendered - August 18, 2000                           -       -           50,000                       -         50,000

Deferred interest relating to issuance of
 detachable options on line of credit  -
 August 23, 2000                                      -       -          763,000                       -        763,000

Deferred interest relating to issuance of
 detachable warrants on line of credit -
 August 23, 2000                                      -       -          117,000                       -        117,000

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

                                      F-5
<PAGE>

                             CONSTELLATION 3D, INC.
                         (A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

                                   Continued


<TABLE>
<CAPTION>




                                                                                          Deficit
                                                  Common Stock                            Accumulated
                                              --------------------    Additional        During the
                                                Shares     Amount   Paid-in Capital    Development Stage        Total
-----------------------------------------------------------------------------------------------------------------------
<S>                  <C>
Conversion of loan payable - August 23,
 2000                                           138,102       1        1,402,162                      -      1,402,163

Conversion of notes payable - August 23,
 2000                                           166,097       2        1,686,397                      -      1,686,399

Issuance of common stock for cash (net of
 issuance cost of $384,945) - August 23,
 2000                                           492,459       5        4,615,050                      -      4,615,055

Issuance of warrants and modification of
 conversion terms in connection with
 conversion of debt and shareholder loans
 - August 23, 2000                                    -       -        1,730,000                      -      1,730,000

Warrants issued in connection with the
 acquisition of patents - August 28, 2000             -       -           56,000                      -         56,000

Issuance of common stock for cash (net of
 issuance cost of $80,017) - August 31,
 2000                                           197,026       2        1,920,407                      -      1,920,409

Conversion of notes payable - September
 12, 2000                                       380,000       4          681,570                      -        681,574

Issuance of common stock for cash -
 September 12, 2000                              14,774       -          144,000                      -        144,000

Issuance of common stock for cash (net of
 issuance cost of $384,945)- September 19,
 2000                                           492,459       5        4,615,050                      -      4,615,055

Conversion of notes payable - October 12,
 2000                                            49,500       1          544,506                      -        544,507

Issuance of warrants and modification of
 conversion terms in connection with
 convertible debt - October 12, 2000                  -       -           53,000                      -         53,000

Noncash stock-based compensation relating
 to issuance of stock options to directors
 -November 9, 2000                                    -       -           36,321                      -         36,321

Issuance of common stock on cashless
 exercise of stock options - December 7,
 2000                                           235,749       2               (2)                     -              -

Noncash stock-based compensation relating
 to issuance of stock options to
 consultants -December 29, 2000                       -       -          833,135                      -        833,135

Net loss                                              -       -                -            (20,247,205)   (20,247,205)
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000                   43,192,775    $432      $35,141,895           $(30,918,539)  $  4,223,788
=======================================================================================================================
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-6
<PAGE>

                             CONSTELLATION 3D, INC.
                         (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                       Cumulative Amounts
                                                         From Inception
                                                      (September 25, 1997)           Year Ended December 31,
                                                      Through December 31,  ----------------------------------------------
                                                             2000              2000             1999             1998
--------------------------------------------------------------------------------------------------------------------------
<S>     <C>
Cash Flows From Operating Activities
 Net loss                                                $(30,918,539)     $(20,247,205)     $(4,866,687)     $(3,191,902)
 Adjustments to reconcile net loss to net cash
  used in operating activities:
  Noncash stock-based compensation                          5,191,206         5,162,456           28,750                -
  Beneficial conversion feature                               245,000           120,000          125,000                -
  Discount amortization on deferred interest                2,566,185         2,566,185                -
  Depreciation                                                152,042            72,679           40,438           33,129
  Write down of furniture and equipment                        49,750                 -           49,750                -
  Interest expense relating to issuance of warrants         1,115,000         1,115,000                -                -
  Interest expense relating to modification of debt           668,000           668,000                -                -
   conversion rates
  Warrants issued relating to services rendered               106,000           106,000                -                -
  Change in assets and liabilities:
     Prepaid and other                                       (245,372)          (94,383)           5,338         (135,214)
     Accounts payable                                       1,923,181           656,369          844,441          150,343
     Accrued interest on debt                                 434,504           380,876           53,625                -
--------------------------------------------------------------------------------------------------------------------------

Net Cash Used in Operating Activities                     (18,713,043)       (9,494,023)      (3,719,345)      (3,143,644)
--------------------------------------------------------------------------------------------------------------------------

Cash Flows From Investing Activities
 Purchase of furniture and equipment                         (739,241)         (257,872)        (145,986)        (200,197)
 Sale of furniture and equipment                               80,405                 -           80,405                -
 Business acquisition, net of cash acquired                 1,019,413                 -        1,019,413                -
--------------------------------------------------------------------------------------------------------------------------

Net Cash Provided by (Used in) Investing Activities           360,577          (257,872)         953,832         (200,197)
--------------------------------------------------------------------------------------------------------------------------

Cash Flows From Financing Activities
 Proceeds from issuance of common stock                    16,533,056        11,544,519          100,000        4,888,537
 Proceeds from issuance of convertible debt                 7,700,000         4,000,000        3,100,000                -
 Proceeds from borrowings on line of credit                 1,000,000         1,000,000                -                -
 Proceeds from (payments to) shareholders loan              1,541,490                 -        1,541,490       (4,152,521)
 Net changes in other long-term debt                           39,237              (735)          (6,856)          20,480
 Net advances from (repayments to) related party              267,283           (93,428)         (62,079)        (108,277)
--------------------------------------------------------------------------------------------------------------------------

Net Cash Provided by Financing Activities                  27,081,066        16,450,356        4,672,555          648,219
--------------------------------------------------------------------------------------------------------------------------

Net Increase (Decrease) in Cash and Cash Equivalents        8,728,600         6,698,461        1,907,042       (2,695,622)

Cash and Cash Equivalents, beginning of period                      -         2,030,139          123,097        2,818,719
--------------------------------------------------------------------------------------------------------------------------

Cash and Cash Equivalents, end of period                 $  8,728,600      $  8,728,600      $ 2,030,139      $   123,097
==========================================================================================================================

Continued
</TABLE>

                                      F-7
<PAGE>

                             CONSTELLATION 3D, INC.
                         (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   Continued
<TABLE>
<S>     <C>
==========================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for taxes                                       $  166,464   $   99,414    $   63,588     $3,462
Cash paid for interest                                    $  211,500   $  211,500       $  -        $  -

Non-cash Financing and Investing Activities
Deferred financing cost related to detachable warrants    $4,760,000   $4,760,000       $  -        $  -
Conversion of notes payable                                3,927,205    2,912,480     1,014,725          -
Conversion of loans payable                                1,643,653    1,402,163       241,490          -
Net assets disposed of upon acquisition                       66,028            -        66,028          -
Stock issued in reverse acquisition                          953,205            -       953,205          -
==========================================================================================================
</TABLE>

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

                                      F-8
<PAGE>

                             CONSTELLATION 3D, INC.
                         (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  Description of Business and Summary of Significant Accounting Policies

     The accompanying consolidated financial statements include the accounts of
Constellation 3D, Inc. and each of its wholly owned subsidiaries ("C3D" or the
"Company") after elimination of intercompany balances and transactions.

     The Company was incorporated in Florida on December 27, 1995, under the
name Latin Venture Partners, Inc. The name of the Company was changed to C3D
Inc. on March 24, 1999 in anticipation of a transaction with Constellation 3D
Technology Limited, a British Virgin Islands company ("Constellation Tech"). On
December 29, 1999, the Company changed its name from C3D Inc. to Constellation
3D, Inc.

     On October 1, 1999, C3D completed an asset purchase agreement and acquired
substantially all the operations of Constellation 3D Technology Limited
("Constellation Tech") for total consideration of 29,250,000 shares of the
Company's $.00001 par value common stock, and assumption of substantially all
liabilities and obligations of Constellation Tech. Constellation Tech is a
related party by virtue of it owning a majority of the shares of the Company's
common stock as well as having common directors and officers.

