**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
  **WASHINGTON,
        DC 20549**
  **FORM
        10-Q**
  ( 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, 2005**
  o Transition
        report under Section 13 or 15(d) of the Securities Exchange Act of
        1934
  For
        the
        transition period from _______ to _______.
  Commission
        File No. 814-00631
  **CELERITY
        SYSTEMS, INC.**
 (Exact
        name of registrant as specified in Its charter)
  Delaware
              52-2050585(State
                  or Other Jurisdiction of Incorporation
                or
                  Organization)
              (I.R.S.
                  Employer Identification No.)4100
                  North Fairfax Drive, Suite 1150, Arlington, Virginia
              22203-1664(Address
                  of Principal Executive Offices)
              (Zip
                  Code)(865)
                  539-5300(Issuer’s
                  Telephone Number, Including Area
                  Code)
 
 Indicate
        by check mark whether the registrant (1) has 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 þNo o
  Indicate
        by check mark whether the registrant is an accelerated filed (as defined
        in Rule
        12b-2 of the Exchange Act).
  Yes o No þ
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
  Yes o No þ
  There
        were 4,390,579,206 shares of common stock outstanding as of October 24, 2005.
  
 
  **PART
        I**
   **FINANCIAL
        INFORMATION**
   **Item
        1.**  **Financial
        Statements**
  CELERITY
                    SYSTEMS, INC.Balance
                    Sheets(unaudited)Assets
                
                
                September
                    30,
                  2005
                
                
                December
                    31,
                  2004Cash
                
                $
                630,033
                
                $
                1,863Other
                    current assets
                
                
                152,879
                
                
                2,664Total
                    current assets
                
                
                782,912
                
                
                4,527Fixed
                    assets, net
                
                
                29,991
                
                
                38,391Investment
                    in Yorkville Advisors Management, LLC, at cost whichapproximates
                    fair value
                
                
                -
                
                
                5,240,000Investment
                    in and advances to Celerity Systems-NV, at fair value
                
                
                -
                
                
                -Debt
                    offering costs, net
                
                
                -
                
                
                40,529Total
                    assets
                
                $
                812,903
                
                $
                5,323,447Liabilities
                    and Stockholders' EquityAccounts
                    payable
                
                $
                314,568
                
                $
                473,637Judgments
                    and defaults payable (including $213,400 to a related party in
                    2004)
                
                
                115,000
                
                
                400,675Accrued
                    interest ( including $188,366 to a related party in 2004)
                
                
                14,539
                
                
                321,629Notes
                    payable - related party
                
                
                -
                
                
                510,000Other
                    current liabilities
                
                
                118,802
                
                
                11,311Total
                    current liabilities
                
                
                562,909
                
                
                1,717,252Convertible
                    debentures - related party, net
                
                
                -
                
                
                583,517Convertible
                    debentures, net
                
                
                232,500
                
                
                1,703,495232,500
                
                
                2,287,012Total
                    liabilities
                
                
                795,409
                
                
                4,004,264Commitments
                    and contingencies
                
                
                -
                
                
                -Stockholders'
                    EquityCommon
                    stock, $.001 par value, 5,000,000,000 shares authorized,4,390,579,206
                    shares and 4,796,102,805 shares issued and outstandingin
                    2005 and 2004, respectively
                
                
                4,390,580
                
                
                4,796,103Additional
                    paid-in capital
                
                
                40,073,252
                
                
                40,555,128Treasury
                    stock, at cost - 226,843,599 shares in 2004
                
                
                -
                
                
                (561,334
                )Accumulated
                    deficit
                
                
                (44,446,338
                )
                
                (43,470,714
                )Total
                    stockholders' equity
                
                
                17,494
                
                
                1,319,183Total
                    liabilities and stockholders' equity
                
                $
                812,903
                
                $
                5,323,447The
                    accompanying notes are an integral part of these condensed financial
                    statements
  2
  CELERITY
                    SYSTEMS, INC.Statements
                    of Operations (unaudited)Three
                    Months Ended September 30, 2005
                
                
                Three
                    Months Ended September 30, 2004
                
                
                Nine
                    Months Ended September 30, 2005
                
                
                Nine
                    Months Ended September 30, 2004Unrealized
                    loss on investments
                
                $
                -
                
                $
                (8,141
                )
                $
                -
                
                $
                (233,103
                )Realized
                    gain on investments
                
                
                2,016
                
                
                -
                
                
                41,960
                
                
                -Dividend
                    income
                
                
                -
                
                
                260,000
                
                
                -
                
                
                955,0002,016
                
                
                251,859
                
                
                41,960
                
                
                721,897General
                    and administrative expenses
                
                
                271,477
                
                
                181,684
                
                
                664,397
                
                
                514,212Operating
                    income (loss)
                
                
                (269,461
                )
                
                70,175
                
                
                (622,437
                )
                
                207,685Other
                    income (expense)Amortization
                    of debt offering costs
                
                
                -
                
                
                (16,154
                )
                
                (40,529
                )
                
