U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                                   (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, 2003

                                       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.
                             ----------------------
             (Exact name of registrant as specified 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                      (Zip Code)
         offices)

 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>

     Indicate  by check  mark  whether  the  registrant  (1) filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or 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 [ ]

     Indicate by check mark if disclosure  of  delinquent  filers in response to
Item  405 of  the  Regulation  S-X is not  contained  herein,  and  will  not be
contained,  to the best of registrant's  knowledge,  in any definitive  proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). Yes___.No___.

     The aggregate  market value of common stock held by  non-affiliates  of the
Registrant as of April 9, 2004 was approximately $3,773,759 based on the closing
price on the Over The  Counter  Bulletin  Board  market.  For  purposes  of this
computation,  shares held by certain stockholders and by directors and executive
officers of the Registrant have been excluded.  Such exclusion of shares held by
such persons is not intended,  nor shall it be deemed,  to be an admission  that
such persons are affiliates of the Registrant.  There were 4,703,473,409  shares
of the Registrant's common stock outstanding at April 9, 2004.



                       DOCUMENTS INCORPORATED BY REFERENCE


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

     Unless otherwise  indicated,  the information in this annual report on form
10-K  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 and the  one-for-twenty  reverse stock split effected in
April,  2002.  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-K 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."

<PAGE>

                                     PART I


ITEM 1.   DESCRIPTION OF BUSINESS

     Overview

     Celerity Systems,  Inc. ("Celerity") is a business development company that
has elected to be regulated pursuant to Section 54 of the Investment Company Act
of 1940 (the "Investment Act"). A business  development company is an investment
company designed to assist eligible  portfolio  companies with capital formation
and management  advice.  Accordingly,  Celerity has changes its business plan to
primarily seek investments in developing companies. Celerity was incorporated in
Delaware  on August  12,  1997.  Celerity  intends to focus its  investments  in
developing companies,  but does not intend to limit its focus its investments in
any particular industry.  Celerity intends to seek investments in companies that
offer attractive investment opportunities.

     On April 24,  2003,  Celerity's  Board of  Directors  voted to be regulated
pursuant to Section 54 of the  Investment  Act.  The  decision  to be  regulated
pursuant  to  Section  54 of the  Investment  Act was made  primarily  to better
reflect Celerity's anticipated future business and for developing relationships.
As a Business  Development  Company  ("BDC") under Section 54 of the  Investment
Act,  Celerity is  required  to invest a portion of its assets  into  developing
companies.

     The types of securities in which  Celerity may invest and the proportion of
its assets  which may be invested in each such type of security is to be left to
the discretion of its Board of Directors.  Celerity may, but is not required, to
take a controlling position in its investment companies.  Celerity's policy with
respect to any assets that are not required to be invested in eligible portfolio
companies or other companies  qualifying under Section 55 of the Investment Act,
as well as with respect to  investing  as part of a group,  is to be left to the
discretion of its Board of Directors.  Celerity will offer managerial assistance
to each of its portfolio  companies and reserves the right to be  compensated by
the portfolio companies at market rates for such services.

     As of  December  31,  2003,  we had cash on hand of  $56,156  and a working
capital  deficiency  of  approximately  $1,374,000.  Our  operations  have  been
financed  primarily  from  the  sale  of debt  and  equity  securities.  For the
foreseeable  future,  we believe we may continue to rely on external  capital to
fund  any  acquisitions,  however,  we  expect  to fund  our  normal  operations
internally.

Investments

     Celerity  has two  investments,  one in a wholly  owned  subsidiary  called
Celerity Systems, Inc., a Nevada corporation ("Celerity-Nevada") and the other a
minority interest in Yorkville Advisors Management, LLC.


CELERITY-NEVADA

     Celerity-Nevada  is a  wholly  owned  subsidiary  that is  engaged,  either
directly or  indirectly  through  third  parties,  in the  production,  sale and
distribution   of   digital   set  top  boxes  and   digital   video   services.
Celerity-Nevada,  through  arrangements with other parties, can offer end-to-end
systems for customers.  It can also provide a comprehensive  content package for
educational  users  with over 1,300  titles  available,  and a content  package,
Celerivision,  for use in entertainment deployments,  such as condominiums,  the
hospitality  industry,   and  multihousing   properties.   Celerity-Nevada  also
maintains unique and valuable software functionality and applications,  which it
incorporates in some of its products and services.  Celerity anticipates playing
an active role in supervising the operations of Celerity-Nevada.

     Celerity-Nevada has three basic products,  the T 6000 set-top box, DigiSeek
Education System and Digitally Encoded Content.  Celerity-Nevada  has developed,
and continues 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,

                                       1
<PAGE>

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.

     Celerity-Nevada  has developed a complete digital education system which it
sells to schools, which includes its 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.

     Celerity-Nevada has acquired rights to over 1300 education titles, which it
has encoded in its Content Preparation Center into the MPEG format, and which it
sells as part of DigiSeek system sales. Celerity-Nevada has also acquired rights
to some entertainment programming, which it has also encoded, and which it sells
as part of its system sales in the hospitality  market,  and which it intends to
sell to other segments,  such as hospitals and  multihousing,  should it achieve
sales in those segments.

YORKVILLE ADVISORS MANAGEMENT, LLC

     On December 1, 2003 the Company  purchased a minority interest in Yorkville
Advisors Management, LLC ("Yorkville"). Yorkville is the investment manager of a
private  equity  fund that is a  principal  holder of equity  securities  of the
Company.  The purchase price amounted to $5,240,000.  The acquisition was funded
through  the sale of  2,000,000  shares  of common  stock to the  aforementioned
private  equity fund,  resulting in net proceedss of $4,000,000  and the balance
paid using the proceeds received from the issuance of convertible notes payable.
During the year  ended  December  31,  2003,  the  Company  received  $65,000 in
dividend income from this investment, which has been recorded as dividend income
in the consolidated statements of operations.

EMPLOYEES

     As of April 9, 2004, we had 4 full time  employees,  2 of whom are employed
full  time  in the  engineering  and  product  development  area,  and 2 of whom
fulfilled management or administrative roles. This level of staffing is a result
of our lack of adequate funding. 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 for the years ended December 31,
2003 and 2002.

MARKETING STRATEGY

     Celerity-Nevada's  marketing  strategy is to seek  customers in each of the
potential emerging markets, to encourage the leading companies and organizations
to adopt  this  technology  and to  position  itself  as a leading  provider  of
interactive video services within niche markets.  Celerity-Nevada  believes that
it is  important  to  achieve  market  penetration  at an  early  stage  in  the
development  of  particular  niche markets in order to compete  successfully  in
those markets.  Celerity-Nevada's 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.  In addition,  the
scalability of its 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.   Celerity-Nevada   believes  that  this
scalability   will   be  an   attractive   feature   to   potential   customers.
Celerity-Nevada also believes 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.  Celerity-Nevada believes 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

                                       2
<PAGE>

markets  in which we  believe  there is greater  interest  at this  time,  while
looking  for  targets  of  opportunity  in  our  other  niche  market  segments.
Celerity-Nevada  believes that the markets,  which appear most favorable at this
time, are schools,  energy  companies,  hospitality,  and enterprise  solutions.
Celerity-Nevada  has limited sales and marketing  experience and there can be no
assurance that we will be successful in implementing its marketing plans.

     Based on its  current  financial  condition,  Celerity-Nevada  is unable to
fully executed our marketing  strategy.  Instead,  it is focusing its efforts on
the  education   market.   Celerity-Nevada   has  targeted  primary  and  second
institutions, as well as universities. 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.  Celerity-Nevada  has six active
school  projects  in  Ohio  and  one  in  Pennsylvania.  It  has  named  Kidston
Communications as its national distributor for K through 12 public education for
North America, and is working collaboratively with them to expand its network of
dealers with the objection of having qualified distributors in every state.

     Many colleges have begun installing  modern  high-speed  networks,  usually
fiber optic 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.

LEGAL PROCEEDINGS

     In December, 2001, Veja Electronics, Inc. d/b/a/ Stack Electronics sued the
Company for breach of  contract  and is seeking  damages in excess of  $106,000.
This action  relates to amounts  alleged to be owed from the  cancellation  of a
purchase order.  During 2003 a judgment was rendered  against the Company in the
amount of $71,000, which has been accrued at December 31, 2003.

     In March, 2003, R. R. Donnelly sued the Company for non-payment of expenses
related to printing  services.  During 2003 a judgment was rendered  against the
Company in the amount of $16,972, which has been accrued at December 31, 2003.

     In July,  2003,  Premier  Components  sued the Company for  non-payment for
inventory  items  purchased.  During 2003 a judgment  was  rendered  against the
Company in the amount of $45,861, which has been accrued at December 31, 2003.

     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.

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, 2003 and
2002, we sustained  losses from continuing  operations of $1.6 and $4.5 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.

                                       3
<PAGE>

     WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS

     Our  operations  have relied almost  entirely on external  financing.  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,  2003
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.


     LACK OF INSURANCE PROTECTION

     The Company does not  presently  have a commercial  general  liability  and
workman's compensation coverage.  Although there have been no claims against the
Company,  the Company's assets are at risk in the event of a successful claim(s)
against it. At such time as cash flow from operations permits,  the Company will
again  seek  to  obtain  general  liability,  product  liability  and  workman's
compensation coverage. The Company maintains auto insurance coverage.

     The Company does not carry director and officer  liability  insurance,  but
does have indemnification agreements covering its officers and directors.

     EFFECT OF PREVIOUSLY ISSUED OPTIONS, WARRANTS AND CONVERTIBLE DEBENTURES

     As of March 15,  2004,  Celerity had  4,703,473,409  shares of common stock
outstanding.  In addition, we have outstanding options, warrants and convertible
debentures  which, if converted or exercised into shares of common stock,  would
result in the issuance of an  additional  1,623,420,188  shares of common stock.
Celerity is only authorized to issue up to 5,000,000,000 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.

     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.

                                       4
<PAGE>

     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  $342,400 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.

                                       5
<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 initial term of the lease was
from  January  15,  2000 to January  14,  2003,  with an option to renew for two
additional  three-year periods. In July, 2002, Celerity exercised it's option to
extend the lease to January 14,  2006.  Monthly  lease  payments  are $5,450 per
month plus utilities and certain other maintenance expenses.


ITEM 3.   LEGAL PROCEEDINGS

     In December, 2001, Veja Electronics, Inc. d/b/a/ Stack Electronics sued the
Company for breach of  contract  and is seeking  damages in excess of  $106,000.
This action  relates to amounts  alleged to be owed from the  cancellation  of a
purchase order.  During 2003 a judgment was rendered  against the Company in the
amount of $71,000, which has been accrued at December 31, 2003.

     In March, 2003, R. R. Donnelly sued the Company for non-payment of expenses
related to printing  services.  During 2003 a judgment was rendered  against the
Company in the amount of $16,972, which has been accrued at December 31, 2003.

     In July,  2003,  Premier  Components  sued the Company for  non-payment for
inventory  items  purchased.  During 2003 a judgment  was  rendered  against the
Company in the amount of $45,861, which has been accrued at December 31, 2003.

     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.


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

     None.

                                       6
<PAGE>

                                     PART II


ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

     Celerity  Systems'  Common  Stock is  currently  traded on the OTC Bulletin
Board under the symbol "CESY".

     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 2002                     -------                 -------
1st Quarter                          $4.8000                 $0.1420
2nd Quarter                          $0.2200                 $0.0080
3rd Quarter                          $0.0450                 $0.0080
4th Quarter                          $0.0060                 $0.0010


FISCAL YEAR 2003
1st Quarter                          $0.0027                 $0.0011
2nd Quarter                          $0.3100                 $0.0009
3rd Quarter                          $0.0180                 $0.0020
4th Quarter                          $0.0330                 $0.0050

     As of March 15, 2004 there were  approximately 239 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

     2001

     Celerity issued  1,280,873  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.

     Celerity 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.

     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.


                                       7
<PAGE>

     2002

     Celerity issued  3,810,385  shares of common stock with a value of $124,058
as payment for certain  consulting  and  directors'  fees,  payroll and accounts
payable items.

     The  Company  converted  $1,502,198,  including  accrued  interest,  of the
convertible debentures into 223,675,473 shares of common stock.

     Celerity converted $627,500 of Series B Preferred Stock,  $60,000 of Series
C Preferred  Stock,  $54,000 of Series D Preferred Stock and $60,000 of Series E
Preferred Stock into 4,600,000 shares of common stock.

     2003

     Celerity issued  71,385,617  shares of common stock with a value of $75,623
as payment for certain consulting and fees, payroll and accounts payable items.

     The  Company  converted  $2,808,392,  including  accrued  interest,  of the
convertible debentures into 1,083,283,880 shares of common stock.

     Celerity  converted  $322,500  of Series B  Preferred  Stock and $40,000 of
Series E Preferred Stock into 2,645,000 shares of common stock.

SELECTED FINANCIAL DATA

     The  selected  financial  data  should  be read  in  conjunction  with  out
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and the  Consolidated  Financial  Statements and notes thereto.  As
discussed in Notes 1 and 2 to the Consolidated  Financial Statements the Company
elected to become a Business Development Company on June 3, 2003. The results of
operations for 2003 are divided into two periods, the "As a Business Development
Company" period and "Prior to becoming a Business  Development  Company" period.
Different  accounting  principles  are  used  in the  preparation  of  financial
statements of a business development company under the Investment Company Act of
1940 and, as a result,  the financial  results for periods prior to June 3, 2003
are not comparable to the period commencing on June 3, 2003 and are not expected
to be representative of our financial results in the future
<TABLE>
<CAPTION>
                                     As a Business
                                     Development
                                     Company        Prior to becoming a Business Development Company
                                     ----------------------------------------------------------------------------------------
                                     For the Period For the Period
                                     January 1,     June 3, 2003   Year Ended    Year Ended     Year Ended    Year Ended
                                     2003 to June   to December 31 December 31,  December 31,   December 31,  December 31,
                                     2, 2003        2003           2002          2001           2000          1999
                                     ------------   -----------    ------------  -------------  ------------  ---------------
<S>                                  <C>            <C>            <C>           <C>            <C>           <C>
Income Statement Data:

Unrealized (loss) on investments     $ (842,121)    $        -     $          -  $          -   $         -   $          -

Dividend income                          65,000              -                -             -             -              -

Revenues                                      -              -          649,815       403,997             -         85,894

Loss from continuing operations
before cumulative effect of change
in accounting principle                (941,132)      (617,716)      (4,455,706)   (6,330,174)   (5,322,593)    (5,434,986)

Net loss from continuing operations    (941,132)      (617,716)      (4,455,706)   (3,731,361)   (5,322,593)    (5,434,986)

                                                              8
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
<S>                                  <C>            <C>            <C>           <C>            <C>           <C>
Net loss per common share from
continuing operations, basic and
diluted                              $        -     $        -     $      (0.08) $      (1.17)  $     (9.20)  $     (21.40)

Total assets                         $5,507,140     (a)            $  2,129,293  $  3,709,977   $   609,043   $  1,228,737

Long-term debt                        2,089,485     (a)               3,117,520     2,980,168     1,100,425      1,305,453

Redeemable preferred stock                    -     (a)                 362,500     1,010,000       168,357              -
</TABLE>


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

     THE  FOLLOWING   INFORMATION   SHOULD  BE  READ  IN  CONJUNCTION  WITH  THE
CONSOLIDATED  FINANCIAL  STATEMENTS OF CELERITY AND THE NOTES THERETO  APPEARING
ELSEWHERE  IN THIS  FILING.  STATEMENTS  IN  THIS  MANAGEMENT'S  DISCUSSION  AND
ANALYSIS OR PLAN OF  OPERATION  AND  ELSEWHERE IN THIS  PROSPECTUS  THAT ARE NOT
STATEMENTS   OF   HISTORICAL   OR  CURRENT  FACT   CONSTITUTE   "FORWARD-LOOKING
STATEMENTS."

