U.S. SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                  FORM 10-QSB

    (MARK ONE)

    |X| Quarterly Report Pursuant to Section 13 or 15(d) of Securities
        Exchange Act of 1934

                        For the quarterly period ended SEPTEMBER 30, 2002

    |_| Transition report under Section 13 or 15(d) of the Securities
        Exchange Act of 1934

                        For the transition period from        to
                                                       ------    -------.

                          Commission File No. 000-28321

                             CELERITY SYSTEMS, INC.
                             ----------------------
                 (Name of Small Business Issuer in Its Charter)

Delaware                                        52-2050585
--------                                         ----------
(State or Other Jurisdiction of                 (I.R.S. Employer
Incorporation or Organization)                   Identification No.)

122 Perimeter Park Drive, Knoxville, Tennessee  37922
----------------------------------------------  -----
(Address of Principal Executive Offices)        (Zip Code)

                                 (865) 539-5300
                                 --------------
                (Issuer's Telephone Number, Including Area Code)

     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,  and (2) has
been subject to such filing requirements for the past 90 days.   Yes |X| No |_|

     There were 129,841,741 shares of Common Stock outstanding as of November 5,
2002 after taking into account a one-for-twenty reverse stock split.


<PAGE>

                                     PART I

FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

CELERITY SYSTEMS, INC.
BALANCE SHEETS

                                           SEPTEMBER 30, 2002
                                               (UNAUDITED)     DECEMBER 31, 2002
                                           ------------------  -----------------
Assets

  Cash                                          $     74,485     $    171,988
  Accounts receivable                                     --            4,282
  Inventory, net                                   1,575,894        2,184,334
                                                -------------    -------------
   Total current assets                            1,650,379        2,360,604

  Property and equipment, net                        196,070          252,286
  Debt offering costs, net of accumulated            723,551        1,076,187
   amortization of $541,904 and $157,418,
   respectively
  Other assets                                        20,900           20,900
                                                -------------    -------------
   Total assets                                 $  2,590,900     $  3,709,977
                                                =============    =============
Liabilities, Redeemable Preferred Stock and
  Stockholders' Deficit

  Accounts payable                              $  1,833,043        2,114,855
  Accrued wages and related taxes                    266,609          145,928
  Accrued interest                                   935,815          768,995
  Other accrued liabilities                          364,272          208,858
  Notes payable - related party                      158,950          117,589
  Equity warrant liability                                --          134,374
  Current maturities of long-term debt               140,000          150,000
                                                -------------    -------------
   Total current liabilities                       3,698,689        3,640,599

  Long-term debt less current maturities           2,983,313        2,830,168
                                                -------------    -------------
   Total liabilities                               6,682,002        6,470,767

  Commitments and contingencies (Notes 7
   and 8)                                                 --               --

  Series B convertible preferred stock,
   $.01 par value; authorized 100
   shares; 75.4 and 95 shares issued and
   outstanding at September 30, 2002 and
   December 31, 2001                                 754,000          950,000
                                                -------------    -------------
  Series C convertible preferred stock,
   $.01 par value; authorized 100
   shares; 6 shares issued and
   outstanding at September 30, 2002 and
   December 31, 2001                                  60,000           60,000
                                                -------------    -------------
  Series D convertible preferred stock,
   $.01 par value; authorized 100
   shares; 5.4 and 0 shares issued and
   outstanding at September 30, 2002 and
   December 31, 2001, respectively                    54,000               --
                                                -------------    -------------


                                       2
<PAGE>

CELERITY SYSTEMS, INC.
BALANCE SHEETS


                                           SEPTEMBER 30, 2002
                                               (UNAUDITED)     DECEMBER 31, 2002
                                           ------------------  -----------------


  Series E convertible preferred stock,
   $.01 par value; authorized 100
   shares; 10 and 0 shares issued and
   outstanding at September 30, 2002 and
   December 31, 2001, respectively                   100,000                -
                                                -------------    -------------
  Common stock, $.001 par value,
   250,000,000 shares authorized,
   91,235,693 and 4,939,766 issued and
   outstanding at September 30, 2002 and
   December 31, 2001, respectively                    91,236            4,940

  Additional paid-in capital                      35,497,639       33,173,170

  Accumulated deficit                            (40,647,977)     (36,948,900)
                                                -------------    -------------
  Total stockholders' deficit                     (5,059,102)      (3,770,790)
                                                -------------    -------------
  Total liabilities, redeemable preferred
   stock and stockholders' deficit             $   2,590,900     $  3,709,977
                                                =============    =============


                                       3
<PAGE>


CELERITY SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED

                                THREE MONTHS ENDED          NINE MONTHS ENDED
                                  SEPTEMBER 30,               SEPTEMBER 30,
                            ------------------------    ------------------------
                               2002         2001           2002           2001
                            ----------    ----------    ----------      --------

Revenues                    $ 141,030   $    87,800   $   605,313   $    90,200
                            ----------  ------------  ------------  ------------
Cost of revenues              122,142       219,184       544,761       222,424
  Gross margin                 18,888      (131,384)       60,552      (132,224)

Operating expenses            590,829     1,034,349     1,810,664     2,340,397
                            ----------  ------------  ------------  ------------
  Loss from operations       (571,941)   (1,165,733)   (1,750,112)   (2,472,621)

Interest expense             (363,117)     (222,339)   (1,943,400)     (560,159)

Income on equity warrant
  liability                         -       815,602       104,745     1,306,652

Other income                    1,414             -         5,755        18,380
                            ----------  ------------  ------------  ------------
  Net income (loss) before
   extraordinary items       (933,644)     (572,470)   (3,583,012)   (1,707,748)

Extraordinary item
  Gain on extinguishment
   of debt                     37,935             -        37,935        71,864
                            ----------  ------------  ------------  ------------
  Loss before cumulative
   effect of change in
   accounting principle      (895,709)     (572,470)   (3,545,077)   (1,635,884)
  Cumulative effect of
   change in accounting
   method                           -             -             -     2,598,813
                            ----------  ------------  ------------  ------------
   Net income (loss)         (895,709)     (572,470)   (3,545,077)      962,929

Amortization of beneficial
  conversion feature and
  accretion of redeemable
  convertible preferred
  stock (Note 4)                    -      (163,708)     (154,000)     (308,042)
                            ----------  ------------  ------------  ------------
  Net income (loss)
   attributable to common
   shareholders             $(895,709)  $  (736,178)  $(3,699,077)  $   654,887
                            ==========  ============  ============  ============
  Basic loss per common
   share (Note 2):
   Net loss before
    extraordinary item      $   (0.02)  $     (0.21)  $     (0.14)  $     (0.70)
   Extraordinary item            0.00             -          0.00          0.03
   Cumulative effect of
    change in accounting
    method                          -             -             -          1.06
                            ----------  ------------  ------------  ------------
   Net income (loss) per
    share                       (0.02)        (0.21)        (0.14)         0.39
   Amortization of
    beneficial conversion
    feature and accretion
    of convertible
    preferred stock                 -         (0.06)        (0.01)        (0.12)
                            ----------  ------------  ------------  ------------
    Net income (loss) per
     share attributable to
     common shareholders    $   (0.02)  $     (0.27)  $     (0.15)  $      0.27
                            ==========  ============  ============  ============


