CELERITY SYSTEMS INC, SB-2, 2000-09-07

CELERITY SYSTEMS INC
SB-2, 2000-09-07
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 7, 2000
REGISTRATION NO. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
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CELERITY SYSTEMS, INC.

(Name of small business issuer in its charter)

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<S> <C> <C>
DELAWARE 3651 52-2050585
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification No.)
of incorporation or organization) Classification Code Number)
</TABLE>

Celerity Systems, Inc.
122 Perimeter Park Drive
Knoxville, Tennessee 37922
(865) 539-5300
(Address and telephone number of principal executive offices)

Kenneth Van Meter, President
Celerity Systems, Inc.
122 Perimeter Park Drive
Knoxville, Tennessee 37922
(865)539-5300
(Name, address and telephone number of agent for service)

COPY TO:

Shalom Leaf, Esq.
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176
(212) 661-6500
(212) 697-6686 (fax)
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
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CALCULATION OF REGISTRATION FEE

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<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share, issuable upon
conversion of the outstanding principal amount of,
and other amounts due under, the Company's $619,980
principal amount of 8% Convertible Debentures due
2003(2).............................................. 1,131,000 $0.595 $672,945 $177.66
Common Stock, par value $.001 per share, issued April
and May, 2000 and common stock issuable upon the
exercise of certain outstanding warrants issued April
and May, 2000 and expiring on April and May, 2003.... 1,428,952 $0.595 850,226.44 224.46
Common Stock, $.001 par value, per share............... 2,086,596 $0.595 1,241,524.62 $327.76
Total.................................................. 4,646,548 $2,764,696.06 $729.88
</TABLE>

(1) Determined pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, on the basis of fluctuating market prices, solely for the purpose
of calculating the registration fee, and is the average of the high and low
prices reported on the OTC bulletin board for August 31, 2000.

(2) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the
Registrant hereby registers such additional shares as may be issuable
pursuant to certain anti-dilution provisions of any of the Convertible
Debentures described above.

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SUBJECT TO COMPLETION, DATED SEPTEMBER 7, 2000
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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PROSPECTUS

4,646,548 SHARES

[LOGO]

CELERITY SYSTEMS, INC.

COMMON STOCK

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The Selling Stockholders are offering 4,646,548 shares of common stock.
Celerity Systems, Inc. will not receive any proceeds from the sale of shares by
the Selling Stockholders.

Celerity markets interactive video products including digital video servers
and digital set up boxes. Our common stock is traded on the OTC bulletin board
under the symbol "CLRT". The last reported sale price of our common stock on
September 1, 2000 was $0.62 per share.

INVESTORS IN THE COMMON STOCK SHOULD HAVE THE ABILITY TO LOSE THEIR ENTIRE
INVESTMENT SINCE AN INVESTMENT IN THE COMMON STOCK IS SPECULATIVE AND SUBJECT TO
MANY RISKS, INCLUDING THE QUESTION WHETHER WE CAN CONTINUE AS A GOING CONCERN,
OUR NEED TO RAISE CAPITAL, AND OUR HISTORY OF LOSSES AND ACCUMULATED DEFICIT.
SEE "RISK FACTORS", BEGINNING ON PAGE 5.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS , 2000
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PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU
SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF INVESTING
IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 5.
REFERENCES IN THIS PROSPECTUS TO THE "COMPANY," "WE," "OUR," AND "US" REFER TO
CELERITY SYSTEMS, INC., A DELAWARE CORPORATION.

THE COMPANY

The Company markets interactive video products to a variety of markets. Its
principal products are digital video servers and digital set top boxes. The
Company's primary services include design, development, integration,
installation, operation, and maintenance services.

THE OFFERING

On behalf of several owners of certain of the Company's securities (the
"Selling Stockholders"), the Company is registering the following 4,646,548
shares of its common stock. See "Principal and Selling Stockholders" on page 36.

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Securities Offered by the
Selling Stockholders................. 1,428,952 shares of our Company's Common Stock (the "Common
Stock") that were issued in April and May 2000 or that may
be issuable upon exercise of outstanding warrants of the
Company issued in April and May 2000 and expiring in April
and May 2003; and

1,131,000 shares of Common Stock that are or may be issuable
upon conversion of the outstanding principal amount of, and
interest and other amounts due under the Company's 8%
Convertible Debentures due 2003; and

2,086,596 shares of Common Stock otherwise issued or
issuable.

Use of Proceeds...................... We will not receive any of the proceeds from the sale of the
shares of Common Stock offered by the Selling Stockholders
or upon conversion of any of the Convertible Securities
described herein. We will receive varying amounts upon
exercise of the warrants, although more than two-thirds of
the warrants are exercisable at $1.4375 per share. If all
the warrants are exercised, we will receive $593,609 which
we will use for general corporate purposes. Information
concerning the Selling Stockholders may change from time to
time and will be set forth in supplements to this
prospectus. See "Use of Proceeds", "Description of
Securities", and "Principal and Selling Stockholders" on
pages 16, 40, and 36, respectively.

Risk Factors......................... Investors in the Common Stock should have the ability to
lose their entire investment since an investment in the
Common Stock is speculative and involves a high degree of
risk, including questioning our ability can continue as a
going concern, our need to raise capital, and our history of
losses and accumulated deficit. See "Risk Factors" on page
5.
</TABLE>

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Offering Price....................... The Selling Stockholders may sell all or part of the shares
of Common Stock offered hereby from time to time in amounts
and on terms to be determined at the time of sale. See "Plan
of Distribution" on page 46.

OTC Bulletin Board Symbol............ "CLRT"
</TABLE>

RECENT DEVELOPMENT

On August 31, 2000, we consummated the sale of 41 shares of our Series A
convertible preferred stock ("Preferred Stock") to private investors for
$410,000 (the "Series A Placement"). Each share of the Preferred Stock has a
liquidation preference of $10,000. The Preferred Stock is convertible into
shares of Common Stock at a conversion price equal to the lesser of $1.40 per
share or 75% of the market price of the Common Stock at the time of conversion.
The Preferred Stock is convertible no earlier than 90 days from its issuance or
the date of effectiveness of a registration statement registering the Common
Stock into which the Preferred Stock is convertible. See "Description of
Securities--Series A Preferred Stock" on page 41.

The holders of the Preferred Stock can require us to redeem their shares and
we can redeem the Preferred Stock at our option upon the occurrence of certain
events at varying premiums over the liquidation preference. We have agreed to
register the Common Stock into which the Preferred Stock is convertible and to
have the applicable registration statement declared effective within 195 days of
the Preferred Stock's issuance. We will be required to pay the holders
liquidated damages if we do not timely file the registration statement, succeed
in having it declared effective as stated, and in certain other circumstances.
See "Description of Securities--Series A Preferred Stock" on page 41.

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RISK FACTORS

YOU SHOULD READ AND UNDERSTAND THE FOLLOWING RISK FACTORS CAREFULLY BEFORE
PURCHASING OUR COMMON STOCK. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY
FACTORS. THAT THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS BASED
ON CURRENT EXPECTATIONS WHICH INVOLVE RISKS AND UNCERTAINTIES IS MORE FULLY
DESCRIBED ON PAGE 49. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD
BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY
APPEAR IN THIS PROSPECTUS.

FINANCIAL RISKS RELATING TO THE COMPANY

ABILITY TO CONTINUE AS A GOING CONCERN

There is substantial uncertainty about our ability to continue as a going
concern. The report of our independent accountants with respect to our
December 31, 1998 and December 31, 1999 financial statements contains an
explanatory paragraph regarding this uncertainty and expressed substantial doubt
about such ability resulting from our recurring losses, and cash flow and
working capital problems. We have also significantly scaled back our operations
as a result of these factors. The lack of sales or a significant financial
commitment raises substantial doubt about our ability to continue as a going
concern or to operate our business on a full-scale basis. There can be no
assurance that we will ever receive the funds necessary for us to continue as a
going concern or to operate our business.

NEED FOR ADDITIONAL FINANCING

At June 30, 2000 we had cash and cash equivalents of approximately $449,300
and a negative working capital of approximately $202,000, and we are dependent
upon the receipt of additional financing in order to continue as a viable
entity. We will not be able to continue operations without additional financing.
The receipt of any additional net proceeds will be applied to our working
capital needs and outstanding obligations. We cannot assure you that such
additional financing will be available when needed on acceptable terms, if at
all.

HISTORY OF LOSSES AND ACCUMULATED DEFICIT

We had net losses of approximately $8,675,000 for 1997, $6,955,800 for 1998,
$5,408,200 for 1999 and $3,282,400 for the six months ended June 30, 2000. We
had an accumulated deficit of approximately $14,472,100 at December 31, 1997,
$21,428,000 at December 31, 1998, $26,836,100 at December 31, 1999 and
$30,118,500 at June 30, 2000. Our losses have continued since June 30, 2000. We
cannot assure you that the losses will shrink or cease, that we will ever
operate profitably, or continue as a going concern. We may experience
fluctuations in future operating results as a result of a number of factors,
including delays in digital video product enhancements and new product
introductions. We cannot assure you that we will be able to develop commercially
successful products or that we will recognize significant revenues from such
products.

RISKS RELATING TO THE COMPANY'S STOCK AND OTHER SECURITIES

NEED FOR INCREASE IN AUTHORIZED SHARES OF COMMON STOCK

We believe that our ability to survive depends on our ability to increase
the number of authorized shares of Common Stock that we can issue. Our
stockholders have been asked to approve an amendment to our Certificate of
Incorporation authorizing our Board of Directors to issue an additional 35
million shares of Common Stock, raising the number of authorized shares of
Common Stock from 15,000,000 to 50,000,000. Our Board of Directors unanimously
adopted a resolution to this

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effect and recommends that the stockholders approve such amendment at the
upcoming 2000 Annual Meeting of Stockholders, currently scheduled for
.

As of August 11, 2000, 12,541,681 shares of Common Stock were outstanding
and 3,418,496 shares are reserved for issuance in relation to outstanding
options, warrants, our Stock Option Plans, and shares issuable upon conversion
of convertible securities, including those that feature fluctuating conversion
prices ("Fluctuating Price Securities"). Accordingly, without considering the
Series A Placement we have obligations to issue 960,177 shares of Common Stock
which are not authorized by our Certificate of Incorporation. At August 31,
2000, converting the securities issued in connection with the Series A Placement
on a pro forma basis, we would have issued an additional 747,650 shares of
Common Stock (approximately) from the conversion of the Preferred Stock and
360,000 shares of Common Stock from the exercise of the warrants issued as part
of the placement fee.

The Board of Directors considers this proposed increased in the number of
our authorized shares of Common Stock a matter critical to our survival. We have
financed our operations through the issuance of Common Stock and securities
exercisable for or convertible into Common Stock. We no longer have any
authorized shares that we can issue for additional financing. Without the
approval of this amendment, we will be forced to find alternative sources of
capital which management believes will be very difficult, if possible at all.

FLUCTUATING PRICE SECURITIES

We have issued securities which are convertible into shares of Common Stock
which feature fluctuating conversion prices ("Fluctuating Price Securities"),
set as a percentage of the market price of the Common Stock, and the existence
of such securities could have a negative impact on the market price of the
Common Stock. Our Fluctuating Price Securities consist of three tranches of
convertible debentures (the "Convertible Debentures") and the Preferred Stock
(together with the Convertible Debentures, the "Convertible Securities"). The
conversion price of the Preferred Stock and all the Convertible Debentures is a
percentage of the market price of our Common Stock; other terms of the three
tranches vary. The lower the price of the Common Stock at the time of
conversion, the more shares a holder of Convertible Securities receives upon
conversion of the Convertible Securities; the higher the price of the Common
Stock at the time of conversion, the fewer shares a holder receives upon
conversion. At August 31, 2000, $969,579, aggregate principal amount, of
Convertible Debentures was outstanding.

In total, at August 31, 2000, we had issued an aggregate of 2,822,468 shares
of Common Stock upon conversion of Convertible Debentures. We would have issued,
approximately, an additional 1.79 million shares, approximately, had conversion
notices for all outstanding Convertible Debentures been received effective
August 31, 2000. If the Preferred Stock had been outstanding and fully
convertible on August 31, 2000, and its holders delivered conversion notices
effective at such date for all 41 shares and we had sufficient authorized but
unissued shares of Common Stock to honor such conversions (none of such
conditions being true), we would have issued approximately 747,650 shares
pursuant to such conversions. In connection with the Series A Placement, we
issued five-year warrants to purchase 360,000 shares of Common Stock at an
exercise price of $0.70 per share. See "Description of Securities--Series A
Preferred Stock" on page 41.

POTENTIAL DILUTION

Conversions of Fluctuating Price Securities could have a substantially
dilutive effect on the interests of current holders of Common Stock. The
issuance of Common Stock upon conversions of Convertible Securities will have a
dilutive effect on the interests of other holders of Common Stock as long as the
price of the Common Stock remains above the maximum exercise price in the
respective Convertible Securities. Depending on the amount of Convertible
Securities that are eligible to be converted and are actually converted, any
downward movement of the price of the Common Stock, and

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the prices at which holders of Convertible Securities convert and the number of
shares issued, the dilutive effect on existing holders of Common Stock could be
substantial.

Conversions of the Convertible Securities and sales of the Common Stock
issued upon conversion could lower the price of the Common Stock due to the
additional supply of shares in the public marketplace. Subsequent conversions
and sales, putting additional shares of Common Stock into the market, could
lower the price further. Any decrease in the price of the Common Stock could
attract the attention of investors, including holders of Convertible Securities,
and encourage short sales of the Common Stock. Short sales could place further
downward pressure on the price of the Common Stock.

DEFAULT ON OBLIGATIONS TO REGISTER SHARES OF COMMON STOCK

All Common Stock issuable upon the conversion of any portion of the
Convertible Securities is "restricted" stock, meaning that it is not registered
under the 1933 Act, as amended, and cannot be sold except pursuant to an
exemption thereto. Accordingly, the respective transaction documents obligate us
to register such Common Stock for the purpose of permitting the holders thereof
to sell such stock on the open markets at a time of their choosing. We have not
timely filed a registration statement covering the shares into which a portion
of Convertible Debentures are convertible, and we are required to pay the
holders of those debentures 2% per month of the principal amount outstanding as
liquidated damages until such a registration statement is declared effective. As
$619,980 of such debentures are outstanding, approximately $12,400 is payable
monthly, in cash or stock at the option of the holder of the debentures. On
June 4, 2000, we made a payment of $9,000 toward our obligations for the month
of May 2000.

If the registration statement of which this Prospectus is a part is not
declared effective prior to December 21, 2000, we will be in default of our
registration obligations toward Kidston Consultants, LLC ("Kidston") and will
begin owing liquidated damages of approximately $20,400 each month a
registration statement registering their shares is not declared effective.

We have agreed to register the Common Stock into which the Preferred Stock
is convertible and for which certain warrants may be exercised within 60 days
following issuance of the Preferred Stock and to have the applicable
registration statement declared effective within 195 days of the Preferred
Stock's issuance. We will be required to pay the holders liquidated damages if
we do not timely file the registration statement (75 days from issuance),
succeed in having it declared effective as stated, and in certain other
circumstances. See "Description of Securities--Series A Preferred Stock" on
page 41.

COMMON STOCK TRADES ON THE OTC BULLETIN BOARD AND IS SUBJECT TO PENNY STOCK
RULES

Our loss of access to the Nasdaq SmallCap market could have a material
adverse effect on the Company's business prospects. The Common Stock was
delisted from trading on the Nasdaq SmallCap Market effective October 21, 1999
and is now traded on the OTC bulletin board. The delisting followed a Nasdaq
panel's determination that we did not meet the $1.00 per share bid price and
$2,000,000 net tangible assets requirements to maintain our listing on the
Nasdaq SmallCap Market. The panel also cited the explanatory paragraph in our
auditors report on our December 31, 1998 financial statements regarding
substantial doubt about our ability to continue as a going concern. Nasdaq
provides brokers and others with immediate access to the best bid and asked
prices, as well as other information, about our Common Stock. With the loss of
the designation, stockholders may find it more difficult to buy, sell and obtain
pricing information, as well as news coverage about our Common Stock. The
delisting may also lessen investors' interest in our securities generally and
materially adversely affect the trading market and prices for such securities
and our ability to issue additional securities or to secure additional
financing.

The price of the Common Stock could make it more difficult for stock holders
to sell their shares. As long as the trading price of the Common Stock is less
than $5.00 per share, (the closing bid price on August 11, 2000 was $0.9844) the
Common Stock will be subject to Rule 15g-9 under the Securities

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Exchange Act of 1934, as amended (the "1934 Act"). Such a stock price could also
cause the Common Stock to become subject to the SEC's "penny stock" rules and
the Securities Enforcement and Penny Stock Reform Act of 1990. The penny stock
rules impose additional sales practice requirements on broker-dealers who sell
penny stock securities to people who are not established customers or accredited
investors. For example, the broker must make a special suitability determination
for the buyer and the buyer must be given written consent before the sale. The
rules also require that the broker-dealer:

- send buyers an SEC-prepared disclosure schedule before completing the
sale,

- disclose his commissions and current quotations for the security,

- disclose whether the broker-dealer is the sole market maker for the penny
stock and, if so, his control over the market, and

- send monthly statements disclosing recent price information held in the
customer's account and information on the limited market in penny stocks.

These additional burdens may discourage broker-dealers from effecting
transactions in the Common Stock. Thus, if our Common Stock were to fall within
the definition of a penny stock, the Company's liquidity could be reduced, and
there could be an adverse effect on its trading market.