     The acquisition of Constellation Tech was treated as a reverse acquisition
whereby C3D was acquired by Constellation Tech, with the balance sheets being
combined using each company's historical cost basis. The results of operations
include that of both companies from the date of acquisition forward. The
financial statements for the period prior to the date of acquisition are those
of Constellation Tech. As the transaction was a reverse acquisition with a
public shell with no operations, no pro forma information related to this
transaction is provided. As disclosed in the original Form 10-K, Constellation
Tech had beneficial ownership of 67.4% of the Company's issued and outstanding
shares of common stock. As of December 7, 2001, Constellation Tech currently has
the power to vote 26,089,283 shares of common stock of the Company, representing
40.9% of the issued and outstanding shares of common stock. Please see "Item 12.
Security Ownership of Certain Beneficial Owners and Management."

     The equity section of the balance sheet and the net loss per share of the
Company are retroactively restated to reflect the effect of the exchange ratio
established in the asset purchase agreement. Accordingly, the 29,250,000 shares
of common stock issued by Constellation 3D, Inc. to Constellation Tech in
connection with the reverse acquisition have been adjusted to appear on the
consolidated statement of stockholders' equity (deficit) as the 29,250,000
shares of common stock outstanding on the statement of stockholders' equity
(deficit) prior to the reverse acquisition. Similarly the consolidated statement
of stockholders' equity (deficit) section has been adjusted to reflect the
"issuance" of 11,109,765 shares of common stock, as of the date of the reverse
acquisition, when in fact such shares were actually issued Constellation 3D,
Inc. prior to the reverse acquisition.

     The Company has developed what it believes to be a state-of-the-art
optical, data storage product that it believes surpasses the physical limits of

                                      F-9
<PAGE>

two-dimensional memory technology. Research and development work on the
Company's technology has been conducted and is being conducted in the United
States, Israel, Russia and Ukraine. The Company operates in one business
segment.

     On December 27, 1999, as approved by the requisite number of shares at the
Annual Meeting of Shareholders, C3D Inc. changed its name to Constellation 3D,
Inc. and amended its Articles of Incorporation to (i) increase its authorized
common stock, par value $.00001, from 50,000,000 shares to 100,000,000 shares;
and (ii) to increase its authorized preferred stock, par value $.00001, from 0
to 10,000,000 shares.  On January 18, 2000, a three-for-one forward split of
C3D's Common Stock took effect for shareholders of record as of December 16,
1999, and all per share information for all prior periods have been adjusted
accordingly.

Cash and Cash Equivalents - The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.

Furniture and Equipment - Furniture and equipment are stated at cost.
Depreciation and amortization are computed utilizing straight-line and
accelerated methods over estimated useful lives ranging from three to seven
years.

Marketing Costs - The Company expenses the cost of marketing and advertising as
incurred. Marketing expense includes a noncash compensation charge of $4,805,671
for the year ended December 31, 2000. (See Note 8)

Income Taxes - The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). SFAS 109 requires the recognition of deferred
tax assets and liabilities for the expected future income tax consequences of
events that have been recognized in a company's financial statements or tax
return. Under this method, deferred tax assets and liabilities are determined
based on the temporary differences between the financial statement carrying
amounts and their tax basis using enacted tax rates in effect in the years in
which the temporary differences are expected to reverse. Valuation allowances
are provided when management determines that the realization of deferred tax
assets fails to meet the more likely than not standard imposed by SFAS 109.

Fair Value of Financial Instruments - Carrying amounts reported in the balance
sheet for cash and cash equivalents, accounts payable, accrued expenses, and
amounts due to related parties and shareholders approximate fair value because
of their immediate or short-term nature. The fair value of long-term debt and
convertible debt plus the related discount approximates their carrying value
because the stated rates of the debt either reflect recent market conditions or
are variable in nature.

Revenue Recognition - The Company is conducting research and development
activities to develop new multi-layer data storage media and currently has no
operating revenues. It is the intent of this company to enter into strategic
alliances to license its technology to its strategic partners.

Research and Development - Costs will be expensed as incurred until
technological feasibility has been obtained, product design has been completed
and a working model has been developed and tested.

Foreign Currency Translation - The financial statements of the subsidiaries are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS 52"). The

                                      F-10
<PAGE>

functional currency of the operations of the Company's subsidiary in Israel is
conducted in the U.S. dollar since most of its financing and other activities
are in US dollars. Transactions and balances originally denominated in dollars
are presented in their original amounts. Balances in non-dollar currencies are
translated into dollars using historical and current exchange rates for non-
monetary and monetary balances, respectively. For non-dollar transactions
reflected in the statements of operations, the exchange rates at the transaction
dates are used. Depreciation expenses are based on historical exchange rates.
The resulting translation gains or losses are carried to (income) expense. The
Company's subsidiary in Russia maintains accounting records in Russian ruble.
The ruble is considered the subsidiary's functional currency. Transactions and
balances not already measured in dollars have been re-measured into dollars as
applied to entities in highly inflationary economies. Revenues, costs, capital
and non-monetary assets and liabilities are translated at historical exchange
rates prevailing on the transaction date. Monetary assets and liabilities are
translated at the exchange rates prevailing on the balance sheet date.
Translation gains and losses from remeasurement of monetary assets and
liabilities that are not denominated in U.S. dollars are not material to the
consolidated operations of the Company, and accordingly, a statement of
comprehensive income  (loss) is not presented.

Stock-Based Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS 123"), establishes a fair value
method of accounting for stock-based compensation plans and for transactions in
which a company acquires goods, financings or services from non-employees in
exchange for equity instruments. SFAS 123 also allows companies to account for
stock-based employee compensation in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," or SFAS
123. The Company elected to follow APB 25 which measures compensation expense
for employee stock options as the excess, if any, of the fair market price of
the Company's stock at the measurement date over the amount an employee must pay
to acquire stock. (See Note 8)

The values ascribed to restricted stock awards are based on the fair value of
the Company's common stock at the date of the grant. The fair values ascribed to
warrants that are issued in connection with financing arrangements and
professional services agreements are amortized over the expected life of the
underlying debt or the term of the agreement.

Net loss per share - Basic loss per share assumes no dilution, and is computed
by dividing net loss by the weighted average number of common shares outstanding
during each period. Diluted earnings per share reflect, in periods in which they
have a dilutive effect, the effect of common shares issuable upon exercise of
stock options, warrants and contingent shares based on the treasury method of
computing such effects, and are not included in the calculation of loss per
share, as their effect was anti-dilutive. All per share information has been
adjusted to reflect the three-for-one stock split declared on December 16, 1999.
The assumed exercise of stock options and warrants, as well as the issuance of
common stock upon conversion of convertible debt, aggregating 12,428,168 shares
at December 31, 2000, would potentially dilute basic earnings per share.

Accounting Estimates - The Company's financial statements are prepared in
conformity with generally accepted accounting principles of the United States,
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates.

Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of periodic
temporary investments of excess cash. The Company places its temporary excess

                                      F-11
<PAGE>

cash investments in high quality short-term money market instruments through
high quality credit financial institutions. At times, such investments may be in
excess of the FDIC insurance limit. A significant portion of the Company's cash
is in one institution.

Reclassifications - Certain reclassifications have been made to the prior
period's financial statement amounts to conform to the current period's
presentation.

Recent Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The
statement establishes accounting and reporting standards requiring that every
derivative instrument (including some types of derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS 133, as amended by SFAS No. 137 defining SFAS No. 133's
effective date, is effective for the Company on January 1, 2001. The adoption of
SFAS 133 did not have a material effect on its financial position or results of
operations.