                                       4
<PAGE>

CELERITY SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED


                                                          NINE MONTHS ENDED
                                                             SEPTEMBER 30
                                                      --------------------------
                                                         2002            2001
                                                      -----------    -----------

Cash flows from operating activities:
  Net income (loss)                                  $(3,545,077)   $   962,929
  Adjustments to reconcile net
  loss to net cash used in operating activities:
   Depreciation and amortization                          67,801        249,630
   Provision for inventory obsolescence                       --         90,000
   Noncash interest expense related to beneficial        898,058        147,843
    conversion feature of debt
   Noncash interest expense related to debt              461,986        301,598
    offering costs
   Noncash interest expense related to notes                   -         36,860
    payable
   Noncash operating expense related to consulting             -         85,231
    fees
   Noncash operating expense related to payroll                -         25,671
    and directors' fees
   Noncash income related to settlement of capital             -        (97,500)
    lease obligation
   Noncash income related to equity warrant             (104,745)    (1,306,652)
    liability
   Noncash income related to change in accounting              -     (2,598,813)
    principle
   Changes in current assets and liabilities:
    Accounts receivable                                    4,282        (88,800)
    Inventory                                            610,071     (2,663,039)
    Accounts payable                                    (184,325)     1,644,012
    Interest payable                                     389,355          4,074
    Other current liabilities                            302,666        179,027
                                                      -----------    -----------
     Net cash used in operating activities            (1,099,928)    (3,027,929)
                                                      -----------    -----------
Cash flows from investing activities:
  Purchase of fixed assets                                (4,174)      (653,647)
                                                      -----------    -----------
   Net cash used in investing activities                  (4,174)      (653,647)
                                                      -----------    -----------

Cash flows from financing activities:
  Proceeds from short-term borrowings - related           33,950         54,000
   party
  Payments on short-term borrowings                            -        (35,000)
  Proceeds from long-term debt                         1,140,000      3,986,000
  Principal payments on long-term debt and capital      (305,000)       (92,500)
   lease obligations
  Proceeds from issuance of common stock                  93,000         30,000
  Proceeds from preferred stock and warrant              154,000        859,654
   offering, net of offering costs
  Financing and debt issue costs                        (109,350)      (987,654)
                                                      -----------    -----------
   Net cash provided by financing activities           1,006,000      3,814,500
                                                      -----------    -----------

Net increase in cash and cash equivalents                (97,502)       132,924

Cash and cash equivalents, beginning of period           171,988         10,366
                                                      -----------    -----------
Cash and cash equivalents, end of period             $    74,486    $   143,290
                                                      ===========    ===========


                                       5
<PAGE>
CELERITY SYSTEMS, INC.
STATEMENT OF CHANGES IN
  STOCKHOLDERS' DEFICIT


                      SHARES OF             ADDITIONAL   ACCUMU-      TOTAL
                       COMMON     COMMON     PAID-IN      LATED    STOCKHOLDERS'
                       STOCK      STOCK      CAPITAL     DEFICIT     DEFICIT
                     ----------- -------- ------------ ----------- ------------
Balances, December
 31, 2001             $4,939,766  $4,940  $33,173,170 $(36,948,900) $(3,770,790)
Issuance of common
  stock                9,300,000   9,300       83,700                    93,000
Issuance of
  convertible
  debentures with
  beneficial
  conversion
  feature                                     540,549                   540,549
Issuance of
  convertible
  preferred stock
  with beneficial
  conversion
  feature                                     154,000                   154,000
Issuance of
  common stock as
  payment of
  certain payroll
  and accounts
  payable items        3,810,385   3,810      120,248                   124,058
Conversion of
  convertible
  debentures to
  shares of
  common stock        $72,793,542 72,794    1,200,735                 1,273,529
Conversion of
  preferred stock
  to shares of
  common stock            392,000    392      195,608                   196,000
Close out of
  Equity Warrant
  Liability                                    29,629                    29,629
Accretion of
  redeemable
  preferred stock                                        (154,000)     (154,000)
Net loss                                               (3,545,077)   (3,545,077)
                     -----------------------------------------------------------
Balances,
  September 30,
  2002               $91,235,693 $91,236  $35,497,639 $(40,647,977) $(5,059,102)
                     ==========================================================


                                       6
<PAGE>


                             CELERITY SYSTEMS, INC.


NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.    PRESENTATION OF UNAUDITED INTERIM FINANCIAL STATEMENTS

      The accompanying  interim condensed financial  statements and notes to the
financial  statements  for the interim  periods as of September 30, 2002 and for
the three and nine months ended September 30, 2002 and 2001, are unaudited.  The
accompanying  interim unaudited  financial  statements have been prepared by the
Company in accordance with generally accepted accounting  principles for interim
financial statements and Item 310(b) of Regulation S-B. Accordingly, they do not
include  all the  information  and  footnotes  required  by  generally  accepted
accounting  principles  for  complete  financial  statements.  In the opinion of
management,  all adjustments  (consisting of normal recurring items)  considered
necessary for a fair presentation have been included.  Operating results for the
nine month period ended  September 30, 2002, are not  necessarily  indicative of
the results  that may be expected for the year ending  December  31,  2002.  The
condensed financial  statements should be read in conjunction with the financial
statements  and notes  thereto  included in the Form 10-KSB of the Company as of
and for the year ended December 31, 2001. All amounts and share totals have been
restated to account for the  one-for-twenty  reverse stock split effective April
24, 2002.  Certain September 30, 2001 balances have been reclassified to conform
with the September 30, 2002 financial statement presentation.

      The Company's  financial  statements have been prepared on a going concern
basis,  which  contemplates  the  realization  of assets and the  settlement  of
liabilities  and  commitments in the normal course of business.  The Company has
had  recurring  losses and  continues  to suffer cash flow and  working  capital
shortages.  Since  inception  in January,  1993 through  September  30, 2002 the
losses total  approximately  $40,648,000.  As of September 30, 2002, the Company
had a negative net working capital of  approximately  $2,048,000.  These factors
taken together with the lack of sales and the absence of  significant  financial
commitment raises substantial doubt about the Company's ability to continue as a
going concern.

