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

                       AMENDMENT NO. 1 TO THE FORM 10-KSB

                                   (Mark one)

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

                   For the fiscal year ended December 31, 2001
                                       OR

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

         For the transition period from ____________ to _______________

                           Commission File No. 0-23279

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

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

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

       Issuer's telephone number                       (865) 539-5300

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

    TITLE OF EACH CLASS               NAME OF EACH EXCHANGE ON WHICH REGISTERED
    -------------------               -----------------------------------------


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

                     COMMON STOCK, PAR VALUE $.001 PER SHARE
                                (Title of Class)

<PAGE>

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

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

        State issuer's revenues for its most recent fiscal year:  $403,997.

        Aggregate  market  value of  voting  stock  held by  non-affiliates  of
registrant as of March 19, 2002: $1,696,362.

        Shares of Common Stock outstanding as of March 19, 2002:  177,334,914.

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



                       DOCUMENTS INCORPORATED BY REFERENCE


                                 Not applicable
         ---------------------------------------------------------------

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

        This Annual Report on Form 10-KSB  contains  forward-looking  statements
that involve certain risks and  uncertainties.  Celerity Systems' actual results
could  differ  materially  from the  results  discussed  in the  forward-looking
statements.  See "Description of Business",  "Risk Factors" and "Forward-Looking
Statements and Associated Risks."

                                       2
<PAGE>

                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

COMPANY OVERVIEW

         We develop  and  manufacture,  at third party  plants,  digital set top
boxes and digital video servers for the  interactive  television  and high speed
Internet markets. In addition, through arrangements with other parties, Celerity
can offer  end-to-end  systems for  customers.  We also provide a  comprehensive
content package for  educational  users with over 1300 titles  available,  and a
content package,  Celerivision,  for use in entertainment  deployments,  such as
condominiums,  the hospitality industry,  and multihousing  properties.  We also
have developed  unique and valuable  software  functionality  and  applications,
which we incorporates in some of our products and services.

         We have targeted ten market  segments for long term  deployment of this
technology:  education,  hospitality,  energy companies,  enterprise  solutions,
telephone companies,  hospitals and assisted living,  retailers,  multi housing,
cable companies, and international.  However our main focus is on the first four
areas.

         The education  market,  particularly the public schools  segment,  is a
growing area,  and we believe that our products and services are more  effective
than  traditional  VCR or analog media  storage  systems,  and at a better cost.
Additionally,  the  embedded  browser in our T 6000TM  Digital Set Top Box gives
each  classroom  or work area the  equivalent  of a "free PC", a plus for school
system budgets. We have two active school projects in Ohio, and we have received
an  order  for  three   additional   schools   there.   We  have  named  Kidston
Communications as our national distributor for K through 12 public education for
North America,  and are working  collaboratively with them to expand our network
of dealers with the objective of having qualified distributors in every state.

         The  hospitality  industry  appears to be well suited to our  products.
Guests want high-speed  Internet  without lugging a computer along,  interactive
TV, and a host of services  including cable  television,  games and gaming,  and
shopping.  Cable TV and pay-per-view alone are just not enough any more. We have
sold two  complete  systems  to  TotalVision  in  Alabama  for two of its resort
condominium properties.

         Energy  companies  have large  quantities of fiber optic cable deployed
throughout  their  service  areas,  and are  looking  for full  service  product
packages to sell to their customers on a retail basis. They also, in some cases,
partner  with other  companies,  such as cable  companies  or  Internet  service
providers, to further enlarge their product offerings.  Our T 6000TM Digital Set
Top Box supports this entire array of services very  effectively,  and can also,
after integration with a particular energy company's  systems,  provide enhanced
services  such  as home  energy  management  using  CEBus  or X 10 home  gateway
technologies.

         Companies  such  as  financial  institutions  want to  disseminate  and
display digital  content within their  facilities,  both on a managed  streaming
basis and also in a fully interactive  process. The T 6000TM Digital Set Top Box
can operate as a  highly-functional  client in such  networks  and add great new
value for these types of applications.

         The multiple  dwelling unit (MDU) market,  with nearly 34 million homes
in the U.S.  alone,  represents a solid  long-term  opportunity.  This market is
underserved  by traditional  cable  companies and appears to be an excellent fit
for our technology.  However, we are pursuing only those opportunities where the
property  owner or system  operator  funds  the  project,  so as to ensure  full
commitment to its success and not require such a high level of investment on our
part.

         The need for  intensive  but user  friendly  services in hospitals  and
assisted  living  facilities,  and for  healthcare in the home also appear to be
good markets for us. In addition to  entertainment  programming,  these services
could include staff and patient training and education,  medical  monitoring and
management, and amenities.

         We believe that retailers  should install our digital video servers and
digital set top boxes in their facilities to market products, play informational
and instructional  videos, train staff, and do incentive-based  selling. In many
cases,  the  cost of the  system  could be paid for by  suppliers  creating,  in
essence "digital shelf space".

                                       3
<PAGE>

         Internationally,  we intend to pursue  only those  projects  which meet
four criteria:  well-funded,  reasonable technical requirements,  a strong local
partner,  and guaranteed timely payment. Our preferred  international  strategy,
however,  is to sell  market  license  rights on a country by  country  basis to
well-qualified international partners.

RECENT DEVELOPMENTS

         As of December  31,  2001,  we had cash on hand of $171,988 and working
capital of  approximately  $(1,279,995).  Our operations are financed  primarily
from the sale of debt and equity  securities.  For the  foreseeable  future,  we
believe we will continue to rely on external capital to fund our operations.

         We are  continuing  to seek  additional  sources of capital in order to
repay our obligations and to provide for our working  capital  requirements  for
the long-term.  We are also continuing to seek strategic investments from one or
more  large  or  well-known   companies  in  the  interactive   video  services,
telecommunications  or high  speed  Internet  industries.  We  believe  that the
involvement  of such a firm or firms is material  to our ability to grow.  There
can be no assurance that we will be able to obtain any such required  additional
funds on a timely basis, or on favorable terms, or at all.

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

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

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

OUR PRODUCTS

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

PRODUCT MANUFACTURED BY US

         DIGITAL SET TOP BOXES.  We have  developed,  and continue to upgrade to
new versions,  an advanced  digital set top box, the T 6000.  The current model,
the Rev 5, is designed to work on a range of  transmission  networks,  including
Ethernet,  Asynchronous Transfer Mode (ATM), and RF cable. It provides output to
S video, composite video, RF video, and VGA/XGA  simultaneously,  allowing it to
work  with most any  display  device,  and it has  connections  for line  audio,
universal serial bus (USB), RF in, stereo audio out, and RS 232 that allow it to
interoperate with a wide array of peripheral devices. Features include a Pentium
processor,  74 MB of memory  (expandable to 138 MB or more),  MPEG decoding,  an
integrated HTML 4 Web browser,  and 2D/3D graphics support. It is produced in an
attractive  consumer  design,  and is  FCC/UL  approved.  This  set top box also
incorporates  hardware  and  software  that can be used for certain home gateway
functions,  such  as  home  energy  management,  security  monitoring,  or  home
healthcare monitoring.

         DIGIKNOW  EDUCATION  SYSTEM.  We  have  developed  a  complete  digital
education  system which we sell to schools,  which  includes  our digital  video
server,  applications server, video on demand applications software, custom menu
and  navigation  software,  digital set top boxes,  and encoded  (digitized  and
compressed ) content.

         DIGITALLY  ENCODED  CONTENT.  We have  acquired  rights  to  over  1300
education titles,  which we have encoded in our Content  Preparation Center into
the MPEG format,  and which we sell as part of DigiKnow  system  sales.  We have
also  acquired  rights  to some  entertainment  programming,  which we have also
encoded,  and  which  we sell as part of our  system  sales  in the  hospitality
market,  and which we intend to sell to other  segments,  such as hospitals  and
multihousing, should we achieve sales in those segments.

                                       4
<PAGE>

PRODUCTS MANUFACTURED AND DEVELOPED BY OTHERS

         We  entered  into an  agreement  with nCube in June 2000 to have an OEM
version of their nCube Media Cube 4 digital video server  manufactured for us as
the Celerity CTL 9500, but with substantially better cost, size, reliability and
environmental  tolerance than many earlier  systems.  We also have  incorporated
certain  hardware and software  functionality to enhance the CTL 9500 system for
use in our target  markets.  This server  system is  scalable  from less than 30
streams (simultaneous interactive TV users) to thousands,  allowing customers to
buy exactly what they need and adjust over time if their needs change.

         Although we provide digital video servers,  we have designed our T 6000
Digital Set Top Box to be standards  compliant,  and we encourage  other digital
server manufacturers to interoperate with it.

         NETWORK  EQUIPMENT.  We have certain  formal and informal  arrangements
with  Nortel,  Cisco,  Extreme  Networks and Elastic  Networks to include  their
network  equipment  as part of overall  bids for  end-to-end  interactive  video
systems  and in  certain  cases  to be  included  in  end-to-end  bids by  these
companies.

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

         OTHER SOFTWARE. We provide a basic video-on-demand  application,  which
we call the  "Celerity"  user  interface and some sample  applications,  such as
shopping,  as part of our server software.  However,  most system operators will
require a suite of applications upon  installation of this type of system,  with
the potential of adding additional  applications in the future.  While we intend
to develop  and  provide  many of these  applications  ourselves,  we  encourage
third-party  developers  to  write  applications  for our  system,  and have had
discussions with several companies about such joint development  activities.  We
believe  that a major  advantage  of our Pentium  processor,  Java-based  HTML 4
browser, and industry standard connections is that it supports such development,
which we believe will make our products more  valuable to users over time.  Most
upgrades and enhancements can be downloaded  automatically or on request without
the need for a site visit.

INTERACTIVE VIDEO/HIGH SPEED INTERNET SEGMENT

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


                                    INDUSTRY

INDUSTRY OVERVIEW

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

                                       5
<PAGE>

         TELECOMMUNICATIONS COMPANIES AND BROADBAND INTERACTIVE SERVICES. In the
early 1990's,  telephone and cable companies and other interested parties,  such
as television and motion picture  studios,  began to experiment with the idea of
providing broadband interactive services. Broadband services are those which run
over a high capacity  digital  network such as asynchronous  digital  subscriber
lines (DSL), high speed data lines (T1 and E1), hybrid fiber coaxial cable (HFC)
lines,  and fiber to the curb  (FTTC)  fiber  optic  lines,  as well as wireless
technologies such as satellite and multi-channel,  multi-frequency  distribution
service (MMDS). These high capacity networks,  made possible by breakthroughs in
the ability to convert  information  from analog to digital form and by improved
data  compression  technologies,  have the ability to deliver vast quantities of
data into a home,  hotel,  business or other facility.  Broadband  networks also
have the  capacity  to provide  for  interactivity  between the user and content
providers. Industry sources anticipate that, if broadband networks become widely
deployed,  they will  usher in a new age of  information  technology  due to the
potential  quantity and  robustness of content,  and the speed,  ease of use and
interactivity of those networks.

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

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

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

         Different  companies have employed different  strategies to address the
shortcomings  of  narrowband  networks  in the  absence of  generally  available
broadband  networks.  For example,  WebTV (owned by Microsoft) has been offering
enhanced graphics and other features over narrowband  networks with a television
rather  than a PC  interface.  In order  to  address  the  need  for high  speed
services,  the cable industry has been 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. We believe that, despite these and other initiatives, narrowband
networks are unlikely to achieve the combination of technological  accessibility
and speed, security, and robustness of transmission  characteristic of broadband
systems.  The public  access  methodology  in the Internet and other  narrowband
networks,  coupled with off -the-shelf modems, makes security,  both for privacy
of communications and secure commercial transactions,  difficult to achieve. The
hardware and software of interactive  broadband  systems and the architecture of

                                       6
<PAGE>

such  networks  creates a more  secure  environment  for such  transactions.  In
addition,  although better  software,  compression  methods and other tools have
enabled  improvements  in  narrowband  services,  the  physical  constraints  of
narrowband  networks are  substantial  compared to those of broadband  networks.
Many  narrowband  lines,  especially  older lines in cities (a preferred  market
segment)  cannot  run at 56  kilobits  per  second  (kbps)  the  highest  widely
available  PC modem  rate.  This rate does not  compare  to 1.5  Megabits  to 25
Megabits per second rates provided by broadband networks.

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

BASIC INTERACTIVE SERVICES CONFIGURATION

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

NETWORK EQUIPMENT

         High Speed Lines (DSL, T1/E1, HFC, FTTC,  satellite,  MMDS) connect the
network service provider's central office or head end to subscribers classrooms,
homes,  hospital  beds,  dormitory  rooms or hotel  rooms.  High-speed  networks
switching   equipment  connects   subscribers  to  content  furnished  by  video
information  providers (VIPs),  either locally or  internationally.  There are a
large number of providers of this network equipment, including Cisco Systems, CF
Alcatel,  Extreme Networks,  Inc.,  Ericsson,  Lucent  Technologies,  Scientific
Atlanta, Inc., Elastic Networks and Siemens Communications.

DIGITAL SET TOP BOXES

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

DIGITAL VIDEO SERVERS

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

                                       7
<PAGE>

CONTENT PREPARATION EQUIPMENT

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

APPLICATIONS AND BUSINESS SUPPORT SOFTWARE

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

SERVICES

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

CONTENT

         We  have  entered  into  some  agreements  and  intend  to  enter  into
additional  arrangements with content aggregators and content owners so as to be
able to offer content as part of end-to-end solutions.

USER EXPERIENCE

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

         We anticipate that applications  will become more robust,  numerous and
exciting  in the future as new  content,  applications  and  enhanced  technical
capabilities become available.  For example, travel reservations and information
could be a possible  application  for interactive  video services.  A subscriber
equipped  with an  ordinary  television  set or PC, a digital  set-top box and a
hand-held  remote control or wireless  keyboard  could select a travel  company,
which  would  be a video  information  provider  (VIP)  on the  system,  from an
on-screen menu. A typical application might show major geographic areas, such as
Asia, Europe, the United States and the Caribbean. A subscriber choosing Europe,
for example,  would be provided with a further choice among European  countries.
By choosing a country,  e.g.,  Spain,  a subscriber  could be presented a choice
among video, graphic and data content relating to that country,  such as general
interest videos and information  relating to packaged tours, airline options and
hotels.  Similar  applications are currently  available on narrowband  services,
such as the Internet;  however,  broadband applications such as our products can
accommodate   lengthy  high  quality  videos  and  robust  graphics,   including
three-dimensional  graphics, which cannot currently be as efficiently downloaded
or viewed via a  narrowband  network.  We also  believe  that the  significantly
greater security,  both for transactions and  communications,  available through
broadband  networks  will be more  attractive  to  consumers.  We  believe  that
broadband  networks  could,  in the future,  also include  applications  with an
electronic data interchange  (EDI) back end, which would allow the subscriber to
ascertain the availability and confirm  reservations for different  products and
services  such as hotel or car  rental or airline  tickets  on a  near-real-time
basis, including potentially two-way video conversations with agents.

                                       8
<PAGE>

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

POTENTIAL MARKETS

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


                                    STRATEGY

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  ourself 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.  Our  marketing is
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.  See "Deployments" and "Strategic  Alliances." In addition, the
scalability of our servers provides  flexibility in deploying  interactive video
services  systems varying in size from systems designed to serve 25 simultaneous
users to those  capable  of  serving  many  thousands  of users in a variety  of
markets on a cost effective  basis. We believe that this  scalability will be an
attractive  feature to  potential  customers.  We also  believe  that our T 6000
digital set top box, with its wide range of capabilities  to  interconnect  with
many different networks and many different peripheral and display devices,  will
allow us to compete favorably in several different markets,  either with our own
digital  video server or with others.  We believe that a  diversified  marketing
approach provides us with flexibility in targeting emerging markets, enabling us
to recognize  market  opportunities  and adapt to perceive  changes in marketing
priorities.  However, due to our limited resources,  we have determined to focus
on those  markets in which we believe  there is greater  interest  at this time,
while looking for targets of opportunity in our other niche market segments.  We
believe that the markets  which appear most  favorable at this time are schools,
energy companies,  hospitality,  and enterprise solutions. We have limited sales
and  marketing  experience  and  there  can be no  assurance  that  we  will  be
successful  in  implementing  its marketing  plans.  See "Risk Factors - Limited
Sales; Limited Marketing and Sales Experience."

PUBLIC NETWORKS

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

         ELECTRIC   COMPANIES.   Domestic  electric   companies  are  now  being
deregulated  and are subject to intense  competitive  pressures  and the need to
find new sources of revenue.  Many  electric  companies  have  installed  or are
continuing to install fiber optic lines in communities  for remote meter reading
and equipment monitoring  purposes.  These lines could be used to provide a full
menu of video services.  Electric  companies are not currently  regulated in the
same  manner as cable and  telephone  companies,  typically  have long  standing
relationships  with  subscribers  and often have pole and buried cable rights of
way which could give them a competitive  advantage over potential  entrants into
the  interactive  video  services  market.  Electric  companies may also see the
provision of additional services as a means as protecting key customers, such as
hospitals,  from  incursion by other energy  companies  outside their  operating
territory,  that can now sell to these customers under the operating  principles
of the North American Power Grid System.  A number of electric  companies in the
United  States  and Canada  have  expressed  an  interest  in such  deployments.
Hopkinsville Electric Service, in Hopkinsville,  Kentucky, ordered a system from
us in February 1999, but problems with their network equipment  provider and the
local telephone company have indefinitely  delayed  deployment,  and the project
may never be done.  Other energy  companies,  such as the NoaNet  project in the
Pacific Northwest, appear to still be expanding their efforts.

                                       9
<PAGE>

         TELEPHONE  COMPANIES.  There are more than  1300  independent  domestic
telephone  companies and ten major  telephone  companies  within North  America.
Major independent  telephone companies include Sprint Corp, Buena Vista Tel. and
Cincinnati Bell Incorporated.  In addition, there has arisen an entire new class
of telephone  companies  called  Competitive  Local  Exchange  Carriers  (CLECs)
including  such  successful  and growing  companies  as RCN. We believe  that as
telephone companies upgrade their backbone networks to fiber optics and begin to
deploy  high-speed  services to homes,  they are good  candidates to install our
systems.  Local telephone  companies,  including long distance carriers that are
installing  local telephone  networks,  have installed or plan to install modern
fiber optic networks may be seeking new revenue opportunities to offset the cost
of such installations. We believe that independent telephone companies and CLECs
may have more flexible management styles than large telecommunications companies
and  may be  quicker  to  commit  to  strategic  decisions,  such  as  providing
interactive video systems to their customers.

         FOREIGN TELEPHONE COMPANIES.  Most of our early server deployments were
for telephone  companies outside the United States.  Foreign companies have been
more  active  in  deploying   interactive  video  services  than  domestic  U.S.
companies.  We believe  that,  in part,  this is because in many  countries  the
telephone  company is owned or supported  directly by the government,  which may
see the addition of such services,  especially  public interest services such as
education and health  oriented  services,  as being  beneficial to its citizens.
Potential markets are emerging in Europe,  Latin America,  Canada and Africa, in
addition to existing and merging  markets in Asia.  However,  we have found that
such projects are  difficult and expensive to perform,  and therefore we are not
actively  marketing our services  abroad.  However,  should we find  profitable,
well-funded  projects  outside the U.S.  where we have has a reliable  strategic
partner in that  geographic  area, and where timely  payment is  guaranteed,  we
would  entertain  doing  such  international  projects.  Our best  international
strategy,  we believe, is to seek strong companies in each country or region and
sell them licensing rights for that territory. See "Deployments."

         CABLE  COMPANIES.  The large  domestic  cable  companies  are currently
served  virtually  entirely by Scientific  Atlanta and  Motorola.  Private cable
companies and  companies  wishing to supplant the local cable  company,  such as
DirecTV, have an interest in deploying interactive video services,  particularly
in markets such as the multi-housing  industry. Some new entrants, such as Wave7
Optics and Phillips,  are trying to penetrate this very closed  market.  If they
do, this could open some opportunities for us.

         INTERNET SERVICE PROVIDERS. There has been a recent move on the part of
major Internet service providers including AOL Time-Warner to install high speed
digital networks,  either fiber, DSL, or some combination thereof, in major city
markets  throughout the U.S. for the purpose of high-speed  Internet access.  We
believe that new ISPs are very interested in providing a large  profitable array
of services to their  customers to help justify the cost of these  installations
and the cost, on the subscriber's part, of the monthly service.

PRIVATE NETWORKS

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

         SCHOOLS.  Improving  primary  and  secondary  education  has  become  a
national priority.  Many states and the federal agencies are looking to advanced
technologies to make a difference. We have two active projects in Ohio, and have
announced  sales to three  additional  schools there.  Our goal is to set up and
manage a nationwide network of qualified systems integrators and distributors to
sell and service our DigiKnow digital educational system to schools.

         DIGITAL  HOSPITALITY.  Some  hotels,  motels and  resorts  are  already
upgrading to a full digital  interactive  services solution.  We anticipate that
certain  upscale  hospitality  properties,  in particular,  will install digital
systems during  construction  or thereafter  upgrade to digital  systems.  These
digital systems have the potential to offer on-demand video programming,  games,
gaming,  shopping,  health,  education and other  services,  in addition to high
quality  pay-per-view  programming.  We have sold and  installed two systems for
TotalVision in condominiums in Gulf Shores, Alabama.

         ENTERPRISE SOLUTIONS. Our systems seem to be very well-suited to be the
core system or client for use in financial  institutions and other companies for
in-site  education,  training,  advertising,  promotion and other  communication
requirements.   We  are  working  with  network  equipment  providers  to  craft
innovative solutions that may be attractive to their customers.  We believe that
the  broadband  digital  networks  represent a logical  extension of  Intranets.

                                       10
<PAGE>

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

         DIGITAL  HOSPITALS.  Many  domestic and foreign  hospitals  are already
wired with state-of-the-art, high-speed digital networks which would be suitable
for interactive  video services  systems,  although it is currently  unclear who
would fund these  systems.  We are aware of several  situations  in which health
care providers such as pharmaceutical  companies have expressed a willingness to
underwrite  some or all of the cost of content  shown on these systems in return
for strategic  positioning in advertising.  Our digital server,  set top box and
operating  system  technology  could  potentially  accommodate  an  architecture
designed to allow patients to view advertisements  targeted to their conditions,
which could be  attractive  to  advertisers.  We believe that another  potential
source of  funding  is the  hospitals  themselves.  Interactive  systems  may be
password- and ID-protected,  so that the user is individually  identified within
the  system.  We believe  that the system  could be  designed  to show  patients
targeted videos containing medical  information or instructions which they would
then  electronically  "sign"  prior  to  being  allowed  to  view  entertainment
services.  Such a system could be  attractive to hospitals as a means of patient
education  and to ensure  that  patients  (or  staff)  have read and  understand
instructions and other information, such as liability warnings. The system would
also be  attractive  in longer term care  facilities,  such as assisted  living,
where the individual is spending more time and has a wider range of interests.