                (65,141
                )Beneficial
                    conversion feature - convertible debentures
                
                
                -
                
                
                (35,688
                )
                
                (242,988
                )
                
                (259,266
                )Interest
                    expense
                
                
                (2,930
                )
                
                (88,183
                )
                
                (71,042
                )
                
                (180,208
                )Settlement
                    of debt
                
                
                61,236
                
                
                1,218
                
                
                1,372
                
                
                41,196Other
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                1,114Total
                    other income (expense)
                
                
                58,306
                
                
                (138,807
                )
                
                (353,187
                )
                
                (462,305
                )Net
                    loss attributable to common stockholders
                
                $
                (211,155
                )
                $
                (68,632
                )
                $
                (975,624
                )
                $
                (254,620
                )Loss
                    per common share, basic and dilutedNet
                    loss per common share attributable to common stockholders
                
                $
                (0.00
                )
                $
                (0.00
                )
                $
                (0.00
                )
                $
                (0.00
                )Weighted
                    average shares outstanding - basic and diluted
                
                
                4,390,579,206
                
                
                4,672,900,005
                
                
                4,457,791,843
                
                
                4,719,002,971
   3
  CELERITY
                    SYSTEMS, INC.Statements
                    of Cash Flows (unaudited)Nine
                    Months Ended June 30, 2005
                
                Nine
                    Months Ended June 30, 2004Cash
                    flows from operating activities:Net
                    loss
                
                $
                (975,624
                )
                $
                (254,620
                )Adjustments
                    to reconcile net loss to netcash
                    used in operating activities:Settlement
                    of debt
                
                
                (180,001
                )
                
                1,218Unrealized
                    loss on investments
                
                
                -
                
                
                233,103Depreciation
                    and amortization
                
                
                8,400
                
                
                6,400Beneficial
                    conversion - convertible notes
                
                
                242,988
                
                
                311,579Amortization
                    of debt offering costs
                
                
                40,529
                
                
                65,141Changes
                    in operating assets and liabilities:Other
                    assets
                
                
                (150,215
                )
                
                (9,380
                )Accounts
                    payable
                
                
                (79,067
                )
                
                26,211Judgments
                    and defaults payable
                
                
                (103,774
                )
                
                (142,381
                )Accrued
                    interest
                
                
                (307,090
                )
                
                2,174Other
                    current liabilities
                
                
                107,491
                
                
                (4,318
                )Net
                    cash provided by (used in) operating activities
                
                
                (1,396,363
                )
                
                235,127Cash
                    flows from investing activities:Purchase
                    of fixed assets
                
                
                -
                
                
                (6,658
                )Advances
                    to Celerity Systems-NV
                
                
                -
                
                
                (233,102
                )Proceeds
                    from liquidation of Yorkville Advisors Management, LLC
                
                
                5,240,000
                
                
                -Net
                    cash provided by (used in) investing activities
                
                
                5,240,000
                
                
                (239,760
                )Cash
                    flows from financing activities:Payments
                    on notes payable - related party
                
                
                (1,255,000
                )
                
                (105,000
                )Proceeds
                    from convertible debentures
                
                
                
                
                
                537,500Principal
                    payments on debt
                
                
                (1,542,500
                )
                
                (475,000
                )Proceeds
                    from issuance of common stock
                
                
                -
                
                
                208,322Acquisition
                    of treasury stock
                
                
                (417,967
                )
                
                (189,808
                )Net
                    cash used in financing activities
                
                
                (3,215,467
                )
                
                (23,986
                )Net
                    increase (decrease) in cash
                
                
                628,170
                
                
                (28,619
                )Cash,
                    beginning of period
                
                
                1,863
                
                
                56,156Cash,
                    end of period
                
                $
                630,033
                
                $
                27,537Cash
                    paid for:Interest
                
                $
                -
                
                $
                201,285Taxes
                
                $
                -
                
                $
                1,450The
                    accompanying notes are an integral part of these condensed financial
                    statements
   4
  CELERITY
                    SYSTEMS, INC.Statement
                    of Changes in Stockholders' EquityFor
                    the nine months ended September 30, 2005Additional
                
                
                
                
                
                
                
                
                TotalCommon
                    Stock
                
                
                Paid-In
                
                
                Treasury
                
                
                Accumulated
                
                
                Stockholders'Shares
                
                
                Amount
                
                
                Capital
                
                
                Stock
                
                
                Deficit
                
                
                (Deficit)
                    EquityBalance
                    December 31, 2004
                
                
                4,796,102,805
                
                $
                4,796,103
                
                $
                40,555,128
                
                $
                (561,334
                )
                $
                (43,470,714
                )
                $
                1,319,183Acquisition
                    of treasury stock (unaudited)
                
                
                
                
                
                
                
                
                
                
                
                (417,967
                )
                
                
                
                
                (417,967
                )Retirement
                    of treasury stock (unaudited)
                
                
                (405,523,599
                )
                
                (405,523
                )
                
                (573,778
                )
                
                979,301
                
                
                
                
                