SHARES ELIGIBLE FOR FUTURE SALE

Other than certain shares held by certain of our affiliates, substantially
all of our shares of Common Stock are freely transferable without restriction or
further registration under the Securities Act. The remaining shares are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act. These restricted securities may be sold pursuant to Rule 144, other than
shares of Common Stock underlying certain options, warrants and convertible
securities which may be sold under Rule 144 pursuant to Rule 701 under the
Securities Act or if "cashless exercise" provisions are utilized in connection
with their exercise. The sale of a substantial number of shares of Common Stock
or the availability of Common Stock for sale could adversely affect the market
price of the Common Stock. See "Shares Eligible for Future Sale" on page 45.

VOLATILITY OF STOCK PRICE

The market prices of equity securities of computer technology and software
companies have experienced extreme price volatility in recent years for reasons
not necessarily related to the individual performance of specific companies.
Accordingly, the market price of the Common Stock may be highly volatile. The
market price of the Common Stock may be significantly affected or may fluctuate
substantially due to factors such as the following: announcements by the Company
or its competitors concerning products, patents, technology and governmental
regulatory actions; other events affecting computer technology and software
companies generally; and general market and economic conditions. See "Market
Information" on page 17.

NON-CASH CHARGES

We are required to reflect the difference between the aggregate conversion
price of all of the Convertible Securities and the current fair market value (on
the date of issuance of the respective Convertible Securities) of the common
shares underlying the Convertible Securities as a discount on the Convertible
Securities and as additional paid in capital. This discount is amortized as a
noncash interest expense over a 90-day period beginning on the date of issuance
of the Convertible Securities.

Noncash charges in 1999 were $285,235, and in the first half of 2000, were
$658,339. As of August 30, 2000, no noncash charges relating to such issuances
were accruing, but issuance of the

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Preferred Stock will cause us to take noncash charges in the third and fourth
quarter of 2000 of $13,928 and $27,857 in the fourth quarter.

If we issue additional securities convertible into Common Stock at a
discount to the then current price of the Common Stock, an applicable noncash
charge must be taken. See Note 9 to the financial statements.

LACK OF DIVIDENDS

We have never paid any dividends on our Common Stock. We anticipate that,
for the foreseeable future, any earnings that may be generated from operations
will be used to support internal growth and that dividends will not be paid to
stockholders. See "Dividend Policy" on page 16.

RISKS RELATING TO THE COMPANY OPERATIONS

DEPENDENCE ON KEY PERSONNEL

Our success depends to a significant extent on the performance and continued
service of senior management, particularly Kenneth D. Van Meter. Our failure to
retain the services of key personnel or to attract additional qualified
employees could materially adversely affect us.

We entered into employment agreements with Messrs. Van Meter and West,
however, both agreements have expired and have not been renewed. Mr. Van Meter
continues to work for us without a contract. See "Management--Employment
Agreements" on page 35.

We do not carry key-man insurance on Mr. Van Meter.

NECESSITY OF ATTRACTING AND RETAINING EMPLOYEES

We currently have six employees, down from approximately 45 employees in
July 1998. As of September 1, 2000, we owed over $190,000 to our former
employees and will not be able to continue to pay our current employees if we do
not obtain additional funds to pay them. Their departure could have a material
adverse effect on the Company. See "Business--Employees" on page 29.

RELIANCE ON KEY CUSTOMERS

We have only two customers to whom we have obligations to sell products.

WIT Technologies, Inc. ("WIT") of Seattle, Washington, has signed an
agreement with us to buy a minimum of 500,000 set top boxes and a small number
of CTL 9500 digital video servers over the next five years and is also obligated
to place its first order by September 30, 2000. The Company estimates that,
should this order be fulfilled, this would result in approximately $275 million
in revenue over five years. However, if WIT fails to make its minimum purchases,
only $100,000 in liquidated damages become payable to us. See
"Business--Customers" on page 26.

Any termination or material alteration of the business relationship with WIT
could have a significant adverse effect on our business. If WIT is unable or
unwilling to comply with the terms of its agreement with us, our ability to
conduct the business of the Company may be materially affected.

In February 1999, the Company received a purchase order from Hopkinsville
Electric Service ("HES") which included one CTL 9000 digital video server and up
to 1,000 T 6000 digital set top boxes. HES has paid a deposit on 25 set top
boxes which was scheduled to ship in the second quarter of 1999, along with the
CTL 9000 digital video server. However, HES' network is not yet available, and,
given the aged nature of this order, we are uncertain when, if ever, HES will
request delivery of the balance of this order.

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NEED FOR STRATEGIC ALLIANCES

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

LIMITED SALES; LIMITED MARKETING AND SALES EXPERIENCE

We have limited resources and limited experience in marketing and selling
our products. We had less than $86,000 in revenues for 1999 from continuing
operations, and have had no revenues in the first six months of 2000 from
interactive video products and services. We discontinued our CD-ROM segment,
although we have continued to receive small orders in 1999 and 2000. We cannot
assure you that we will be able to establish and maintain adequate marketing and
sales opportunities or make arrangements with others to perform such activities.

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

DEPENDENCE ON SUPPLIERS; MANUFACTURING RISKS

One of our principal products, the CTL 9500 video server, is manufactured by
nCube Corporation of Foster City, California ("nCube") on an OEM basis. While we
believe nCube to be a reliable supplier, our agreement with them is only for two
years and began in June 2000. If nCube proves unable or unwilling to comply with
the terms of our agreement, a material adverse effect on the Company could
result. See "Business--Products" on page 24.

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

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

VARIABILITY OF QUARTERLY OPERATING RESULTS

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

10
<PAGE>
sales and product development cycles for interactive video products can be
relatively long and may depend on factors such as the size and scope of our
projects. Other than our agreement with WIT, we have not received a substantial
new order for continuing operations since May 1999. Furthermore, as a result of
a variety of other factors, including the introduction of new products and
services by competitors, and pricing pressures and economic conditions in
various geographic areas where our customers and potential customers do
business, our sales and operating results may vary substantially from year to
year and from quarter to quarter. The variation in sales and operating results
may be expected to increase as a result of discontinuing of our CD-ROM
operations. In addition, the timing of revenue recognition for revenue received
from long term projects under our accounting policies may also contribute to
significant variations in our operating results from quarter to quarter.

RISKS RELATING TO THE TECHNOLOGY MARKETPLACE

COMPETITION

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

UNCERTAIN MARKET ACCEPTANCE

To date, we have not gained wide market acceptance for our products. We are
engaged in the design and development of interactive video products. As with any
new technology, there is a substantial risk that the marketplace may not accept
the technology utilized in our products. Market acceptance of our products will
depend, in large part, upon our ability to demonstrate the performance
advantages and cost-effectiveness of their products over competing products and
the general acceptance of interactive video services. In particular, we believe
that widespread deployment of interactive video systems will depend on a number
of factors, including: decreases in the cost per subscriber; the
"user-friendliness" of such systems, particularly set top boxes and remote
controls which are relatively easy to understand and use; and improvements in
the quantity and quality of interactive services available. Although recent
developments have reduced the cost per subscriber, and we anticipate that such
costs will continue to decrease as interactive video systems are more widely
deployed, the current cost per subscriber may make the system too expensive for
a number of potential network operators. We cannot assure you that they will be
able to market their technology successfully or that any of their current or
future products will be accepted in the marketplace.

NO ASSURANCE OF TECHNOLOGICAL SUCCESS

Our ability to commercialize our products is dependent on the advancement of
our existing technology. In order to obtain and maintain a significant market
share we will continually be required to make advances in technology. Because of
our lack of funds, we have essentially ceased research and development efforts,
except for incremental improvements to the existing T 6000 set top box. If we
resume such efforts, we cannot assure you that our research and development
efforts will result in the development of such technology on a timely basis or
at all. Our failure to resume such efforts or any failures in such research and
development efforts could result in significant delays in product development
and have a material adverse effect on the Company. We cannot assure you that we
will not encounter unanticipated technological obstacles which either delay or
prevent us from completing the development of our products. We believe there are
certain technological obstacles to be overcome in order to develop future
products. These obstacles include the lack of an electronic data interchange
server interface (used for real-time exchange of data between servers) and
enhancements in the ability

11
<PAGE>
to access and utilize information stored on remote servers. In certain cases, we
will be dependent upon technological advances which must be made by third
parties. We cannot assure you that they or such third parties will not encounter
technological obstacles which either delay or prevent us from completing the
development of our future products. Such obstacles could have a material adverse
effect on the Company. See "Business--Research and Developments Costs" on
page 28.

PRODUCT OBSOLESCENCE; TECHNOLOGICAL CHANGE

The industries in which we operate is characterized by unpredictable and
rapid technological changes and evolving industry standards. We will be
substantially dependent on our ability to identify emerging markets and develop
products that satisfy such markets. We cannot assure you that we will be able to
accurately identify emerging markets or that any products we have or will
develop will not be rendered obsolete as a result of technological developments.
We believe that competition in our business may intensify as technological
advances in the field are made and become more widely known. Many companies with
substantially greater resources than ours are engaged in the development of
products similar to those we sell. Commercial availability of such products
could render our products obsolete, which would have a material adverse effect
on the Company. From time to time, we may announce new products or technologies
that have the potential to replace our existing products offerings. We cannot
assure you that the announcement or expectation of new product offerings by us
or others will not cause customers to defer purchases of our existing products,
which could materially adversely affect the Company.

ERRORS AND OMISSIONS; SOFTWARE AND HARDWARE BUGS

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

LACK OF PATENT AND COPYRIGHT PROTECTION

Although we have filed a provisional patent application with respect to
certain technologies contained in our T 6000 set top box, we hold no patents and
have not generally filed patent applications. Our methods of protecting our
proprietary knowledge may not afford adequate protection. We cannot assure you
that any patents applied for will be issued, or, if issued, that such patents
would provide them with meaningful protection from competition. It is possible
that our technology will be subject to theft and infringement. Furthermore, in
accordance with our current business plan, it will be necessary for us to make
our intellectual property available to vendors, customers, and other companies
in the industry, making it even more difficult to protect our technology.

RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT

Technology-based industries, such as ours, is characterized by an increasing
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright and
other intellectual property rights to technologies that we use and are important
to our products. While there currently are no outstanding infringement claims
pending by or against us, we cannot assure you that third parties will not
assert infringement claims against us in the future, that assertions by such
parties will not result in costly litigation, or that they will not prevail in

12
<PAGE>
any such litigation. In addition, we cannot assure you that we will be able to
license any valid and infringed patents from third parties on commercially
reasonable terms or, alternatively, be able to redesign products on a
cost-effective basis to avoid any alleged infringement. Any infringement claim
or other litigation against or by us could have a material adverse effect on the
Company.

EFFECT OF INDUSTRY STANDARDS AND COMPATIBILITY WITH EQUIPMENT AND SOFTWARE

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

RISKS RELATING TO MANAGEMENT'S CONTROL OF THE COMPANY AND CHANGES OF CONTROL

CONTROL BY MANAGEMENT

Our officers and directors beneficially own approximately 14.3% of the
outstanding Common Stock. As a result of such ownership, management may have the
ability to control or substantially influence both the election of the directors
and the outcome of issues submitted to a vote of stockholders.

POSSIBLE EFFECTS OF THE CONVERTIBLE DEBENTURES

The existence of the Convertible Securities may discourage attempts to
acquire the Company. In response to information regarding a possible acquisition
attempt, holders of Convertible Securities could elect to convert any or all of
their holdings of Convertible Securities into Common Stock, thus raising the
amount of Common Stock an acquirer must acquire to gain control of the Company.
Also, any Convertible Securities that the holders do not convert would remain
outstanding after an acquisition unless the acquirer or the Company redeems the
Convertible Securities at 125% or 135% of the principal amount of the applicable
debentures or of the liquidation preference (plus interest) of the Preferred
Stock. Any future issuances of GMF Debentures would not be redeemable at our
option and would either remain outstanding after an acquisition, representing
future dilution to the interest of the acquirer, or would require private
negotiations by the acquirer to purchase those securities. All outstanding
Convertible Debentures, by their terms, become obligations of an entity which
assumes all our liabilities.

All the Convertible Debentures contain a provision that states that we are
not obligated to issue such number of shares of the Common Stock that would
constitute a change of control of the Company or would exceed 19.99% of our then
outstanding Common Stock. Furthermore, the Spring 1999 Debentures contain a
provision which restricts us from issuing any holder thereof an amount of Common
Stock, which when combined with such holder's existing Common Stock ownership,
would exceed 4.99% of the then outstanding Common Stock. These provisions were
included to comply with regulations of the Nasdaq SmallCap Market (which no
longer apply to us), to prevent holders from becoming our affiliate, and to
prevent a security holder from taking control of the Company without the
affirmative vote of the holders of our Common Stock. See "Description of
Securities--Convertible Debentures" on page 43.

POSSIBLE EFFECTS OF THE PREFERRED STOCK

The existence of the Preferred Stock may discourage attempts to acquire the
Company. In response to information regarding a possible acquisition attempt,
holders of Preferred Stock could elect

13
<PAGE>
to convert any or all of their holdings into Common Stock, thus raising the
amount of Common Stock an acquirer must acquire to gain control of the Company.

The Preferred Stock requires that we give them written notice of a Major
Transaction (as defined in the Certificate of Designation) between 15 and 10
days prior to its consummation. After receipt of such notice, if holders of
two-thirds of Preferred Stock then outstanding vote in favor of redemption, we
will be required to redeem all the outstanding shares of Preferred Stock at the
greater of the Liquidation Value (as defined in the Certificate of Designation)
or the value of Common Stock the holders would have received had they converted.

The Preferred Stock restricts us from issuing to any holder thereof an
amount of Common Stock, which when combined with such holder's existing Common
Stock ownership, would exceed 4.99% of the then outstanding Common Stock. This
provision was included to prevent holders from becoming our affiliate. See
"Description of Securities--Series A Preferred Stock" on page 41.

EXISTENCE OF "BLANK CHECK" PREFERRED STOCK

Our Certificate of Incorporation authorizes our Board of Directors to issue
up to 2,999,950 shares of "blank check" preferred stock. The Board of Directors,
without stockholder approval, may fix all the rights of the preferred stock. The
issuance of such stock could, among other results, negatively affect the voting
power of the holders of Common Stock. Under certain circumstances, the issuance
of the preferred stock would make it more difficult for a third party to gain
control of the Company, discourage bids for the Common Stock at a premium, or
otherwise adversely affect the market price of the Common Stock. Such provisions
may discourage attempts to acquire the Company. See "Description of
Securities--Preferred Stock" on page 40.

ANTI-TAKEOVER EFFECTS ASSOCIATED WITH DELAWARE LAW

In addition, certain provisions of Delaware law may also discourage third
party attempts to acquire control of the Company without the approval of the
Board of Directors, even if such acquisition would be beneficial to
stockholders. See "Description of Securities--Delaware Anti-Takeover Law" on
page 45.

LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS

Our Certificate of Incorporation includes provisions to eliminate, to the
extent permitted by law, the personal liability of directors for monetary
damages arising from a breach of their fiduciary duties as directors. Our
Certificate of Incorporation also includes provisions to the effect that
(subject to certain exceptions) we shall indemnify, and upon request shall
advance expenses to, any director in connection with any action related to such
a breach of their fiduciary duties as directors to the extent permitted by law.
In addition, our Certificate of Incorporation requires that we indemnify any
director, officer, employee or agent of ours for acts which such person
conducted in good faith. As a result of such provisions, stockholders may be
unable to recover damages against the directors and officers for actions taken
by them which constitute negligence, gross negligence, or a violation of their
fiduciary duties. This may reduce the likelihood of stockholders instituting
derivative litigation against directors and officers. This may also discourage
or deter stockholders from suing directors, officers, employees, and agents of
ours for breaches of their duty of care, even though such action, if successful,
might otherwise benefit the Company and our stockholders. See "Description of
Securities--Directors' Limitation of Liability and Indemnification" on page 44.

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<PAGE>
OTHER BUSINESS RISKS

PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE

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

GOVERNMENT REGULATION

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

GENERAL ECONOMIC CONDITIONS

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

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<PAGE>
THE COMPANY

We were incorporated in Tennessee in 1993 and were reincorporated in
Delaware in August 1997. We design, develop, integrate, install, operate, and
support interactive video services hardware and software. In the interactive
video services area, we seek to provide solutions, including products and
services developed by us and by strategic partners, that enable interactive
video programming and applications to be provided to a wide variety of market
niches.

Our principal executive offices are located at 122 Perimeter Park Drive,
Knoxville, Tennessee 37922 and our telephone number is (865) 539-5300. We
maintain a website at http://www.celerity.com. This reference to our website
address does not constitute incorporation by reference of the information
contained on our website, so you should not consider any information on this
website to be a part of this prospectus.

RECENT DEVELOPMENT

On August 31, 2000, we consummated the sale of 41 shares of our Series A
convertible preferred stock ("Preferred Stock") to private investors for
$410,000 ( the "Series A Placement"). Each share of the Preferred Stock has a
liquidation preference of $10,000. The Preferred Stock is convertible into
shares of Common Stock at a conversion price equal to the lesser of $1.40 per
share or 75% of the market price of the Common Stock at the time of conversion.
The Preferred Stock is convertible no earlier than 90 days from its issuance or
the date of effectiveness of a registration statement registering the Common
Stock into which the Preferred Stock is convertible. See "Description of
Securities--Series A Preferred Stock" on page 41.