OVERVIEW

     Celerity Systems, Inc. (the "Company"), a Delaware corporation,  was formed
to design, develop,  integrate,  install,  operate and support interactive video
services hardware and software  ("interactive  video") systems. On June 3, 2003,
the Company  elected to become a Business  Development  Company  ("BDC") that is
regulated  under the  Investment  Company Act of 1940,  as amended.  A BDC is an
investment company designed to assist eligible portfolio  companies with capital
formation which are required to offer, and many times do render, substantial and
continuing  management advice. As contemplated by this transaction,  the Company
materially changed its business plan to primarily seek investments in developing
companies that offer attractive investment opportunities.  This new focus is not
limited to any particular industry.

     Prior to the election as a business  development  company  Celerity Systems
developed and  manufactured,  at third party  plants,  digital set top boxes and
digital video servers for the  interactive  television  and high speed  Internet
markets.  The  Company  also can  provide a  comprehensive  content  package for
education users, and a content package,  Celerivision,  for use in entertainment
deployments,  such as  condominiums,  the hospitality  industry and multihousing
properties.

     The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has had recurring
losses since  inception of  approximately  $43,117,000,  and continues to suffer
cash flow and working  capital  shortages.  As of December 31, 2003, the Company
had net working capital deficiency of approximately  $1,374,000.  These factors,
taken together with the absence of significant sales and financial  commitments,
raises  substantial  doubt  about the  Company's  ability to continue as a going
concern.

     On June 3,  2003,  the  Company  filed  with the  Securities  and  Exchange
Commission to become a BDC which is regulated under Section 54 of the Investment
Company Act of 1940. As a BDC, the Company may sell shares of its freely trading
common stock in amounts up to $5,000,000 in a twelve-month  period.  Shares sold
are exempt from  registration  under Regulation E of the Securities Act of 1933.
On June 4, 2003 the Company  filed an Offering  Circular  Under  Regulation E to
sell up to  $4,500,000  of its  common  stock at a minimum  price of $0.001 to a
maximum price of $0.02.  Between June 30, 2003 and December 31, 2003 the Company
sold 1,149,833,333  shares resulting in net proceeds of $1,166,500.  The ability
of the Company to continue as a going concern is dependent  upon it's ability to
successfully   accomplish  the  plan  described  above  and  eventually   attain
profitable operations.

     The  results of  operations  for 2003 are  divided  into two  periods.  The
five-month period, representing the period January 1, 2003 through June 2, 2003,
reflects the  Company's  results  prior to  operating as a BDC. The  seven-month
period from June 3, 2003 to December 31, 2003, reflects the Company's results as
a BDC. Accounting principles used in the preparation of the financial statements
beginning June 3, 2003 are different than those of prior periods and, therefore,
the  financial  position  and  results of  operations  of these  periods are not
directly comparable.  The primary differences in accounting principles relate to
the carrying value of investments.

                                       9
<PAGE>

RESULTS OF OPERATIONS


     YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

     UNREALIZED LOSS ON INVESTMENTS

     Since  the  election  to  operate  as a BDC the  Company  has  recorded  an
unrealized loss on its investment in Celerity Systems-NV. This loss is comprised
of two elements:

 ---------------------------------------------------------------------------
 Effect of recording advances at fair value                     $  342,121
 Effect of recording equity investments at fair value              500,000
                                                                ----------
                                                                $ 842,121
                                                                ==========

     During the seven month period ended December 31, 2003, Celerity NV recorded
sales of $247,945,  a gross  profit from these sales of  $160,996,  an inventory
write-down of  $1,076,369  and other  general and  administrative  expenses that
resulted  in a net  loss of  $939,765  for the  period.  The  write  down of the
Company's  advances to and  investment in NV recognize  that without  additional
sales  there  is a  substantial  risk  that  NV will  not be  able  to  continue
operation.

     DIVIDEND INCOME

     Since its  investment  in  Yorkville  on December 1, 2003,  the Company has
received  $65,000 in proceed,  which has been recorded as Dividend income in the
statement of operations.

     OPERATING EXPENSES

     Operating  expenses for 2003 were $651,267  compared to 2002 of $2,045,738.
Decreased operating expenses in 2003 can be attributed to lower payroll expenses
(approximately  $912,000) and reduced  expenses for legal,  accounting and other
professional  services  (approximately  $80,000).  Expenses were also reduced by
lower development costs associated with prototypes (approximately $164,000), and
reduced facility and occupancy expenses (approximately $84,000).

     AMORTIZATION OF DEBT OFFERING COSTS

     Amortization  of debt  offering  costs for 2003 was  $467,871  compared  to
$568,263 in 2002.  This  decrease  results  from debt being  issued in 2003 with
minimal  offering  costs,  $16,500,  as  compared  to the prior  year  amount of
$109,350.

     BENEFICIAL CONVERSION FEATURE - CONVERTIBLE NOTES

     Non-cash   interest  expense  relating  to  amortization  of  a  beneficial
conversion  feature for the various  convertible  debentures  issues in 2003 and
2002 amounted to $905,800 and  $1,018,759  for the years ended December 31, 2003
and 2002, respectively. This decrease results from a lower amount of convertible
debt in 2003 compared to 2002.

     INTEREST EXPENSE

     Interest  expense  for 2003 was  $467,869  compared  to 2002  that  totaled
$691,782.  Liquidated  damages  incurred  due  to the  late  filing  of  certain
registration  statements  resulted in a charge of $228,680 in 2003 compared to a
charge of  $266,700  in 2002.  Interest  expense on  borrowings  decreased  from
$425,082 in 2002 to $244,869 in 2003.  The largest  portion of this  decrease is
from interest  expense  associated  with purchase  order  financing  provided by
Kidston  Communications.  Kidston  Communications  is a company  controlled by a
former  director  of  the  Company  (see  Related  Party  Transaction).  Expense
associated with this financing amounted to$0 in 2003 and $114,723 in 2002.

                                       10
<PAGE>

     SETTLEMENT OF DEBT

     During  2003  the  Company  settled  certain  trade  payables,  convertible
debentures and accrued  interest of $4,099,301.  Such  settlement  resulted in a
gain on forgiveness of $1,711,080 in 2003 compared to $49,132 in 2002.

     INCOME ON EQUITY WARRANT LIABILITY

     For the year ended December 31, 2002, Celerity had income on equity warrant
liability of $134,374.  These amounts  represent 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.  The  reduced  amount  is a result of the
increase in the number of authorized shares available for warrants.

     OTHER INCOME

     For the years ended  December 31, 2003 and 2002,  Celerity had other income
of $-0- and $6,254, respectively.

     NET LOSS

     As a result of the  foregoing,  Celerity had a net loss of  $1,558,848,  or
$0.00 per share,  for the year ended December 3, 2003 compared to a net loss of
$4,455,706, or $0.08 per share, for the prior year.

     ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

     Celerity  had  outstanding   redeemable  convertible  preferred  stock.  At
issuance in 2002, the conversion  price of the Series D Preferred Stock was at a
discount to the price of Celerity's  common stock.  Celerity  recorded a $54,000
dividend relative to the beneficial conversion feature of the Series D Preferred
Stock.  Also in 2002, at issuance the conversion price of the Series E Preferred
Stock  was at a  discount  to the price of  Celerity's  common  stock.  Celerity
recorded a $100,000  dividend relative to the beneficial  conversion  feature of
the Series E Preferred Stock.

     NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

     As a result  of the  foregoing,  Celerity  had a net loss  attributable  to
common  stockholders  of  $1,558,848,  or $0.00  per  share  for the year  ended
December 31, 2003 compared to a net loss of $4,609,706,  or $0.08 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 $56,156 as of December 31, 2003 and $5,012 as of December 31, 2002.  Our
cash position  continues to be  uncertain.  Our primary need for cash is to fund
our  ongoing  operations  until such time that the income  from our  investments
generate  enough  proceeds to fund  operations.  In addition,  our need for cash
includes satisfying current liabilities of $1,436,946,  consisting  primarily of
accounts payable of $463,552,  accrued interest of $270,746,  notes payable to a
related  party of $115,000  and  judgments  and  defaults  payable of  $570,781,
including  a judgment  of $16,972  obtained by R.R.  Donnelley  Corporation  for
non-payment  of  printing   fees,  a  judgment  of  $71,000   obtained  by  Veja
Electronics,  Inc. for breach of contract,  and a judgment of $8,000 obtained by
Del Rio Enterprises for non-payment of services. Additionally this also includes
notes payable in default of $132,409 and liquidated  damages relating to certain
convertible debentures of $342,400. We do not currently have sufficient funds to
pay these  obligations.  We will need  significant  new funding from the sale of
securities or from proceeds from our investments to fund our ongoing  operations
and to satisfy the above obligations. We anticipate the dividend income from our
investment in Yorkville  Advisors  Management  will be sufficient to operate the
Company. We currently do not have any commitments for funding.

     Since  December 31, 2003, we issued  150,000,000  shares of common stock to
various investors for cash proceeds in the amount of $210,000.

                                       11
<PAGE>

     As discussed in the overview  section,  on June 3, 2003 the Company elected
to become a BDC which is regulated  under Section 54 of the  Investment  Company
Act of 1940.  As a BDC the  Company  may sell  shares of its common  stock up to
$5,000,000  in a twelve month period.  Shares sold are exempt from  registration
under  Regulation E of the  Securities  Act of 1933.  To that end, at our Annual
Meeting of Shareholders  held on January 14, 2003, the shareholders  approved an
increase in our authorized capital stock to 5 billion shares of common stock. On
June 4, 2003 the Company filed an Offering  Circular Under  Regulation E to sell
up to  $4,500,000  of its common stock at a minimum price of $0.001 to a maximum
price of $0.02.  Between June 4, 2003 and December 31, 2003 the Company has sold
1,149,833,333 shares resulting in net proceeds of $1,166,500.

     On April 24,  2002,  the Company  entered into a purchase  order  financing
arrangement with Kidston Communications.  Pursuant to this arrangement,  Kidston
Communications  will  purchase  products  and  materials  from  the  Company  in
sufficient quantities to fill open purchase orders received by the Company. Upon
such  purchase,  title to the  products  and  materials  needed to fill the open
purchase  orders vests in Kidston  Communications  and are  segregated  from the
Company's products and materials. Celerity is then responsible for production of
the final products to be shipped to the customers.  The purchase price for these
products and  materials is the amount of the open  purchase  orders,  less a 15%
discount.  If the order is filled  after 10 months,  then an interest  charge of
1.5% per month will apply.  This discount is being  accounted for as an interest
expense on the  Company's  financial  statements  and  amounts to  approximately
$114,723 as of December 31, 2003. As of December 31, 2003 Kidston Communications
has  financed,  since April 24, 2002,  open  purchase  orders  having a value of
$764,823.

     We are also 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 the investors in the 10%
convertible  debentures  issued in 2002. Such security  interests 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, 2003,  we had a net increase in cash of
$51,144. Our sources and uses of funds were as follows:

     CASH USED IN OPERATING  ACTIVITIES.  We used net cash of  $1,070,642 in our
operating  activities  in the year ended  December  31,  2003.  Net cash used in
operating  activities  resulted  primarily  from a net loss of  $1,558,848,  and
non-cash  income related to settlement of debt of $1,711,080.  Our net cash used
in operating  activities was partially  offset by depreciation  and amortization
expenses  of $17,289,  non-cash  expenses of  $2,336,975  related to  beneficial
conversion feature,  amortization of debt offering costs, the unrealized loss on
an investment, the loss on abandonment of fixed assets and issuance of shares in
payment of certain expenses, and a decrease in accrued interest of $427,708. The
decrease in accrued interest is the result of a net reduction during the year of
$590,678 of  convertible  debentures  and the related  interest  and  liquidated
damages  accrued.  Other uses of cash  during the year  included  an increase in
accounts receivable and inventory of $34,322 and a reduction of accounts payable
of $376,442, accrued wages of $136,858 and other current liabilities of $29,300.

     CASH  USED IN  INVESTING  ACTIVITIES.  We used  net cash of  $6,697,459  in
investing activities in the year ended December 31, 2003 of which $5,240,000 was
used  in  the  acquisition  of  a  minority  interest  in  Yorkville   Advisors'
Management, LLC and $297,356 was used in advances to Celerity NV.

     CASH PROVIDED BY FINANCING  ACTIVITIES.  We received $6,697,459 in net cash
from financing  activities,  consisting  primarily of proceeds from  convertible
notes  payable of  $1,679,000,  notes  payable - related  party of  $40,000  and
issuance  of  common  stock of  $5,166,500.  This was  partially  offset by debt
offering  costs of $16,500,  principal  payments on long-term debt of $7,591 and
payments on notes payable - related party of $163,950.

     As of  December  31,  2003  we  had a net  working  capital  deficiency  of
approximately $1,374,000.  Celerity NV has ceased purchasing any material amount
of  inventory  until  inventory  levels can be reduced and has reduced  overhead
expenses,  which  will  have a  favorable  impact on cash  required  to fund the
business.  We had no  significant  capital  spending or purchase  commitments at
December 31, 2003 other than a certain facility lease.

                                       12
<PAGE>

     YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

     REVENUES

     Revenues  for the year ended  December 31, 2002 were  $649,815  compared to
$403,997 for the year ended  December 31, 2001.  This increase is primarily from
increased sales of  approximately  $535,000 to the education  markets  partially
offset by a  decrease  of  approximately  $303,000  in sales to the  hospitality
market. 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.

     COSTS OF REVENUES

     Costs of revenues  were $970,739 in 2002 compared to $1,163,129 in 2001. We
had a negative gross margin of $320,924  compared to $759,132 in 2001.  Costs of
revenues in 2002 and 2001 were primarily due to costs  associated  with products
delivered in each respective  year,  inventory  adjustments in 2002 of $369,546,
the write down of $377,114 in 2001 of obsolete inventory to net realizable value
and a reserve of lower of cost or market of $237,250 in 2001.

     OPERATING EXPENSES

     Operating expenses for 2002 were $2,045,738 compared to 2001 of $5,667,077.
Decreased  operating  expenses in 2002 can be attributed  to lower  amortization
costs from 2001  associated  with the issuance of warrants in connection with an
Equity Line of Credit  Agreement  (approximately  $1,364,000)  and,  separately,
lower  amortization of costs associated with a purchase or financing  commitment
(approximately  $408,000).  Expenses were also reduced by lower  contract  labor
costs  incurred in the  development  of our  interactive  digital  video  system
(approximately  $768,000),  costs  associated  with  the  write  down of  assets
associated  with  the  termination  of  projects  in  the  multi-housing  market
(approximately $385,000), reduced expenses from the engagement of consultants to
assist  us  with  investor  relations  and  investment  banking   (approximately
$520,000),  and reduced  expenses for legal,  accounting and other  professional
services  (approximately  $246,000).  These  reductions were partially offset by
increased payroll expenses in 2002 compared to 2001 (approximately $85,000).

     INTEREST EXPENSE

     Interest  expense for 2002 was  $2,278,804  compared  to 2001 that  totaled
$1,680,035. Of the totals for 2002 and 2001 were non-cash expenses incurred as a
result of the amortization,  through a charge to interest  expense,  of both the
beneficial debt conversion  features of the 2002 and 2001 securities  offerings,
$1,018,759 and $575,224,  respectively,  and  amortization  of the debt offering
costs  related  to the same  securities  offerings  of  $568,263  and  $198,633,
respectively.  Liquidated  damages  incurred  due to the late  filing of certain
registration  statements  resulted in a charge of $266,700 in 2002 compared to a
charge of  $694,400  in 2001.  Interest  expense on  borrowings  increased  from
$176,757 in 2001 to $425,082 in 2002.  The largest  portion of this  increase is
from interest  expense  associated  with purchase  order  financing  provided by
Kidston  Communications.  Kidston  Communications  is a company  controlled by a
former director of Celerity (see Related Party Transaction).  Expense associated
with this financing amounted to $114,723 in 2002.