In March 2000, the Financial Accounting Standards Board released Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN
44"). FIN 44 addresses certain practice issues related to Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). FIN
44 applies only to companies that have chosen not to adopt SFAS 123, Accounting
for Stock-Based Compensation, for transactions with employees. Among other
issues, FIN 44 clarifies (a) the definition of an employee for purposes of
applying APB 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occur after either December 15, 1998 or January 12, 2000.  To the
extent that FIN 44 covers events occurring during the periods after December 15,
1998 or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying FIN 44 are recognized on a prospective basis from July 1,
2000. The Company's adoption of FIN 44 did not have a material effect the
Company's financial position or results of operations.

During the fourth quarter of 2000, the Emerging Issues Task Force (EITF) issued
consensus 00-27 "Application of EITF No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingency Adjustable
Conversion Ratios, to certain Convertible Instruments" ("EITF No. 00-27"). EITF
No. 00-27 requires the remeasurement of the original issue discount on
convertible debt with characteristics similar to the convertible debt issued by
the Company during years ended December 31, 2000 and 1999. This accounting
change required the value of the warrants issued with the convertible debt to be
included in calculating the beneficial conversion value. The adoption of EITF
No. 00-27 did not have a material effect on the Company's financial position or
previously reported results of operations.

NOTE 2.  Development Stage Operations

     The Company has been in the development stage since its inception. It has
had no operating revenues to date, has accumulated losses of $30,918,539, and

                                      F-12
<PAGE>

will require additional working capital to complete its business development
activities and generate revenues adequate to cover operating and further
development expenses.

     The Company believes it can raise additional working capital through future
sales of its common stock or subordinated debt in private placement
transactions. However, there can be no assurance that the Company will be
successful in its efforts to raise these funds.

NOTE 3.  Furniture and Equipment

Furniture and equipment consists of the following:

<TABLE>
<CAPTION>
                                                 December 31,      December 31,
                                                     2000               1999
------------------------------------------------------------------------------
<S>                                        <C>               <C>
Furniture and equipment                            $578,335           $320,463

Less: accumulated depreciation                      152,042             79,363
==============================================================================


Furniture and equipment, net                       $426,293           $241,100
==============================================================================
</TABLE>

                                      F-13
<PAGE>

NOTE 4.  Convertible Notes Payable (See Note 8)

Convertible notes payable consist of the following:

<TABLE>
<CAPTION>
                                           December 31,      December 31,
                                              2000              1999
------------------------------------------------------------------------
<S>                                    <C>              <C>
Convertible note payable, interest
 at LIBOR + 3%, due on demand (a)       $           --        $  650,577


Convertible note payable, interest
 at 8%, due October 31, 2001 (b)                    --           505,480


Convertible note payable, interest
 at 8%, due October 31, 2001 (c)                    --         1,600,000


Convertible note payable, interest
 at 10%, due September 24, 2001 (d)          4,105,753                --

========================================================================


                                             4,105,753         2,756,057

Less: amount representing interest
 on detachable stock purchase
 warrants                                    1,880,847                --
(See Note 8)
========================================================================
                                             2,224,906         2,756,057

Less: current maturities                     2,224,906           650,577
========================================================================
                                        $         --          $2,105,480
========================================================================
</TABLE>

(a) Pursuant to a Term Sheet dated October 15, 1998, Agrotec Ltd./Formula
Ventures Ltd., loaned $600,000 to Memory Devices (MD) (1996) Ltd., a subsidiary
of Constellation 3D Holdings Limited. Pursuant to a Loan Conversion Rights
Agreement, dated December 2, 1998, the principal and interest on the $600,000
loan was convertible into preferred shares of the Company at a price equal to
75% of a calculated share value. The share value was the quotient of (i) the
lowest valuation of the Company used in a financing of the Company between
December 2, 1998 and the conversion date over (ii) the issued and outstanding
share capital of the Company, on a fully diluted basis. In the event that a
financing did not occur, the valuation of the Company, was required to be agreed
upon by the parties. The parties agreed upon a conversion price of $1.79. On
July 1, 1999, Constellation Tech acquired all the assets of Constellation 3D
Holdings Limited, including the stock of Memory Devices (MD)(1996) Ltd.

                                      F-14
<PAGE>

     On September 12, 2000, an aggregate principal of $600,000 plus accrued
interest of approximately $81,574 on the debt was converted by Formula Ventures
L.P., FV-PEH L.P., and Formula Ventures (Israel) L.P. into 380,000 shares of
common stock at the conversion price of $1.79 per share.  Since the debt was
converted pursuant to the original conversion terms, the Company did not
recognize an additional interest expense.


(b) In November 11, 1999 the Company issued $500,000 in principal amount of 8%
convertible subordinated debentures due October 31, 2001 to Wilbro Nominees
Limited ("Wilbro"). The original conversion terms provided that the notes would
be converted at the price of the lesser of (A) the average market price of the
common stock over a period of twenty (20) trading days preceding any applicable
date of conversion (the "Conversion Date") less a discount of 20%, or (B) the
average market price of the common stock over a period of twenty (20) days
preceding any applicable Conversion Date (such price being referred to herein as
the "Initial Conversion Price"), provided that, in the event of (A) above, no
discount shall apply unless such average market price of the Common Stock is at
least $5.00 per share. On the date of issuance, the Company recorded interest
expense of $125,000 for the value ascribed to the beneficial conversion feature.

      In order to induce Wilbro to convert its debentures into common stock, the
Company agreed to: (i) amend the then applicable conversion price, which ranges
from $8.68 to $16.77, to $11.00; and (ii) offer Wilbro 15,000 common stock
purchase warrants.  On October 12, 2000, an aggregate of $500,000 in principal
amount and accrued interest of $44,507 of the debentures was converted by Wilbro
into 49,500 shares of common stock at a conversion price of $11.00 per share.
As a result of the amendment of the conversion price, the Company recognized an
additional interest expense of $18,000 based on the excess of the fair value of
the common stock transferred in excess of the fair value of the common stock
issuable pursuant to the original conversion terms. The Company also recognized
an addition to paid in capital of stockholders' equity.  Wilbro also received
one-year warrants to purchase 15,000 shares of common stock at an exercise price
of $10.1531. The fair value ascribed to the warrants was approximately $35,000.
Such amount was recorded as an interest expense and as an addition to paid-in
capital of stockholders' equity.


(c) On December 24, 1999 the Company issued $1,600,000 in principal amount of 8%
subordinated debentures due October 31, 2001 to Winnburn Advisory ("Winnburn").
The original conversion terms provided that the notes would be converted at the
price of the greater of (A) the average market price of the common stock over a
period of twenty (20) trading days preceding any applicable date of conversion
(the "Conversion Date"), or (B) $16.67.

     In order to induce Winnburn to convert its debentures into common stock,
the Company agreed to: (i) amend the then applicable conversion price, $16.67,
to $10.1531; and (ii) offer Winnburn 83,048 and 66,439 common stock purchase
warrants.  On August 23, 2000, an aggregate of $1,600,000 and accrued interest
of $86,399 of was converted by Winnburn into 166,097 shares of common stock.  As
a result of the amendment of the conversion price, the Company recognized an
additional interest expense of $650,000 based on the excess of the fair values
of the common stock transferred over the fair value of the common stock issuable
pursuant to the original conversion terms. The Company also recognized an
addition to paid-in capital of stockholders' equity.  Winnburn also received
one-year warrants to purchase 83,048 shares of common stock at an exercise price
of $10.1531 per share and five-year warrants to purchase 66,439 shares of common
stock at an exercise price of $14.6656 per share.  The fair value ascribed to
the warrants was approximately $590,000. Such amount was recorded as interest
expense and as an additional paid-in capital of stockholders' equity.