The holders of the Preferred Stock can require us to redeem their shares and
we can redeem the Preferred Stock at our option upon the occurence of certain
events at varying premiums over the liquidation preference. We have agreed to
register the Common Stock into which the Preferred Stock is convertible and to
have the applicable registration statement declared effective within 195 days of
the Preferred Stock's issuance. We will be required to pay the holders
liquidated damages if we do not timely file the registration statement, succeed
in having it declared effective as stated, and in certain other circumstances.
See "Description of Securities--Series A Preferred Stock" on page 41.

USE OF PROCEEDS

We will not receive any proceeds from any sale of the shares offered hereby
or upon conversion of the Convertible Securities. We will receive varying
amounts upon exercise of the warrants although more than two-thirds of the
warrants are exercisable at $1.4375 per share. If all the warrants are
exercised, we will receive $593,609 which we will use for general corporate
purposes. See "Principal and Selling Stockholders" and "Plan of Distribution" on
pages 36 and 46, respectively.

DIVIDEND POLICY

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

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<PAGE>
MARKET INFORMATION

The Common Stock ceased trading on the Nasdaq SmallCap Market on
October 21, 1999 and is currently traded on the OTC Bulletin Board under the
symbol "CLRT". See "Risk Factors--Common Stock Trades on the OTB Bulletin Board
and is Subject to Penny Stock Rules" on page 7.

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

<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal year 1998
3rd Quarter............................................. $2.500 $0.938
4th Quarter............................................. $2.688 $0.656

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

Fiscal year 2000
1st Quarter............................................. $2.438 $0.516
2nd Quarter............................................. $2.250 $0.297
3rd Quarter through September 1, 2000................... $1.375 $0.594
</TABLE>

As of August 11, 2000 there were approximately 122 holders of record of the
Common Stock.

We have not paid dividends on the Common Stock since inception and do not
intend to pay any dividends to our stockholders in the foreseeable future. We
currently intend to retain earnings, if any, for the development and expansion
of the business. The declaration of dividends in the future will be at the
election of the Board of Directors and will depend upon our earnings, capital
requirements and financial position, general economic conditions and other
factors the Board of Directors deems relevant. See "Dividend Policy" on
page 16.

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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial
statements and notes thereto and other financial information appearing elsewhere
in this prospectus. Statements in this Management's Discussion and Analysis or
Plan of Operation and elsewhere in this prospectus that are not statements of
historical or current fact constitute "forward-looking statements." Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors including those set forth herein under the caption "Risk Factors"
that could cause our actual results to be materially different from the
historical results or from any future results expressed or implied by such
forward-looking statements. Such risks include, without limitation, our history
of losses and accumulated deficit, and need for additional financing; risks
applicable to foreign sales, our lack of assurance in our technological success,
competition and others. In addition to statements which explicitly describe such
risks and uncertainties, prospective investors are urged to consider statement
labeled with the terms "believes," "belief," "expects," "intends,"
"anticipates," or "plans" to be uncertain and forward-looking.

IMPORTANT NOTE

- There is substantial uncertainty about our ability to continue as a going
concern. See "Risk Factors--Ability to Continue as a Going Concern" on
page 5;

- Our supply of cash is dangerously low; at June 30, 2000 we had cash and
cash equivalents of approximately $449,300 and a negative working capital
of approximately $202,000, and we are dependent upon the receipt of
additional financing in order to continue operations (even at our scaled
back level). See "Risk Factors--Need for Additional Financing" on page 5;
and

- Our operations have generated multi-million dollar losses and an
accumulated deficit of approximately $30,118,500 at June 30, 2000. See
"Risk Factors--History of Losses and Accumulated Deficit" on page 5. See
also "--Liquidity and Capital Resources" on page 21.

UPCOMING STOCKHOLDERS' MEETING

Even prior to the Series A Placement, we had contingent obligations to issue
960,177 shares of Common Stock which are not authorized by our Certificate of
Incorporation, after taking into account 1,240,567 shares issuable pursuant to
warrants and options which contain exercise prices in excess of the current
market price of the Common Stock. The Series A Placement added contingent
obligations to issue approximately 747,650 shares (calculating the conversion
price at August 31).

The Board of Directors considers this proposed increase in the number of our
authorized shares of Common Stock a matter critical to our survival. We have
financed our operations through the issuance of Common Stock and securities
exercisable for or convertible into Common Stock. We no longer have any
authorized shares that we can issue for additional financing. Without the
approval of this amendment, we will be forced to find alternative sources of
capital which we believe will be very difficult, if possible at all.

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<PAGE>
OVERVIEW

Prior to 1998, the Company's major activity was selling digital video
servers in the interactive video services market to customers abroad. Beginning
in 1998, the Company has focused its sales efforts in North America, and
developed and sold the first production units of a new digital set top box, the
T 6000. The Company continued to focus most of its development and production
efforts during 1998 and although on a much more limited basis through 1999 and
into 2000 on the T 6000, while also seeking new projects for the Company's
digital video servers, which could be deployed with the T 6000 or other
compatible set top boxes.

In February 1999, the Company received a purchase order from HES which
included one CTL 9000 digital video server and up to 1,000 T 6000 digital set
top boxes. This order was expected to ship in the second quarter of 1999, but
HES' network is not yet available, and, given the aged nature of this order, we
are uncertain when, if ever, HES will request delivery of the balance of this
order. The value of this purchase order in total is approximately $1,024,000,
although to date HES has only paid approximately $13,000 in early 1999 as a
deposit on 25 set top boxes.

On June 22, 2000, WIT executed a written agreement saying that for the next
five years it would purchase all of its requirements for digital set top boxes
and digital video servers from us, unless we were unwilling or unable to fill an
order. WIT is obligated to order a minimum of 500,000 set top boxes, with the
added requirement that it place its first order by September 30, 2000. The
Company estimates that, should this order be fulfilled, this would result in
approximately $275 million in revenue over five years. If it fails to meet its
minimum purchase obligation, it must pay $100,000 in liquidated damages.

On August 10, 1999, we entered into a definitive agreement to merge with
FutureTrak International, Inc., a firm specializing in the multi-dwelling unit
marketplace, which contemplated the merger of FutureTrak into a wholly-owned
subsidiary of the Company. However, on December 7, 1999, we jointly terminated
the merger agreement primarily because efforts to obtain necessary funding for
the planned activities of the merged companies had not proven successful.

In December 1999, the Company entered into a manufacturing agreement with
Global PMX Company, Limited, under which T 6000 digital set top boxes are to be
manufactured in Global PMX plants in Taiwan.

In June 2000 the Company entered into an agreement with nCube Corporation
which, among other things, provided that nCube will manufacture the Company's
CTL 9500 digital video server.

Management has also focused on attempting to obtain the necessary capital to
maintain our operations. We are continuing to seek to arrange financing,
including possible strategic investment or opportunities to sell some or all of
our assets and business, while continuing to pursue sales opportunities. We have
narrowed our sales efforts to those which, we believe, have the best chance of
closing in the near term. Since October 1998, our sales efforts have been
supervised by our President. In March 2000, we hired a Director of Sales and
Marketing. We continue to encounter a longer and more complex sales cycle and to
realize fewer sales than previously anticipated. However, management believes
that we are now better positioned to become an important participant in many of
its key market segments. There can be no assurance that this will be the case.
Because of our long-term sales cycle, period-to-period comparisons set forth
below may not be meaningful and may not necessarily be indicative of the results
that may be expected for future periods.

Our CD-ROM business segment and assets have been written down to zero, and
are completely inactive except for filling any miscellaneous customer orders
which may be received. The segment is accounted for as a discontinued operation.

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<PAGE>
We have one interactive video customer that represented 50% of our revenues
in 1999 and 0% in the first half of 2000, and one CD-ROM customer, income from
which was treated as income from discontinued operations. Sales to Canada
represented 35% of revenues for 1999 and 0% for the first half of 2000.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999

Revenues

There were no revenues for the six months ended June 30, 2000 as compared to
approximately $81,000 for the same period in 1999. The primary reason for this
decrease is due to the lack of interactive video sales in 2000. The low level of
interactive video sales is partially a result of the constrained sales and
marketing activities caused by our cash situation.

Costs of Revenues

Costs of revenues for the six months ended June 30, 2000 were approximately
$685,000 as compared to approximately $20,000 in 1999. Our negative gross margin
was approximately $685,000 for the six months ended June 30, 2000 as compared to
a gross margin of approximately $62,000 for the same period in 1999.

The increase in costs of revenues was primarily due to additional inventory
obsolescence associated with an agreement with nCube Corporation to manufacture
our updated line of digital video servers. A significant portion of the revenues
generated in 1999 were for services that had little or no associated costs
incurred in 1999.

Operating Expenses

Operating expenses for the six months ending June 30, 2000 were
approximately $1,897,000 as compared to $1,596,000 for the same period in 1999.
Operating expenses increased due to the engagement of consultants to assist us
with investor relations and investment banking and non-cash payments of
directors' fees for prior years' services. These increases of approximately
$1,005,000 are all non-cash expenses. Amortization increased due to the initial
closing of a private offering in which approximately $1,787,000 of outstanding
debt was canceled in exchange for Common Stock and warrants (Note 14). These
increases were partially offset by a reduction in payroll, facility and
depreciation expenses of approximately $890,000 in 2000 from 1999. These
decreases reflect our continuing efforts to conserve cash and to minimize
operating costs. Employment decreased from an average of approximately 30 full
time staff during the first quarter of 1999 to a current level of approximately
five during the first half of 2000. In January, 2000, we relocated to a
significantly less costly facility. This relocation resulted in the abandonment
of certain leashold improvements and furniture recorded as part of a capitalized
lease which was returned.

Interest Expense

Interest expense in the first six months of 2000 was approximately $746,000
as compared to approximately $288,000 in the first six months of 1999. Of these
amounts, approximately $670,000 and $141,000 in 2000 and 1999, respectively, are
non-cash expenses related to the convertible features of certain debentures
issued in 2000 and 1999.

Net Loss

As a result of the above factors, net loss from continuing operations for
the six months ended June 30, 2000 was approximately $3,319,000 as compared to
$1,776,000 for the same period in 1999.

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<PAGE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

Revenues

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

Costs of Revenues

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

Operating Expenses

Operating expenses for the twelve months ended December 31, 1999 were
$4,667,719, as compared to $6,810,757 for the same period in 1998. The decrease
is due to the significant reduction in personnel costs. During 1999 we reduced
our workforce to approximately five employees, due in large measure to our
inability to realize sufficient cash flow from operations.

Interest Expense and Income

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

Loss from Continuing Operations

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

LIQUIDITY AND CAPITAL RESOURCES

At August 31, 2000, we received gross proceeds of $410,000 in the Series A
Placement. See "Description of Securities--Series A Placement" and "--Series A
Preferred Stock" on pages 40 and 41, respectively.

We had cash balances on hand as of June 30, 2000 of approximately $449,000
and a negative working capital of approximately $202,000, and we are dependent
upon the receipt of additional financing in order to continue operations, even
at our scaled back level and despite the proceeds from the Series A Placement.

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As of September 1, 2000, we owed approximately $191,140 in back wages to
former employees (down from $234,860 at June 30, 2000), $125,000 to a nominee
for our Board of Directors, and $5,000 to a third party.

Since our inception in January 1993 and through June 30, 2000, we have an
accumulated deficit of $30,118,499. We expect to incur operating losses for the
indefinite future as we attempt to achieve some sales success. We are also
continuing to pursue our sales efforts by offering attractive pricing to close
sales in a timely manner.

Since January 1, 1999, we have received new interactive service orders from
WIT, Hopkinsville Electric Service and Optelecom, although we have yet to
realize material revenues from any of such contracts. There can be no assurance,
however, as to the receipt or timing of revenues from operations, including, in
particular, revenues from products currently under development.

The Company has no existing bank lines of credit.

Our primary source of financing since inception has been the issuance of
debt, convertible debt and common and preferred stock.

Since October 1998, we have conducted the following capital-raising
transactions:

- Issued approximately $2.1 million in convertible debentures of which
approximately $969,580 was outstanding at September 1, 2000;

- Issued 2,828,468 shares of Common Stock pursuant to conversions of
convertible debentures;

- Issued an aggregate of 1,503,738 shares of Common Stock and warrants to
purchase an aggregate of 357,462 shares of Common Stock to certain of our
creditors, including some of our affiliates in exchange for the
cancellation of an aggregate amount of approximately $1.79 million of
indebtedness, including accrued interest;

- Issued $450,000, aggregate principal amount, of 7% Notes due 2001 (some
were also due in 1999 and 2000) to investors, including affiliates of the
Company, $150,000 of which was outstanding at September 1, 2000;

- Issued $500,000 in non-convertible indebtedness, none of which was
outstanding at September 1, 2000;

- Issued 1.7 million shares of Common Stock for $1.06 million; and

- Issued 41 shares of Series A Preferred Stock for $410,000.

Further important details about these transactions may be found in
"Description of Securities" on page 40, "Certain Relationships and Related
Transactions" on page 39, "Risk Factors--Fluctuating Price Securities" on
page 6, and "--Potential Dilution" on page 6. In the aggregate, we have paid
approximately $242,496 and issued 250,000 shares of Common Stock, and warrants
to purchase approximately 810,000 shares of our Common Stock at varying exercise
prices to third parties, including placement agents, who facilitated these
transactions. Of such warrants, 632,500 remain unexercised.

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<PAGE>
BUSINESS

THE FOLLOWING DISCUSSION ASSUMES THAT WE WILL CONTINUE AS A GOING CONCERN
AND BE ABLE TO IMPLEMENT ITS BUSINESS PLAN. DESPITE THE PROCEEDS FROM THE
SERIES A PLACEMENT, THERE CAN BE NO ASSURANCE THAT WE WILL HAVE SUFFICIENT FUNDS
TO BE ABLE TO DO SO. SEE "RISK FACTORS--NEED FOR ADDITIONAL FINANCING" ON
PAGE 5.

COMPANY OVERVIEW

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

A very promising near-term market is the MDU marketplace with nearly 34
million housing units in the United States alone. This market opportunity is
marked by traditional cable companies' under service, and because it is possible
to sign long-term exclusive right of entry contracts with building owners in 35
states. Additionally, a large number of the existing MDU cable agreements are
expiring over the next three years.

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

The intense competition among traditional telcos, cable companies,
competitive local exchange carriers (CLECs), long distance carriers, energy
companies, and Internet service providers (ISPs) to provide a robust suite of
enhanced broadband digital services to homes, schools, multi housing, hospitals,
and the hospitality industry provides another emerging opportunity for deploying
our products when partnered with one of these competitors.

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

INDUSTRY OVERVIEW

LINEAR TELEVISION AND VCR TECHNOLOGY

New technologies such as Replay and TiVo allow digital recording from
television; however, they are limited to the programming normally on television.

TELECOMMUNICATIONS COMPANIES AND BROADBAND INTERACTIVE SERVICES

High capacity networks, made possible by breakthroughs in the ability to
convert information from analog to digital form and by improved data compression
technologies, have the ability to deliver vast quantities of data into a home,
hotel, business or other facility. Broadband networks also have the capacity to
provide for interactivity between the user and content providers. Industry
sources anticipate that, if broadband networks become widely deployed, they will
usher in a new age of information technology due to the potential quantity and
robustness of content, and the speed, ease of use and interactivity of those
networks.

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<PAGE>
NARROWBAND INTERACTIVE SERVICES

The Internet has conditioned consumers, and younger consumers in particular,
to obtaining information, experiencing content, playing games and shopping in an
interactive fashion. However, telephony based services, which are generically
referred to as narrowband services, have constraints on the quantity of
information that can be delivered, and are currently unable to download large
files, such as full length videos, at a satisfactory quality or speed.

In order to address the need for high speed services, the cable industry has
begun deploying cable modems, and the telephone industry has begun deploying DSL
equipment for high speed access, so that the narrowband services can run at the
highest possible speed on metallic, telephone or cable lines. For example, @Home
Network is deploying as a high speed Internet Service Provider (ISP) on several
cable companies' networks. The Company believes that, despite these and other
initiatives, narrowband networks are unlikely to achieve the combination of
technological accessibility and speed, security, and robustness of transmission
characteristic of broadband systems.

THE COMPANY'S BROADBAND INTERACTIVE VIDEO SERVICES

The Company believes that the increase in linear viewing alternatives such
as direct broadcast satellite (DBS) have increased consumer demand for more
content choices and that the development of the Internet has increased consumer
interest in interactive content generally. The Company believes that the
inherent limitations of narrowband networks, as compared with broadband
networks, create a market opportunity for a broadband technology, such as the
Company's, that offers superior speed and robustness, combined with a "user
friendly" television-based technology. Even if major domestic telecommunications
were to currently undertake such initiatives, it would take a substantial number
of years and a massive capital commitment to deploy large-scale broadband
networks. The Company also believes that advances in servers, set top boxes, and
network equipment enable operators of small scale broadband networks to now
offer interactive video services to their subscribers at attractive prices. See
"--Marketing Strategy" on page 25.

BASIC INTERACTIVE SERVICES CONFIGURATION

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

PRODUCTS

Digital Set Top Boxes. We have developed a new digital set top box, the T
6000 which is designed to work with many transmission networks and supports
multiple outputs of video, sound and data. We believe that the T 6000's open
architecture and array of functionality and connectivity make it one of the more
advanced of such products in the industry today. Features include a
Pentium-Registered Trademark- or Pentium-Registered Trademark- clone processor,
extensive memory, a wide array of network inputs and system outputs, 2D and 3D
graphics and an attractive consumer design. The set top box also incorporates
hardware and software that can be utilized for home energy management, home
security monitoring and healthcare monitoring.