      The Company has focused on attempting  to obtain the necessary  capital to
maintain its operations. Additionally, the Company has focused its sales efforts
to those which it believes  have the best chance of closing in the near term. In
the first nine months of 2002, the Company  received gross proceeds from private
placements of convertible debt totaling  $1,140,000,  Series D and E Convertible
Preferred Stock totaling $154,000 and from common stock of $93,000.  These funds
enabled  the Company to operate  for the last few  months;  however,  additional
financing  will be necessary to sustain its  operations and achieve its business
plan. The Company is attempting to obtain such additional financing.  Management
is also actively seeking one or more strategic  investors.  The Company has also
received  orders to provide five of its DigiKnow  Digital  Education  Systems to
schools in the Midwest.  However, there can be no assurance as to the receipt or
timing of revenues from  operations  including  revenues from these contracts or
that  management  will be  able  to find a  strategic  investor  or  secure  the
additional  financing  necessary to sustain  operations  or achieve its business
plan.

      On September 24, 2002,  the President and CEO of the Company  resigned his
position.  From  September  24, 2002 through  October 30, 2002,  the Company was
managed by the Board of Directors.  On October 30, 2002,  the Board of Directors
appointed  Robert  Legnosky as President and a director.  Mr.  McNamara was also
appointed a director on that date.  Messrs,  Kidston and Hultquist resigned from
all positions on October 30, 2002 and October 28, 2002, respectively. On October
25, 2002 the  Company  laid off the  balance of its  workforce  due to a lack of
funds, although several employees have been rehired since that date. The Company
is  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 the Company  may sell shares of its 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.

      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.


2.    LOSS PER SHARE

      Basic and  diluted  loss per share  were  computed  by  dividing  net loss
attributable to common stock by the weighted average fully diluted common shares
outstanding  during each  period.  Potential  common  equivalent  shares are not
included in the  computation  of per share  amounts in the  periods  because the
Company  reported  a net loss  and  their  effect  would  be  anti-dilutive.  At



                                       7
<PAGE>

September 30, 2002, the number of shares excluded from the  computation  because
of their  anti-dilutive  effect is approximately  3,968,738,883.  Following is a
reconciliation  of the  numerators  and  denominators  of the basic earnings per
share:

                                THREE MONTHS ENDED          NINE MONTHS ENDED
                                  SEPTEMBER 30,               SEPTEMBER 30,
                            ------------------------    ------------------------
                               2002         2001           2002           2001
                            ----------    ----------    ----------      --------
Income (loss)
 Basic and diluted:
   Income (loss)
   applicable to
   common stockholders    $ (895,709)   $ (736,178)   $ (3,699,077)  $  654,887

Number of Shares
 Basic and diluted:
   Income (loss)
   applicable to
   common stockholders     47,549,523     2,741,255      24,692,630   2,444,872

3.    ISSUANCE OF CONVERTIBLE DEBENTURES

      The Company 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.  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.  The Company  recognized a
beneficial  conversion  feature for the convertible  debentures as a discount on
the convertible  debentures and as additional paid-in capital.  This discount of
$540,550  will be  amortized as a non-cash  interest  expense over the five year
period  from  the  date  of  issuance  to  the  stated  redemption  date  of the
debentures. Upon conversion prior to the stated date of redemption the remaining
unamortized discount will be recognized as a non-cash interest expense.

      The long-term debt of the Company includes the following items:

             Unsecured notes payable                 $     140,000
             4% convertible debentures                   2,731,637
             10% secured convertible debenture           1,500,000
                                                     --------------
                                                         4,371,637
             Less: Unamortized debt discount           (1,248,324)
                   Current maturities                    (140,000)
                                                     -------------
             Long-term debt less current maturities      2,983,313
                                                     =============


4.    ISSUANCE OF CONVERTIBLE PREFERRED 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 $0.01 per share (which  conversion price was adjusted
to $0.20 per share for the reverse  stock split on April 24,  2002),  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.



                                       8
<PAGE>

      On the date of issuance of the Series D Convertible  Preferred  Stock, the
effective  conversion  price was at a discount to the price of the common  stock
into which it was convertible.  The Company recorded a $54,000 dividend relative
to the beneficial  conversion feature. 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 no preferred shares converted to shares of common stock, 5.4 shares remaining
outstanding at September 30, 2002.

      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 $0.001 per share (which
conversion  price was adjusted to $0.02 per share for the reverse stock split on
April 24,  2002),  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 no  preferred  shares  converted  to shares of common  stock,  10 shares
remaining outstanding at September 30, 2002.

      On the date of issuance of the Series E Convertible  Preferred  Stock, the
effective  conversion  price was at a discount to the price of the common  stock
into which it was convertible. The Company recorded a $100,000 dividend relative
to the 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 D
and Series E Convertible Preferred Stock is as follows:

          2002                                        $      --
          2003                                               --
          2004                                          154,000
                                                      ----------
          Total required redemption for the
          Series D and Series E Convertible
          Preferred Stock                             $ 154,000
                                                      ==========

      In September 2002,  $161,522 of interest  payable was converted into a 10%
secured convertible debenture.

5.    SUPPLEMENTAL CASH FLOW INFORMATION

      During the first nine months of 2002, the Company issued  3,810,385 shares
of common  stock with a value of $124,058  as payment  for  certain  payroll and
accounts payable items.

      Also during the first nine  months of 2002,  convertible  debentures  with
outstanding  principal and interest of $1,273,529 were converted into 72,793,542
shares of common stock.

      Also  during  the  first  nine  months  of  2002,  redeemable  convertible
preferred stock of $196,000 was converted into 392,000 shares of common stock.

      Also  during the first nine  months of 2002,  $7,411 of  amortization  was
incurred relating to warrants issued in conjunction with certain notes payable.

6.    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.  The Company is
required  to pay  liquidated  damages in the form of  increased  interest on the
convertible  debentures  as a result  of not  filing an  effective  registration




                                       9
<PAGE>

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. The Company has accrued
$714,840 for liquidated damages at September 30, 2002.

      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 the Supreme Court of the State of New York,  County of New York.
In this action, the plaintiff,  Merrill /New York Company,  sued the Company for
the non-payment of financial  printing fees. In 2002,  Merrill/New  York Company
obtained a judgment for $136,435  against the  Company.  Such  judgment has been
fully  accrued on the books of the  Company.  The Company  intends to appeal the
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
September 30, 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 September 30, 2002. The Company intends to defend this action.

      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.  These amounts are included in the Company's  accounts  payable and are
accruing applicable late fees and interest.


7.    RELATED PARTY TRANSACTIONS

      On April 24, 2002,  the Company  entered into a purchase  order  financing
arrangement with Kidston Communications. Kidston Communications is controlled by
Ed Kidston,  a director of the Company until  October 30, 2002 and  shareholder.
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.  The  Company 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  will be
accounted for as an interest expense on the Company's  financial  statements and
amounts to approximately  $102,555 as of September 30, 2002. As of September 30,
2002, Kidston Communications has financed open purchase orders having a value of
$680,705.

      In September  2002, a 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.