                                      F-15
<PAGE>

(d) On March 24, 2000, C3D issued a 10% subordinated convertible debenture for
the principal amount of $4,000,000 to Sands Brothers Venture Capital Associates
LLC ("Sands Brothers VC"). The subordinate convertible debenture can be
converted at any time into shares of common stock of the Company at a conversion
price of $17.65 and expires on September 24, 2001. Sands Brothers VC has the
right to demand repayment of all or any portion of the principal amount of the
convertible debenture and interest outstanding before the maturity date in the
event that C3D receives more than $25,000,000 in gross financing through the
sale of debt and/or equity securities or a change of control of the Company
occurs. C3D granted the subordinate convertible debenture holder certain
registration rights with respect to the underlying Common Stock.


NOTE 5.      Convertible Line of Credit (See Note 8 and 11)


     On August 23, 2000, the Company entered into a certain Loan Agreement with
Constellation 3D Technology Limited, a British Virgin Islands company
("Constellation Tech") and an affiliate of the Company, pursuant to which
Constellation Tech agreed to open a credit line of up to $6,000,000 for the
Company expiring on February 23, 2001. The credit line was amended to extend the
availability until December 31, 2001. The interest rate for each withdrawal will
be the interest rate of three-month LIBOR plus 3%. Constellation Tech has the
right to convert the loan amount into equity at a price per share of 90% of the
average closing price of the Company's common stock for the 12 trading days
prior to August 23, 2000, which was $10.72.

     In connection with this credit line, Constellation Tech received a three-
year warrant (the "Signing Warrant') to purchase 20,000 shares of the Company's
common stock, which warrant had an exercise price of $11.50 and is exercisable
from August 23, 2000 to August 23, 2003.

     In connection with the credit line, Constellation Tech also had the right
to receive a three-year warrant to purchase 10,000 shares of the Company's
common stock upon each withdrawal made by the Company from this credit line.
The exercise price of such warrants is equal to $11.50. The Company withdrew
$1,000,000 on August 23, 2000 and therefore received a total of 30,000 warrants
on such date.  The fair value ascribed to the 30,000 warrants was approximately
$117,000 and was be recorded as deferred financing cost and is to be amortized
as interest expense over the remaining term of the credit line.  The Company
made no additional withdrawals under the credit line.

     Up to one year from the Company's last withdrawal from the credit line,
Constellation Tech has the right (the "Right'') to purchase up to 103,306 shares
of common stock per $1,000,000 of principal extended. The right has an exercise
price of $9.648 and the Right may only be exercised if the aggregate exercise
price is at least $2,000,000. The Right expires one year from the day of the
last withdrawal. The fair value ascribed to the Right was approximately
$763,000, and was recorded as deferred financing cost and amortized to interest
expense over the term of the credit line. At December 31, 2000, the Company has
utilized $1,000,000 of this credit facility.

     Constellation Tech is a related party.  Constellation Tech as of December
7, 2001, has the power to vote 26,089,283 shares of common stock of the Company,
representing 40.9% of our issued and outstanding shares of common stock.

                                      F-16
<PAGE>

NOTE 6.  Income Taxes

     At December 31, 2000 and 1999, the Company has net deferred tax assets of
$4,730,000 and $519,000 available to offset future US and foreign source income,
respectively, primarily due to net operating loss carryforwards  of $2,425,000
and deferred start-up costs of $9,398,000, which begin to expire in 2019. The
net operating loss carryforwards may be restricted by the change in ownership
rules under internal revenue code section 382. The Company's effective tax rate
was estimated at 40%. A 100% valuation allowance has been recorded against the
deferred tax asset as management, due to the uncertainty about its ability to
generate taxable income, has yet to establish the recoverability of this asset.

     The Company recognized current tax expense of $99,414, $63,588 and $3,462
for the years ended December 31, 2000, 1999 and 1998, respectively. Tax expense
for all periods presented represent Russian and Israeli tax legislation
requiring taxes to be provided for cash receipts.

NOTE 7.  Related Party Transactions

     The Company retained all key employees under informal agreements during the
years ended December 31, 2000, 1999 and 1998. These agreements may be cancelled
at any time. The expense of these agreements totaled $540,000, $437,500 and
$400,000 for the years ended December 31, 2000, 1999 and 1998, respectively. As
of December 31, 2000 and 1999, due to related parties included $91,875 and
$190,000, respectively, of unpaid expenses under those agreements.

     The Company assumed amounts due to a related party for $164,385 at the time
of the reverse acquisition on October 1, 1999 (see Note 1), which was paid
during the year ended December 31, 2000.

     On October 29, 1999 and November 18, 1999, the Company borrowed $300,000
and $1,000,000, respectively, from Epicenter Venture Finance Limited
("Epicenter"). The aggregate $1,300,000 loan was unsecured and had an annual
interest rate of 10%. The loan was scheduled to mature on the earlier July 31,
2000 or upon the Company securing various levels of financing. Interest amounted
to approximately $85,000 and $17,000 during the years ended December 31, 2000
and 1999 respectively.

     In order to induce Epicenter to convert its loan into common stock, the
Company agreed to offer Epicenter: (i) the right to convert the note into common
stock at a conversion rate of $10.1531 per share, and (ii) 55,241 common stock
purchase warrants.  On August 23, 2000, the principal amount of $1,300,000 plus
interest of $102,163 on the loan was converted by Epicenter into 138,102 shares
of common stock. The shareholder also received one-year warrants to purchase
69,051 shares of common stock at an exercise price of $10.1531 per share and
five-year warrants to purchase 55,241 shares of common stock at an exercise
price of $14.6656 per share. The fair value ascribed to the warrants was
approximately $490,000. Such amount was recorded as interest expense and as an
additional paid-in capital of stockholders' equity.


NOTE 8.  Stockholders' Equity (Deficit) (See Note 11)

     For accounting purposes, on December 27, 1998, stockholders of
Constellation Tech converted approximately $4,888,537 of stockholder advances

                                      F-17
<PAGE>

into 3,749,400 shares of Constellation Tech's common stock. Additionally, for
accounting purposes, Constellation Tech was recapitalized on December 27, 1998
through the issuance of an additional 25,464,000 shares of common stock to
existing shareholders of Constellation Tech. For accounting purposes, after the
recapitalization, together with the issuance of 36,000 shares of common stock
for debt settlement on April 1, 1999, the number of issued shares of
Constellation Tech's common stock amounted to 29,250,000.

     On October 1, 1999, the Company completed an asset purchase agreement and
acquired substantially all the operations of Constellation Tech for total
consideration of 29,250,000 shares of the Company's $.00001 par value common
stock, and assumption of substantially all liabilities and obligations of
Constellation Tech.

     The 29,250,000 shares of common stock issued by Constellation 3D, Inc. to
Constellation Tech in connection with the reverse acquisition have been adjusted
to appear on the consolidated statement of stockholders' equity (deficit) as the
29,250,000 shares of common stock outstanding on the statement of stockholders'
equity (deficit) prior to the reverse acquisition. Similarly the consolidated
statement of stockholders' equity (deficit) section has been adjusted to reflect
the "issuance" of 11,109,765 shares of common stock, as of the date of the
reverse acquisition when in fact such shares were actually issued by
Constellation 3D, Inc. prior to the reverse acquisition.

     During the year ended December 31, 2000, the Company issued a total of
10,500,000 shares of Common Stock to Constellation 3D Trust LLC, a wholly owned
subsidiary of the Company. Constellation 3D Trust LLC intends to use the shares
to raise debt or equity capital and contribute the proceeds thereof to the
Company. For the purposes of the Company's consolidated financial statements,
the issuance of the 10,500,000 shares of Common Stock are not considered to be
issued or outstanding because the Common Stock has remained under the control of
the Company and will be cancelled if no financing transaction is completed. On
September 15, 2000, 10,000,000 of the shares of Common Stock were cancelled.

