<PAGE>

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

                                   FORM 10-KSB

                                   (Mark one)

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

                   For the fiscal year ended December 31, 2002

                                       OR

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

         For the transition period from ____________ to _______________

                           Commission File No. 0-23279

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

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

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

     Issuer's telephone number                       (865) 539-5300

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

 Title of each Class                  Name of each exchange on which registered
 -------------------                  -----------------------------------------


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

                     Common Stock, par value $.001 per share
                     ---------------------------------------
                                (Title of Class)


<PAGE>

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

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

         State issuer's revenues for its most recent fiscal year: $649,815

         Aggregate  market  value of  voting  stock  held by  non-affiliates  of
registrant as of March 24, 2003: $253,525

         Shares of Common Stock outstanding as of March 24, 2003: 253,525,535

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



                       DOCUMENTS INCORPORATED BY REFERENCE


                                 Not applicable
         _______________________________________________________________


         Unless  otherwise  indicated,  the information in this annual report on
form 10-KSB gives effect to the one-for-two-and-one-half  reverse stock split of
Celerity  Systems' common stock, par value $0.001 per share (the "Common Stock")
effected in August 1997 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-KSB contains  forward-looking  statements
that involve certain risks and  uncertainties.  Celerity Systems' actual results
could  differ  materially  from the  results  discussed  in the  forward-looking
statements.  See "Description of Business",  "Risk Factors" and "Forward-Looking
Statements and Associated Risks."

<PAGE>


<TABLE>
<CAPTION>

                                TABLE OF CONTENTS

<S>                                                                                                                     <C>
PART I....................................................................................................................1
     ITEM 1.  DESCRIPTION OF BUSINESS.....................................................................................1
     ITEM 2.  DESCRIPTION OF PROPERTY.....................................................................................8
     ITEM 3.  LEGAL PROCEEDINGS...........................................................................................8
     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................................8
PART II...................................................................................................................9
     ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................................9
     ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..................................................10
     ITEM 7.  FINANCIAL STATEMENTS.......................................................................................16
     ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................17
PART III.................................................................................................................18
     ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
     EXCHANGE ACT........................................................................................................18
     ITEM 10. EXECUTIVE COMPENSATION.....................................................................................19
     ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................................22
     ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................................24
     ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.....................................................25
     ITEM 14. CONTROLS AND PROCEDURES....................................................................................31
SIGNATURE................................................................................................................34
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002..A-1
OFFICER'S CERTIFICATE PURSUANT TO SECTION 302...........................................................................B-1
EXHIBIT 3.6.........................................................................................................3.6 - 1
EXHIBIT 3.7.........................................................................................................3.7 - 1
FINANCIAL STATEMENTS....................................................................................................F-1
</TABLE>

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                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS


Company Overview

         We develop  and  manufacture,  at third party  plants,  digital set top
boxes and digital video servers for the  interactive  television  and high speed
Internet markets. In addition, through arrangements with other parties, Celerity
can offer  end-to-end  systems for  customers.  We also provide a  comprehensive
content package for  educational  users with over 1300 titles  available,  and a
content package,  Celerivision,  for use in entertainment  deployments,  such as
condominiums,  the hospitality industry,  and multihousing  properties.  We also
have developed  unique and valuable  software  functionality  and  applications,
which  incorporates  in some of our products and services.  Based on our lack of
funding,  we have  substantially  curtailed our operations.  Without  additional
outside  funding,  there  is a  substantial  risk  that we  will  not be able to
continue operations.

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

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


Recent Developments

         As of  December  31,  2002,  we had cash on hand of $5,012 and  working
capital of  approximately  $(2,727,000).  Our operations are financed  primarily
from the sale of debt and equity  securities.  For the  foreseeable  future,  we
believe we will continue to rely on external capital to fund our operations.

         We are pursuing the option of becoming a business  development  company
regulated under Section 54 of the Investment Company Act of 1940.

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


Our Products

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


Product Manufactured By Us

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


                                       1
<PAGE>

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

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


Products Manufactured And Developed By Others

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

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

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

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

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


Interactive Video/High Speed Internet Segment

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


                                    INDUSTRY

Industry Overview

         Linear  Television  and VCR  Technology.  Until  about  30  years  ago,
audio-visual home entertainment choices were primarily limited to linear content
(i.e.,  content  that plays in a  pre-programmed  sequence  and which  cannot be
controlled  by  the  viewer).   In  the  1970's,   the  growing   popularity  of
videocassette  recorders (VCR's) and videocassette tapes provided new choices to
home viewing audiences.  VCR and videocassette  technology provides viewers with
the ability to view content on demand and to manage  content  through the use of
pause,  resume,  fast forward,  rewind,  and other features.  VCR use,  however,
entails the inconvenience of leaving home to purchase or rent video cassettes or
choosing  from  among the often  limited  content  available  for  recording  on
television.  Many  video  stores  have  only  a  limited  selection  of  titles,
particularly in areas such as educational content and games, and the most sought
after titles are frequently unavailable.  The proliferation of


                                       2
<PAGE>

cable television,  satellite television,  pay-per-view, and similar technologies
has improved linear television choices,  but these technologies do not offer the
ability to select  content to be viewed on demand,  rather  than on a  scheduled
basis.  New  technologies  such as digital  video disc (DVD) have  improved  the
quality of stored content, but entail similar inconveniences and limited choices
as VCR  technology.  New  technologies  such as Replay  and TiVo  allow  digital
recording from television;  however, they have complicated user interfaces and a
very limited range of available content.

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

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

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

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

         Different  companies have employed different  strategies to address the
shortcomings  of  narrowband  networks  in the  absence of  generally  available
broadband  networks.  In order to address the need for high speed services,  the
cable industry has been deploying cable modems,  and the telephone  industry has
begun  deploying DSL equipment  for high speed  access,  so that the  narrowband
services can run at the highest  possible speed on metallic,  telephone or cable
lines. We believe that,


                                       3
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despite these and other initiatives, narrowband networks are unlikely to achieve
the  combination  of  technological   accessibility  and  speed,  security,  and
robustness  of  transmission  characteristic  of broadband  systems.  The public
access methodology in the Internet and other narrowband  networks,  coupled with
off -the-shelf  modems,  makes security,  both for privacy of communications and
secure commercial transactions,  difficult to achieve. The hardware and software
of interactive broadband systems and the architecture of such networks creates a
more secure  environment  for such  transactions.  In addition,  although better
software,  compression  methods and other  tools have  enabled  improvements  in
narrowband  services,  the  physical  constraints  of  narrowband  networks  are
substantial  compared to those of broadband  networks.  Many  narrowband  lines,
especially  older lines in cities (a preferred  market segment) cannot run at 56
kilobits per second (kbps) the highest widely available PC modem rate. This rate
does not compare to 1.5  Megabits to 25 Megabits  per second  rates  provided by
broadband networks.

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


Basic Interactive Services Configuration

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


Network Equipment

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


Digital Set Top Boxes

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


Digital Video Servers

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


Content Preparation Equipment

         In order to store content in a digital server, send it over a broadband
network,  and interpret  the content  through a digital set top box, the content
must be encoded (or  converted  from analog to digital  format) and  compressed.
Compression


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standards, primarily Motion Picture Experts Group One and Two (MPEG1 and MPEG2),
have been adopted for the preparation and storage of this content.


Applications And Business Support Software

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


Services

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


Content

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


User Experience

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

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

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


Potential Markets

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



                                       5
<PAGE>


                                    STRATEGY


Marketing Strategy

         Our  marketing  strategy is to seek  customers in each of the potential
emerging markets,  to encourage the leading companies and organizations to adopt
this  technology  and to position  ourself as a leading  provider of interactive
video services within niche markets.  We believe that it is important to achieve
market  penetration  at an early stage in the  development  of particular  niche
markets in order to compete  successfully  in those  markets.  Our  marketing is
based on our  demonstrated  ability to install  digital video systems on each of
the major  network  types and its  potential to provide  end-to-end  interactive
video  solutions.   In  addition,   the  scalability  of  our  servers  provides
flexibility in deploying interactive video services systems varying in size from
systems designed to serve 25 simultaneous users to those capable of serving many
thousands of users in a variety of markets on a cost effective basis. We believe
that this scalability will be an attractive feature to potential  customers.  We
also  believe  that  our T 6000  digital  set top box,  with  its wide  range of
capabilities  to  interconnect  with many different  networks and many different
peripheral and display  devices,  will allow us to compete  favorably in several
different  markets,  either with our own digital video server or with others. We
believe that a diversified  marketing  approach  provides us with flexibility in
targeting  emerging markets,  enabling us to recognize market  opportunities and
adapt to perceive changes in marketing  priorities.  However, due to our limited
resources,  we have  determined  to focus on those  markets  in which we believe
there is greater interest at this time, while looking for targets of opportunity
in our other niche market  segments.  We believe that the markets,  which appear
most favorable at this time, are schools,  energy  companies,  hospitality,  and
enterprise  solutions.  We have limited sales and marketing experience and there
can be no assurance  that we will be  successful in  implementing  its marketing
plans.

         Unfortunately,  based on our current financial condition, we are unable
to fully executed our marketing  strategy.  Instead, we are focusing our efforts
on the education market.

         Consistent  with our current  focus on the  education  market,  we have
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.
We have four active school  projects in Ohio,  one in  Pennsylvania  and we have
received  an order for one  additional  school in Ohio.  We have  named  Kidston
Communications as our national distributor for K through 12 public education for
North America,  and are working  collaboratively with them to expand our network
of dealers with the objective of having qualified distributors in every state.

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


Employees

         As of March  24,  2003,  we had 3 full  time  employees,  1 of whom was
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 in the years ended  December
31, 2002 and 2001.


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


                                       6
<PAGE>


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, 2002
and 2001,  we  sustained  losses  from  continuing  operations  of $4.5 and $6.4
million,  respectively.  Future losses are likely to occur. Accordingly,  we may
experience  significant  liquidity  and cash flow problems if we are not able to
raise additional capital as needed and on acceptable terms. No assurances can be
given  that  we  will  be  successful  in  reaching  or  maintaining  profitable
operations.


         We Will Need To Raise Additional Capital To Finance Operations

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


         There is  Substantial  Doubt  About our  Ability to Continue as a Going
         Concern Due to Recurring  Losses and Working Capital  Shortages,  Which
         Means That We May Not Be Able To Continue  Operations  Unless We Obtain
         Additional Funding

         The report of our  independent  accountants  on our  December  31, 2002
financial statements included an explanatory  paragraph indicating that there is
substantial  doubt  about our  ability to  continue  as a going  concern  due to
recurring  losses and working  capital  shortages.  Our ability to continue as a
going concern will be determined  by our ability to obtain  additional  funding.
Our financial  statements do not include any adjustments  that might result from
the outcome of this uncertainty.


         Lack Of Patent And Copyright Protection

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


         Effect  of  Previously   Issued   Options,   Warrants  and  Convertible
Debentures

         As of March 24, 2003,  Celerity had 253,525,535  shares of common stock
outstanding.  In addition, we had outstanding preferred stock, options, warrants
and  convertible  debentures  which,  if converted  or exercised  into shares of
common stock, would result in the issuance of an additional 5,084,646,211 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.


                                       7
<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  $715,000 in the form of  increased  interest  on the  convertible
debentures as a result of our failure to timely file such registration statement
and have it declared effective by the Securities and Exchange Commission.


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   average
approximately  $5,450 per month plus  utilities  and certain  other  maintenance
expenses.


ITEM 3.  LEGAL PROCEEDINGS

         The Company is a defendant in a lawsuit brought by a financial  printer
for  non-payment of expenses.  The action was brought on January 30, 2001 and is
pending  before  Supreme Court in the State of New York,  County of New York. In
this action, the plaintiff,  Merrill/New York Company,  has sued the Company for
the non-payment of financial printing fees and is seeking approximately $118,000
in damages,  plus interest and certain cost. In 2002,  Merrill/New  York Company
obtained a summary  judgment  against the Company for $136,435  which,  has been
fully accrued at December 31, 2002. The Company intends to appeal this decision.

         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 shipment of products.
The Company  intends to defend this action and no amounts  have been  accrued at
December 31, 2002.

         On  February  14,  2002,  Metalade  FL,  Inc.  sued the  Company  for a
delinquent account. The action was brought in the Circuit Court for Knox County,
Tennessee  and is styled as Metalade  FL, Inc. v.  Celerity  Systems,  Inc.  The
plaintiff  alleges it is owed in excess of $103,000  related to the  shipment of
products.  The Company has accrued  approximately  $103,000 in accounts  payable
related to this action at December  31, 2002.  The Company and Metalade  entered
into a consent  judgment  in the  amount  of  $108,000,  of which  approximately
$32,000 has been paid.  The  remaining  amount has been  accrued at December 31,
2002.