8.    STOCK OPTIONS

      During  the third  Quarter  of 2002 the Board of  Directors  approved  the
issuance of  6,886,000  options to  employees  to acquire  common  shares of the
Company.  The estimated  fair value of these grants was $13,716 using the Black-
Scholes option-pricing model with the following assumptions;  risk-free interest
rate of 1.86%,  volatility  of 330.54% and expected  lives of three  years.  The
Company  recorded  no  compensation  expense  related  to these  options  as the
exercise  price  of the  options  was  equal  to the  fair  market  value of the
Company's common stock at grant date.

9.    SUBSEQUENT EVENTS

      On October 25, 2002, the Company laid off the balance of its workforce due
to a lack of funds,  although  several  employees  have been rehired  since that
date.  The  Company is pursuing  the option of  becoming a business  development
company  which is regulated  under Section 54 of the  Investment  Company Act of


                                       10

<PAGE>

1940.  As a business  development  company  the  Company  may sell shares of its
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.

      In the fourth quarter of 2002, the Company issued 38,606,048 shares of
common stock for conversion of convertible debentures.



                                       11
<PAGE>


ITEM 2.    MANAGEMENT'S PLAN OF OPERATION AND DISCUSSION AND ANALYSIS

INTRODUCTORY STATEMENTS

      FORWARD-LOOKING  STATEMENTS AND  ASSOCIATED  RISKS.  THIS FILING  CONTAINS
FORWARD-LOOKING STATEMENTS,  INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS,
(A) OUR COMPANY'S  PROJECTED SALES AND  PROFITABILITY,  (B) OUR COMPANY'S GROWTH
STRATEGIES,  (C) ANTICIPATED TRENDS IN OUR COMPANY'S INDUSTRY, (D) OUR COMPANY'S
FUTURE  FINANCING  PLANS AND (E) OUR  COMPANY'S  ANTICIPATED  NEEDS FOR  WORKING
CAPITAL.  IN  ADDITION,   WHEN  USED  IN  THIS  FILING,  THE  WORDS  "BELIEVES,"
"ANTICIPATES," "INTENDS," "IN ANTICIPATION OF," "EXPECTS," AND SIMILAR WORDS ARE
INTENDED  TO  IDENTIFY   FORWARD-LOOKING   STATEMENTS.   THESE   FORWARD-LOOKING
STATEMENTS ARE BASED LARGELY ON OUR COMPANY'S  EXPECTATIONS AND ARE SUBJECT TO A
NUMBER OF RISKS AND  UNCERTAINTIES,  INCLUDING THOSE DESCRIBED IN "BUSINESS RISK
FACTORS" OF OUR FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2001. ACTUAL RESULTS
COULD DIFFER  MATERIALLY  FROM THESE  FORWARD-LOOKING  STATEMENTS AS A RESULT OF
CHANGES IN TRENDS IN THE  ECONOMY  AND OUR  COMPANY'S  INDUSTRY,  DEMAND FOR OUR
COMPANY'S PRODUCTS, COMPETITION, REDUCTIONS IN THE AVAILABILITY OF FINANCING AND
AVAILABILITY  OF RAW MATERIALS,  AND OTHER FACTORS.  IN LIGHT OF THESE RISKS AND
UNCERTAINTIES,  THERE CAN BE NO ASSURANCE  THAT THE  FORWARD-LOOKING  STATEMENTS
CONTAINED IN THIS FILING WILL IN FACT OCCUR.


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

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


      CRITICAL ACCOUNTING POLICIES

      The  Company  recognizes  revenue  in  accordance  with  Staff  Accounting
Bulletin 101 whereby revenue is realized when all of the following  criteria are
met: 1) Persuasive  evidence of an arrangement  exists; 2) Delivery has occurred
or services have been rendered;  3) The seller's price to the buyer is fixed and
determinable, and 4) Collectibility is reasonably assured.

      Effective June 30, 2001,  Celerity  systems 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  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 a  mark-to-market  adjustment  of
$2,598,813  was  recorded  as the  cumulative  effect of a change in  accounting
principle.

      Celerity Systems has adopted the provisions of FASB ("Financial Accounting
Standards  Board"  or  "FASB")  Statement  No.;  138,  "Accounting  for  Certain
Derivative  Instruments and Hedging Activities,  (an amendment of FASB Statement
No. 133)." Because Celerity systems had adopted the provisions of FASB Statement
No. 133 prior to June 15,  2002,  this  statement  is  effective  for all fiscal
quarters  beginning  after June 15, 2000.  The adoption of this principle had no
material effect on Celerity Systems' financial statements.


                                       12
<PAGE>

      Celerity  Systems has adopted the  provisions  of FASB  Statement No. 140,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of  Liabilities  (a  replacement  of FASB  Statement No.  125)." This  statement
provides  accounting  and  reporting  standards  for  transfers and servicing of
financial assets and  extinguishments of liabilities.  Those standards are based
on consistent  application  of a  financial-components  approach that focuses on
control.  Under that  approach,  Celerity  Systems  recognized the financial and
servicing  assets it controls and the liabilities it has incurred,  derecognized
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.

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

      SFAS No. 141 provides standards for accounting for business  combinations.
Amount other things,  it requires that only the purchase method of accounting be
used and that  certain  intangible  assets  acquires  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, Celerity Systems 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  Celerity  Systems 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 these new accounting pronouncements had no material effect
on Celerity System's financial statements.

      On August 16, 2001, the Financial  Accounting  Standards Board 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 of incurs a gain or loss upon settlement.  While Celerity Systems has not
completed  the  process  of  determining  the  effect  of  this  new  accounting
pronouncement on its financial  statements,  Celerity Systems  currently expects
that the effect of SFAS No. 143 on Celerity Systems' financial statements,  when
it becomes effective, will not be significant.

      On  October  3,  2001,  the FASB  issued  SFAS  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  No.  144
supersedes SFAS Statement No. 121) FAS No. 121),  "Accounting for the Impairment
of Long-lived  Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 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 No.
121) for  long-lived  assets  that  are to be  disposed  of by sale,  as well as

                                       13
<PAGE>

addresses  the  principal  implementation  issues.  SFAS No. 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
statement amounts for operating losses that have not yet occurred. Additionally,
FAS No.  144  expands  the  scope of  discontinued  operations  to  include  all
components of an entity with operations that can be distinguished  from the rest
of the entity and will be eliminated  from the ongoing  operations of the entity
in a disposal transaction.

      The  adoption  of this  new  accounting  pronouncement  had no  effect  on
Celerity Systems' financial statements.

      In  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 fiscal years  beginning after May 15, 2002.
SFAS No. 145 rescinds FASB Statement No. 4, amends FASB  Statements  Nos. 64 and
13  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.   While  Celerity   Systems  has  not  completed  the  process  of
determining  the effect of this new  accounting  pronouncement  on its financial
statements,  Celerity Systems  currently expects that the effect of SFAS No. 145
on Celerity Systems' financial statements,  when it becomes effective,  will not
be significant.