     On March 24, 2000, the Company issued a 10% subordinated convertible
debenture for the principal amount of $4,000,000 to Sands Brothers VC. The
subordinate convertible debenture can be converted at any time into shares of
Common Stock of the Company at a conversion price of $17.65 and expires on
September 24, 2001. The market value for the Company's stock on March 24, 2000
was $46.50. The excess of the fair value of the conversion formula over the fair
value of the stock was deemed to be a beneficial conversion feature valued at
$120,000, which was recorded as interest expense and an increase to additional
paid-in capital.

     Upon closing of the $4,000,000 subordinated convertible debenture to Sands
Brothers VC on March 24, 2000, and pursuant to the terms of the agency agreement
originally signed on December 1, 1999 (the "Agency Agreement" and "Warrant
Agreement"), by and between the Company and Sands Brothers & Co. Ltd. ("Sands
Brothers"), the Company issued to Sands Brothers detachable warrants to purchase
1,050,000 shares of Common Stock at an exercise price of $3.67 per share and
warrants to purchase 2,400,000 shares of Common Stock at an exercise price of
$15.13 per share expiring December 1, 2004.   As of the date of settlement, the
Company valued the warrants issued to Sands Brothers at an aggregate of
$10,137,700 and valued the warrants that Sands Brothers retained at an aggregate
of $706,593.

     The Company granted the warrant holder certain registration rights with
respect to the underlying Common Stock and the option to exercise the stock

                                      F-18
<PAGE>

warrants in lieu of any cash payment in exchange for the number of shares of
Common Stock that amount to the difference between the market price and the
exercise price of the stock warrants.

     Proceeds from the subordinated convertible debenture issued with the
detachable stock purchase warrants are allocated between the debenture and the
warrants based on their relative fair values as required by Accounting
Principles Board Opinion No. 14. The value ascribed to the detachable warrants
for accounting purposes was $3,880,000 based on the proceeds of the subordinated
convertible debenture to the Company. The $3,880,000 value was recorded as a
debt discount and will be amortized as a component of interest expense over the
term of the related debt. This amount is presented as an addition to paid-in
capital of stockholders' deficit and as an offset to the related liability in
the accompanying December 31, 2000 balance sheet.

     On August 17, 2000, the Company entered into a Common Stock Investment
Agreement pursuant to which the Company sold to TCO Investment, Inc ("TCO")
25,000 shares of the Company's common stock for an aggregate of $250,000.  The
Company also issued TCO. adjustment warrants as an inducement to purchase the
25,000 shares of common stock of the Company and provide TCO certain investment
value protection in case the market price of the Company's common stock declined
below $11.68 The adjustment warrants were exerciseable until August 17, 2005 and
had an exercise price of $0.0. The aggregate fair value ascribed to the warrants
was $73,391.

     As an inducement for TCO Investment, Inc to purchase 25,000 shares of
common stock, on August 18, 2000, the Company issued Guldborg International and
Farpell Inc., the principals of TCO Investment, Inc., five-year warrants to
purchase 15,000 and 10,000 shares of the Company common stock, respectively.
The warrants have an exercise price of $11.50 and expire on August 18, 2005. The
aggregate fair value ascribed to the warrants was $190,875.  The placement
commission and the warrants were accounted for as a cost of financing.
Accordingly, the proceeds of the sale were recorded net of the placement
commission.

     On August 18, 2000, the Company granted Blank Rome Comisky & McCauley LLP a
warrant to purchase 5,555 shares of the Company's common stock in order to
reduce the amount of the Company's outstanding legal fees due to Blank Rome
Comisky & McCauley LLP by Fifty Thousand Dollars ($50,000.00). Blank Rome
Comisky & McCauley LLP has served as the Company's legal counsel. The warrant
currently is exercisable at a price of $0.001 per share and will terminate on
July 31, 2005.

     On August 23, 2000, the Company entered into the Common Stock Investment
Agreement with Halifax Fund, L.P., a private fund organized under the laws of
the Cayman Islands, providing for a $5 million equity financing ($4,615,055, net
of cost of financing), through a sale of 492,459 shares of the Company's common
stock to Halifax Fund, L.P. In connection with this equity financing, the
Company issued the following warrants to Halifax Fund, L.P.: (1) five-year
warrants to purchase 196,984 shares of the Company's common stock at the initial
exercise price of $14.6656 per share, (2) adjustment warrants to purchase a
number of shares of common stock pursuant to a certain formula set forth in the
written agreement, and (3) one-year warrants to purchase 246,229 shares of
common stock at the initial exercise price of $10.15313 per share.

     On September 19, 2000, the Company entered into a Letter Agreement with
Halifax Fund, L.P., amending the Common Stock Investment Agreement of August 23,
2000. According to the Letter Agreement, Halifax Fund, L.P., provided to the
Company an additional $5,000,000 equity financing ($4,615,055, net of cost of
financing), in consideration for the same number of shares and warrants as
purchased by it in connection with the first $5,000,000 financing described
above. Therefore, Halifax Fund, L.P. has purchased in the aggregate (1) 984,918

                                      F-19
<PAGE>

shares of the Company's common stock, (2) adjustment warrants to purchase a
number of shares of common stock pursuant to a certain formula set forth in the
written agreement, (3) five-year warrants to purchase 393,968 shares of the
Company's common stock, and (4) one-year warrants to purchase 492,458 shares of
the Company's common stock for a total consideration of $10 million.  The
adjustment warrants, the five year warrants and the one year warrants had a fair
market value of $3,135,118, $3,295,723 and $2,593,432, respectively. In
connection with this sale, the Company granted Halifax certain registration
rights with respect to the shares of common stock and the shares to be issued
upon the exercise of the above described warrants.

     The adjustment warrants were issued to the Halifax as an inducement to
purchase the 984,918 shares of common stock of the Company and the adjustment
warrants were intended to provide Halifax Fund, L.P. certain investment value
protection in case the market price of the Company's common stock declined below
$11.68. The adjustment warrants were exercisable until September 19, 2005 and
had an exercise price of $0.0. The adjustment warrants were exercisable into
such number of shares as is derived by subtracting 984,918 from the quotient of
(i) 1,150,000 over (ii) the average of the 20 lowest daily trades for a share of
common stock during the period starting 15 trading days after the day on which a
registration statement covering the initial shares is first declared effective
by the commission and ending on the 100th trading day thereafter.  All the
shares issued pursuant to the exercise of the adjustment warrants were treated
as adjustments to the initial investments and were recorded in the stockholders'
equity section as a credit to common stock, for the par value of the shares, and
a debit to additional paid in capital.

     In connection with the sale of the foregoing securities to Halifax Fund,
L.P., the Company paid placement fees to the Shemano Group and Koor Underwriters
and Issuers Ltd.  The Shemano Group, Inc., received $500,000 (5% of the
$10,000,000 purchase price) as a placement commission and five-year warrants to
purchase 400,000 shares of the Company's common stock at an exercise price of
$14.4456 per share. The Shemano warrants had a fair value of $3,346,183.  The
Koor Underwriters and Issuers Ltd. received $200,000 (2% of the $10,000,000
purchase price) as a placement commission and five-year warrants to purchase
200,000 shares of the Company's common stock at an exercise price of $14.4456
per share. The Koors Underwriters warrants had a fair value of $1,673,091.  The
placement commission and the warrants were accounted for as a cost of financing.
Accordingly, the proceeds of the sale were recorded net of the placement
commission.

     On August 22, 2000, in consideration of the assignment of patents to the
Company by Mr. Schwartz, the Chief Technology Officer of the Company at the
time, and Reflekt Technology, Inc., a Massachusetts corporation, of which Mr.
Schwartz is the President, sole director and sole stockholder, the Company
granted jointly to Mr. Schwartz and Reflekt Technology, Inc. a warrant to
purchase 10,000 shares of the Company's common stock. The patents were valued by
the Company's officers based upon the patents' perceived benefit to the Company
and the projected cost of independently developing comparable patented
technology for use in the Company's products.