         On  October  9,  2002,  Waytec  Electronics  sued  the  Company  for  a
delinquent  account.  The action was brought in the Circuit Court of the City of
Lynchburg,  Virginia. In this action the plaintiff,  Waytec Electronics has sued
the Company for non-payment of inventory items and is seeking $77,705.  In 2002,
a default  judgment  was entered  against the  Company.  This amount  accrued at
December 31, 2002.

         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.


                                       8
<PAGE>

                                     PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


Market Information

         The  Common  Stock  ceased  trading on the  Nasdaq  SmallCap  Market on
October 21, 1999.  Celerity Systems' Common Stock is currently traded on the OTC
Bulletin Board under the symbol "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 2001
1st Quarter                     $4.8000                 $0.6200
2nd Quarter                    $12.4000                 $1.9200
3rd Quarter                     $5.4000                 $1.3800
4th Quarter                     $1.7000                 $0.4000

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

         As of March 24, 2003 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


         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.

         Celerity  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

         In the first  quarter  of 2003,  Celerity  issued  4,554,956  shares of
common stock as payment of certain payroll and accounts payable items.

         In the first  quarter  of 2003,  Celerity  issued  2,645,000  shares of
common stock for the conversion of the remaining shares of preferred stock.


                                       9
<PAGE>

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

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

         We have  continued  to focus  most of our  development  and  production
efforts  during  2002 and 2001 on our T 6000 set top box.  In  addition,  we are
seeking new projects  using our digital  video  servers,  that could be deployed
with the T 6000 or other  compatible set top boxes.  Our T 6000 set top box will
be manufactured by IES in Gray, TN.

         Management  has also  focused on  attempting  to obtain  the  necessary
capital  to  maintain  our  operations.  We are  continuing  to seek to  arrange
financing,    including   possible   strategic   investment   opportunities   or
opportunities  to sell some or all of our assets and business,  while continuing
to pursue  sales  opportunities.  We have  narrowed  our sales  efforts to those
which,  we believe  have the best  chance of  closing  in the near  term.  Since
inception in January,  1993 through December 31, 2002 Celerity has had losses of
$41,558,606, and continues to suffer cash flow and working capital shortages. As
of  December  31,  2002,   Celerity  had  a  negative  net  working  capital  of
approximately  $2,727,000.   The  lack  of  sales  or  a  significant  financial
commitment  raises  substantial  doubt  about our ability to continue as a going
concern or to resume a full-scale level of operations.

         Celerity  had  one   interactive   video   customer  that   represented
approximately 100% of our revenues in 2002 and 75% in 2001.


Results Of Operations


         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, 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).




                                       10
<PAGE>

         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.


         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.


         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 Extraordinary Items

         As a result of the above factors,  loss before  extraordinary items for
the twelve months ended December 31, 2002 was $4,504,838, or $0.08 per share, as
compared to $6,402,038, or $2.01 per share, for the same period in 2001.


         Gain On Extinguishment Of Debt

         During 2002 the  Celerity  negotiated  settlement  of certain  accounts
payable items which  resulted in  cancellation  of debt income of $49,132.  This
item is reflected as an extraordinary item.

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


         Cumulative Effect Of Change In Accounting Principle

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



                                       11
<PAGE>

         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.


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 $5,012 as of December  31, 2002 and  $171,988 as of December
31, 2001. Our cash position continues to be uncertain,  and we currently have no
cash.  Our primary  need for cash is to fund our ongoing  operations  until such
time that the sale of our products  generates enough revenue to fund operations.
In  addition,  our need for cash  includes  satisfying  current  liabilities  of
$4,042,761,  consisting  primarily of accounts  payable of  $2,099,204,  accrued
wages and related  taxes of  $327,041,  accrued  interest of  $1,018,867,  other
accrued liabilities of $64,472,  deferred revenue of $154,227,  notes payable of
$238,950,  and current  portion of  long-term  debt of $140,000.  These  current
liabilities  include a judgment of $136,435 obtained by Merrill  Corporation for
non-payment of printing  fees, a consent  judgment of $108,000 with Metalade FL,
Inc. for non-payment of inventory purchases,  and a judgment of $77,705 obtained
by  Waytec  Electronics  for  non-payment  of  inventory  purchases.  We do  not
currently  have  sufficient  funds  to  pay  these  obligations.  We  will  need
significant  new  funding  from  the  sale of  securities  to fund  our  ongoing
operations  and to satisfy the above  obligations.  We currently do not have any
commitments for funding.

         In June 2001,  we entered  into an Equity  Line of Credit  pursuant  to
which Cornell Capital Partners,  L.P. had agreed to purchase up to $10.0 million
of common  stock.  Initially  we  registered  up to  164,314,919  shares under a
registration  statement  filed on October 18, 2001 for  issuance to the investor
under the Equity Line of Credit and convertible debentures. On January 18, 2002,
we requested that the SEC withdraw the October 18, 2001  registration  statement
as a result of Celerity's  termination of the Equity Line of Credit. On June 28,
2002, we filed an additional  registration statement relating to shares of stock
obtained under convertible  debentures  related to the Equity Line of Credit. On
November  1,  2002,  we  requested  that the SEC  withdraw  the  June  28,  2002
registration statement.  Accordingly,  the Equity Line of Credit is not a source
of liquidity for Celerity.

         Since  December 31, 2002,  we issued  $139,000  principal  amount of 5%
convertible  debentures  resulting  in net  proceeds of $139,000 and borrowed an
additional $40,000 in the form of 10% unsecured short term notes.

         We are pursuing the option of becoming a business  development  company
which is regulated under Section 54 of the Investment  Company Act of 1940. As a
business  development  company we may sell shares of our freely  trading  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.

         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 our former legal
counsel, a former director of Celerity, and the investors in the 10% convertible
debentures  issued in 2002.  Such


                                       12
<PAGE>

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, 2002, we had a net decrease in cash
and cash equivalents of $166,976. Our sources and uses of funds were as follows:

         Cash Used In Operating  Activities.  We used net cash of  $1,251,082 in
our operating  activities in the year ended  December 31, 2002. Net cash used in
operating  activities  resulted  primarily  from a net loss of  $4,455,706,  and
non-cash  income  related to the equity warrant  liability of $134,374.  Our net
cash used in operating  activities  was  partially  offset by  depreciation  and
amortization expenses of $654,490,  non-cash expenses of $1,142,817,  a decrease
in inventory of $1,013,318,  an increase in accrued  interest of $487,914 and an
increase in other current  liabilities of $67,728.  The decrease in inventory is
the result of sales  during the year which was not  replaced  by new  inventory.
Since no orders have been  received,  we have  ceased  purchasing  any  material
amount of  inventory  until  inventory  levels can be reduced  The  increase  in
accrued interest of $487,914 from December 31, 2001 results from borrowings at a
higher rate, 10% on the $1,500,00 secured  convertible  debenture issued in 2002
and the 15%  discount  associated  with  purchase  order  financing  provided by
Kidston Communications, controlled by Ed Kidston, a former director.

         Cash  Used In  Investing  Activities.  We used  net cash of  $2,494  in
investing  activities in the year ended  December 31, 2002.  This relates to the
purchase of fixed assets.

         Cash Provided By Financing  Activities.  We received  $1,086,600 in net
cash from financing activities,  consisting primarily of proceeds from long-term
debt of $1,140,000,  short-term borrowings of $113,950, issuance of common stock
of  $93,000  and  preferred  stock of  $154,000.  This was  partially  offset by
principal  payments on long-term  debt of $305,000 and  financing and debt issue
costs of $109,350.

         Since our  inception in January 1993 and through  December 31, 2002, we
have an accumulated deficit of $41,558,606.  We expect to incur operating losses
for the indefinite  future as we continue to develop and market our  technology.
Since  January 1, 2003,  we have  received  an order for the sale of our Digital
Education System to an Ohio school system.

         As of  December  31,  2002 we had a  negative  net  working  capital of
approximately  $2,727,000.  Inventory decreased  approximately  $1,013,318 since
December  31,  2001 and is the result of  inventory  shipped to  complete  sales
orders and for which no replacement  items were purchased.  Since no significant
new orders have been received,  we have ceased purchasing any material amount of
inventory until inventory  levels can be reduced.  Accounts payable are expected
to remain high until  inventory  levels can be reduced  through sales. We had no
significant capital spending or purchase  commitments at December 31, 2002 other
than a certain  facility  lease and  inventory  component  purchase  commitments
required in the ordinary course of our business.

         We have no existing bank lines of credit.


Contractual Obligations And Commercial Commitments

         The following chart sets forth 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
                                                                  Total
                                        -----------------------------------------------------
                                                  Less than                            After
  Contractual Obligations               Total      1 Year     1-3 Years  4-5 years    5 Years
  -----------------------               -----      ------     ---------  ---------    -------
<S>                                  <C>           <C>                   <C>         <C>
Long - Term Debt                     4,156,844     140,000        --     2,586,844   1,430,000
Current Obligations                  3,902,761        --          --          --          --
Operating Leases                       196,200      62,675     130,800       2,725        --
Unconditioned Purchase Obligations        --          --          --          --          --
Other Long - Term Obligations             --          --          --          --          --
Total Contractual Cash Obligations        --          --          --          --          --
</TABLE>


                                       13
<PAGE>

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

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

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

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

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

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

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

         SFAS No. 142 provides, among other things, that goodwill and intangible
assets  with  indeterminate  lives  shall not be  amortized.  Goodwill  shall be
assigned to a reporting unit and annually  assessed for  impairment.  Intangible
assets with


                                       14
<PAGE>

determinate lives shall be amortized over their estimated useful lives, with the
useful lives reassessed continuously, and shall be assessed for impairment under
the  provisions of SFAS No. 121,  "Accounting  for the  Impairment of Long-Lived
Assets and for  Long-Lived  Assets to be Disposed Of." Goodwill is also assessed
for impairment on an interim basis when events and circumstances  warrant.  Upon
adoption of SFAS No. 142, we will assess  whether an  impairment  loss should be
recognized and measured by comparing the fair value of the  "reporting  unit" to
the carrying  value,  including  goodwill.  If the carrying  value  exceeds fair
value,  then we will compare the implied fair value of the goodwill" (as defined
in SFAS No. 142) to the carrying amount of the goodwill.  If the carrying amount
of the  goodwill  exceeds the  implied  fair value,  then the  goodwill  will be
adjusted to the implied fair value.

         The  adoption  of  this  new  accounting  pronouncement  on  Celerity's
financial statements has not been significant.

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

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

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

         The  adoption  of  this  new  accounting  pronouncement  on  Celerity's
financial statements has not been significant.

         On April,  2002,  the FASB  issued SFAS No.  145,  "Rescission  of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections" which is effective for financial statements issued for fiscal years
beginning  after May 15, 2002.  This  Statement  rescinds FASB  Statement No. 4,
"Reporting  Gains and Losses from  Extinguishment  of Debt", and an amendment of
that Statement,  FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements".  This Statement also rescinds FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers". This Statement amends FASB
Statement No. 13, "Accounting for Leases, to eliminate an inconsistency  between
the  required  accounting  for  sale-leaseback  transactions  and  the  required
accounting for certain lease  modifications  that have economic effects that are
similar  to  sale-leaseback  transactions.  This  Statement  also  amends  other
existing  authoritative  pronouncements to make various  technical  corrections,
clarify meanings, or describe their applicability under changed conditions.

         While Celerity has not completed the process of determining  the effect
of this new  accounting  pronouncement  on its  financial  statements,  Celerity
currently  expects  that the  effect  of SFAS No.  145 on  Celerity's  financial
statements, when it becomes effective, will not be significant.

         On July 30, 2002, the FASB issued SFAS No. 146,  "Accounting  for Costs
Associated  with  Exit or  Disposal  Activities"  which  is  applied  to exit or
disposal  activities  initiated  after December 31, 2002. The standard  requires
companies to recognize costs  associated  with exit or disposal  activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan.  While Celerity has not completed the process of determining the effect of
this  new  accounting


                                       15
<PAGE>

pronouncement on its financial  statements,  Celerity currently expects that the
effect of SFAS No.  146 on  Celerity's  financial  statements,  when it  becomes
effective, will not be significant.

         On  October,  2002,  the FASB issued  SFAS No.  147,  "Acquisitions  of
Certain Financial Institutions" which is effective on financial statements as of
October  1,  2002.  This  Statement  provides   interpretive   guidance  on  the
application of the purchase method to  acquisitions  of financial  institutions.
Except for transactions  between two or more mutual enterprises,  this Statement
removes acquisitions of financial  institutions from the scope of both Statement
72 and Interpretation 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, "Business  Combinations",  and No. 142,
"Goodwill and Other  Intangible  Assets".  The adoption of this principle had no
material effect on Celerity's financial statements.

         On  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 effect of the adoption of this new  accounting  pronouncement  on Celerity's
financial statements has not been significant.