In December 1999, we entered into a nonexclusive manufacturing agreement
with Global PMX Company, Limited, under which T 6000 digital set top box
manufacturing is to be done in Global PMX plants in Taiwan. T 6000 manufacturing
is expected to begin commercially in Taiwan during the third quarter of 2000.

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Digital Video Servers. We market the CTL 9500 digital video server. This
server offers all the functionality of the Company's earlier models, the CTL
7000, 8000 and 9000, but at lower cost, higher capacity and with more features
and better environmental capabilities.

On June 27, 2000, we entered into a two-year agreement with nCube
Corporation, of Foster City, California, whereby we will resell their Media
Cube 4 video server (both hardware and software components-OEM version) as our
own CTL 9500 digital video server. We agreed to purchase a demonstration and
development system and an additional system within 12 months at a 40% discount
for a total purchase commitment of approximately $50,000. This non-exclusive
arrangement entitles us to a 30% discount during the term of the agreement based
upon our sales commitment of $5 million. There is no payment owed if we do not
order the minimum amount. See "Risk Factors--Dependence on Suppliers;
Manufacturing Risks" on page 10.

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

SERVICES

We intend to act as an overall systems integrator for interactive video
projects, which may entail integrating the end-to-end system in our facility
prior to shipment, on-site integration, or both. The scope of work required for
integration will vary widely, depending upon project size and other variables.

CONTENT

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

POTENTIAL MARKETS

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

MARKETING STRATEGY

Our marketing strategy is to seek customers in each of the potential
emerging markets, to encourage the leading companies and organizations to adopt
this technology and to position itself as a leading provider of interactive
video services within niche markets. We believe that it is important to achieve
market penetration at an early stage in the development of particular niche
markets in order to compete successfully in those markets. We are marketing
ourselves based on our demonstrated ability to install digital video systems on
each of the major network types and its potential to provide end-to-end
interactive video solutions.

In addition, the scalability of our servers provides flexibility in
deploying interactive video services systems in varying in size from systems
designed to serve simultaneous users to those capable of serving many thousands
of users in a variety of markets on a cost effective basis. We believe that this
scalability would be an attractive feature to potential customers. We also
believe that our T 6000 digital set top

25
<PAGE>
box, with its wide range of capabilities to interconnect with many different
networks and many different peripheral and display devices, will allow us to
compete favorably in several different markets, either with our own digital
video server or with others. We believe that our diversified marketing approach
provides us with flexibility in targeting emerging markets, enabling us to
recognize market opportunities and adapt to perceive changes in marketing
priorities. However, due to our limited resources, we have determined to focus
on those markets where there is greater interest at this time, while looking for
targets of opportunity in its other niche market segments. The markets which
appear most favorable at this time are telephone companies, energy companies,
hospitality and multi-housing. We have limited sales and marketing experience
and there can be no assurance that it will be successful in implementing its
marketing plans. See "Risk Factors--Limited Sales; Limited Marketing and Sales
Experience" on page 10.

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

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

SALES AND MARKETING

During 1999, we had one full time salesperson for a portion of the year and
during the remainder of the year all sales and marketing was done by the
President and CEO. We constructed an demonstration facility in our Perimeter
Park Drive office in Knoxville, Tennessee. We also participate in trade shows
such as the National Association of Broadcasters (NAB), the National Cable
Telecommunications Association (NCTA), Supercomm and the Western Cable Show. We
utilize sales and product literature and information to communicate with
potential customers. In March 2000, we hired a Director of Sales and anticipate
that this will assist in increasing Company sales activities, and we maintain a
site on the Internet which produces a number of sales leads each month.

We have entered into arrangements, both formal and informal, with a wide
array of companies with the aim of developing third party sales and distribution
of its products. These parties include the following: Nortel; Minerva
(encoders); Battelle Laboratories (energy management software); Marconi (ATM
switches); Innovacom (encoders) and Cisco (network equipment). The Company is
currently emphasizing North American markets. In this market, we are actively
pursuing third party distribution opportunities in the energy, telephone,
hospitality, multiple dwelling unit and medical markets.

CUSTOMERS

On June 22, 2000, WIT promised that for the next five years it would
purchase all of its requirements for digital set top boxes and digital video
servers from us, unless we were unwilling or unable to fill an order. WIT is
obligated to order a minimum of 500,000 set top boxes, with the added
requirement that it place its first order by September 30, 2000. The Company
estimates that, should this order be fulfilled, this would result in
approximately $275 million in revenue over 5 years. If it fails to meet its
minimum purchase obligation, WIT must pay $100,000 in liquidated damages. In
addition, we agreed to sell WIT up to three CTL 7000 digital video servers, as
well as CTL 9500 digital video servers upon request, within one year and agreed
to provide WIT with a digital video server for up to one year for demonstration
purposes. We agreed not to sell any products or services to any entity
introduced to us by WIT, other than through WIT.

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<PAGE>
Upon execution of this agreement, we agreed to sell WIT 100,000 shares of
Common Stock for $68,000 upon their tender of such amount, which has yet to be
received. Also, WIT is to receive warrants to purchase 20,000 shares of Common
Stock for each 10,000 digital set top boxes purchased, up to a total of 1
million shares. Such warrants are to be of 5 years duration and at an exercise
price of the current market price of the Common Stock when issued, less 15%.

In February 1999, the Company received a purchase order from HES which
included one CTL 9000 digital video server and up to 1,000 T 6000 digital set
top boxes. HES' goal was for the T 6000 digital set top box to remotely read the
electric meter and to set and control electric appliances throughout the home,
potentially allowing savings on electric bills for subscribers with such units
in their homes. This order was expected to ship in the second quarter of 1999,
but HES' network is not yet available, and, given the aged nature of this order,
we are uncertain when, if ever, HES will request delivery of the balance of this
order. If they do, however we will be able to ship the server and remaining set
top boxes within our standard 90-day timeframe. The value of this purchase order
in total is approximately $1,024,000, although to date HES has only paid
approximately $13,000 in early 1999 as a deposit on 25 set top boxes. When
complete, this will be the first deployment of our system for an electric
utility company, one of our planned major market opportunities.

STRATEGIC ALLIANCES

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

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

We have commenced discussions as to certain of these relationships, while
others are part of our strategic plan, but all are not yet in progress. No
assurance can be given that we will be successful in entering into such
strategic alliances on acceptable terms or, if any such strategic alliances are
entered into, or that the anticipated benefits will be realized. See "Risk
Factors--Need For Strategic Alliances" on page 10.

COMPETITION

The interactive video services market is highly competitive and
characterized by changing technology and evolving industry standards. Our
competitors include a number of companies, many of which are significantly
larger than we are and which have greater financial resources or which have
entered into strategic alliances with such companies. Competitive factors in the
interactive video services market include completeness of features, product
scalability and functionality, network compatibility, product quality,
reliability and price, marketing and sales resources and customer service

27
<PAGE>
and support. We compete on the basis of our ability to install digital video
systems on each of the major types of networks accommodating interactive video
services and its ability to offer economically viable solutions based on the
scalability of our systems. See "Risk Factors--Competition" and "--Product
Obsolescence; Technological Change" on pages 11 and 12, respectively.

INTELLECTUAL PROPERTY

We do not have any patents on our products, but have filed provisional
patent application on a number of our more recent inventions, primarily those
related to the T 6000 digital set top box. We regard the products that we own as
proprietary and rely primarily on a combination of trade secret laws,
non-disclosure agreements, other technical copy protection methods (embedded
coding) and copyright (where applicable) to protect our rights in and to our
products. It is our policy that all employees and third party developers sign
nondisclosure agreements. However, this may not afford us sufficient protection
for our know-how on our proprietary products. Other parties may develop similar
know-how and products, duplicate our know-how and products, or develop patents
that would materially and adversely affect our business, financial condition and
results of operations. Although we believe that our products and services do not
infringe the right of third parties and although we have not received notice of
any infringement claims, third parties may assert infringement claims against us
and such claims may result in us being required to enter into royalty
arrangements, pay damages, or defend litigation, any of which could materially
adversely affect our business, financial condition and results of operations.
See "Risk Factors--Lack of Patent and Copyright Protection" on page 12.

QUALITY CONTROL, SERVICE AND WARRANTIES

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

We generally warrant our interactive video servers to be free from defects
in material and workmanship for one year from shipment. At the end of the
warranty period, we offer maintenance and support programs. In some cases,
customers may require a longer or more extensive warranty as part of the
competitive bid process. See "Risk Factors--Product Liability and Availability
of Insurance" on page 15.

We generally warrant our digital set top boxes on a similar basis, but for a
period which is the later of 90 days from shipment or 60 days from installation.

CD-ROM SEGMENT

We discontinued our CD-ROM business segment, wrote its assets down to zero,
and rendered it completely inactive except for filling miscellaneous orders when
they are received.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs amounted to $912,045, $90,498 and $0 and for
the years ended December 31, 1998 and 1999, and the six months ended June 30,
2000, respectively. We no longer conduct research and development on any new
products and do not expect to in the forseeable future largely as a result of
our lack of funds, however, we continue to improve and enhance the T 6000
digital set top box. This includes upgrading the components and software
operating system, adding new features and functionality, and making it more
readily manufacturable and reducing its production cost. We also do substantial
technical work, as required, to customize our products in ways requested by
specific customers, such as adding a video codec or a specific network
interface. See "Risk Factors--No Assurance of Technological Success" on
page 11.

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EMPLOYEES

As of March 20, 2000, we had six full time employees, four of whom were
employed full time in the engineering and product development area, one of whom
fulfilled the marketing and sales function and one of whom fulfilled management
or administrative roles. Our employees are not represented by a union or
governed by a collective bargaining agreement and has never experienced a work
stoppage. We believe that relations with our employees are satisfactory. As of
September 1, 2000, we owed approximately $191,140 in back wages to former
employees, down from $234,860 at June 30, 2000 (interest does not accrue on such
amount). See "Risk Factors--Necessity of Attracting and Retaining Employees" on
page 9.

PROPERTIES

Until January 2000, we leased space at 1400 Centerpoint Boulevard,
Knoxville, Tennessee ("Centerpoint"). We then relocated our offices and
operations to 7,420 square feet of leased facilities at 122 Perimeter Park
Drive, Knoxville, Tennessee.

The landlord of Centerpoint filed a $45,000 security interest in the general
assets of the Company due to our breach of the lease governing our use of the
Centerpoint premises. In June 2000 his attorneys made a settlement offer, the
primary term of which were a cash payment of $175,000 by a certain time. We made
such payment in a timely manner, but have not received a release form from the
landlord or a release of the security interest. While we believe that the
landlord's silence since our payment indicates that the dispute has been
settled, there can be no assurance that the landlord will not, in the future,
raise new claims against us, reassert known claims, or assert that we failed to
comply with the terms at the settlement offer.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers, directors and nominees for director are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- ------------------------------------------
<S> <C> <C>
Kenneth D. Van Meter...................... 53 President, Chief Executive Officer and
Chairman of the Board

Glenn West................................ 37 Director

Fenton Scruggs(1)......................... 63 Director

Donald Greenhouse(1)(2)................... 64 Director

Stephen Portch(1)(2)...................... 49 Director

Mark Braunstein(2)........................ 51 Director

David Hultquist........................... 37 Nominee for Director

Bruce Thompson............................ 70 Nominee for Director
</TABLE>

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

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

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

GLENN WEST. Mr. West, one of our founders, has served as Executive
Vice-President, Director of Technology and a member of the Board of Directors
since our inception in 1993. Prior to founding the Company, from 1987 to 1993,
Mr. West served as Senior Systems Engineer for Data Research and Applications, a
software company. Mr. West was on a voluntary leave of absence from employment
with the Company, which ended May 1, 2000, with the expiration of his employment
agreement. Such agreement has not been renewed. See "--Employment Agreements" on
page 35.

FENTON SCRUGGS. Dr. Scruggs, one of our founders, funded our initial
start-up of the Company, and has been a member of our Board of Directors since
our inception in 1993. Dr. Scruggs is a Board Certified Pathologist from
Chattanooga, Tennessee, who has been in private practice since 1969.
Dr. Scruggs received his undergraduate degree from the University of Virginia in
1959 and his graduate

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degree from the University of Tennessee in 1962. Dr. Scruggs completed his
residency at Memphis Methodist Hospital and was a General Medical Officer in the
U.S. Air Force from 1963 to 1965.

DONALD GREENHOUSE. Mr. Greenhouse has been a member our Board of Directors
since 1995, but is not standing for reelection as a director at this year's
stockholders' meeting, currently scheduled for , 2000.
Mr. Greenhouse also served as interim Chief Executive Officer of the Company
from August 1996 until January 1997. Mr. Greenhouse is President and Chief
Executive Officer of Seneca Point Associates, Inc., a consulting firm he founded
in November 1989. Mr. Greenhouse has approximately 40 years of management
experience in manufacturing, technology and service industries. Seneca Point
Associates, Inc. is a non-traditional consulting firm engaged by clients
nationally to fill full-time senior management positions.

STEPHEN PORTCH. Dr. Portch has been a member of our Board of Directors
since December 1, 1997, but is not standing for reelection as a director at this
year's stockholders' meeting, currently scheduled for , 2000.
Dr. Portch has been Chancellor of the University System of Georgia since 1994.
He oversees 30,600 employees, a $3.65 billion dollar budget and 206,000
students. Previously, Dr. Portch was Senior Vice President of the University of
Wisconsin System. Dr. Portch holds a Ph.D. and M.A. from Pennsylvania State
University, and he received his B.S., with honors, from the University of
Reading (England).

MARK BRAUNSTEIN. Dr. Braunstein has been a member of our Board of Directors
since January 8, 1998, but is not standing for reelection as a director at this
year's stockholders' meeting, currently scheduled for , 2000. Since
February 1991, Dr. Braunstein has been the Chairman and Chief Executive Officer
of Patient Care Technologies, Inc., which is in the clinical information systems
business.

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

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

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

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

EXECUTIVE COMPENSATION

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

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
-----------------------
COMPENSATION AWARDS
-----------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
NAME AND PRINCIPAL ------------------- STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS AWARD(S) OPTIONS COMPENSATION
------------------------------ -------- -------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth D. Van Meter.......... 1999 $170,100(1) -- -- -- --
Chief Executive Officer and 1998 $170,100(2) -- -- 413,200(3) --
President 1997 $154,731 $71,810(4) -- 413,200 --

Dennis K. Smith............... 1999 $131,250(5) -- 10,000 -- --
Vice President of
Engineering 1998 $125,000(6) -- 10,000 36,500(3) --
and Operations 1997 -- -- -- -- --
</TABLE>

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

(1) Includes $155,925 voluntarily deferred in 1999; such amount was exchanged
for shares of Common Stock and warrants in the Spring 2000 Placement. See
"Certain Relationships and Related Transactions--Private Placements Reducing
Indebtedness" on page 39.

(2) Includes $70,875 voluntarily deferred in 1998; such amount was exchanged for
shares of Common Stock and warrants in the Spring 2000 Placement. See
"Certain Relationships and Related Transactions--Private Placements Reducing
Indebtedness" on page 39.

(3) Options repriced on December 1, 1998. See "--Repricing" on page 54. No
options were granted to the Named Executive Officers during the fiscal year
ended December 31, 1999.

(4) Includes (i) $17,864 paid in the first quarter of 1998 and (ii) $53,946,
half of which was due to be paid on each of January 20, 1999 and
January 20, 2000. The indebtedness of $53,946 was exchanged for shares of
Common Stock and warrants in the Spring 2000 Placement. See "See "Certain
Relationships and Related Transactions--Private Placements Reducing
Indebtedness" on page 39.

(5) Includes $73,149 voluntarily deferred in 1999; such amount was exchanged for
shares of Common Stock. and warrants in the Spring 2000 Placement. See
"Certain Relationships and Related Transactions--Private Placements Reducing
Indebtedness" on page 39.

32
<PAGE>
(6) Includes $14,583 voluntarily deferred in 1998; such amount was exchanged for
shares of Common Stock and warrants in the Spring 2000 Placement. See
"Certain Relationships and Related Transactions--Private Placements Reducing
Indebtedness" on page 39.

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

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

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

Dennis K. Smith................ -- -- 20,167 16,333 -0- -0-
</TABLE>

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

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

DIRECTOR COMPENSATION

Beginning in 1998, our policy is for each outside director to receive
nonqualified stock options for 20,000 shares in addition to $2,500 per quarter.

STOCK OPTION PLANS

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

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

The exercise price per share of Common Stock subject to an incentive stock
option may not be less than the fair market value per share of Common Stock on
the date the option is granted. The per share exercise price of the Common Stock
subject to a non-qualified option may be established by the Board of Directors,
but may not be less than 85% of the fair market value of the Common Stock on the
date of the grant. The aggregate fair market value (determined as of the date
the option is granted) of Common Stock for which any person may be granted
incentive stock options which first become exercisable in any calendar year may
not exceed $100,000. No person who owns, directly or indirectly, at the time of
the granting of an incentive stock option to such person, more than 10% of the
total combined voting power of all classes of our capital stock (a "10%
Stockholder") shall be eligible to receive any incentive stock options under the
Plan unless the exercise price is at least 110%

33
<PAGE>
of the fair market value of the shares of Common Stock subject to the option,
determined on the date of grant.