     SETTLEMENT OF DEBT

     During 2002 and 2001,  Celerity  negotiated  settlement of certain accounts
payable  items that  resulted  in  cancellation  of debt  income of $49,132  and
$71,864, respectively.

     INCOME ON EQUITY WARRANT LIABILITY

     For the years  ended  December  31, 2002 and 2002,  Celerity  had income on
equity warrant liability of $134,374 and $1,893,852, respectively. These amounts
represent 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.  The reduced amount is a result of the significant  decrease in the price
of Celerity's common stock over the 2 year period.

                                       13
<PAGE>

     LOSS ON TREASURY STOCK

     During the year ended  December 31, 2001,  Celerity  discovered  that it no
longer had possession of 16,869 shares of treasury stock. As a result,  Celerity
has written off the cost basis value of the shares, or $227,500 in 2001. No such
write-off was taken in 2002.

     LOSS BEFORE CUMULATIVE EFFCT OF CHANGE IN ACCOUNTING PRINCIPLE

     As a result of the above factors,  loss before  cumulative effect of change
in  accounting  principle  for the twelve  months  ended  December  31, 2002 was
$4,455,706,  or $0.08 per share, as compared to $6,330,174,  or $1.99 per share,
for the same period in 2001.

     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. No adjustments was recorded in 2002.

     NET LOSS

     As a result of the  foregoing,  Celerity had a net loss of  $4,455,706,  or
$0.08 per share,  for the year ended  December 1, 2002 compared to a net loss of
$3,731,361, or $1.17 per share, for the prior year.

     ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

     Celerity  has  outstanding   redeemable  convertible  preferred  stock.  At
issuance in 2002, the conversion  price of the Series D Preferred Stock was at a
discount to the price of Celerity's  common stock.  Celerity  recorded a $54,000
dividend relative to the beneficial conversion feature of the Series D Preferred
Stock.  Also in 2002, at issuance the conversion price of the Series E Preferred
Stock  was at a  discount  to the price of  Celerity's  common  stock.  Celerity
recorded a $100,000  dividend relative to the beneficial  conversion  feature of
the Series E Preferred Stock.

     In 2001, 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 $868,000  dividend  in 2001  relative  to the  beneficial  conversion
feature of the Series B Preferred Stock. Also, $132,000 of the proceeds from the
issuance of the Series B Preferred Stock was allocated to the warrants  attached
and  resulted  in full  accretion  of this  amount  in  2001.  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  $4,609,706,  or $0.08  per  share  for the year  ended
December 31, 2002 compared to a net loss of $4,791,361,  or $1.50 per share, for
the prior year.

     We have no existing bank lines of credit.

                                       14
<PAGE>

     There can be no  assurances  that we will be  successful in our attempts to
raise sufficient  capital  essential to our survival.  To the extent that we are
unable to raise the  necessary  operating  capital it will become  necessary  to
further curtain  operations.  Additionally,  even if we raise operating capital,
there can be no assurances  that the net proceeds  will be sufficient  enough to
enable us to develop our business to a level where we will generate  profits and
positive cash flows.  These matters raise substantial doubt about our ability to
continue as a going concern.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

     The  following  chart  sets  for  Celerity's  contractual  obligations  and
commercial  commitments  and the time  frames  for which  such  commitments  and
obligations come due.
<TABLE>
<CAPTION>
                                                                Payments Due by Period
     Contractual  Obligations           Total         Less than     1-3 Years        4-5 Years     After 5
                                                      1 Year                                       Years
<S>                                     <C>           <C>            <C>           <C>            <C>
Long-Term Debt                          $2,844,909    $  132,409     $1,475,000    $1,237,500
Current Obligations                      1,304,537     1,304,537             --            --           --
Operating Leases                           133,525        65,400         68,125            --           --
Unconditioned Purchase Obligations              --            --             --            --           --
Other Long-Term Obligations                     --            --             --            --           --
                                        ----------    ----------    ------------   ----------     --------
  Total Contractual Cash Obligations    $4,282,971    $1,502,346     $1,543,125    $1,237,500           --
</TABLE>


DEFAULTS UPON SENIOR SECURITIES

     On October 27, 2001, we defaulted on payments due of $150,000, plus accrued
interest,  on certain unsecured notes. Written demand has been received from one
of the two note  holders.  We are seeking to make  arrangements  with these note
holders. In addition,  certain creditors have threatened litigation if not paid.
We are  seeking  to make  arrangements  with  these  creditors.  There can be no
assurance that any claims, if made, will not have an adverse effect on us.

ACCOUNTING PRONOUNCEMENTS

     Recent Accounting Pronouncements - The Company adopted FASB 149, "Amendment
of Statement 133 on Derivative  Instruments and Hedging Activities",  on July 1,
2003. FASB 149 clarifies and amends FASB 133 for implementation issues raised by
constituents  or includes  the  conclusions  reached by the FASB on certain FASB
Staff  Implementation  Issues.  Statement  149 also amends FASB 133 to require a
lender to account for loan  commitments  related to mortgage  loans that will be
held for sale as  derivatives.  SFAS No. 149 is effective for contracts  entered
into or modified  after June 30, 2003. The adoption of SFAS No. 149 did not have
a material impact on the Company's financial position or results of operations.

     In  November  2002,  the  FASB  issued   Interpretation   ("FIN")  No.  45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees of  Indebtedness of Others." FIN No. 45 requires a company,
at the time it issues a guarantee,  to recognize  an initial  liability  for the
fair value of obligations assumed under the guarantee and elaborates on existing
disclosure  requirements  related to  guarantees  and  warranties.  The  initial
recognition  requirements  of FIN No. 45 are effective for guarantees  issued or
modified after December 31, 2002. The  implementation of FIN No. 45 did not have
a material impact on the Company's financial statements.

     In May,  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial Instruments with Characteristics of both Liabilities and Equity" which
is effective for financial  instruments  entered into or modified  after May 31,
2003,  and otherwise is effective at the  beginning of the first interim  period
beginning after June 15, 2003. This Statement  establishes  standards for how an
issuer   classifies   and   measures   certain   financial    instruments   with
characteristics  of both  liabilities  and equity.  It  requires  that an issuer
classify a financial  instrument  that is within its scope as a  liability.  The
implementation  of SFAS No.150 did not have a material  impact on the  Company's
financial statements.

     In January,  2003,  the FASB issued  FASB  Interpretation  No. 46 (FIN 46),
"Consolidation  of Variable Interest  Entities,  an interpretation of Accounting
Research  Bulletin  No.  51.  FIN  46  expands  upon  and  strengthens  existing
accounting  guidance  that  addresses  when  a  company  should  include  in its
financial statements the assets, liabilities and activities of another entity. A
variable  interest entity is any legal structure used for business purposes that

                                       15
<PAGE>

either does not have equity investors with voting rights or has equity investors
that do no provide sufficient  financial resources for the entity to support its
activities.  FIN 46 requires a variable  interest entity to be consolidated by a
company if that  company  is subject to a majority  of the risk of loss from the
variable interest  entity's  activities or entitled to receive a majority of the
entity's  residual  returns or both. The  consolidation  requirements  of FIN 46
apply  immediately to variable interest entities created after January 31, 2003.
The consolidation  requirements apply to older entities in the first fiscal year
or interim period  beginning after June 15, 2003.  However,  on October 8, 2003,
the FASB deferred the latest date by which all public entities must apply FIN 46
to the first reporting period ended after December 15, 2003.

     In December 2003, the FASB issued  Interpretation  No. 46R ("FIN46R") which
revised certain provision of FIN 46. Publicly  reporting entities that are small
business  issuers must apply FIN 46R to all entities subject to FIN 46R no later
than the end of the first reporting period that ends after December 15, 2004 (as
of December  31, 2004,  for a calendar  year  enterprise).  The  effective  date
includes those entities to which FIN 46 had  previously  been applied.  However,
prior to the  application  of FIN 46R, a public entity that is a small  business
issuer  shall  apply  FIN 46 or FIN 46R to those  entities  that are  considered
special-purpose  entities  no later  than as of the end of the  first  reporting
period that ends after  March 15,  2004 (as of December  31, 2003 for a calendar
year enterprise).  The Company does not expect the adoption of FIN 46 or FIN 46R
to have a material effect on its consolidated  financial  position or results of
operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

     Fair Value of Financial Instruments - The carrying amount of items included
in working  capital  approximates  fair value  because of the short  maturity of
those  instruments.  The carrying value of the Company's 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.

     Debt Offering Costs - Debt offering costs are related to private placements
and 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 the  remaining  unamortized  cost is
expensed.

     Investment  Valuation - Investments  in equity  securities  are recorded at
fair  value,  represented  as cost,  plus or minus  unrealized  appreciation  or
depreciation,  respectively.  The fair  value of  investment  that have no ready
market, are determined in good faith by management, and approved by the Board of
Directors,  based upon assets and revenues of the underlying  investee companies
as well as general market trends for businesses in the same industry. Because of
the inherent uncertainty of valuations,  management's estimates of the values of
the  investments may differ  significantly  from the values that would have been
used had a ready market for the investments existed and the differences could be
material.

     Revenue  Recognition - 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 and ratably over the life of any maintenance or support agreement.  The
Company's  general sales terms require a deposit with the order and balance upon
delivery, except for educational sales that are handled on a net 30 basis.

     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. A valuation allowance
related to the deferred tax assets is also  recorded when it is more likely than
not that some or all of the deferred tax asset will not be realized.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

     The  Company  does not have any  exposure  to market  risk as it relates to
changes in interest rates as all of the borrowings of the Company are at a fixed
rate of interest.

     The Company has no cash  equivalents  or  short-term  investment  which are
subject to market risk.

                                       16
<PAGE>

FOREIGN CURRENCY RISK

     The Company does not do any business that has any risk of foreign  exchange
rate fluctuations.

EQUITY SECURITY PRICE RISK

     We do not have any investment in marketable equity  securities;  therefore,
we do not have any direct equity price risk.

COMMODITY PRICE RISK

     We no not do any business involving commodities;  therefore, we do not have
any commodity price risk.


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-K.


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

     On April 24,  2003,  Celerity  Systems  dismissed  HJ &  Associates  as its
independent certified public accountant.

     HJ & Associates  report on Celerity's  financial  statements  for the years
ended  December  31,  2001 and 2002,  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.

     HJ & Associates  dismissal was recommended and approved by Celerity's Audit
Committee and Board of Directors.

     Since January 1, 2001, as well as any  subsequent  interim  period prior to
dismissal, 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.

     Since January 1, 2001, as well as any  subsequent  interim  period prior to
dismissal,  HJ &  Associates  did  not  advise  Celerity  of any of the  matters
identified in paragraph (a)(1)(iv)(B) of Item 304 of Regulation S-B.

     On April 24,  2003,  Celerity  engaged  Marcum & Kleigman as its  principal
accountant to audit Celerity's  financial  statements.  Celerity did not consult
Marcum & Kleigman on any matters  described  in  paragraph  (a)(2)(i) or (ii) of
Item 304 of  Regulation  S-B since  January  1, 2003 or any  subsequent  interim
period prior to engaging Marcum & Kliegman.


ITEM 8A.  CONTROLS AND PROCEDURES

     Within the past 90 days, The Company's Chief  Executive  Officer and Acting
Chief Financial  Officer evaluated the effectiveness of the design and operation
of the Company's  disclosure controls and procedures as of the end of the period
covered by this report.  The Company's Chief Executive  Officer and Acting Chief
Financial  Officer  concluded  that, as of the end of the period covered by this
report,  the Company maintains  disclosure  controls and procedures that provide
reasonable assurance that information required to be disclosed by the Company in
the reports that the Company files or submits under the Securities  Exchange Act
of 1934, as amended, is recorded, processed,  summarized and reported within the
time period specified in the SEC's rules and forms, and that such information is
accumulated and  communicated to the Company's  management,  including its Chief
Executive  Officer and Acting Chief Financial  Officer,  as appropriate to allow
timely decisions regarding required disclosure.

     There have been no changes in the Company's internal control over financial
reporting  that occurred  during the quarter  ended  December 31, 2003 that have
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.

                                       17
<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:
<TABLE>
<CAPTION>
NAME                        AGE    POSITION                              PERIOD SERVED
------------------------    --     ----------------------------------    -------------------
<S>                         <C>    <C>                                   <C>
Robert Legnosky             30     President, Chief Executive Officer    October 30, 2002 to
                                   and Chairman of the Board             Present

John McNamara, Jr.          30     Director                              October 30, 2002 to
                                                                         Present

Dr. Michael Kesselbrenner   52     Director                              January 14, 2003 to
                                                                         Present
</TABLE>

     Below  are   biographies   of  our   executive   officers  and   directors:

     ROBERT  LEGNOSKY.  Mr.  Robert B.  Legnosky  has been our  President  and a
Director since October 30, 2002. Since 1998, Mr. Legnosky has served as a Senior
Technical Consultant in AXA Financial/Equitable Life where he provided technical
support and direction on cash analysis and monitored unprocessed cash reports to
ensure  service  standards.  In 1997 to 1998,  Mr.  Legnosky  served  as a Sales
Associate  with Cybermax  Computer Inc.  where he advised  consumers on personal
computers, provided technical support to clients, and drafted proposals. In 1997
to 1998, Mr. Legnosky also served as a Group Life Claims Manager with Prudential
Insurance  Company where he evaluated life insurance  claims.  Mr.  Legnosky Mr.
Legnosky  graduated  from  Rutgers  University  with a Bachelor  of Science  and
Bachelor of Arts in 1996.

     JOHN MCNAMARA. Mr. John McNamara, Jr. has been a Director since October 30,
2002.  Since 1998, Mr.  McNamara has served as a Technical  Consultant  with The
Equitable  where he provided  technical  support and assistance to customers and
internal personnel for 401(k) processing, website access, and acted as a liaison
for  Momentum  Administrative  Services.  Mr.  McNamara  graduated  from Rutgers
University  with a Bachelor  of Arts in  Psychology  and a  Bachelor  of Arts in
Sociology in 1996.

     MICHAEL  KESSELBRENNER.  Dr. Michael  Kesselbrenner is a medical doctor who
has served as a Director in the Cardiac Catheterization Laboratory in The Valley
Hospital  in   Ridgewood,   New  Jersey   since  1996,  a  Director  of  Cardiac
Rehabilitation in St. Joseph's  Hospital in Paterson,  New Jersey since 1987 and
has  also  taught  at  St.  Joseph's  Hospital  since  1990.  Additionally,  Mr.
Kesselbrenner has also had his own private practice in Paramus, New Jersey since
1986.  Beyond  his  current  positions,   Mr.  Kesselbrenner  has  had  numerous
publications, awards, honors, research positions, academic appointments and held
many elected  offices.  Mr.  Kesselbrenner  graduated  from Columbia  University
achieving  Magna  Cum  Laude  honors  with his  undergraduate  degree  and later
graduating with his medical degree. Mr. Kesselbrenner continued his training for
the next 8 years as an  intern,  resident  and fellow in  various  locations  in
California and New Jersey up until 1986.

     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.  John Stephen McNamara, Jr. and Michael Kesselbrenner will
serve as  members of the Audit  Committee  if  elected  to  Celerity's  Board of
Directors  at the Special  Meeting of the  Shareholders.  Messrs.  McNamara  and
Kesselbrenner are independent  members of the Board of Directors.  The functions

                                       18
<PAGE>

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.  The
Audit  Committee met 2 times during fiscal 2001.  The Audit  Committee  does not
have a  "financial  expert"  due to the lack of  capital  needed  to  attract  a
qualified expert.

     COMPENSATION   COMMITTEE.   John   Stephen   McNamara,   Jr.  and   Michael
Kesselbrenner will serve as the members of our Compensation Committee if elected
to Celerity's Board of Directors at the Special Meeting of the shareholders. The
Compensation Committee 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.
The Compensation Committee did not meet during fiscal 2001.