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

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

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

         VALUATION  OF OPTIONS  AND  WARRANTS  - The  valuation  of options  and
warrants  granted to  unrelated  parties  for  services  are  measured as of the
earlier (1) the date at which a commitment for  performance by the  counterparty
to earn the equity  instrument  is  reached  or (2) the date the  counterparty's
performance is complete. Pursuant to the requirements of EITF 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling,  Goods or Services",  the options and warrants will
continue  to be  revalued  in  situations  where they are  granted  prior to the
completion of the performance.


ITEM 7.  FINANCIAL STATEMENTS



                                       16
<PAGE>

                             CELERITY SYSTEMS, INC.


              FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT


                                DECEMBER 31, 2002



<TABLE>
<CAPTION>
<S>                                                                                                <C>
Auditors' Report                                                                                   F-1

Balance Sheet as of December 31, 2002                                                              F-2

Statement of Operations for the Years Ended December 31, 2002 and 2001                             F-3

Statement of Changes in Stockholders' Deficit for Year Ended December 31, 2002 and 2001            F-4

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

Notes to Financial Statements                                                                      F-6
</TABLE>


<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-1

<PAGE>


CELERITY SYSTEMS, INC.
Balance Sheet
December 31, 2002

<TABLE>
<CAPTION>
                                                                                            2002
                                                                                        ------------
Assets
<S>                                                                                     <C>
   Cash                                                                                 $      5,012
   Inventory, net (Note 4)                                                                 1,310,143
                                                                                        ------------
        Total current assets                                                               1,315,155

Property and equipment, net (Note 5)                                                         175,964
Debt offering costs, net of accumulated amortization of $648,181                             617,274
Other assets                                                                                  20,900
                                                                                        ------------

     Total assets                                                                       $  2,129,293
                                                                                        ============

Liabilities, Redeemable Preferred Stock and Stockholders' Deficit

Accounts payable                                                                        $  2,099,204
Accrued wages and related taxes                                                              327,041
Accrued interest                                                                           1,018,867
Deferred revenue                                                                             154,227
Other accrued liabilities                                                                     64,472
Notes payable - Related Party (Notes 8 and 15)                                               238,950
Current maturities of long-term debt                                                         140,000
                                                                                        ------------

     Total current liabilities                                                             4,042,761

Long-term debt, less current maturities (Note 9)                                           2,977,520
                                                                                        ------------

     Total liabilities                                                                     7,020,281

Commitments and contingencies (Notes 3, 7, 9, 10 and 13)                                          --

Series A redeemable convertible preferred stock, $.01 par value; authorized
50 shares; 0 shares issued and outstanding at December 31, 2002 (Note 9)                          --
                                                                                        ------------

Series B convertible  preferred stock,  $.01 par value;  authorized 100 shares;
32.25 shares issued and outstanding at
December 31, 2002  (Note 9)                                                                  322,500
                                                                                        ------------

Series C convertible preferred stock, $.01 par value; authorized
100 shares; 0 shares issued and outstanding at December 31, 2002  (Note 9)                        --
                                                                                        ------------

Series D convertible preferred stock, $.01 par value; authorized
100 shares; 0 shares issued and outstanding at December 31, 2002  (Note 9)                        --
                                                                                        ------------

Series E convertible preferred stock, $.01 par value; authorized
100 shares; 4 shares issued and outstanding at December 31, 2002  (Note 9)                    40,000
                                                                                        ------------

Common stock, $.001 par value, 250,000,000 shares authorized,
     246,325,579 issued and outstanding at December 31, 2002                                 246,325
Additional paid-in capital                                                                36,058,793
Accumulated deficit                                                                      (41,558,606)
                                                                                        ------------
     Total stockholders' deficit                                                          (5,253,488)
                                                                                        ------------

     Total liabilities, redeemable preferred stock and stockholders' deficit            $  2,129,293
                                                                                        ============
</TABLE>



    The accompanying notes are an integral part of these financial statements

                                       F-2


<PAGE>


CELERITY SYSTEMS, INC.
Statements of Operations
For the years ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                             2002                 2001
                                                                          -----------          -----------
<S>                                                                       <C>                  <C>
  Revenues                                                                $   649,815          $   403,997
  Cost of revenues                                                            970,739            1,163,129
                                                                          -----------          -----------
           Gross deficit                                                     (320,924)            (759,132)
  Operating expenses                                                        2,045,738            5,667,077
                                                                          -----------          -----------
          Loss from operations                                             (2,366,662)          (6,426,209)

     Interest expense                                                      (2,278,804)          (1,680,035)
     Income on equity warrant liability                                       134,374            1,893,852
     Loss on treasury stock                                                        --             (227,500)
     Other (expense) income                                                     6,254               37,854
                                                                          -----------          -----------
          Loss before extraordinary items                                  (4,504,838)          (6,402,038)
  Extraordinary items
    Gain on extinguishment of debt                                             49,132               71,864
                                                                          -----------          -----------
  Loss before cumulative effect of change in accounting principle          (4,455,706)          (6,330,174)
     Cumulative effect of change in accounting principle                           --            2,598,813
                                                                          -----------          -----------
          Net loss                                                         (4,455,706)          (3,731,361)
Amortization of beneficial conversion feature and accretion
of redeemable convertible preferred stock                                     154,000            1,060,000
                                                                          -----------          -----------
          Net loss attributable to common stockholders                    $(4,609,706)         $(4,791,361)
                                                                          ===========          ===========

  Basic and diluted loss per common share (Note 11):
     Loss before extraordinary items                                      $     (0.08)         $     (2.01)
     Extraordinary items                                                           --                 0.02
     Cumulative effect of change in accounting method                              --                 0.82
                                                                          -----------          -----------
     Net loss per share                                                   $     (0.08)         $     (1.17)

Amortization of beneficial conversion feature and accretion
of redeemable convertible preferred stock                                          --                (0.33)
                                                                          -----------          -----------

          Net loss per share attributable to common stockholders          $     (0.08)         $     (1.50)
                                                                          ===========          ===========
</TABLE>



    The accompanying notes are an integral part of these financial statements

                                       F-3

<PAGE>


CELERITY SYSTEMS, INC.
Statement of Changes in Stockholders' Deficit
For the years ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                                                     Additional
                                                                                   Shares Of         Common          Paid-In
                                                                                   Common Stock      Stock           Capital
                                                                                   ------------      ------------    ------------
<S>                                                                                   <C>            <C>             <C>
Balances, December 31, 2000                                                           1,231,974      $      1,232    $ 30,430,956
Issuance of common stock                                                                 50,000                50          29,950
Issuance of common stock in connection with a purchase or finance commitment            120,000               120         407,880

 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 items                                                      64,144                64         145,464
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
Reclassification as a result of a change in accounting principle for
 outstanding warrants                                                                                                  (2,863,760)
Loss on treasury stock
Net loss
                                                                                   ------------      ------------    ------------
Balances, December 31, 2001                                                           4,939,766             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 items                                                   3,810,385             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
                                                                                   ------------      ------------    ------------
Balances, December 31, 2002                                                         246,325,579      $    246,325    $ 36,058,793
                                                                                   ============      ============    ============

<CAPTION>
                                                                                                                     Total
                                                                                   Treasury          Accumulated     Stockholders'
                                                                                   Stock             Deficit         Deficit
                                                                                   ------------      ------------    ------------
<S>                                                                                <C>               <C>             <C>
Balances, December 31, 2000                                                        $   (227,500)     $(32,157,539)   $ (1,952,581)
Issuance of common stock                                                                                                   30,000
Issuance of common stock in connection with a purchase or finance commitment                                              408,000

 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 items                                                                                       145,528
Conversion of convertible debentures to shares of common stock                                                          1,686,349
Conversion of convertible preferred stock to shares of common stock                                                       190,911
Amortization of beneficial conversion feature and accretion of redeemable
 convertible preferred stock                                                                           (1,060,000)     (1,032,554)
Reclassification as a result of a change in accounting principle for
 outstanding warrants                                                                                                  (2,863,760)
Loss on treasury stock                                                                  227,500                           227,500
Net loss                                                                                               (3,731,361)     (3,731,361)
                                                                                   ------------      ------------    ------------
Balances, 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 items                                                                                       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
Net Loss                                                                                               (4,455,706)     (4,455,706)
                                                                                   ------------      ------------    ------------
Balances, December 31, 2002                                                        $         --      $(41,558,606)   $ (5,253,488)
                                                                                   ============      ============    ============
</TABLE>



                                       F-4

<PAGE>


CELERITY SYSTEMS, INC.
Statements of Cash Flows
For the years ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                          2002                 2001
                                                                                       -----------          -----------
Cash flows from operating activities:
<S>                                                                                    <C>                  <C>
   Net loss                                                                            $(4,455,706)         $(3,731,361)
   Adjustments to reconcile net loss to net
        cash used in operating activities:
            Depreciation and amortization                                                   86,227               92,811
            Amortization expense related to termination of financing agreement                  --              408,000
            Amortization expense related to debt offering costs                            568,263              198,633
            Amortization of equity placement fee related to
terminated equity credit line                                                                   --            1,363,975
Noncash operating expense related to the issuance of warrants                                   --              399,304
Noncash expense related to treasury stock                                                       --              227,500
            Loss on disposal of fixed assets                                                    --              365,383
            Provision for inventory obsolescence                                           (15,900)             237,250
            Noncash interest expense related to beneficial
                 conversion feature of debt                                              1,018,759              575,224
            Noncash interest expense related to notes payable                                   --               66,506
            Noncash operating expense related to consulting fees                            97,487              113,683
            Noncash operating expense related to payroll
               and directors' fees                                                          26,571               31,843
            Noncash gain related to settlement of capital lease obligation                      --              (97,500)
            Noncash income related to equity warrant liability                            (134,374)          (1,893,852)
            Noncash income related to change in accounting principle                            --           (2,598,813)
            Changes in current assets and liabilities:
                Accounts receivable                                                          4,282               (4,282)
                Inventory                                                                1,013,318           (2,021,427)
                Accounts payable                                                           (15,651)           1,456,378
                Accrued interest                                                           487,914              617,496
                Other current liabilities                                                   67,728              119,405
                                                                                       -----------          -----------
                    Net cash used in operating activitities                             (1,251,082)          (4,073,844)

Cash flows from investing activities:
   Purchase of fixed assets                                                                 (2,494)            (574,083)
                                                                                       -----------          -----------
                    Net cash used in investing activitities                                 (2,494)            (574,083)

Cash flows from financing activities:
   Proceeds from short-term borrowings                                                     113,950               54,000
   Payments on short-term borrowings                                                            --              (54,000)
   Proceeds from long-term debt                                                          1,140,000            5,686,000
   Principal payments on long-term debt                                                   (305,000)            (592,500)
   Proceeds from issuance of common stock                                                   93,000               30,000
   Proceeds from preferred stock offering, net of offering costs                           154,000              919,654
   Financing and debt issue costs                                                         (109,350)          (1,233,605)

                                                                                       -----------          -----------
                    Net cash provided by financing activitities                          1,086,600            4,809,549

Net increase (decrease) in cash and cash equivalents                                      (166,976)             161,622
Cash and cash equivalents, beginning of year                                               171,988               10,366
                                                                                       -----------          -----------

Cash and cash equivalents, end of year                                                 $     5,012          $   171,988
                                                                                       ===========          ===========
</TABLE>



 The accompanying notes are an integral part of these financial statements

                                       F-5

<PAGE>



                             CELERITY SYSTEMS, INC.
                          Notes to Financial Statements


1.       Organization and Nature of Business

         Celerity  Systems,  Inc.  (the  "Company"),   a  Delaware  corporation,
         designs,  develops,   integrates,   installs,   operates  and  supports
         interactive video services hardware and software ("interactive video").
         Celerity also  designed,  developed,  installed,  and supported  CD-ROM
         software  products for  business  applications.  In February,  1998 the
         Company began to scale back the CD-ROM segment to a maintenance mode of
         operations  and in February,  2001  completed  the sale of this segment
         (Note 4). In the interactive  video services area, the Company seeks to
         provide  solutions,  including  products and services  developed by the
         Company  and by  strategic  partners,  that  enable  interactive  video
         programming and applications to be provided to a wide variety of market
         niches.  The sales of interactive video products are made direct to its
         customers, except for the education market which is conducted through a
         network of distributors.

         On April 28, 2002,  the  shareholders  voted to increase the authorized
         capitalization  of the Company from 5,000,000 to 250,000,000  shares of
         common  stock.  Additionally,  the  shareholders  approved  a  1-for-20
         reverse  stock  split.   All  references  to  common  stock  have  been
         retroactively restated.

         Celerity  had  one   interactive   video   customer  that   represented
         approximately 100% of the Company's revenues in 2002 and 75% in 2001.


2.       Summary of Significant Accounting Policies

         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.

         Cash and Cash  Equivalents - Celerity  considers all highly liquid debt
         instruments  with an  original  maturity  of three  months or less when
         purchased  as cash  equivalents.  Celerity  places its  temporary  cash
         investments  principally in bank repurchase agreements and money market
         accounts with one bank.