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

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

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

REPRICING

On November 25, 1998, our Board of Directors approved a resolution which
permitted and directed us to reprice all outstanding options to purchase Common
Stock which were held by our employees as of December 1, 1998, to a price equal
to the closing price of the Common Stock reported on the Nasdaq SmallCap Market
on December 1, 1998. Such closing price on December 1, 1998 was $0.688 per
share.

At August 11, 2000, options to purchase 37,500 shares of Common Stock were
outstanding under the 1995 Plan at exercise prices ranging from $0.688 to $0.91
per share with the majority of such options exercisable at $0.91 per share. At
August 11, 2000, options to purchase 135,720 shares of Common Stock were
outstanding under the 1997 Plan at exercise prices ranging from $0.688 to $2.938
per share, although a third of such options are exercisable at $0.688 per share.
Options granted to our directors under the 1997 Plan consist of: (i) options
granted to Mark Braunstein, Donald Greenhouse and Fenton Scruggs to each
purchase 20,000 shares of Common Stock, respectively, at an exercise price of
$2.125 per share; (ii) options granted to Stephen Portch to purchase 20,000
shares of Common Stock at an exercise price of $2.625 per share; (iii) options
granted to Mark Braunstein and Fenton Scruggs to each purchase 851 shares of
Common Stock, respectively, at an exercise price of $2.938 per share;
(iv) options granted to Stephen Portch and Donald Greenhouse to each purchase
1,333 shares of Common Stock, respectively, at an exercise price of $1.875; and
(v) options granted to Stephen Portch and Donald Greenhouse, Mark Braunstein and
Fenton Scruggs to each purchase 1,538 shares of Common Stock, respectively, at
an exercise price of $1.625 per share.

34
<PAGE>
OPTIONS GRANTED OUTSIDE THE PLANS

In addition to the options which have been granted under the Plans, we have
granted options outside of the Plans. On August 11, 2000, options to purchase
439,200 shares of Common Stock were outstanding, including: options granted to
Donald Greenhouse, to purchase 26,000 shares of Common Stock at an exercise
price of $1.38 per share and options granted to Mr. Van Meter to purchase
413,200 shares of Common Stock at an exercise price of $0.688 per share.

401(K) PROFIT SHARING PLAN

We had a 401(k) profit sharing plan (the "401(k) Plan") which was terminated
in 1999. We made no matching contributions to such plan during its life.

EMPLOYMENT AGREEMENTS

KENNETH VAN METER. Our employment agreement with Mr. Van Meter, as amended,
expired January 20, 2000. Mr. Van Meter is currently employed by us without such
an agreement. Pursuant to his prior employment agreement, Mr. Van Meter received
an annual base salary of $162,000. The employment agreement provided for the
annual review of Mr. Van Meter's salary; Mr. Van Meter received a 5% raise as of
January 20, 1998. In May 2000, our Board of Directors approved an increase to
Mr. Van Meter's base salary for 2000 to $225,000 with a potential bonus of 200%
of such salary. Retroactive salary increases for 1998 and 1999 were also granted
and were paid in shares of common stock in June 2000 ($8,505 raise for 1998,
paid as 8,000 shares; $8,930 raise for 1999, paid as 10,338 shares).

Pursuant to his employment agreement (now expired), Mr. Van Meter may have,
at the discretion of the Board of Directors, received an annual incentive bonus
equal to up to 99% of Mr. Van Meter's base salary if he and the Company reached
certain milestones. Up to two-thirds of such incentive bonus were to be awarded
and paid within thirty days following the end of each calendar year and up to
the remaining one third of such bonus was to be awarded at the end of each
calendar year and vest in two equal installments on the first and second
anniversaries of the date of the award.

In July 1997, Mr. Van Meter purchased 15,000 shares of Common Stock for
nominal consideration plus the cancellation of certain anti-dilution rights and
received options to purchase 183,200 shares of Common Stock at $1.38 per share
and options to purchase 230,000 shares of Common Stock at $3.00 per share. Such
options were repriced on December 1, 1998 at an exercise price of $0.688 per
share. Additionally, during 1997, Mr. Van Meter received reimbursement of
approximately $37,272 for expenses incurred as a result of his relocation.

GLENN WEST. Our employment agreement with Mr. West expired on May 1, 2000.
The employment agreement provided that Mr. West may not compete with the Company
for two years after the termination of his employment. A state court, however,
may determine to limit or not enforce such non-compete clause as against public
policy. As of January 1, 1999, Mr. West ceased employment with us pursuant to a
leave of absence. Mr. West has taken a full-time position with another company
and will not be returning to his duties with us.

35
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of certain of our securities as of August 11, 2000 (both securities
covered by this prospectus and shares of Common Stock owned by our directors and
officers but are not offered for sale by this prospectus) by (i) each person who
is known by us to own of record or beneficially more than 5% of the outstanding
Common Stock, (ii) each of our directors and the Named Executive Officers and
(iii) all of our directors and executive officers as a group. Unless otherwise
indicated, each of the stockholders listed in the table below has sole voting
and dispositive power with respect to the shares beneficially owned by such
stockholder.

SELLING STOCKHOLDER RELATIONSHIPS TO THE COMPANY

Roger Broussard, David Brumgard, Cabot Longnecker, and Thomas Pierce are our
employees. David Hultquist is a nominee for our Board of Directors. Our
relationship with Hultquist began when we hired him as a consultant for debt
reorganization pursuant to an agreement dated December 18, 1999 and issued
200,000 shares of Common Stock at the then current market price to him under the
terms thereof. See "Management--Executive Officers and Directors" on page 30.
Dennis Smith and William Chambers are former officers of the Company.

Centerpoint Plaza, L.P. was an owner and landlord of the Centerpoint
property which we leased through January 2000. Prior to such time, Centerpoint
Plaza, L.P. sold the premises. We developed a subsequent dispute with the new
owner. See "Business--Properties" on page 29.

We hired Mark Bergman as a consultant for investment public relations
services pursuant to an agreement dated December 30, 1999 and issued
Mr. Bergman 250,000 shares of Common Stock pursuant to his agreement. Steve
Harb, Sally Snyder, Ed Souther, and David Leigh are employees of Harb Souther &
Snyder, who performs certain accounting services for us. Ron Phillips is the
owner of a local travel agency through which we have purchased airline tickets.

Mark Anthony Angelo is an employee of the May Davis Group, Inc. ("May
Davis"), who serves as a financial and investment banking consultant pursuant to
a nonexclusive consulting contract. May Davis has served as our placement agent
for several transactions. As compensation for these transactions and other
consulting work we have paid May Davis cash and issued them Common Stock and
warrants to purchase Common Stock.

M Holdings, Inc. was the placement agent for a financing in April 2000.

Kidston Consulting, LLC, executed a consulting agreement with us whereby it
would attempt to resell our products and be compensated by a commission on such
sales. Kidston Consulting, LLC is an affiliate of Kidston Family Corporation,
LLC, who purchased 1.5 million shares of Common Stock in the Kidston Placement
on June 16, 2000.

WIT has agreed to purchase certain products from us, including set top
boxes. See "Business--Customers" on page 26.

Other than the relationships described above and in the respective footnotes
and the ownership of our securities by the Selling Stockholders, none of the
Selling Stockholders has had any material relationship with us within the past
three years. The above table has been prepared based on information furnished to
us by or on behalf of the Selling Stockholders. See "Certain Relationships and
Related Transactions" on page 39.

36
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT OF BENEFICIALLY OWNED PERCENT OF
NAME OF BENEFICIAL OWNER(1) BEFORE THE OFFERING CLASS(2) AFTER THE OFFERING(3) CLASS(2)
--------------------------- ------------------- ---------- --------------------- ----------
<S> <C> <C> <C> <C>
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
Kenneth D. Van Meter.................... 889,399(4) 8.0% 889,399 8.0%
Glenn West.............................. 157,636(5) 1.5% 157,636 1.5%
Dennis K. Smith......................... 106,003(6) 1.0% 106,003 1.0%
Dr. Fenton Scruggs...................... 438,214(7) 4.1% 438,214 4.1%
Donald Greenhouse(8).................... 40,630(9) 0.4% 40,630 0.4%
Stephen Portch.......................... 40,630(9) 0.4% 40,630 0.4%
Dr. Mark Braunstein..................... 40,308(10) 0.4% 40,308 0.4%
All directors and executive officers as 1,606,817 14.3%
a group (7 persons)
(4)(5)(6)(7)(9)(10)...................

SELLING STOCKHOLDERS
Roger Broussard......................... 10,887(11) 0 -
David Brumgard.......................... 12,012(11) 0 -
William Chambers........................ 15,178(11) 0 -
David Hultquist......................... 397,000(12) 0 -
Cabot Longnecker........................ 11,521 0 -
Dennis Smith............................ 76,469(11) 0 -
Thomas Pierce........................... 7,943(11) 0 -
Centerpoint Plaza, L.P.................. 71,104(11) 0 -
Mark Bergman............................ 250,000 0 -
Steve Harb.............................. 10,368 0 -
Sally Synder............................ 12,521 0 -
Ed Souther.............................. 50,069 0 -
David Leigh............................. 3,623 0 -
Marc Anthony Angelo..................... 59,000(13) 0 -
M Holdings, Inc......................... 100,000(14) 0 -
Kidston Family Corporation, LLC......... 1,500,000 0 -
WIT Technologies, Inc................... 100,000 0 -
Sui Wa Chau............................. 138,727(15) 0 -
Peter Chenan Chen....................... 208,132(15) 0 -
Mike Dahlquist.......................... 13,875(15) 0 -
Qinu Guan............................... 277,509(15) 0 -
K&M Industry, Inc....................... 69,377(15) 0 -
Denise and Vernon Koto.................. 13,875(15) 0 -
Rance Merkel............................ 138,754(15) 0 -
Leo Abbe................................ 35,903(11) 0 -
Rodney Conard........................... 27,411(11) 0 -
Mark Cromwell........................... 83,487(11) 0 -
Antonio Daza............................ 4,482(11) 0 -
Carroll Edwards......................... 775,743(11) 0 -
Harbourview Trade and Consulting 7,893(11) 0 -
Limited...............................
Richard Law............................. 36,983(11) 0 -
Richard Seltzer......................... 19,222(11) 0 -
Smith Brandon International............. 3,022(11) 0 -
Townsend Agency......................... 25,990(11) 0 -
Trilogy Systems, Inc.................... 29,205(11) 0 -
Waytec Electronics Corp................. 6,018(11) 0 -
</TABLE>

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

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

37
<PAGE>
(2) Shares of Common Stock are deemed outstanding for purposes of computing the
percentage of beneficial ownership if such shares of Common Stock underlie
securities which are exercisable or convertible within 60 days of the date
of this prospectus.

(3) Assuming all of the shares of Common Stock offered for sale on behalf of the
Selling Stockholders are sold.

(4) Includes 183,464 shares of Common Stock which are subject to currently
exercisable stock options, and warrants to purchase 307,865 shares of Common
Stock obtained in the Spring 2000 Placement. See "Certain Relationships and
Related Transactions--Placements Reducing Indebtedness" on page 39. Does not
include 21,032 shares of Common Stock owned by Mr. Van Meter's adult
children to which he disclaims beneficial ownership.

(5) Includes warrants to purchase 66,318 shares of Common Stock obtained in the
Spring 2000 Placement. See "Certain Relationships and Related
Transactions--Placements Reducing Indebtedness" on page 39.

(6) Includes warrants to purchase 27,271 shares of Common Stock obtained in the
Spring 2000 Placement. See "Certain Relationships and Related
Transactions--Placements Reducing Indebtedness" on page 39.

(7) Includes 14,413 shares of Common Stock which are subject to currently
exercisable stock options and warrants to purchase 36,411 shares of Common
Stock obtained in the Spring 2000 Placement. See "Certain Relationships and
Related Transactions--Placements Reducing Indebtedness" on page 39.

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

(9) Represents 14,735 shares of Common Stock which are subject to currently
exercisable stock options.

(10) Represents 14,413 shares of Common Stock which are subject to currently
exercisable stock options.

(11) Includes shares of Common Stock into which presently exercisable warrants
may be exercised. Such Common Stock and warrants were acquired in the Spring
2000 Placement. See "Certain Relationships and Related
Transactions--Placements Reducing Indebtedness" on page 39.

(12) Includes 125,000 shares of Common Stock which are subject to currently
exercisable warrants obtained in the Spring 2000 Placement. See "Certain
Relationships and Related Transactions--Placements Reducing Indebtedness" on
page 39. Does not include 200,000 shares of Common Stock owned by a trust
for the benefit of Mr. Hultquist's children as to which he disclaims
beneficial ownership.

(13) Includes 59,000 shares of Common Stock owned by his wife.

(14) Includes 100,000 shares of Common Stock issuable upon the exercise of
warrants which are currently exercisable.

(15) Consists of shares of Common Stock issuable upon conversion of the
outstanding principal amount of our 8% due 2003 subordinated convertible
debentures. We are not required to issue to the holders of convertible
debentures shares of Common Stock issuable upon the conversion thereof
representing in the aggregate more than 19.99% of the number of shares of
Common Stock outstanding on the date the Convertible Debentures were
purchased by such holder or such number of shares as would result in a
change of control of the Company unless a majority of the stockholders of
the Company approve the issuance. Such approval has not been obtained. See
"Risk Factors--Fluctuating Price Securities" and "--Possible Effects of the
Convertible Debentures" and "Description of Securities--Convertible
Debentures" on pages 6, 13, and 43, respectively.

38
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

DEFERRED PAYMENTS AND CASH LOANS TO THE COMPANY

Several persons affiliated with the Company have permitted us to defer
paying them certain amounts we owed to them. Mr. Van Meter has permitted the
deferral of compensation payments, $70,875 in 1998, $204,515 in 1999, and $0 in
2000. Mr. West permitted the deferral of payments of contractor fees, $2,500 in
1998, and $30,000 in 1999. Mr. Smith permitted the deferral of an aggregate of
compensation payments, $14,219 in 1998 and $73,149 in 1999. Mr. Smith also
permitted the payment deferral of $25,000 owed to him in connection with his
relocation in 1998. Mr. Chambers, a former officer and employee of the Company,
permitted the deferral of compensation payments of $22,969 in 1998 and $54,687
in 1999. As of December 31, 1999, a total of $1,130,245 of compensation and fees
was deferred by current and former officers and employees, including the amounts
noted above.

Several persons affiliated with the Company have made cash loans to the
Company. Mr. Van Meter loaned the Company an aggregate of $55,000 during 1998,
an aggregate of $17,219 during 1999, and has made no loans to the Company during
2000. Dr. Scruggs lent the Company $100,000 in 1998. Mr. Hultquist, a private
investor and present nominee for our Board of Directors, loaned the Company
$70,000 in the first quarter of 2000 (which was repaid in cash) and $125,000 in
the second quarter of 2000 which remains outstanding.

Except for the loans from Mr. Hultquist, and $191,142 of compensation owed
to former employees, none of the amounts owed described in this section remain
outstanding due to such persons' investments in the transactions described in
the following section.

PRIVATE PLACEMENTS REDUCING INDEBTEDNESS

In October 1998, the Company consummated a private placement (the "1998
Royalty Placement") of $450,000, aggregate principal amount, 7% Notes due 1999
and 2001 ("Royalty Notes") in which subscribers were also entitled to receive
royalties of $0.50 for each $100,000 invested (pro rated for lesser investments)
for each set top box sold over a period of five years or the total notes placed.
Each of Messrs. Van Meter and Smith and Dr. Scruggs, converted purchased Royalty
Notes by the cancellation of Company indebtedness or cancelling the Company's
obligation to pay them money, the payment of which was then being deferred. The
amounts of Royalty Notes purchased were $50,000, $25,000 and $100,000 for Van
Meter, Smith, and Scruggs respectively. William Chambers, then an officer of the
Company, purchased a Royalty Note in the Royalty Private Placement for $50,000.

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

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

39
<PAGE>
of the Company's directors, including a majority of the Company's independent
and disinterested directors who have access at the Company's expense to the
Company's legal counsel.

DESCRIPTION OF SECURITIES

The following summary description of our capital stock and selected
provisions of our Certificate of Incorporation and Bylaws is a summary and is
qualified in its entirety by reference to our Certificate of Incorporation and
Bylaws.

COMMON STOCK

We are authorized to issue up to 15,000,000 shares of Common Stock, par
value $.001 per share, of which 12,541,681 shares were outstanding at
August 11, 2000. Holders of Common Stock are entitled to one vote for each share
held of record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, if any,
holders of Common Stock are entitled to receive ratably, dividends when, as, and
if declared by the Board of Directors out of funds legally available therefor
and, upon our liquidation, dissolution or winding up, are entitled to share
ratably in all assets remaining after payment of liabilities and payment of
accrued dividends and liquidation preferences on the preferred stock, if any.
Holders of Common Stock have no preemptive rights and have no rights to convert
their Common Stock into any other securities. The outstanding Common Stock is
validly authorized and issued, fully paid and nonassessable.

Our stockholders have been asked to approve a amendment to our Certificate
of Incorporation authorizing our Board of Directors to issue an additional
35 million shares of Common Stock, raising the number of authorized shares of
Common Stock from 15,000,000 to 50,000,000. Our Board of Directors unanimously
adopted a resolution to this effect and recommended that the stockholders
approve such amendment at the upcoming 2000 Annual Meeting of Stockholders.

In addition to the shares of Common Stock currently outstanding, 3,418,496
shares are reserved for issuance in relation to outstanding options, warrants,
our Stock Option Plans, and shares issuable upon conversion of the Convertible
Debentures. Accordingly, we have obligations to issue 960,177 shares of Common
Stock which are not authorized by our Certificate of Incorporation. See "Risk
Factors--Need for Increase in Authorized Shares of Common Stock" on page 5.