         MULTIPLE  DWELLING  UNITS  (MDUs).  Many  large  apartment   complexes,
condominiums,  gated  communities  and similar groups of homes,  termed Multiple
Dwelling  Units  or MDUs  are  now  installing  modern  network  systems  during
construction  or as an upgrade  in order to  attract  or retain  tenants or as a
source of revenue.  We believe that certain  types of MDUs,  such as  retirement
communities,  represent  particularly  attractive potential markets, since these
networks might offer shopping,  education,  interactive health and entertainment
services to senior  citizens  or to  consumers  who have  limited  mobility.  In
January  and  March  2001,  we  announced  contracts  with Bala  Properties  and
In4Structures  to do MDU  projects in four cities.  We  installed  one system in
Arizona,  but have  mutually  determined to not continue the projects due to our
inability to obtain third party lease financing and the builder's  unwillingness
to fund the systems.  Going forward,  we will do such projects only if funded in
whole or at least  primarily by the property  owner,  so as to ensure their full
commitment to the projects and their profitability and success.

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

         RETAILING.  We believe our  products  and  services are well suited for
point of sale (POS)  applications  in which a server and  multiple set top boxes
would be  deployed  in a large  retail  environment  to provide  customers  with
detailed  information  on products and services,  including  pricing,  specials,
promotions,  and for  training  staff on  products.  It is  possible  that these
systems  could be paid for in whole or in part by vendors,  creating the concept
of "virtual shelf space".

EMPLOYEES

         As of March 19, 2002,  we had 17 full time  employees,  13 of whom were
employed full time in the  engineering and product  development  area, 2 of whom
fulfilled the marketing and sales function and 2 of whom fulfilled management or
administrative  roles.  Our employees are not represented by a union or governed
by a collective  bargaining  agreement and we believe that our relationship with
our employees is good. We also employ a number of contractors and consultants on
a regular basis.

RESEARCH AND DEVELOPMENT COSTS

         We had no research and  development  costs in the years ended  December
31, 2001 and 2000.

                                       11
<PAGE>

RISK FACTORS

         We are subject to various risks which may materially harm our business,
financial condition and results of operations. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE  DECIDING  TO  PURCHASE  OUR  COMMON  STOCK.  IF ANY OF  THESE  RISKS  OR
UNCERTAINTIES  ACTUALLY OCCUR,  OUR BUSINESS,  FINANCIAL  CONDITION OR OPERATING
RESULTS  COULD BE  MATERIALLY  HARMED.  IN THAT CASE,  THE TRADING  PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

WE HAVE  HISTORICALLY  LOST MONEY AND  SIGNIFICANT  LOSSES MAY  CONTINUE  IN THE
FUTURE

         We have  historically  lost money. In the years ended December 31, 2001
and 2000, we sustained  losses before  discontinued  operations of $6.4 and $5.3
million,  respectively.  Future losses are likely to occur. Accordingly,  we may
experience  significant  liquidity  and cash flow problems if we are not able to
raise additional capital as needed and on acceptable terms. No assurances can be
given  that  we  will  be  successful  in  reaching  or  maintaining  profitable
operations.

WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS

         Our  operations  have relied almost  entirely on external  financing to
fund our operations.  Such financing has historically come from a combination of
borrowings, from and sale of common stock to third parties and funds provided by
certain officers and directors. We will need to raise additional capital to fund
our anticipated  operating  expenses and future  expansion.  Among other things,
external  financing  will be required to cover our  operating  costs.  We cannot
assure you that financing  whether from external sources or related parties will
be available if needed or on  favorable  terms.  The sale of our common stock to
raise capital may cause dilution to our existing shareholders.  Our inability to
obtain  adequate   financing  will  result  in  the  need  to  curtail  business
operations.  Any of these events would be materially harmful to our business and
may result in a lower stock price.

THERE IS SUBSTANTIAL  DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE
TO RECURRING LOSSES AND WORKING CAPITAL  SHORTAGES,  WHICH MEANS THAT WE MAY NOT
BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING

         The report of our  independent  accountants  on our  December  31, 2001
financial statements included an explanatory  paragraph indicating that there is
substantial  doubt  about our  ability to  continue  as a going  concern  due to
recurring  losses and working  capital  shortages.  Our ability to continue as a
going concern will be determined  by our ability to obtain  additional  funding.
Our financial  statements do not include any adjustments  that might result from
the outcome of this uncertainty.

LACK OF PATENT AND COPYRIGHT PROTECTION

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

EFFECT OF PREVIOUSLY ISSUED OPTIONS, WARRANTS AND CONVERTIBLE DEBENTURES

         As of March 19, 2002,  Celerity had 177,334,914  shares of common stock
outstanding.  In addition, we had outstanding preferred stock, options, warrants
and  convertible  debentures  which,  if converted  or exercised  into shares of
common stock,  would result in the issuance of an additional  767,282,776 shares
of common stock.  Celerity is only authorized to issue up to 250,000,000  shares
of common stock.  As a result,  if the holders of all or a significant  block of
these holders exercised or converted their  securities,  Celerity would not have
enough authorized capital stock to honor such requests.  Celerity's inability to
honor such requests could result in substantial liability.

                                       12
<PAGE>

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

OBLIGATIONS IN CONNECTION WITH THE ISSUANCE OF CONVERTIBLE DEBENTURES

         We are obligated to register the underlying  common stock issuable upon
conversion  of our  convertible  debentures  under various  registration  rights
agreements. We did not timely fulfill our registration obligations in respect to
some of the convertible debentures. We are required to pay liquidated damages of
approximately  $626,000 in the form of  increased  interest  on the  convertible
debentures as a result of our failure to timely file such registration statement
and have it declared effective by the Securities and Exchange Commission.

                                       13
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

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

ITEM 3.  LEGAL PROCEEDINGS

         We have an outstanding claim for non-payment of printing expenses.  The
action was brought on January 30, 2001 and is pending  before  Supreme  Court of
the  State of New  York,  County of New York.  In this  action,  the  plaintiff,
Merrill/New  York Company,  has sued  Celerity  Systems for the  non-payment  of
financial printing fees and is seeking  approximately  $118,000 in damages, plus
interest and certain costs. In 2002, Merrill/New York Company obtained a summary
judgment  against the Celerity  for  $136,435.  Celerity  intends to appeal this
decision.

         We also have an  outstanding  claim for  non-payment  for materials and
supplies.  The action was brought on February 14, 2002 and is pending before the
Circuit Court for Knox County,  Tennessee.  In this action,  styled METALADE FL,
INC. V. CELERITY  SYSTEMS,  INC.,  the plaintiff,  Metalade,  FL, Inc., has sued
Celerity Systems for the non-payment of materials and supplies. The plaintiff is
seeking approximately $103,500 in damages, plus interest and certain costs.

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

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

         None.

                                       14
<PAGE>

                                     PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

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

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

                                               HIGH                  LOW
FISCAL YEAR 1999                        ------------------    ------------------
1st Quarter                                   $1.625               $0.750
2nd Quarter                                   $1.125               $0.406
3rd Quarter                                   $1.500               $0.375
4th Quarter                                   $0.719               $0.125

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

FISCAL YEAR 2001
1st Quarter                                  $0.2400              $0.0310
2nd Quarter                                  $0.6200              $0.0960
3rd Quarter                                  $0.2700              $0.0690
4th Quarter                                  $0.0850              $0.0200


         As of March 5, 2002 there were  approximately  179 holders of record of
the Common Stock.

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

RECENT SALES OF UNREGISTERED SECURITIES

         In the fourth quarter of 2001,  Celerity  issued  $1,700,000  principal
amount  of 4%  convertible  debentures  under  its  Line  of  Credit  Agreement,
resulting in net proceeds of  approximately  $1,328,000.  Celerity  recognized a
beneficial  conversion  feature for the convertible  debentures as a discount on
the convertible  debentures and as additional paid-in capital.  This discount of
$800,830  will be amortized as a non-cash  interest  expense over the  five-year
period  from  the  date  of  issuance  to  the  stated  redemption  date  of the
debentures.

         During 2001, Celerity received $54,000 in short-term  financing from an
individual who is a member of the Board of Directors.  In connection  with these
notes, the individual  received  warrants to purchase 54,000 shares of common at
$0.20 per share.  These warrants were charged to operations as interest expense.
The value of the warrants, $5,375, was determined using the Black-Scholes option
pricing model with the following  assumptions:  risk-free interest rate of 4.00%

                                       15
<PAGE>

or 7.00%,  expected  dividends of zero,  volatility range of 207.57% and 213.81%
and expected lives of up to two years.  These warrants  expire between  February
and September, 2003.


         In the fourth quarter of 2001, Celerity consummated a private placement
of 6 shares of Series C Convertible  Preferred Stock resulting in gross proceeds
of $60,000. The preferred stock provides for preferential dividends at an annual
rate of 8%. The Company has made no  accounting  entries to record  dividends on
preferred stock as the Board of Directors has not authorized their issuance. The
preferred stock is convertible into shares of common stock at a conversion price
equal to $0.04 per share,  subject to  availability,  at any time during the two
years following  execution of the  subscription  agreements.  Should there be an
insufficient  number  of  shares  of  common  stock  available  at the  time the
preferred  stock is offered  for  conversion,  the  conversion  period  shall be
extended by the number of days between the  conversion  date and the date common
shares become available.  Two years from the original issuance date, and subject
to applicable  law,  Celerity shall offer to redeem such  preferred  shares then
outstanding  at a price  equal  to the  original  issuance  price  plus  accrued
dividends.


         On  the  date  of  issuance  of  the  Preferred  Stock,  the  effective
conversion  price was at a discount to the price of the common  stock into which
the  Preferred  Stock is  convertible.  Celerity  recorded  a  $60,000  dividend
relative to the beneficial  conversion  feature.  As this Series C is considered
perpetual  preferred  stock,  amortization  of the $60,000 is reflected over the
period from the date of issuance to the earliest  conversion date,  resulting in
full accretion during 2001.

         The total that would be required  for  redemption  for the Series B and
Series C convertible preferred stock is as follows:

             2002                                                      $    --

             2003                                                    1,010,000
                                                                    ----------
             Total required redemption for the Series B and Series
             preferred stock                                        $1,010,000
                                                                    ==========

         In the first quarter of 2002, Celerity issued $400,000 principal amount
of 4% convertible debentures under its Line of Credit Agreement resulting in net
proceeds of approximately $359,250.  Celerity recognized a beneficial conversion
feature  for  the  convertible  debentures  as a  discount  on  the  convertible
debentures and as additional  paid-in capital.  This discount of $84,848 will be
amortized as a non-cash interest expense over the five-year period from the date
of issuance to the stated redemption date of the debentures.


         In the first quarter of 2002, Celerity  consummated a private placement
of 5.4  shares  of  Series D  Convertible  Preferred  Stock  resulting  in gross
proceeds of $54,000. The preferred stock provides for preferential  dividends at
an annual  rate of 8%.  The  Company  has made no  accounting  entries to record
dividends on preferred stock as the Board of Directors has not authorized  their
issuance.  The preferred  stock is convertible  into shares of common stock at a
conversion price equal to $0.01 per share, subject to availability,  at any time
during the two years following execution of the subscription agreements.  Should
there be an insufficient  number of shares of common stock available at the time
the preferred  stock is offered for conversion,  the conversion  period shall be
extended by the number of days between the  conversion  date and the date common
shares become available.  Two years from the original issuance date, and subject
to applicable  law,  Celerity shall offer to redeem such  preferred  shares then
outstanding  at a price  equal  to the  original  issuance  price  plus  accrued
dividends.


         On  the  date  of  issuance  of  the  preferred  stock,  the  effective
conversion  price was at a discount to the price of the common  stock into which
the  preferred  stock is  convertible.  Celerity  recorded  a  $54,000  dividend
relative to the beneficial  conversion  feature.  As this Series D is considered
perpetual  preferred  stock,  amortization  of the $54,000 is reflected over the
period from the date of issuance to the earliest  conversion date,  resulting in
full accretion during the first quarter of 2002.

                                       16
<PAGE>


         In the first quarter of 2002, Celerity  consummated a private placement
of 10 shares of Series E Convertible Preferred Stock resulting in gross proceeds
of $100,000.  The  preferred  stock  provides for  preferential  dividends at an
annual  rate of 8%.  The  Company  has  made no  accounting  entries  to  record
dividends on preferred stock as the Board of Directors has not authorized  their
issuance.  The preferred  stock is convertible  into shares of common stock at a
conversion price equal to $0.001 per share, subject to availability, at any time
during the two years following execution of the subscription agreements.  Should
there be an insufficient  number of shares of common stock available at the time
the preferred  stock is offered for conversion,  the conversion  period shall be
extended by the number of days between the  conversion  date and the date common
shares become available.  Two years from the original issuance date, and subject
to applicable  law,  Celerity shall offer to redeem such  preferred  shares then
outstanding  at a price  equal  to the  original  issuance  price  plus  accrued
dividends.


         On  the  date  of  issuance  of  the  preferred  stock,  the  effective
conversion  price was at a discount to the price of the common  stock into which
the  preferred  stock is  convertible. Celerity  recorded  a  $100,000  dividend
relative to the beneficial  conversion  feature.  As this Series E is considered
perpetual  preferred  stock, amortization  of the $100,000 is reflected over the
period from the date of issuance to the earliest  conversion date,  resulting in
full accretion during the first quarter of 2002.


                                       17
<PAGE>

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

         The  following  discussion  should  be read  in  conjunction  with  the
financial statements and notes thereto and other financial information appearing
elsewhere in this Annual Report on Form 10-KSB.  Statements in this Management's
Discussion and Analysis or Plan of Operation and elsewhere in this Annual Report
that  are  not   statements   of   historical   or   current   fact   constitute
"forward-looking  statements." Such forward-looking statements involve known and
unknown risks, uncertainties,  and other factors including those set forth under
"Description of  Business--Risk  Factors" that could cause the actual results of
Celerity Systems to be materially  different from the historical results or from
any future results expressed or implied by such forward-looking  statements.  In
addition to statements which explicitly  describe such risks and  uncertainties,
prospective  investors  are urged to consider  statement  labeled with the terms
"believes,"  "belief,"  "expects,"  "intends,"  "anticipates,"  or "plans" to be
uncertain and forward-looking.

OVERVIEW

         Prior to 1998, our major activity was selling  digital video servers in
the interactive video services market. All sales were in Korea,  Israel,  Taiwan
and China.  However,  beginning in 1998,  we focused our sales  efforts in North
America,  and developed and sold the first production units of a new digital set
top box, the T 6000.

         In February 1998,  Celerity decided to scale back its CD-ROM segment to
a maintenance mode of operations.  Celerity  developed a formal plan of disposal
that became  effective in May 1998. The segment had revenues of $-0- and $70,070
in 2001 and 2000,  respectively.  In February, 2001, Celerity sold the assets of
its CD-ROM segment for 20 preferred  shares of the buyer,  which are convertible
to common shares on a scheduled  basis over a two-year  period.  As Celerity had
written  the  assets of this  segment  down to zero,  and the fair  value of the
shares of the buyer is not currently determinable,  no gain or loss on this sale
was recorded.

         We have  continued  to focus  most of our  development  and  production
efforts  during  2000 and 2001 on our T 6000 Set Top Box.  In  addition,  we are
seeking new projects  using our digital video  servers,  which could be deployed
with the T 6000 or other compatible set top boxes. In December, 1999, we entered
into a  manufacturing  agreement  with Global PMX  Company,  Limited,  which was
terminated by us in November  2000. We have since entered into  agreements  with
Nextek,  Inc. in Madison,  AL and IES in Gray, TN under which all T 6000 set top
boxes will be manufactured

         Management  has also  focused on  attempting  to obtain  the  necessary
capital  to  maintain  our  operations.  We are  continuing  to seek  financing,
including possible strategic  investment  opportunities or opportunities to sell
some or all of our  assets  and  business,  while  continuing  to  pursue  sales
opportunities.  We have narrowed our sales  efforts to those which,  we believe,
have the best chance of closing in the near term.  We  continue  to  encounter a
longer and more complex sales cycle than  originally  contemplated.  The lack of
sales or a significant  financial  commitment raises substantial doubt about our
ability  to  continue  as a going  concern  or to resume a  full-scale  level of
operations.

         Celerity had one interactive video customer that represented 75% of its
revenues in 2001. Celerity had no revenues in 2000.

RECENT DEVELOPMENTS


         As of December 31,  2001,  we had cash on hand of $171,988 and negative
working  capital  of  approximately  $(627,000).  Our  operations  are  financed
primarily  from the  sale of debt  and  equity  securities.  For the  forseeable
future,  we believe we will  continue  to rely  primarily  on  external  capital
through  equity  financing  and/or  financing  of  purchase  orders or  accounts
receivable  to fund our  operations.  Since January 1, 2002 we have received new
orders  for the sale of our  Digital  Education  System  in  addition  to system
scheduled  to ship in the first  quarter  of 2002.  Additionally,  we are in the
process  of bidding on nearly 40  schools  and are  working to add  distributors
nationwide.

         We are  continuing  to seek  additional  sources of capital in order to
repay our obligations and to provide for our working  capital  requirements  for
the long-term.  We are also continuing to seek strategic investments from one or
more  large  or  well-known   companies  in  the  interactive   video  services,
telecommunications  or high  speed  Internet  industries.  We  believe  that the
involvement  of such a firm or firms is material  to our ability to grow.  There
can be no assurance that we will be able to obtain any such required  additional
funds on a timely basis, or on favorable terms, or at all.

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

         During 2001 inventory increased by $2,021,427, the result of a build-up
in response to orders which were  subsequently  withdrawn.  Since no orders have
been received,  we have ceased purchasing any material amount of inventory until
inventory levels can be reduced.  Accounts payable  increased by $1,430,022 from
December 31, 2000  directly as the result of the  increased  level of inventory.
Accounts  payable are  expected to remain high and  delinquent  until  inventory
levels can be reduced through sales.  Other current  liabilities  increased from
December  31,  2000 by  $736,901,  of which  $617,496  is from  higher  interest
payable.


RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

         REVENUES.  Revenues for the year ended  December 31, 2001 were $403,997
compared  to $-0- for the  year  ended  December  31,  2000.  This  increase  is
primarily  from sales of digital video systems to the education and  hospitality
markets.  The continuing low level of interactive digital video systems sales is
a result of the constrained  sales and marketing  activities  caused by our cash
shortage and delays associated in 2000 with the production of the T 6000 set top
box.

         COSTS OF REVENUES.  Costs of revenues were  $1,163,129 in 2001 compared
to $717,755 in 2000. We had a negative gross margin of $759,132 in 2001 compared
to $717,755 in 2000.  Costs of revenues in 2001 and 2000 were  primarily  due to

                                       18
<PAGE>

the write down of $377,114 and $683,750  respectively,  of obsolete inventory to
net realizable value plus, in 2001, costs associated with products  delivered in
the year and a reserve for lower of cost or market of  $237,250.  The write down
in 2000 was due to inventory  obsolescence  associated  with an  agreement  with
nCUBE  Corporation  to  manufacture  our updated line of CTL 9000 digital  video
servers.


         OPERATING  EXPENSES.  Operating  expenses for the 2001 were  $5,667,077
compared to $3,461,120  for 2000.  Increased  operating  expenses in 2001 can be
attributed  to higher  amortization  from the issuance of warrants in connection
with  an  Equity  Line  of  Credit  Agreement  (approximately  $1,363,975)  and,
separately,  a  purchase  or  financing  commitment   (approximately  $408,000),
increased  contract  labor  incurred  in  the  upgrade  and  development  of our
interactive digital video system (approximately  $509,729), and costs associated
with the write down of assets associated with the termination of projects in the
multi-housing market (approximately  $365,383), and higher professional services
of $191,158.  These  increases were partially  offset by a reduction of expenses
for the  engagement  of  consultants  to assist us with  investor  relations and
investment banking (approximately $681,843), and non-cash payments of directors'
fees (approximately $169,635).

         INTEREST EXPENSE.  Interest expense for 2001 was $1,680,035 compared to
2000 that  totaled  $1,135,634.  Of the totals for 2001 and 2000,  $575,224  and
$712,550,  respectively,  were  non-cash  expenses  incurred  as a result of the
amortization  through  a charge  to  interest  expense  of the  beneficial  debt
conversion  features  of the  2001  and 2000  securities  offerings.  Liquidated
damages  incurred  due to the late  filing of  certain  registration  statements
resulted in an expense of $626,400 in 2001 and a non-cash  expense of $89,541 in
2000. Interest income was $2,169 in 2001 versus $6,804 in 2000. This decrease is
the result of the lower  average cash  balances in 2001 compared to 2000 and the
related interest earned on overnight investments.


         INCOME ON EQUITY  WARRANT  LIABILITY.  For the year ended  December 31,
2001, Celerity had income on equity warrant liability of $1,893,852. This amount
represents a  mark-to-market  adjustment in connection with warrants to purchase
common  stock  which  are  outstanding  (see  Cumulative  Effect  of  Change  in
Accounting   Principle).   The  value  of  these   warrants  and  the  resulting
mark-to-market  adjustment was determined using the Black-Scholes Option Pricing
Model.

         LOSS ON  TREASURY  STOCK.  During the year  ended  December  31,  2001,
Celerity  discovered  that it no longer  had  possession  of  337,364  shares of
treasury  stock.  As a result,  Celerity has written off the cost basis value of
the shares, or $227,500.

         LOSS BEFORE DISCONTINUED OPERATIONS.  As a result of the above factors,
loss from  continuing  operations  for the twelve months ended December 31, 2001
was  $6,402,038,  or $0.10 per share,  as compared to  $5,322,593,  or $0.46 per
share, for the same period in 2000.

         GAIN ON  EXTINGUISHMENT  OF DEBT.  In  April  1998,  Celerity  incurred
capital  lease  obligations  of  approximately  $259,000 for certain  equipment.
Monthly  payment of principal  and interest of $9,541 were due through 2001 with
$82,628 past due at December 31, 1999.  The equipment was returned to the lessor
as part of the relocation of Celerity's  facilities.  Celerity agreed to a final
settlement  in 2001 which  resulted in a gain from  cancellation  of debt in the
amount of $71,864. This item is reflected as an extraordinary item.


         CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Effective June 30,
2001,  Celerity adopted the provisions of EITF 00-19," Accounting for Derivative
Financial  Instruments  Indexed to, and Potentially  settled in, a Company's Own
Stock".  This issue  provides that warrants to purchase  common shares which are
outstanding  and for  which the  number of  authorized  but  unissued  shares is
insufficient to satisfy the maximum number of shares that could be required upon
the exercise of such warrants,  then the contract is reclassified from equity to
an asset or liability.  The effect of the application of this pronouncement that
requires asset or liability  classification  for those contracts that existed as
of September 20, 2000, would be calculated as of June 30, 2001, and presented on
that date as a cumulative  effect of a change in accounting  principle.  At June
30,  2001,   $2,863,760  was  reclassified   from  equity  to  a  liability  and
mark-to-market adjustment of $2,598,813 was recorded as the cumulative effect of
a change in accounting principle.


         Had this change been adopted as of December 31, 2000 our results  would
have been:

Celerity Systems, Inc.
Pro Forma effect of change in accounting method

<TABLE>
                                                                  Twelve Months Ended
                                                                   December 31, 2000
                                                        ---------------------------------------
                                                            As reported          Pro Forma
        Net Income (Loss) from

<S>                                                       <C>                 <C>

Continuing Operations                                     $    (5,322,593)    $   (4,721,317)

Discontinued operations                                            35,094             35,094
Cumulative effect of change in accounting
method                                                                  -          2,227,313
                                                        ---------------------------------------
                                                          $    (5,287,499)    $   (2,458,910)
Amortization of beneficial conversion feature
and accretion of redeemable convertible
preferred stock                                                   332,908            332,908
                                                        ---------------------------------------
Net Income (Loss) applicable to common
shareholders                                              $    (5,620,407)    $   (2,791,818)
                                                        =======================================

Weighted-average common shares outstanding                        582,260            582,260

Basic and diluted income (loss) per common
share

Continuing operations                                     $         (9.71)    $        (8.68)

Discontinued opetations                                              0.06                  0
Cumulative effect of change in accounting
method                                                                  -               3.83
                                                        --------------------------------------
Net Income (Loss) per share to common
shareholders                                              $         (9.66)    $        (4.79)
                                                        =======================================

</TABLE>

         NET LOSS.  As a result  of the  foregoing,  Celerity  had a net loss of
$3,731,361, or $0.06 per share, for the year ended December 31, 2001 compared to
a net loss of $5,287,499, or $0.46 per share, for the prior year.

         AMORTIZATION  OF  BENEFICIAL   CONVERSION   FEATURE  AND  ACCRETION  OF
REDEEMABLE   CONVERTIBLE  PREFERRED  STOCK.  Celerity  recognized  a  beneficial
conversion feature for various convertible debentures issued in 2001 and 2000 as
discount on the convertible  debentures and as additional paid-in capital.  This
discount of  $2,151,794  and $651,104 for 2001 and 2000,  respectively,  will be
amortized as a non-cash  interest  expense over the five-year period between the
date of issuance of the convertible  debentures to the stated redemption date of
the debentures.  For the years ended December 31, 2001 and 2000, Celerity had an

                                       19
<PAGE>

amortization  of  beneficial   conversion  feature  of  $575,224  and  $712,550,
respectively.  Upon  conversion  prior  to the  stated  date of  redemption  the
remaining  unamortized  discount  will  be  recognized  as a  non-cash  interest
expense.

         In addition,  Celerity had outstanding redeemable convertible preferred
stock. At issuance the conversion price of the Series A Preferred Stock was at a
discount to the price of Celerity's  common stock.  Celerity  recorded a $33,942
dividend relative to the beneficial conversion feature of the Series A Preferred
Stock. At issuance the conversion price of the Series B Preferred Stock was at a
discount to the price of Celerity's  common stock.  The Series B Preferred Stock
is  considered  perpetual  preferred  stock.  As a result,  Celerity  recorded a
$770,000 dividend relative to the beneficial  conversion feature of the Series B
Preferred  Stock.  At issuance  the  conversion  price of the Series C Preferred
Stock  was at a  discount  to the price of  Celerity's  common  stock.  Celerity
recorded a $60,000 dividend relative to the beneficial conversion feature of the
Series C Preferred  Stock.

         NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.

         As a result of the foregoing,  Celerity had a net loss  attributable to
common  stockholders  of  $4,791,361,  or $0.08 per  share,  for the year  ended
December 31, 2001 compared to a net loss of $5,620,407,  or $0.49 per share, for
the prior year.

         LIQUIDITY AND CAPITAL RESOURCES

         The primary  source of financing  for us since our  inception  has been
through  the  issuance  of common  and  preferred  stock  and debt.  We had cash
balances on hand of $171,988 as of December  31, 2001 and $10,366 as of December
31, 2000. Our cash position continues to be uncertain,  and we currently have no
cash.  Our primary  need for cash is to fund our ongoing  operations  until such
time that the sale of our products  generates enough revenue to fund operations.
In  addition,  our need for cash  includes  satisfying  current  liabilities  of
$3,640,599,  consisting  primarily of accounts  payable of  $2,114,855,  accrued
wages and related taxes of $77,022,  accrued interest of $768,995, other accrued
liabilities  of  $277,764,  notes  payable of $117,589,  and current  portion of
long-term  debt  and  capital  lease  obligations  of  $150,000.  These  current
liabilities  include a judgment of $136,435 obtained by Merrill  Corporation for
non-payment of printing fees. We do not currently have  sufficient  funds to pay
these  obligations.  We will  need  significant  new  funding  from  the sale of
securities to fund our ongoing  operations and to satisfy the above obligations.
We currently do not have any commitments for funding.

         Since December 31, 2001, we raised gross  proceeds of $545,000.  In the
first quarter of 2002, we issued  $400,000  principal  amount of 4%  convertible
debentures  under our Line of Credit  Agreement  resulting  in net  proceeds  of
approximately $359,000,  consummated a private placement of 5.4 shares of Series
D Redeemable Convertible Preferred Stock and a private placement of 10 shares of
Series E Redeemable  Convertible  Preferred Stock resulting in gross proceeds of
$54,000 and $100,000,  respectively.  We are looking at several other options in
terms of  improving  our cash  shortage.  We are  continuing  to seek to arrange
financing,    including   possible   strategic   investment   opportunities   or
opportunities  to sell some or all of our assets and business,  while continuing
to pursue  sales  opportunities.  We have  granted a  security  interest  in our
personal property to our former legal counsel. Such security interest may hinder
our efforts to obtain  financing.  The lack of sales or a significant  financial
commitment  raises  substantial  doubt  about our ability to continue as a going
concern or to resume a full-scale level of operations.

         During the year ended  December 31, 2001, we had a net increase in cash
and cash equivalents of $161,622. Our sources and uses of funds were as follows:

         CASH USED IN OPERATING  ACTIVITIES.  We used net cash of  $4,073,844 in
our operating  activities in the year ended  December 31, 2001. Net cash used in
operating activities resulted primarily from a net loss of $3,731,361,  non-cash
income related to the equity warrant  liability of $1,893,852,  non-cash  income
related to the change in accounting  principle of $2,598,813  and an increase in
inventory of $2,021,427. The increase in inventory is the result of an inventory
build-up in  response  to orders  which were  subsequently  withdrawn.  Since no
orders have been  received,  we have ceased  purchasing  any material  amount of
inventory until inventory levels can be reduced.  Our net cash used in operating
activities was partially  offset by depreciation  and  amortization  expenses of
$2,063,419,  non-cash  expenses  of  $1,414,060,  the loss on  disposal of fixed
assets of  $365,383,  provision  for  inventory  obsolescence  of  $237,250,  an
increase  in accounts  payable of  $1,456,378  and an increase in other  current
liabilities of $736,901,  primarily  interest payable.  The increase in accounts
payable of $1,456,378 from December 31, 2000  corresponds to the increased level
of  inventory.  Accounts  payable are  expected  to remain high until  inventory
levels can be reduced through sales.

                                       20
<PAGE>

         CASH USED IN  INVESTING  ACTIVITIES.  We used net cash of  $574,083  in
investing  activities in the year ended  December 31, 2001.  This relates to the
purchase of equipment to be used in  connection  with the  multi-housing  market
projects.  Subsequently,  we terminated  these  projects due to the high cost of
purchasing the equipment and the relatively slow expected return on investment.

         CASH PROVIDED BY FINANCING  ACTIVITIES.  We received  $4,809,549 in net
cash from financing activities,  consisting primarily of proceeds from long-term
debt of $5,686,000 and preferred stock of $919,654. This was partially offset by
principal  payments on long-term debt and capital lease  obligations of $592,500
and financing and debt issue costs of $1,233,605.

         Since our  inception in January 1993 and through  December 31, 2001, we
have an accumulated deficit of $36,948,900.  We expect to incur operating losses
for the indefinite  future as we continue to develop and market our  technology.
Since  January 1, 2002,  we have received new orders for the sale of our Digital
Education System to an Ohio school system in addition to one currently scheduled
to deliver in the first  quarter  of 2002.  We are in the  process of bidding on
nearly 40  schools,  almost all in Ohio,  and are  working  to add  distributors
nationwide.  If we are successful in being awarded these projects,  we expect to
ship product in the second or third quarter of 2002.  There can be no assurance,
however, as to the receipt or timing of revenues from operations,  including, in
particular, revenues from products currently under development.

         As of  December  31,  2001 we had a  negative  net  working  capital of
approximately  $1,279,995.  Inventory increased  approximately  $2,021,427 since
December  31,  2000 and is the result of an  inventory  build-up  in response to
orders which were subsequently  withdrawn.  Since no significant new orders have
been received,  we have ceased purchasing any material amount of inventory until
inventory levels can be reduced.  The increase in accounts payable of $1,456,378
from December 31, 2000 corresponds to the increased level of inventory. Accounts
payable  are  expected  to remain  high  until  inventory  levels can be reduced
through sales. We had no significant capital spending or purchase commitments at
December 31, 2001 other than certain  facility  leases and  inventory  component
purchase commitments required in the ordinary course of our business.

         We have no existing bank lines of credit.

Recent Accounting Pronouncements

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

         Effective  June 30,  2001,  we adopted  the  provisions  of EITF 00-19,
"Accounting  for Derivative  Financial  Instruments  Indexed to, and Potentially
settled  in, a  Company's  Own  Stock".  This issue  provides  that  warrants to
purchase  common  shares  which are  outstanding  and for  which  the  number of
authorized but unissued  shares is insufficient to satisfy the maximum number of
shares  that could be required  upon the  exercise  of such  warrants,  then the
contract is reclassified from equity to an asset or liability. The effect of the
application   of  this   pronouncement   that   requires   asset  or   liability
classification  for those  contracts that existed as of June 30, 2001,  would be
calculated  as of June 30,  2001,  and  presented  on that date as a  cumulative
effect of a change in accounting  principle.  At June 30, 2001,  $2,863,760  was
reclassified  from  equity  to a  liability  and  mark-to-market  adjustment  of
$2,598,813  was  recorded  as the  cumulative  effect of a change in  accounting
principle.  For the  year  ended  December  31,  2001,  a  total  mark-to-market
adjustment of $4,492,665 was recorded as income on equity warrant  liability for
those contracts that existed as of December 31, 2001.

         We adopted the  provisions of FASB  Statement No. 138  "Accounting  for
Certain  Derivative  Instruments and Hedging  Activities,  (an amendment of FASB
Statement No. 133.)" Because we had adopted the provisions of FASB Statement No.
133, prior to June 15, 2000, this statement is effective for all fiscal quarters
beginning  after June 15, 2000.  The adoption of this  principle had no material
effect on our financial statements.

         Celerity  has  adopted  the   provisions  of  FASB  Statement  No.  140
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of  Liabilities  (a  replacement  of FASB  Statement No.  125.)" This  statement
provides  accounting  and  reporting  standard for  transfers  and  servicing of
financial assets and  extinguishments of liabilities.  Those standards are based
on consistent  application  of a  financial-components  approach that focuses on
control.  Under that approach,  the transfer of financial  assets, we recognized
the financial and servicing  assets we control and the  liabilities we incurred,
derecognizes   financial   assets  when  control  has  been   surrendered,   and
derecognizes  liabilities when extinguished.  This statement provides consistent
standards for  distinguishing  transfers of financial assets that are sales from
transfers that are secured borrowings. This statement is effective for transfers
and servicing of financial assets and  extinguishments of liabilities  occurring
after  March  31,  2001.   This  statement  is  effective  for  recognition  and
reclassification  of collateral and for disclosures  relating to  securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
adoption  of this  principle  resulted  in the  re-establishment  of $163,605 in
accounts payable written off during the year.

         Celerity   adopted  the   provisions  of  SFAS  No.'s  141,   "Business
Combinations,"  and SFAS No. 142,  "Goodwill and Other Intangible  Assets." SFAS
No. 141 is  effective as to any business  combination  occurring  after June 30,
2001 and certain  transition  provisions  that affect  accounting  for  business
combinations  prior to June 30, 2001 are  effective as of the date that SFAS No.
142 is applied in its  entirety,  which will be January 1, 2002 for us. SFAS No.
142 is effective,  generally, in fiscal years beginning after December 15, 2001,
which will be the fiscal year ending December 31, 2002 for us.

         SFAS  No.  141  provides   standards   for   accounting   for  business
combinations.  Among other things,  it requires that only the purchase method of
accounting  be used and that certain  intangible  assets  acquired in a business
combination  (i.e.  those that result from  contractual or other legal rights or
are  separable)  be  recorded as an asset apart from  goodwill.  The  transition
provisions require that an assessment be made of previous business  combinations
and, if appropriate, reclassifications be made to or from goodwill to adjust the
recording of intangible  assets such that the criteria for recording  intangible
assets apart from goodwill is applied to the previous business combinations.

         SFAS No. 142 provides, among other things, that goodwill and intangible
assets  with  indeterminate  lives  shall not be  amortized.  Goodwill  shall be
assigned to a reporting unit and annually  assessed for  impairment.  Intangible
assets with  determinate  lives shall be amortized over their  estimated  useful
lives, with the useful lives reassessed continuously,  and shall be assessed for
impairment under the provisions of SFAS No. 121,  "Accounting for the Impairment
of Long-Lived  Assets and for Long-Lived  Assets to be Disposed Of." Goodwill is
also assessed for  impairment on an interim basis when events and  circumstances
warrant.  Upon  adoption of SFAS No. 142, we will assess  whether an  impairment
loss  should be  recognized  and  measured  by  comparing  the fair value of the
"reporting  unit" to the carrying  value,  including  goodwill.  If the carrying
value  exceeds  fair value,  then we will  compare the implied fair value of the
goodwill"  (as defined in SFAS No. 142) to the carrying  amount of the goodwill.
If the carrying amount of the goodwill exceeds the implied fair value,  then the
goodwill will be adjusted to the implied fair value.

         While Celerity has not completed the process of determining  the effect
of this new accounting  pronouncement on its financial statements,  we currently
expect  that the effect of SFAS No.  142 on our  financial  statements,  when it
becomes effective, will not be significant.

         On August 16, 2001,  the Financial  Accounting  Standards  Board (FASB)
issued SFAS No. 143,  "Accounting for Asset  Retirement  Obligations,"  which is
effective  for fiscal  years  beginning  after June 15, 2002.  It requires  that
obligations  associated  with the retirement of a tangible  long-lived  asset be
recorded as a liability when those obligations are incurred,  with the amount of
the liability  initially  measured at fair value.  Upon initially  recognizing a
liability for an accrued  retirement  obligation,  an entity must capitalize the
cost by recognizing an increase in the carrying amount of the related long-lived
asset.  Over time,  the  liability is accreted to its present value each period,
and the  capitalized  cost is  depreciated  over the useful  life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement.  While we have
not  completed  the  process of  determining  the effect of this new  accounting
pronouncement on its financial  statements,  we currently expect that the effect
of SFAS No. 143 on our financial statements, when it becomes effective, will not
be significant.

         On October 3, 2001, the FASB issued SFAS No. 144,  "Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets" which is effective for financial
statements  issued for fiscal  years  beginning  after  December  15,  2001 and,
generally,  its provisions are to be applied prospectively.  SFAS 144 supercedes
SFAS Statement No. 121 (FAS 121),  "Accounting  for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to Be  Disposed  Of." SFAS 144 applies to all
long-lived assets (including  discontinued  operations) and consequently  amends
Accounting  Principles  Board  Opinion  No. 30 (APB 30),  "Reporting  Results of
Operations Reporting the Effects of Disposal of a Segment of a Business."

         SFAS 144 develops one accounting model (based on the model in SFAS 121)
for  long-lived  assets that are to be disposed of by sale, as well as addresses
the principal  implementation  issues.  SFAS 144 requires that long-lived assets
that are to be  disposed  of by sale be  measured  at the lower of book value or
fair value less cost to sell. That requirement eliminates the requirement of APB
30 that  discontinued  operations  be measured at net  realizable  value or that
entities  include under  "discontinued  operations" in the financial  statements
amounts for operating losses that have not yet occurred.  Additionally,  FAS 144
expands the scope of  discontinued  operations  to include all  components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be  eliminated  from the  ongoing  operations  of the  entity  in a
disposal transaction.

         While Celerity has not completed the process of determining  the effect
of this new accounting  pronouncement on its financial statements,  we currently
expect that the effect of SFAS No. 144 on our  Company's  financial  statements,
when it becomes effective, will not be significant.

         LONG-LIVED ASSETS - In accordance with SFAS No. 121 "Accounting for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of",
long-lived  assets are evaluated for  impairment  whenever  events or changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable. Any changes in estimated useful life are recorded prospectively and
any impairment  adjustments are recorded as expense in the period the impairment
occurs. The amount of any impairment considered necessary would be determined by
comparing the book available at the time,  depending on the stage of development
of the line of business  and  Celerity's  intentions  at the time an  impairment
adjustment were considered necessary.

         ADVERTISING  - Celerity  follows the policy of charging the costs of
advertising to expense as incurred.

         STOCK  OPTIONS - As permitted by FASB  Statement  123  "Accounting  for
Stock  Based  Compensation"  (SFAS No.  123),  we elected to measure  and record
compensation  cost relative to employee  stock option costs in  accordance  with
Accounting  Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to
Employees,"  and related  interpretations  and make proforma  disclosures of net
income  and  earnings  per share as if the fair value  method of  valuing  stock
options had been applied.  Under APB Opinion 25, compensation cost is recognized
for stock  options  granted to employees  when the option price is less than the
market price of the underlying common stock on the date of grant.

         VALUATION  OF OPTIONS  AND  WARRANTS  - The  valuation  of options  and
warrants  granted to  unrelated  parties  for  services  are  measured as of the
earlier (1) the date at which a commitment for  performance by the  counterparty
to earn the equity  instrument  is  reached  or (2) the date the  counterparty's
performance is complete. Pursuant to the requirements of EITF 96-18, the options
and warrants will  continue to be revalued in situations  where they are granted
prior to the completion of the performance.

ITEM 7.  FINANCIAL STATEMENTS

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

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

         On December 11, 2001, Celerity Systems dismissed PricewaterhouseCoopers
LLP ("PRICEWATERHOUSECOOPERS") as its independent certified public accountant.

         PricewaterhouseCoopers'  reports on Celerity's financial statements for
each of the the years ended  December 31, 1999 and 2000,  respectively,  did not
contain an adverse opinion or a disclaimer of opinion,  and was not qualified or
modified as to uncertainty,  audit scope, or accounting principles,  except that
the reports from PricewaterhouseCoopers for each of the two years ended December
31, 1999 and 2000,  respectively,  expressed substantial doubts about Celerity's
ability to continue as a going concern.

         PricewaterhouseCoopers'  dismissal  was  recommended  and  approved  by
Celerity's Audit Committee and Board of Directors.

         For each of the two years ended December 31, 1999 and 2000, and through
December  11,  2001,  there were no  disagreements  on any matter of  accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make  reference in  connection  with their opinion to the subject
matter of the disagreement.

         For each of the two years ended December 31, 1999 and 2000, and through
December 11, 2001,  PricewaterhouseCoopers did not advise Celerity of any of the
matters identified in paragraph (a)(1)(iv)(B) of Item 304 of Regulation S-B.

         On December  11, 2001,  Celerity  engaged HJ &  Associates,  LLC as its
principal accountant to audit Celerity's financial statements.  Celerity did not
consult HJ & Associates,  LLC on any matters described in paragraph (a)(2)(i) or
(ii) of Item 304 of  Regulation  S-B since  January  1,  2000 or any  subsequent
interim period prior to engaging HJ & Associates, LLC.

                                       21
<PAGE>
                                   PART III


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


EXECUTIVE OFFICERS AND DIRECTORS

         Our executive officers and directors are as follows:

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

   Kenneth D. Van Meter     55              President, Chief Executive
                                            Officer and Chairman of the Board

   Fenton Scruggs           64              Director

   David Hultquist          39              Director

   Edward Kidston           42              Director

         Below are biographies of our executive officers and directors:

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

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

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

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

                                       22
<PAGE>

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

COMMITTEES OF THE BOARD OF DIRECTORS

         AUDIT  COMMITTEE.  David  Hultquist  and  Fenton  Scruggs  serve as the
members of the Audit Committee. Mr. Scruggs was appointed to the Audit Committee
on February 12, 2002. The functions of the Audit Committee are primarily to: (1)
to  provide  advice  to the  Board of  Directors  in  selecting,  evaluating  or
replacing  outside  auditors,  (2) to review  the fees  charged  by the  outside
auditors  for audit  and  non-audit  services  (3) to  ensure  that the  outside
auditors  prepare and deliver  annually a Statement as to  Independence,  (4) to
meet with outside auditors to discuss the results of their examination and their
evaluation of internal controls and the overall qualify of financial  reporting,
and (5) to meet with the  outside  auditors  to discuss  the scope of the annual
audit, to discuss the audited financial statements.