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

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

         Inventory  - Inventory  is stated at the lower of cost or market,  with
         cost being  determined  using the first-in,  first-out  (FIFO)  method.
         Celerity  has  established  an  allowance  for  obsolete  inventory  of
         approximately $221,350.

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

         Debt  Offering  Costs - Debt  offering  costs are  related  to  private
         placements in 2002 and 2001 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



                                      F-6
<PAGE>

         debentures.  Should  conversion occur prior to the stated maturity date
         immediate recognition is made of the remaining unamortized cost through
         a charge to interest  expense.  Interest expense related to these costs
         was $568,263 and $198,633 in 2002 and 2001 respectively.

         Revenue  Recognition - Celerity records revenues upon shipment of goods
         and after all risks and rewards of  ownership  of the related  products
         has passed to the buyer.  Celerity  records sales for services upon the
         completion  of training,  ratably over the life of any  maintenance  of
         support  agreement  and in the current  period for any access or rental
         fees.  Celerity's  general sales terms require a deposit with the order
         and  balance  upon  delivery,  except for  educational  sales which are
         handled on a net 30 basis.

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

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

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

         Effective  June 30, 2001,  the Company  adopted the  provisions of EITF
         00-19, "Accounting for Derivative Financial Instruments Indexed to, and
         Potentially  settled in, a Company's  Own Stock".  This issue  provides
         that warrants to purchase  common shares which are  outstanding and for
         which the number of authorized but unissued  shares is  insufficient to
         satisfy  the maximum  number of shares that could be required  upon the
         exercise  of such  warrants,  then the  contract is  reclassified  from
         equity to an asset or liability.  The effect of the application of this
         pronouncement that requires asset or liability classification for those
         contracts  that existed as of June 30, 2001,  would be calculated as of
         June 30, 2001,  and presented on that date as a cumulative  effect of a
         change  in  accounting  principle.  At June 30,  2001,  $2,863,760  was
         reclassified from equity to a liability and  mark-to-market  adjustment
         of  $2,598,813  was  recorded as the  cumulative  effect of a change in
         accounting  principle.  For the year ended  December  31, 2002, a total
         mark-to-market adjustment of $134,374,  compared to $4,492,665 in 2001,
         was recorded as income on equity warrant  liability for those contracts
         that existed as of December 31, 2002.

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

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



                                      F-7
<PAGE>

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

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

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

         The  adoption of this new  accounting  pronouncement  on the  Company's
         financial statements has not been significant.

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

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

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



                                      F-8
<PAGE>

         The  adoption of this new  accounting  pronouncement  on the  Company's
         financial statements has not been significant.

         On April,  2002,  the FASB  issued SFAS No.  145,  "Rescission  of FASB
         Statements  No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and
         Technical  Corrections"  which is effective  for  financial  statements
         issued for fiscal years  beginning  after May 15, 2002.  This Statement
         rescinds  FASB  Statement  No.  4,  "Reporting  Gains and  Losses  from
         Extinguishment  of Debt",  and an  amendment  of that  Statement,  FASB
         Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
         Requirements".  This  Statement  also rescinds  FASB  Statement No. 44,
         "Accounting for Intangible  Assets of Motor  Carriers".  This Statement
         amends FASB Statement No. 13,  "Accounting for Leases,  to eliminate an
         inconsistency   between  the  required  accounting  for  sale-leaseback
         transactions   and  the   required   accounting   for   certain   lease
         modifications   that  have   economic   effects  that  are  similar  to
         sale-leaseback transactions.  This Statement also amends other existing
         authoritative  pronouncements  to make various  technical  corrections,
         clarify  meanings,   or  describe  their  applicability  under  changed
         conditions.

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

         On July 30, 2002, the FASB issued SFAS No. 146,  "Accounting  for Costs
         Associated with Exit or Disposal  Activities"  which is applied to exit
         or disposal activities  initiated after December 31, 2002. The standard
         requires  companies to recognize costs associated with exit or disposal
         activities  when  they  are  incurred  rather  than  at the  date  of a
         commitment  to an exit or  disposal  plan.  While the  Company  has not
         completed the process of determining  the effect of this new accounting
         pronouncement  on  its  financial  statements,  the  Company  currently
         expects  that the  effect of SFAS No.  146 on the  Company's  financial
         statements, when it becomes effective, will not be significant.

         On  October,  2002,  the FASB issued  SFAS No.  147,  "Acquisitions  of
         Certain  Financial   Institutions"  which  is  effective  on  financial
         statements as of October 1, 2002. This Statement provides  interpretive
         guidance on the  application of the purchase  method to acquisitions of
         financial  institutions.  Except for  transactions  between two or more
         mutual  enterprises,  this Statement removes  acquisitions of financial
         institutions  from the scope of both Statement 72 and  Interpretation 9
         and requires  that those  transactions  be accounted  for in accordance
         with FASB  Statements No. 141,  "Business  Combinations",  and No. 142,
         "Goodwill and Other Intangible Assets".  The adoption of this principle
         had no material effect on the Company's financial statements.

         On  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 effect of the  adoption of this new  accounting
         pronouncement  on the  Company's  financial  statements  has  not  been
         significant.

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

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

         STOCK  OPTIONS - As permitted  by SFAS No. 123, the Company  elected to
         measure and record  compensation cost relative to employee stock option
         costs in accordance with APB 25, 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
         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.



                                      F-9
<PAGE>

         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, "Accounting for Equity Instruments That Are
         Issued to Other Than  Employees for Acquiring,  or in Conjunction  with
         Selling, Goods or Services",  the options and warrants will continue to
         be  revalued  in  situations  where  they  are  granted  prior  to  the
         completion of the performance.

         RECLASSIFICATION   -  Certain  December  31,  2001  balance  have  been
         reclassified to conform with the December 31, 2002 presentation.


3.       Going Concern

         Celerity's  financial  statements have been prepared on a going concern
         basis,  which contemplates the realization of assets and the settlement
         of  liabilities  and  commitments  in the  normal  course of  business.
         Celerity has had recurring  losses.  Since  inception in January,  1993
         through December 31, 2002 of $41,558,606,  and continues to suffer cash
         flow and working  capital  shortages.  As of  December  31,  2002,  the
         Company had a negative net working capital of approximately $2,727,000.
         These factors taken  together with the lack of sales and the absence of
         significant  financial  commitment  raises  substantial doubt about the
         Company's ability to continue as a going concern.

         Celerity has focused on attempting  to obtain the necessary  capital to
         maintain  its  operations.  Additionally,  the Company has narrowed its
         sales  efforts  to those  which it  believes  have the best  chance  of
         closing in the near term.  In the first  quarter of 2003,  the  Company
         received  gross proceeds from private  placements of  convertible  debt
         totaling $139,000. These funds should enable the Company to operate for
         the next few weeks, however,  additional financing will be necessary to
         sustain operations and achieve the Company's business plan. Celerity is
         attempting  to obtain such  additional  financing.  Management  is also
         actively seeking one or more strategic investors.

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


4.       Inventory

         Inventory at December 31, 2002 consists of:

                                                                     2002
                                                                  -----------
           Raw materials                                          $ 1,290,095
           Finished goods                                             241,398
                                                                  -----------
                                                                    1,531,493
           Reserve for lower of cost or market                       (221,350)
                                                                  -----------
                                                                  $ 1,310,143
                                                                  ===========

         The Reserve for lower of cost or market  represents  a write down to an
         estimated net realizable  value. The write down results from a lower of
         cost or market valuation on certain parts and finished goods.


                                      F-10
<PAGE>


5.       Property and Equipment

         Substantially all property and equipment of the Company is comprised of
         computers and computer-related  equipment,  therefore, all property and
         equipment is included in one category entitled "Property and equipment,
         net." Cost and related  accumulated  depreciation for December 31, 2002
         is as follows:

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

         Depreciation  expense  in  2002  and  2001  was  $70,627  and  $56,789,
         respectively.  During  2001  equipment  was  purchased  to be  used  in
         connection with multi-housing market projects.  Celerity has terminated
         these projects due to the high cost of purchasing the equipment and the
         relatively slow expected return on investment. Celerity recorded a loss
         on  disposal  of fixed  assets of  $365,383  in  connection  with these
         projects in 2001.


6.       Income Taxes

         The tax effects of temporary  differences  giving rise to the Company's
         deferred tax assets (liabilities) at December 31, 2002 and 2001, are as
         follows:

<TABLE>
<CAPTION>
                                                                           2002            2001
                                                                       ------------    ------------
          Current:
          <S>                                                           <C>             <C>
            Inventory reserve                                                84,000          90,000
            Other                                                            55,000          53,000
                                                                       ------------    ------------
                                                                            139,000         143,000
          Valuation allowance for net current deferred tax assets          (139,000)       (143,000)
                                                                       ------------    ------------

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

          Noncurrent:
            Net operating loss and research credit carryforwards       $ 14,010,000    $ 12,323,000
            Stock based compensation                                             --         819,000
            Property and equipment                                           (5,000)         (8,000)
                                                                       ------------    ------------
                                                                         14,005,000      13,134,000
          Valuation allowance for net noncurrent deferred tax assets    (14,005,000)    (13,134,000)
                                                                       ------------    ------------

            Total net noncurrent deferred tax asset                    $         --    $         --
                                                                       ============    ============
</TABLE>



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

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

<TABLE>
<CAPTION>
                                                                              2002           2001
                                                                          -----------    -----------
<S>                                                                       <C>            <C>
          Computed "expected" tax (benefit)                               $(1,165,000)   $(1,312,000)
          State income tax (benefit), net of federal income tax benefit      (136,000)      (105,000)
          Change in valuation allowance                                       875,000      1,344,000
          Permanent differences and other                                     426,000         73,000
                                                                          -----------    -----------
                                                                          $        --    $        --
                                                                          ===========    ===========
</TABLE>


         At December 31, 2002, the Company has approximately  $35,900,000 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
         2010 through 2022.


                                      F-11
<PAGE>


7.       Common Stock Warrants


1999 Warrants

         In June 1999, the Company  received  $500,000 in bridge  financing.  In
         connection with this placement, the agent received warrants to purchase
         5,000  shares of common at $30.00  per share  which  were  repriced  to
         $18.80  per share in April  2000.  The fair value of the  warrants  was
         determined  using  the  Black-Scholes  option  pricing  model  with the
         following  assumptions:  risk-free  interest  rate of  7.00%,  expected
         dividends of zero,  volatility  of 188.09% and expected  lives of up to
         three years. Celerity recorded loan cost and additional paid in capital
         of $16,300 for the fair value of the repricing of these  warrants to be
         amortized over the life of the related debt.  These warrants  expire in
         April 2003.


2000 Warrants

         In the first half of 2000,  the  Company  issued  warrants  to purchase
         17,873  shares of common stock at prices  ranging from $14.88 to $32.50
         in connection with a private placement of common stock.  These warrants
         expire at various dates between April and June 2003.  The fair value of
         the warrants was  determined  using the  Black-Scholes  option  pricing
         model with the following assumptions: risk-free interest rate of 6.53%,
         expected dividends of zero,  volatility of 70.19% and expected lives of
         up to three years.

         In 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.  These warrants  expire in August 2005. The fair value of the
         warrants was determined  using the  Black-Scholes  option pricing model
         with the  following  assumptions:  risk-free  interest  rate of  7.00%,
         expected dividends of zero, volatility of 175.95% and expected lives of
         up to five years.


2001 Warrants

         In the  first  quarter  of 2001,  the  Company  consummated  a  private
         placement  of 23 shares of Series B  Redeemable  Convertible  Preferred
         Stock.  The preferred stock is convertible  into shares of common stock
         at  a   conversion   price  equal  to  $0.50  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.  Celerity  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.  Celerity will record accretion as
         of the effective date of conversion.

         On June 14,  2001,  the Company  entered  into an Equity Line of Credit
         pursuant in which the Company may, at its discretion, periodically sell
         to the Investor shares of common stock for a total purchase price of up
         to $10.0  million.  (Note 8) For each share of common  stock  purchased
         under the  Equity  Line of  Credit,  the  Investor  will pay 82% of the
         average of the 3 lowest closing bid prices on which our common stock is
         traded  for the 5 days  immediately  following  the  notice  date.  The
         consultant  received warrants purchasing 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.  The  value  of the  warrants,
         $1,363,975, was determined using the Black-Scholes option pricing model
         with the  following  assumptions:  risk-free  interest  rate of  7.00%,
         expected dividends of zero, volatility of 278.99% and expected lives of
         up to five years. These warrants expire in June 2006.

         In  accordance  with EITF 00-19,  the  Company  has  recorded an equity
         warranty liability of $1,363,975 in connection with these warrants.  As
         the  number  of  shares  which may be  issued  upon  conversion  of the
         convertible  debentures  is  indeterminate,   a  sufficient  number  of
         authorized but unissued shares may not be available.  As a result,  the
         Company recorded a mark-to-market adjustment of $134,374 and $1,893,852
         in 2002 and 2001,  respectively,  which has been reflected as income on
         equity warrant liability.