                -Settlement
                    of debt withrelated
                    parties (unaudited)
                
                
                
                
                
                
                
                
                91,902
                
                
                
                
                
                
                
                
                91,902Net
                    loss (unaudited)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (975,624
                )
                
                (975,624
                )Balance,
                    September 30, 2005
                
                
                4,390,579,206
                
                $
                4,390,580
                
                $
                40,073,252
                
                $
                -
                
                $
                (44,446,338
                )
                $
                17,494
 The
          accompanying notes are an integral part of these condensed financial statements
   5
 **CELERITY
        SYSTEMS, INC.**
   **Notes
        to Unaudited Condensed Financial Statements**
   **Overview**
  Celerity
        Systems, Inc., a Delaware corporation (the “ Company ”)
        has
        operated as a business development company (“ BDC ”)
        regulated pursuant to Section 54 of the Investment Company Act of 1940, as
        amended (the “ 1940
        Act ”).
        On
        August 29, 2005, the Board of Directors (the “ Board ”)
        moved
        to discontinue as a business development company subject to approval by the
        stockholders at their next special meeting to be held in December 2005. We
        intend to seek opportunities to invest in companies that offer attractive
        investment opportunities.
   **1.**  **Presentation
        of Unaudited Interim Financial Statements**
  The
        accompanying interim condensed financial statements and notes to the financial
        statements for the interim period as of September 30, 2005 and for the nine
        months ended September 30, 2005 and 2004, are unaudited. The accompanying
        interim unaudited financial statements have been prepared by the Company
        in
        accordance with accounting principles generally accepted in the United States
        for interim financial statements and pursuant to the requirements for reporting
        on Form 10-Q and Article 10 of Regulation S-X. 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 adjustments) considered necessary
        for a fair presentation have been included. Operating results for the nine
        month
        period ended September 30, 2005, are not necessarily indicative of the results
        that may be expected for the year ending December 31, 2005. The condensed
        financial statements should be read in conjunction with the financial statements
        and notes thereto included in the Form 10-K of the Company as of and
        for
        the year ended December 31, 2004. Certain September 30, 2004 balances have
        been
        reclassified to conform with the September 30, 2005 financial statement
        presentation.
  On
        May
        20, 2003, the Company formed a subsidiary, Celerity Systems, Inc., a Nevada
        corporation, (“ Celerity
        NV ”).
        The
        assets and liabilities related to the existing interactive video business
        were
        transferred to Celerity NV for 100% of the common stock of Celerity NV. As
        this
        subsidiary is not an investment company, after June 2, 2003, it is not
        consolidated with the parent company. The Company’s investment in Celerity NV is
        recorded at fair value, represented as cost, plus or minus unrealized
        appreciation or depreciation, respectively.
  On
        August
        19, 2005, the Company formed a subsidiary, Homeland Security Advisory Services
        Corp., a Delaware corporation (“HSASC”).  The only assets of HSASC
        as of the date of this Report are two Strategic Advisor Services Agreements
        that
        were transferred to HSASC on August 31, 2005 by C. Thomas McMillen in connection
        with Mr. McMillen being hired to serve as a Director, President and Chief
        Executive Officer of the Company. This transfer and the terms of the
        two
        Agreements are discussed below under Note 11, “Subsequent Events”.
  On
        October 6,
        2005, the Company formed a subsidiary, Homeland Security Advisory Services,
        LLC,
        a Delaware limited liability company (“HSASL”).  HSASL has no assets
        at this time.
  On
        November 3,
        2005, the Company formed a subsidiary, IntelliSecure Corp., a Delaware
        corporation (“IntelliSecure”). IntelliSecure has no assets at this
        time.
  In
        accordance with Article 6 of Regulation S-X under the Securities Act of 1933,
        as
        amended, and Securities Exchange Act of 1934, as amended, the Company does
        not
        consolidate portfolio company investments in which the Company has a controlling
        interest.
  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, 2005, the losses total
        $44,436,338. These factors, taken together with the lack of revenues and
        the
        absence of significant financial commitments, raise substantial doubt about
        the
        Company’s ability to continue as a going concern.
  On
        June
        3, 2003, the Company elected to become a business development company regulated
        under Section 54 of the Investment Company Act of 1940, as amended. On June
        4,
        2003 the Company filed an Offering Circular Under Regulation E to sell up
        to
        $4,500,000 of its common stock at a minimum price of $0.001 to a maximum
        price
        of $0.02 in the succeeding 12-month period. Between June 4, 2003 and January
        13,
        2004, the last date of sale of securities under this offering, the Company
        sold
        1,289,833,333 shares resulting in net proceeds of $1,360,000.
  There
        can
        be no assurances that the Company will be successful in its attempts to raise
        sufficient capital essential to its survival. To the extent that the Company
        is
        unable to raise the necessary operating capital it will become necessary
        to
        further curtail operations. Additionally, even if the Company does raise
        operating capital, there can be no assurances that the net proceeds will
        be
        sufficient enough to enable it to develop its business to a level where it
        will
        generate profits and positive cash flows. The financial statements do not
        include any adjustments relating to the recovery of the recorded assets or
        the
        classification of the liabilities that might be necessary should the Company
        be
        unable to continue as a going concern.
  6
 **Stock-Based
        Compensation**
  The
        Company has granted options for 580,000,000 shares of the Company’s common stock
        to C. Thomas McMillen, all of which are subject to the terms and conditions
        of
        the Company’s option plan, as such plan may be amended from time-to-time. Since
        adoption of the option plan is subject to the stockholders’ approval at the
        upcoming Special Meeting to be held in December 2005 and is therefore not
        currently in force, and since the Company has not granted any stock options
        in
        2004, there was no stock-based compensation to be determined under the fair
        value method during the nine months ended September 30, 2005 and 2004 and
        there
        is no difference between net loss as reported and pro forma net
        loss.
  **2.** **Investment
        in Celerity Systems, Inc. (A Nevada corporation)**
  Celerity
        NV had no operations for the nine months ended September 30, 2005. The following
        table represents Celerity NV’s operating results for the nine months ended
        September 30, 2004.
  Sales
              