         COMPENSATION  COMMITTEE.  Fenton  Scruggs,  David  Hultquist and Edward
Kidston serve as the members of our Compensation Committee, which is responsible
for making  recommendations  to our Board of  Directors  regarding  compensation
arrangements  for our  officers and for making  recommendations  to our Board of
Directors  regarding the adoption of any employee benefit plans and the grant of
stock options or other benefits under such plans.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section  16(a) of the  Securities  Exchange  Act of 1934,  as  amended,
requires our directors and executive officers,  and persons who beneficially own
more  than ten  percent  of a  registered  class  of  Celerity  Systems'  equity
securities,  to file with the Securities and Exchange Commission initial reports
of  ownership  and reports of changes in ownership of Common Stock and the other
equity  securities of Celerity  Systems.  Officers,  directors,  and persons who
beneficially  own more  than  ten  percent  of a  registered  class of  Celerity
Systems'  equities are required by the  regulations of the Commission to furnish
Celerity  Systems  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, 2001,  our officers,  directors,  and
greater  than ten percent  beneficial  owners  complied  with all Section  16(a)
filing requirements applicable to them except as follows:

         o    Edward A.  Kidston  failed to timely  file a Form 4 in  connection
              with the  purchase  24,368  shares of Common  Stock on January 24,
              2001, 5 shares of Series B Redeemable  Convertible Preferred Stock
              on March 27, 2001, .3333 share of Series B Redeemable  Convertible
              Preferred Stock on April 10, 2001, in connection with the issuance
              of a warrant  for  1,000,000  shares of Common  Stock on March 27,
              2001,  and the issuance of a warrant to purchase  20,000 shares of
              Common Stock on November 9, 2000.

         o    Fenton Scruggs  failed to timely file a Form 4 in connection  with
              the  purchase  of 42,644  shares of Common  Stock and  options  to
              purchase 5,000 shares of Common Stock on January 22, 2001.

         o    Bruce Thompson  failed to timely file a Form 4 in connection  with
              the purchase of 35,146 shares of Common Stock on January 24, 2001.
              Mr.  Thompson  also failed to timely  file a Form 4 in  connection
              with the purchase of 5 shares of Series B  Redeemable  Convertible
              Preferred  Stock  on  March  2,  2001,  .3333  share  of  Series B
              Redeemable  Convertible  Preferred Stock on March 27, 2001, and in
              connection  with  the  issuance  by  Celerity  of  a  warrant  for
              1,000,000 shares of Common Stock on March 2, 2001.

         o    Kenneth Van Meter has failed to timely file a Form 4 in connection
              with the acquisition  118,506 shares of Common Stock on January 4,
              2001, and 5 shares of Series B. Preferred Stock on March 27, 2001.

                                       23
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

         SUMMARY  COMPENSATION  TABLE. The following table sets forth the annual
and long-term  compensation  for services in all capacities for the fiscal years
ended  December  31,  2001,  2000,  and 1999 paid to Kenneth  D. Van Meter,  our
Chairman of the Board, President,  and Chief Executive Officer ("NAMED EXECUTIVE
OFFICER").  No other executive officer received compensation  exceeding $100,000
during the fiscal year ended December 31, 2001.

<TABLE>
                                   SUMMARY COMPENSATION TABLE

                                        ANNUAL COMPENSATION                          LONG TERM COMPENSATION
                                   ------------------------------------   ------------------------------------------------
                                                                             AWARDS
                                                                          ------------
                                                                           RESTRICTED      SECURITIES
                                                                              STOCK        UNDERLYING         ALL OTHER
NAME AND PRINCIPAL POSITION             YEAR        SALARY        BONUS     AWARD(S)         OPTIONS        COMPENSATION
---------------------------------- ------------- -------------- ---------  -----------   ----------------  ----------------
<S>                                     <C>        <C>              <C>       <C>             <C>             <C>
Kenneth D. Van Meter                    2001       $254,286(1)       --        --             --              $5,438(4)
Chairman of the Board,                  2000       $278,760(2)       --        --             --                  --
Chief Executive Officer, and            1999       $170,100(3)       --        --             --                  --
President
</TABLE>
-------------------------

(1)      Includes $68,906 voluntarily deferred in 2001.

(2)      Includes $13,125 voluntarily deferred in 2000 and $96,185 paid in
         common shares of the Company.

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

(4)      This represents a Company contribution to Mr. Van Meter's Simple IRA.

         No options  were  granted  to the Named  Executive  Officer  during the
fiscal years ended  December 31, 2000.  In November  2001,  the Named  Executive
Officer  received  options to purchase  2,000,000  shares of common  stock at an
exercise price of $0.075 per share.

         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,  2001 by the Named  Executive
Officer.
<TABLE>

                  AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
                                                                  NUMBER OF SECURITIES
                                  NUMBER OF                      UNDERLYING UNEXERCISED          VALUE OF UNEXERCISED
                                    SHARES                             OPTIONS AT               IN-THE-MONEY OPTIONS AT
                                 ACQUIRED ON       VALUE           DECEMBER 31, 2001             DECEMBER 31, 2001(1)
                                                             -----------------------------  ------------------------------
NAME                               EXERCISE       REALIZED    EXERCISABLE   UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
------------------------------- --------------- ------------ -----------------------------  -------------- ---------------
<S>                                 <C>             <C>         <C>           <C>               <C>             <C>
Kenneth D. Van Meter                  --             --         913,200       1,500,000          -0-             -0-

----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)      Amount  reflects  the market value of the  underlying  shares of Common
         Stock at the closing price  reported on the  Over-the-Counter  Bulletin
         Board on December 31, 2001 ($0.024 per share),  less the exercise price
         of each option.


EMPLOYMENT AGREEMENT

         On  December  12,  2001,  Mr.  Van  Meter  entered  into  a  three-year
employment  agreement.  After the initial  three-year  term,  the agreement will
automatically  renew for successive  one-year terms unless either party notifies
the other at least six months prior to the start of any  successive  term of its
intent not to renew the  agreement.  The  agreement  provides for an annual base

                                       24
<PAGE>

salary of $236,250.  The  agreement  provides  for the annual  review of Mr. Van
Meter's salary. Pursuant to the agreement, Mr. Van Meter is eligible for a bonus
at the  discretion  of the board.  The agreement  further  provides that Mr. Van
Meter may terminate  the  agreement for good reason and, in such event,  Mr. Van
Meter  would be  entitled  to his  compensation  for the  duration  of the term,
including base salary,  bonuses and benefits.  The agreement defines good reason
as a material  breach of the  agreement,  limiting  Mr. Van Meter's  employment,
selling  substantially  all of the  Company's  assets  (unless the  agreement is
proposed to be honored by the Company or the acquirer) or upon bankruptcy or any
similar adjudication.

COMPENSATION OF DIRECTORS

         In 2001, our  non-employee  directors did not receive  compensation for
service on the board.

         In 2000,  our  non-employee  directors  received  $2,000  per  calendar
quarter  payable in shares of our common stock.  In addition,  our  non-employee
directors  received  options to purchase 5,000 shares of our common stock at the
market price of our Common Stock on the last day of each calendar quarter.

         In 1999,  our  non-employee  directors  received  $2,500  per  calendar
quarter payable in shares of our common stock.

STOCK OPTION PLANS

         On August 10, 1995, the Board of Directors and stockholders adopted our
1995 Stock Option Plan (the "1995  PLAN").  The 1995 Plan provides for the grant
of options to purchase up to 178,929 shares of Common Stock to our employees and
officers.  In August 1997, our Board of Directors and the  stockholders  adopted
our 1997 Stock  Option Plan (the "1997  PLAN").  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.  In November  2001, our Board of Directors
adopted our 2001 Stock  Option  Plan.  The 2001 Plan  provides  for the grant of
options to purchase up to  10,000,000  shares of common stock to our  employees,
directors and officers. Options granted under the Plans may be either "incentive
stock options"  within the meaning of Section 422A of the Internal  Revenue Code
of 1986, as amended (the "CODE"), or non-qualified options.

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

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

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

         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

                                       25
<PAGE>

than 10 years from the date of grant.  Option under the 2001 Plan must be issued
within 10 years from  November  7, 2001,  the  effective  date of the 2001 Plan.
Incentive  stock options  issued to a 10%  Stockholder  are limited to five-year
terms.  Payment of the exercise price for options granted under the Plans may be
made in cash or, if  approved  by our Board of  Directors,  by delivery to us of
shares of Common Stock already owned by the optionee  having a fair market value
equal to the exercise price of the options being exercised,  or by a combination
of such methods.  Therefore,  an optionee may be able to tender shares of Common
Stock to  purchase  additional  shares  of Common  Stock  and may  theoretically
exercise all of such  optionee's  stock  options with no  additional  investment
other than the purchase of the original shares.

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

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


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

BENEFICIAL OWNERS

         COMMON STOCK. As of March 19, 2002,  other than the persons  identified
below, no person owned beneficially more than five percent (5%) of the Company's
common stock.

         PREFERRED  STOCK.  As  of  March  19,  2002,  other  than  the  persons
identified  below, no person owned  beneficially  more than five percent (5%) of
the  Company's  Series B Preferred  Stock,  Series C Preferred  Stock,  Series D
Preferred Stock, and Series E Preferred Stock.

<TABLE>
<CAPTION>
                                                                            SHARES              PERCENT OF
NAME AND ADDRESS                     TITLE OF CLASS                     BENEFICIALLY OWNED        CLASS(1)
-----------------------------------  ---------------------------------  -------------------    --------------
<S>                                  <C>                                     <C>                 <C>
DKMT Co.                             Series B Preferred Stock                  15(2)             15.79%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

Cornell Capital Partners, LLC        Series B Preferred Stock                   7(3)              7.37%
521 Fifth Avenue, 17th Floor
New York, New York 10175

Mary Ellen Misiak                    Series B Preferred Stock                   7(3)              7.37%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

William Murphy                       Series B Preferred Stock                   5(4)              5.26%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

Gerald Simpson                       Series B Preferred Stock                   5(4)              5.26%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

Rodney Conard                        Series C Preferred Stock                0.50(5)              8.33%
c/o 122 Perimeter Park Drive         Series D Preferred Stock                0.50(8)              9.26%
Knoxville, Tennessee 37922

</TABLE>

                                26
<PAGE>

<TABLE>
<CAPTION>
                                                                            SHARES              PERCENT OF
NAME AND ADDRESS                            TITLE OF CLASS              BENEFICIALLY OWNED       CLASS(1)
-----------------------------------  ---------------------------------  ---------------------  --------------

<S>                                  <C>                                   <C>                     <C>

Mike and Vicki Faucher               Series C Preferred Stock                     1(6)             16.67%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

David Huntley                        Series C Preferred Stock                     1(6)             16.67%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

Debbie Huntley                       Series C Preferred Stock                     1(6)             16.67%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

Daniel Jinks                         Series C Preferred Stock                  0.50(5)              8.33%
c/o 122 Perimeter Park Drive         Series D Preferred Stock                  0.50(8)              9.26%
Knoxville, Tennessee 37922

Edward Kohn                          Series C Preferred Stock                     1(6)             16.67%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

Jordanna Wasilesku                   Series C Preferred Stock                     1(6)             16.67%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

Pete Davey                           Series D Preferred Stock                     1(7)             18.52%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

Thomas Frintzilas                    Series D Preferred Stock                     1(7)             18.52%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

Christine Newman                     Series D Preferred Stock                     1(7)             18.52%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922

Stephen Schaeffer                    Series D Preferred Stock                   0.40(9)             7.41%
2642 Forest Avenue                   Series C Preferred Stock                     1(6)             16.67%
East Meadow, New York  11554

MYOB INVESTMENTS LLC                 Common Stock                          14,735,294               8.31%
7800 Cellar Door Drive
Briston, Massachusetts 20136

Mark Angelo                          Series E Preferred Stock                   1.25(10)           12.50%
282 Pembroke Road
Mountainside, New Jersey 07092

Meir Levin                           Series E Preferred Stock                   0.75(13)            7.50%
521 5th Avenue, Suite 1700
Suite 1620
New York, New York 10175

David Gonzalez                       Series E Preferred Stock                   1(11)              10.00%
509 Monroe Street
Apt. 4R
Hoboken, New Jersey  07030

Hamid Fashandi                       Series E Preferred Stock                   0.50(12)            5.00%
9-02 Bush Place
Fair Lawn, New Jersey 07410

</TABLE>

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

(1)      Applicable  percentage of Series B Preferred Stock,  Series C Preferred
         Stock and Series D Preferred  Stock is based on the shares  outstanding
         as of March 19, 2002.

(2)      Convertible into 6,000,000 shares of common stock.

(3)      Convertible into 2,800,000 shares of common stock.

(4)      Convertible into 2,000,000 shares of common stock.

(5)      Convertible into 125,000 shares of common stock.

(6)      Convertible into 250,000 shares of common stock.

                                       27
<PAGE>

(7)      Convertible into 1,000,000 shares of common stock.

(8)      Convertible into 500,000 shares of common stock.

(9)      Convertible into 400,000 shares of common stock.

(10)     Convertible into 12,500,000 shares of common stock.

(11)     Convertible into 10,000,000 shares of common stock.

(12)     Convertible into 5,000,000 shares of common stock.

(13)     Convertible into 7,500,000 shares of common stock

                                       28
<PAGE>

DIRECTORS AND EXECUTIVE OFFICERS

         The  following  table shows the amount of capital  stock of the Company
beneficially owned by the Company's  directors,  the executive officers named in
the Summary Compensation Table below and by all directors and executive officers
as a  group  as of  March  19,  2002.  Unless  otherwise  indicated,  beneficial
ownership  is direct and the person  indicated  has sole  voting and  investment
power. As of March 19, 2002, the Company had 177,334,914  shares of common stock
outstanding, 95 shares of Series B Preferred Stock outstanding (which each share
of Series B Preferred Stock is convertible into 400,000 shares of common stock),
6 shares of Series C Preferred Stock  outstanding  (which each share of Series C
Preferred Stock is convertible into 250,000 shares of common stock),  5.4 shares
of Series D Preferred Stock outstanding  (which each share of Series D Preferred
Stock is convertible  into 1,000,000  shares of common stock),  and 10 shares of
Series E  Preferred  Stock  outstanding  (which each share of Series E Preferred
Stock is convertible into 10,000,000).

<TABLE>
                                                                          SHARES
                                                                       BENEFICIALLY            PERCENT
NAME AND ADDRESS                     TITLE OF CLASS                       OWNED                OF CLASS(1)
-----------------------------------  --------------------------  ------------------------   ----------------
<S>                                  <C>                                 <C>                     <C>
Kenneth D. Van Meter                 Common Stock                        3,417,049(2)              1.93%
122 Perimeter Park Drive
Knoxville, Tennessee 37922

David Hultquist                      Common Stock                        1,092,812(3)              0.62%
122 Perimeter Park Drive             Series B Preferred Stock                    2(4)              2.11%
Knoxville, Tennessee 37922           Series D Preferred Stock                   1(10)             18.52%

Ed Kidston                           Common Stock                        2,639,845(5)              1.49%
122 Perimeter Park Drive             Series B Preferred Stock                 5.34(6)              5.62%
Knoxville, Tennessee 37922           Series E Preferred Stock                    6(11)            60.00%

Fenton Scruggs                       Common Stock                          548,970(7)              0.31%
122 Perimeter Park Drive
Knoxville, Tennessee 37922

All Officers and Directors as a      Common Stock                        7,698,676(8)              4.28%
Group                                Series B Preferred Stock                 7.34(9)              7.73%
                                     Series D Preferred Stock                   1(10)             18.51%
                                     Series E Preferred Stock                   6(11)             60.00%
</TABLE>
-----------------------
(1)      Applicable  percentage of ownership is based on  177,334,914  shares of
         common  stock  outstanding, 95 shares of  Series B  Preferred  Stock, 6
         shares of Series C  Preferred  Stock, 5.4  shares of Series D Preferred
         Stock and 10 shares of Series E Preferred Stock outstanding as of March
         19, 2002,  together with  securities  convertible or  exercisable  into
         shares of common stock within 60 days for each shareholder.  Beneficial
         ownership is determined in accordance  with the rules of the Securities
         and Exchange  Commission  and generally  includes  voting or investment
         power with respect to  securities.  Shares of common  stock  subject to
         securities that are currently exercisable or exercisable within 60 days
         of March 19,  2002 are  deemed to be  beneficially  owned by the person
         holding such  securities for the purpose of computing the percentage of
         ownership of such person,  but are not treated as  outstanding  for the
         purpose of computing the percentage ownership of any other person.

(2)      Includes  options  and  warrants  to  purchase up to 913,200 and 78,129
         shares of common stock, respectively.  Excludes 21,032 shares of common
         stock owned by Mr. Van Meter's adult  children as to which he disclaims
         beneficial ownership.

(3)      Includes  options  and  warrants  to  purchase  up to 6,666 and 579,000
         shares of common stock, respectively. Excludes 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.

(4)      Convertible into 800,000 shares of common stock.

(5)      All shares are held  indirectly  through  Kidston Family  Companies,  a
         limited  liability  company in which Mr. Kidston is a managing  member,
         Mr.  Kidston's  wife  or in  educational  accounts  for  Mr.  Kidston's
         children. Includes options and warrants to purchase 6,666 and 1,000,000
         shares of common stock, respectively.

                                       29
<PAGE>

(6)      Convertible into 2,136,000 shares of common stock.

(7)      Includes  options  and  warrants  to  purchase  up to 24,054 and 21,198
         shares of common stock, respectively.

(8)      Includes  options and warrants to purchase up to 950,586 and  1,678,327
         shares of common stock, respectively.

(9)      Convertible into 2,936,000 shares of common stock.

(10)     Convertible into 1,000,000 shares of common stock.

(11)     Convertible into 60,000,000 shares of common stock.

                                       30
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On March  19,  2002,  Ed  Kidston,  a  member  of  Celerity's  Board of
Directors,  purchased six shares of Series E Preferred  Stock.  Mr. Kidston paid
$10,000 per share for an aggregate  amount of $60,000.  These shares had a value
of $60,000 on the date of issuance.  The Series E Preferred  Stock  provides for
preferential  dividends  at an  annual  rate  of  8%.  The  Preferred  Stock  is
convertible  into shares of common stock at a  conversion  price equal to $0.001
per  share,  subject to  availability,  anytime  during the two years  following
execution of the Subscription Agreement.  Should there be an insufficient number
of shares of common stock  available at the time Preferred  Stock is offered for
conversion,  the  conversion  period  shall be  extended  by the  number of days
between the  conversion  date and the date common shares become  available.  Two
years from the original  issuance date subject to applicable law, Celerity shall
offer to  redeem  Preferred  Shares  then  outstanding  at a price  equal to the
original issuance price plus accrued dividends.

         On March 5, 2001, we entered into a National Distributor  Agreement for
the education market with Kidston Communications, a company controlled by Edward
Kidston,  a  director  of  Celerity.  Pursuant  to the terms of this  Agreement,
Kidston  Communications is the exclusive  national  distributor in the education
market in the United States.  The term of the Agreement is through  December 31,
2003 and will automatically  renew for additional  three-year periods unless one
party  notifies  the other of its  intent not to renew at least 30 days prior to
the  end  of  the  then  current  term.  The  Agreement  provides  that  Kidston
Communications may purchase products from our Company at a five percent discount
to list  price,  provided  that the price is not  higher  than the price paid by
other customers for like  quantities of similar  products and with similar terms
and conditions.  If Kidston Communications exceeds its sales targets by at least
thirty  percent,  then it will  receive an  additional  5%  discount to the list
price. Sales targets will be established  annually by the parties by December 15
of the  preceding  year.  During  2001,  we had  sales  of  $87,800  to  Kidston
Communications.

         During 2001, Celerity received $54,000 in short-term  financing from an
individual who is a member of the Board of Directors.  In connection  with these
notes, the individual  received  warrants to purchase 54,000 shares of common at
$0.20 per share.  These warrants were charged to operations as interest expense.
The value of the warrants, $5,375, was determined using the Black-Scholes option
pricing model with the following  assumptions:  risk-free interest rate of 4.00%
or 7.00%,  expected  dividends of zero,  volatility range of 207.57% and 213.81%
and expected lives of up to two years.  These warrants  expire between  February
and September 2003.

         Several  persons  affiliated  with us have permitted us to defer paying
them certain amounts we owe to them. Mr. Van Meter has permitted the deferral of
compensation  payments,  $70,875 in 1998,  $204,515 in 1999, $18,750 in 2000 and
$68,906 in 2001.  In  addition,  Celerity  issued 5 shares of Series B Preferred
Stock to Mr. Van Meter in lieu of payment  for  payroll  and  accounts  payable.
These shares had a value of $50,000 on the date of issuance.

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

         In  conjunction  with a loan to a third party in mid-1999,  Dr.  Fenton
Scruggs transferred  approximately 278,000 tradeable shares of Common Stock into
an escrow account for our benefit,  the loan was repaid on December 1, 1999; Dr.
Scruggs' shares were subsequently  released from escrow.  Dr. Scruggs was issued
55,583  shares  of Common  Stock  (20% of the  number  of shares he placed  into
escrow) in January 2000 for the use of such shares.

         In December 1999, David Hultquist,  who subsequently  became a director
of the Company in October 2000,  purchased 400,000 shares of Common Stock at the
then current market price. We previously  registered  400,000 of such shares. We
also  entered  into a loan  arrangement  with Mr.  Hultquist.  Such  arrangement
provides that in connection with loans made thereunder,  we issued him a warrant
to  purchase up to 200,000  shares of Common  Stock at the then  current  market
price. At December 31, 2001,  there were warrants to purchase  179,000 shares of
common stock outstanding.

         We also entered into a consulting  agreement with Mr. Hultquist for his
services payable in shares of Common Stock (calculated  monthly at a price equal
to the  average  for the most  recent  five  trading  days less  20%),  plus the
issuance of one share of Common Stock per each dollar of fees.  We have recorded
a $40,000 expense.

         Several persons affiliated with us have made cash loans to the Company.
Mr. Van Meter loaned us an aggregate  of $550,000  during 1998 and  aggregate of
$17,219  during  1999 and made no loans to us during 2000 or 2001.  Dr.  Scruggs
loaned the Company  $100,000 in 1998.  Mr.  Hultquist,  a member of our Board of
Directors,  loaned us $70,000 in the first  quarter of 2000 (which was repaid in
cash) and $125,000 in the second quarter of 2000 which remains outstanding.

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

                                       31
<PAGE>

         In October 1998, we consummated a private  placement (the "1998 ROYALTY
PLACEMENT") of $450,000,  aggregate principal amount, 7% Notes due 1999 and 2001
("ROYALTY NOTES") in which subscribers were also entitled to received  royalties
of $0.50 for each $100,000 invested (pro rated for lesser  investments) for each
set top box sold over a period of five years or the total notes placed.  Each of
Messrs.  Van Meter and Smith and Dr.  Scruggs,  purchased  Royalty  Notes by the
cancellation of our  indebtedness or canceling our obligation to pay them money,
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.