                                      F-12
<PAGE>

         In January,  2002 the Company  terminated the Equity Line of Credit due
         to delays in getting  related shares  registered and in order to pursue
         other  types  of  financing  arrangements.  As a result  the  remaining
         unamortized  portion  of  the  equity  placement  fee  was  immediately
         recognized as amortization expense.

         In  August  2001,  the  Company  placed  $1,586,000  of 4%  convertible
         debentures.  In  connection  with this  placement,  the agent  received
         warrants to purchase 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.

         In September  2001,  Celerity  issued  warrants to Internet  Finance to
         purchase  25,000 shares of Celerity  common stock.  These warrants were
         charged to operations as consulting expense. The value of the warrants,
         $48,978,  was determined using the  Black-Scholes  option pricing model
         with the  following  assumptions:  risk-free  interest  rate of  4.00%,
         expected dividends of zero, volatility of 279.34% and expected lives of
         up to three years. One-half of these warrants have an exercise price of
         $3.00 per share and one-half have an exercise price of $5.00 per share.
         In  addition,  Celerity  is  obligated  to  issue to  Internet  Finance
         warrants to purchase  additional  shares of common stock if Celerity is
         successful in obtaining  financing  arranged by Internet  Finance.  For
         each $500,000 of capital  received by Celerity,  Internet  Finance will
         receive warrants to purchase 12,500 shares of common stock at $3.00 per
         share.  Internet Finance will also receive cash compensation of 2.5% of
         all funds received by Celerity under the contract.

         During 2001, the Company received $54,000 in short-term  financing from
         an  individual  who is a former  member of the Board of  Directors.  In
         connection  with these  notes,  the  individual  received  warrants  to
         purchase 2,700 shares of common at $4.00 per share. These warrants were
         charged to operations as interest  expense.  The value of the warrants,
         $5,375,  was determined  using the  Black-Scholes  option pricing model
         with the  following  assumptions:  risk-free  interest rate of 4.00% or
         7.00%,  expected  dividends  of zero,  volatility  range of 207.57% and
         213.81% and expected lives of up to two years.  These  warrants  expire
         between February and September, 2003.


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.


8.       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%. On April, 2002, the Company
         defaulted on payments due of $125,000,  plus accrued  interest,  on the
         notes payable.  Celerity is seeking to make arrangements with this note
         holder.


Long Term Debt

         In October and November 1998, the Company placed  $450,000 of 7% notes.
         Each note holder is entitled to  royalties  of fifty cents per $100,000
         invested (pro rated for lesser investments) for each T 6000 set top box
         sold  during a period of up to five years.  Of the total notes  placed,
         $300,000 were converted into common stock upon the closing of a private
         offering  in the  first  half  of  2000  (included  in  note 9) and the
         remainder  are due in October  2001.  There was  $140,000  and $150,000
         outstanding at December 31, 2002 and 2001, respectively. On October 27,
         2001, the Company  defaulted on payments due of $150,000,  plus accrued
         interest,  on the  royalty  notes  payable.  Written  demand  has  been
         received from one of the two note holders.  Celerity is seeking to make
         arrangements with these note holders.

         In January,  February and March 1999,  the Company  sold  $600,000 in a
         private  placement  offering  to outside  investors.  Investors  in the
         private placement  received 9% convertible  debentures with a principal
         amount equal to the amount of the  investment  and a term of two years.
         The debentures  are  convertible  into the Company's  common stock at a
         price equal to the lesser of (i) 75% of the  average  closing bid price
         of the common stock for the five



                                      F-13
<PAGE>

         days immediately  preceding the date of conversion,  or (ii) four times
         the five-day  average  closing bid price for the five days  immediately
         preceding  the date of closing.  Celerity may redeem the  debentures at
         prices  that  range  from 115% to 125% of the  principal  amount,  plus
         accrued  interest.  The debentures are subject to mandatory  conversion
         upon  maturity.  At December 31, 2001,  $590,000 of the  debentures had
         converted to shares of common stock and $10,000 had been  redeemed.  At
         both December 31, 2002 and 2001, there was $-0- outstanding of these 9%
         debentures.

         In November and December  1999,  the Company sold $314,980 in a private
         placement  offering  to outside  investors.  Investors  in the  private
         placement received 4% convertible debentures with a principal amount of
         $110,000  and 8%  convertible  debentures  with a  principal  amount of
         $204,980,  both  with  a  term  of  three  years.  The  debentures  are
         convertible  into the Company's  common stock at a price equal,  at the
         Debenture  holders option,  either,  (i) 65% of the average closing bid
         price of the common stock for the five days  immediately  preceding the
         date of  conversion,  or (ii) $15.00 per share for the 4% debentures or
         $10.00 per share for the 8%  debentures.  Celerity filed a Registration
         Statement  that became  effective  within 90 days of the  Closing  Date
         Celerity  has the right to  redeem  in part or in full any  outstanding
         debentures at 135% of the principal amount, plus accrued interest.  The
         debentures  are  subject to  mandatory  conversion  upon  maturity.  At
         December 31, 2001,  all of the  debentures had been converted to shares
         of common stock.

         Celerity issued $629,980  aggregate  principal amount of 8% convertible
         debentures in the first quarter of 2000. The Debentures  have a term of
         three years and are  convertible  into the Company's  common stock at a
         price,  at the  option of the  holder,  equal to either  (I) 75% of the
         average closing bid price of the common stock for the five trading days
         immediately  preceding  conversion,  or (ii) $30.00 per share. Celerity
         may  redeem  the  debentures  at a  redemption  price  of  125%  of the
         principal amount, plus accrued interest.  All outstanding principal and
         interest is subject to mandatory conversion three years after issuance.
         At December  31,  2001,  all of the  debentures  had been  converted to
         shares of common stock.

         Celerity issued $800,000  aggregate  principal amount of 4% convertible
         debentures in the first nine months of 2002,  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% secured convertible debenture.

         Also,  the  Company  issued  a 10%  secured  convertible  debenture  of
         $1,500,000  in exchange  for 4%  debentures  due of  $998,478,  related
         accrued interest of $161,522 and additional gross proceeds of $340,000,
         resulting in net proceeds of approximately $306,000. 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 an amount equal to $0.06. Celerity
         recognized  a  beneficial   conversion   feature  for  the  convertible
         debentures  as  a  discount  on  the  convertible   debentures  and  as
         additional paid-in capital. This discount of $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.
         At December 31, 2002, $25,000 of the debentures had converted to shares
         of common  stock,  $45,000 had been  redeemed and  $1,430,000  remained
         outstanding.


Equity Line of Credit

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

         Celerity issued $5,686,000 aggregate principal amount of 4% convertible
         debentures  in 2001 and  $1,005,000 in 2000 under this  agreement.  The
         debentures  have a term of five  years  and are  convertible  into  the
         Company's


                                      F-14
<PAGE>

         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,  2002,
         $2,614,156 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, 2002 and 2001,  there
         was  $2,586,844  and  $4,436,000  outstanding  of these 4%  debentures,
         respectively.

         On June 14,  2001,  the Company  entered  into an Equity Line of Credit
         pursuant to which the Company may, at its discretion, periodically sell
         to the Investor shares of common stock for a total purchase price of up
         to $10.0 million.  For each share of common stock  purchased  under the
         Equity Line of Credit,  the Investor will pay 82% of the average of the
         3 lowest closing bid prices on which our common stock is traded for the
         5 days  immediately  following  the notice date.  Unless  waived by the
         Investor,  the amount of each  advance is subject to a maximum  advance
         amount based on an average daily volume of the Company's  common stock.
         Celerity  may request an advance  every ten trading  days. A consulting
         fee of 10% of each  advance will be paid upon closing each of the sales
         under this  agreement.  Celerity had not drawn any advances  under this
         agreement at December 31, 2001.

         In  January,  2002 the  Company  terminated  the Equity  Line of Credit
         entered into on June 14, 2001 due to delays in getting  related  shares
         registered   and  in  order  to  pursue   other   types  of   financing
         arrangements. As a result, there is no effective registration statement
         including  common  shares  to be  issued  in  connection  with  certain
         debentures issued in 2001 under the 1999 Line of Credit  Agreement.  We
         are  required  to pay  liquidated  damages  in the  form  of  increased
         interest on the  convertible  debentures  as a result of our failure to
         time file such registration statement and have it declared effective by
         the Securities  and Exchange  Commission.  We have accrued  $714,840 as
         additional interest expense for this item.


Beneficial Conversion Features of Debt

         Celerity  recognized  a beneficial  conversion  feature for the various
         convertible  debentures  issued  in 2002  and 2001 as  discount  on the
         convertible debentures and as additional paid-in capital. This discount
         of $452,251  and  $2,151,794  for 2002 and 2001  respectively,  will be
         amortized  as a non-cash  interest  expense over the  five-year  period
         between  the date of  issuance  of the  convertible  debentures  to the
         stated redemption date of the debentures.  Upon conversion prior to the
         stated  date  of  redemption  the  remaining  unamortized  discount  is
         immediately  recognized  as  a  non-cash  interest  expense.   Non-cash
         interest  expense  amounted to  $1,018,759  and  $575,224 for the years
         ended December 31, 2002 and 2001, respectively.

         The maturities of the Company's long-term debt as of December 31, 2002,
are as follows:


          2003                             $   140,000
          2004                                     -0-
          2005                                     -0-
          2006                                     -0-
          2007                               2,586,844
          Thereafter                         1,430,000
                                           -----------
                                             4,156,844
                Less debt discount          (1,039,324)
                Less current portion          (140,000)
                                           -----------

          Total long-term debt             $ 2,977,520
                                           ===========


Capital Lease Obligations

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




                                      F-15
<PAGE>

9.       Preferred Stock


REDEEMABLE CONVERTIBLE PREFERRED STOCK


         SERIES A

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

         The  preferred  stock is  convertible  into shares of common stock at a
         conversion  price  equal to the  lesser of (i) $28.00 per share or (ii)
         75% of the average  closing bid price of the common  stock for the five
         trading  days  immediately  preceding  the  date  of  conversion.   The
         preferred  stock  became  convertible  no earlier than 90 days from its
         issuance  or the  date of  effectiveness  of a  registration  statement
         registering  the  common  stock  into  which  the  preferred  stock  is
         convertible.  All shares of preferred  stock  outstanding on August 31,
         2002  convert  into shares of common stock as if holders of such shares
         had delivered a conversion  notice  effective at such date. At December
         31, 2001,  $410,000 face value of the preferred  stock had converted to
         shares of common stock.

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

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

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


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  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
         $0.50 per share,  subject to  availability,  at any time during the two
         years following execution of the subscription agreements.  Should there
         be an  insufficient  number of shares of common stock  available at the
         time the  preferred  stock is offered for  conversion,  the  conversion
         period shall be extended by the number of days  between the  conversion
         date and the date common  shares become  available.  Two years from the
         original  issuance  date,  the  Company  shall  offer  to  redeem  such
         preferred  shares then  outstanding  at a price  equal to the  original
         issuance price plus accrued  dividends.  Warrants to purchase one share
         of  common  stock  for each two  shares of  common  stock  issued  upon
         conversion of this tranche of Series B Preferred  Stock were  included.
         These warrants are exercisable for a two year period following the date
         that the last share of the Series B  Redeemable  Convertible  Preferred
         Stock is  converted  into common  stock and have an  exercise  price of
         $2.00 per share. The company allocated  $132,000 of the proceeds to the
         warrants  based on  their  relative  fair  value.  As this  Series B is
         considered  perpetual  preferred  stock,  accretion  of the $132,000 is
         reflected  over the period from the date of  issuance  to the  earliest
         conversion date resulting in full accretion  during 2001. The resulting
         $98,000  beneficial  conversion  feature  of the  preferred  stock  was
         reflected as a dividend and also amortized fully in 2001.

         Celerity also consummated an additional  private placement of 72 shares
         of Series B Convertible  Preferred Stock resulting in gross proceeds of
         $720,000,  and issued an  additional 5 shares having a value of $50,000
         as payment for certain  accounts  payable and accrued wages.  The Stock
         provides  for  preferential  dividends  at an  annual  rate of 8%.



                                      F-16
<PAGE>

         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.  The  beneficial  conversion  feature of  $679,654  will be
         reflected  as a  dividend  from the date of  issuance  to the  earliest
         conversion  date.  Should there be an insufficient  number of shares of
         common stock  available at the time the preferred  stock is offered for
         conversion,  the  conversion  period shall be extended by the number of
         days  between the  conversion  date and the date common  shares  become
         available.  Two years from the original issuance date the Company shall
         offer to redeem such preferred shares then outstanding at a price equal
         to the original  issuance price plus accrued  dividends.  Celerity will
         record  accretion up to the redemption value in the period from date of
         issuance  to  the  earliest  conversion  date.  As  this  Series  B  is
         considered  perpetual  preferred  stock,  accretion  of the $770,000 is
         reflected  in full as accretion  during 2001.  As of December 31, 2002,
         $677,500 face value of the  preferred  stock had converted to shares of
         common stock.