              $
              -0-Cost
                  of Sales
              
              
              -0-Gross
                  loss
              
              
              -0-General
                  and administrative expenses
              
              
              214,221Net
                  loss
              
              
              (214,221
              )
 
  The
        following table represents Celerity NV’s balance sheet as of September 30,
        2004.
  Accounts
                  receivable, net
              
              $
              -0-Inventories,
                  net
              
              
              -0-Total
                  current assets
              
              
              -0-Fixed
                  assets, net
              
              
              -0-Other
              
              
              -0-Total
                  assets
              
              $
              -0-Accounts
                  payable
              
              $
              72,763Advances
                  from Celerity Systems, Inc.
              
              
              575,223Other
                  current liabilities
              
              
              6,000Total
                  liabilities
              
              
              653,986Stockholder
                  DeficitCommon
                  stock
              
              
              250Additional
                  paid-in capital
              
              
              499,750Accumulated
                  deficit
              
              
              (1,153,986
              )Total
                  stockholder deficit
              
              
              (653,986
              )Total
                  liabilities and deficit
              
              $
              -0-
 
  Celerity
        NV developed and manufactured, at third party plants, digital set top boxes
        and
        digital video servers for the interactive television and high speed Internet
        markets. Celerity NV also provided a comprehensive content package for education
        users with over 1,300 titles available.
  Prior
        to
        September 2004, the Company charged Celerity NV for salaries and benefits
        and a
        portion of overhead costs as a facility charge. During the first nine months
        of
        2004, the Company advanced $233,103 to Celerity NV to fund Celerity NV’s
        operations. This amount resulted in an unrealized depreciation on the investment
        in Celerity NV of $233,103 as reflected in the statement of operations of
        the
        Company.
  In
        September 2004, the Company decided to cease operations within Celerity NV
        and
        exchanged all of the operating assets, customer lists and a cash payment
        of
        $15,000 for a 25% equity interest in Escent Systems, Inc. The Company has
        no
        managerial involvement and has not guaranteed or otherwise committed any
        future
        financing to the venture. Because of the start up nature of the new company,
        Celerity NV has valued its investment in Escent at nil. Also, in 2004, the
        Company recognized a loss of its cost and the unrealized depreciation of
        its
        cost and advances in Celerity NV.
  7
 **3.  Investment
        in
        Sagamore Holdings, Inc.**
  In
        September 2004, the Company entered into a business development agreement
        with
        Sagamore Holdings, Inc. (“ Sagamore ”)
        with
        an effective date of October 4, 2004. The Company received 7,500,000 shares
        of
        Sagamore common stock as consideration for its agreement to provide future
        services regarding capital formation and management advise. The Company has
        reviewed the valuation of the Sagamore stock using fair value, and, based
        on the
        liquidation preference of the preferred stockholder, management has considered
        the value of the stock as nil. Also, the Company has rendered no specific
        services in 2005 or 2004. There have been no events or circumstances occurring
        in the nine months ended September 30, 2005 that would change the valuation.
        Accordingly, the Board has continued to include the value of the Sagamore
        stock
        in its financial statements as nil and has not recognized any revenue from
        the
        transaction
  **4.** **Investment
        in Yorkville Advisors Management, LLC**
  On
        December 1, 2003, the Company purchased a minority interest in Yorkville
        Advisors Management, LLC (“ Yorkville ”).
        Yorkville is the investment manager of a private equity fund that is a principal
        holder of equity securities of the Company. The purchase price amounted to
        $5,240,000. The acquisition was funded through the sale of 2,000,000,000
        shares
        of common stock to the aforementioned private equity fund, resulting in net
        proceeds of $4,000,000 and the balance paid using the proceeds received from
        the
        issuance of convertible notes payable. During the year ended December 31,
        2004
        and 2003, the Company received proceeds of $1,255,000 and $65,000, respectively,
        from this investment, which amounts have been recorded as dividend income
        in the
        statements of operations. In 2005, the Company was informed that Yorkville
        was
        in the process of an orderly liquidation of its business. Under the terms
        of a
        Preferential Rights Agreement, the Company’s membership interest in Yorkville
        was converted into a new class with certain preferential rights entitling
        the
        Company to receive consideration equal to the original purchase price of
        the
        investment less certain debt of approximately $1,500,000 due to Cornell Capital
        Partners, LP (“ Cornell ”),
        an
        affiliate of Yorkville. In the nine months ended September 30, 2005, the
        Company
        received $5,240,000 net of the $1,500,000 due to Cornell, a related party,
        for
        debt the Company had recorded at $1,681,901. The resulting gain has been
        recorded as an addition to additional paid in capital in the balance sheet
        as of
        September 30, 2005.
   **5.** **Loss
        Per Share**
  Basic
        and
        diluted loss per share were computed by dividing net loss attributable to
        common
        stock by the weighted average number of 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.
   **6.** **Convertible
        Debentures**
  The
        long-term debt of the Company includes convertible debentures, issued for
        cash
        in the normal course of business, and is represented by the following
        items:
  September
                  30, 2005
              