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, 2003,  our officers,  directors,  and
greater  than ten percent  beneficial  owners  complied  with all Section  16(a)
filing requirements applicable to them:

CODE OF ETHICS

     On March 16, 2004 the Board of Directors  of the Company  adopted a written
Code of Ethics  designed  to deter  wrongdoing  and  promote  honest and ethical
conduct,  full,  fair and  accurate  disclosure,  compliance  with laws,  prompt
internal reporting and  accountability to adherence to the Code of Ethics.  This
Code of Ethics has been filed with the Securities and Exchange  Commission as an
Exhibit to this Form 10-K.


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,  2002,  2001 and 2000 paid to  Kenneth  D. Van  Meter,  our former
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, 2002. Mr. Legnosky  became our Chief  Executive  Officer on October
30, 2002. Mr. Van Meter's employment terminated September 2002.
<TABLE>
<CAPTION>
                                             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>
Robert B. Legnosky,                 2003       $63,333           --          --               --                --
  Chairman of the Board,            2002       $4,000
  Chief Executive Officer and
  President

                                                         19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                 <C>       <C>                <C>         <C>              <C>         <C>
Kenneth D. Van Meter                2002      $236,250(1)
  Former Chairman of the Board,     2001      $254,286(2)                                                 $5,438(3)
  Chief Executive Officer and
  President
-------------------------
(1)  Includes $157,500 voluntarily deferred in 2002.
(2)  Includes $68,906 voluntarily in 2001.
(3)
</TABLE>

     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, 2003 by the Named Executive Officer.
<TABLE>
<CAPTION>
                              AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                                         FISCAL YEAR END OPTION VALUES

                                                     NUMBER OF SECURITIES
                                                    UNDERLYING UNEXERCISED           VALUE OF UNEXERCISED
                        NUMBER OF                         OPTIONS AT                IN-THE-MONEY OPTIONS AT
                         SHARES                       DECEMBER 31, 2002              DECEMBER 31, 2002(1)
                       ACQUIRED ON     VALUE      ----------------------------    ----------------------------
NAME                    EXERCISE      REALIZED    EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
------------------     -----------    --------    -----------    -------------    -----------    -------------
<S>                         <C>          <C>           <C>            <C>             <C>             <C>
None                        --           --            --             --              -0-             -0-
----------------
</TABLE>



EMPLOYMENT AGREEMENT

     Celerity Systems does not currently have any employment  contracts with its
sole officer.  Until  September 24, 2002,  Celerity had an employment  agreement
with its former President and Chief Executive Officer, Mr. Kenneth D. Van Meter.
This agreement terminated upon Mr. Van Meter's resignation.

COMPENSATION OF DIRECTORS

     Effective as of April 1, 2003 our  non-employee  directors  received $2,500
per calendar quarter and a one-time issuance of 500,000  restricted share of the
Company.

     In 2002, our non-employee  directors  received $2,000 per calendar quarter,
retroactive to January 1, 2001, and payable in shares of our common stock.

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

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.  In September  2002, our Board of Directors  adopted our
2002  Stock  Option  Plan.  The 2002 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.

                                       20
<PAGE>

     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 Celerity (a "10%
STOCKHOLDER") shall be eligible to receive any incentive stock options under the
Plan unless the exercise  price is at least 110% of the fair market value of the
shares of Common Stock subject to the option, determined on the date of grant.

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

     Options  under the 1995 Plan must be issued within 10 years from August 10,
1995, the effective  date of the 1995 Plan.  Options under the 1997 Plan must be
issued within 10 years from August 6, 1997, the effective date of the 1997 Plan.
Incentive stock options granted under the Plans cannot be exercised more than 10
years from the date of grant.  Options under the 2001 Plan must be issued within
10 years from  November 7, 2001,  the effective  date of the 2001 Plan.  Options
under the 2001 Plan must be issued within 10 years from  September 27, 2002, the
effective  date of the  2002  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.

                                       21
<PAGE>

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN

     The following  table sets forth the  securities  that have been  authorized
under equity compensation plans as of December 31, 2003.
<TABLE>
<CAPTION>

                                                                       NUMBER OF
                                                                      SECURITIES
                                                                      REMAINING
                                    NUMBER                           AVAILABLE FOR
                                OF SECURITIES                      FUTURE ISSUANCE
                                TO BE ISSUED    WEIGHTED-AVERAGE    UNDER EQUITY
                                UPON EXERCISE    EXERCISE PRICE   COMPENSATION PLANS
                                OF OUTSTANDING   OF OUTSTANDING      (EXCLUDING
                                   OPTIONS,         OPTIONS,         SECURITIES
                                 WARRANTS AND     WARRANTS AND       REFLECTED
                                   RIGHTS           RIGHTS          IN COLUMN (a))
                                ---------------  ---------------  --------------------
                                    (a)               (b)                (c)
----------------------------    ---------------  ---------------  --------------------
<S>                                         <C>             <C>                    <C>

Equity compensation plans
approved by security holders                --              --                     --

Equity compensation plans
not approved by security
holders                                     --              --                     --
                                ---------------  ---------------  --------------------
TOTAL                                       --              --                     --
</TABLE>


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

BENEFICIAL OWNERS

     The following table sets forth,  information with respect of the beneficial
ownership  as of March 15,  2004,  for any person who is known to Celerity to be
the beneficial owner of more than five percent (5%) of Celerity's common stock.


                                                     SHARES
                                                   BENEFICIALLY       PERCENT
NAME AND ADDRESS               TITLE OF CLASS         OWNED         OF CLASS (1)
----------------------------   -----------------  -------------     ------------

Cornell Capital Partners, LP   Common Stock       2,000,000,000        47.3%
101 Hudson St
Jersey City, NJ 07302


(1)  Applicable  percentage  of  ownership is based on  4,703,473,409  shares of
     common stock  outstanding  as of March 15, 2004,  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 15, 2004 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.


DIRECTORS AND EXECUTIVE OFFICERS

     The  following  table  shows  the  amount  of  capital  stock  of  Celerity
beneficially owned by Celerity's directors,  the executive officers named in the
Summary  Compensation  Table and by all directors  and  executive  officers as a
group as of March 15, 2004. Unless otherwise indicated,  beneficial ownership is
direct and the person  indicated  has sole voting and  investment  power.  As of
March 15, 2004, Celerity had 4,703,473,409 shares of common stock outstanding.

                                                     SHARES
                                                   BENEFICIALLY      PERCENT
NAME AND ADDRESS                 TITLE OF CLASS       OWNED        OF CLASS (1)
-------------------------------  --------------    ------------    ------------

Dr. Michael Kesselbrenner        Common Stock       7,570,978         0.16%
122 Perimeter Park Drive
Knoxville, Tennessee 37922

                                       22
<PAGE>

                                                     SHARES
                                                   BENEFICIALLY      PERCENT
NAME AND ADDRESS                 TITLE OF CLASS       OWNED        OF CLASS (1)
-------------------------------  --------------    ------------    ------------

Robert B. Legnosky               Common Stock         360,000         0.00%

Jack McNamara                    Common Stock               0         0.00%

All Officers and Directors
as Group                         Common Stock       7,570,978         2.99%
-----------------------

(1)  Applicable  percentage  of  ownership is based on  4,703,473,409  shares of
     common stock  outstanding  as of March 15, 2004,  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 15, 2004 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.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     At  December  31, 2003 the Company  has an  outstanding  note  payable to a
principal holder of equity securities of the Company in the amount of $105,000.

     At December 31, 2003, the Company has an outstanding demand note payable to
a former member of the Company's Board of Directors in the amount of $10,000.

     In April 2000,  Celerity received $195,000 from David Hultquist,  who later
became a member of Celerity's Board of Directors. The note was due in April 2002
and bears interest at 9%. On April,  2002, the Company defaulted on payments due
of $125,000,  plus accrued interest,  aggregating to approximately $135,000. The
Company  agreed to a final  settlement  in 2003  that  resulted  in income  from
settlement of debt of $1,012.

     In  September  2002,  the Company  issued a 10%  convertible  debenture  of
$1,500,000  to a related  party in exchange for 4%  debentures  due of $998,478,
related  accrued   interest  of  $161,522  and  additional   proceeds,   net  of
approximately  $34,000  of  offering  costs,  of  approximately  $306,000.  This
debenture is secured by all of the Company's  assets.  This debenture has a term
of five years and is convertible  into the Company's common stock, at the option
of the holder,  at a price equal to 87.5% of the lowest closing bid price of the
common stock for the five  trading days  immediately  preceding  conversion,  or
$0.06 per share. 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 $540,550 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.  Upon  conversion  prior to the
stated date of redemption the remaining  unamortized discount will be recognized
as a non-cash interest  expense.  During 2002 the related party sold $500,000 of
this  debenture,  of which  $350,000  remains  outstanding at December 31, 2003.
During 2003 the related party sold $145,000 of this debenture, of which $115,000
remains  outstanding at December 31, 2003. At December 31, 2003, $285,000 of the
debentures  had converted to shares of common  stock,  $45,000 had been redeemed
and $1,170,000 remained outstanding, of which $705,000 is to a related party.

     On April  24,  2002,  Celerity  entered  into a  purchase  order  financing
arrangement with Kidston Communications.  Pursuant to this arrangement,  Kidston
Communications  will purchase products and materials from Celerity in sufficient
quantities  to fill  open  purchase  orders  received  by  Celerity.  Upon  such
purchase,  title to the products and materials  needed to fill the open purchase
orders  vests in  Kidston  Communications  and are  segregated  from  Celerity's
products and materials. Celerity is then responsible for production of the final
products to be shipped to the  customers.  The purchase price for these products
and materials is the amount of the open purchase orders, less a 15% discount. If
the order is filled after 10 months,  then an interest  charge of 1.5% per month
will apply.  This  discount  is being  accounted  for as an interest  expense on
Celerity's  financial  statements  and amounts to  approximately  $114,723 as of
December 31, 2003. As of December 31, 2002 Kidston  Communications  has financed
open purchase orders having a value of $764,823.

                                       23
<PAGE>

     In July 2002,  Ken Van  Meter,  the former  President  and CEO of  Celerity
loaned Celerity $950. The amount is to cover short-term  operating  expenses and
was settled during 2003.

     In  September  2002,  Ed Kidston,  a former  director  and  shareholder  of
Celerity loaned Celerity  $33,000.  The amount is to cover short-term  operating
expenses and is due upon demand.

     At December 31, 2002, Celerity owed Ken Van Meter, the former President and
Chief Executive Officer of Celerity $226,406 in unpaid payroll.  This amount was
settled in 2003.

     During 2002,  Celerity issued 1,333,334 shares of Common Stock with a value
of  $24,000  in lieu of  payment  of  directors'  fees to Ed  Kidston  and David
Hultquist.

     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,
$68,906 in 2001 and $157,500 in 2002. 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.

     On March 5, 2001, the Company entered into a National Distributor Agreement
for the education market with Kidston  Communications,  a company  controlled by
Edward Kidston a director of the Company until October 30, 2002. 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  terms 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 will  similar  terms  and  conditions.  The  Company  had sales of
$247,945 and $626,957 to Kidston Communications in 2003 and 2002,  respectively,
which represented 100% and 96% of total sales, respectively.

     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 Celerity and
officers,  directors,  principal stockholders or affiliates, and any forgiveness
of such loans,  will be on terms no less  favorable to us than could be obtained
from an  unaffiliated  third  party,  and will be  approved by a majority of our
directors,  including a majority of our independent and disinterested  directors
who have access at our expense to our legal counsel.


ITEM 13.  EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

     (a)  DOCUMENTS FILED AS PART OF THIS REPORT.

     See index to Consolidated Financial Statements attached, which are filed as
part of this report.

     (b)  REPORTS ON FORM 8-K.

          None.

     (c)  THE  FOLLOWING  EXHIBITS  ARE  FILED  AS  PART  OF  THIS  REGISTRATION
          STATEMENT:
<TABLE>
<CAPTION>
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

                                                          24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.    DESCRIPTION                                         LOCATION
-----------    --------------------------------------------------  ---------------------------------------------------
<S>            <C>                                                 <C>
3.4            Certificate of Designation of Series D Preferred    Incorporated by reference to Exhibit 3.4 to the
               Stock                                               Form 10-KSB for the year ended December 31, 2001
                                                                   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 the
               Stock                                               Form 10-KSB for the year ended December 31, 2001
                                                                   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

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

                                                          25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.    DESCRIPTION                                         LOCATION
-----------    --------------------------------------------------  ---------------------------------------------------
<S>            <C>                                                 <C>
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 September 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

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

                                                          26
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.    DESCRIPTION                                         LOCATION
-----------    --------------------------------------------------  ---------------------------------------------------
<S>            <C>                                                 <C>
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 September 30, 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

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 September 26,       Incorporated by reference to Exhibit 10.8 to the
               1995, 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 September 15,     Incorporated by reference to Exhibit 10.11 to
               1997, 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 September 30, 1993,      Incorporated by reference to Exhibit 10.13 to
               between Celerity and Herzog, Heine & Geduld, Inc.   the Registration Statement on SB-2 filed with
               and Development Agreement attached thereto          the SEC on August 13, 1997

10.14          Subcontract Agreement, dated September 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

                                                          27
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.    DESCRIPTION                                         LOCATION
-----------    --------------------------------------------------  ---------------------------------------------------
<S>            <C>                                                 <C>

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 September 30, 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 September 30, 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 September 30, 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

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

                                                          28
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.    DESCRIPTION                                         LOCATION
-----------    --------------------------------------------------  ---------------------------------------------------
<S>            <C>                                                 <C>
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 September 22, 2000,       Incorporated by reference to Exhibit 99.2 to the
               between 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
               September 14, 2001 between Celerity Systems, Inc.   Statement on Form SB-2 filed with the SEC on
               and Cornell Capital Partners, L.P.                  October 18, 2001

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

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

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

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

                                                          29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.    DESCRIPTION                                         LOCATION
-----------    --------------------------------------------------  ---------------------------------------------------
<S>            <C>                                                 <C>
10.45          Termination Agreement                               Incorporated by reference to Exhibit 10.45 to
                                                                   the Form 10-KSB for the year ended December 31,
                                                                   2001 filed with the SEC on March 27, 2002

10.46          Letter Agreement dated as of April 26, 2002         Incorporated by reference to Exhibit 10.46 to
               regarding the Purchase Order Financing              form SB-2 filed with the SEC on September 28,
                                                                   2002

10.47          Letter Agreement dated September 12, 2002 between   Incorporated by reference to Exhibit 10.47 to
               Cornell Capital Partners and Celerity Systems,      form SB-2 filed with the SEC on September 28,
               Inc.                                                2002

14.1           Code of Ethics                                      Provided herein.

31.1           Certification re: Section 302                       Provided herewith

32.1           Certification re: Section 906                       Provided herewith
</TABLE>


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

     Marcum &  Kliegman  audited  our  financial  statements  for the year ended
December 31, 2003 and HJ & Associates  audited our financial  statements for the
year ended December 31, 2002.

     AUDIT  FEES.  During the year ended  December  31,  2003  Marcum & Kliegman
billed us an aggregate of $52,500 for professional services rendered for:

     o    Audit of our annual financial statements included in our Annual Report
          on Form 10-K for the year ended December 31, 2003;

     o    Review of our financial  statements  included in our Quarterly Reports
          on Form 10-QSB for the year ended December 31, 2003.

     During  the year  ended  December  31,  2002 HJ &  Associates  billed us an
aggregate of $52,500 for professional services rendered for:

     o    Audit of our annual financial statements included in our Annual Report
          on Form 10-KSB for the year ended December 31, 2002;

     o    Review of our financial  statements  included in our Quarterly Reports
          on Form 10-QSB for the year ended December 31, 2002

     AUDIT-RELATED  FEES.  During the years  ended  December  31,  2003 and 2002
Marcum & Kliegman and HJ & Associates  billed us an aggregate of $0 for services
rendered other than those described above under the heading "Audit Fees."