     The warrant has an exercise price of $11.25 per share and is exerciseable
until August 22, 2004. The fair value ascribed to the warrants was approximately
$56,000. Such amount was recorded as a non-cash compensation charge to
operations.

     On August 31, 2000, the Company sold 197,026 shares of the Company's common
stock for an aggregate consideration of $2,000,426 ($1,920,409, net of financing
costs, ) to a group consisting of the following seventeen investors: I. Nahori,
Y. Hershkovitz, O. Ackerman, T. Barak, Z. Korech, T. Edri, O. Ron, E. Miro, A.
Shilontchik, Y. Peleg, A. Ben-Ami, G. Altshuler, Koor Underwriters and Issuers

                                      F-20
<PAGE>

Ltd., Menorah Gaoon Investment Ltd., Shalom and Yafa Bilgori, The Hebrew
University Employee Fund, and S. Tov, collectively called Koor's Investors. In
connection with this equity financing, the Company issued the following warrants
to Koor's Investors: (1) five-year warrants to purchase 78,813 shares of the
Company's common stock at the initial exercise price of $14.6656 per share, (2)
adjustment warrants to purchase a number of shares of common stock pursuant to a
certain formula set forth in the written agreement, and (3) one-year warrants to
purchase 98,513 shares of common stock at the initial exercise price of
$10.15313 per share. The adjustment warrants, the five year warrants and the one
year warrants had a fair market value of $578,397, $659,733, and $519,357,
respectively.

     The adjustment warrants were issued to the Koor's investors as an
inducement to purchase the 197,026 shares of common stock of the Company and
were intended to provide the Koor's investors certain investment value
protection in case the market price of the Company's common stock declined below
$11.68. The adjustment warrants were exerciseable until August 31, 2005 and had
an exercise price of $0.0.  The adjustment warrants were exercisable into such
number of shares as is derived by subtracting 197,026 from the quotient of (i)
2,300,490 over (ii) the average of the 20 lowest daily trades for a share of
common stock during the period starting 15 trading days after the day on which a
registration statement covering the initial shares is first declared effective
by the commission and ending on the 50th trading day thereafter.

     In connection with the sale of the foregoing securities to Koor's
Investors, the Company paid Koor Underwriters and Issuers Ltd. a placement fee.
Koor's Underwriters and Issuers Ltd received $80,017 (4% of the $2,000,426
purchase price) as a placement commission and five-year warrants to purchase
295,539 shares of the Company's common stock at a price of $14.6656. The
warrants had a fair market value of $2,473,917.  The Company also paid a 17%
Value Added Tax on the cash payments. The placement commission and the warrants
were accounted for as a cost of financing. Accordingly, the proceeds of the sale
were recorded net of the placement commission.

     On September 12, 2000, the Company entered into the Common Stock Investment
Agreement with Jacqueline Hershkovitz. According to the Common Stock Investment
Agreement, J. Hershkovitz purchased, for aggregate cash consideration of
$150,000, (1) 14,774 shares of common stock at a price of $10.15313 per share,
(2) adjustment warrants to purchase a number of shares of common stock pursuant
to a certain formula set forth in the written agreement, (3) five year warrants
to purchase 5,910 shares of common stock at an exercise price of $14.6656 per
share, and (4) one year warrants to purchase 7,387 shares of common stock at an
exercise price of $10.15313 per share. The adjustment warrants, the five year
warrants and the one year warrants had a fair market value of $42,424, $38,526
and $26,644.

     The adjustment warrants were issued to Ms. Hershkovitz as an inducement to
purchase the 14,774 shares of common stock of the Company provide J. Hershkovitz
certain investment value protection in case the market price of the Company's
common stock declined below $11.68. The adjustment warrants were exercisable
until September 12, 2005 and had an exercise price of $0.0. The adjustment
warrants were exercisable into such number of shares as is derived by
subtracting 14,774 from the quotient of (i) 172,500 divided by (ii) the average
of the 20 lowest daily trades for a share of common stock during the period
starting 15 trading days after the day on which a registration statement
covering the initial shares was first declared effective by the commission and
ending on the 50th trading day thereafter. All the shares issued pursuant to the
exercise of the adjustment warrants were treated as adjustments to the initial

                                      F-21
<PAGE>

investments and were recorded in the stockholders' equity section as a credit to
common stock, for the par value of the shares, and a debit to additional paid in
capital.

Warrants

     Unless more specifically indicated otherwise, the Company estimates the
fair value of each warrant which was valued at the grant date by using the Black
Scholes option-pricing model with the following weighted average assumptions
used for grants during the year ended December 31, 2000: no dividend yield;
expected life equal to the term to maturity of the subject warrant; expected
volatility of 80%; and risk-free interest rates of 5.76% to 6.26%.

     During December 2000, the Company granted warrants to non-employee
consultants who provide services to purchase 375,000 and 100,000 shares of the
Company's common stock at an exercise price of $10.1531 to $14.6656 per share
respectively. The warrants to purchase the Company's common stock vest over 12
months and expire in 2003 through 2005. In connection with the issuance, the
Company recorded a non-cash expense to general and administrative expenses of
$277,880, representing the fair value of the warrants granted, calculated using
the Black-Scholes option-pricing model. Compensation expense will be recorded
over the vesting period.

The following table summarizes information about warrants outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                                                                                             Fair Market
                                                Exercise                                   Value on Grant
      Grant Date             Shares              Price              Expiration Date             Date
-----------------------------------------------------------------------------------------------------------

<S>                     <C>                <C>                 <C>                        <C>
March 24, 2000               1,050,000            $   3.67      December 1, 2004             $45,975,000
March 24, 2000               2,400,000            $  15.13      December 1, 2004             $86,382,000
August 17, 2000                 25,000            $  11.50      August 17, 2005              $   191,000
August 18, 2000                  5,555            $  0.001      July 31, 2005                $    50,000
August 22, 2000                 10,000            $  11.25      August 22, 2004              $    56,000
August 23, 2000                 30,000            $  11.50      August 23, 2003              $   117,000
August 23, 2000                152,099            $10.1531      August 23, 2001              $   585,000
August 23, 2000                121,680            $14.6656      August 23, 2005              $   495,000
August 31, 2000                 98,513            $10.1531      August 31, 2001              $   519,000
August 31, 2000                374,352            $14.6656      August 31, 2005              $ 3,134,000
September 12, 2000               7,387            $10.1531      September 12, 2001           $    27,000
September 12, 2000               5,910            $14.6656      September 12, 2005           $    39,000
September 19, 2000             492,458            $10.1531      September 19, 2001           $ 2,593,000
September 19, 2000             993,968            $14.6656      September 19, 2005           $ 8,315,000
October 12, 2000                15,000            $10.1531      October 12, 2001             $    35,000
December 4, 2000               120,000            $10.1531      December 1, 2005             $   310,000
December 4, 2000               250,000            $10.1531      December 31, 2003            $   477,000
December 4, 2000               100,000            $14.6656      December 31, 2005            $   242,000
===========================================================================================================
                             6,251,922            $  12.13
===========================================================================================================
</TABLE>

      The table does not include adjustment warrants issuable in connection with
certain equity financings.

                                      F-22
<PAGE>

Stock Options

     On March 8, 1999, certain board members were granted options to purchase up
to 525,000 shares of the Company's common stock at $1.33 per share. These
options vested immediately expiring in June 2004. No expense was recognized upon
granting of the options as the exercise price was equal to the estimated market
value, as evidenced by the sale of 1,359,765 shares of common stock to unrelated
third parties completed on March 15, 1999 but not issued until May 15, 1999. On
December 7, 2000, the Company received notification of the option holder's
intent to exercise 300,000 options on a cashless basis. The Company issued
235,749 common shares. As of December 31, 2000, there were 225,000 options
outstanding relating to this grant.