              
              December
                  31, 20044%
                  convertible debentures
              
              $
              -0-
              
              $
              12,5005%
                  convertible debentures
              
              
              232,500
              
              
              1,812,50010%
                  secured convertible debenture
              
              
              -0-
              
              
              705,000232,500
              
              
              2,530,000Less:Unamortized
                  debt discount
              
              
              (-0-
              )
              
              (242,988
              )Long-term
                  debt
              
              $
              232,500
              
              $
              2,287,0121
 
 During
        the nine months ended September 30, 2005, no convertible debentures were
        presented for conversion, accordingly, no shares of its common stock were
        issued.
  _________
 1 This
        amount represents debentures issued by the Company in the normal course of
        business during 2003 and 2004, for which the Company received cash.
        Substantially all of the principal amount of these debentures were issued
        to
        unrelated parties; $705,000 was issued to Cornell, a related party.
   8
  **7.** **Stock
        Buyback Program**
  In
        September 2004, the Board authorized the Company to establish a stock buyback
        program whereby the Company would acquire up to 500,000,000 shares of its
        common
        stock over a twelve month period from the open market at favorable prices.
        There
        was no obligation to acquire any specific number of shares or purchase at
        any
        specific price. At December 31, 2004, the Company had acquired 226,843,599
        shares at a cost of $561,334 and from January through September 2005, the
        Company acquired 178,680,000 shares at a cost of $417,967. The acquisitions
        have
        been accounted for as treasury stock until the cancellation of 405,523,599
        shares on June 2, 2005. The funding was provided primarily through a short
        term
        note of $500,000 from a related party through December 2004. In the nine
        month
        period through September 2005, the purchases were funded from proceeds from
        the
        liquidation of its Yorkville investment.
   **8.** **Judgments
        and Defaults Payable**
  In
        January 2002, the Company terminated the Equity Line of Credit with Cornell
        because of delays in getting the related shares registered and, also, 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 Line of Credit Agreement. The Company is required
        to
        pay liquidated damages in the form of increased interest on the convertible
        debentures as a result of not filing an effective registration statement
        for
        these debentures at a rate of 2% of the principle plus interest per month.
        The
        liability for liquidated damages has been accrued at its maximum amount.
        The
        Company has remaining accrued liquidated damages of $36,000 at September
        30,
        2005.
  In
        December 2001, Veja Electronics, Inc. d/b/a Stack Electronics sued the Company
        for breach of contract and is seeking damages in excess of $106,000. This
        action
        relates to amounts alleged to be owed from the cancellation of a purchase
        order.
        During 2003 a judgment was rendered against the Company in the amount of
        $71,000, which has been accrued at September 30, 2005.
  In
        2003,
        Del Rio Enterprises sued the Company for non-payment of services rendered.
        During 2003 a judgment was rendered against the Company in the amount of
        $8,000.
        This amount has been accrued at September 30, 2005.
  In
        addition, the United States Internal Revenue Service and the Knox County,
        Tennessee Trustee, creditors for which we have fully accrued liabilities,
        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.
  **9.** **Common
        Stock**
  During
        the nine months ended September 30, 2005, the Company did not issue any shares
        of its common stock.
  **10.** **Reorganization**
  At
        Special Meetings held on August 17, 2005 and August 29, 2005, the Board decided
        to pursue a new strategic direction to focus on owing and operating small
        and
        mid-sized businesses that provide homeland security solutions through innovative
        technologies to both the public and private sector and to drive growth through
        management, strategic guidance, capital and financial support, and government
        marketing expertise. To attain this end, the Board moved to approve and
        recommend several provisions to the Company’s stockholders at the upcoming
        Special Meeting to be held in December 2005.
  First,
        the name of the Company will be changed to “Homeland Security Capital Company”
        to more closely describe the nature of the business, provided, however, that
        such name change will not be effective unless and until the stockholders
        approve
        of the Company withdrawing its election to be treated as a BDC under the
        1940
        Act. Second, the Board moved to increase the number of authorized shares
        of
        common stock to twenty billion (20,000,000,000) with a par value of $0.001
        per
        share, and the number of shares of authorized preferred stock to three million
        (3,000,000) with a par value of $0.01 per share. Third, the Board adopted
        for
        recommendation to the stockholders a stock option plan and reservation of
        seven
        hundred and twenty million (720,000,000) shares of common stock for issuance
        thereunder. Fourth, the Board approved for recommendation to the stockholders
        that the Company withdraw its election as a BDC under the ICA and called
        for a
        Special Meeting of Stockholders to occur in December 2005 and established
        October 7, 2005 as the Record Date to determine the stockholders entitled
        to
        vote at such Meeting. Fifth, the Board approved a term sheet regarding the
        purchase by Cornell of $1 million of convertible preferred stock from the
        Company. Further, the Board also approved a term sheet regarding a financing
        agreement whereby Cornell would purchase up to $50 million of the Company’s
        common stock. Both of these term sheets are subject to definitive agreements.
        Sixth, the Board moved to accept the resignation of Robert Legnosky as a
        Director, Chief Executive Officer and President of the Company and to approve
        the appointment to serve in an unfilled position as a Director, and the
        employment of C. Thomas McMillen as the Company’s new Chief Executive Officer
        and President. Mr. Legnosky remained a Director and President of the Company’s
        subsidiary, Celerity NV. Finally, the Board moved that the Company was directed
        to prepare and file proxy materials with the United States Securities and
        Exchange Commission (the “ Commission ”)
        to
        solicit proxies for the December 2005 Special Meeting, and authorized the
        Company to do all things necessary to effect these changes and transactions.
  9
 **11.** **Subsequent
        Events**
  The
        Company entered into two business development agreements in 2004 in which
        the
        Company was to receive shares of common stock for providing capital formation
        and management services in the future. However, no consideration has been
        received and no services performed as of September 30, 2005 and to the date
        of
        this Report. The Company and the respective parties are currently negotiating
        a
        termination agreement.
  On
        August
        31, 2005, C. Thomas McMillen transferred two Strategic Advisor Services
        Agreement, one with Hexa-One, Inc. (“ Hexa-One ”)
        and
        the other with Techalt, Inc. (“ Tech-Alt ”),
        to
        HSASC, a wholly-owned subsidiary of the Company in connection with
        Mr.
        McMillen being hired to serve as a Director, President and Chief Executive
        Officer of the Company. As a result of the assignment of the Hexa-One Agreement,
        HSASC will receive 250,000 shares of common stock of Hexa-One in exchange
        for
        the provision of consulting services. As a result of the assignment of the
        Tech-Alt Agreement, HSASC will receive:
        (i) one hundred percent (100%) of the cash proceeds resulting from the sale
        non-qualified options to purchase three hundred thousand (300,000) shares
        of
        common stock of Techalt, less (ii) an amount equal to the taxes assessed
        against
        Mr. McMillen as the legal owner of said options in connection with such sale,
        and (iii) further reduced by any consulting payments to Mr. McMillen for
        his
        personal consulting services rendered to Techalt after such date.
 