PREFERRED STOCK

We are authorized to issue up to 3,000,000 shares of preferred stock, par
value $.01 per share. Fifty shares of preferred stock, $.01 par value per share,
are designated as Series A Preferred Stock, the terms of which are described
below. 2,999,950 shares of preferred stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion rights and redemption rights. The
issuance of any such preferred stock could adversely affect the rights of the
holders of Common Stock and, therefore, reduce the value of the Common Stock.
The ability of the Board of Directors to issue preferred stock could discourage,
delay or prevent a takeover of the Company. See "Risk Factors--Existence of
'Blank Check' Preferred Stock" on page 14.

THE SERIES A PLACEMENT

On August 31, 2000, we consummated the initial closing of a private offering
of preferred stock to accredited investors and received gross proceeds of
$410,000. Such investors received a total of 41 shares of Series A Convertible
Preferred Stock (the "Preferred Stock"; the "Series A Placement"). The net
proceeds of the offering are to be used for working capital and accrued
expenses. See

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"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" on page 21.

SERIES A PREFERRED STOCK

We are authorized to issue 50 shares of Series A Preferred Stock, par value
$.001 per share. Each share of Preferred Stock has a liquidation preference of
$10,000 plus an amount representing 6% thereof as has accrued since issuance;
such amount is the Liquidation Value, defined as equal to
((.06)(N/365)($10,000)) + $10,000, where "N" means the number of days from
issuance of the Preferred Stock to the date of calculation. The Preferred Stock
does not pay a dividend. The holders of the Preferred Stock have voting rights
with as required by law, and a two-thirds vote is required for us to issue
securities senior to or PARI PASSU with the Preferred Stock, or for us to
adversely affect such shares as a class. A vote of the Preferred Stock's holders
is also required in connection with certain redemption events as described
below. All shares of Preferred Stock outstanding on August 31, 2002 convert into
shares of Common Stock as if holders of such shares had delivered a conversion
notice effective at such date. The holders of Preferred Stock are entitled to
participate in pro rata offering of certain securities made to holders of Common
Stock as if their shares of Preferred Stock had been converted into Common Stock
on such date. The holders may be entitled to liquidated damages under certain
circumstances, including if the registration statement is not filed or declared
effective in a timely fashion and if we do not fulfill our redemption
obligations, some of which are set forth below.

CONVERSIONS AND REDEMPTIONS

The Preferred Stock is convertible into shares of Common Stock by the
holders, subject to certain exceptions, upon the earlier of 90 days after
issuance, the date a registration statement covering the resale of the common
stock issuable upon conversion of the Preferred Stock is declared effective by
the Commission or five days after receiving a "no-review" status from the
Commission in connection with such registration statement.

Conversions

The number of shares of Common Stock issuable upon conversion is calculated
according to the following formula: ((.06)(N/365)(10,000) + 10,000) divided by
the "Conversion Price", the lower of $1.40 and the price obtained by multiplying
0.75 times the average of the closing bid prices of the Common Stock for the
five consecutive trading days immediately preceding the date of conversion, and
where N means the number of days from issuance of the Preferred Stock.

Redemptions upon the Vote of the Holders

If holders of two-thirds of the Preferred Stock then outstanding vote in
favor of redemption, such holders may require us to redeem all of the Preferred
Stock then outstanding upon the occurrence of Major Transactions, Triggering
Events or our failure to timely deliver freely tradable Common Stock upon
receipt of a duly delivered conversion notice. A Major Transaction includes
mergers where we are not the surviving entity and the sale of all or
substantially all of our assets. Triggering Events include: any failure on our
part to maintain an effective registration statement when required to do so, an
announcement that upon receipt of conversion notices that we intend not to
comply with our obligations thereunder, and our failure to comply with certain
covenants in the Securities Purchase Agreement or Registration Rights Agreement
resulting in the reasonable expectation of a material adverse event or that the
truthfulness of our representations in such agreements would have prevented such
material adverse event.

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Amounts Payable Upon Redemption

The amount payable per share upon such redemptions is equal to (i) in the
case of Major Transaction, the greater of the Liquidation Value or the value of
the Common Stock that such holders would have received if they had delivered
conversion notices to us effective the date of the public announcement of the
Major Transaction; (ii) in the case of a Triggering Event, the greater of 120%
of the Liquidation Value or the value of the Common Stock that such holders
would have received if they had delivered conversion notices to us effective the
date immediately prior to the day on which the Triggering Event occurred; and
(iii) in the case of our failure to deliver freely tradable shares of Common
Stock in response to a conversion notice, the greater of 120% of the Liquidation
Value, or the Liquidation Value divided by the Conversion Price (lower of $1.40
or 75% of the market price of a share of Common Stock, as calculated) multiplied
by the Closing Bid Price (as defined) of a share of Common Stock as of the
effective date of such conversion notice. In the third instance, such holder may
otherwise require us to issue shares of Common Stock which are not freely
tradable pursuant to its conversion notice or such holder may void its
conversion notice and have us return its shares of Preferred Stock

Redemptions at the Option of the Company

We may redeem the Preferred Stock at our option in a pro rata fashion upon
payment of 125% of the Liquidation Value of the Preferred Stock called for
redemption in increments of not less than $100,000.

REGISTRATION RIGHTS OF THE SERIES A PREFERRED STOCK

We have agreed to file a registration statement within 75 days from the
issuance of the Preferred Stock. Such registration statement is required to be
declared effective within 195 days after filing. We agreed to indemnify and hold
harmless the holders and certain other parties in connection with any action or
proceeding that arises out of, or is based upon any allegedly untrue statements,
omissions or violations of the registration statement, unless any of the
foregoing arise out of information furnished to us by such persons. To the
extent any indemnification is prohibited or limited by law, the indemnifying
party has agreed to make a contribution in such proportion as is appropriate to
reflect relative fault with respect to any amounts for which it would otherwise
be liable. In addition, we have agreed to bear nearly all expenses relating to
the registration of the shares of Common Stock into which the Preferred Stock is
convertible.

THE PREFERRED STOCK AS FLUCTUATING PRICE SECURITIES

The Preferred Stock is convertible into shares of Common Stock at a
conversion price that fluctuates as a discounted percentage of the market price
of the Common Stock (a "Fluctuating Price Security"). Accordingly, the lower the
price of the Common Stock at the time of conversion, the more shares a holder
receives upon conversion of the Preferred Stock; the higher the price of the
Common Stock at the time of conversion, the fewer shares a holder receives upon
conversion. See "Risk Factors--Fluctuating Price Securities" and "--Potential
Dilution" on pages 6 and 6, respectively.

At August 31, 2000 we also had $969,579, aggregate principal amount, of
convertible debentures outstanding which bear similar percentage conversion
features. Had conversion notices for all outstanding convertible debentures been
received effective August 31, 2000, we would have been required to issue an
additional 1,334,649 shares of Common Stock pursuant thereto. At such date we
had received no conversion notices for which we had not issued Common Stock. Had
conversion notices for all 41 shares of Preferred Stock been received effective
August 31, 2000, 747,650 shares of common stock would have been issuable upon
conversion thereof, assuming that we had sufficient number of authorized but
unissued shares of Common Stock and that the Preferred Stock was fully
convertible at such date (neither of such conditions being true).

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We would be obligated to issue approximately the following number of shares
of Common Stock if holders of the outstanding convertible debentures and
Preferred Stock were to issue conversion notices for all their outstanding
securities and the market price of the Common Stock were to decline the
specified percentages from its August 31, 2000 price: 2,761,970 shares (25%
decrease); 4,142,950 shares (50% decrease); and 8,285,900 shares (75% decrease).
See "Risk Factors--Potential Dilution" on page 6.

We have issued such Fluctuating Price Securities because the terms of such
securities were the best that we could command in the market at the times we
were seeking to raise capital. We used the Convertible Securities to raise
needed working capital; however, we assumed the conversion, registration, and
other obligations required by such securities.

In order to meet our obligations upon conversion notices of the Preferred
Stock and the convertible debentures, the Board of Directors has approved,
subject to stockholder approval at the 2000 Annual Meeting of Stockholders, an
increase in the number of authorized shares of Common Stock from 15,000,000 to
50,000,000. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Upcoming Stockholders' Meeting" on page 18.

CONVERTIBLE DEBENTURES

We have issued three tranches of Convertible Debentures. The conversion
price of all the Convertible Debentures is a percentage of the market price of
our Common Stock; other terms of the three tranches vary. The lower the price of
the Common Stock at the time of conversion, the more shares a holder of
Convertible Debentures receives upon conversion of the Convertible Debentures;
the higher the price of the Common Stock at the time of conversion, the fewer
shares a holder receives upon conversion. At September 1, 2000, $969,579,
aggregate principal amount, of Convertible Debentures was outstanding.

SPRING 1999 DEBENTURES

On March 24, 1999, we consummated the final sale of our first tranche of
Convertible Debentures in a private placement more fully described in our
Current Report on Form 8-K, filed with the Commission on January 19, 1999. We
issued a total of $600,000 of 9% convertible debentures due 2001 (the "Spring
1999 Debentures"). The Spring 1999 Debentures are convertible at any time at the
option of the holder until maturity at a conversion price equal to the lesser of
75% of the average closing bid price of the Common Stock for the five trading
days immediately prior to the conversion date or equal to the average closing
bid price times four for the five trading days immediately prior to the
respective closing date for that initial purchaser. Interest on the Spring 1999
Debentures is payable in shares of Common Stock upon conversion, redemption or
maturity. The Spring 1999 Debentures are redeemable at our option for 125% of
the principal amount of the debentures, plus accrued interest. If we fail to
redeem the Spring 1999 Debentures prior to maturity, such securities
automatically convert into shares of Common Stock. At September 1, 2000, holders
had converted $300,000 principal amount of Spring 1999 Debentures, and we had
issued 1,207,854 shares of Common Stock upon conversion thereof.

GMF DEBENTURES

Effective September 30, 1999, we entered into agreements with GMF Holdings
("GMF"), under which we could require GMF to purchase up to $5 million of our 4%
subordinated convertible debentures due September 2004 (the "GMF Debentures"),
as more fully described in our Current Report on Form 8-K, filed with the
Commission on October 8, 1999. At August 11, 2000 we had issued $550,000 of GMF
Debentures. By the terms of such agreements, we may require GMF to purchase up
to a maximum of $500,000 of GMF Debentures every 30 days and possibly less,
depending on the trading volume of the Common Stock. The GMF Debentures are
convertible at a conversion price equal to 75% of the highest bid price of the
Common Stock during the five trading days immediately

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preceding the date of conversion. Interest on the GMF Debentures is payable in
cash or shares of Common Stock (at our option) upon conversion or maturity. We
are not permitted to redeem the GMF Debentures prior to their maturity, at which
time they are converted into Common Stock. At September 1, 2000, holders had
converted $550,000 principal amount of GMF Debentures, and we had issued
1,035,748 shares of Common Stock upon conversions.

GMF's obligations to purchase additional debentures terminate September 30,
2000 unless such agreements are extended or renewed. We are currently discussing
those possibilities with GMF. If the agreements are not renewed or extended,
GMF's obligations are likely to be limited to purchasing $400,000 of GMF
Debentures or less, given the monthly restrictions on the principal amount of
debentures that we can require GMF to purchase.

B&G DEBENTURES

On February 17, 2000, we consummated the final sale of our third tranche of
Convertible Debentures in a private placement more fully described in our
Current Report on Form 8-K, filed with the Commission on March 23, 2000. We
issued a total of $774,980 of subordinated convertible debentures (the "B&G
Debentures"); $110,000 of B&G Debentures pay 4% interest and mature
October 2002; $204,980 of B&G Debentures pay 8% interest and mature in
November 2002; and $629,980 of B&G Debentures pay 8% interest and mature in
February 2003. The B&G Debentures are convertible at any time at the option of
the holders until maturity at the lesser of 75% of average closing bid price of
the Common Stock for the five trading days immediately prior to the conversion
date or fixed prices ranging from $0.50 to $1.50. Interest on the B&G Debentures
is payable in shares of Common Stock (at our option) upon conversion,
redemption, or maturity. The B&G Debentures are redeemable at our option for
either 135% or 125% of the face amount of the debentures, plus accrued interest.
If we fail to redeem a B&G Debenture prior to its maturity, such security
automatically converts into shares of Common Stock, based on the price of the
Common Stock on its maturity date. At September 1, 2000, holders had converted
$275,381 principal amount of the B&G Debentures (all types), and we had issued
578,866 shares of Common Stock upon conversion.

The registration rights agreement with the holders of the 8% due 2003
convertible debentures required us to have an effective registration statement
in place by April 30, 2000 which did not occur. We have paid the holders thereof
$9,000 in partial of payment of the liquidation damages owed. The registration
statement of which this propsectus is a part is intended to comply with our
obligations thereunder and permit the cessation of such liquidated damages.

TRANSFER AGENT

American Stock Transfer and Trust Company is the transfer agent for our
Common Stock.

DIRECTORS' LIMITATION OF LIABILITY AND INDEMNIFICATION

Our Certificate of Incorporation includes provisions which eliminate the
personal liability of directors for monetary damages resulting from breaches of
their fiduciary duty (except for liability for breaches of the duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, violations under Section 174 of the Delaware General
Corporation Law or for any transaction from which the director derived an
improper personal benefit). We believe that these provisions are necessary to
attract and retain qualified persons as directors and officers.

Section 145 of the Delaware General Corporation Law permits indemnification
by a corporation of certain officers, directors, employees and agents.

Our Bylaws provide that we will indemnify each of our directors and officers
with respect to all liability and loss suffered and expenses incurred by such
person in any action, suit or proceeding in

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which such person was or is made or threatened to be made a party or is
otherwise involved by reason of the fact that such person is or was a director
or officer. We are also obligated to pay the expenses of the directors and
officers incurred in defending such proceedings, subject to reimbursement if it
is subsequently determined that such person is not entitled to indemnification.

We intend to renew our policy of insurance (in October 2000) under which our
directors and officers will be insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers by reason of any acts or omissions covered under such policy in their
respective capacities as directors or officers, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been advised
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

DELAWARE ANTI-TAKEOVER LAW

We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions and limitations, prohibits a Delaware
corporation from engaging in any "business combination" with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (for the purposes of
determining the number of Shares outstanding, those Shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
Shares held subject to the plan will be tendered in a tender or exchange offer
are excluded from the calculation); or (iii) on or subsequent to such date, the
business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.

For purposes of Section 203, a "business combination" includes (i) any
merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested stockholder;
(iii) subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder; (iv) any transaction involving the corporation which has
the effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation. Section 203 defines an "interested stockholder" as any entity
or person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

SHARES ELIGIBLE FOR FUTURE SALE

Upon the consummation of this offering, we will have outstanding 12,541,681
shares of Common Stock all of which will be freely tradeable without restriction
or further registration under the Securities Act. We have contingent obligations
to issue an aggregate of approximately 5,766,717 shares of Common Stock upon the
exercise of certain warrants, options and Convertible Securities, including the
Preferred Stock and 1,240,567 options and warrants the exercise price of which
is above the current market price of the Common Stock. The number of shares of
Common Stock issuable upon the conversion of the Convertible Securities will
vary with the price of the Common Stock and would increase if the price of the
Common Stock were to decrease, as described in "Risk Factors--Fluctuating

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Securities", "--Potential Dilution" and "--Need for Increase in Authorized
Shares of Common Stock" on pages 5, 6 and 6, respectively. All such shares of
Common Stock issuable pursuant to our contingent obligations will be "restricted
securities" (as that term is defined in Rule 144 under the Securities Act) and
in the future may only be sold pursuant to a registration statement under the
Securities Act, in compliance with the exemption provisions of Rule 144 or
pursuant to another exemption under the Securities Act. Commencing approximately
12 months following the date of this prospectus, substantially all of these
restricted securities would become eligible for sale in the public market
pursuant to Rule 144.

In general, under Rule 144, as currently in effect, a person (including a
person who may be deemed our "affiliate" as that term is defined under the
Securities Act) who has beneficially owned such shares for at least one year
would be entitled to sell within any three-month period a number of shares
beneficially owned for at least one year that do not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are further subject to certain restrictions relating
to the manner of sale, notice and the availability of current public information
about us. After two years have elapsed from the date of the issuance of
restricted securities by us or their acquisition from an affiliate, such shares
may be sold without limitation by persons who have not been affiliates of ours
for at least three months.

The sale, or availability for sale, of substantial amounts of Common Stock
in the public market subsequent to this offering pursuant to Rule 144 or
otherwise could materially adversely affect the market price of the Common Stock
and could impair our ability to raise additional capital through the sale of our
equity securities or debt financing.

PLAN OF DISTRIBUTION

The Common Stock may be sold from time to time to purchasers directly by the
Selling Stockholders. Alternatively, the Selling Stockholders may from time to
time offer the Common Stock with discounts, concessions or commissions from the
Selling Stockholders and/or the purchasers of the Common Stock for whom they may
act as agent. The Selling Stockholders and any such brokers, dealers or agents
who participate in the distribution of the Common Stock may be deemed to be
"underwriters", and any profits on the sale of the Common Stock by them and any
discounts, commissions or concessions received by any such brokers, dealers or
agents might be deemed to be underwriting discounts and commissions under the
1933 Act. To the extent a Selling Stockholder may be deemed to be an
underwriter, the Selling Stockholder may be subject to certain statutory
liabilities, including, but not limited to, Sections 11, 12 and 17 of the 1933
Act and Rule 10b-5 under the 1934 Act.