      In June,  2002,  the FASB  issued  SFAS No.  146,  "Accounting  for  Costs
Associated   with  Exit  or  Disposal   Activities"   which  is  to  be  applied
prospectively to exit or disposal activities  initiated after December 31, 2002.
SFAS  146  requires  that a  liability  for a cost  associated  with  an exit or
disposal  activity be recognized  when the liability is incurred  rather than at
the date of a commitment to an exit or disposal plan, and establishes  that fair
value is the objective for initial measurement of the liability.  While Celerity
Systems  has not  completed  the process of  determining  the effect of this new
accounting pronouncement on its financial statements, Celerity Systems currently
expects  that  the  effect  of  SFAS  No.  146 on  Celerity  Systems'  financial
statements, when it becomes effective, will not be significant.

RESULTS OF OPERATIONS

      THREE  MONTHS  ENDED  SEPTEMBER  30, 2002  COMPARED TO THREE  MONTHS ENDED
SEPTEMBER 30, 2001

      REVENUES

      We had  revenues of $141,030  for the quarter  ended  September  30, 2002,
compared to $87,800 for the same period in 2001. These revenues in 2002 and 2001
result from deliveries of our DigiKnow  Digital  Education  System to schools in
Ohio.  In the three months ended  September 30, 2002, we received no new orders,
which  leaves a remaining  backlog of orders of  approximately  $184,000.  These
orders  are not  considered  sales  until we ship the  products.  Shipments  are
expected to occur  primarily  in 2003.  We market our product for the  education
market as the DigiKnow  Digital  Education  System.  Partial  financing  for the
purchase of inventory and payment of final assembly has been provided by Kidston
Communications, a company controlled by Ed Kidston, a director until October 30,
2002 and  shareholder  of our  company.  A  discussion  about  the terms of this
financing  are set forth  below  under the  "Liquidity  and  Capital  Resources"
section.

      COSTS OF REVENUES

      Costs of revenues were $122,142 in the third quarter of 2002,  compared to
$219,184 in 2001. We had a gross margin of $18,888 in the third quarter of 2002,
compared  to a gross  margin of  $(131,384)  in the same  period of 2001.  Gross
margins are  impacted by the mix of product  sold  between  lower margin set top
boxes and higher margin services,  video servers and other equipment included in
our DigiKnow  Digital  Education  System.  The third  quarter of 2002 reflects a
higher  mix of set top  boxes to other  items.  The  third  quarter  of 2001 was
impacted  negatively  by the  product  mix of  sales  in that  quarter  plus the
addition of $90,000 to the lower of cost of market reserve.

      OPERATING EXPENSES

      Operating  expenses for the three months  ending  September  30, 2002 were
$590,829,  compared to  $1,034,349  for the same period in 2001.  This  decrease
results  primarily from a reduction of approximately  $201,000 in contract labor
costs  incurred for the  development  of software to be used in our  interactive
digital  video  system,  a  reduction  of   approximately   $122,000  in  legal,
shareholder  and  other  related  professional  services,  and by  approximately
$178,000  of  reduced   amortization  expense  associated  warrants  issued  for
financial  consulting.  These reductions were partially offset by an increase in
payroll costs in 2002 of approximately $65,000 as compared to 2001.


                                       14
<PAGE>

      INTEREST EXPENSES

      Interest  expense in the third quarter of 2002 was  $361,117,  compared to
$222,339  in the same period of 2001.  Of these  amounts,  amortization  of debt
offering  costs  totaled  $73,484 in the second  quarter of 2002 as  compared to
$192,469 in the same period of 2001.  Additionally,  the second  quarter of 2002
was  impacted  unfavorably  by  approximately  $135,500  over 2001  from  higher
interest expenses associated with convertible debentures.

      We  recognized a  beneficial  conversion  feature for various  convertible
debentures  outstanding  at  September  30, 2002 as discount on the  convertible
debentures and as additional paid-in capital. The unamortized discount remaining
at September  30,  2002,  $1,248,324,  will be amortized as a non-cash  interest
expense  over  the  five  year  period  between  the  date  of  issuance  of the
convertible debentures to the stated redemption date of the debentures.  For the
three  months  ended  September  30, 2002 and 2001,  we had an  amortization  of
beneficial  conversion  feature of  $184,322  and  $60,059,  respectively.  Upon
conversion  prior to the stated date of  redemption  the  remaining  unamortized
discount will be recognized as a non-cash interest expense.

      EQUITY WARRANT INCOME

      For the three months  ended  September  30, 2002,  we had income on equity
warrant  liability  of $-0- as compared to $815,602 for the same period in 2001.
This amount  represents a mark-to-market  adjustment in connection with warrants
to purchase common stock which are outstanding (see Cumulative  Effect of Change
in  Accounting  Principle).  The  value  of  these  warrants  and the  resulting
mark-to-market  adjustment  at September  30,  2001,  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 341.91% and
expected lives ranging from 1 month to 4 1/2 years.

      GAIN ON EXTINGUISHMENT OF DEBT

      During the third  quarter of 2002,  Celerity  settled  with the holders of
certain  convertible  debentures  wherein the total amount due upon  conversion,
including interest and accrued liquidated damages, was reduced by $37,935.  This
item is reflected as an extraordinary item on the Statement of Operation.

      NET LOSS

      As a result of the above  factors,  we had a net loss of $895,709 or $0.02
per share,  for the quarter ended September 30, 2002,  compared to a net loss of
$572,470, or $0.21 per share for the same period in 2001.

      NINE  MONTHS  ENDED  SEPTEMBER  30, 2002  COMPARED  TO NINE  MONTHS  ENDED
SEPTEMBER 30, 2001

      REVENUES

      Revenues  were  $605,313  for the nine months  ended  September  30, 2002,
compared to $90,200 for the same period in 2001.  These  revenues in 2002 result
from deliveries of our DigiKnow Digital  Education System to schools in Ohio and
Pennsylvania. In that regard, we have made progress in the education markets. In
the six months ended  September 30, 2002, we received  orders for  approximately
$632,000 of products  and have a  remaining  backlog of orders of  approximately
$184,000.  These  orders are not  considered  sales until we ship the  products.
Shipments are expected to occur primarily in 2002. We market our product for the
education market as the DigiKnow Digital Education System. Partial financing for
the purchase of  inventory  and payment of final  assembly has been  provided by
Kidston  Communications,  a company  controlled  by Ed Kidston,  a director  and
shareholder of our company.  A discussion  about the terms of this financing are
set forth below under the "Liquidity and Capital Resources" section.