 On
        October 6, 2005, the Company closed a Securities Purchase Agreement with
        Cornell
        for the purchase of $1,000,000 of Series F Convertible Preferred stock, par
        value of $0.01 per share (the “ Series
        F Stock ”).
        Upon
        the termination of the Company’s status as a BDC under the ICA, the Series F
        Preferred Stock will become convertible at the option of the holder thereof,
        into such number of fully paid and non-assessable shares of the common stock
        of
        the Company, par value $0.001 per share, as is determined by dividing (a)
        the
        sum of (i) $1,000,000 (the original purchase price for the Series F Preferred
        Stock, plus (ii) all accrued but unpaid dividends thereon by (b) the conversion
        price then in effect. As set forth in the Certificate of Designation of the
        Series F Preferred Stock, the conversion price is $0.001, as adjusted from
        time-to-time as provided in such Certificate of Designation.
 
 In
        connection with the above transaction, the Company issued Cornell one million
        shares of Series F Stock.
 
 The
        Company will have the right to redeem upon three calendar days prior written
        notice to Cornell, all or any part of the Series F Preferred Stock at a
        redemption price equal to 125% of the amount redeemed. The redemption price,
        in
        immediately available funds, will accompany the written notice.
 
 While
        the
        Company has elected to be treated as a BDC under Section 54 of the ICA, the
        holders of the Series F Preferred Stock will not be paid any dividends by
        the
        Company. Upon termination of the Company’s election to be treated as a BDC, the
        Series F Preferred Stock will not accrue dividends unless the aggregate number
        of shares of the Company’s common stock outstanding at any time and prior to
        conversion is less than 3,200,000,000 shares. Any such dividends will accrue
        at
        12% per annum and will be paid on a pro rata basis when and if declared by
        the
        Board. Dividends will be paid in cash, and dividends will be cumulative and
        will
        accrue from the date of issuance whether or not earned or declared and whether
        or not there exists profits, surplus or other funds legally available for
        the
        payment of dividends, provided, however, that no cash dividends or distributions
        will be declared or paid or set apart for payment on the common stock in
        any
        calendar year unless cash dividends or distributions on the Series F Preferred
        Stock for such calendar year are likewise declared and paid.
 