     TAX FEES.  During  the years  ended  December  31,  2003 and 2002  Marcum &
Kliegman and HJ & Associates  billed us an aggregate of $0 for services rendered
other than those described above under the heading "Audit Fees."

     ALL OTHER FEES.  During the years ended December 31, 2003 and 2002 Marcum &
Kliegman and HJ & Associates  billed us an aggregate of $0 for services rendered
other than those described above under the heading "Audit Fees."

     All services  provided by Marcum & Kliegman have been  pre-approved  by the
Audit Committee before Marcum & Kliegman began to perform those services.

     No services  provided by Marcum & Kliegman were  pre-approved  by the Audit
Committee pursuant to paragraph (c)(7)(ii)C of Rule 2-01 of Regulation S-X.

                                       30
<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/ Robert B. Legnosky
-----------------------------
Robert B. Legnosky                 President, Chief Executive Officer       April 14, 2004
                                   and Chairman of the Board


     In accordance  with the Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates indicated.
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE                          TITLE                                    DATE
-----------------------------      -------------------------------------    ---------------
<S>                                <C>                                      <C>

/s/ Robert B. Legnosky             President, Chief Executive Officer       April 14, 2004
-----------------------------      and Chairman of the Board
Robert B. Legnosky                 (Principal Executive Officer)
                                   (Principal Financial Officer)


/s/ Michael Kesselbrenner          Director                                 April 14, 2004
-----------------------------
Michael Kesselbrenner


/s/ John McNamara, Jr.             Director                                 April 14, 2004
-----------------------------
John McNamara, Jr.

                                             31
</TABLE>
<PAGE>

                             CELERITY SYSTEMS, INC.


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Auditors' Reports                                                          F-1,2

Balance Sheets as of December 31, 2003 and 2002                              F-3

Statements of Operations for the Years Ended December 31, 2003
and 2002 and 2001                                                            F-4

Statements of Cash Flows for the Years Ended December 31, 2003
and 2002 and 2001                                                            F-5

Statement of Changes in Stockholders' Equity (Deficit) for the
years Ended December 31, 2003 and 2002 and                                 F-6,7
2001

Notes to Financial Statements                                                F-8

<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


Board of Directors and Stockholders
Celerity Systems, Inc.

     We have audited the  accompanying  consolidated  balance  sheet of Celerity
Systems,  Inc. as of December 31, 2003, and the related consolidated  statements
of  operations,  stockholders'  (deficit)  equity  and cash flows for the period
January 1, 2003 to June 2, 2003 and the period June 3, 2003 through December 31,
2003.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

     We conducted our audit in  accordance  with  auditing  standards  generally
accepted in the United States.  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 our audit provides a reasonable basis for our
opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all  material  respects,  the  consolidated  financial  position  of Celerity
Systems,  Inc.  at  December  31,  2003 and the  consolidated  results  of their
operations  and their cash flows for the period  January 1, 2003 to June 2, 2003
and the  period  June 3, 2003  through  December  31,  2003 in  conformity  with
accounting principles generally accepted in the United States.

     As discussed in Note 1 to the consolidated financial statements, accounting
principles  used in the  preparation of the  consolidated  financial  statements
beginning June 3, 2003 (upon conversion to a business  development company under
the  Investment  Company Act of 1940,  as amended) are  different  than those of
prior periods and therefore are not directly comparable.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming the Company will continue as a going concern. As discussed in Note 4 to
the  consolidated  financial  statements,  the Company has had recurring  losses
since inception of  approximately  $43,117,000 and continues to suffer cash flow
and working capital shortages. As of December 31, 2003, the Company had negative
net working capital of  approximately  $1,374,000.  These factors taken together
with  the  absence  of  significant   sales  and  financial   commitments  raise
substantial doubt about the Company's ability to continue as a going concern.



/s/ Marcum & Kliegman LLP
----------------------------
New York, New York
March 5, 2004

                                       F-1

<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,  2002,  and the related  statements  of  operations,  stockholders'
deficit,  and cash flows for the years ended  December 31, 2002 and 2001.  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  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the 2002 financial statements referred to above present fairly,
in all material respects, the financial position of Celerity Systems, Inc. as of
December  31,  2002,  and the results of its  operations  and cash flows for the
years ended December 31, 2002 and 2001 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 approximately
$2,727,000 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.




HJ & Associates, LLC
Salt Lake City, Utah
April 3, 2003

                                       F-2

<PAGE>


CELERITY SYSTEMS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                              December 31,
                                                                ------------------------------------------
 Assets                                                                 2003                  2002
                                                                ---------------------   ------------------
<S>                                                             <C>                     <C>
   Cash                                                                 $ 56,156              $ 5,012
   Inventories, net                                                            -            1,310,143
   Other current assets                                                    6,764                    -
                                                                ---------------------   ------------------
         Total current assets                                             62,920            1,315,155
                                                                ---------------------   ------------------

 Fixed assets, net                                                        38,317              175,964
 Investment in Yorkville Advisors Management, LLC,
    at cost which approximates fair value                              5,240,000                    -
 Investment in and advances to Celerity Systems-NV,
    at fair value                                                              -                    -
 Debt offering costs, net                                                165,903              617,274
 Other                                                                         -               20,900
                                                                ---------------------   ------------------

      Total assets                                                   $ 5,507,140           $2,129,293
                                                                =====================   ==================

 Liabilities and Stockholders' Equity

 Accounts payable                                                      $ 463,552           $2,099,204
 Judgments and defaults payable (including $213,400
    and $0 to a related party)                                           570,781              140,000
 Accrued wages and related taxes                                               -              327,041
 Accrued interest ( including $126,416 and $35,179
    to a related party)                                                  270,746            1,018,867
 Notes payable - related party                                           115,000              238,950
 Deferred revenue                                                              -              154,227
 Other current liabilities                                                16,867               64,472
                                                                ---------------------   ------------------

      Total current liabilities                                        1,436,946            4,042,761

 Convertible debentures - related party, net                             570,727                    -
 Convertible debentures, net                                           1,518,758            2,977,520
                                                                ---------------------   ------------------
                                                                       2,089,485            2,977,520
                                                                ---------------------   ------------------

      Total liabilities                                                3,526,431            7,020,281
                                                                ---------------------   ------------------

 Commitments and contingencies                                                 -                    -

 Series B convertible preferred stock, $.01 par value;
    authorized 100 shares; 32.25 shares issued and
    outstanding at December 31, 2002                                           -              322,500

 Series E convertible preferred stock, $.01 par value;
    authorized 100 shares; 4 shares issued and outstanding
    at December 31, 2002                                                       -               40,000

 Stockholders' Equity (Deficit)
 Common stock, $.001 par value, 5,000,000,000 and 250,000
    shares authorized, 4,553,473,409 and 246,325,579 issued
    and outstanding in 2003 and 2002, respectively                     4,553,473              246,325
 Additional paid-in capital                                           40,544,690           36,058,793
 Net unrealized depreciation on investments                             (842,121)                   -
 Accumulated deficit                                                 (42,275,333)         (41,558,606)
                                                                ---------------------   ------------------
      Total stockholders' equity (deficit)                             1,980,709           (5,253,488)
                                                                ---------------------   ------------------

      Total liabilities and stockholders' equity (deficit)           $ 5,507,140           $2,129,293
                                                                =====================   ==================

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

                                                    F-3
</TABLE>
<PAGE>

CELERITY SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                         As a Business
                                          Development
                                           Company             Prior to becoming a Business Development Company
                                       -------------------   ----------------------------------------------------
                                           Period June 3
                                              2003                                     Year Ended          Year Ended
                                         to December 31,       Period January 1,      December 31,         December 31,
                                              2003           2003 to June 2, 2003        2002                 2001
                                       --------------------  -------------------   -----------------    -----------------
<S>                                    <C>                   <C>                   <C>                  <C>
Unrealized loss on investments           $     (842,121)     $           -          $            -       $            -
Dividend income                                  65,000                  -                       -                    -
                                       --------------------  -------------------   -----------------    -----------------
                                               (777,121)                 -                       -                    -
Sales                                                 -                  -                 649,815              403,997
Cost of sales                                         -                  -                 601,193              548,765
                                       --------------------  -------------------   -----------------    -----------------
                                                      -                  -                  48,622             (144,768)
Inventory write-downs and adjustments                 -                  -                 369,546              614,364
                                       --------------------  -------------------   -----------------    -----------------
    Gross loss                                 (777,121)                 -                (320,924)            (759,132)
  General and administrative expenses           351,001            300,266               2,045,738            5,667,077
                                       --------------------  -------------------   -----------------    -----------------
    Operating loss                           (1,128,122)          (300,266)             (2,366,662)          (6,426,209)
Other income (expense)
  Amortization of debt offering costs          (372,808)           (95,063)               (568,263)            (198,633)
  Beneficial conversion feature -
    convertible debentures                     (709,720)          (196,080)             (1,018,759)            (575,224)
  Interest expense                             (265,467)          (202,402)               (691,782)            (906,178)
  Settlement of debt                          1,534,985            176,095                  49,132               71,864
  Income on equity warrant liability                  -                  -                 134,374            1,893,852
  Loss on treasury stock                              -                  -                       -             (227,500)
  Other income                                        -                  -                   6,254               37,854
                                       --------------------  -------------------   -----------------    -----------------
Total other income (expense)                    186,990           (317,450)             (2,089,044)              96,035
                                       --------------------  -------------------   -----------------    -----------------
  Loss before cumulative effect of
    change in accounting principle             (941,132)          (617,716)             (4,455,706)          (6,330,174)
Cumulative effect of change in
  accounting principle                                -                  -                     -             2,598,813
                                       --------------------  -------------------   -----------------    -----------------
    Net loss                                   (941,132)          (617,716)             (4,455,706)          (3,731,361)
  Beneficial conversion feature -
    preferred stock                                   -                  -                 154,000            1,060,000
                                       --------------------  -------------------   -----------------    -----------------
    Net loss attributable to common
      stockholders                       $    (941,132)      $    (617,716)         $   (4,609,706)      $   (4,791,361)
                                       ====================  ===================   =================    =================

Loss per common share, basic and
  diluted
  Loss before cumulative effect of
    change in accounting principle       $            -      $           -          $        (0.08)      $        (1.99)
  Cumulative effect of change in
    accounting principle                              -                  -                       -                 0.82
                                       --------------------  -------------------   -----------------    -----------------
  Net loss per common share, basic
    and diluted                                       -                  -                   (0.08)               (1.17)
  Beneficial conversion feature -
    preferred stock                                   -                  -                       -                (0.33)
                                       --------------------  -------------------   -----------------    -----------------
Net loss per common share
  attributable to common stockholders    $            -      $           -          $        (0.08)      $        (1.50)
                                       ====================  ===================   =================    =================

    Weighted average shares
      outstanding - basic and diluted     1,046,447,945        283,614,763              57,076,981            3,181,652
                                       ====================  ===================   =================    =================

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

                                                           F-4
</TABLE>
<PAGE>

CELERITY SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                         As a Business
                                                          Development
                                                            Company         Prior to becoming a Business Development Company
                                                         ---------------    -------------------------------------------------
                                                             Period
                                                           June 3, 2003         Period        Year Ended         Year Ended
                                                           to December,     January 1, 2003    December 31,      December 31,
                                                               2003         to June 2, 2003       2002              2001
                                                         ---------------    -------------    --------------    --------------
<S>                                                      <C>                <C>              <C>               <C>
Cash flows from operating activities:
  Net loss                                               $     (941,132)    $   (617,716)    $  (4,455,706)    $  (3,731,361)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
      Settlement of debt                                     (1,534,985)        (176,095)          (49,132)          (71,864)
      Unealized loss on investment                              842,121
      Termination of financing agreement                              -                -                 -           408,000
      Equity placement fee related to terminated
        equity credit line                                            -                -                 -         1,363,975
      Equity warrant liability                                                                    (134,374)       (1,893,852)
      Change in accounting principle                                  -                -                 -        (2,598,813)
      Issuance of warrants                                            -                -                 -           399,304
      Loss of treasury stock                                          -                -                 -           227,500
      Depreciation and amortization                                   -           17,289            86,227            92,811
      Interest expense related to notes payable                       -                -                 -            66,506
      Expense related to consulting fees,
        payroll and directors' fees                                   -                -                 -           145,526
      Inventory write-downs and adjustments                           -                -           369,546           237,250
      Beneficial conversion - convertible notes                 709,720          196,080         1,018,759           575,224
      Amortization of debt offering costs                       372,808           95,063           568,263           198,633
      Gain on settlement of capital lease obligation                                                                 (97,500)
      Loss on abandonment of fixed assets                             -           46,561                 -           365,383
      Shares of common stock issued as payment
        for consulting fees, payroll and
        directors' fees                                          67,143            8,479           124,058                 -
      Changes in operating assets and
        liabilities:
        Accounts receivable                                           -                -             4,282            (4,282)
        Inventories                                                   -          (34,322)          627,872        (1,949,563)
        Other assets                                             (6,764)               -                 -                 -
        Accounts payable                                       (325,708)         (50,734)           33,481         1,456,378
        Accrued wages                                          (136,858)               -           250,019                 -
        Accrued interest                                        215,486          212,222           237,895           617,496
        Other current liabilities                               (21,137)          (8,163)           67,728           119,405
                                                         ---------------    -------------    --------------    --------------
          Net cash used in operating activitities           (759,306)           (311,336)       (1,251,082)       (4,073,844)

Cash flows from investing activities:
  Purchase of fixed assets                                      (38,317)               -            (2,494)         (574,083)
  Advances to Celerity Systems-NV                              (297,356)
  Acquisition of minority interest in Yorkville
    Advisors' Management, LLC                                (5,240,000)               -                 -                 -
                                                         ---------------    -------------    --------------    --------------
          Net cash used in investing activitities            (5,575,673)               -            (2,494)         (574,083)

Cash flows from financing activities:
  Proceeds from notes payable - related party                    15,000           25,000           113,950            54,000
  Payments on  notes payable - related party                   (163,950)               -                 -           (54,000)
  Proceeds from convertible debentures                        1,380,000          299,000         1,140,000         5,686,000
  Principal payments on debt                                     (7,591)               -          (305,000)         (592,500)
  Proceeds from issuance of common stock                      5,166,500                -            93,000            30,000
  Proceeds from preferred stock offering, net of
    offering costs                                                    -                -           154,000           919,654
  Debt offering costs                                                 -          (16,500)         (109,350)       (1,233,605)
                                                         ---------------    -------------    --------------    --------------
           Net cash provided by financing activitities        6,389,959          307,500         1,086,600         4,809,549

Net increase (decrease) in cash                                  54,980           (3,836)         (166,976)          161,622
Cash, beginning of period                                         1,176            5,012           171,988            10,366
                                                         ---------------    -------------    --------------    --------------

Cash, end of period                                      $       56,156     $      1,176     $       5,012     $     171,988
                                                         ===============    =============    ==============    ==============

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

                                                             F-5
</TABLE>
<PAGE>

CELERITY SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders' (Deficit) Equity
For the years ended December 31, 2003 and 2002 and 2001
<TABLE>
<CAPTION>
                                                        Common Stock               Additional
                                               --------------------------------     Paid-In         Treasury
                                                 Shares             Amount          Capital          Stock
                                               --------------    --------------   --------------   -----------
<S>                                            <C>               <C>              <C>              <C>
 Balance, December 31, 2000                        1,231,971     $       1,232    $  30,430,956    $ (227,500)