      COSTS OF REVENUES

      Costs of revenues  were  $544,761 for the nine months ended  September 30,
2002 compared to $222,424 in 2001. We had a gross margin of $60,552 in the first
nine months of 2002,  compared to a negative  gross margin of  $(132,224) in the
same  period of 2001.  Gross  margins are  impacted  by the mix of product  sold
between lower margin set top boxes and higher margin services, video servers and
other  equipment  included  in our  DigiKnow  Digital  Education  System and the
increase by $90,000 in the lower of cost or market  reserve in the third quarter
of 2001.  Sales  during the first half of 2002  reflects a higher mix of set top
boxes to other items.

                                       15
<PAGE>

      OPERATING EXPENSES

      Operating  expenses  for the nine months  ending  September  30, 2002 were
$1,810,664,  compared to $2,268,533  for the same period in 2001.  This decrease
results  primarily from a reduction of approximately  $490,000 in contract labor
costs  incurred for the  development  of software to be used in our  interactive
digital  video  system  as these  contractors  were  replaced  by  employees,  a
reduction in legal costs of  approximately  $148,000  primarily as a result of a
change in the  Company's  general  counsel,  and a  reduction  of  approximately
$202,000 in finance consulting expenses and related  amortization  expense. As a
direct result of the previously  mentioned increase in employees,  payroll costs
in the first nine months of 2002 increased by approximately $342,000 as compared
to 2001.  Also,  tax  expense  was  higher in the first  nine  months of 2001 by
approximately $30,000 as the result of a property tax audit.

      INTEREST EXPENSE

      Interest  expense  for the nine  months  ending  September  30,  2002 were
$1,943,400,  compared to $560,159 for the same period in 2001. Of these amounts,
amortization of debt offering costs totaled $464,486 in the first nine months of
2002 as compared to $301,598 in the same period of 2001. Additionally, the first
half of 2002 was impacted by  approximately  $190,000 over 2001 from  liquidated
damages recorded due to the lack of having an effective  registration  statement
relating  to certain  convertible  debentures.  Of this  increase  approximately
$115,000 is related to the financing arrangement with Kidston Communications,  a
company  controlled by Ed Kidston,  a director and shareholder of our company. A
discussion  about the terms of this  financing  are set  forth  below  under the
"Liquidity and Capital Resources" section.

      We  recognized a  beneficial  conversion  feature for various  convertible
debentures  outstanding  at  September  30, 2002 as discount on the  convertible
debentures and as additional paid-in capital. The unamortized discount remaining
at September  30,  2002,  $1,248,324,  will be amortized as a non-cash  interest
expense  over  the  five  year  period  between  the  date  of  issuance  of the
convertible debentures to the stated redemption date of the debentures.  For the
nine  months  ended  September  30,  2002 and 2001,  we had an  amortization  of
beneficial  conversion  feature of $898,057  and  $147,846,  respectively.  Upon
conversion  prior to the stated date of  redemption  the  remaining  unamortized
discount will be recognized as a non-cash interest expense.

      EQUITY WARRANT INCOME

      For the nine months  ended  September  30,  2002,  we had income on equity
warrant  liability of $104,745 as compared to $1,306,652  for the same period in
2001.  This amount  represents a  mark-to-market  adjustment in connection  with
warrants to purchase common stock which are outstanding  (see Cumulative  Effect
of  Change  in  Accounting  Principle).  The  value  of these  warrants  and the
resulting mark-to-market  adjustment at September 30, 2001, 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 341.91% and
expected lives ranging from 1 month to 4 1/2 years.

      GAIN ON EXTINGUISHMENT OF DEBT

      During the third  quarter of 2002,  Celerity  settled  with the holders of
certain  convertible  debentures  wherein the total amount due upon  conversion,
including interest and accrued liquidated damages, was reduced by $37,935.

      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.  The Company  agreed to a final  settlement in the second
quarter of 2001 which resulted in a gain from cancellation of debt in the amount
of $71,864.  This item is reflected as an extraordinary item on the Statement of
Operation.

      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 September 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

                                       16
<PAGE>

principle.  For the nine months ended September 30, 2002 a total  mark-to-market
adjustment  of  $104,745  was  recorded  as income on equity  warrant  liability
compared to  $1,306,652  for the same period in 2001.  Warrants  outstanding  at
September  30, 2002 have an exercise  price in excess of the closing stock price
at that date and the large  majority of them have a remaining life of 1-2 years.
This coupled with the volatility and low price of Celerity's common stock result
in a much reduced  liability for the outstanding  warrants and reduced income on
equity warrant liability.

      NET LOSS

      As a result of the above factors, we had a net loss of $3,545,077 or $0.14
per share, for the nine months ended September 30, 2002,  compared to net income
of $962,929, or $0.39 per share for the same period in 2001.

      AMORTIZATION OF BENEFICIAL  CONVERSION FEATURE AND ACCRETION OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK

      In addition,  we had outstanding  convertible preferred stock. At issuance
during  the  first  quarter  of  2001,  the  conversion  price  of the  Series B
Convertible  Preferred Stock was at a discount to the price of our common stock.
The Series B  Convertible  Preferred  Stock is  considered  perpetual  preferred
stock. As a result,  we recorded a $308,042  dividend relative to the beneficial
conversion feature of the Series B Convertible Preferred Stock in the first nine
months of 2001.

      At issuance during the first quarter of 2002, the conversion  price of the
Series D  Convertible  Preferred  Stock  was at a  discount  to the price of our
common stock. The Series D Convertible  Preferred Stock is considered  perpetual
preferred  stock. As a result,  we recorded a $54,000  dividend  relative to the
beneficial  conversion  feature of the Series D Convertible  Preferred Stock. At
issuance the conversion  price of the Series E Preferred Stock was at a discount
to the price of our common  stock.  The Series E Preferred  Stock is  considered
perpetual preferred stock. As a result, we recorded a $100,000 dividend relative
to the beneficial conversion feature of the Series E Preferred Stock.

      LIQUIDITY AND CAPITAL RESOURCES

      The  primary  source  of  financing  for us since our  inception  has been
through the issuance of common and redeemable  convertible  preferred  stock and
debt.  We had cash  balances  on hand of $74,485 as of  September  30,  2002 and
$171,988 as of December 31, 2001.  Our cash position  continues to be uncertain.
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.  These
ongoing  operations  include the purchase of parts used in the production of our
products. In addition, our need for cash includes satisfying current liabilities
of $3,698,689,  consisting primarily of accounts payable of $1,833,043,  accrued
wages and related taxes of $266,609, accrued interest of $935,815, other accrued
liabilities  of  $364,272,  notes  payable of $158,950  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. We
also have  outstanding  redeemable  convertible  preferred  stock. The preferred
stock is redeemable as follows:

             YEAR                                              AMOUNT
           ----------------------------------------------  ----------
             2002                                           $      --
             2003                                             814,000
             2004                                             154,000
                                                           ----------
             Total Required to Redeem Redeemable
              Convertible Preferred Stock                   $ 968,000
                                                           ==========

      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.  Except for financing
from  Kidston  Communications,  we  currently  do not have any  commitments  for
funding.  The Company is 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  the  Company  may sell shares of its
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.