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







                                       32
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      The following exhibits are filed as part of this  registration
                  statement:

<TABLE>
EXHIBIT NO.           DESCRIPTION                                         LOCATION
-------------------   --------------------------------------------------  ------------------------------------------------
<S>                   <C>                                                 <C>
3.1                   Certificate of Incorporation of Celerity Systems,   Incorporated by reference to Exhibit 3.1 to the
                      Inc.                                                Registration Statement on SB-2 filed with the
                                                                          SEC on August 13, 1997

3.2                   By laws of Celerity Systems, Inc.                   Incorporated by reference to Exhibit 3.2 to the
                                                                          Registration Statement on SB-2 filed with the
                                                                          SEC on August 13, 1997

3.3                   Certificate of Designation of Series C Preferred    Incorporated by reference to the Registration
                      Stock                                               Statement on Form SB-2 filed with the SEC on
                                                                          October 18, 2001

3.4                   Certificate of Designation of Series D Preferred    Incorporated by reference to Exhibit 3.4 to
                      Stock                                               the Form 10-KSB filed with the SEC on
                                                                          March 27, 2002

3.5                   Certificate of Designation of Series E Preferred    Incorporated by reference to Exhibit 3.5 to
                      Stock                                               the Form 10-KSB filed with the SEC on
                                                                          March 27, 2002

4.1                   Form of Underwriter's Warrant                       Incorporated by reference to Exhibit 4.1 to
                                                                          Amendment No. 1 to Registration Statement on
                                                                          SB-2 filed with the SEC on October 8, 1997

4.2                   1995 Stock Option Plan                              Incorporated by reference to Exhibit 4.2 to the
                                                                          Registration Statement on SB-2 filed with the
                                                                          SEC on August 13, 1997

4.3                   1997 Stock Option Plan                              Incorporated by reference to Exhibit 4.3 to the
                                                                          Registration Statement on SB-2 filed with the
                                                                          SEC on August 13, 1997

4.4                   Form of Stock Certificate                           Incorporated by reference to Exhibit 4.4 to
                                                                          Amendment No. 2 to Registration Statement on
                                                                          SB-2 filed with the SEC on October 28, 1997

4.5                   Form of Bridge Warrant                              Incorporated by reference to Exhibit 4.5 to the
                                                                          Registration Statement on SB-2 filed with the
                                                                          SEC on August 13, 1997

4.6                   Form of 1996 Warrant                                Incorporated by reference to Exhibit 4.6 to
                                                                          Amendment No. 2 to Registration Statement on
                                                                          SB-2 filed with the SEC on October 28, 1997
</TABLE>

                                       33
<PAGE>
<TABLE>
EXHIBIT NO.           DESCRIPTION                                         LOCATION
-------------------   --------------------------------------------------  ------------------------------------------------
<S>                   <C>                                                 <C>
4.7                   Form of Hampshire Warrant                           Incorporated by reference to Exhibit 4.7 to
                                                                          Amendment No. 1 to Registration Statement on
                                                                          SB-2 filed with the SEC on October 8, 1997

4.8                   Form of 1995 Warrant                                Incorporated by reference to Exhibit 4.8 to the
                                                                          Registration Statement on SB-2 filed with the
                                                                          SEC on August 13, 1997

4.9                   Letter Agreement dated July 15, 1997, between       Incorporated by reference to Exhibit 4.9 to the
                      Celerity and Mahmoud Youssefi, including exhibits   Registration Statement on SB-2 filed with the
                                                                          SEC on August 13, 1997

4.10                  Letter Agreement, dated July 11, 1997, between      Incorporated by reference to Exhibit 4.10 to the
                      Celerity and Dr. Fenton Scruggs                     Registration Statement on SB-2 filed with the
                                                                          SEC on August 13, 1997

4.11                  Form of 9% Convertible Debenture                    Incorporated by reference to Exhibit 4.11 to
                                                                          Amendment No. 1 to Form 10-KSB for the year
                                                                          ended December 31, 1998 filed with the SEC on
                                                                          April 30, 1999

4.12                  Form of 7% Promissory Note                          Incorporated by reference to Exhibit 4.12 to
                                                                          Amendment No. 1 to Form 10-KSB for the year
                                                                          ended December 31, 1998 filed with the SEC on
                                                                          April 30, 1999

4.13                  Form of Registration Rights Agreement, between      Incorporated by reference to Exhibit 4.13 to
                      Celerity and each of RNI Limited Partnership,       Amendment No. 1 to Form 10-KSB for the year
                      First Empire Corporation, Greg A. Tucker and        ended December 31, 1998 as filed with the SEC on
                      Michael Kesselbrenner                               April 30, 1999

4.14                  Form of Warrant issued April 27, 1999               Incorporated by reference to Exhibit 4.2 to the
                                                                          Registration Statement on S-3 filed with the SEC
                                                                          on June 18, 1999

4.15                  Shareholders Agreement, dated August 10, 1999,      Incorporated by reference to Exhibit 99.2 to the
                      between Celerity Systems, Inc., FutureTrak Merger   Form 8-K filed with the SEC on September 14, 1999
                      Corp. and certain parties listed therein

4.16                  Registration Rights Agreement, dated September      Incorporated by reference to Exhibit 99.2 to the
                      30, 1999, between Celerity and GMF Holdings         Form 8-K filed with the SEC on October 8, 1999

4.17                  Form of Debenture in connection with Line of        Incorporated by  reference  to Exhibit  99.4 to the
                      Credit  Agreement, dated  September  30,  1999      Form 8-K filed with the SEC on October 8, 1999

4.18                  Form of Warrant issued September 30, 1999           Incorporated by reference to Exhibit 4.10 to the
                                                                          Registration Statement on S-3 filed with the SEC
                                                                          on February 15, 2000

4.19                  Form of 4% Convertible Debenture due 2002 between   Incorporated by reference to Exhibit 4.2 to the
                      Celerity and each of John Bridges, John Faure,      Registration Statement on S-3 filed with the SEC
                      Loni Spurkeland, Robert Dettle, Michael Genta,      on February 15, 2000
                      Lennart Dallgren

4.20                  Form of 8% Convertible Debenture due 2002 between   Incorporated by reference to Exhibit 4.3 to the
                      Celerity and each of Richard T. Garrett, W. David   Registration Statement on S-3 filed with the SEC
                      McCoy, Dominick Chirarisi, Gilda R. Chirarisi,      on February 15, 2000
                      Joseph C. Cardella, Carl Hoehner

4.21                  Form of 8% Convertible Debenture due 2003 between   Incorporated by reference to Exhibit 4.4 to the
                      Celerity and John Bolliger                          Registration Statement on S-3 filed with the SEC
                                                                          on February 15, 2000
</TABLE>

                                       34
<PAGE>

<TABLE>
EXHIBIT NO.           DESCRIPTION                                         LOCATION
-------------------   --------------------------------------------------  ------------------------------------------------
<S>                   <C>                                                 <C>
4.22                  Form of Registration Rights Agreement, between      Incorporated by reference to Exhibit 4.6 to the
                      Celerity and each of John Bridges, John Faure,      Registration Statement on S-3 filed with the SEC
                      Loni Spurkeland, Robert Dettle, Michael Genta,      on February 15, 2000
                      Lennart Dallgren

4.23                  Form of Registration Rights Agreement, between      Incorporated by reference to Exhibit 4.7 to the
                      Celerity and each of Richard T. Garrett, W. David   Registration Statement on S-3 filed with the SEC
                      McCoy, Dominick Chirarisi, Gilda R. Chirarisi,      on February 15, 2000
                      Joseph C. Cardella, Carl Hoehner

4.24                  Form of Registration Rights Agreement, between      Incorporated by reference to Exhibit 4.8 to the
                      Celerity and John Bolliger                          Registration Statement on S-3 filed with the SEC
                                                                          on February 15, 2000

4.25                  Form of 8% Convertible Debenture due 2003 between   Incorporated by reference to Exhibit 99.7 to the
                      Celerity and each of Sui Wa Chau, Qinu Guan,        Form 8-K filed with the SEC on March 23, 2000
                      Peter Chenan Chen, K&M Industry, Inc., Michael
                      Dahlquist, Denise and Vernon Koto and Rance Merkel

4.26                  Form of Registration Rights Agreement, between      Incorporated by reference to Exhibit 99.8 to the
                      Celerity and each of Sui Wa Chau, Qinu Guan,        Form 8-K filed with the SEC on March 23, 2000
                      Peter Chenan Chen, K&M Industry, Inc., Michael
                      Dahlquist, Denise and Vernon Koto and Rance Merkel

4.27                  Securities Purchase Agreement, dated August 31,     Incorporated by reference to Exhibit 99.1 to the
                      2000, between Celerity and the Investors            Form 8-K filed with the SEC on September 5, 2000
                      specified therein

4.28                  Registration Rights Agreement, dated August 31,     Incorporated by reference to Exhibit 99.2 to the
                      2000, between Celerity and the Investors            Form 8-K filed with the SEC on September 5, 2000
                      specified therein

4.29                  Form of Warrant issued March 31, 2000               Incorporated by reference to Exhibit 99.3 to the
                                                                          Form 8-K filed with the SEC on April 5, 2000

10.1                  Employment Agreement, dated January 7, 1997, as     Incorporated by reference to Exhibit 10.1 to
                      amended, between Celerity and Kenneth D. Van Meter  Amendment No. 1 to Registration Statement on
                                                                          SB-2 filed with the SEC on October 8, 1997

10.2                  Employment, Non-Solicitation, Confidentiality and   Incorporated by reference to Exhibit 10.2 to the
                      Non-Competition Agreement, dated as of May 1,       Registration Statement on SB-2 filed with the
                      1996, between Celerity and Glenn West               SEC on August 13, 1997

10.3                  Termination Agreement, dated as of April 5, 1997,   Incorporated by reference to Exhibit 10.3 to the
                      between Celerity and Mahmoud Youssefi               Registration Statement on SB-2 filed with the
                                                                          SEC on August 13, 1997
10.4                  [Reserved]

10.5                  Letter Agreement, dated March 13, 1997, between     Incorporated by reference to Exhibit 10.5 to
                      Celerity and William Chambers                       Amendment No. 1 to Registration Statement on
                                                                          SB-2 filed with the SEC on October 8, 1997

10.6                  Letter Agreement, dated July 24, 1997, between      Incorporated by reference to Exhibit 10.6 to
                      Celerity and Mark. C. Cromwell                      Amendment No. 1 to Registration Statement on
                                                                          SB-2 filed with the SEC on October 8, 1997
</TABLE>

                                       35
<PAGE>
<TABLE>
EXHIBIT NO.           DESCRIPTION                                         LOCATION
-------------------   --------------------------------------------------  ------------------------------------------------
<S>                   <C>                                                 <C>
10.7                  Exclusive OEM/Distribution Agreement, dated         Incorporated by reference to Exhibit 10.7 to the
                      March 10, 1995, between Celerity and InterSystem    Registration Statement on SB-2 filed with the
                      Multimedia, Inc.                                    SEC on August 13, 1997

10.8                  Purchase Order Agreement, dated June 26, 1995,      Incorporated by reference to Exhibit 10.8 to the
                      between Tadiran Telecommunications Ltd. and         Registration Statement on SB-2 filed with the
                      Celerity                                            SEC on August 13, 1997

10.9                  License Agreement, dated as of September 26,        Incorporated by reference to Exhibit 10.9 to the
                      1996, between Celerity and En Kay Telecom Co.,      Registration Statement on SB-2 filed with the
                      Ltd.                                                SEC on August 13, 1997

10.10                 License Agreement, dated as of February 21, 1997,   Incorporated by reference to Exhibit 10.10 to
                      between Celerity and En Kay Telecom Co., Ltd.       the Registration Statement on SB-2 filed with
                                                                          the SEC on August 13, 1997

10.11                 Remarketer Agreement, dated as of June 15, 1997,    Incorporated by reference to Exhibit 10.11 to
                      between Celerity and Minerva Systems, Inc.          the Registration Statement on SB-2 filed with
                                                                          the SEC on August 13, 1997

10.12                 Memorandum of Understanding, dated April 25,        Incorporated by reference to Exhibit 10.12 to
                      1996, between Integrated Network Corporation and    the Registration Statement on SB-2 filed with
                      Celerity                                            the SEC on August 13, 1997

10.13                 Letter of Agreement, dated March 31, 1993,          Incorporated by reference to Exhibit 10.13 to
                      between Celerity and Herzog, Heine & Geduld,        the Registration Statement on SB-2 filed with
                      Inc. and Development Agreement attached thereto     the SEC on August 13, 1997

10.14                 Subcontract Agreement, dated June 26, 1997,         Incorporated by reference to Exhibit 10.14 to
                      between Unisys Corporation and Celerity             the Registration Statement on SB-2 filed with
                                                                          the SEC on August 13, 1997

10.15                 Lease Agreement for Crossroad Commons, dated        Incorporated by reference to Exhibit 10.15 to
                      November 25, 1996, as amended, between Lincoln      Amendment No. 1 to Registration Statement on
                      Investment Management, Inc., as attorney in fact    SB-2 filed with the SEC on October 8, 1997
                      for the Lincoln National Life Insurance Company,
                      and Celerity

10.16                 Lease Agreement, dated November 25, 1997, between   Incorporated by reference to Exhibit 10.16 to
                      Centerpoint Plaza, L.P. and Celerity                the Form 10-KSB for the year ended December 31,
                                                                          1997 filed with the SEC on March 31, 1998

10.17                 Letter Agreement, dated October 3, 1997, between    Incorporated by reference to Exhibit 10.17 to
                      Dennis Smith and Celerity                           the Form 10-KSB for the year ended December 31,
                                                                          1997 filed with the SEC on March 31, 1998

10.18                 Letter Agreement, dated January 8, 1998, between    Incorporated by reference to Exhibit 10.18 to
                      James Fultz and Celerity                            the Form 10-KSB for the year ended December 31,
                                                                          1997 filed with the SEC on March 31, 1999

10.19                 Amendment to Employment, Non-Solicitation,          Incorporated by reference to Exhibit 10.19 to
                      Confidentiality and Non-Competition Agreement,      the Form 10-KSB for the year ended December 31,
                      dated January 1, 1999, between Celerity and Glenn   1997 filed with the SEC on April 30, 1998
                      West

10.20                 Form of Subscription Agreement, between Celerity    Incorporated by reference to Exhibit 10.20 to
                      and each of RNI Limited Partnership, First Empire   Amendment No. 1 to Form 10-KSB for the year
                      Corporation, Greg A. Tucker and Michael             ended December 31, 1998 filed with the SEC on
                      Kesselbrenner                                       April 30, 1999
</TABLE>
                                       36
<PAGE>
<TABLE>
EXHIBIT NO.           DESCRIPTION                                         LOCATION
-------------------   --------------------------------------------------  ------------------------------------------------
<S>                   <C>                                                 <C>
10.21                 Form of Subscription Agreement, between Celerity    Incorporated by reference to Exhibit 10.21 to
                      and each of Donald Alexander, Leo Abbe,             Amendment No. 1 to Form 10-KSB for the year
                      Centerpoint Plaza, L.P., William Chambers, Fenton   ended December 31, 1998 filed with the SEC on
                      Scruggs, Dennis Smith, Kenneth Van Meter, George    April 30, 1999
                      Semb and Rodney Conard

10.22                 Form of Royalty Agreement, between Celerity and     Incorporated by reference to Exhibit 10.22 to
                      each of Donald Alexander, Leo Abbe, Centerpoint     Amendment No. 1 to Form 10-KSB for the year
                      Plaza, LP, William Chambers, Fenton Scruggs,        ended December 31, 1998 filed with the SEC on
                      Dennis Smith, Kenneth Van Meter, George Semb and    April 30, 1999
                      Rodney Conard

10.23                 Agreement and Plan of Merger, dated August 10,      Incorporated by reference to Exhibit 99.1 to the
                      1999, between Celerity Systems, Inc., FutureTrak    Form 8-K filed with the SEC on September 14, 1999
                      Merger Corp. and FutureTrak International, Inc.

10.24                 Line of Credit Agreement, dated September 30,       Incorporated by reference to Exhibit 99.1 to the
                      1999, between GMF Holdings, May Davis Group and     Form 8-K filed with the SEC on October 8, 1999
                      Celerity

10.25                 Termination Agreement, dated December 7, 1999,      Incorporated by reference to Exhibit 99.1 to the
                      between Celerity, FutureTrak Merger Corp. and       Form 8-K filed with the SEC on December 8, 1999
                      FutureTrak International, Inc.

10.26                 Manufacturing Agreement, dated November 30, 1999,   Incorporated by reference to Exhibit 99.2 to the
                      between Celerity, Primax Electronics, Ltd and       Form 8-K filed with the SEC on January 5, 2000
                      Global Business Group, Ltd.

10.27                 Lease, dated December 17, 1999, between Andy        Incorporated by reference to Exhibit 99.1 to the
                      Charles Johnson, Raymond Perry Johnson, Tommy F.    Form 8-K filed with the SEC on January 5, 2000
                      Griffin. and Celerity

10.28                 Amendment to the Line of Credit Agreement between   Incorporated by reference to Exhibit 10.28 to
                      Celerity and GMF Holdings, Inc. dated October 16,   the Registration Statement on SB-2 filed with
                      2000                                                the SEC on October 27, 2000

10.29                 Purchase Agreement, dated June 22, 2000, between    Incorporated by reference to Exhibit 99.2 to the
                      Celerity and WIT Technologies Inc.                  Form 8-K filed with the SEC on July 11, 2000

10.30                 Manufacturing Service Agreement, dated January 4,   Incorporated by reference to Exhibit 99.1 to the
                      2001, between Celerity and Nextek, Inc.             Registration Statement on SB-2 filed with the
                                                                          SEC on December 27, 2000

10.31                 Broadband Services Agreement, dated January 4,      Incorporated by reference to Exhibit 99.2 to the
                      2001, between Celerity and DeserScape L.P.          Form 8-K filed with the SEC on January 10, 2001

10.32                 Cooperative Marketing Agreement, dated January 4,   Incorporated by reference to Exhibit 99.3 to the
                      2001, between Celerity and In4Structures LLC        Form 8-K filed with the SEC on January 10, 2001

10.33                 Equity Line of Credit Agreement dated as of         Incorporated by reference to the Registration
                      June 14, 2001 between Celerity Systems, Inc. and    Statement on Form SB-2 filed with the SEC on
                      Cornell Capital Partners, L.P.                      October 18, 2001

10.34                 Registration Rights Agreement dated as of           Incorporated by reference to the Registration
                      June 14, 2001 between Celerity Systems, Inc. and    Statement on Form SB-2 filed with the SEC on
                      Cornell Capital Partners, L.P.                      October 18, 2001

10.35                 Consulting Services Agreement dated as of           Incorporated by reference to the Registration
                      June 14, 2001 between Celerity Systems, Inc. and    Statement on Form SB-2 filed with the SEC on
                      Cornell Capital Partners, L.P.                      October 18, 2001

10.36                 Escrow Agreement dated as of June 14, 2001 among    Incorporated by reference to the Registration
                      Celerity Systems, Inc. Meir Levin and Cornell       Statement on Form SB-2 filed with the SEC on
                      Capital Partners, L.P.                              October 18, 2001

10.37                 Warrant to purchase 2,500,000 shares of common      Incorporated by reference to the Registration
                      stock dated as of June 14, 2001 given by Celerity   Statement on Form SB-2 filed with the SEC on
                      Systems to Cornell Capital Partners, L.P.           October 18, 2001
</TABLE>
                                       37
<PAGE>
<TABLE>
EXHIBIT NO.           DESCRIPTION                                         LOCATION
-------------------   --------------------------------------------------  ------------------------------------------------
<S>                   <C>                                                 <C>
10.38                 Warrant to purchase 3,500,000 shares of common      Incorporated by reference to the Registration
                      stock dated as of August, 2001 given by Celerity    Statement on Form SB-2 filed with the SEC on
                      Systems to Cornell Capital Partners, L.P.           October 18, 2001

10.39                 Letter Agreement dated August, 2001 between         Incorporated by reference to the Registration
                      Celerity Systems and Yorkville Advisors             Statement on Form SB-2 filed with the SEC on
                      Management, LLC                                     October 18, 2001

10.40                 Consulting Services Agreement dated as of August,   Incorporated by reference to the Registration
                      2001 between Celerity Systems, Inc. and Yorkville   Statement on Form SB-2 filed with the SEC on
                      Advisors, LLC                                       October 18, 2001

10.41                 Consulting Services Agreement dated as of           Incorporated by reference to the Registration
                      September, 2001 between Celerity Systems, Inc.      Statement on Form SB-2 filed with the SEC on
                      and Yorkville Advisors, LLC                         October 18, 2001

10.42                 Advisory Agreement dated September 6, 2001          Incorporated by reference to the Registration
                      between Celerity Systems, Inc. and Internet         Statement on Form SB-2 filed with the SEC on
                      Finance International Corporation                   October 18, 2001

10.43                 Financing Agreement dated as of August, 2001        Incorporated by reference to the Registration
                      between Celerity Systems, Inc. and Artesian         Statement on Form SB-2 filed with the SEC on
                      Direct Holdings Corporation                         October 18, 2001

10.44                 Partial Guaranty Agreement dated August, 2001       Incorporated by reference to the Registration
                      given by Ed Kidston to Celerity Systems, Inc.       Statement on Form SB-2 filed with the SEC on
                                                                          October 18, 2001

10.45                 Termination Agreement                               Incorporated by reference to Exhibit 10.45 to
                                                                          the Form 10-KSB filed with the SEC on
                                                                          March 27, 2002
</TABLE>


                                       38
<PAGE>

                             CELERITY SYSTEMS, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                                       AND

                          INDEPENDENT AUDITORS' REPORT

                                DECEMBER 31, 2001


<PAGE>


Celerity Systems, Inc.

Index to Financial Statements

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



Independent Auditors' Report                                   F-2

Financial Statements

         Balance Sheet                                         F-3
         December 31, 2001

         Statement of Operations                               F-4
         Year Ended December 31, 2001 and 2000

         Statements of Stockholders' Deficit                   F-5
         Year Ended December 31, 2001 and 2000

         Statement of Cash Flows                               F-6
         Year Ended December 31, 2001 and 2000

Notes to Financial Statements                                  F-7

<PAGE>




                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Celerity Systems, Inc.
Knoxville, Tennessee

We have audited the accompanying  balance sheet of Celerity Systems,  Inc. as of
December 31,  2001,  and the related  statements  of  operations,  stockholders'
deficit,  and cash flows for the years ended  December 31, 2001 and 2000.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Celerity Systems,  Inc. as of
December  31,  2001,  and the results of its  operations  and cash flows for the
years ended December 31, 2001 and 2000 in conformity with accounting  principles
generally accepted in the United States of America.

         The accompanying  financial statements have been prepared assuming that
the Company  will  continue as a going  concern.  As  discussed in Note 3 to the
financial  statements,  the Company has a working  capital deficit of $1,280,000
and has  suffered  recurring  losses  from  operations  and net  operating  cash
outflows that raise  substantial  doubt about its ability to continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note 3. The  financial  statements  do not  include any  adjustments  that might
result from the outcome of this uncertainty.


We have audited the  statement  of  operations,  stockholders'  deficit and cash
flows  for the year  ended  December  31,  2000  subsequent  to our audit of the
balance sheet and the related  statement of operations,  stockholders'  deficit,
and cash flows for the year ended December 31, 2001. Our audit did not result in
modifications to the reported  statement of operations,  stockholders'  deficit,
and cash flows previously reported on by other auditors.