 Issuance of common stock                             50,000                50           29,950
  Issuance of convertible debentures with
    beneficial conversion feature                                                     2,151,794
  Issuance of convertible preferred stock
    with beneficial conversion feature                                                  969,654
 Issuance of common stock as payment of
   certain consulting and directors' fees,
   payroll and accounts payable                      184,144               184          553,344
 Conversion of convertible debentures to
   shares of common stock                          3,155,638             3,156        1,683,193
 Conversion of convertible preferred stock
   to shares of common stock                         318,010               318          190,593
 Amortization of beneficial conversion
   feature and accretion of redeemable
   convertible preferred stock                                                           27,446
 Change in accounting principle                                                      (2,863,760)
 Loss on treasury stock                                                                               227,500
 Net loss
                                               --------------    --------------   --------------   -----------
 Balance, December 31, 2001                        4,939,763             4,940       33,173,170             -

 Issuance of common stock                          9,300,000             9,300           83,700
  Issuance of convertible debentures with
    beneficial conversion feature                                                       452,252
  Issuance of convertible preferred stock
    with beneficial conversion feature                                                  154,000
 Issuance of common stock as payment of
   certain consulting and directors' fees,
   payroll and accounts payable                    3,810,388             3,810          120,248
 Conversion of convertible debentures to
   shares of common stock                        223,675,428           223,675        1,278,523
 Conversion of convertible preferred stock
   to shares of common stock                       4,600,000             4,600          796,900
 Amortization of beneficial conversion
   feature and accretion of redeemable
   convertible preferred stock
 Close out of equity warranty liability
   account                                                                               29,629
 Reestablish equity warranty liability
   account                                                                              (29,629)
 Net loss
                                               --------------    --------------   --------------   -----------
 Balance, December 31, 2002                      246,325,579           246,325       36,058,793            -

  Issuance of convertible debentures with
    beneficial conversion feature                                                       198,200
 Issuance of common stock as payment of
   certain consulting  fees, payroll and
   accounts payable                                4,555,617             4,556            3,924
 Conversion of convertible debentures to
   shares of common stock                        228,023,673           228,024           67,976
 Conversion of convertible preferred stock
   to shares of common stock                       2,645,000             2,645          359,855
 Net loss
                                               --------------    --------------   --------------   -----------
 Balance, June 2, 2003                           481,549,869           481,550       36,688,748             -

 Issuance of common stock for cash             3,149,833,333         3,149,833        2,016,667
  Issuance of convertible debentures with
    beneficial conversion feature                                                       181,290
 Issuance of common stock as payment of
   certain consulting  fees, payroll and
   accounts payable                               66,830,000            66,830              313
 Conversion of convertible debentures to
   shares of common stock                        855,260,207           855,260        1,657,672
 Net loss
                                               --------------    --------------   --------------   -----------
 Balance, December 31, 2003                    4,553,473,409     $   4,553,473    $  40,544,690    $        -
                                               ==============    ==============   ==============   ===========


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

                                                      F-6
</TABLE>
<PAGE>

CELERITY SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders' (Deficit) Equity
For the years ended December 31, 2003 and 2002 and 2001
<TABLE>
<CAPTION>
                                               Net Unrealized                           Total
                                                Depreciation      Accumulated        Stockholders'
                                               on Investments       Deficit        (Deficit) Equity
                                               ---------------   --------------   ------------------
<S>                                            <C>               <C>               <C>
 Balance, December 31, 2000                    $        -        $ (32,157,539)     $ (1,952,851)
 Issuance of common stock
  Issuance of convertible debentures with                                                 30,000
    beneficial conversion feature
  Issuance of convertible preferred stock                                              2,151,794
    with beneficial conversion feature
 Issuance of common stock as payment of                                                  969,654
   certain consulting and directors' fees,
   payroll and accounts payable
 Conversion of convertible debentures to                                                 553,528
   shares of common stock
 Conversion of convertible preferred stock                                             1,686,349
   to shares of common stock
 Amortization of beneficial conversion                                                   190,911
   feature and accretion of redeemable
   convertible preferred stock                                      (1,060,000)       (1,032,554)
 Change in accounting principle                                                       (2,863,760)
 Loss on treasury stock                                   -                              227,500
 Net loss                                                           (3,731,361)       (3,731,361)
                                               ---------------   --------------    ----------------
 Balance, December 31, 2001                               -        (36,948,900)       (3,770,790)

 Issuance of common stock                                                                 93,000
  Issuance of convertible debentures with
    beneficial conversion feature                                                        452,252
  Issuance of convertible preferred stock
    with beneficial conversion feature                                                   154,000
 Issuance of common stock as payment of
   certain consulting and directors' fees,
   payroll and accounts payable                                                          124,058
 Conversion of convertible debentures to
   shares of common stock                                                              1,502,198
 Conversion of convertible preferred stock
   to shares of common stock                                                             801,500
 Amortization of beneficial conversion
   feature and accretion of redeemable
   convertible preferred stock                                        (154,000)         (154,000)
 Close out of equity warranty liability
   account                                                                                29,629
 Reestablish equity warranty liability
   account                                                                               (29,629)
 Net loss                                                           (4,455,706)       (4,455,706)
                                               ---------------   --------------    ----------------
 Balance, December 31, 2002                               -        (41,558,606)       (5,253,488)

  Issuance of convertible debentures with
    beneficial conversion feature                                                        198,200
 Issuance of common stock as payment of
   certain consulting  fees, payroll and
   accounts payable                                                                        8,480
 Conversion of convertible debentures to
   shares of common stock                                                                296,000
 Conversion of convertible preferred stock
   to shares of common stock                                                             362,500
 Net loss                                                             (617,716)         (617,716)
                                               ---------------   --------------    ----------------
 Balance, June 2, 2003                                    -        (42,176,322)       (5,006,024)

 Issuance of common stock for cash                                                     5,166,500
  Issuance of convertible debentures with
    beneficial conversion feature                                                        181,290
 Issuance of common stock as payment of
   certain consulting  fees, payroll and
   accounts payable                                                                       67,143
 Conversion of convertible debentures to
   shares of common stock                                                              2,512,932
 Net loss                                          (842,121)           (99,011)         (941,132)
                                               ---------------   --------------    ----------------
 Balance, December 31, 2003                      $ (842,121)     $ (42,275,333)     $  1,980,709
                                               ===============   ==============    ================


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

                                                F-7
</TABLE>
<PAGE>

                             CELERITY SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION AND NATURE OF BUSINESS

     Celerity  Systems,  Inc.  (the  "Company"),  a Delaware  corporation,  is a
     closed-end  management  investment  company  that was  initially  formed to
     design, develop, integrate,  install, operate and support interactive video
     services hardware and software  ("interactive  video") systems.  On June 2,
     2003, the Company elected to become a Business  Development Company ("BDC")
     that is regulated under the Investment  Company Act of 1940, as amended.  A
     BDC  is  an  investment  company  designed  to  assist  eligible  portfolio
     companies  with capital  formation  which are  required to offer,  and many
     times  do  render,   substantial  and  continuing   management  advice.  As
     contemplated  by this  transaction,  the  Company  materially  changed  its
     business plan to primarily seek  investments  in developing  companies that
     offer attractive investment opportunities. This new focus is not limited to
     any particular industry.

     On May 20, 2003, the Company formed a subsidiary, Celerity Systems, Inc. (a
     Nevada corporation), ("Celerity NV"). The assets and liabilities related to
     the existing interactive video business were transferred to Celerity NV for
     100% of the common stock. As this subsidiary is not an investment  company,
     after  June 2, 2003 it is not  consolidated  with the parent  company.  The
     Company's investment in Celerity NV is recorded at fair value,  represented
     as  cost,  plus  or  minus   unrealized   appreciation   or   depreciation,
     respectively.

     Since  its  designation  as a BDC the  Company  has made an  investment  in
     Yorkville Advisors Management, LLC (Note 7).

     In accordance  with Article 6 of Regulation S-X under the Securities Act of
     1933 and Securities  Exchange Act of 1934, the Company does not consolidate
     portfolio  company  investments  in which  the  Company  has a  controlling
     interest.

2.   CONVERSION TO BUSINESS DEVELOPMENT COMPANY

     The  results of  operations  for 2003 are  divided  into two  periods.  The
     five-month period,  representing the period January 1, 2003 through June 2,
     2003,  reflects  the  Company's  results  prior to  operating as a BDC. The
     seven-month period ended December 31, 2003,  reflects the Company's results
     as a BDC.  Accounting  principles  used in the preparation of the financial
     statements beginning June 2, 2003 are different than those of prior periods
     and,  therefore,  the financial position and results of operations of these
     periods are not directly comparable.  The primary differences in accounting
     principles relate to the carrying value of investments.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Consolidation - The consolidated  financial statements include the accounts
     of Celerity  Systems,  Inc. (a Delaware  corporation)  and its wholly-owned
     subsidiary.  All significant  inter-company  transactions and balances have
     been eliminated in consolidation.

     Estimates-  The  preparation  of financial  statements in  conformity  with
     accounting  principles  generally  accepted in the United States of America
     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.

     Concentration of Risk- The Company's bank account is insured by the Federal
     Deposit  Insurance  Corporation  up to  $100,000.  The amounts held for the
     Company  occasionally exceed such amount.  However, the Company believes it
     is not exposed to any significant credit risks. Additionally, approximately
     95% of the Company's  assets are in the  Investment  in Yorkville  Advisors
     Management, LLC.

     Fair Value of Financial Instruments - The carrying amount of items included
     in working capital approximates fair value because of the short maturity of
     those  instruments.  The carrying value of the Company's debt  approximates

                                      F-8
<PAGE>

     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.

     Fixed Assets - Fixed assets are recorded at cost.  Depreciation is computed
     using the  straight-line  method  over the  estimated  useful  lives of the
     underlying  assets,   generally  five  years.  Leasehold  improvements  are
     amortized using the straight-line  method over the shorter of the estimated
     useful  lives of the  assets or the term of the lease.  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
     consolidated financial statements is fairly stated based on this criteria.

     Debt Offering Costs - Debt offering costs are related to private placements
     and 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 the remaining
     unamortized cost is expensed.

                                                   2003              2002
                                                   ----              ----
            January 1,                           $617,274        $1,076,187
            New debt offering costs                16,500          109,350
            Amortization                         (467,871)         (568,263)
                                                 ---------       -----------
            December 31,                         $165,903          $617,274
                                                 =========       ===========

     Investment  Valuation - Investments  in equity  securities  are recorded at
     fair value,  represented as cost, plus or minus unrealized  appreciation or
     depreciation,  respectively.  The fair  value of  investments  that have no
     ready market,  are determined in good faith by management,  and approved by
     the Board of  Directors,  based upon assets and revenues of the  underlying
     investee  companies as well as general  market trends for businesses in the
     same  industry.   Because  of  the  inherent   uncertainty  of  valuations,
     management's  estimates  of  the  values  of  the  investments  may  differ
     significantly  from the values that would have been used had a ready market
     for the investments existed and the differences could be material.

     Revenue  Recognition - 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  and ratably  over the life of any  maintenance  or
     support agreement. The Company's general sales terms require a deposit with
     the order and balance upon delivery,  except for educational sales that are
     handled on a net 30 basis.

     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.  A valuation  allowance related to the deferred tax assets is also
     recorded  when it is more likely than not that some or all of the  deferred
     tax asset will not be realized.

     Change in  Accounting  Principles - 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,  be  reclassified  from  equity to a
     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
     the Company  recorded a  mark-to-market  adjustment  of  $2,598,813  as the
     cumulative effect of a change in accounting  principle.  For the year ended
     December 31, 2003, a total mark-to-market adjustment of $ -0- , compared to

                                      F-9
<PAGE>

     $134,374 in 2002,  was recorded as income on equity  warrant  liability for
     those contracts that existed as of December 31, 2001.

     In 2002,  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  standards 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 2002.

     Stock Based Compensation - In December, 2002, the FASB issued SFAS No. 148,
     "Accounting  for  Stock-Based  Compensation-Transition  and Disclosure - an
     amendment  of FASB  Statement  No. 123" which is  effective  for  financial
     statements  issued for fiscal years ending  after  December 15, 2002.  This
     Statement  amends  FASB  Statement  No.  123,  Accounting  for  Stock-Based
     Compensation,  to provide alternative methods of transition for a voluntary
     change  to the fair  value  based  method  of  accounting  for  stock-based
     employee  compensation.  In addition,  this Statement amends the disclosure
     requirements  of Statement  123 to require  prominent  disclosures  in both
     annual and interim financial  statements about the method of accounting for
     stock-based  compensation  and the  effect of the method  used on  reported
     results.  The Company  continues to follow the  pro-forma  disclosures  for
     stock based compensation as permitted in SFAS 123.

     The  Company had no stock  options  granted in 2003.  Further,  the Company
     recorded no compensation  expense related to options granted in 2002 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 issued in 2002 consistent with the method of SFAS
     123,  the  Company's  net loss  would have been  adjusted  to the pro forma
     amounts indicated below:
<TABLE>
<CAPTION>
                                                         2003          2002             2001
<S>                                                <C>            <C>             <C>
Net loss                                           $ (1,558,848)  $ (4,455,706)   $ (3,731,361)
Less: stock-based compensation expense
Determined under fair value method                           --        (55,830)       (279,145)
                                                   --------------------------------------------
Net loss per share                                 $ (1,558,848)  $ (4,511,536)   $ (4,010,506)

Net value per share
                 Basic and Diluted - as reported   $      (0.00)  $      (0.08)   $      (1.17)
                 Basic and Diluted - pro forma     $      (0.00)  $      (0.08)   $      (1.26)

</TABLE>

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes  option-pricing model with the following assumptions used
     for grants in 2002;  risk-free  interest rate of 1.86%,  volatility between
     237% and 330% and expected lives from three to ten years.

     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.

     Recent Accounting Pronouncements - The Company adopted FASB 149, "Amendment
     of Statement 133 on Derivative Instruments and Hedging Activities", on July
     1, 2003. FASB 149 clarifies and amends FASB 133 for  implementation  issues
     raised by constituents  or includes the conclusions  reached by the FASB on
     certain FASB Staff  Implementation  Issues.  Statement 149 also amends FASB
     133 to require a lender to account for loan commitments related to mortgage

                                      F-10
<PAGE>

     loans that will be held for sale as derivatives.  SFAS No. 149 is effective
     for contracts entered into or modified after June 30, 2003. The adoption of
     SFAS No. 149 did not have a material  impact on the Company's  consolidated
     financial position or results of operations.

     In  November  2002,  the  FASB  issued   Interpretation   ("FIN")  No.  45,
     "Guarantor's   Accounting  and  Disclosure   Requirements  for  Guarantees,
     Including  Indirect  Guarantees  of  Indebtedness  of  Others."  FIN No. 45
     requires a company,  at the time it issues a  guarantee,  to  recognize  an
     initial  liability  for the fair  value of  obligations  assumed  under the
     guarantee and  elaborates on existing  disclosure  requirements  related to
     guarantees and warranties.  The initial recognition requirements of FIN No.
     45 are effective for guarantees issued or modified after December 31, 2002.
     The  implementation  of FIN No.  45 did not have a  material  impact on the
     Company's consolidated financial statements.

     In May,  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
     Financial  Instruments with Characteristics of both Liabilities and Equity"
     which is effective for financial instruments entered into or modified after
     May 31, 2003,  and  otherwise  is  effective at the  beginning of the first
     interim period  beginning after June 15, 2003.  This Statement  establishes
     standards  for how an issuer  classifies  and  measures  certain  financial
     instruments  with  characteristics  of  both  liabilities  and  equity.  It
     requires that an issuer classify a financial  instrument that is within its
     scope as a  liability.  The  implementation  of SFAS  No.150 did not have a
     material impact on the Company's consolidated financial statements.