     On December 27, 1999, the Company adopted the 1999 stock option plan (the
"Plan"). The Plan allows the Company to grant both qualified and nonqualified
stock options at prices not less than fair market value at date of grant to
officers, key employees, directors or anyone who provides services to the
Company. A maximum of 4,617,540 shares was approved to be issued under the Plan.
As of December 31, 2000, there were 4,468,050 options under this Plan
outstanding.

     Options granted under the Plan expire not more than ten years from the date
of grant. Generally, options vest in five years. All stock options issued under
the plan have been granted at exercise prices at or above the market value of
the Company's common stock on the date of the grant.

     On May 11, 2000 the Company granted options to a non-employee consultant
who provided business development services to purchase 450,000 shares of the
Company's common stock at an exercise price of $5.00 per share when the fair
value was $14.50. The option to purchase the shares vested on June 30, 2000 and
will expire in May 2005. In connection with the issuance, the Company recorded a
non-cash compensation charge to operations of $4,293,000, representing the fair
value of the issuance, calculated using the Black-Scholes option-pricing model.
This amount is included in the marketing expense for the year ended December 31,
2000.

     On August 22, 2000, the Company issued options to purchase 390,000 shares
of common stock to Vladimir Schwartz, the Chief Technology Officer, as
compensation for services. Of the total grant, 140,000 options vest immediately
and 250,000 options vest after one year from the date of the grant. The exercise
price is $11.25 per share, which was the market price at the time of grant, and
expires on August 22, 2004. The fair market value of the options was $2,563,143.
Consistent with APB 25, accounting treatment for employee stock options, the
option grant did not result in an accounting charge.

     On November 9, 2000 the Company granted options to three directors of the
Company to purchase 5,000 shares each of the Company's common stock at an
exercise price of $1.00 per share. The option to purchase the shares vests on
May 26, 2001 and will expire in May 2006. In connection with the issuance, the
Company recorded a non-cash compensation expense of $36,321 with an offsetting
credit to additional paid in capital, representing the fair value of the
issuance. Compensation expense will be recorded over the vesting period.

     During the fourth quarter of 2000, the Company granted options to non-
employee consultants who provide services to purchase 215,000 shares of the
Company's common stock at an exercise price of $6.25 per share. The options to
purchase the Company's common stock vests over the next four years and will
expire in December 2005. In connection with the issuance, the Company recorded a

                                      F-23
<PAGE>

non-cash expense to operations of $555,255, representing the fair value of the
options granted. The non-cash expense amount is represented as $512,671 in
marketing expenses and $42,584 in general and administrative expenses for the
year ended December 31, 2000. Compensation expense will be recorded over the
vesting period.

     SFAS No. 123 requires the Company to provide pro forma information
regarding net loss as if compensation cost of the Company's stock option plan
had been determined in accordance with the fair value based method prescribed in
SFAS No. 123. The weighted average fair value of options granted during the
years ended December 31, 2000 and 1999 were $6.52 and $4.73 respectively.  The
Company estimates the fair value of each stock option at the grant date by using
the Black Scholes option-pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 2000 and 1999:
no dividends yield for any period; expected lives of 1 to 5 years; expected
volatility of 80% and 46% respectively; weighted average risk-free interest
rates of 6.6% and 5.1% respectively.

     Under the accounting provisions of FASB Statement 123 for options to
employees and directors, the Company's net loss and net loss per share would
have been adjusted to the pro forma amounts indicated below. There is no effect
on pro forma net loss per share for 1998 and for the period from inception
(September 25, 1997) to December 31, 1997.

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                       -----------------------------------------
                                                    2000                 1999
--------------------------------------------------------------------------------
<S>                                      <C>                  <C>
Pro forma net loss.....................         $42,928,779           $5,547,700
Pro forma net loss per share:
Basic and Diluted......................         $     (1.03)          $    (0.17)
--------------------------------------------------------------------------------
</TABLE>

     A summary of the status of the Company's stock option plan as of December
31, 2000 and changes during the period from inception (September 25, 1997)
through December 31, 2000 is presented below:

<TABLE>
<CAPTION>
                                                                         Number       Weighted average
                                                                       of shares       exercise price

-------------------------------------------------------------------------------------------------------
Options outstanding at September 25,1997 (inception)                         --                --
-------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>
Options granted in 1999...........................................      525,000            $ 1.33
-------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1999..........................      525,000            $ 1.33
-------------------------------------------------------------------------------------------------------
Options granted in 2000...........................................    5,814,617            $ 9.60
-------------------------------------------------------------------------------------------------------

Options exercised in 2000.........................................     (300,000)           $ 1.33

Options forfeited in 2000.........................................      (90,000)           $10.69

Options outstanding at December 31, 2000..........................    5,949,617            $ 9.27
Options exercisable at December 31, 2000..........................    2,779,317            $ 8.67
-------------------------------------------------------------------------------------------------------
</TABLE>


                                      F-24
<PAGE>

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

<TABLE>
<CAPTION>
                                              Options Outstanding                                  Options Exercisable
                    -----------------------------------------------------------------   -------------------------------------------
                           Number              Weighted Average                                Number
      Range of         Outstanding as             Remaining          Weighted Average      Exercisable as          Weighted Average
   Exercise Price   of December 31, 2000   Contractual Life (Years)   Exercise Price    of December 31, 2000        Exercise Price
   --------------   --------------------   ------------------------   --------------    --------------------        --------------
<S>                   <C>                <C>                <C>                <C>                <C>
      $   1.00                15,000               5.40                  $ 1.00                     -                    $    -
      $   1.33               225,000               3.46                  $ 1.33               225,000                    $ 1.33
      $   5.00               450,000               4.37                  $ 5.00               450,000                    $ 5.00
      $   6.25               863,500               4.99                  $ 6.25               145,000                    $ 6.25
      $  10.00                20,000               5.00                  $10.00                     -                    $    -
      $  10.22                18,000               4.40                  $10.22                     -                    $    -
      $  10.69             3,781,550               4.37                  $10.69             1,622,750                    $10.69
      $  10.72               186,567               0.60                  $10.72               186,567                    $10.72
      $  11.25               390,000               3.64                  $11.25               150,000                    $11.25
  -----------------------------------------------------------------------------------   -------------------------------------------
  $  1.00 - $ 11.25        5,949,617               4.78                  $ 9.27             2,779,317                    $ 8.81
  -----------------------------------------------------------------------------------   -------------------------------------------
</TABLE>

NOTE 9.  Commitments

     The Company has entered into operating lease agreements for buildings used
for office space and research activities. The leases expire on various dates
between the years 2001 and 2004. Future minimum lease payments approximate
$293,000, $190,000, $82,000, and $26,844 for the years ended December 31, 2001,
2002, 2003, and 2004, respectively. Rent expense was approximately $295,000,
$160,000 and $116,800 for the years ended December 31, 2000, 1999 and 1998,
respectively.

     The Company has entered into consulting and employment contracts in the
normal course of business. The contracts expire on various dates between the
years 2001 and 2002. Future minimum contract payments approximate $287,500 and
$75,000 for the years ended December 31, 2001 and 2002, respectively. Expenses
related to these contracts was approximately $45,000 for the year ended December
31, 2000.

NOTE 10.  Legal Proceedings

     (a) On June 9, 2000, Challis International Limited commenced a lawsuit in
the Supreme Court of the State of New York, County of New York, against
Constellation 3D Technology Limited and the Company. The complaint alleges that
Challis entered into several contracts with Constellation Tech or its
predecessor-in-interest pursuant to which Constellation Tech agreed to provide
Challis with 11.946% of the shares it would receive in the Company. Although
none of the contracts upon which Challis bases its claims were with the Company,
Challis seeks to hold the Company liable by alleging that the Company is the
alter ego of Constellation Tech. Although the Company is not a party to any of
the contracts, Challis alleges that since one of the Company's officers signed
an appendix to one of the contracts, the Company is therefore directly liable.
In addition, Challis alleges that the contracts entitle it to 3,494,205 shares

                                      F-25
<PAGE>

of the Company's common stock. The complaint seeks an order directing the
Company to issue proper certificates to Challis for 3,494,205 shares or,
alternatively, the fair market value of the shares, plus any incidental damages.
The Company does not believe that the ultimate outcome of the litigation will
have an adverse effect on the Company's financial position, results of
operations and cash flows. The Company intends to vigorously to defend this
lawsuit.