         SERIES C

         In the  fourth  quarter  of 2001,  the  Company  consummated  a private
         placement of 6 shares of Series C Convertible Preferred Stock resulting
         in gross  proceeds  of $60,000.  The Stock  provides  for  preferential
         dividends at an annual rate of 8%. The preferred  stock is  convertible
         into shares of common  stock at a  conversion  price equal to $0.80 per
         share,  subject  to  availability,  at any time  during  the two  years
         following execution of the subscription agreements.  Should there be an
         insufficient number of shares of common stock available at the time the
         preferred stock is offered for conversion,  the conversion period shall
         be extended by the number of days between the  conversion  date and the
         date  common  shares  become  available.  Two years  from the  original
         issuance date, the Company shall offer to redeem such preferred  shares
         then  outstanding at a price equal to the original  issuance price plus
         accrued dividends.

         On  the  date  of  issuance  of  the  Preferred  Stock,  the  effective
         conversion  price was at a discount  to the price of the  common  stock
         into which the  Preferred  Stock is  convertible.  Celerity  recorded a
         $60,000 dividend relative to the beneficial conversion feature. As this
         Series C is considered  perpetual preferred stock,  amortization of the
         $60,000 is  reflected  over the period from the date of issuance to the
         earliest  conversion date,  resulting in full accretion during 2001. As
         of December 31, 2002,  $60,000  face value of the  preferred  stock had
         converted to 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. Celerity recorded a $54,000
         dividend relative to the beneficial  conversion  feature.  The Series D
         Convertible  Preferred  Stock is considered  perpetual  preferred stock
         and,  therefore,  amortization  of the  $54,000 is  reflected  over the
         period  from the date of  issuance  to the  earliest  conversion  date,
         resulting in full  accretion  during the first  quarter of 2002.  As of
         December  31,  2002,  $54,000  face  value of the  preferred  stock had
         converted to 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.  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. As of December  31,  2002,  6 preferred
         shares  converted  to shares of common  stock,  and there were 4 shares
         remaining outstanding.



                                      F-17
<PAGE>

         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.  Celerity  recorded  a
         $100,000 dividend relative to the beneficial  conversion  feature.  The
         Series E Convertible  Preferred Stock is considered perpetual preferred
         stock and,  therefore,  amortization  of the $100,000 is reflected over
         the period from the date of issuance to the earliest  conversion  date,
         resulting in full accretion during the first quarter of 2002.

         The total amount that would be required for redemption for the Series B
         and Series E Convertible Preferred Stock is as follows:

          2003                                                 $    322,500
          2004                                                       40,000
                                                               ------------
          Total required redemption for the Series B
          and Series E Convertible Preferred Stock             $    362,500
                                                               ============


         These preferred shares were not converted in 2002. In the first quarter
         of 2003,  Celerity  issued  2,645,000  shares for the conversion of the
         remaining shares of preferred shares.


10.      Stock Options

         Celerity  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 2,100 were  outstanding  at
         both December 31, 2002 and 2001. 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  3,627 and  4,997  shares  outstanding  under the 1997 plan at
         December  31,  2002  and  2001,  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 212,000 and 179,800 shares  outstanding under the 2001 plan
         at  December  31,  2002 and 2001,  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 6,886,000 shares outstanding under the 2002 plan at
         December 31, 2002.

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

         Celerity 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 2,000 and 23,910 of these options  which remain  outstanding
         at December 31, 2002 and 2001,  respectively.  These options  generally
         vest over 3 years and expire ten years from date of grant.



                                      F-18
<PAGE>

<TABLE>
<CAPTION>
                                              2002                            2001
                                      ----------------------------     -------------------------
                                                   Weighted Average              Weighted Average
                                       Options      Exercise Price     Options    Exercise Price
                                      ---------     --------------     -------    --------------
          Outstanding at
<S>                                      <C>           <C>              <C>          <C>
            beginning of year            210,807       $  3.29          34,809       $ 18.60
          Granted                      7,186,000          0.01         183,050          1.60
          Exercised                           --            --              --            --
          Forfeited                     (290,830)         1.78          (7,052)        32.60
                                       ---------       -------         -------       -------
          Outstanding at end of
            year                       7,105,727       $  0.03         210,807       $  3.29
                                       =========       =======         =======       =======

          Options Exercisable at
            year end                   1,798,078       $0.0052          69,046       $  6.20
                                       =========       =======          ======       =======
</TABLE>

         The weighted-average  fair value per option granted during the year was
         $0.01  and  $0.08  for the  years  ended  December  31,  2002 and 2001,
         respectively.

         The  following  table  summarizes  information  about stock  options at
         December 31, 2002:

<TABLE>
<CAPTION>
                                                Options Outstanding                  Options Exercisable
                                      -----------------------------------------      -------------------
                                                               Weighted Average
                                         Number                   Remaining                 Number
             Exercise Prices          Outstanding              Contractual Life          Outstanding
             ---------------          -----------              ----------------          -----------
<S>          <C>                           <C>                           <C>               <C>
             $ 0.002                       6,886,000                     9.74              1,721,500
             $ 0.014                         135,000                     9.27                 33,750
             $ 1.500                          77,000                     8.86                 38,500
             $ 3.200                           2,500                     8.24                    825
             $ 3.400                           1,000                     7.86                    670
             $ 7.000                           1,000                     7.80                    670
             $ 0.656                             750                     6.70                    503
             $ 0.688                              10                     5.70                      7
             $ 0.910                             750                     7.59                    503
             $ 1.250                           1,717                     7.59                  1,150
                                           ---------                                       ---------
                                           7,105,727                                       1,798,078
                                           ---------                                       ---------
</TABLE>


         Celerity recorded no compensation expense related to options granted in
         2002 and 2001,  as the  exercise  price of the options was equal to the
         fair market value of the  Company's  common  stock at grant dates.  Had
         compensation  cost for the options granted been determined based on the
         fair value at the grant dates for awards under the Plan consistent with
         the method of SFAS 123, the Company's net loss would have been adjusted
         to the pro forma amounts indicated below at December 31:


<TABLE>
<CAPTION>
                                               2002                                    2001
                                  ---------------------------------       ---------------------------------
                                       As                                      As
                                    Reported           Pro Forma            Reported            Pro Forma
                                  -------------       -------------       -------------       -------------
<S>                               <C>                 <C>                 <C>                 <C>
          Net loss                $  (4,455,706)      $  (4,511,536)      $  (3,731,361)      $   4,010,506)
          Net loss per share      $       (0.08)      $       (0.08)      $       (1.17)      $       (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 and 2001;  risk-free interest rates
         of 1.86% and 2.88% in 2002 and 3.92% in 2001,  volatility  between 237%
         and 330% in 2002 and 205%  and  268% in 2001 and  expected  lives  from
         three to ten years.


                                      F-19
<PAGE>

11.      Loss Per Share

         Basic loss per share were  computed by dividing net loss  applicable to
         common stock by the weighted average common shares  outstanding  during
         each period.  Potential common  equivalent  shares of 5,086,232,698 and
         17,161,617  at  December  31,  2002  and  2001,  respectively,  are not
         included in the computation of per share amounts in the periods because
         the Company reported a loss from continuing operations.

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

<TABLE>
<CAPTION>
                                                                 2002               2001
                                                              ------------       ------------
          Loss
            Basic:
<S>                                                           <C>                <C>
              Loss attributable to common stockholders        $ (4,589,022)      $ (4,791,361)
                                                              ------------       ------------

          Shares
            Basic:
              Weighted-average common shares outstanding        57,076,981          3,181,652
                                                              ============       ============
</TABLE>



12.      Cash Flows

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

                                                  2002       2001
                                              ------------  -------
          Cash paid during the year for:
          Interest                            $      1,262  $   849


         Noncash investing and financing activities:


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.

         Celerity  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.


2001

         Celerity  issued 64,144 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 120,000 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 $3.40 per
         share  of the date of  issuance  or  $408,000.  Based  upon  Artesian's
         failure to provide  any  funding  or any orders as  promised  under the
         agreement and their  continuing  failure to show any probability of any
         orders or funding,  the Company has demanded the return of these shares
         and fully amortized the value as an operating expense.

         Celerity  converted  $1,686,349,  including  accrued  interest,  of the
         convertible debentures into 3,155,540 shares of common stock.

         Celerity  converted $140,911 of Series A Preferred Stock and $50,000 of
         Series B Preferred Stock into 318,010 shares of common stock.




                                      F-20
<PAGE>

13.      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  does 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.  Celerity 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
         principle 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  or the  date a new  registration
         statement  becomes   effective.   Celerity  has  accrued  $714,840  for
         liquidated damages at December 31, 2002.

         Celerity is a defendant in a lawsuit brought by a financial printer for
         non-payment of expenses. The action was brought on January 30, 2001 and
         is pending before Supreme Court of the State of New York, County of New
         York. In this action, the plaintiff, Merrill/New York Company, has sued
         the Company  for the  non-payment  of  financial  printing  fees and is
         seeking  approximately  $118,000 in damages,  plus interest and certain
         costs. In 2002,  Merrill/New  York Company  obtained a summary judgment
         against  the  Company  for  $136,435  which has been  fully  accrued at
         December 31, 2002. Celerity intends to appeal this decision.

         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
         shipment  of  products.  Celerity  intends to defend this action and no
         amounts have been accrued at December 31, 2002.

         On  February  14,  2002,  Metalade  FL,  Inc.  sued the  Company  for a
         delinquent  account.  The action was brought in the  Circuit  Court for
         Knox County,  Tennessee  and is styled as Metalade FL, Inc. v. Celerity
         Systems,  Inc. The  plaintiff  alleges it is owed in excess of $103,000
         related to the shipment of products. Celerity has accrued approximately
         $103,000 in  accounts  payable  related to this action at December  31,
         2002.  Celerity  and Metalade  entered  into a consent  judgment in the
         amount of $108,000,  of which approximately  $32,000 has been paid. The
         remaining amount has been accrued at December 31, 2002.

         On  October,  9,  2002,  Waytec  Electronics  sued  the  Company  for a
         delinquent account.  The action was brought in the Circuit Court of the
         City of  Lynchburg,  Virginia.  In this  action the  plaintiff,  Waytec
         Electronics,  has sued the Company for  non-payment of inventory  items
         and is seeking $77,705. In 2002, a default judgment was entered against
         the Company. This amount has been accrued at December 31, 2002.

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

         Celerity leases office space under an operating  lease.  Future minimum
         lease payments by year, and in the aggregate,  under this noncancelable
         operating lease at December 31, 2002, are as follows:

                    2003                                       62,675
                    2004                                       65,400
                    2005                                       65,400
                    2006                                        2,725
                                                          -----------
                                                          $   196,200
                                                          ===========


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


14.      Subsequent Events

         In the first quarter of 2003,  the Company  issued  $139,000  principal
         amount  of 5%  convertible  debentures  resulting  in net  proceeds  of
         $139,000. The Debentures have a term of three years and are convertible
         into the  Company's  common  stock at a price per share equal to $0.001
         per share.  As the  conversion  price was equal with the stock price on
         the date of  issuance  there is no  beneficial  conversion  feature for
         these convertible debentures.

         In the first quarter of 2003,  the Company issued  4,554,956  shares of
         common stock as payment of certain payroll and accounts payable items.

         In the first quarter of 2003,  the Company issued  2,645,000  shares of
         common stock for the  conversion of the  remaining  shares of preferred
         stock.

         In the first  quarter of 2003,  the Company  issued  $40,000  principal
         amount of 10% short-term notes payable.

         On  January  14,  2003,   the  Company  held  its  Annual   Meeting  of
         Shareholders.  The  shareholders  approved an increase in the Company's


                                      F-21
<PAGE>

         authorized  capital  stock to 5 billion  shares of  common  stock,  and
         approved  the  appointment  of  three  directors  and  its  independent
         accountants.


15.      Related Party Transactions


                                    REVENUES

         On March 5, 2001, we entered into a National Distributor  Agreement for
         the education market with Kidston Communications,  a company controlled
         by Edward Kidston, a director of the Company until October 30, 2002 and
         shareholder.   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.   We  had  sales  of   $626,597   and  $87,800  to  Kidston
         Communications in 2002 and 2001, respectively.

         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,  2002.  As of December  31,
         Kidston Communications has financed open purchase orders having a value
         of $764,823.


                                ACCRUED EXPENSES

         At December 31, 2002,  the Company owes the former  President and Chief
         Executive Officer of the Company $226,406 in unpaid payroll.


                                  NOTES PAYABLE

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

         In July 2002,  the President and CEO of the Company  loaned the Company
         $950. The amount is to cover short-term  operating  expenses and is due
         upon demand.