 The
        Company intends to use the proceeds that it received in connection with the
        sale
        of the Series F Stock to Cornell for general working capital purposes, including
        funding the Company’s business plans and operations.
 
 10
 **Item
        2.** **Management’s
        Plan of Operation and Discussion and Analysis**
   **Introductory
        Statements**
  *Forward-Looking
        Statements and Associated Risks.* ****** *This
        Report contains forward-looking statements. Such forward-looking statements
        include statements regarding, among other things, (a) our projected sales
        and
        profitability, (b) our growth strategies, (c) anticipated trends in
        our
        industry, (d) our future financing plans, (e) our anticipated needs for working
        capital, (f) our lack of operational experience, and (g) the benefits
        related to ownership of our common stock. Forward-looking statements, which
        involve assumptions and describe our future plans, strategies, and expectations,
        are generally identifiable by use of the words
“may,”“will,”“should,”“expect,”“anticipate,”“estimate,”“believe,”“intend,” or
“project” or the negative of these words or other variations on these words or
        comparable terminology. 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-K for the year ended December 31, 2004. 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 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
        Report
        will in fact occur as projected.*
  **Critical
        Accounting Policies**
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires our management to make
        assumptions, estimates and judgments that affect the amounts reported in
        the
        financial statements, including the notes thereto, and related disclosures
        of
        commitments and contingencies, if any. We consider our critical accounting
        policies to be those that are complex and those that require significant
        judgments and estimates in the preparation of our financial statements,
        including valuation of our investments. Management relies on historical
        experience and on other assumptions believed to be reasonable under the
        circumstances in making its judgment and estimates. Actual results could
        differ
        materially from those estimates.
  *Estimates.* The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those estimates.
  *Fair
        Value of Financial Instruments.* The
        carrying amount of items included in working capital approximates fair value
        because of the short maturity of those instruments. The carrying value of
        the
        Company’s debt approximates fair value because it bears interest at rates that
        are similar to current borrowing rates for loans of comparable terms, maturity
        and credit risk that are available to the Company.
  *Debt
        Offering Costs.* Debt
        offering costs are related to private placements and are being amortized
        on a
        straight line basis over the term of the related debt, most of which is in
        the
        form of convertible debentures. Should conversion occur prior to the stated
        maturity date the remaining unamortized cost is expensed.
  *Investment
        Valuation.* Investments in equity securities are recorded at fair value, represented
        as
        cost, plus or minus unrealized appreciation or depreciation, respectively.
        The
        fair value of investments that have no ready market, are determined in good
        faith by management, and approved by the Board, based upon assets and revenues
        of the underlying investee companies as well as general market trends for
        businesses in the same industry. Because of the inherent uncertainty of
        valuations, management’s estimates of the values of the investments may differ
        significantly from the values that would have been used had a ready market
        for
        the investments existed and the differences could be material.
  *Income
        Taxes.* The
        Company accounts for income taxes using the asset and liability method, whereby
        deferred tax assets and liabilities are determined based upon the differences
        between financial reporting and tax bases of assets and liabilities and are
        measured using the enacted tax rates and laws that will be in effect when
        the
        differences are expected to reverse. A valuation allowance related to the
        deferred tax assets is also recorded when it is more likely than not that
        some
        or all of the deferred tax asset will not be realized.
  *Going
        Concern.* The
        Company’s financial statements have been prepared on a going concern basis,
        which contemplates the realization of asset 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, 2005, the losses total
        $44,446,338. These factors taken together with the lack of revenues and the
        absence of significant financial commitments raise substantial doubt about
        the
        Company’s ability to continue as a going concern. The Company’s source of income
        during 2004 has been dividends from its minority investment in Yorkville.
        The
        Company’s investment in the minority interest of Yorkville was made on December
        1, 2003 and the Company has received $1,310,000 in dividend proceeds since
        that
        date. As of September 30, 2005, the Company has liquidated all of its interest
        in Yorkville and will not receive any further dividend income in the
        future.
  11
  **Results
        of Operations**
   **Three
        Months Ended September 30, 2005 Compared to Three Months Ended September
        30,
        2004**
   **Realized
        loss on investments**
  Since
        the
        election to operate as a BDC under the ICA, the Company has recorded a realized
        loss on its investment in Celerity NV. This loss is comprised of two
        elements:
  Effect
                  of recording advances at fair value
              
              $
              633,008Effect
                  of recording equity investments at fair value
              