/s/ HJ & Associates, LLC
------------------------
HJ & Associates, LLC
Salt Lake City, Utah
June 14, 2002



                                      F-2
<PAGE>

<TABLE>
 CELERITY SYSTEMS, INC.
 Balance Sheet
 December 31, 2001
 <S>                                                                                <C>
                                                                                      2001
                                                                                  -------------
 Assets

    Cash                                                                             $ 171,988
    Accounts receivable                                                                  4,282
    Inventory, net (Note 5)                                                          2,184,334
                                                                                  -------------
         Total current assets                                                        2,360,604

 Property and equipment, net (Note 6)                                                  252,286
 Debt offering costs, net of accumulated amortization of $157,418 (Note 2)           1,076,187
 Other assets                                                                           20,900
                                                                                  -------------

      Total assets                                                                  $3,709,977
                                                                                  =============


 Liabilities, Redeemable Preferred Stock and Stockholders' Deficit

 Accounts payable                                                                   $2,114,855
 Accrued wages and related taxes                                                        77,022
 Accrued interest                                                                      768,995
 Other accrued liabilities                                                             277,764
 Notes payable - Related Party (Notes 10 and 17)                                       117,589
 Equity warrant liability                                                              134,374
 Current maturities of long-term debt and capital lease obligations                    150,000
                                                                                   -------------

      Total current liabilities                                                       3,640,599

 Long-term debt and capital lease obligations, less current maturities (Note 10       2,830,168
                                                                                   -------------

      Total liabilities                                                              6,470,767

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

 Series A redeemable convertible preferred stock, $.01 par value; authorized
 50 shares; 0  shares issued and outstanding at
 December 31, 2001                                                                           -

 Series B redeemable convertible preferred stock, $.01 par value; authorized
 100 shares; 95 shares issued and outstanding at
 December 31, 2001  (Note 11)                                                          950,000

 Series C redeemable convertible preferred stock, $.01 par value; authorized
 100 shares; 6 issued and outstanding at
 December 31, 2001 (Note 11)                                                            60,000
                                                                                  -------------


 Common stock, $.001 par value, 250,000,000 shares authorized,
      98,794,516 issued and outstanding at December 31, 2001                            98,795
 Additional paid-in capital                                                         33,079,315
 Treasury stock, at cost, 0 shares at December 31, 2001 (Note 18)                            -
 Accumulated deficit                                                               (36,948,900)
                                                                                  -------------
      Total stockholders' deficit                                                   (3,770,790)
                                                                                  -------------

      Total liabilities, redeemable preferred stock and stockholders' deficit       $3,709,977
                                                                                  =============
</TABLE>

 The accompanying notes are an integral part of these financial statements

                                      F-3
<PAGE>

<TABLE>
 CELERITY SYSTEMS, INC.
 Statements of Operations
 For the years ended December 31, 2001 and 2000
<S>                                                                   <C>               <C>
                                                                              2001             2000
                                                                      ----------------  ---------------
Revenues                                                                  $   403,997    $      --
Cost of revenues                                                            1,163,129        717,755
                                                                          -----------    -----------
                                                                             (759,132)      (717,755)
Operating expenses                                                          5,667,077      3,461,120
                                                                          -----------    -----------
        Loss from operations                                               (6,426,209)    (4,178,875)

   Interest expense                                                        (1,680,035)    (1,135,634)
   Income on equity warrant liability                                       1,893,852           --
   Loss on treasury stock                                                    (227,500)          --
   Other (expense) income                                                      37,854         (8,084)
                                                                          -----------    -----------
        Loss before discontinued operations                                (6,402,038)    (5,322,593)
Discontinued operations:
   Income on disposal of discontinued CD-ROM segment (Note 4)                    --           35,094
                                                                          -----------    -----------
        Loss before extraordinary items                                    (6,402,038)    (5,287,499)
   Extraordinary items
   Gain on extinguishment of debt (Note 10)                                    71,864           --
                                                                          -----------    -----------
        Loss before cumulative effect of change in accounting principle    (6,330,174)    (5,287,499)

   Cumulative effect of change in accounting principle                      2,598,813
                                                                          -----------    -----------
        Net loss                                                           (3,731,361)    (5,287,499)

Amortization of beneficial conversion feature and accretion
  of convertible preferred stock                                            1,060,000       332,908
                                                                          -----------    -----------

    Net loss attributable to common stockholders                          $(4,791,361)   $(5,620,407)
                                                                          ===========    ===========

Basic loss per common share (Note 13):
   Loss before discontinued operations                                    $     (0.10)  $     (0.46)
   Discontinued operations                                                       --             --
   Extraordinary items                                                           --             --
   Cumulative effect of change in accounting principle                           0.04           --
                                                                          -----------    -----------
   Net loss per share                                                     $     (0.06)   $    (0.46)

Amortization of beneficial conversion feature and accretion of
  convertible preferred stock                                                   (0.02)        (0.03)
                                                                          -----------    -----------

    Net loss per share attributable to common stockholders                $     (0.08)   $    (0.49)
                                                                          ===========    ===========

</TABLE>

 The accompanying notes are an integral part of these financial statements

                                      F-4
<PAGE>

<TABLE>
 CELERITY SYSTEMS, INC.
 Statement of Changes in Stockholders' Deficit
 For the years ended December 31, 2001 and 2000

                                            Shares of              Additional                                          Total
                                             Common      Common      Paid-In      Treasury        Accumulated       Stockholders'
                                              Stock       Stock      Capital        Stock           Deficit           Deficit
                                              -----       -----      -------        -----           -------           -------
<S>                                        <C>         <C>       <C>            <C>               <C>               <C>
 Balances, December 31, 1999                6,269,521  $  6,270  $ 23,695,245   $  (227,500)      $ (26,836,098)    $ (3,362,083)

 Issuance of common stock                   1,700,000     1,700     1,058,300                                          1,060,000

 Issuance of common stock warrants
   with short-term note                                                75,589                                             75,589

 Issuance of common stock warrants
   with Series A Preferred Stock                                      202,800                                            202,800

 Exercise of common stock warrants            177,500       178       135,923                                            136,101

 Exercise of employee stock options            87,500        87        51,844                                             51,931

 Issuance of convertible debentures
   with beneficial conversion feature                                 651,104                                            651,104

 Issuance of common stock as payment of
   certain consulting and directors'
   fees, payroll and accounts payable
   items                                      814,255       814       942,440                                            943,254

 Conversion of notes, accounts payable
   and wages to shares of common stock
   and warrants to purchase 357 ,464
   shares of common stock                   1,503,738     1,504     1,781,908                                          1,783,412

 Conversion of accounts payable to
   common stock                               383,586       384       207,706                                            208,090

 Conversion of convertible debentures
   to shares of common stock                9,009,096     9,009     1,597,599                                          1,606,608

 Conversion of convertible preferred
   stock to shares of common stock          4,695,453     4,695       272,113                                            276,808

 Issuance of convertible preferred
   stock with beneficial conversion
   feature                                                             33,942                           (33,942)               -

 Accretion of redeemable preferred
   stock                                                             (298,966)                                          (298,966)

 Net loss                                                                                            (5,287,499)      (5,287,499)
                                           ----------  --------  ------------   -----------       -------------     ------------
 Balances, December 31, 2000               24,640,649    24,641    30,407,547      (227,500)        (32,157,539)      (1,952,851)

 Issuance of common stock                   1,000,000     1,000        29,000                                             30,000
 Issuance of common stock in connection
   with a purchase or finance commitment    2,400,000     2,400       405,600                                            408,000
  Issuance of convertible debentures
   with beneficial conversion feature                               2,151,794                                          2,151,794
  Issuance of convertible preferred
     stock with beneficial conversion
     feature                                                          969,654                                            969,654
 Issuance of common stock as payment
     of certain consulting and
     directors' fees, payroll and
     accounts payable items                 1,282,873     1,283       144,245                                            145,528
 Conversion of convertible debentures
     to shares of common stock             63,110,791    63,111     1,623,238                                          1,686,349
 Conversion of convertible preferred
     stock to shares of common stock        6,360,203     6,360       184,551                                            190,911
 Amortization of beneficial conversion
     feature and accretion of redeemable
     convertible preferred stock                                       27,446                        (1,060,000)      (1,032,554)
 Reclassification as a result of a change
     in accounting principle for outstanding
     warrants                                                      (2,863,760)                                        (2,863,760)
 Loss on treasury stock                                                             227,500                              227,500
 Net loss                                                                                            (3,731,361)      (3,731,361)
                                           ----------  --------  ------------   -----------       -------------     ------------
 Balances, December 31, 2001               98,794,516    98,795  $ 33,079,315  $          -        $(36,948,900)    $ (3,770,790)
                                           ==========  ========  ============  ============       =============     ============
</TABLE>
 The accompanying notes are an integral part of these financial statements


                                      F-5
<PAGE>

<TABLE>
 CELERITY SYSTEMS, INC.
 Statements of Cash Flows
 For the years ended December 31, 2001 and 2000

                                                                                 2001           2000
                                                                           --------------- --------------
<S>                                                                        <C>             <C>
 Cash flows from operating activities:
    Net loss                                                               $  (3,731,361)  $ (5,287,499)
    Adjustments to reconcile net loss to net
         cash used in operating activities:
             Depreciation and amortization                                       291,444        280,187
             Amortization expense related to termination of financing agreement  408,000              -
             Amortization of equity placement fee related to
             terminated equity credit line                                     1,363,975              -
 Noncash operating expense related to the issuance of warrants                   399,304              -
 Noncash expense related to treasury stock                                       227,500              -
             Loss on disposal of fixed assets                                    365,383              -
             Provision for inventory obsolescence                                237,250        683,750
             Noncash interest expense related to beneficial
                  conversion feature of debt                                     575,224        712,550
             Noncash interest expense related to notes payable                    66,506         22,234
             Noncash stock-based compensation                                          -        259,534
             Noncash operating expense related to consulting fees                113,683        578,125
             Noncash operating expense related to payroll
                and directors' fees                                               31,843        365,129
             Noncash gain related to settlement of capital lease obligation      (97,500)             -
             Noncash income related to equity warrant liability               (1,893,852)             -
             Noncash income related to change in accounting principle         (2,598,813)             -
             Changes in current assets and liabilities:
                 Accounts receivable                                              (4,282)        31,500
                 Prepaid expenses                                                      -         24,000
                 Inventory                                                    (2,021,427)      (229,554)
                 Accounts payable                                              1,456,378        (43,728)
                 Other current liabilities                                       736,901       (413,053)
                                                                           --------------  ------------
                     Net cash used in operating activitities                  (4,073,844)    (3,016,825)

 Cash flows from investing activities:
    Purchase of fixed assets                                                    (574,083)       (48,567)
                                                                           --------------  ------------
                     Net cash used in investing activitities                    (574,083)       (48,567)

 Cash flows from financing activities:
    Proceeds from short-term borrowings                                           54,000        200,000
    Payments on short-term borrowings                                            (54,000)     (100,000)
    Proceeds from long-term debt                                               5,686,000      1,634,980
    Principal payments on long-term debt and capital lease obligations          (592,500)       (90,000)
    Proceeds from issuance of common stock                                        30,000      1,060,000
    Proceeds from exercise of common stock warrants                                    -        136,101
    Proceeds from exercise of common stock options                                     -          2,775
    Proceeds from preferred stock offering, net of offering costs                919,654        369,000
    Financing and debt issue costs                                            (1,233,605)      (137,481)
                                                                           --------------  ------------
                     Net cash provided by financing activitities               4,809,549      3,075,375

 Net increase (decrease) in cash and cash equivalents                            161,622          9,983
 Cash and cash equivalents, beginning of year                                     10,366            383
                                                                           --------------  ------------
 Cash and cash equivalents, end of year                                    $     171,988   $     10,366
                                                                          =============== ==============
</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  and in
       February,  2001  completed  the sale of this  segment  (Note  4).  In the
       interactive video services area, the Company seeks to provide  solutions,
       including products and services developed by the Company and by strategic
       partners,  that enable  interactive video programming and applications to
       be provided to a wide variety of market niches.  The sales of interactive
       video products are made direct to its customers, except for the education
       market which is conducted through a network of distributors.

       The  Company  had  one  interactive   video  customer  that   represented
       approximately  75% of the Company's  revenues in 2001. The Company had no
       revenues in 2000.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       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.

       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 and money market
       accounts with one bank.

       CONCENTRATION  OF  RISK - The  Company  maintains  checking  accounts  at
       financial institutions located in Tennessee.  The accounts are insured by
       the  Federal  Deposit  Insurance  Corporation  up to $100,000  each.  The
       amounts held for the Company occasionally exceed that amount.

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


       INVENTORY - Inventory is stated at the lower of cost or market, with cost
       being determined using the first-in, first-out (FIFO) method. During 2001
       the  Company's  sales of its  finished  set top box were at a price lower
       than its cost of  manufacturing.  As the net realizable  value of the raw
       material  parts and finished goods  inventory  related to the set top box
       was not  expected to  increase  at a price  equal to or greater  than its
       cost,  an allowance to recognize  this lower of cost or market  writedown
       was recorded for both the raw material and finished  goods  components of
       the  inventory  relating  to the set top box.  The Company  believes  the
       remaining   value  of  the  inventory  will  be  realized  based  on  the
       "commodity"  nature of the raw material  parts and the pricing of the set
       top box quoted for the various bids outstanding in its Digital  Education
       system.  The Company has accrued an allowance  for obsolete  inventory of
       approximately $237,250.


       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  are  related  to  private
       placements in 2001 and 2000, are being amortized on a straight line basis
       over  the  term of the  related  debt,  most of  which  is in the form of
       convertible  debentures.  Should  conversion  occur  prior to the  stated
       maturity date immediate  recognition is made of the remaining unamortized

                                      F-7
<PAGE>

       cost  through  a charge to  amortization  expense.  Amortization  expense
       related  to  these  costs  was  $198,633  and  $204,894  in 2001 and 2000
       respectively.


       REVENUE  RECOGNITION - The Company  recognizes revenue in accordance with
       Staff Accounting Bulletin 101 whereby revenue is realized when all of the
       following  criteria  are met: 1)  Persuasive  evidence of an  arrangement
       exists;  2) Delivery has occurred or services have been rendered;  3) The
       seller's  price  to  the  buyer  is  fixed  or   determinable;   and,  4)
       Collectibility is reasonably  assured.  The Company records revenues upon
       shipment  of goods and after all risks and  rewards of  ownership  of the
       related  products has passed to the buyer.  The Company records sales for
       services upon the  completion  of training,  ratable over the life of any
       maintenance or support agreement and in the current period for any access
       or rental fees. The Company's  general sales terms require a deposit with
       the order and balance upon delivery,  except for educational  sales which
       are handled on a net 30 basis.


       RESEARCH  AND  DEVELOPMENT  COSTS - Research  and  development  costs are
       expensed as  incurred.  No  expenses  were  recorded  for the years ended
       December 31, 2001 and 2000.

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

       STOCK BASED  COMPENSATION - On January 1, 1996, the Company  adopted SFAS
       123, Accounting for Stock Based  Compensation.  As permitted by SFAS 123,
       the Company has chosen to apply APB Opinion No. 25,  Accounting for Stock
       Issued to Employees  (APB 25) and related  interpretations  in accounting
       for its Plans.  The pro forma  disclosures  of the impact of SFAS 123 are
       described in Note 12 of the financial statements.

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

       Effective  June 30,  2001,  the Company  adopted the  provisions  of EITF
       00-19,  "Accounting for Derivative Financial  Instruments Indexed to, and
       Potentially  settled in, a Company's Own Stock". This issue provides that
       warrants to purchase  common shares which are  outstanding  and for which
       the number of authorized but unissued  shares is  insufficient to satisfy
       the maximum  number of shares that could be required upon the exercise of
       such warrants,  then the contract is reclassified from equity to an asset
       or liability.  The effect of the application of this  pronouncement  that
       requires  asset or  liability  classification  for those  contracts  that
       existed as of June 30, 2001, would be calculated as of June 30, 2001, and
       presented on that date as a cumulative  effect of a change in  accounting
       principle. At June 30, 2001, $2,863,760 was reclassified from equity to a
       liability and mark-to-market adjustment of $2,598,813 was recorded as the
       cumulative effect of a change in accounting principle. For the year ended
       December 31, 2001, a total  mark-to-market  adjustment of $4,492,665  was
       recorded as income on equity warrant  liability for those  contracts that
       existed as of December 31, 2001.

       The  Company  has  adopted  the  provisions  of FASB  Statement  No.  138
       "Accounting for Certain  Derivative  Instruments and Hedging  Activities,
       (an  amendment  of FASB  Statement  No.  133.)"  Because  the Company had
       adopted the provisions of FASB Statement No. 133, prior to June 15, 2000,
       this statement is effective for all fiscal quarters  beginning after June
       15, 2000.  The adoption of this  principle had no material  effect on the
       Company's financial statements.

       The  Company  has  adopted  the  provisions  of FASB  Statement  No.  140
       "Accounting   for  Transfers  and  Servicing  of  Financial   Assets  and
       Extinguishments  of  Liabilities  (a  replacement  of FASB  Statement No.
       125.)" This  statement  provides  accounting  and reporting  standard for
       transfers  and  servicing  of  financial  assets and  extinguishments  of
       liabilities.  Those  standards are based on consistent  application  of a
       financial-components   approach  that  focuses  on  control.  Under  that
       approach,  the transfer of financial assets,  the Company  recognized the
       financial and  servicing  assets it controls and the  liabilities  it has
       incurred,   derecognizes   financial   assets   when   control  has  been
       surrendered,   and  derecognizes  liabilities  when  extinguished.   This
       statement provides consistent  standards for distinguishing  transfers of
       financial   assets  that  are  sales  from  transfers  that  are  secured
       borrowings.  This  statement is effective  for transfers and servicing of
       financial assets and extinguishments of liabilities occurring after March
       31,   2001.   This   statement   is   effective   for   recognition   and
       reclassification   of  collateral   and  for   disclosures   relating  to
       securitization  transactions and collateral for fiscal years ending after
       December  15,  2000.  The  adoption  of this  principle  resulted  in the
       re-establishment  of $163,605 in accounts  payable written off during the
       year.

                                      F-8
<PAGE>

       The  Company  has adopted  the  provisions  of SFAS No.'s 141,  "Business
       Combinations," and SFAS No. 142, "Goodwill and Other Intangible  Assets."
       SFAS No. 141 is effective as to any business combination  occurring after
       June 30, 2001 and certain  transition  provisions that affect  accounting
       for business  combinations prior to June 30, 2001 are effective as of the
       date that SFAS No. 142 is applied in its entirety,  which will be January
       1, 2002 for the Company. SFAS No. 142 is effective,  generally, in fiscal
       years  beginning  after December 15, 2001,  which will be the fiscal year
       ending December 31, 2002 for the Company.

       SFAS No. 141 provides standards for accounting for business combinations.
       Among  other  things,  it  requires  that  only the  purchase  method  of
       accounting  be used and that  certain  intangible  assets  acquired  in a
       business  combination  (i.e.  those that result from contractual or other
       legal  rights  or are  separable)  be  recorded  as an asset  apart  from
       goodwill. The transition provisions require that an assessment be made of
       previous business combinations and, if appropriate,  reclassifications be
       made to or from  goodwill to adjust the  recording of  intangible  assets
       such  that the  criteria  for  recording  intangible  assets  apart  from
       goodwill is applied to the previous business combinations.

       SFAS No. 142 provides,  among other things,  that goodwill and intangible
       assets with indeterminate lives shall not be amortized. Goodwill shall be
       assigned  to a  reporting  unit and  annually  assessed  for  impairment.
       Intangible  assets with  determinate  lives shall be amortized over their
       estimated useful lives,  with the useful lives  reassessed  continuously,
       and shall be assessed for  impairment  under the  provisions  of SFAS No.
       121,  "Accounting  for  the  Impairment  of  Long-Lived  Assets  and  for
       Long-Lived  Assets to be  Disposed  Of."  Goodwill is also  assessed  for
       impairment  on an interim  basis when events and  circumstances  warrant.
       Upon  adoption  of SFAS No.  142,  the  Company  will  assess  whether an
       impairment  loss should be recognized  and measured by comparing the fair
       value of the "reporting unit" to the carrying value,  including goodwill.
       If the carrying  value exceeds fair value,  then the Company will compare
       the implied fair value of the  goodwill"  (as defined in SFAS No. 142) to
       the  carrying  amount  of the  goodwill.  If the  carrying  amount of the
       goodwill  exceeds  the  implied  fair value,  then the  goodwill  will be
       adjusted to the implied fair value.

       While the Company has not completed the process of determining the effect
       of this new accounting  pronouncement  on its financial  statements,  the
       Company  currently  expects  that  the  effect  of  SFAS  No.  142 on the
       Company's financial  statements,  when it becomes effective,  will not be
       significant.

       On August 16,  2001,  the  Financial  Accounting  Standards  Board (FASB)
       issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which
       is effective for fiscal years  beginning after June 15, 2002. It requires
       that obligations  associated with the retirement of a tangible long-lived
       asset be recorded as a liability  when those  obligations  are  incurred,
       with the amount of the liability  initially  measured at fair value. Upon
       initially  recognizing a liability for an accrued retirement  obligation,
       an entity  must  capitalize  the cost by  recognizing  an increase in the
       carrying amount of the related long-lived asset. Over time, the liability
       is accreted to its present value each period, and the capitalized cost is
       depreciated over the useful life of the related asset. Upon settlement of
       the  liability,  an entity either settles the obligation for its recorded
       amount or incurs a gain or loss upon  settlement.  While the  Company has
       not  completed  the  process  of  determining  the  effect  of  this  new
       accounting  pronouncement  on  its  financial  statements,   the  Company
       currently  expects  that  the  effect  of SFAS No.  143 on the  Company's
       financial statements, when it becomes effective, will not be significant.

       On October 3, 2001,  the FASB issued SFAS No.  144,  "Accounting  for the
       Impairment  or Disposal of  Long-Lived  Assets"  which is  effective  for
       financial statements issued for fiscal years beginning after December 15,
       2001 and, generally, its provisions are to be applied prospectively. SFAS
       144  supercedes  SFAS  Statement No. 121 (FAS 121),  "Accounting  for the
       Impairment of Long-Lived  Assets and for Long-Lived Assets to Be Disposed
       Of." SFAS 144 applies to all long-lived  assets  (including  discontinued
       operations) and consequently  amends Accounting  Principles Board Opinion
       No. 30 (APB 30),  "Reporting Results of Operations  Reporting the Effects
       of Disposal of a Segment of a Business."