      During the nine  months  ended  September  30,  2002,  we issued  $800,000
principal  amount of 4%  convertible  debentures  resulting  in net  proceeds of
approximately $726,000,  consummated a private placement of 5.4 shares of Series
D Redeemable Convertible Preferred Stock and a private placement of 10 shares of
Series E Redeemable  Convertible  Preferred Stock resulting in gross proceeds of
$54,000 and $100,000,  respectively,  and issued common stock for $93,000. 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.  On April 24, 2002,  we entered  into a purchase  order

                                       17
<PAGE>

financing  arrangement with Kidston  Communications.  Kidston  Communications is
controlled by Ed Kidston, a director and shareholder of our company. Pursuant to
this arrangement,  Kidston  Communications  will purchase products and materials
from us in  sufficient  quantities  to fill  open  purchase  orders.  Upon  such
purchase,  title to the products and materials  needed to fill the open purchase
orders vests in Kidston  Communications and are segregated from our products and
materials.  We are 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 any order is
filled  after 10 months,  then an interest  charge of 1.5% per month will apply.
This  discount  will be accounted  for as an interest  expense on our  financial
statements.  As of September 30, 2002, Kidston  Communications has financed open
purchase orders having a value of $764,823.

      We are looking at several  other  options in terms of  improving  our cash
shortage.  We are continuing to seek to arrange  financing,  including  possible
strategic  investment  opportunities or opportunities to sell some or all of our
assets and business,  while  continuing to pursue sales  opportunities.  We have
granted a security  interest  in our  property  to our  landlord  and  granted a
security  interest in our personal  property to our former legal  counsel.  Such
security interest may hinder our efforts to obtain financing.  The lack of sales
or a significant financial commitment raises substantial doubt about our ability
to continue as a going concern.

      During the nine months ended  September 30, 2002, we had a net decrease in
cash and cash  equivalents  of  $97,502.  Our  sources and uses of funds were as
follows:

      CASH USED IN OPERATING  ACTIVITIES.  We used net cash of $1,099,928 in our
operating  activities in the nine months ended September 30, 2002. Net cash used
in operating  activities  resulted  primarily  from a net loss of $3,545,077 and
non-cash  income  related to the equity  warrant  liability of  $104,745,  and a
decrease  in  accounts  payable  of  $184,325.  Our net cash  used in  operating
activities was partially  offset by depreciation  and  amortization  expenses of
$67,801,  non-cash  expenses of $1,360,044,  a decrease in inventory of $610,071
and an increase in interest payable of $389,355 and other current liabilities of
$302,666.  The  increase in other  current  liabilities  includes  $51,000  from
deposits on new orders  received  and  $196,800  from  deferral of wages due the
Company's former  president.  Accounts payable are expected to remain high until
inventory levels can be reduced through sales.

      CASH USED IN INVESTING ACTIVITIES. We used net cash of $4,174 in investing
activities  in the nine months ended  September  30,  2002.  This relates to the
purchase of software for use in projects for the education market.

      CASH PROVIDED BY FINANCING ACTIVITIES.  We received $1,006,600 in net cash
from  financing  activities,  consisting  primarily of proceeds from  short-term
borrowings of $33,950, long-term debt of $1,140,000, preferred stock of $154,000
and common stock of $93,000.  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  September  30, 2002,  we
have an accumulated deficit of $40,647,977.  We expect to incur operating losses
for the indefinite  future as we continue to develop and market our  technology.
Since  January 1,  2002,  we have  received  four new orders for the sale of our
Digital  Education  System to school systems in addition to one delivered in the
second  quarter of 2002 ordered in 2001. As of September 30, 2002 our backlog of
unfilled orders is approximately $184,000. We are currently bidding, through our
distributor  network,  almost all in Ohio,  and are working to add  distributors
nationwide.  There can be no  assurance  as to the receipt or timing of revenues
from  operations,  including,  in particular,  revenues from products  currently
under development.

      As of  September  30,  2002,  we had a  negative  net  working  capital of
approximately  $2,048,310.  We have ceased  purchasing  any  material  amount of
inventory until inventory levels can be reduced.  We had no significant  capital
spending or purchase  commitments  at  September  30, 2002 other than a facility
lease and  inventory  component  purchase  commitments  required in the ordinary
course of its business.

      The Company's  financial  statements have been prepared on a going concern
basis,  which  contemplates  the  realization  of assets and the  settlement  of
liabilities  and  commitments in the normal course of business.  The Company has
had  recurring  losses and  continues  to suffer cash flow and  working  capital
shortages.  Since  inception  in January,  1993 through  September  30, 2002 the
losses total  $40,648,000.  As of September 30, 2002, the Company had a negative
net working capital of  approximately  $2,048,000.  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.


                                       18
<PAGE>

ITEM 3.    CONTROLS AND PROCEDURES

      QUARTERLY EVALUATION OF DISCLOSURE CONTROLS AND INTERNAL CONTROLS.  Within
the 90 days  prior to the date of this  Quarterly  Report  on Form  10-QSB,  the
company  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   Quarterly   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  Quarterly  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.

      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 Quarterly 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.  The company'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  the  company  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 the company and the effect of the
controls on the information  generated for use in this Quarterly  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 the
company's Internal  Controls,  or whether the company had identified any acts of
fraud involving  personnel who have a significant role in the company'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  Quarterly
Report. In the professional auditing literature,  "significant deficiencies" are

                                       19
<PAGE>

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 Quarterly 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.

      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 the Company 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.


                                       20
<PAGE>

                                     PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      There is no  pending  litigation  against  us,  other  than  those  claims
described below:

      o   We  have  a  judgment  against  us for  the  non-payment  of  printing
          expenses.  The action was  brought on January  30, 2001 and is pending
          before Supreme Court of the State of New York,  County of New York. In
          this action, the plaintiff,  Merrill/New York Company, has sued us for
          the non-payment of financial printing fees. In 2002,  Merrill/New York
          Company  obtained a judgment  for  $136,435  against  us. We intend to
          appeal this decision.

      o   On December 2001, Veja Electronics,  Inc. d/b/a Stack Electronics sued
          us for  breach  of  contract  and is  seeking  damages  in  excess  of
          $106,000.  This action relates to amounts  alleged to be owed from the
          order of products not received by us. We intend to defend this action.

      o   On February  14,  2002,  Metalade  FL, Inc.  sued us 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. We intend to defend this action.

      o   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.


ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

      (a), (b) and (d)    None.

      (c)                 SALES OF UNREGISTERED SECURITIES.

      In August 2002, we issued $25,000 of convertible debentures, from which we
received  net  proceeds  of  approximately  $25,000.  These  debentures  accrued
interest at 4% per year and are  convertible  into  shares of common  stock at a
conversion  price,  at the  option of the  holder,  equal to 75% of the  average
closing bid price of our common stock for the 5 days prior to conversion, or the
price of $0.04. At our option, these debentures may be paid in cash or converted
into shares of common stock on the fifth anniversary unless converted earlier by
the holder.