         At December 31, 2002, the Company has an outstanding  note payable to a
         former  member of the  Company's  Board of  Directors  in the amount of
         $125,000 (see Note 8).




                                      F-22
<PAGE>

                              COMMON STOCK WARRANTS

         During 2001,  the Company  issued 2,700  warrants to a former member of
         the Company's Board of Directors to purchase common stock in connection
         with short-term financing (see Note 7).

         During 2001, the Company  issued 120,000  warrants to former members of
         the Company's Board of Directors to purchase common stock in connection
         with the issuance of Series B Redeemable  Convertible  Preferred  Stock
         (see Note 7).


                                  STOCK OPTIONS

         During 2001, the Company  issued  100,250  options to former members of
         the Company's Board of Directors for services (see Note 10).


                                 PREFERRED STOCK

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


                                  COMMON STOCK

         During 2002, the Company issued 1,333,334 shares of Common Stock with a
         value of $24,000 in lieu of payment of directors' fees.


16.      Treasury Stock

         During the year ended December 31, 2001, the Company discovered that it
         no longer had  possession  of 16,869  shares of  treasury  stock.  As a
         result, the Company has written off the cost basis value of the shares,
         or $227,500.



                                      F-23
<PAGE>



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

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

         PricewaterhouseCoopers'  report on Celerity's  financial statements for
the years ended  December  31, 1999 and 2000,  respectively,  did not contain an
adverse opinion or a disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope, or accounting principles.

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

         Since January 1, 1999, 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, 1999, as well as any  subsequent  interim period prior
to  dismissal,  PricewaterhouseCoopers  did not  advise  Celerity  of any of the
matters identified in paragraph (a)(1)(iv)(B) of Item 304 of Regulation S-B.

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



                                       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                 29         President, Chief Executive Officer    October 25, 2002 to
                                           and Chairman of the Board             Present

John McNamara, Jr.              29         Director                              October 25, 2002 to
                                                                                 Present

Dr. Michael Kesselbrenner       51         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
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

                                       18

<PAGE>

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.

         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, 2001,  our officers,  directors,  and
greater  than ten percent  beneficial  owners  complied  with all Section  16(a)
filing requirements applicable to them except as follows:

      o     Kenneth Van Meter, our former President, Chief Executive Officer and
            Chairman of the Board of Directors, has failed to timely file a Form
            4 in connection  with the  acquisition  of 118,506  shares of Common
            Stock on January 4, 2001,  and 5 shares of Series B Preferred  Stock
            on March 27, 2001.


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
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.

<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>
Robert B. Legnosky,                     2002            $4,000       --            --                --                --
  Chairman of the Board,
  Chief Executive Officer and
  President

Kenneth D. Van Meter                    2002      $236,250 (1)       --            --                --                --
                                        2001      $254,286 (2)       --            --                --        $5,438 (4)
                                        2000      $278,760 (3)       --            --                --                --
</TABLE>

_________________________

(1)      Includes $157,500 voluntary deferred in 2002
(2)      Includes $68,906 voluntarily deferred in 2001.
(3)      Includes  $13,125  voluntarily  deferred  in 2000 and  $96,185  paid in
         common shares of Celerity.
(4)      This represents a Company contribution to Mr. Van Meter's Simple IRA.



                                       19
<PAGE>

         In November 2001, Mr. Van Meter  received  options to purchase  100,000
shares of common stock at an exercise  price of $1.50 per share.  In April 2002,
Mr. Van Meter received  options to purchase 150,000 shares of common stock at an
exercise price of $0.14 per share.

         The  following  table sets forth  certain  information  concerning  the
number and value of securities  underlying  exercisable and unexercisable  stock
options as of the fiscal year ended  December  31,  2002 by the Named  Executive
Officer.

<TABLE>
<CAPTION>
                     Aggregated Option Exercises In Last Fiscal Year And Fiscal Year End Option Values

                                                                  Number of Securities
                                  Number of                      Underlying Unexercised          Value of Unexercised
                                    Shares                             Options at               In-the-Money Options at
                                 Acquired on       Value           December 31, 2002             December 31, 2002(1)
Name                               Exercise       Realized    Exercisable   Unexercisable    Exercisable    Unexercisable
----                               --------       --------    -----------   -------------    -----------    -------------
<S>                             <C>               <C>         <C>           <C>              <C>            <C>
Kenneth D. Van Meter                  --             --           83,160       270,660           -0-             -0-
</TABLE>

-------------
(1)      Amount  reflects  the market value of the  underlying  shares of Common
         Stock at the closing price  reported on the  Over-the-Counter  Bulletin
         Board on December 31, 2002 ($0.001 per share),  less the exercise price
         of each option.

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.
Mr. Van Meter resigned on September 24, 2002.


Compensation Of Directors

         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.

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


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.

         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



                                      F-27
<PAGE>

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.


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, 2002.

<TABLE>
<CAPTION>
                                                                                                       Number
                                                                                                    Of Securities
                                                                                                      Remaining
                                                                                                      Available
                                                                  Number                             For Future
                                                               Of Securities                          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>



                                       21
<PAGE>


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  24,  2003,  for any  person  who is known to
Celerity to be the beneficial owner of more than five percent (5%) of Celerity's
common stock.

<TABLE>
<CAPTION>
                                                            Shares
                                                         Beneficially              Percent
Name and Address               Title of Class                Owned               of Class (2)
----------------               --------------                -----               ------------

<S>                                                          <C>                       <C>
Gerald Holland (1)             Common Stock                  22,082,019                8.7%
22 Coult Lane
Old Lyne, CT 06371

Teresa Holland (1)             Common Stock                  22,082,019                8.7%
22 Coult Lane
Old Lyne, CT 06371
</TABLE>

----------

(1)      Based on Schedule 13D filings dated February 3, 2003.
(2)      Applicable  percentage of ownership is based on  253,525,535  shares of
         common stock outstanding as of March 24, 2003, 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  24,  2003  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 below and by all directors and executive officers as
a group as of March 24, 2003. Unless otherwise  indicated,  beneficial ownership
is direct and the person  indicated has sole voting and investment  power. As of
March 24, 2003, Celerity had 253,525,535 shares of common stock outstanding.

<TABLE>
<CAPTION>
                                                                   Shares
                                                                Beneficially              Percent
Name and Address                      Title of Class                Owned               of Class (1)
----------------                      --------------                -----               ------------
<S>                                                                <C>                      <C>
Kenneth D. Van Meter                  Common Stock                 125,539(2)               0.00%
122 Perimeter Park Drive
Knoxville, Tennessee 37922

Dr. Michael Kesselbrenner             Common Stock                  7,570,978               2.99%
122 Perimeter Park Drive
Knoxville, Tennessee 37922

Robert B. Legnosky                    Common Stock                          0               0.00%




John Stephen McNamara                 Common Stock                          0               0.00%


All Officers and Directors as Group   Common Stock                  7,570,978               2.99%
</TABLE>


                                       22
<PAGE>

----------

(1)      Applicable  percentage of ownership is based on  253,525,535  shares of
         common stock outstanding as of March 24, 2003, 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  24,  2003  are  deemed  to be
         beneficially  owned  by the  person  holding  such  securities  for the
         purpose of computing the  percentage  of ownership of such person,  but
         are not  treated  as  outstanding  for the  purpose  of  computing  the
         percentage ownership of any other person.
(2)      Includes  warrants  to  purchase  up to 3,907  shares of common  stock.
         Excludes  21,032  shares of common stock owned by Mr. Van Meter's adult
         children as to which he disclaims beneficial ownership.



                                       23
<PAGE>



ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         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,  Celerity  defaulted  on
payments due of $125,000, plus accrued interest, on the notes payable.  Celerity
is seeking to make arrangements with this note holder.

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

         Several  persons  affiliated  with us have made cash loans to Celerity.
Mr. Van Meter loaned us an aggregate  of $550,000  during 1998 and  aggregate of
$17,219  during 1999 and  aggregate  of $950 during 2002 and made no loans to us
during 2000 or 2001. Mr.  Hultquist,  a former member of our Board of Directors,
loaned us  $70,000 in the first  quarter of 2000  (which was repaid in cash) and
$125,000 in the second quarter of 2000 which remains outstanding. Except for the
loans from Mr.  Hultquist  and  approximately  $91,000 of  compensation  owed to
former  employees,  none of the amounts owed  described  in this section  remain
outstanding  due to such  persons'  investments  in the  transactions  described
herein.

          During 2001,  Celerity  issued 2,700  warrants to David  Hultquist,  a
former member of  Celerity's  Board of  Directors,  to purchase  common stock in
connection with short-term financing.

          During 2001,  Celerity issued 120,000  warrants to Ed Kidston,  former
members of Celerity's Board of Directors, to purchase common stock in connection
with the issuance of Series B Redeemable Convertible Preferred Stock.

          During 2001,  Celerity issued 100,250 options to Ken Van Meter and Dr.
Fenton Scruggs, former members of Celerity's Board of Directors, for services.

          During  2001,  Celerity  issued  5  shares  of  Series  B  Convertible
Preferred  Stock with a value of $50,000  in lieu of payment of  consulting  and
directors'  fees,  payroll and accounts  payable to Ken Van Meter, the President
and Chief Executive Officer of Celerity.

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

         On March 5, 2001, we entered into a National Distributor  Agreement for
the education market with Kidston Communications, a company controlled by Edward
Kidston,  a director of  Celerity  until  October  30,  2002 and a  shareholder.
Pursuant to the terms of this Agreement, Kidston Communications is the exclusive
national  distributor in the education market in the United States.  The term of
the  Agreement  is through  December 31, 2003 and will  automatically  renew for
additional  three-year periods unless one party notifies the other of its intent
not to renew at least 30 days  prior to the end of the then  current  term.  The
Agreement  provides that Kidston  Communications  may purchase products from our
Company at a five percent discount to list price, provided that the price is not
higher than the price paid by other  customers  for like  quantities  of similar
products  and with  similar  terms and  conditions.  If  Kidston  Communications
exceeds its sales  targets by at least thirty  percent,  then it will receive an
additional  5% discount to the list price.  Sales  targets  will be  established
annually by the parties by December 15 of the  preceding  year.  We had sales of
$626,597 and $87,800 to Kidston Communications in 2002 and 2001, respectively.

         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



                                       24
<PAGE>

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, 2002. As of December 31, 2002 Kidston
Communications has financed open purchase orders having a value of $764,823.

          In July 2002, Ken Van Meter,  the President and CEO of Celerity loaned
Celerity $950. The amount is to cover short-term  operating  expenses and is due
upon demand.

          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  owes  Ken Van  Meter,  the  former
President and Chief Executive Officer of Celerity $226,406 in unpaid payroll.

          At December 31,  2002,  Celerity  has an  outstanding  note payable to
David Hultquist,  a former member of Celerity's Board of Directors in the amount
of $125,000.

          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.

          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.


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.


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.

          Current  Report on Form 8-K filed on April 10, 2002 pursuant to Item 5
(Other Events) reporting that on April 9, 2002, Celerity held its Annual Meeting
of Shareholders and a majority of Celerity's stockholders approved the following
matters:  (i) the  reelection  of Kenneth D. Van Meter,  Fenton  Scruggs,  David
Hultquist and Edward  Kidston as directors of Celerity,  with terms  expiring at
the 2003  annual  meeting,  or until  their  successors  have been  elected  and
qualified;  (ii) the amendment to Celerity's  certificate  of  Incorporation  to
effect a one-for-twenty reverse stock split of Celerity's issued and outstanding
capital   stock,   and  (iii)  the  amendment  to  Celerity's   certificate   of
incorporation  to increase the  authorized  common stock to  250,000,000  shares
after taking into account the one-for twenty reverse stock split.

         Current Report on Form 8-K filed on September 27, 2002 pursuant to Item
6 (Resignation of Registrant's  Directors) reporting that on September 26, 2002,
Celerity  announced  that Kenneth D. Van Meter had resigned as President,  Chief
Executive Officer and director of Celerity.



                                       25
<PAGE>

         Current  Report on Form 8-K filed on November 13, 2002 pursuant to Item
5 (Other Events) reporting that effective  October 25, 2002,  Celerity' Board of
Directors  appointed  Robert  B.  Legnosky  and John  Stephen  McNamara,  Jr. as
directors to fill the  vacancies  on the Board of  Directors.  In addition,  Mr.
Legnosky was appointed President and Mr. McNamara was appointed Secretary.  Also
effective  October 25, 2002,  Messrs.  Hultquist  and Kidston  resigned from the
Board of Directors.

         Current  Report on Form 8-K was filed on December 30, 2002  pursuant to
Item 5 (Other Events) reporting that on December 30, 2002, Celerity announced at
its Annual Meeting of  Shareholders  that the meeting had been  adjourned  until
10:00 a.m.,  January 14, 2003, at One Riverfront Plaza, 7th Floor,  Newark,  New
Jersey 07102, and that all proxies received up to 10:00 a.m.,  January 14, 2003,
will be counted at the reconvened  meeting.  All shareholders as of the original
record date, December 17, 2002, were entitled to vote by proxy or in person.