       SFAS 144 develops one  accounting  model (based on the model in SFAS 121)
       for  long-lived  assets that are to be  disposed  of by sale,  as well as
       addresses the  principal  implementation  issues.  SFAS 144 requires that
       long-lived  assets  that are to be disposed of by sale be measured at the
       lower of book  value or fair value  less cost to sell.  That  requirement
       eliminates  the  requirement  of APB 30 that  discontinued  operations be
       measured  at  net  realizable   value  or  that  entities  include  under
       "discontinued   operations"  in  the  financial  statements  amounts  for
       operating  losses  that  have  not yet  occurred.  Additionally,  FAS 144
       expands the scope of discontinued operations to include all components of
       an entity with operations that (1) can be distinguished  from the rest of
       the entity and (2) will be eliminated from the ongoing  operations of the
       entity in a disposal transaction.

                                      F-9
<PAGE>

       While the Company has not completed the process of determining the effect
       of this new accounting  pronouncement  on its financial  statements,  the
       Company  currently  expects  that  the  effect  of  SFAS  No.  144 on the
       Company's financial  statements,  when it becomes effective,  will not be
       significant.

       LONG-LIVED  ASSETS - In accordance  with SFAS No. 121 "Accounting for the
       Impairment of Long-Lived  Assets and for Long-Lived Assets to Be Disposed
       Of",  long-lived  assets are evaluated for impairment  whenever events or
       changes in  circumstances  indicate that the carrying  amount of an asset
       may not be recoverable. Any changes in estimated useful life are recorded
       prospectively  and any impairment  adjustments are recorded as expense in
       the period the impairment occurs. The amount of any impairment considered
       necessary  would be  determined  by comparing  the book  available at the
       time,  depending on the stage of  development of the line of business and
       the  Company's  intentions  at the  time an  impairment  adjustment  were
       considered necessary.

       ADVERTISING  - The Company  follows  the policy of charging  the costs of
       advertising to expense as incurred.  STOCK OPTIONS - As permitted by FASB
       Statement 123 "Accounting for Stock Based  Compensation"  (SFAS No. 123),
       the Company elected to measure and record  compensation  cost relative to
       employee  stock option costs in  accordance  with  Accounting  Principles
       Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and
       related  interpretations and make proforma  disclosures of net income and
       earnings per share as if the fair value method of valuing  stock  options
       had been applied.  Under APB Opinion 25,  compensation cost is recognized
       for stock options granted to employees when the option price is less than
       the market price of the underlying common stock on the date of grant.

       VALUATION OF OPTIONS AND WARRANTS - The valuation of options and warrants
       granted to unrelated  parties for services are measured as of the earlier
       (1) the date at which a commitment for performance by the counterparty to
       earn the equity instrument is reached or (2) the date the  counterparty's
       performance is complete.  Pursuant to the requirements of EITF 96-18, the
       options and warrants  will  continue to be revalued in  situations  where
       they are granted prior to the completion of the performance.

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.  Since  inception  in January,  1993  through
       December 31, 2001 of  $36,948,900,  and continues to suffer cash flow and
       working  capital  shortages.  As of December 31, 2001,  the Company had a
       negative net working capital of approximately  $1,280,000.  These factors
       taken  together  with the lack of sales and the  absence  of  significant
       financial commitment raises substantial doubt about the Company's ability
       to continue as a going concern.

       The Company has focused on attempting to obtain the necessary  capital to
       maintain its operations. Additionally, the Company has narrowed its sales
       efforts to those which it believes have the best chance of closing in the
       near term.  In the first  quarter of 2002,  the  Company  received  gross
       proceeds from private  placements of convertible  debt totaling  $400,000
       and Series D Convertible  Preferred Stock totaling  $54,000.  These funds
       should  enable the Company to operate  for the next few months,  however,
       additional  financing  will be  necessary to sustain our  operations  and
       achieve  our  business  plan.  The Company is  attempting  to obtain such
       additional  financing.  Management is also  actively  seeking one or more
       strategic investors.  The Company has also received orders to provide its
       DigiKnow Digital Education System to an Ohio school.  However,  there can
       be no assurance as to the receipt or timing of revenues  from  operations
       including  revenues from these  contracts or that management will be able
       to find a strategic investor or secure the additional financing necessary
       to sustain operations or achieve its business plan.

       The ability of the Company to  continue as a going  concern is  dependent
       upon its ability to  successfully  accomplish  the plan  described in the
       preceding  paragraph and eventually  attain  profitable  operations.  The
       accompanying  financial  statements do not include any  adjustments  that
       might be  necessary  if the  Company  is  unable to  continue  as a going
       concern.

4.     DISCONTINUED SEGMENT

       In February 1998, the Company decided to scale back its CD-ROM segment to
       a maintenance mode of operations.  The Company developed a formal plan of
       disposal that became  effective in May 1998.  The segment had revenues of

                                      F-10
<PAGE>

       $-0- and $70,070 in 2001 and 2000,  respectively.  In February,  2001 the
       Company sold the assets of its CD-ROM segment for 20 preferred  shares of
       the buyer,  which are  convertible to common shares on a scheduled  basis
       over a two-year  period.  As the  Company  had written the assets of this
       segment  down to zero,  and the fair  value of the shares of the buyer is
       not currently determinable, no gain or loss on this sale was recorded.

5.     INVENTORY

       Inventory at December 31, 2001 and 2000, consists of:

                                                                  2001
                                                            ----------------
       Raw materials                                          $1,690,564
       Finished goods                                            731,020
                                                              -----------
                                                               2,421,584
       Reserve for lower of cost or market                      (237,250)
                                                              -----------
                                                              $2,184,334
                                                              ===========

       During  2001,  the  Company  wrote  inventory  down to an  estimated  net
       realizable value. This write down amounted to $237,250 in 2001. The write
       down  results from a lower of cost or market  valuation on certain  parts
       and finished goods.

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, 2001,
       are as follows:

                                                                  2001
                                                            ----------------
       Property and equipment                                 $ 481,003
       Accumulated depreciation                                (228,717)
                                                              -----------
       Property and equipment, net                            $ 252,286
                                                              ===========

       Depreciation   expense  in  2001  and  2002  was  $56,789  and   $52,877,
       respectively.  During  the year  equipment  was  purchased  to be used in
       connection with multi-housing market projects. The Company has terminated
       these  projects due to the high cost of purchasing  the equipment and the
       relatively  slow expected  return on investment.  The Company  recorded a
       loss on disposable  of fixed assets of $365,383 in connection  with these
       projects.


7.     INCOME TAXES

       The tax effects of  temporary  differences  giving rise to the  Company's
       deferred tax assets  (liabilities)  at December 31, 2001 and 2000, are as
       follows:

                                                    2001             2000
                                              ----------------------------------
       Current:
             Inventory reserve                     90,000           286,000
             Other                                 53,000            56,000
                                                -----------       ----------
                                                  143,000           342,000
       Valuation allowance for net current
       deferred tax assets                       (143,000)         (342,000)
                                                -----------       -----------
          Total net current deferred tax asset   $   - -           $    - -
                                                ===========       ===========

                                      F-11
<PAGE>

       Noncurrent:
          Net operating loss and research
          credit carryforwards                 $ 12,323,000      $10,717,000
          Stock based compensation                  819,000          879,000
          Property and equipment                     (8,000)          (5,000)
                                               -------------     ------------
                                                 13,134,000       11,591,000
       Valuation allowance for net noncurrent
       deferred tax assets                      (13,134,000)     (11,591,000)
                                               -------------     ------------
          Total net noncurrent deferred tax
          asset                                $      - -        $     - -
                                               =============     ============

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

       In 2001 and 2000, income tax expense allocated to discontinued operations
       was $-0- and $13,000 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:

                                                       2001            2000
                                                  --------------   -------------
       Computed "expected" tax (benefit)          $(1,312,000)     $(1,798,000)
       State income tax (benefit), net of federal
       income tax benefit                            (105,000)        (209,000)
       Change in valuation allowance                1,344,000        1,949,000
       Permanent differences and other                 73,000           58,000
                                                  --------------   -------------
                                                  $     - -          $     - -
                                                  ==============   =============

       At December 31, 2001,  the Company has  approximately  $32,302,000 of net
       operating loss carryforwards which in certain  circumstances could become
       limited due to a change in control. These amounts are available to reduce
       the Company's  future taxable income and expire in the years 2008 through
       2021.

8.     COMMON STOCK WARRANTS

       1996 WARRANTS

       In the  second  quarter  of 1996,  the  Company  sold  units in a private
       placement  offering  to  outside  investors.   In  connection  with  this
       placement,  the agent  received  warrants  to purchase  35,556  shares of
       common  stock  at  $10.31  per  share.  The  1998,  1999,  2000  and 2001
       convertible debenture issuances triggered the antidilution  provisions of
       the 1996 warrant  agreement.  An  additional  29,820  warrants  have been
       issued and the exercise  price has been lowered to $5.61.  These warrants
       expire in July 2002. Pursuant to the terms of these warrants,  additional
       shares  were to be issued upon  exercise  and the  exercise  price of the
       related  warrants was lowered.  The total value of the warrants  remained
       constant, therefore, no accounting entry was required.

       1997 WARRANTS

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

       1999 WARRANTS

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

       In June 1999,  the  Company  received  $500,000 in bridge  financing.  In
       connection with this placement,  the agent received  warrants to purchase
       100,000  shares of common at $1.50 per share which were repriced to $0.94
       per share in April 2000.  The fair value of the warrants  was  determined
       using  the   Black-Scholes   option  pricing  model  with  the  following

                                      F-12
<PAGE>

       assumptions:  risk-free  interest  rate of 7.00%,  expected  dividends of
       zero,  volatility of 188.09% and expected lives of up to three years. The
       Company recorded loan cost and additional paid in capital for the $16,300
       for the fair value of the  repricing  of these  warrants to be  amortized
       over the life of the related debt. These warrants expire in April 2003.

       In October and November 1999, the Company placed $110,000 and $204,980 of
       4% and 8% convertible debentures,  respectively. In connection with these
       placements,  the agent  received  warrants to purchase  250,000 shares of
       common  stock at $0.586 per share.  The  Company  recorded  loan cost and
       additional  paid in capital for the $75,000 fair value of these  warrants
       to be amortized over the life of the related debt.  These warrants expire
       in September 2002.

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

       2000 WARRANTS

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

       In April 2000, the Company received $125,000 in short-term financing from
       an individual  who later became a member of the Board of Directors  (Note
       10). In connection  with this note, the individual  received a warrant to
       purchase  125,000  shares  of  common at $0.20  per  share.  The  Company
       allocated  $59,291 of the net  proceeds  to the  warrants  based on their
       relative  fair value by recording  debt discount and  additional  paid in
       capital.  These  warrants  expire in April  2002.  The fair  value of the
       warrants was determined using the Black-Scholes option pricing model with
       the following  assumptions:  risk-free  interest rate of 7.00%,  expected
       dividends of zero,  volatility of 188.09% and expected lives of up to two
       years.

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

       2001 WARRANTS

       In the first quarter of 2001, the Company consummated a private placement
       of 23 shares of Series B  Redeemable  Convertible  Preferred  Stock.  The
       preferred  stock  is  convertible  into  shares  of  common  stock  at  a
       conversion price equal to $0.025 per share,  subject to availability,  at
       any time during the two years  following  execution  of the  subscription
       agreements.  Warrants to purchase  one share of common stock for each two
       shares of common stock issued upon conversion of this tranche of Series B
       Preferred  Stock were  included.  These  warrants to  purchase  4,600,000
       shares of common  stock have an exercise  price of $.10 per share and are
       exercisable for a two year period  following the date that the last share
       of the Series B Redeemable  Convertible Preferred Stock is converted into
       common  stock.  The Company  allocated  $132,000  of the  proceeds to the
       warrants  based on their  relative fair value.  The value of the warrants
       was  determined  using the  Black-Scholes  option  pricing model with the
       following  assumptions:   risk-free  interest  rate  of  6.77%,  expected
       dividends  of zero,  volatility  of 219.79% and  expected  lives of up to
       three years.  The Company will record  accretion as of the effective date
       of conversion.

       On June 14,  2001,  the  Company  entered  into an Equity  Line of Credit
       pursuant in which the Company may, at its discretion,  periodically  sell
       to the Investor  shares of common stock for a total  purchase price of up
       to $10.0  million.  (Note 10) For each  share of common  stock  purchased
       under the Equity Line of Credit, the Investor will pay 82% of the average
       of the 3 lowest  closing  bid prices on which our common  stock is traded
       for the 5 days  immediately  following  the notice date.  The  consultant
       received  warrants to  purchase  3,500,000  shares of common  stock at an
       exercise  price of $0.10 The fair value of these warrants was recorded as
       a equity  placement  fee.  The  value of the  warrants,  $1,363,975,  was
       determined  using  the  Black-Scholes   option  pricing  model  with  the
       following  assumptions:   risk-free  interest  rate  of  7.00%,  expected
       dividends of zero, volatility of 278.99% and expected lives of up to five

                                      F-13
<PAGE>

       years. These warrants expire in June 2006. In accordance with EITF 00-19,
       the Company has recorded an equity  warranty  liability of  $1,363,975 in
       connection  with these  warrants.  As the  number of shares  which may be
       issued upon conversion of the convertible debentures is indeterminate,  a
       sufficient number of authorized but unissued shares may not be available.
       As a result,  the Company has  recorded a  mark-to-market  adjustment  of
       $1,297,896 in 2001,  which has been reflected as income on equity warrant
       liability.  In January,  2002 the Company  terminated  the Equity Line of
       Credit due to delays in getting related shares registered and in order to
       pursue other types of financing  arrangements.  As a result the remaining
       unamortized   portion  of  the  equity   placement  fee  was  immediately
       recognized as amortization expense.

       In  August  2001,  the  Company  placed   $1,586,000  of  4%  convertible
       debentures.  In  connection  with  this  placement,  the  agent  received
       warrants to purchase 2,500,000 shares of common stock at $0.10 per share.
       The warrants  issued were for  consulting  fees in  conjunction  with the
       issuance of the  debentures  and are accounted for as a cost of financing
       to be amortized over the 5 year life of the debentures.  The value of the
       warrants, $344,951, was determined using the Black-Scholes option pricing
       model with the following  assumptions:  risk-free interest rate of 7.00%,
       expected  dividends of zero,  volatility of 207.44% and expected lives of
       up to five years.

       In  September  2001,  Celerity  issued  warrants to  Internet  Finance to
       purchase  500,000  shares of Celerity  common stock.  These warrants were
       charged to operations as consulting  expense.  The value of the warrants,
       $48,978, was determined using the Black-Scholes option pricing model with
       the following  assumptions:  risk-free  interest rate of 4.00%,  expected
       dividends  of zero,  volatility  of 279.34% and  expected  lives of up to
       three years.  One-half of these  warrants have an exercise price of $0.15
       per share and  one-half  have an  exercise  price of $0.25 per share.  In
       addition,  Celerity is obligated to issue to Internet Finance warrants to
       purchase  additional  shares of common stock if Celerity is successful in
       obtaining  financing  arranged by Internet Finance.  For each $500,000 of
       capital  received by Celerity,  Internet Capital will receive warrants to
       purchase  250,000  shares of common  stock at $0.15 per  share.  Internet
       Finance will also receive cash compensation of 2.5% of all funds received
       by Celerity under the contract.

       During 2001, the Company received $54,000 in short-term financing from an
       individual  who is a member  of the  Board of  Directors  (Note  10).  In
       connection with these notes, the individual received warrants to purchase
       54,000 shares of common at $0.20 per share.  These  warrants were charged
       to operations as interest expense. The value of the warrants, $5,375, was
       determined  using  the  Black-Scholes   option  pricing  model  with  the
       following  assumptions:  risk-free  interest  rate  of  4.00%  or  7.00%,
       expected  dividends of zero,  volatility range of 207.57% and 213.81% and
       expected lives of up to two years These warrants expire between  February
       and September, 2003.

9.     ACCOUNTS, NOTES AND WAGES CONVERSION

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

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

       NOTES PAYABLE - RELATED PARTY

       In April 2000, the Company received $195,000 from an individual who later
       became a member of the Company's  Board of Directors.  The note is due in
       April 2002 and bears  interest at 9%. In addition,  warrants  were issued
       with a fair value of $59,291.  The unamortized  debt discount  associated
       with these warrants is $7,411 and is shown as a reduction of the $125,000
       note outstanding at December 31, 2001.

       LONG TERM DEBT

       In October and November 1998,  the Company  placed  $450,000 of 7% notes.
       Each note  holder is entitled to  royalties  of fifty cents per  $100,000
       invested (pro rated for lesser  investments)  for each T 6000 set top box
       sold  during a period of up to five  years.  Of the total  notes  placed,
       $300,000 were  converted  into common stock upon the closing of a private
       offering in the first half of 2000 (included in note 9) and the remainder
       are due in October 2001.  There was $150,000  outstanding at December 31,
       2001 and 2000. On October 27, 2001, the Company defaulted on payments due

                                      F-14
<PAGE>

       of $150,000, plus accrued interest, on the royalty notes payable. Written
       demand has been received from one of the two note holders. The Company is
       seeking to make arrangements with these note holders.

       In January,  February  and March 1999,  the  Company  sold  $600,000 in a
       private placement offering to outside investors. Investors in the private
       placement  received 9%  convertible  debentures  with a principal  amount
       equal  to the  amount  of the  investment  and a term of two  years.  The
       debentures  are  convertible  into the Company's  common stock at a price
       equal to the lesser of (i ) 75% of the  average  closing bid price of the
       common  stock  for  the  five  days  immediately  preceding  the  date of
       conversion, or (ii) four times the five-day average closing bid price for
       the five days immediately  preceding the date of closing. The Company may
       redeem  the  debentures  at prices  that  range  from 115% to 125% of the
       principal amount,  plus accrued  interest.  The debentures are subject to
       mandatory conversion upon maturity. At December 31, 2001, $590,000 of the
       debentures  had  converted to shares of common stock and $10,000 had been
       redeemed.  At  December  31, 2001 and 2000,  there was $-0- and  $300,000
       outstanding of these 9% debentures, respectively.

       In November and  December  1999,  the Company sold  $314,980 in a private
       placement  offering  to  outside  investors.  Investors  in  the  private
       placement  received 4% convertible  debentures with a principal amount of
       $110,000  and 8%  convertible  debentures  with  a  principal  amount  of
       $204,980, both with a term of three years. The debentures are convertible
       into the  Company's  common  stock  at a price  equal,  at the  Debenture
       holders option,  either, (i ) 65% of the average closing bid price of the
       common  stock  for  the  five  days  immediately  preceding  the  date of
       conversion,  or (ii) $0.75 cents per share for the 4% debentures or $0.50
       per  share  for the 8%  debentures.  The  Company  filed  a  Registration
       Statement  that became  effective  within 90 days of the Closing Date The
       Company  has the  right  to  redeem  in part or in full  any  outstanding
       debentures at 135% of the principal amount,  plus accrued  interest.  The
       debentures are subject to mandatory conversion upon maturity. At December
       31, 2001,  $314,980 of the  debentures  had converted to shares of common
       stock.  At  December  31,  2001 and  2000,  there  was  $-0- and  $49,599
       outstanding of these debentures, respectively.

       The Company issued $629,980 aggregate  principal amount of 8% convertible
       debentures in the first quarter of 2000.  The  Debentures  have a term of
       three years and are  convertible  into the  Company's  common  stock at a
       price,  at the  option  of the  holder,  equal to  either  (I) 75% of the
       average  closing bid price of the common  stock for the five trading days
       immediately preceding  conversion,  or (ii) $1.50 per share. Celerity may
       redeem the  debentures  at a  redemption  price of 125% of the  principal
       amount, plus accrued interest.  All outstanding principal and interest is
       subject to mandatory  conversion three years after issuance.  At December
       31, 2001,  $629,980 of the  debentures  had converted to shares of common
       stock and $-0- remained outstanding.

       EQUITY LINE OF CREDIT

       Effective September 30, 1999, the Company entered into $5,000,000 Line of
       Credit  Agreement.  Pursuant to the Line of Credit  Agreement the Company
       could issue and sell up to $5,000,000  principal amount of 4% Convertible
       Debentures  during  a  period  beginning  on  the  effective  date  of  a
       registration   statement   covering  the  common  stock   underlying  the
       Convertible  Debentures and ending  September 30, 2000. The amount of the
       drawdown is subject to the satisfaction of certain conditions,  including
       conditions  relating to the trading volume of the Company's  common stock
       and is limited to a maximum of $500,000  per calendar  month.  During the
       period ended September 30, 2000, the Company had issued $550,000 of these
       debentures.  On October  16,  2000 the  agreement  was renewed for a term
       ending October 31, 2001 and the maximum amount of debentures which may be
       issued was increased to a cumulative $10,000,000. On October 31, 2001 the
       agreement  was renewed for an additional  term ending  December 31, 2001.
       Between the initial  renewal date and December 31, 2001,  the Company has
       issued $6,141,000 of additional debentures.

       The  Company  issued   $5,686,000   aggregate   principal  amount  of  4%
       convertible  debentures  in  2001  and  $1,005,000  in  2000  under  this
       agreement.  The debentures  have a term of five 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.  As of December 31,
       2001,  $1,715,000  of the  debentures  had  converted to shares of common
       stock and  $540,000  had been  redeemed.  At December  31, 2001 and 2000,
       there was  $4,436,000  and $300,000  outstanding  of these 4% debentures,
       respectively.

       On June 14,  2001,  the  Company  entered  into an Equity  Line of Credit
       pursuant to which the Company may, at its discretion,  periodically  sell
       to the Investor  shares of common stock for a total  purchase price of up
       to $10.0 million. (Note 8) For each share of common stock purchased under
       the Equity Line of Credit,  the  Investor  will pay 82% of the average of
       the 3 lowest  closing bid prices on which our common  stock is traded for

                                      F-15
<PAGE>

       the 5 days  immediately  following the notice date.  Unless waived by the
       Investor,  the amount of each  advance  is  subject to a maximum  advance
       amount based on an average  daily volume of the  Company's  common stock.
       Celerity may request an advance every ten trading days. A consulting  fee
       of 10% of each  advance will be paid upon closing each of the sales under
       this  agreement.  The  Company  has not drawn  any  advances  under  this
       agreement at December 31, 2001.

       In January, 2002 the Company terminated the Equity Line of Credit entered
       into on June 14, 2001 due to delays in getting related shares  registered
       and in order  to  pursue  other  types of  financing  arrangements.  As a
       result,  we do not have an  effective  registration  statement  including
       common shares to be issued in connection with certain  debentures  issued
       in 2001 under the 1999 Line of Credit  Agreement.  We are required to pay
       liquidated  damages in the form of increased  interest on the convertible
       debentures  as a result of our  failure  to time  file such  registration
       statement and have it declared  effective by the  Securities and Exchange
       Commission.  We have accrued $626,400 as additional  interest expense for
       this item.