     In  December  2003,  the  FASB  issued   Interpretation  No.  46  (revised)
     "Consolidation of Variable Interest Entities"  (FIN46R),  an interpretation
     of   Accounting   Research   Bulletin  No.  51,   "Consolidated   Financial
     Statements".  Variable  interest  entities,  some of  which  were  formerly
     referred to as special purpose entities,  are generally  entities for which
     their  other  equity  investors  (1) do not provide  significant  financial
     resources for the entity to sustain its activities,  (2) do not have voting
     rights or (3) have voting rights that are disproportionately  high compared
     with their economic  interests.  Under FIN46R,  variable  interest entities
     must be consolidated by the primary beneficiary. The primary beneficiary is
     generally  defined  as having  the  majority  of the risks and  rewards  of
     ownership arising from the variable  interest entity.  FIN46R also requires
     certain  disclosures  if a  significant  variable  interest is held but not
     required to be consolidated.  The effective date of revised  Interpretation
     No. 46 varies but is effective for the Company  commending  March 31, 2004.
     The Company does not expect this standard to have a material  impact on its
     consolidated financial condition or results of operations.

     Long-Lived  Assets - The Company  accounts  for  impairment  of  long-lived
     assets in  accordance  with  Statement  of Financial  Accounting  Standards
     ("SFAS") No. 144,  "Accounting for the Impairment or Disposal of Long-Lived
     Assets". SFAS No. 144 established a uniform accounting model for long-lived
     assets to be disposed of. SFAS No. 144 also requires that long-lived assets
     be reviewed  for  impairment  whenever  events or changes in  circumstances
     indicate  that the  carrying  amount  of an asset  may not be  recoverable.
     Recoverability  of assets to be held and used is measured by comparing  the
     carrying amount of an asset to estimated undiscounted future net cash flows
     expected to be generated by the asset.  If the carrying amount of the asset
     exceeds its estimated future cash flows, an impairment charge is recognized
     by the amount by which the  carrying  amount of the asset  exceeds the fair
     value of the asset.  At December 31, 2003, the Company  believes that there
     has been no impairment of its long lived assets.

     Advertising  - The  Company  follows  the policy of  charging  the costs of
     advertising  to expense as incurred.  Expenses  incurred were $4,640 and $0
     and $0 for the years ended December 31, 2003, 2002 and 2001.

     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.

     Reclassification  - Certain prior year balances have been  reclassified  to
     conform with the December 31, 2003 presentation.

     On  December  12,  2003,   the  Company   entered  into  a  Standby  Equity
     Distribution  Agreement with Cornell Capital Partners,  LP. Pursuant to the
     Standby Equity Distribution Agreement,  the Company, may at its discretion,
     periodically  issue and sell to Cornell  Capital  Partners shares of common
     stock for a total purchase price of $10 million. The amount of each advance
     is  subject to an  aggregate  maximum  advance  amount of  $450,000  in any
     thirty-day  period,  provided  that each  advance may not exceed  $150,000.
     Cornell Capital  Partners will purchase shares of our common stock for a 1%
     discount to the lowest closing bid price of our common stock for the 5 days
     immediately  following  the  notice  date.  In  addition,  Cornell  Capital
     Partners  will  retain  4%  of  each  advance  under  the  Standby   Equity
     Distribution  agreement and receive a one-time  commitment fee of $490,000,
     payable  by  the  issuance  of a  convertible  debenture.  Cornell  Capital
     Partners  intends to sell any shares  purchased  under the  Standby  Equity
     Distribution Agreement at the then prevailing market price.

                                      F-11
<PAGE>

4.   GOING CONCERN

     The Company's consolidated financial statements have been prepared assuming
     that the  Company  will  continue as a going  concern.  The Company has had
     recurring  losses  since  inception  of  approximately   $43,117,000,   and
     continues to suffer cash flow and working capital shortages. As of December
     31, 2003,  the Company had a working  capital  deficiency of  approximately
     $1,374,000.  These factors,  taken together with the absence of significant
     sales  and  financial  commitments,  raises  substantial  doubt  about  the
     Company's ability to continue as a going concern.

     As  discussed in Note 1, on June 3, 2003,  the Company  elected to become a
     business  development  company.  As contemplated by this  transaction,  the
     company  materially changed its business plan to primarily seek investments
     in developing  companies that offer  attractive  investment  opportunities.
     This new focus is not limited to any particular industry.

     On June 3,  2003,  the  Company  filed  with the  Securities  and  Exchange
     Commission  to  become a BDC which is  regulated  under  Section  54 of the
     Investment  Company Act of 1940.  As a BDC,  the Company may sell shares of
     its  freely  trading  common  stock  in  amounts  up  to  $5,000,000  in  a
     twelve-month  period.  Shares  sold  are  exempt  from  registration  under
     Regulation  E of the  Securities  Act of 1933.  On June 4, 2003 the Company
     filed an Offering  Circular Under  Regulation E to sell up to $4,500,000 of
     its common stock at a minimum  price of $0.001 to a maximum price of $0.02.
     Between June 30, 2003 and December 31, 2003 the Company sold  1,149,833,333
     shares resulting in net proceeds of $1,166,500.

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

5.   ACCOUNTS RECEIVABLE, NET

     The Company  utilitzes  the  reserve  method to account for bad debts based
     upon a periodic review of the accounts.

6.   FIXED ASSETS, NET

     Cost  and  related  accumulated  depreciation  of the  fixed  assets  as of
     December 31, 2003 is as follows:

                                     2003              2002
                                     ----              -----
 Property and equipment            $38,317         $   475,308
 Accumulated depreciation               --            (299,344)
                                   -------         ------------
                                   $38,317         $   175,964
                                   =======         ============

     Depreciation  expense in 2003 and 2002 and 2001 was $17,289 and  $86,227and
     $56,789,  respectively. In 2003, the Company recorded a loss on abandonment
     charge on the  disposal of certain  fixed  assets of $46,561 in  connection
     with  certain  abandoned  projects.  Additionally,  the  Company  wrote off
     approximately  $197,000  of retired  and fully  depreciated  fixed  assets.
     During  2001  equipment  was  purchased  to  be  used  in  connection  with
     multi-housing  projects.  The Company  terminated those projects due to the
     high cost of  purchasing  the equipment  and the  relatively  slow expected
     return on investment.  The Company  recorded a loss on abandonment of fixed
     assets of $365,383 in connection with these projects in 2001.

7.   INVESTMENT IN YORKVILLE ADVISORS' MANAGEMENT, LLC

     In June,  2003 the Company's Board of Directors voted to become a BDC under
     Section 54 of the  Investment  Company act of 1940. On December 1, 2003 the
     Company purchased a minority interest in Yorkville Advisors Management, LLC
     ("Yorkville"). Yorkville is the investment manager of a private equity fund
     that is a  principal  holder  of  equity  securities  of the  Company.  The
     purchase price amounted to $5,240,000.  The  acquisition was funded through
     the sale of  2,000,000,000  shares  of common  stock to the  aforementioned
     private  equity  fund,  resulting  in net  proceeds of  $4,000,000  and the
     balance paid using the proceeds  received from the issuance of  convertible
     notes  payable.  These shares which were issued  subsequent to December 31,
     2003 and have been reflected as  outstanding at such date.  During the year
     ended December 31, 2003, the Company  received  $65,000 in dividend  income
     from this  investment,  which has been  recorded as Dividend  Income in the
     consolidated statements of operations.

8.   INVESTMENT IN CELERITY SYSTEMS, INC. (A NEVADA CORPORATION)

     The following table represents Celerity NV's statement of operations.

                                      F-12
<PAGE>

     The following  table  represents  Celerity NV's statement of operations for
     the year ended December 31, 2003.

        Sales                                             $  247,945
        Cost of Sales                                         86,949
                                                          ------------
                                                             160,996
        Inventory write-downs and adjustments              1,076,369
                                                          ------------
        Gross loss                                          (915,373)
        General and administrative expenses                  193,660
                                                          ------------
        Operating loss                                    (1,109,033)
        Other income (expense)
        Interest expense                                      (5,682)
        Settlement of debt                                   174,950
                                                          ------------
        Total other income (expense)                         169,268
                                                          ------------
      Net loss                                              (939,765)
                                                          ============


     The following table  represents  Celerity NV's balance sheet as of December
     31, 2003.

        Accounts receivable, net                         $    49,319
        Inventories, net                                     299,200
                                                         -------------
          Total current assets                               348,519
        Fixed assets, net                                     67,933
        Other                                                  1,600
                                                         -------------
        Total assets                                     $  4 18,052
                                                         =============

        Accounts payable                                 $   834,216
        Other current liabilities                             23,601
                                                         -------------
        Total liabilities                                    857,817

        Stockholder Deficit
        Common stock                                             250
        Additional paid-in capital                           499,750
        Accumulated deficit                                 (939,765)
                                                          ------------
        Total stockholder deficit                         $ (439,765)
                                                          ------------
        Total liabilities and deficit                     $  418,052
                                                          ============


     Celerity NV develops and manufacturers,  at third party plants, digital set
     top boxes and digital video servers for the interactive television and high
     speed Internet markets. NV can also provide a comprehensive content package
     for  education  users with over 1,300  titles  available.  Due to a lack of
     funding NV has been  targeting  the education  market,  to the exclusion of
     other markets available to us.

     The education market, particularly the public schools segment, is a growing
     area.  NV believes that its products and services are more  effective  than
     tradition VCR or analog media storage systems, and at a better cost.

     During the fourth  quarter of 2003 an  informal  arrangement  concerning  a
     pending sale was terminated and the Company  determined  that a significant
     portion of the  inventory  was not salable.  As a result  during the fourth
     quarter of 2003 NV recorded a reserve  adjustment of $1,068,870.  The write
     down results from a lower of cost of market  valuation on certain parts and
     finished goods.  Without additional sales, there is a substantial risk that
     NV will not be able to continue operations.

     The Company  charges NV for salaries and benefits and a portion of costs as
     a  facility  charge.  Additionally  the  Company  advances  funds  for  any
     inventory  purchases necessary to complete a sale. During 2003, the Company

                                      F-13
<PAGE>

     advanced  $342,121  to NV.  This  amount  plus the  initial  investment  of
     $500,000  in  net  assets  transferred  to NV  resulted  in  an  unrealized
     depreciation  on the  investment  in NV of  $842,121  as  reflected  in the
     statement  of  operations  of the Company as a BDC.  Accordingly,  the Fair
     Value of such investment has been recorded at zero as of December 31, 2003.

     On March 5, 2001, the Company entered into a National Distributor Agreement
     for the education market with Kidston Communications,  a company controlled
     by Edward  Kidston,  a director of the  Company  until  October  30,  2002.
     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.  The Company had sales of $247,945 to
     Kidston Communications in 2003 which represented 100% of total sales.





9.   JUDGMENTS  AND DEFAULTS  PAYABLE

     At December  31, 2003  amounts  shown in this  account  reflect  $95,972 in
     judgments  recorded  against the Company,  $342,400 of  liquidated  damages
     accrued as a result of not filing an effective  registration  statement for
     certain  convertible  debentures  and $132,409 of royalty notes payable for
     which the Company is in default.

10.  INCOME TAXES

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

                                                   2003             2002
                                               ----------------------------
     Current:
         Inventory reserve                     $         --   $     84,000
         Other                                       51,000         55,000
                                               -------------  -------------
                                                     51,000        139,000
     Valuation allowance for net
       current deferred tax assets                  (51,000)      (139,000)
                                               -------------  -------------

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

     Noncurrent:
         Net operating loss and research
           credit carryforwards                $ 13,513,000   $ 14,010,000
         Property and equipment                      (5,000)        (5,000)
                                               -------------  -------------

     Valuation allowance for net noncurrent
       deferred tax assets                      (13,508,000)   (14,005,000)
                                               -------------  -------------

         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
     not be realized.  Accordingly,  a valuation  allowance has been established
     against the total net deferred tax asset.

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

                                      F-14
<PAGE>

                                        2003          2002          2001
                                    ----------    ------------  ------------
Computed "expected" tax (benefit)   $(530,000)    $(1,165,000)  $(1,312,000)
State income tax (benefit), net of
  federal income tax benefit          (62,000)       (136,000)     (105,000)
Beneficial conversion feature
  expense                             359,000         875,000     1,344,000
Loss of benefit of deferred tax
  asset                               233,000         426,000        73,000
                                    ----------    ------------  -------------
                                    $      --     $        --   $        --
                                    ==========    ============  =============

     At December  31, 2003,  the Company has  approximately  $35,436,000  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 2011 through
     2023.

11.  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 was due in
     April 2002 and bears interest at 9%. In April 2002 the Company defaulted on
     payments  due  of  $125,000   plus   accrued   interest,   aggregating   to
     approximately  $135,000.  The Company agreed to a final  settlement in 2003
     which resulted in income from settlement of debt of $1,012.

     At  December  31, 2003 the Company  has an  outstanding  note  payable to a
     principal  holder of equity  securities  of the  Company  in the  amount of
     $105,000.

     At December 31, 2003, the Company has an outstanding demand note payable to
     a former  member  of the  Company's  Board of  Directors  in the  amount of
     $10,000.

LONG TERM DEBT

     In October and November 1998, the Company placed  $450,000 of 7% notes with
     a term of three 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.  On October 27,  2001,  the Company  defaulted  on payments due of
     $150,000,  plus accrued  interest.  At December  31, 2003,  the note had an
     outstanding balance of $132,409.  Written demand has been received from one
     of the two note holders and full  settlement of $32,409 was made in January
     2004. The Company is seeking to make  arrangements  with the remaining note
     holder.

     In 2002,  the Company  issued  $800,000  aggregate  principal  amount of 4%
     convertible   debentures   resulting  in  net  proceeds  of   approximately
     $726,000.The  debentures have a term of five years and are convertible into
     the Company's  common stock, at the option of the holder,  at a price equal
     to 75% of the average  closing  bid price of the common  stock for the five
     trading  days  immediately  preceding  conversion.  At December  31,  2002,
     $400,000 of the  debentures  had  converted  to shares of common  stock and
     $400,000 was exchanged into a 10% convertible debenture.

     In  September  2002,  the Company  issued a 10%  convertible  debenture  of
     $1,500,000  to a  related  party  in  exchange  for  4%  debentures  due of
     $998,478, related accrued interest of $161,522 and additional proceeds, net
     of approximately $34,000 of offering costs, of approximately $306,000. This
     debenture is secured by all of the Company's  assets.  This debenture has a
     term of five years and is convertible  into the Company's  common stock, at
     the option of the holder,  at a price equal to 87.5% of the lowest  closing
     bid  price of the  common  stock  for the  five  trading  days  immediately
     preceding  conversion,  or  $0.06  per  share.  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 $540,550 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.  Upon  conversion  prior  to the  stated  date of
     redemption  the  remaining  unamortized  discount  will be  recognized as a
     non-cash interest  expense.  During 2002 the related party sold $500,000 of
     this debenture, of which $350,000 remains outstanding at December 31, 2003.
     During 2003 the related  party sold  $145,000 of this  debenture,  of which
     $115,000  remains  outstanding  at December 31, 2003. At December 31, 2003,
     $285,000 of the debentures had converted to shares of common stock, $45,000
     had been redeemed and $1,170,000 remained outstanding, of which $705,000 is
     to a related party.

                                      F-15
<PAGE>

     The Company issued $429,000  aggregate  principal  amount of 5% convertible
     debentures  in 2003,  resulting in  proceeds,  net of $16,500 of debt issue
     costs,  of  $413,500.  The  debentures  have a term of three  years and are
     convertible  into the Company's  common stock, at the option of the holder,
     at a price equal to $0.001. 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 $158,200
     will be amortized as a non-cash interest expense over the three year period
     from the date of issuance to the stated  redemption date of the debentures.
     Upon  conversion  prior to the  stated  date of  redemption  the  remaining
     unamortized  discount will be expensed.  At December 31, 2003,  $204,000 of
     the  debentures  had  converted  to shares of common  stock,  and  $225,000
     remained outstanding.