     (b) On February 9, 2001, Clearview Capital (UK) Ltd. ("Clearview")
commenced a lawsuit against the Company in the United States District Court for
the Southern District of New York.  The complaint alleges that the Company
entered into a contract with Clearview which provided that for a period of three
years commencing October 26, 1999, should financings take place between the
Company and a party or affiliate of a party as defined in the contract then the
Company would be obligated to pay Clearview cash commissions of 6% of the
financings, plus warrants equal to 15% of the financings with an exercise price
of 110% of the market.  Although the Company was not provided financing by any
of the party's included on Clearview's list, Clearview alleges that financing
provided by the Halifax Fund, L.P. falls within the parameters of the contract,
thereby obligating the Company to pay Clearview a commission.  The complaint
seeks damages of (i) $600,000 in cash; (ii) warrants to purchase $750,000 of the
Company's shares with an exercise price of $12.65 per share; and (iii) warrants
to purchase $750,000 of the Company's shares with an exercise price of $14.03
per share. The Company is unable to determine with any certainty the ultimate
outcome of the litigation but does not believe that an adverse outcome will have
a material adverse effect on the Company's financial position, results of
operations and cash flows. The Company intends vigorously to defend this
lawsuit.

     (c) On October 20, 2000, the Company filed a registration statement on Form
S-1 with the Securities and Exchange Commission with respect to the registration
of common shares of stock held by certain security holders of the Company (the
"Registration Statement").  On December 22, 2000, the Company received a letter
from outside counsel to Sands Brothers & Co., Ltd. ("Sands"), claiming that the
Company breached certain alleged agreements with Sands by failing to include in
the Registration Statement shares underlying warrants to purchase 3,450,000
shares of the Company's common stock to which Sands claimed it was entitled (the
"Alleged Warrants").  Sands claimed that it had been damaged, at a minimum, in
the amount of $32,128,125 (less the exercise price) by the Company's alleged
failure to register shares underlying the Alleged Warrants.  In addition, Sands
claimed that the Company breached certain agreements with Sands by failing to
compensate Sands for certain financing the Company received from third parties,
by failing to pay financial advisory fees allegedly owed to Sands, and by
failing to give Sands a right of first refusal on certain third party financing.
In the December 22, 2000 letter, Sands demanded:  (i) that the shares underlying
the Alleged Warrants be included in a registration statement; (ii) that the
Company compensate Sands for financing it received from certain investors; (iii)
that the Company pay Sands $36,000 in financial advisory fees; and (iv) that the
Company pay Sands damages for its alleged failure to abide by the alleged first
refusal obligations.  The Company contends that Sands has failed to fulfill its
obligations to the Company and accordingly is not due the compensation demanded.
Because Sands has failed to fulfill their obligations to the Company under
agreements between the parties, the Company believes that the claims asserted in
their December 22, 2000 letter are without merit. Although there can be no
assurance that the dispute will not result in litigation, the Company believes
that the ultimate outcome of such litigation will not have a material adverse
effect on the Company's business, financial position, results of operations and
cash flows.  The Company intends to vigorously defend any lawsuit filed by
Sands.

     (d) On January 15, 2001, the Company received a letter from outside counsel
to High Tech Investments Corp. Ltd. ("High Tech"), demanding, among other
things, that the Company pay $5 million to High Tech and issue to High Tech
shares of stock in an amount equal to two percent of the outstanding stock in
the Company. According to High Tech, it is owed these amounts based on alleged

                                      F-26
<PAGE>

agreements between the Company and High Tech that were signed in October 1999,
according to which High Tech would market the Company in Japan and would promote
the Company's business relationship with various Japanese companies. If High
Tech's demands are not met, High Tech has threatened "to exercise all legal
means available to it to cause the agreements to be performed" and to seek to
recover damages for the Company's purported non-performance. The Company has
maintained the position that High Tech has no right to payment under the
purported agreements and intends to vigorously oppose any attempt by High Tech
to enforce these purported agreements. On March 7, 2001, the Company filed a
declaratory judgment suit in the Supreme Court for the State of New York seeking
a declaration that the purported agreements with Hi-Tech are not valid contracts
and that Hi-Tech is not entitled to any payment from the Company.

NOTE 11.  Subsequent Events

     (a) On January 30, 2001, at the annual meeting of shareholders of the
Company, the shareholders approved the redomicile of the Company's place of
incorporation from Florida to Delaware by merging the Company with and into its
newly-created wholly-owned subsidiary Constellation 3D, Inc., a Delaware
corporation (the "Subsidiary"). On February 8, 2001, Articles of Merger were
filed with the Florida Secretary of State and a Certificate of Merger was filed
with the Delaware Secretary of State, which formally resulted in the redomicile
of the Company to the State of Delaware. As a result of the redomicile of the
Company, the par value was adjusted from $0.001 per share of common stock to a
par value of $0.00001 and all per share information for all prior periods have
been adjusted accordingly. Further, the Company's charter no longer authorized
the issuance of 10 million shares of preferred stock following the Delaware re-
domiciliation.

     (b) On February 14, 2001, the Koor investors exercised their adjustment
warrants and were issued warrants to purchase an additional 243,152 shares of
common stock for no additional consideration for a period of 60 days. On the
same day, another stockholder exercised their adjustment warrants and were
issued an additional 19,704 warrants to purchase shares of common stock for no
additional consideration for a period of 60 days.

     (c) On March 11, 2001, the line of credit with Constellation Tech was
amended such that the $6,000,000 would be available until December 31, 2001,
with a maximum limit of $1,000,000 per withdrawal for any consecutive 30-day
period.

     (d) On March 29, 2001, the Company received a firm offer from an affiliate
of a major investor for an equity credit line of at least $25 million which is
available to the Company at the Company's option through April 30, 2001.


                                      F-27
<PAGE>

NOTE 12. Quarterly Financial Data (Unaudited)

The following is a summary of selected quarterly financial data for 2000 and
1999.
<TABLE>
<CAPTION>

                                                   First               Second               Third              Fourth
                                                  Quarter              Quarter             Quarter             Quarter
                                     ======================================================================================
Net loss:
<S>                                    <C>                       <C>                  <C>                 <C>
2000.................................            $2,816,973           $7,201,987          $5,244,999         $4,983,246
1999.................................            $  648,919           $1,008,539          $1,105,256         $2,103,973

Net loss before noncash charges (1):
2000.................................            $2,635,864           $2,300,435          $2,655,353         $2,845,233
1999.................................            $  636,102           $  948,284          $1,097,149         $1,941,214

Net loss per share:
2000 Basic and Diluted............                     0.07                 0.18                0.13               0.11
1999 Basic and Diluted............                     0.02                 0.03                0.04               0.06
                                     ======================================================================================
</TABLE>

(1) The Company recorded noncash charges during the years ended December 31,
2000 and 1999. During the year ended December 31, 2000, these charges consisted
primarily of stock-based compensation, discount amortization of deferred
interest and interest expense relating to the issuance of warrants. The charges
amounted to $181,109, $4,901,552, $2,589,646 and $2,138,013 during the quarters
ended March 31, 2000, June 30, 2000, September 30, 2000 and December 31, 2000,
respectively.


                                      F-28
<PAGE>

                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Constellation 3D, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

December 13, 2001.

                                    CONSTELLATION 3D, INC.


                                    By:  /s/ Eugene Levich
                                        ------------------
                                    Name: Eugene Levich
                                    Title: President and Chief Executive Officer