       BENEFICIAL CONVERSION FEATURES OF DEBT

       The Company  recognized a beneficial  conversion  feature for the various
       convertible  debentures  issued  in  2001  and  2000 as  discount  on the
       convertible  debentures and as additional paid-in capital.  This discount
       of  $2,151,794  and  $651,104  for 2001 and  2000  respectively,  will be
       amortized  as a  non-cash  interest  expense  over the  five-year  period
       between the date of issuance of the convertible  debentures to the stated
       redemption  date of the debentures.  Upon conversion  prior to the stated
       date of redemption  the  remaining  unamortized  discount is  immediately
       recognized as a non-cash  interest  expense.  Non-cash  interest  expense
       amounted to $575,224 and  $712,550 for the years ended  December 31, 2001
       and 2000, respectively.

       CAPITAL LEASE OBLIGATIONS

       In  April  1998,  the  Company  incurred  capital  lease  obligations  of
       approximately  $259,000  for  certain  equipment.   Monthly  payments  of
       principal  and interest of $9,541 were due through 2001 with $82,628 past
       due at December 31,  1999.  The  equipment  was returned to the lessor as
       part of the relocation of the Company's  facilities (Note 6). The Company
       agreed  to a final  settlement  in 2001  which  resulted  in a gain  from
       cancellation of debt in the amount of $71,864.  This item is reflected as
       an  extraordinary  item on the  Statement of  Operation.  At December 31,
       2001, $-0- was outstanding.

       The  maturities of the Company's  long-term debt as of December 31, 2001,
       are as follows:

        2001                                          $150,000
        2002                                               -0-
        2003                                               -0-
        2004                                               -0-
        2005                                               -0-
        2006                                         4,436,000
                                                    -----------
                                                     4,586,000
                             Less debt discount     (1,605,832)
                           Less current portion       (150,000)
                                                    ------------
       Total long-term debt and capital lease
       obligations                                  $2,830,168
                                                    ============

11.    PREFERRED STOCK

       REDEEMABLE CONVERTIBLE PREFERRED STOCK

       SERIES A

       In August 2000, the Company  consummated a private placement of 41 shares
       of Series A redeemable convertible preferred stock, at $10,000 per share,
       resulting in net proceeds of approximately $369,000. In addition warrants
       with a fair value of $200,000 were issued to the placement agent and were
       recorded as a cost of the offering.

                                      F-16
<PAGE>

       The  preferred  stock is  convertible  into  shares of common  stock at a
       conversion  price  equal to the lesser of (i) $1.40 per share or (ii) 75%
       of the average closing bid price of the common stock for the five trading
       days  immediately  preceding the date of conversion.  The preferred stock
       became  convertible no earlier than 90 days from its issuance or the date
       of effectiveness of a registration statement registering the common stock
       into which the preferred  stock is  convertible.  All shares of preferred
       stock  outstanding on August 31, 2002 convert into shares of common stock
       as if holders of such shares had delivered a conversion  notice effective
       at such  date.  27.285  and  13.715  shares of the  preferred  stock were
       converted to shares of common stock during the twelve month period ending
       December 31, 2000 and 2001,  respectively.  At December  31, 2001,  $0.00
       face value of the preferred stock remained outstanding.

       The holders of two-thirds of the Preferred  Stock can require the Company
       to  redeem  their  shares  upon the  occurrence  of any of the  following
       events: (a) a merger where the Company is not the surviving entity, (b) a
       sale of all or  substantially  of the  Company's  assets,  (c) failure to
       maintain an effective  registration  statement,  or (d) failure to comply
       with certain other  covenants.  The amount  payable upon such  redemption
       ranges from liquidation value to a premium of up to 120%. The Company, at
       its option,  can redeem the  Preferred  Stock upon payment of 125% of the
       liquidation  value.  In 2000, the Company  accreted the carrying value of
       its  Preferred  Stock  to 120% of  liquidation  value by  increasing  the
       accumulated  deficit  by  $298,966.  As  the  remaining  preferred  stock
       converted in 2001, there was no accretion recorded.

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

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

       SERIES B


       In the first quarter of 2001, the Company consummated a private placement
       of 23 shares of Series B Redeemable Convertible Preferred Stock resulting
       in gross  proceeds  of  $230,000.  The Stock  provides  for  preferential
       dividends  at an annual rate of 8%. The  preferred  stock is  convertible
       into  shares of common  stock at a  conversion  price equal to $0.025 per
       share,  subject  to  availability,  at any  time  during  the  two  years
       following  execution of the subscription  agreements.  Should there be an
       insufficient  number of shares of common stock  available at the time the
       preferred stock is offered for conversion, the conversion period shall be
       extended by the number of days between the  conversion  date and the date
       common  shares  become  available.  Two years from the original  issuance
       date,  the  Company  shall  offer to redeem  such  preferred  shares then
       outstanding at a price equal to the original  issuance price plus accrued
       dividends.  Warrants to purchase  one share of common  stock for each two
       shares of common stock issued upon conversion of this tranche of Series B
       Preferred  Stock were included.  These warrants are exercisable for a two
       year  period  following  the date  that the  last  share of the  Series B
       Redeemable Convertible Preferred Stock is converted into common stock and
       have an exercise price of $.10 per share. The company allocated  $132,000
       of the proceeds to the warrants  based on their  relative fair value.  As
       this Series B is considered  perpetual preferred stock,  accretion of the
       $132,000  is  reflected  over the period from the date of issuance to the
       earliest  conversion  date resulting in full  accretion  during 2001. The
       resulting $98,000  beneficial  conversion  feature of the preferred stock
       will be reflected as a dividend and also amortized fully in 2001.

       The Company also consummated an additional private placement of 72 shares
       of Series B Convertible  Preferred  Stock  resulting in gross proceeds of
       $720,000,  and issued an additional 5 shares having a value of $50,000 as
       payment  for  certain  accounts  payable  and  accrued  wages.  The Stock
       provides  for  preferential  dividends  at an  annual  rate  of  8%.  The
       preferred  stock  is  convertible  into  shares  of  common  stock  at  a
       conversion price equal to $0.025 per share,  subject to availability,  at
       any time during the two years  following  execution  of the  subscription
       agreements.  The  beneficial  conversion  feature  of  $679,654  will  be
       reflected  as a  dividend  from  the  date of  issuance  to the  earliest
       conversion  date.  Should  there be an  insufficient  number of shares of
       common  stock  available at the time the  preferred  stock is offered for
       conversion, the conversion period shall be extended by the number of days
       between the conversion date and the date common shares become  available.
       Two years from the  original  issuance  date the  Company  shall offer to
       redeem such  preferred  shares then  outstanding  at a price equal to the
       original issuance price plus accrued  dividends.  The Company will record
       accretion up to the redemption  value in the period from date of issuance
       to the earliest conversion date. As this Series B is considered perpetual
       preferred  stock,  accretion  of the  $770,000  is  reflected  in full as

                                      F-17
<PAGE>

       accretion during 2001. Of the 100 shares issued during 2001, 5 shares had
       converted to shares of common stock and 95 shares remained outstanding.



       SERIES C


       In the  fourth  quarter  of  2001,  the  Company  consummated  a  private
       placement of 6 shares of Series C Redeemable  Convertible Preferred Stock
       resulting  in  gross   proceeds  of  $60,000.   The  Stock  provides  for
       preferential  dividends at an annual rate of 8%. The  preferred  stock is
       convertible  into shares of common stock at a  conversion  price equal to
       $0.04 per share,  subject  to  availability,  at any time  during the two
       years following execution of the subscription agreements. Should there be
       an  insufficient  number of shares of common stock  available at the time
       the preferred  stock is offered for  conversion,  the  conversion  period
       shall be extended by the number of days between the  conversion  date and
       the date common  shares  become  available.  Two years from the  original
       issuance date,  the Company shall offer to redeem such  preferred  shares
       then  outstanding  at a price equal to the original  issuance  price plus
       accrued  dividends.  No shares were  converted  to shares of common stock
       during 2001 and 6 remain outstanding at December 1, 2001.


       On the date of issuance of the Preferred Stock, the effective  conversion
       price was at a discount  to the price of the common  stock into which the
       Preferred Stock is convertible.  The Company  recorded a $60,000 dividend
       relative  to the  beneficial  conversion  feature.  As this  Series  C is
       considered  perpetual  preferred  stock,  amortization  of the $60,000 is
       reflected  over the  period  from the date of  issuance  to the  earliest
       conversion date, resulting in full accretion during 2001.

       The total amount that would be required for  redemption  for the Series B
       and Series C convertible preferred stock is as follows":

        2002                                                  $       --
        2003                                                   1,010,000
                                                             -------------
        Total required redemption for the Series B
        and Series C convertible preferred stock              $1,010,000
                                                             =============
12.    STOCK OPTIONS

       The Company established a stock option plan in 1995 to provide additional
       incentives  to its  officers  and  employees.  Eligible  persons  are all
       employees  employed on the date of grant.  Management may vary the terms,
       provisions and exercise price of individual  options  granted,  with both
       incentive stock options and non-qualified  options  authorized for grant.
       In 1995,  the Board of  Directors  approved the issuance of up to 178,929
       options  to  acquire  common  shares  of which  42,000  and  37,500  were
       outstanding  at December 31, 2001 and 2000,  respectively.  In 1997,  the
       Company  established an additional  stock option plan under which 200,000
       options to acquire  common shares were reserved for issuance.  There were
       options to purchase 99,938 and 159,483 shares  outstanding under the 1997
       plan at December 31, 2001 and 2000,  respectively.  In 2001,  the Company
       established  an  additional  stock  option  plan under  which  10,000,000
       options to acquire  common shares were reserved for issuance.  There were
       options to purchase  3,596,000 shares  outstanding under the 2001 plan at
       December 31, 2001.

       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,  except for the 2001 plan which vests 25% at date of grant
       and the balance ratable over three years.

                                      F-18
<PAGE>

       The Company has also granted  options to members of the  Company's  Board
       and to members of  management  which are outside the 1995 and 1997 plans.
       There were 478,200 and 499,200 of these options which remain  outstanding
       at December 31, 2001 and 2000, respectively. These options generally vest
       over 3 years and expire ten years from date of grant.

<TABLE>

                                                           2001                                  2000
                                            -------------------------------------    --------------------------------
                                                             Weighted Average                    Weighted Average
                                                 Options      Exercise Price          Options     Exercise Price
                                                 -------     ----------------         -------    ----------------
<S>                                              <C>            <C>                  <C>             <C>
        Outstanding at beginning of year           696,183        $ 0.93               715,620         $ 0.89
        Granted                                  3,661,000          0.08               143,763           0.76
        Exercised                                        -             -               (87,500)          0.59
        Forfeited                                 (141,045)         1.63               (75,700)          0.69
                                                 ----------                            --------

        Outstanding at end of year               4,216,138        $ 0.16               696,183         $ 0.93
                                                 ==========                            ========

        Options exercisable at year end          1,380,924        $ 0.31               507,407         $ 0.90
</TABLE>

       The  weighted-average  fair value per option  granted during the year was
       $0.08  and  $0.62  for the  years  ended  December  31,  2001  and  2000,
       respectively.

       The  following  table  summarizes  information  about  stock  options  at
       December 31, 2001:

<TABLE>
                                         Options Outstanding                    Options Exercisable
                                ------------------------------------------   --------------------------
                                                      Weighted-Average
                                   Number                Remaining                     Number
       Exercise Prices         Outstanding           Contractual Life               Outstanding
       ----------------------  ------------          ------------------          ------------------
<S>    <C>                     <C>                   <C>                        <C>
       $ 0.05                                             9.07                              --
                                       5,000
       $ 0.08                      3,596,000              9.86                         899,000
       $ 0.16                         55,000              9.24                              --
       $ 0.17                         20,000              8.86                           6,600
       $ 0.35                         40,000              8.80                          13,200
       $ 0.66                         15,000              7.70                          10,050
       $ 0.69                        413,400              5.42                         413,400
       $ 0.91                         15,000              8.59                           4,950
       $ 1.25                         34,349              8.59                          11,335
       $ 1.63                          1,538              6.50                           1,538
       $ 2.13                         20,000              6.02                          20,000
       $ 2.94                            851              6.35                             851
                              -----------------                               -------------------
                                   4,216,138                                         1,380,924
                              -----------------                               -------------------
</TABLE>

       The Company  recorded no compensation  expense related to options granted
       in 2001 and 2000,  as the exercise  price of the options was equal to the
       fair market  value of the  Company's  common  stock at grant  dates.  Had
       compensation  cost for the options granted been  determined  based on the
       fair value at the grant dates for awards under the Plan  consistent  with
       the method of SFAS 123, the  Company's  net loss would have been adjusted
       to the pro forma amounts indicated below at December 31:

                                       2001                       2000
                               -----------------------  ------------------------
                                  As                       As
                               Reported    Pro Forma    Reported      Pro Forma

        Net loss             $(3,731,361) $(4,010,506) $(5,287,499)  $5,377,256
        Net loss per share     $   (0.06)  $   (0.06)   $   (0.46)       (0.47)

                                      F-19
<PAGE>

       The fair value of each  option  grant is  estimated  on the date of grant
       using  the   Black-Scholes   option-pricing   model  with  the  following
       assumptions used for grants in 2001 and 2000;  risk-free interest rate of
       3.92% in 2001 and 6.77% in 2000, volatility between 205% and 268% in 2001
       and  168%  and 200% in 2000 and  expected  lives  from two to ten  years.

13.    LOSS PER SHARE

       Basic 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  343,232,333  and
       17,097,077 at December 31, 2001 and 2000, 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 earnings per share:

                                               2001              2000
                                         ---------------    ---------------
       Loss
         Basic:
           Loss attributable to common
           stockholders                   $ (4,791,361)       $(5,620,407)

       Shares
         Basic:
           Weighted-average common
           shares outstanding               63,632,359          11,465,200
                                          =============       =============

14.    CASH FLOWS

       Supplemental  disclosure  of cash flow  information  for the years  ended
       December 31, 2001 and 2000, is as follows:

                                                  2001              2000
                                               ----------       -----------
       Cash paid during the year for:
       Interest                                  $ 456             $ 849

       Noncash investing and financing activities:

       2001

       The  Company  issued  1,282,873  shares of common  stock  with a value of
       $145,528 and 5 shares of Series B Redeemable  Convertible Preferred Stock
       with a value of $50,000 as payment for certain  consulting and directors'
       fees, payroll and accounts payable items.

       The Company issued  2,400,000  shares of common stock to Artesian  Direct
       for its  commitment to purchase $10 million of the Company's  products or
       to provide $10 million of  financing.  These  shares were valued at $0.17
       per share of the date of  issuance  or  $408,000.  Based upon  Artesian's
       failure  to provide  any  funding  or any  orders as  promised  under the
       agreement and their  continuing  failure to show any  probability  of any
       orders or funding,  the Company has  demanded  the return of these shares
       and fully amortized the value as an operating expense.

       The Company converted  $1,686,349,  including  accrued  interest,  of the
       convertible debentures into 63,110,791 shares of common stock.

       The Company converted $140,911 of Series A Preferred Stock and $50,000 of
       Series B Preferred Stock into 6,360,203 shares of common stock.

       2000

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

                                      F-20
<PAGE>

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

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

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

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

15.    COMMITMENTS AND CONTINGENCIES

       The Company is a defendant  in a lawsuit  brought by a financial  printer
       for  non-payment of expenses.  The action was brought on January 30, 2001
       and is pending before  Supreme Court of the State of New York,  County of
       New York. In this action,  the plaintiff,  Merrill/New York Company,  has
       sued the Company for the  non-payment  of financial  printing fees and is
       seeking  approximately  $118,000 in damages,  plus  interest  and certain
       costs.  In 2002,  Merrill/New  York Company  obtained a summary  judgment
       against  the  Company for  $136,435.  The Company  intends to appeal this
       decision.

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

       The Company leases office space under an operating lease.  Future minimum
       lease payments by year, and in the  aggregate,  under this  noncancelable
       operating lease at December 31, 2001, are as follows:

                            2002                 60,000
                            2003                  2,500
                                               ---------
                                               $ 62,500
                                               =========

       Rent  expense  for  operating  leases was $60,000 and $56,354 in 2001 and
       2000, respectively.

16.    SUBSEQUENT EVENTS

       In January, 2002 the Company terminated the Equity Line of Credit entered
       into on June 14, 2001 (Note 10) due to delays in getting  related  shares
       registered and in order to pursue other types of financing arrangements.

       In the first  quarter of 2002,  the  Company  issued  $400,000  principal
       amount  of 4%  convertible  debentures  under its  Equity  Line of Credit
       Agreement  resulting  in net  proceeds  of  approximately  $359,250.  The
       Company  recognized a beneficial  conversion  feature for the convertible
       debentures as a discount on the convertible  debentures and as additional
       paid-in capital. This discount of $84,848 will be amortized as a non-cash
       interest  expense  over the five year period from the date of issuance to
       the stated redemption date of the debentures.

       In the first quarter of 2002, the Company consummated a private placement
       of 5.4 shares of Series D Convertible  Preferred Stock resulting in gross
       proceeds of $54,000. The Stock provides for preferential  dividends at an
       annual  rate of 8%. The  preferred  stock is  convertible  into shares of
       common stock at a conversion  price equal to $0.01 per share,  subject to

                                      F-21
<PAGE>

       availability, at any time during the two years following execution of the
       subscription agreements. Should there be an insufficient number of shares
       of common stock  available at the time the preferred stock is offered for
       conversion, the conversion period shall be extended by the number of days
       between the conversion date and the date common shares become  available.
       Two years from the original  issuance  date,  the Company  shall offer to
       redeem such  preferred  shares then  outstanding  at a price equal to the
       original issuance price plus accrued dividends.

       On the date of issuance of the Preferred Stock, the effective  conversion
       price was at a discount  to the price of the common  stock into which the
       Preferred Stock is convertible.  The Company  recorded a $54,000 dividend
       relative  to the  beneficial  conversion  feature.  As this  Series  D is
       considered  perpetual  preferred  stock,  amortization  of the $54,000 is
       reflected  over the  period  from the date of  issuance  to the  earliest
       conversion date,  resulting in full accretion during the first quarter of
       2002.

       In the first quarter of 2002, the Company consummated a private placement
       of 10 shares of Series E Convertible  Preferred  Stock resulting in gross
       proceeds of $100,000. The Stock provides for preferential dividends at an
       annual  rate of 8%. The  preferred  stock is  convertible  into shares of
       common stock at a conversion price equal to $0.001 per share,  subject to
       availability, at any time during the two years following execution of the
       subscription agreements. Should there be an insufficient number of shares
       of common stock  available at the time the preferred stock is offered for
       conversion, the conversion period shall be extended by the number of days
       between the conversion date and the date common shares become  available.
       Two years from the original  issuance  date,  the Company  shall offer to
       redeem such  preferred  shares then  outstanding  at a price equal to the
       original issuance price plus accrued dividends.

       On the date of issuance of the Preferred Stock, the effective  conversion
       price was at a discount  to the price of the common  stock into which the
       Preferred Stock is convertible.  The Company recorded a $100,000 dividend
       relative  to the  beneficial  conversion  feature.  As this  Series  E is
       considered  perpetual  preferred  stock,  amortization of the $100,000 is
       reflected  over the  period  from the date of  issuance  to the  earliest
       conversion date,  resulting in full accretion during the first quarter of
       2002.

       The  Company  is a  defendant  in a lawsuit  brought  by a  supplier  for
       non-payment  of expenses.  The action was brought on March 5, 2002 and is
       pending before  Circuit Court of the State of Tennessee,  County of Knox.
       In this action, the plaintiff, Metalade FL, Inc. has sued the Company for
       the  non-payment  of  inventory  purchases  and is seeking  approximately
       $103,000 in damages,  plus interest and certain  costs.  The Company does
       not  anticipate  any material loss from this action and intends to defend
       it vigorously.

       In the first quarter of 2002,  the Company  issued  75,895,630  shares of
       common stock for  conversion  of  convertible  debentures  and  2,644,768
       shares of common stock as payment of certain payroll and accounts payable
       items.

17.    RELATED PARTY TRANSACTIONS

       REVENUES

       On March 5, 2001,  we entered into a National  Distributor  Agreement for
       the education market with Kidston Communications, a company controlled by
       Edward Kidston, a director of our Company.  Pursuant to the terms of this
       Agreement,  Kidston  Communications is the exclusive national distributor
       in the education  market in the United States.  The term of the Agreement
       is through December 31, 2003 and will automatically  renew for additional
       three year periods  unless one party notifies the other of its intent not
       to renew at least 30 days prior to the end of the then current term.  The
       Agreement provides that Kidston Communications may purchase products from
       our Company at a five percent  discount to list price,  provided that the
       price is not  higher  than the  price  paid by other  customers  for like
       quantities  of similar  products and with similar  terms and  conditions.
       During 2001, we had sales of $87,800 to Kidston Communications.

       ACCRUED EXPENSES

       At December 31, 2001, the Company owes the President and Chief  Executive
       Officer of the Company $68,906 in unpaid payroll.

       NOTES PAYABLE

       At December 31, 2001,  the Company has an  outstanding  note payable to a
       member of the Company's Board of Directors in the amount of $125,000 (see
       Note 10).

       COMMON STOCK WARRANTS

       During  2001,  the  Company  issued  54,000  warrants  to a member of the
       Company's  Board of Directors to purchase common stock in connection with
       short-term financing (see Note 8).

       During  2001,  the Company  issued  2,400,000  warrants to members of the
       Company's  Board of Directors to purchase common stock in connection with
       the issuance of Series B Redeemable Convertible Preferred Stock (see Note
       8).

       STOCK OPTIONS

       During  2001,  the  Company  issued  2,005,000  options to members of the
       Company's Board of Directors for services (see Note 12).

                                      F-22
<PAGE>

       PREFERRED STOCK


       During  2001,  the  Company  issued 5  shares  of  Series  B  Convertible
       Preferred Stock with a value of $50,000 in lieu of payment of payroll and
       accounts  payable to the  President  and Chief  Executive  Officer of the
       Company.


18.    TREASURY STOCK

       During the year ended December 31, 2001, the Company  discovered  that it
       no longer  had  possession  of 337,364  shares of  treasury  stock.  As a
       result,  the  Company has written off the cost basis value of the shares,
       or $227,500.

                                      F-23
<PAGE>

                                    SIGNATURE

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

CELERITY SYSTEMS, INC.

<TABLE>
<S>                                        <C>                                         <C>
/S/ KENNETH D. VAN METER
Kenneth D. Van Meter                       President and Chief Executive Officer       July 15, 2002


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

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

/s/ Kenneth D. Van Meter                   President, Chief Executive Officer          July 15, 2002
------------------------------------         and Chairman of the Board
Kenneth D. Van Meter                         (Principal Executive Officer)
                                             (Principal Financial Officer)


/s/ Edward Kidston                         Director                                    July 15, 2002
------------------------------------
Edward Kidston


/s/ David Hultquist                        Director                                    July 15, 2002
------------------------------------
David Hultquist

</TABLE>