     In 2003, the Company issued  $1,250,000  aggregate  principal  amount of 5%
     convertible debentures. These debentures have a term of three years and are
     convertible  into the Company's  common stock, at the option of the holder,
     at a price equal to 80% of the lowest closing bid price of the common stock
     for the five trading days  immediately  preceding  conversion.  The Company
     recognized a beneficial  conversion feature for the convertible  debentures
     as a discount  on the  convertible  on the  convertible  debentures  and as
     additional paid-in capital.  This discount of $596,715 will be amortized as
     a non-cash  interest  expense  over the three year  period from the date of
     issuance to the stated  redemption date of the debentures.  Upon conversion
     prior to the stated date of redemption the remaining  unamortized  discount
     will be recognized as a non-cash  interest  expense.  At December 31, 2003,
     all of the debentures remained outstanding.

EQUITY LINE OF CREDIT

     The Company issued $5,686,000  aggregate principal amount of 4% convertible
     debentures  in 2001 and  $1,005,000  in 2000  under a line of credit  dated
     December  31,  1999.  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, 2003,  $5,133,500 of the debentures had converted to shares of
     common stock,  $700,000 had been converted  into a 10% secured  convertible
     debenture  and $790,000 had been  redeemed.  At December 31, 2003 and 2002,
     there  was  $67,500  and  $2,586,844  outstanding  of these 4%  debentures,
     respectively.

     There is no effective  registration statement including common shares to be
     issued in connection  with certain  debentures,  approximately  $1,200,000,
     issued in 2001  under the 1999 Line of Credit  Agreement.  The  Company  is
     required to pay liquidated  damages in the form of increased  interest,  at
     the rate of 2% per month to a maximum of 24%, 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.  At
     December 31, 2003, we have accrued $342,400 as additional  interest expense
     for this item, which has been included in judgments and defaults payable in
     the accompanying consolidated balance sheet.

BENEFICIAL CONVERSION FEATURES OF DEBT

     The Company  recognized  a  beneficial  conversion  feature for the various
     convertible  debentures  issued  in  2003  and  2002  as  discounts  on the
     convertible  debentures and additional  paid-in  capital.  This discount of
     $489,490 and $452,252 for 2003 and 2002 respectively,  will be amortized as
     a non-cash  interest expense over the three or 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  expensed.
     Non-cash interest expense amounted to $905,800 and $1,018,759 for the years
     ended December 31, 2003 and 2002, respectively.

     The maturities of the Company's  long-term debt as of December 31, 2003 are
     as follows:

                                    Total       Related Party      Other
                                  ----------    -------------   -----------
     2006                         $1,475,000    $     60,000    $1,415,000
     2007                             67,500              --        67,500

                                      F-16
<PAGE>

     2008                          1,170,000         705,000       465,000
                                  -----------   -------------   -----------
                                   2,712,500         765,000     1,947,500
         Less unamortized debt
         discount                   (623,015)       (194,273)     (428,742)
                                  -----------   -------------   -----------
       Total long-term debt       $2,089,485    $    570,727    $1,518,758
                                  ===========   =============   ============


12.  PREFERRED STOCK

CONVERTIBLE PREFERRED STOCK

     SERIES B

     In the first quarter of 2001, the Company  consummated a private  placement
     of 23 shares of Series B  Convertible  Preferred  Stock  resulting in gross
     proceeds  of  $230,000.  The  preferred  stock  provided  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 $0.50 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 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 $2.00 per share.  The Company
     allocated  $132,000 of the proceeds to the warrants based on their relative
     fair value.

     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. In 2003, all of the
     Series B preferred stock was converted to 645,000 shares of common stock.

     SERIES D

     In the first half 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 Series D 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 $0.20 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 if permitted by applicable
     law.

     On the date of issuance of the Series D Convertible  Preferred  Stock,  the
     effective  conversion  price was at a  discount  to the price of the common
     stock  into  which it was  convertible.  The  Company  recorded  a  $54,000
     dividend  relative  to the  beneficial  conversion  feature.  In 2002,  the
     Company  converted  the Series D  preferred  stock into  270,000  shares of
     common stock.

     SERIES E

     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 Series E Convertible 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
     $0.02 per share, subject to availability,  at any time during the two years
     following execution of the subscription agreements. On the date of issuance
     of the Series E Convertible Preferred Stock, the effective conversion price
     was at a  discount  to the  price of the  common  stock  into  which it was
     convertible.  The  Company  recorded a $100,000  dividend  relative  to the

                                      F-17
<PAGE>

     beneficial conversion feature. In 2003, all preferred shares were converted
     into 2,000,000 shares of common stock.

13.  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 8,946 options
     to acquire common shares of which 0 and 2,100 were  outstanding at December
     31,  2003 and 2002,  respectively.  In 1997,  the  Company  established  an
     additional  stock option plan under which 10,000  options to acquire common
     shares were reserved for  issuance.  There were options to purchase 250 and
     3,627 shares outstanding under the 1997 plan at December 31, 2003 and 2002,
     respectively.  In 2001, the Company  established an additional stock option
     plan under which 500,000 options to acquire common shares were reserved for
     issuance.  There  were  options  to  purchase  25,200  and  212,000  shares
     outstanding   under  the  2001  plan  at   December   31,  2003  and  2002,
     respectively.  In 2002, 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  760,000 and 6,886,000 shares
     outstanding   under  the  2002  plan  at   December   31,  2003  and  2002,
     respectively.

     Options  granted under these plans  subsequent  to the 1997 initial  public
     offering vest over three years and expire ten years from the date of grant,
     except for the 2002 and 2001 plans which vests 25% at date of grant and the
     balance ratable over three years.

     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 0 and 2,000 of these options which remain  outstanding at December 31,
     2003 and 2002, respectively. These options vest over 3 years and expire ten
     years from date of grant.
<TABLE>
<CAPTION>
                                     2003                    2002                   2001

                                         Weighted                Weighted
                                          Average                 Average               Weighted
                                         Exercise                Exercise                Average
                            Options       Price      Options      Price     Options   Exercise Price
<S>                       <C>             <C>       <C>           <C>       <C>         <C>
Outstanding at beginning
of
Year                       7,105,727      $ 0.03      210,807     $ 3.29     34,809     $ 18.60
Granted                          ---         ---    7,186,000       0.01    183,050        1.60
Exercised                        ---         ---          ---        ---        ---         ---
Forfeited                 (6,320,277)       0.07     (290,830)      1.78     (7,052)      32.60
                          -----------     ------    ----------    ------    --------    -------

Outstanding at end
of year                      785,450      $ 0.04    7,105,977     $ 0.03    210,807     $  3.29
                          ===========     ======   ===========    ======    ========    =======

Options exercisable at
year End                     397,818      $ 0.06    1,798,078     $ 0.01     69,046     $  6.20
                          ===========     ======    ==========    ======    ========    =======
</TABLE>

     The  weighted-average  fair value per option  granted during the year ended
     December 31, 2002 was $0.01.

     The following table summarizes  information about stock options at December
     31, 2003:

                             Options Outstanding             Options Exercisable
                             -------------------             -------------------
                                          Weighted
                                          Average
                         Number           Remaining             Number
Exercise Prices          Outstanding      Contractual Life      Outstanding
---------------          -----------      ----------------      -----------
$0.002                     760,000             8.74               380,000

                                      F-18
<PAGE>

$0.140                       5,000             8.27                 2,500
$1.50                       20,200             7.86                15,150
$3.20                          250            27.24                   168
                          --------                               ---------
                           785,450                                397,818
                          ========                               =========


14.  COMMON STOCK WARRANTS

2000 WARRANTS

     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 18,000 shares of common stock at $14.00 per share. The
     $202,800  fair  value  of  these  warrants  was  recorded  as a cost of the
     offering.  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.  These  warrants  expire in
     August 2005.

2001 WARRANTS

     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 preferred  stock is  convertible  into
     shares of common  stock at a  conversion  price  equal to $0.50 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 230,000 shares of common stock have an exercise price of $2.00 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. As the last share of the Preferred  Stock converted in March,  2003,
     these warrants will expire in March 2005.

     On June 14,  2001,  the  Company  entered  into an  Equity  Line of  Credit
     pursuant in which the Company  may, at its  discretion,  periodically  sell
     shares of common stock for a total  purchase  price of up to $10.0  million
     (Note 11). 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 the common  stock is traded for the 5 days  immediately
     following the notice date.  The  consultant,  who is also a related  party,
     received warrants to purchase 175,000 shares of common stock at an exercise
     price of $2.00.  The fair value of these warrants was recorded as an equity
     placement fee. These warrants expire in June 2006.

     In  accordance  with EITF 00-19,  the Company  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  recorded  a  mark-to-market
     adjustment of $134,374 in 2002 which has been reflected as income on equity
     warrant liability.

     In August 2001, the Company placed $1,586,000 of 4% convertible debentures.
     In connection with this placement,  the agent, who is also a related party,
     received  warrants to purchase  125,000 shares of common stock at $2.00 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.

                                      F-19
<PAGE>

2002 WARRANTS

     During 2002, the Company  received $60,000 in proceeds from the issuance of
     common stock for cash. In connection with these issuances,  the individuals
     received  warrants  to  purchase  up to 650,000  shares of common  stock at
     between $0.08 and $0.10 per share. The warrants expire in August 2004.

     There were no additional warrants issued during 2003. At December 31, 2003,
     there were 993,000 warrants outstanding with an exercise price ranging from
     $0.08 to $14.00  with a weighted  average  price of $0.98.  These  warrants
     expire at various dates August, 2004 and August, 2006.

15.  SETTLEMENT OF TRADE PAYABLE AND CONVERTIBLE DEBENTURES

     During  2003  the  Company  settled  certain  trade  payables,  convertible
     debentures, and accrued interest of $4,407,354. Such settlement resulted in
     a gain on forgiveness of $1,886,029.

16.  LOSS PER SHARE

     Basic and  diluted  loss per  share  were  computed  by  dividing  net loss
     applicable  to  common  stock  by  the  weighted   average   common  shares
     outstanding  during each  period.  Potential  common  equivalent  shares of
     1,623,420,188, 5,086,232,698 and 17,161,617 at December 31, 2003,d 2002 and
     2001,  respectively,  are not  included  in the  computation  of per  share
     amounts in the periods as the effect would be antidilutive.

17.  CASH FLOWS

     Supplemental  disclosure  of cash  flow  information  for the  years  ended
     December 31, 2003 and 2002 and 2001, is as follows:


                                            2003       2002      2001
                                            ----       ----      ----
        Cash paid during the year for:
        Interest                          $ 17,409   $ 1,262   $   849
        Taxes                             $  8,450   $ 5,500   $    --

     2003

     The  Company  issued  71,385,617  shares  of common  stock  with a value of
     $75,623 as payment for certain  consulting and directors' fees, payroll and
     accounts payable items.

     The  Company  converted  $2,808,932,  including  accrued  interest,  of the
     convertible debentures into 1,083,283,880 shares of common stock.

     The Company  converted  $322,500 of Series B Preferred Stock and $40,000 of
     Series E Preferred Stock into 2,645,000 shares of common stock.

     2002

     The  Company  issued  3,810,385  shares  of  common  stock  with a value of
     $124,058 as payment for certain consulting and directors' fees, payroll and
     accounts payable items.

     The  Company  converted  $1,502,198,  including  accrued  interest,  of the
     convertible debentures into 223,675,428 shares of common stock.

     The Company  converted  $627,500 of Series B Preferred Stock and $60,000 of
     Series C Preferred  Stock,  $54,000 of Series D Preferred Stock and $60,000
     of Series E Preferred Stock into 4,600,000 shares of common stock.

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 as 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.

                                      F-20
<PAGE>

18.  COMMITMENTS AND CONTINGENCIES

     In January 2002,  the Company  terminated the Equity Line of Credit entered
     into on  September  14,  2001  due to  delays  in  getting  related  shares
     registered and in order to pursue other types of financing arrangements. As
     a result,  the Company  did not have an  effective  registration  statement
     including common shares to be issued in connection with certain  debentures
     issued in 2001 and the first  quarter of 2002 under the 1999 Line of Credit
     Agreement. The Company is required to pay liquidated damages in the form of
     increased interest on the convertible  debentures as a result of not filing
     an effective registration statement for these debentures at a rate of 2% of
     the  principles  plus  interest per month.  The  liability  for  liquidated
     damages  will  continue  to accrue  until the  earlier of one year from the
     issuance date of the convertible debentures,  as prescribed under Rule 144,
     or the date a new registration statement becomes effective. The Company has
     accrued $342,400 for liquidated damages at December 31, 2003.

     In December, 2001, Veja Electronics, Inc. d/b/a/ Stack Electronics sued the
     Company  for  breach  of  contract  and is  seeking  damages  in  excess of
     $106,000.  This  action  relates  to  amounts  alleged  to be owed from the
     cancellation  of a purchase  order.  During  2003 a judgment  was  rendered
     against  the Company in the amount of  $71,000,  which has been  accrued at
     December 31, 2003.

     In March, 2003, R. R. Donnelly sued the Company for non-payment of expenses
     related to printing  services.  During 2003 a judgment was rendered against
     the  Company in the amount of $16,972,  which has been  accrued at December
     31, 2003.

     In July,  2003,  Premier  Components  sued the Company for  non-payment for
     inventory items purchased.  During 2003 a judgment was rendered against the
     Company in the amount of $45,861,  which has been  accrued at December  31,
     2003.

     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 in Knoxville,  Tennessee under an operating
     lease which expires in January,  2006.  Future  minimum  lease  payments by
     year, and in the aggregate,  under this  noncancelable  operating  lease at
     December 31, 2003, are as follows:

                2004                            65,400
                2005                            65,400
                2006                             2,725
                                             ---------

                                              $133,525
                                             =========


     Rent  expense for  operating  leases was $65,175 and $60,000 and $60,000 in
     2003 and 2002 and 2001, respectively.

19.  RELATED PARTY TRANSACTIONS

REVENUES/SALES CONCENTRATIONS

     On March 5, 2001, the Company entered into a National Distributor Agreement
     for the education market with Kidston Communications,  a company controlled
     by Edward  Kidston,  a director of the  Company  until  October  30,  2002.
     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.  The Company had sales of $247,945 and

                                      F-21
<PAGE>

     $626,597 and $87,800 to Kidston  Communications  in 2003 and 2002 and 2001,
     respectively,  which  represented  100%  and 96% and  22% of  total  sales,
     respectively.

20.  SELECTED QUARTERLY DATA-UNAUDITED

     The following  table sets forth certain  quarterly  information for each of
     the eight  quarters  ended with the quarter ended  December 31, 2003.  This
     information   was  derived  from  our  unaudited   consolidated   financial
     statements.  Results  for any  quarter are not  necessarily  indicative  of
     results for the full year or any future quarter.
<TABLE>
<CAPTION>
                                                            2003
                             --------------------------------------------------------------------
                                 Qtr 1             Qtr 2             Qtr 3             Qtr 4
                             --------------    --------------     -------------     -------------
<S>                          <C>               <C>                <C>               <C>
Unrealized loss on
investment                   $         -       $         -        $       -         $  842,121

Dividend income                        -                 -                -             65,000

Net sales                              -                 -                -                  -

Gross income (loss)                    -                 -                -           (777,121)
Net loss                        (208,487)         (439,696)        (463,976)          (446,689)
Loss per common
share-basic and diluted      $         -       $         -        $       -         $        -
</TABLE>
<TABLE>
<CAPTION>
                                                            2002
                             --------------------------------------------------------------------
                                 Qtr 1             Qtr 2             Qtr 3             Qtr 4
                             --------------    --------------     -------------     -------------
<S>                          <C>               <C>                <C>               <C>
Net sales                    $     2,234       $   462,049        $ 141,030         $   44,502
Gross income (loss)                2,234            39,430           18,888           (381,476)
Net loss                      (1,476,255)       (1,173,113)        (895,709)          (910,629)
Loss per common
share-basic and diluted      $     (0.21)      $     (0.10)       $   (0.02)        $    (0.08)
</TABLE>

20.  SUBSEQUENT EVENT

     In the first quarter of 2004, the Company issued  150,000,000 shares of its
     common stock for cash proceeds in the amount of $210,000.

                                      F-22