The Common Stock may be sold from time to time in one or more transactions
at fixed prices, at prevailing market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices. The Common Stock
may be sold by one or more of the following methods:

- a block trade in which the broker or dealer so engaged will attempt to
sell the Common Stock issuable upon conversion thereof as agent but may
position and resell a portion of the block as principal to facilitate the
transaction;

- purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this prospectus;

- ordinary brokerage transactions and transactions in which the broker
solicits purchasers;

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- an exchange distribution in accordance with the rules of such exchange,
including a sale on the OTB Bulletin Board;

- face-to-face transactions between sellers and purchasers without a
broker-dealer;

- through the writing of options; and

- other transactions.

At any time a particular offer of the Common Stock is made, we will
distribute a revised prospectus or prospectus supplement, if required, which
will set forth the aggregate amount and type of securities being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, any discounts, commissions, concessions and other items constituting
compensation from the Selling Stockholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers. We will file the prospectus
supplement and, if necessary, a post-effective amendment to the registration
statement of which this prospectus is a part, with the SEC to reflect the
disclosure of additional information with respect to the distribution of the
Common Stock. In addition, the shares of Common Stock covered by this prospectus
may be sold in private transactions or under Rule 144 rather than pursuant to
this prospectus by any of the Selling Stockholders.

The Selling Stockholders and any other person participating in such
distribution will be subject to applicable provisions of the 1934 Act and the
rules and regulations thereunder, including, without limitation, Regulation M.
That regulation may limit the timing of purchases and sales of any of the Common
Stock by the Selling Stockholders and any other participating person. Under
applicable rules and regulations under the 1934 Act, any person engaged in a
distribution of the shares may not simultaneously engage in market-making
activities with respect to such shares for a period of one or five business days
prior to the commencement of such distribution. In addition to, and without
limiting, the foregoing, each of the Selling Stockholders and any other person
participating in a distribution will be subject to the applicable provisions of
the 1933 Act and the rules and regulations there under, including, without
limitation, Regulation M, which provisions may limit the timing of purchases and
sales of any of the shares by the Selling Stockholders or any such other person.

In order to comply with certain state securities laws, if applicable, the
shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In certain states, the shares may not be sold unless such
shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.

All of the foregoing may affect the marketability of the shares.

We have agreed to pay substantially all of the expenses incidental to this
registration, offering and resale by the Selling Stockholders of the Common
Stock to the public other than commissions, fees and discounts of underwriters,
brokers, dealers and agents.

We will not receive any of the proceeds of the sale of the Common Stock
offered by the Selling Stockholders or upon conversion of any of the Convertible
Securities described herein. We will receive varying amounts upon exercise of
the warrants, although more than two-thirds of the warrants are exercisable at
$1.4375 per share. If all the warrants are exercised, we will receive $593,609
which will be used for general corporate purposes. See "Use of Proceeds" on
page 16.

OUR REGISTRATION OBLIGATIONS

We have agreed in the several registration rights agreements to keep a
prospectus usable until the shares of Common Stock issuable upon conversion of
the respective Convertible Securities and exercise of the respective warrants,
no longer require the delivery of a prospectus to be sold in the capital
markets. To our knowledge currently no plans, arrangements or understandings
exist between any Selling Stockholder and any broker, dealer, agent or
underwriter regarding the sale of the securities by

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any Selling Stockholder, except the general understanding that several of the
Selling Stockholders intend to sell part or all of their holdings promptly upon
the effectiveness of the registration statement of which the prospectus is a
part. We cannot assure you that any Selling Stockholder will sell any or all of
the securities offered by it under this prospectus or that any Selling
Stockholder will not transfer, devise or gift such securities by other means not
described in this prospectus.

Pursuant to the several registration rights agreements entered into in
connection with our private placements, we and each of the Selling Stockholders
will be indemnified by the other against certain liabilities, including certain
liabilities under the 1933 Act, or will be entitled to contribution in
connection with these matters.

LEGAL MATTERS

The validity of the shares of Common Stock under applicable state law has
been passed upon for the Company by Squadron, Ellenoff, Plesent, Sheinfeld, LLP,
New York, New York. We have granted Squadron, Ellenoff a security interest in
our personal property to secure amounts due to them.

EXPERTS

The financial statements as of December 31, 1998 and December 31, 1999 and
for each of the two years in the period ended December 31, 1999 included in this
Prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to the Company's ability to continue as a going
concern as described in Note 3 to the financial statements) of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

[The remainder of this page has been left blank intentionally.]

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WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any materials we file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the SEC's regional offices in New York City and Chicago. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically (http://www.sec.gov). You also may inspect
reports and other information concerning us at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.

We have filed with the Commission a Registration Statement on Form SB-2
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act, with respect to the Common
Stock offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Common Stock and us, reference is hereby made to
the Registration Statement which may be examined without charge at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, NW, Washington, DC 20549. Copies thereof may be obtained from the
Commission upon payment of the prescribed fees. Statements contained in this
Prospectus as to the contents of any contract or document referred to herein are
not necessarily complete, and in each instance reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement or
such other document, each such statement being qualified in all respects by such
reference.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

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

[The remainder of this page has been left blank intentionally.]

49
<PAGE>
CELERITY SYSTEMS, INC,
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2

Financial Statements:

Balance Sheets as of December 31, 1998 and 1999 and
June 30, 2000 (unaudited)................................. F-3

Statements of Operations for the years ended
December 31, 1998, 1999 and for the six month periods
ended
June 30, 1999 and 2000 (unaudited)........................ F-4

Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998 and 1999 and
for the six months ended June 30, 1999 and 2000
(unaudited)............................................... F-5

Statements of Cash Flows for the years ended
December 31, 1998 and 1999 and for the six month periods
ended June 30, 1999 and 2000 (unaudited).................. F-6

Notes to the Financial Statements........................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Celerity Systems, Inc.

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

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

PricewaterhouseCoopers LLP
March 10, 2000
Knoxville, Tennessee

F-2
<PAGE>
CELERITY SYSTEMS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash................................................ $ 18,273 $ 383 $ 449,301
Accounts receivable, less allowance for doubtful
accounts of $436,472 in 1998...................... 280,315 31,500 --
Other receivables................................... -- 28,000 4,300
Inventory, net...................................... 1,206,611 854,353 322,807
Prepaid expenses.................................... 63,150 24,000 116,975
------------ ------------ ------------
Total current assets.......................... 1,568,349 938,236 893,383
Property and equipment, net......................... 1,697,367 104,686 129,019
Debt offering costs, net of accumulated amortization
of $0, $134,894 and $93,735 (unaudited),
respectively...................................... -- 76,629 122,739
Other assets........................................ -- 109,186 107,978
------------ ------------ ------------
Total assets.................................. $ 3,265,716 $ 1,228,737 $ 1,253,119
============ ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable.................................... $ 821,814 $ 984,341 $ 364,666
Accrued wages and related taxes..................... 626,389 1,209,639 260,112
Accrued interest.................................... 5,250 224,622 119,645
Other accrued liabilities........................... 161,890 309,513 100,960
Notes payable....................................... 5,000 557,252 130,000
Current maturities of long-term debt and capital
lease obligations................................. 271,937 401,173 120,000
------------ ------------ ------------
Total current liabilities..................... 1,892,280 3,686,540 1,095,383
Long-term debt and capital lease obligations, less
current maturities................................ 397,955 904,280 1,429,579
------------ ------------ ------------
Total liabilities............................. 2,290,235 4,590,820 2,524,962
Common stock, $.001 par value, 15,000,000 shares
authorized, 4,748,847 issued and 4,411,483
outstanding, and 6,269,521 issued and 5,932,157
outstanding at December 31, 1998 and 1999,
respectively and 12,086,835 issued and 11,749,471
outstanding at June 30, 2000 (unaudited).......... 4,749 6,270 12,087
Additional paid-in capital.......................... 22,626,174 23,695,245 29,062,069
Treasury stock, at cost, 337,364 shares at December
31, 1998 and 1999 and June 30, 2000 (unaudited)... (227,500) (227,500) (227,500)
Accumulated deficit................................. (21,427,942) (26,836,098) (30,118,499)
------------ ------------ ------------
Total stockholders' equity (deficit).......... 975,481 (3,362,083) (1,271,843)
------------ ------------ ------------
Total liabilities and stockholders' equity
(deficit)................................... $ 3,265,716 $ 1,228,737 $ 1,253,119
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements

F-3
<PAGE>
CELERITY SYSTEMS, INC.

STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these financial statements

F-4
<PAGE>
CELERITY SYSTEMS, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999

AND THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)

<TABLE>
<CAPTION>
ADDITIONAL
SHARES OF COMMON PAID-IN TREASURY ACCUMULATED
COMMON STOCK STOCK CAPITAL STOCK DEFICIT
------------ -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1998............ 4,442,134 $4,442 $22,399,692 $(227,500) $(14,472,095)
Issuance of stock to employee benefit
plan............................... 156,590 156 135,766 -- --
Exercise of employee stock options... 46,600 47 4,796 -- --
Conversion of accounts and notes
payable to stock................... 103,523 104 85,920 -- --
Net loss............................. -- (6,955,847)
---------- ------ ----------- --------- ------------
Balances, December 31, 1998.......... 4,748,847 4,749 22,626,174 (227,500) (21,427,942)
Exercise of employee stock options... 28,800 29 2,851 -- --
Issuance of common stock............. 200,000 200 39,800
Issuance of convertible debentures
with beneficial.................... 375,935
Issuance of warrants to purchase
450,000 shares of common stock..... 111,605
Conversion of accounts and notes
payable to common stock............ 438,015 438 379,734
Conversion of convertible debentures
to common stock.................... 853,859 854 159,146 -- --
Net loss............................. (5,408,156)
---------- ------ ----------- --------- ------------
Balances, December 31, 1999.......... 6,269,521 $6,270 $23,695,245 $(227,500) $(26,836,098)
========== ====== =========== ========= ============
</TABLE>

<TABLE>
<CAPTION>
ADDITIONAL
SHARES OF COMMON PAID-IN TREASURY ACCUMULATED
COMMON STOCK STOCK CAPITAL STOCK DEFICIT
------------ -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 2000
(unaudited)........................ 6,269,521 $ 6,270 $23,695,245 $(227,500) $(26,836,098)
Issuance of common stock
(unaudited)........................ 1,700,000 1,700 1,058,300
Exercise of employee stock options
(unaudited)........................ 16,000 16 2,759
Exercise of common stock warrants
(unaudited)........................ 177,500 178 135,923
Issuance of convertible debentures
with beneficial conversion feature
(unaudited)........................ 567,639
Issuance of common stock as payment
of certain consulting and
directors' fees, payroll and
accounts payable items
(unaudited)........................ 847,963 848 1,037,084
Conversion of notes, accounts, wages
and related payroll taxes to shares
of common stock and warrants to
purchase 357,464 shares of common
stock (unaudited).................. 1,575,238 1,575 1,830,993
Conversion of convertible debentures
to shares of common stock
(unaudited)........................ 1,500,613 1,500 734,126
Net loss (unaudited)................. (3,282,401)
---------- ------- ----------- --------- ------------
Balances, June 30, 2000
(unaudited)........................ 12,086,835 $12,087 $29,062,069 $(227,500) $(30,118,499)
========== ======= =========== ========= ============
</TABLE>

The accompanying notes are an integral part of these financial statements

F-5
<PAGE>
CELERITY SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(6,955,847) $(5,408,156) $(1,703,182) $(3,282,401)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization.................. 515,233 665,418 476,300 398,894
Loss on disposal of fixed assets............... 41,197 1,085,474 -- --
Noncash interest expense related to beneficial
conversion feature of debt................... -- 285,235 140,906 658,339
Noncash stock based compensation............... 17,205 -- -- --
Warranty reserve............................... (235,000) -- -- --
Provision for doubtful accounts receivable..... 152,129 -- -- --
Noncash operating expense relating to
consulting fees.............................. 468,750
Provision for inventory obsolescence........... (273,544) 354,523 -- 683,750
Noncash operating expense related to payroll
and directors fees........................... -- 309,222
Changes in current assets and liabilities:
Accounts receivable.......................... 594,793 248,815 11,080 27,200
Prepaid expenses............................. 40,189 39,150 8,413 16,400
Inventory.................................... 111,998 (2,265) (9,976) (152,204)
Costs in excess of billings on uncompleted
contracts.................................. 20,963 -- -- --
Accounts payable............................. 15,509 542,700 24,435 (420,670)
Other current liabilities.................... 478,289 950,245 484,018 (526,322)
----------- ----------- ----------- -----------
Net cash used in operating activities...... (5,476,886) (1,238,861) (568,006) (1,819,042)
Cash flows from investing activities:
Purchases of property and equipment.............. (879,494) -- -- (45,915)
Issuance of other receivables.................... -- (50,000) (50,000) --
Collection of other receivables.................. -- 22,000 -- --
Maturity of short-term instruments............... 1,229,788 -- -- --
Investments in other assets...................... -- (20,900) -- --
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities............................... 350,294 (48,900) (50,000) (45,915)
Cash flows from financing activities:
Proceeds from short-term borrowings.............. -- 677,253 137,553 130,000
Principal payments on short-term borrowings...... -- (125,000) -- (30,000)
Proceeds from long-term debt..................... 450,000 914,980 600,000 1,179,980
Principal payments on long-term debt and capital
lease obligations.............................. (38,875) (28,719) (18,622) (30,000)
Proceeds from issuance of common stock........... 140,765 40,000 2,880 1,060,000
Proceeds from exercise of common stock
warrants....................................... 136,100
Proceeds from exercise of common stock options... -- 2,880 -- 2,775
Financing and debt issue costs................... -- (211,523) (87,025) (134,980)
----------- ----------- ----------- -----------
Net cash provided by financing
activities............................... 551,890 1,269,871 634,786 2,313,875
Net increase/decrease in cash and cash
equivalents...................................... (4,574,702) (17,890) 16,780 448,918
Cash and cash equivalents, beginning of period..... 4,592,975 18,273 18,273 383
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period........... $ 18,273 $ 383 $ 35,053 $ 449,301
=========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements

F-6
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF BUSINESS

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

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

PRESENTATION OF UNAUDITED INTERIM FINANCIAL STATEMENTS

Information in the accompanying interim condensed financial statements and
notes to the financial statements for the interim periods as of and for the six
months ended June 30, 1999 and 2000, is unaudited. The accompanying interim
unaudited financial statements have been prepared by the Company in accordance
with generally accepted accounting principles and Regulation S-B. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six month period ended June 30, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. The condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the audited financial
statements of the Company as of and for the period ended December 31, 1999.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

F-7
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
overhead costs based on predetermined overhead rates. The Company records sales
of products not under contract when the related products are shipped.

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

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

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

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

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

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

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

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

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulleting No. 101, or SAB 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. It is
effective for the fourth fiscal quarter of fiscal

F-8
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years beginning after December 15, 1999. This statement has not had a material
impact on the Company.

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

3. GOING CONCERN

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

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

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

4. DISCONTINUED SEGMENT

In February 1998, the Company decided to scale back its CD-ROM segment to a
maintenance mode of operations. The Company developed a formal plan of disposal
that became effective in May 1998. The Company is actively seeking a buyer for
the segment which had revenues of $460,955 and $174,209 in 1998 and 1999,
respectively. The Company believes the most valuable assets for sale are the
segment's customer list and product source code which have no recorded value.
Inventory of $48,465 is available for sale and the Company continues to sell the
inventory as existing customers request such merchandise. Management cannot
determine which assets will remain at the time of disposal and has written down
to an estimated net realizable value the related furniture, equipment and
inventory.

F-9
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INVENTORY

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

<TABLE>
<CAPTION>
1998 1999
---------- --------
<S> <C> <C>
Raw materials......................................... $ 774,257 $924,890
Finished goods........................................ 502,891 -0-
---------- --------
1,277,148 924,890
Reserve for inventory obsolescence.................... (70,537) (70,537)
---------- --------
$1,206,611 $854,353
========== ========
</TABLE>

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

6. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
1998 1999
----------- ---------
<S> <C> <C>
Property and equipment............................... $ 2,811,861 $ 223,737
Accumulated depreciation............................. (1,114,494) (119,051)
----------- ---------
Property and equipment, net.......................... $ 1,697,367 $ 104,686
=========== =========
</TABLE>

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

F-10
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES

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

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

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

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

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

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

F-11
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

8. COMMON STOCK WARRANTS

In June and July 1996, the Company sold units in a private placement
offering to outside investors. The 60 units consisted of one 10% Note in the
principal amount of $50,000, 7,111 shares of common stock and warrants to
purchase 2,625 shares of common stock. Additionally, the agent received warrants
to purchase 35,556 shares of common stock at $10.31 per share.

In November 1996, the Company issued an additional 867 warrants for each
unit held by the outside investors in connection with the Company's default on
previously outstanding investor debt and subsequent conversion of the principal
to common stock. The warrants issued to the agent were increased to 38,852 in
connection with the default and the exercise price was decreased to $9.44. In
October and November 1998, the Company agreed to issue $86,024 in common stock
at a 20% discount. This triggered the antidilution provisions of the 1996
warrant agreements. An additional 29 warrants were issued for each unit and the
exercise price was lowered to $8.39. All warrants issued in the 1996 placement
will expire on the third anniversary of the closing of the initial public
offering. The warrant issued to the agent was further increased to 39,184 in
connection with the 1998 antidilution and the exercise price was decreased to
$9.36. These will expire five years from the date of grant.