      In September 2002, 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

      In July and August,  2002, we issued  9,300,000 shares of common stock for
$93,000.

ITEM 3.    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.


<PAGE>

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

           None

ITEM 5.    OTHER INFORMATION

           Not applicable.




                                       22

<PAGE>


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

      (a)  Exhibits.

Exhibit No.  Description                   Location
-----------  -----------                   --------

3.1          Certificate of Incorporation  Incorporated by reference to Exhibit
             of Celerity Systems, Inc.     3.1 to the Registration Statement on
                                           SB-2 filed with the SEC on August 13,
                                           1997

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

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

3.4          Certificate of Designation    Incorporated by reference to
             of Series D Preferred Stock   Exhibit 3.4 to the Form 10-KSB for
                                           the year ended December 31, 2001
                                           filed with the SEC on March 27, 2002

3.5          Certificate of Designation    Incorporated by reference to
             of Series E Preferred Stock   Exhibit 3.5 to the Form 10-KSB for
                                           the year ended December 31, 2001
                                           filed with the SEC on March 27, 2002

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

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

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

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

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

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

4.7          Form of Hampshire Warrant     Incorporated by reference to
                                           Exhibit 4.7 to Amendment No. 1 to
                                           Registration Statement on SB-2 filed
                                           with the SEC on October 8, 1997

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

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

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

4.11         Form of 9% Convertible        Incorporated by reference to
             Debenture                     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   Incorporated by reference to
             Agreement, between Celerity   Exhibit 4.13 to Amendment No. 1 to
             and each of RNI Limited       Form 10-KSB for the year ended
             Partnership, First Empire     December 31, 1998 as filed with
             Corporation, Greg A. Tucker   the SEC on April 30, 1999
             and Michael Kesselbrenner

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

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


                                       23
<PAGE>

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

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

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

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

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

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

4.22         Form of Registration Rights   Incorporated by reference to
             Agreement, between Celerity   Exhibit 4.6 to the Registration
             and each of John Bridges,     Statement on S-3 filed with the
             John Faure, Loni Spurkeland,  SEC on February 15, 2000
             Robert Dettle, Michael
             Genta, Lennart Dallgren

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

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

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

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

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

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

4.29         Form of Warrant issued        Incorporated by reference to
             September 30, 2000            Exhibit 99.3 to the Form 8-K
                                           filed with the SEC on April
                                           5, 2000

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

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

10.3         Termination Agreement, dated  Incorporated by reference to
             as of April 5, 1997, between  Exhibit 10.3 to the
             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       Incorporated by reference to
             March 13, 1997, between       Exhibit 10.5 to Amendment
             Celerity and William Chambers No. 1 to Registration
                                           Statement on SB-2 filed with
                                           the SEC on October 8, 1997

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

10.7         Exclusive OEM/Distribution    Incorporated by reference to
             Agreement, dated March 10,    Exhibit 10.7 to the
             1995, between Celerity and    Registration Statement on
             InterSystem Multimedia, Inc.  SB-2 filed with the SEC on
                                           August 13, 1997

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


                                       24
<PAGE>

Exhibit No.  Description                   Location
-----------  -----------                   --------

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

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

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

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

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

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

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

10.16        Lease Agreement, dated        Incorporated by reference to
             November 25, 1997, between    Exhibit 10.16 to the Form
             Centerpoint Plaza, L.P. and   10-KSB for the year ended
             Celerity                      December 31, 1997 filed with
                                           the SEC on September 30, 1998

10.17        Letter Agreement, dated       Incorporated by reference to
             October 3, 1997, between      Exhibit 10.17 to the Form
             Dennis Smith and Celerity     10-KSB for the year ended
                                           December 31, 1997 filed with
                                           the SEC on September 30, 1998

10.18        Letter Agreement, dated       Incorporated by reference to
             January 8, 1998, between      Exhibit 10.18 to the Form
             James Fultz and Celerity      10-KSB for the year ended
                                           December 31, 1997 filed with
                                           the SEC on September 30, 1999

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

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

10.21        Form of Subscription          Incorporated by reference to
             Agreement, between Celerity   Exhibit 10.21 to Amendment
             and each of Donald            No. 1 to Form 10-KSB for the
             Alexander, Leo Abbe,          year ended December 31, 1998
             Centerpoint Plaza, L.P.,      filed with the SEC on April
             William Chambers, Fenton      30, 1999
             Scruggs, Dennis Smith,
             Kenneth Van Meter, George
             Semb and Rodney Conard

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

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

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

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

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

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

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

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


<PAGE>

Exhibit No.  Description                   Location
-----------  -----------                   --------

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

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

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

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

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

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

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

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

10.38        Warrant to purchase           Incorporated by reference to
             3,500,000 shares of common    the Registration Statement
             stock dated as of August,     on Form SB-2 filed with the
             2001 given by Celerity        SEC on October 18, 2001
             Systems to Cornell Capital
             Partners, L.P.

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

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

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

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

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

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

10.45        Termination Agreement         Incorporated by reference to Exhibit
                                           10.45 to the Form 10-KSB for the year
                                           ended December 31, 2001 filed with
                                           the SEC on March 27, 2002

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

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

      (b)  Reports on Form 8-K.

      On November 13, 2002, Celerity Systems filed a form 8-K announcing the
appointment of Robert B. Legnosky and John Stephen McNamana to Celerity's Board
of Directors. The form 8-K also announced the appointment of Mr. Legnosky to the
position of President.



                                       26

<PAGE>

                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date: November 18, 2002              CELERITY SYSTEMS, INC.

                                       By:/s/Robert Legnosky
                                          -----------------------------------
                                           Robert Legnosky, President



                                       27
<PAGE>

                          FORM OF OFFICER'S CERTIFICATE
                             PURSUANT TO SECTION 302

                                  CERTIFICATION

I, Robert Legnosky, certify that:

1. I have reviewed  this  quarterly  report on Form 10-QSB of Celerity  Systems,
Inc.

2. Based on my  knowledge,  this  quarterly  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 quarterly
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  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 quarterly 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 quarterly 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
      quarterly report (the "Evaluation Date"); and

      c)  presented  in  this  quarterly   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
quarterly  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: November 18, 2002         By:/s/Robert Legnosky
                                   ---------------------------------------------
                                   Robert Legnosky,
                                   President and Interim Chief Financial Officer



                                       28
<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 Quarterly  Report of Celerity  Systems,  Inc. (the
"Company")  on Form 10-Q for the period ended  September  30, 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 the
Company.

Date: November 18, 2002          By:/s/Robert Legnosky
                                    --------------------------------------------
                                    Robert Legnosky, President and Interim Chief
                                    Financial Officer




                                       29