          (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

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

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

3.6                   Certificate of Amendment to Certificate of          Provided herewith
                      Incorporation of Celerity Systems, Inc. dated
                      August 23, 2001

3.7                   Certificate of Amendment to Certificate of          Provided herewith
                      Incorporation of Celerity Systems, Inc. dated
                      April 17, 2002

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

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

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

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

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

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


                                       26
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                         Location
-----------           -----------                                         --------
<S>                   <C>                                                 <C>
4.7                   Form of Hampshire Warrant                           Incorporated by reference to Exhibit 4.7 to
                                                                          Amendment No. 1 to Registration Statement on
                                                                          SB-2 filed with the SEC on October 8, 1997

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       27
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

10.4                  [Reserved]

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

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

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
</TABLE>


                                       28
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                         Location
-----------           -----------                                         --------
<S>                   <C>                                                 <C>
10.8                  Purchase Order Agreement, dated June 26, 1995,      Incorporated by reference to Exhibit 10.8 to the
                      between Tadiran Telecommunications Ltd. and         Registration Statement on SB-2 filed with the
                      Celerity                                            SEC on August 13, 1997

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

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

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

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

10.13                 Letter of Agreement, dated March 31, 1993,          Incorporated by reference to Exhibit 10.13 to
                      between Celerity and Herzog, Heine & Geduld, 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 June 26, 1997,         Incorporated by reference to Exhibit 10.14 to
                      between Unisys Corporation and Celerity             the Registration Statement on SB-2 filed with
                                                                          the SEC on August 13, 1997

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

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

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

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

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

10.20                 Form of Subscription Agreement, between Celerity    Incorporated by reference to Exhibit 10.20 to
                      and each of RNI Limited Partnership, First Empire   Amendment No. 1 to Form 10-KSB for the year
                      Corporation, Greg A. Tucker and Michael             ended December 31, 1998 filed with the SEC on
                      Kesselbrenner                                       April 30, 1999

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
</TABLE>


                                       29
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.37                 Warrant to purchase 2,500,000 shares of common      Incorporated by reference to Exhibit 10.37 to
                      stock dated as of June 14, 2001 given by Celerity   the Registration Statement on Form SB-2 filed
                      Systems to Cornell Capital Partners, L.P.           with the SEC on October 18, 2001
</TABLE>


                                       30
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                         Location
-----------           -----------                                         --------
<S>                   <C>                                                 <C>
10.38                 Warrant to purchase 3,500,000 shares of common      Incorporated by reference to Exhibit 10.38 to
                      stock dated as of August, 2001 given by Celerity    the Registration Statement on Form SB-2 filed
                      Systems to Cornell Capital Partners, L.P.           with the SEC on October 18, 2001

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

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

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

10.42                 Consulting Services Agreement dated as of           Incorporated by reference to Exhibit 10.42 to
                      September, 2001 between Celerity Systems, Inc.      the Registration Statement on Form SB-2 filed
                      and Yorkville Advisors, LLC                         with the SEC on October 18, 2001

10.43                 Advisory Agreement dated September 6, 2001          Incorporated by reference to Exhibit 10.43 to
                      between Celerity Systems, Inc. and Internet         the Registration Statement on Form SB-2 filed
                      Finance International Corporation                   with the SEC on October 18, 2001

10.44                 Financing Agreement dated as of August, 2001        Incorporated by reference to Exhibit 10.44 to
                      between Celerity Systems, Inc. and Artesian         the Registration Statement on Form SB-2 filed
                      Direct Holdings Corporation                         with the SEC on October 18, 2001
</TABLE>


                                       31
<PAGE>

<TABLE>
<CAPTION>
Exhibit No.           Description                                         Location
-----------           -----------                                         --------
<S>                   <C>                                                 <C>
10.45                 Partial Guaranty Agreement dated August, 2001       Incorporated by reference to Exhibit 10.45 to
                      given by Ed Kidston to Celerity Systems, Inc.       the Registration Statement on Form SB-2 filed
                                                                          with the SEC on October 18, 2001

10.46                 Termination Agreement by and between Celerity       Incorporated by reference to Exhibit 10.45 to
                      Systems, Inc. and Cornell Capital Partners, LP      the Form 10-KSB for the year ended December 31,
                      dated February 2002                                 2001 filed with SEC on March 27, 2002

10.47                 Letter Agreement dated April 26, 2002 regarding     Incorporated by reference to Exhibit 10.46 to
                      Purchase Order Financing                            the Registration Statement on Form SB-2 filed
                                                                          with the SEC on June 28, 2002

10.48                 Letter Agreement dated June 12, 2002 between        Incorporated by reference to Exhibit 10.47 to
                      Cornell Capital Partners, LP and Celerity           the Registration Statement on Form SB-2 filed
                      Systems, Inc.                                       with the SEC on June 28, 2002
</TABLE>


ITEM 14.  CONTROLS AND PROCEDURES

         Annual evaluation of Disclosure Controls and Internal Controls.  Within
the 90 days prior to the date of this Quarterly Report on Form 10-KSB,  Celerity
evaluated  the  effectiveness  of the design and  operation  of its  "disclosure
controls and procedures"  (Disclosure Controls),  and its "internal controls and
procedures for financial reporting"  (Internal  Controls).  This evaluation (the
Controls  Evaluation) was done under the supervision and with the  participation
of management, including our President, who is our sole executive officer. Rules
adopted  by the SEC  require  that in this  section of the  Quarterly  Report we
present  the  conclusions  of  the  President  about  the  effectiveness  of our
Disclosure  Controls  and Internal  Controls  based on and as of the date of the
Controls Evaluation.

         CEO  and  CFO  Certifications.   Appearing  immediately  following  the
Signatures  section  of this  Annual  Report  there  are two  separate  forms of
"Certifications"  of the President.  The first form of Certification is required
in accord with  Section 302 of the  Sarbanes-Oxley  Act of 2002 (the Section 302
Certification).  This  section  of the  Annual  Report  which you are  currently
reading is the information concerning the Controls Evaluation referred to in the
Section 302  Certifications  and this information  should be read in conjunction
with the Section 302  Certifications  for a more complete  understanding  of the
topics presented.



                                       32
<PAGE>

         Disclosure  Controls and  Internal  Controls.  Disclosure  Controls are
procedures  that are designed with the  objective of ensuring  that  information
required to be disclosed in our reports filed under the Securities  Exchange Act
of 1934  (Exchange  Act),  such as this Annual Report,  is recorded,  processed,
summarized and reported within the time periods  specified in the Securities and
Exchange  Commission's  (SEC)  rules and  forms.  Disclosure  Controls  are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the President, as appropriate to allow
timely decisions regarding required disclosure. Internal Controls are procedures
which are designed with the objective of providing reasonable assurance that (1)
our transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported,  all  to  permit  the  preparation  of  our  financial  statements  in
conformity with generally accepted accounting principles.

         Limitations on the  Effectiveness of Controls.  Celerity's  management,
including the  President,  does not expect that our  Disclosure  Controls or our
Internal  Controls will prevent all error and all fraud.  A control  system,  no
matter how well  conceived  and  operated,  can  provide  only  reasonable,  not
absolute,  assurance that the objectives of the control system are met. Further,
the design of a control  system must  reflect  the fact that there are  resource
constraints,  and the benefits of controls must be considered  relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within Celerity have been detected. These inherent limitations
include the realities that judgments in decision-making  can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,  controls
can be circumvented by the individual acts of some persons,  by collusion of two
or more people,  or by  management  override of the  control.  The design of any
system of  controls  also is based in part upon  certain  assumptions  about the
likelihood of future events,  and there can be no assurance that any design will
succeed in achieving  its stated goals under all  potential  future  conditions;
over time,  control may become inadequate  because of changes in conditions,  or
the degree of  compliance  with the  policies  or  procedures  may  deteriorate.
Because  of  the  inherent  limitations  in  a  cost-effective  control  system,
misstatements due to error or fraud may occur and not be detected.

         Scope of the Controls  Evaluation.  The  evaluation  of our  Disclosure
Controls and our Internal Controls included a review of the controls' objectives
and design,  the  controls'  implementation  by  Celerity  and the effect of the
controls on the  information  generated  for use in this Annual  Report.  In the
course of the Controls Evaluation,  we sought to identify data errors,  controls
problems or acts of fraud and to confirm  that  appropriate  corrective  action,
including process improvements,  were being undertaken.  This type of evaluation
will be done on a quarterly  basis so that the conclusions  concerning  controls
effectiveness can be reported in our Quarterly Reports on Form 10-QSB and Annual
Report on Form 10-KSB. The overall goals of these various evaluation  activities
are to monitor our  Disclosure  Controls and our  Internal  Controls and to make
modifications  as  necessary;  our intent in this regard is that the  Disclosure
Controls and the Internal  Controls will be  maintained as dynamic  systems that
change (including with improvements and corrections) as conditions warrant.

         Among other matters,  we sought in our evaluation to determine  whether
there were any "significant deficiencies" or "material weaknesses" in Celerity's
Internal  Controls,  or  whether  Celerity  had  identified  any  acts of  fraud
involving personnel who have a significant role in Celerity's Internal Controls.
This  information was important both for the Controls  Evaluation  generally and
because  items  5 and 6 in the  Section  302  Certifications  require  that  the
President disclose that information to our Board and to our independent auditors
and to report on related  matters in this section of the Annual  Report.  In the
professional auditing literature,  "significant deficiencies" are referred to as
"reportable conditions";  these are control issues that could have a significant
adverse effect on the ability to record, process, summarize and report financial
data in the  financial  statements.  A  "material  weakness"  is  defined in the
auditing  literature as a particularly  serious  reportable  condition where the
internal  control  does not  reduce  to a  relatively  low  level  the risk that
misstatements  caused  by error or fraud  may  occur in  amounts  that  would be
material in relation to the financial  statements  and not be detected  within a
timely  period by employees in the normal course of  performing  their  assigned
functions.  We also sought to deal with other  controls  matters in the Controls
Evaluation,  and in each case if a problem was  identified,  we considered  what
revision,  improvement  and/or  correction  to make in accord with our  on-going
procedures.

         In accord with SEC  requirements,  the President notes that,  since the
date of the Controls  Evaluation to the date of this Annual  Report,  there have
been no significant  changes in Internal Controls or in other factors that could
significantly  affect Internal  Controls,  including any corrective actions with
regard to significant deficiencies and material weaknesses.



                                       33
<PAGE>

         Conclusions.  Based upon the Controls  Evaluation,  our  President  has
concluded that, subject to the limitations noted above, our Disclosure  Controls
are effective to ensure that material  information  relating to Celerity is made
known to  management,  including the President,  particularly  during the period
when our periodic reports are being prepared, and that our Internal Controls are
effective to provide  reasonable  assurance  that our financial  statements  are
fairly presented in conformity with generally accepted accounting principles.



                                       34
<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.


/s/ Robert B. Legnosky
------------------------
Robert B. Legnosky         President and Chief Executive Officer  April 14, 2003


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

<TABLE>
<CAPTION>
Signature                        Title                                    Date
---------                        -----                                    ----
<S>                              <C>                                      <C>
/s/ Robert B. Legnosky           President, Chief Executive Officer       April 14, 2003
-----------------------------    and Chairman of the Board
Robert B. Legnosky               (Principal Executive Officer)
                                 (Principal Financial Officer)
</TABLE>



                                       35
<PAGE>


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In  connection  with the Annual Report of Celerity  Systems,  Inc. (the
"Company") on Form 10-KSB for the year ended December 31, 2002 as filed with the
Securities and Exchange  Commission on the date hereof (the  "Report"),  each of
the  undersigned,  in the capacities and on the dates  indicated  below,  hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:

         1. The Report fully complies with the  requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

         2. The  information  contained in the Report  fairly  presents,  in all
material respects, the financial condition and results of operation of Celerity.


Dated:   April 14, 2003                By: /s/Robert B. Legnosky
                                           -------------------------------------
                                           Robert B. Legnosky
                                           President, Chief Executive Officer
                                           and Chairman of the Board
                                           (Acting Chief Financial Officer)



                                      A-1
<PAGE>


                              OFFICER'S CERTIFICATE
                             PURSUANT TO SECTION 302


                                  CERTIFICATION


         I, Robert B. Legnosky, certify that:

         1. I have  reviewed  this  annual  report on Form  10-KSB  of  Celerity
Systems, Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a)       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: April 14, 2003                       By: /s/ Robert B. Legnosky
                                               ---------------------------------
                                               Robert B. Legnosky
                                               President, Chief Executive
                                               Officer and Chairman of the Board
                                               (Acting Chief Financial Officer)

                                      B-1