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

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

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

In June 1999, the Company received $500,000 in bridge financing. In
connection with this placement the agent received warrants to purchase 100,000
shares of common stock at $1.50 per share which were subsequently repriced to
$0.94 per share. See Note 14.

F-12
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

9. NOTES PAYABLE, LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Notes payable include $27,252 advanced from the Company's President on a
non-interest bearing short-term basis. These funds were used for working capital
purposes. During 1999 $30,000 was advanced from an inventory supplier to fund
purchases required for a specific customer order. This note is due, plus
interest of $15,000, upon receipt of the funds from the specified customer.
Also, bridge financing was obtained in the amount of $500,000. This financing
had a term of 120 days and provided for interest of $100,000.

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

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

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

In November and December 1999, the Company sold $314,980 in a private
placement offering to outside investors. Investors in the private placement
received 4% convertible debentures with a principal amount of $110,000 and 8%
convertible debentures with a principal amount of $204,980, both with a term of
three years. The debentures are convertible into the Company's common stock at a
price equal, at the Debenture holders option, either, (i) 65% of the average
closing bid price of the common stock for the five days immediately preceding
the date of conversion, or (ii) $0.75 cents per

F-13
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. NOTES PAYABLE, LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
share or $0.50 per share. The Company is obligated to file a Registration
Statement and use its best efforts to assure that the Registration Statement is
effective within 90 days of the Closing Date. In the event that the Registration
Statement is not effective within 90 days the Company will pay damages to the
Debenture holder in the amount of 2% for each month the Registration Statement
is not effective after the 90 day period. The Company has the right to redeem in
part or in full any outstanding debentures at 135% of the principal amount, plus
accrued interest. The debentures are subject to mandatory conversion upon
maturity. The Company recorded debt discount and additional paid in capital for
the $146,285 fair value of the beneficial conversion feature. The Company
recognized the difference between the aggregate conversion price of all the
convertible debentures issued in 1999 and the current fair market value (on the
date of issuance of the convertible debentures) of the shares underlying the
convertible debentures as discount on the convertible debentures and as
additional paid-in capital. This discount of $375,935 is being amortized as a
non-cash interest.

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

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

10. STOCK OPTIONS

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

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

During 1997, the Company granted options to acquire 26,000 common shares to
a member of the Company's Board and 499,200 to members of management outside the
1995 and 1997 plans. The

F-14
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. STOCK OPTIONS (CONTINUED)
483,200 options which remain outstanding at December 31, 1999 are fully vested
and expire ten years from date of grant.

<TABLE>
<CAPTION>
1998 1999
--------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............. 637,200 $2.30 742,120 $0.78
Granted.................................... 192,420 1.02 30,000 0.66
Exercised.................................. (46,600) 0.10 (28,800) 0.10
Forfeited.................................. (40,900) 1.21 (27,700) 0.74
------- ----- ------- -----
Outstanding at end of year................... 742,120 $0.78 715,620 $0.89

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

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

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

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE OUTSTANDING EXERCISE PRICE
--------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
December 31, 1998
$0.10................... 47,600 6.65 47,600 $0.10
$0.69................... 620,342 9.21 457,800 $0.69
$1.13................... 200 9.92 -- --
$1.38................... 26,200 8.21 26,200 $1.38
$1.63................... 3,076 9.33 -- --
$2.13................... 40,000 9.00 -- --
$2.94................... 1,702 9.42 -- --
$4.90................... 3,000 7.25 3,000 $4.90

December 31, 1999
$0.10................... 14,000 6.97 14,000 $0.10
$0.66................... 30,000 9.71 -- --
$0.69................... 555,000 7.56 504,554 $0.69
$1.13................... 100 8.93 33 $1.13
$1.38................... 26,000 7.26 26,000 $1.38
$1.63................... 6,152 8.50 2,030 $1.63
$1.88................... 2,666 8.41 879 $1.88
$2.13................... 60,000 8.03 19,800 $2.13
$2.63................... 20,000 8.01 6,600 $2.63
$4.90................... 1,702 8.35 562 $2.94
</TABLE>

F-15
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
1998 1999
------------------------- -------------------------
AS AS
REPORTED PRO FORMA REPORTED PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss................... $(6,955,847) $(7,098,413) $(5,408,156) $(5,560,882)
Net loss per share......... $ (1.63) $ (1.67) $ (1.06) $ (1.09)
</TABLE>

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

11. LOSS PER SHARE

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

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

<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- -------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Loss
Basic and diluted:
Loss available to common
stockholders................. $(6,955,847) $(5,408,156) $(1,703,182) $(3,282,401)
=========== =========== =========== ===========
Shares
Basic and diluted:
Weighted-average common shares
outstanding.................. 4,260,327 5,108,954 4,395,137 8,437,406
=========== =========== =========== ===========
</TABLE>

F-16
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. CASH FLOWS

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

<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Cash paid during the year for:
Interest........................................... $ 29,806 $ 252,630
</TABLE>

Noncash investing and financing activities:

1998

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

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

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

1999

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

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

13. COMMITMENTS AND CONTINGENCIES

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

<TABLE>
<S> <C>
2000........................................................ $ 59,503
2001........................................................ 62,003
2002........................................................ 60,501
2003........................................................ 2,500
Thereafter.................................................. 0
--------
$184,507
========
</TABLE>

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

The Company entered into a written lease agreement dated November 25, 1997,
which was amended on April 1, 1998. The lease was terminated by the landlord as
a result of the Company's breach, effective January 29, 1999. Pursuant to an
agreement between the Company and the landlord, the Company acknowledged breach
of the lease due to its failure to pay the required rental amount, and the
landlord agreed to forego its right to immediate possession of the premises
until February 20, 1999 if the Company performed certain acts. The agreement
provided that any time after February 20, 1999, the landlord could cause its
counsel to (a) file a detainer warrant or complaint and (b) submit the answers
and agreed judgments executed by the Company if the parties did not enter into a
written agreement regarding the portion of the previously leased premises
currently occupied by the Company.

F-17
<PAGE>
CELERITY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is still in negotiations with the Landlord. No assurance can be
given as to the successful conclusion of these negotiations.

14. SUBSEQUENT EVENTS (UNAUDITED)

The Company issued $550,000 aggregate principal amount of 4% convertible
debentures in the second quarter of 2000. The debentures have a term of four
years and are convertible into the Company's common stock at a price, at the
option of the holder, equal to 75% of the average closing bid price of the
common stock for the five trading days immediately preceding conversion. The
Company recorded debt discount and additional paid in capital for the $457,245
fair value of the beneficial conversion feature. During the second quarter, the
holders of all $550,000 of these debentures exercised their option to convert
into the Company's common stock. The Company issued 836,298 shares of common
stock in connection with these conversions.

In the first half of 2000, the Company converted $1,787,323 of outstanding
debt into common stock upon the initial closing of a private offering. Investors
in the private offering received 1,503,738 shares of the Company's common stock,
calculated at the average closing bid price of the common stock for the five
days immediately prior to acceptance of the investor's subscription agreement
less twenty percent. In addition, investors received warrants to purchase common
stock at the rate of one warrant for each five dollars of debt converted. The
warrants have an exercise price of $1.44 and expire on April 9, 2003.

In the first half of 2000, the Company issued 1,600,000 shares of common
stock in private placements for a value of $1,060,000.

In April 2000, the Company repriced 100,000 warrants that it had issued to
the placement agent in connection with the June 1999 bridge financing from $1.50
per share to $0.94 per share and extended their expiration date from
December 15, 2001 to April 3, 2003.

In August 2000, the Company issued 41 shares of Series A convertible
preferred stock. The shares have a liquidation preference of $10,000 per share.
The preferred shares are convertible into the Company's common stock at a price
equal to 75% of the average closing bid price of the common stock for the five
trading days immediately preceding conversion. The Company will record a noncash
preferred stock dividend in the third and fourth quarters of 2000 totalling
$41,785 for the fair value of the beneficial conversion feature. The placement
agent received $41,000 and five-year warrants to purchase 360,000 shares of
common stock at $0.70 per share as the placement agent. The fair value of these
warrants was determined to be $202,000 which will be recorded as a cost of the
offering.

F-18
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY SELLING
STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<S> <C>
Prospectus Summary........................ 3

Risk Factors.............................. 5

The Company............................... 16

Use of Proceeds........................... 16

Dividend Policy........................... 16

Market Information........................ 17

Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 18

Business.................................. 23

Management................................ 30

Principal and Selling Stockholders........ 36

Certain Relationships and Related
Transactions............................ 39

Description of Securities................. 40

Shares Eligible for Future Sale........... 45

Plan of Distribution...................... 46

Legal Matters............................. 48

Experts................................... 48

Where You Can Find More Information....... 49

Special Note Regarding Forward Looking
Statements.............................. 49

Index to Consolidated Financial
Statements.............................. F-1
</TABLE>

4,646,548 SHARES

CELERITY SYSTEMS, INC.

COMMON STOCK

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

PROSPECTUS

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

SEPTEMBER , 2000

ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS

Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. The Company's Certificate of Incorporation includes the
following language:

No director of the Corporation shall be liable to the Corporation or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director; PROVIDED that this provision does not eliminate the liability of the
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from
which the director derived an improper personal benefit.

Article Ninth of the Certificate of Incorporation of the Company permits
indemnification of directors of the Corporation. Such Article provides as
follows:

"A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit. Any
repeal or modification of this paragraph shall not
adversely affect any right or protection of a director of
the Corporation existing hereunder with respect to any act
or omission occurring prior to such repeal or
modification.

If the Delaware General Corporation Law is hereafter
amended to authorize the further elimination or limitation
of the liability of a director, then the liability of a
director of the Corporation shall be eliminated or limited
to the fullest extent permitted by the amended Delaware
General Corporation Law. Any repeal or modification of
this paragraph shall not adversely affect any right or
protection of a director of the Corporation existing
hereunder with respect to any act or omission occurring
prior to such repeal or modification."

Additionally, the Company's Bylaws provide that the Company will indemnify
each of its directors and officers with respect to all liability and loss
suffered and expenses incurred by such person in any action, suit or proceeding
in which such person was or is made or threatened to be made a party or is
otherwise involved by reason of the fact that such person is or was a director
or officer of the Company. The Company is also obligated to pay the expenses of
the directors and officers incurred in defending such proceedings, subject to
reimbursement if it is subsequently determined that such person is not entitled
to indemnification.

II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby. All
of the amounts shown are estimates except for the SEC Registration Fee:

<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 729.88
Legal Fees and Expenses..................................... 80,000
Blue Sky Fees (including counsel fees)...................... 5,000
Accounting Fees and Expenses................................ 15,000
Transfer Agent and Registrar Fees........................... 3,000
Miscellaneous............................................... 5,000
Total....................................................... $108,729.18
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

Set forth below in chronological order is information regarding the number
of shares of Common Stock sold by the Company since September 1997, the
consideration received by the Company for such shares, and information relating
to the section of the Securities Act, or rule of the Commission under which
exemption from registration was claimed. None of these securities was registered
under the Securities Act. No sales of securities involved the use of an
underwriter and no commissions were paid in connection with the sale of any
securities except as indicated. The Company conducted these transactions in
reliance on the exemption contained in Section 4(2) of the Securities Act of
1933, as amended.

On August 31, 2000, we sold 41 shares of Series A preferred stock to
accredited investors for $410,000. May Davis received $41,000 and five-year
warrants to purchase 360,000 shares of Common Stock at $0.70 per share as a
placement fee.

On June 16, 2000, we sold 1.5 million shares of Common Stock to an
accredited investor, for $1,020,000 in cash and the execution of a consulting
contract with its affiliate.

In April 2000, we borrowed $500,000 from a private investor. In May 2000
such investor exchanged all rights under the note for stock and warrants to
purchase common stock. M Holdings, Inc. received warrants to purchase 100,000
shares of common stock in connection with these transactions.

During April and May 2000, we issued an aggregate of 1,503,738 shares of
Common Stock and warrants to purchase an aggregate of 357,462 shares of Common
Stock to certain of our creditors, including current and former officers and
employees, in exchange for the cancellation of an aggregate amount of
approximately $1.79 million of indebtedness, including accrued interest. Of such
indebtedness, approximately $665,000 was held by the Company's officers and
directors and approximately $377,000 was held by other current and former
employees.

In December 1999 and January 2000, we issued 400,000 shares of common stock
to David Hultquist, a nominee for our Board of Directors, at the then current
market price of the common stock, for a total of $80,000.

From December 1999 through March 2000, we issued $629,980, aggregate
principal amount of 8% subordinated convertible debentures due 2003 to eight
private investors. Such debentures are convertible at any time at the option of
the holder at a conversion price roughly equal to 75% of the market price of the
Common Stock. May Davis received $62,998 as a placement fee.

During November 1999, we issued $204,980, aggregate principal amount of 8%
subordinated convertible debentures due 2002 to five private investors. Such
debentures are convertible at any time

II-2
<PAGE>
at the option of the holder at a conversion price of 75% of the market price of
the Common Stock. May Davis received $20,498 as a placement fee.

During October and November 1999, we issued $110,000, aggregate principal
amount of 4% subordinated convertible debentures due 2002 to seven private
investors. Such debentures are convertible at any time at the option of the
holder at a conversion price of 75% of the market price of the Common Stock. May
Davis received $11,000 as a placement fee.

On September 30, 1999, we executed a Line of Credit Agreement with an
accredited investor, which permitted us to issue up to $5 million in 4%
convertible debentures to such investor over the life of the agreement. Since
such time, we have issued $550,000 of such debentures. Such debentures are
convertible at any time at the option of the holder at a conversion price of 75%
of the market price of the Common Stock. May Davis received $35,000 and
three-year warrants to purchase 250,000 shares of Common Stock at $0.586 per
share as a placement fee.

In January, February, and March 1999, we issued $600,000, aggregate
principal amount, of 9% convertible debentures due 2001 to four accredited
investors. Such debentures are convertible at any time at the option of the
holder at a conversion price of 75% of the market price of the Common Stock or
four times the five-day average closing bid price for the five days immediately
preceding the date of closing for such investor. The Company has issued
1,207,854 shares of Common Stock pursuant to conversion notices relating to
$300,000, aggregate principal amount, of these debentures. May Davis, as
placement agent, was paid to a 10% cash fee and a 2% fee for non-accountable
expenses and repayment of certain other expenses. May Davis received $72,000 and
three-year warrants to purchase 100,000 shares of Common Stock at $1.00 per
share as a placement fee.

In October 1998, we issued $450,000, aggregate principal amount, of 7% Notes
due 2001 (some were also due in 1999 and 2000) to private investors, including
our officers, directors, and employees. Noteholders are also entitled to a
royalty based on the number of set top boxes that we sell through 2003.

ITEM 27. EXHIBITS

(a) The following exhibits are filed herewith:

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
3.1 Certificate of Incorporation of Celerity Systems, Inc. (1)

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

3.3 Certificate of Designations, Preferences and Rights of
Series A Preferred Stock (11)

4.1 Form of Underwriter's Warrant (1)

4.2 1995 Stock Option Plan (1)

4.3 1997 Stock Option Plan (1)

4.4 Form of Stock Certificate (1)

4.5 Form of Bridge Warrant (1)

4.6 Form of 1996 Warrant (1)

4.7 Form of Hampshire Warrant (1)

4.8 Form of 1995 Warrant (1)

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

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

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<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
4.11 Form of 9% Convertible Debenture (3)

4.12 Form of 7% Promissory Note (3)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4.27 Securities Purchase Agreement, dated August 31, 2000,
between Celerity Systems, Inc. and the Investors indicated
therein. (11)

4.28 Registration Rights Agreement, dated August 31, 2000,
Celerity Systems, Inc. and the Investors indicated therein.
(11)

5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP re:
legality (to be filed by amendment)

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

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

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

10.4 [Reserved]
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
10.5 Letter Agreement, dated March 13, 1997, between the Company
and William Chambers (1)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
10.27 Lease, dated December 17, 1999, between Andy Charles
Johnson, Raymond Perry Johnson, Tommy F. Griffin and the
Company. (8)

23 Consent of PricewaterhouseCoopers, LLP (12)
</TABLE>

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

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

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

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

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

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

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

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

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

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

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

(11) Filed as an Exhibit to the Form 8-K filed August 31, 2000.

(12) Filed herewith.

ITEM 28. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes:

(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) to include any prospectus required by section 10(a)(3) of the
Securities Act;

(ii) to reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement;

(iii) to include any additional or changed material information on
the plan of distribution;

(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be treated as a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; and

(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-6
<PAGE>
SIGNATURE

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

<TABLE>
<S> <C> <C>
CELERITY SYSTEMS, INC.

/s/ KENNETH D. VAN METER
-----------------------------------------
Kenneth D. Van Meter
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

August 30, 2000

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KENNETH D. VAN METER President, and Chairman of the August 30, 2000
------------------------------------------- Board of Directors,
Kenneth D. Van Meter principal executive officer,
principal accounting officer
and principal financial
officer

/s/ GLENN WEST Director August 30, 2000
-------------------------------------------
Glenn West

/s/ FENTON SCRUGGS Director August 30, 2000
-------------------------------------------
Fenton Scruggs

/s/ STEPHEN PORTCH Director August 30, 2000
-------------------------------------------
Stephen Portch

/s/ MARK BRAUNSTEIN Director August 30, 2000
-------------------------------------------
Mark Braunstein

/s/ DONALD GREENHOUSE Director August 30, 2000
-------------------------------------------
Donald Greenhouse
</TABLE>

II-7