              
              500,000$
              1,133,008
 
 The
        Company calculates realized loss on investments by totaling the aggregate
        amount
        of its initial investment, plus any additional advances made since the beginning
        of the investment. Unrealized losses on investments are calculated in the
        same
        manner, except they are then booked as an allowance for loss/reserve until
        realized.
  The
        write-down of the Company’s advances to and investment in Celerity NV recognized
        that without additional sales, there was a substantial risk that Celerity
        NV
        would not be able to continue operations. On November 4, 2004, Celerity NV
        entered into an Asset Purchase Agreement with Escent Systems, Inc.
        (“ Escent ”)
        whereby Celerity NV sold its assets and interactive video business to Escent
        in
        return for 25% of Escent’s equity. Celerity NV also provided $15,000 in cash
        toward the working capital of the new venture. Because Escent has limited
        sales
        history and lack of necessary product and content development capacity, Celerity
        NV has determined that the fair value of the investment to be nil.
  During
        the three month period ended September 30, 2004, Celerity NV recorded no
        sales
        or gross profit and incurred other general and administrative expenses that
        resulted in a net loss of $79,448 for the period. During such period Celerity
        NV
        received parent company advances of $8,141 to fund its working capital
        requirements. Management recorded a write-down of the Company’s advances since
        without additional sales, there is a substantial risk that Celerity NV will
        not
        be able to continue operations.
  The
        Company has had no transactions with Celerity NV in the nine months ended
        September 30, 2005
   **Dividend
        income**
  Since
        its
        investment in Yorkville on December 1, 2003, the Company has received $1,255,000
        in 2004 and $65,000 in 2003 in proceeds, which have been recorded as dividend
        income in the statements of operations. On January 31, 2005, the members
        of
        Yorkville decided to wind-up its operations and amended its Operating Agreement
        to establish a new class of membership with preferential rights. The Company’s
        investment interest was converted to this new class of ownership. The
        preferential rights allowed the Company to receive its investment purchase
        price
        returned in cash by December 31, 2005, but receive no other dividend income
        distributions. During the three month period ended September 30, 2005, the
        Company has received no proceeds and the Company has no further interest
        in
        Yorkville.
  During
        the three month period ended September 30, 2004, the Company received $260,000
        in proceeds from its investment in Yorkville and recorded these receipts
        as
        dividend income in the statement of operations.
  12
  **Operating
        Expenses**
  Operating
        expenses for the third quarter of 2005 were $271,477 compared to $181,684
        for
        the third quarter of 2004, an increase of $89,793 or 49.4%. Increased operating
        expenses in 2005 can be attributed to higher payroll due to the signing bonus
        ($125,000) for C. Thomas McMillen, who serves as a Director, Chief Executive
        Officer and President of the Company and higher operating costs totaling
        approximately $135,000. Expenses were reduced by lower facility charges of
        $27,700 and lower professional fees of $17,400.
   **Amortization
        of debt offering costs**
  Amortization
        of debt offering costs for the third quarter of 2005 was nil compared to
        $16,154
        in same period of 2004. The debt associated with the debt offering costs
        was
        paid-off in the first quarter of 2005.
   **Beneficial
        conversion feature - convertible notes**
  Non-cash
        interest expense relating to amortization of a beneficial conversion feature
        for
        the various convertible debentures issues amounted to nil and $35,688 for
        the
        three months ended September 30, 2005 and 2004, respectively. This decrease
        results primarily from the payment of the debt prior to the third quarter
        of
        2005 which caused full recognition of the related beneficial conversion feature
        in that period.
   **Interest
        Expense**
  Interest
        expense for the three months ended September 30, 2005 was $2,930 compared
        to
        $88,183 for the same period in 2004, a decrease of $85,253 or 96.7%. The
        decrease is attributable to the repayment of debt primarily from the funds
        from
        the liquidation of the Yorkville investment in 2005.
  **Settlement
        of Debt**
  For
        the
        three months ended September 30, 2005, the Company settled certain trade
        payables that resulted in net gains of $61,236, compared to the three months
        ended September 30, 2004 when debt settlements resulted in net gains of
        $1,218.
   **Net
        Loss Attributable to Common Stockholders**
  As
        a
        result of the foregoing, the Company had a net loss of $211,155 or $0.00
        per
        share for the three months ended September 30, 2005, compared to a net gain
        of
        $68,632 or $0.00 per share for the three months ended September 30, 2004,
        an
        increase of $142,523 or 207.7%.
   **Nine
        Months Ended September 30, 2005 Compared to Nine Months Ended September 30,
        2004**
   **Realized
        loss on investments**
  Since
        the
        election to operate as a BDC, the Company has recorded a realized loss on
        its
        investment in Celerity NV. This loss is comprised of two elements:
  Effect
                  of recording advances at fair value
              
              $
              633,008Effect
                  of recording equity investments at fair value
              
              
              500,000$
              1,133,008
   13
 
 The
        Company calculates realized loss on investments by totaling the aggregate
        amount
        of its initial investment, plus any additional advances made since the beginning
        of the investment. Unrealized losses on investments are calculated in the
        same
        manner, except they are then booked as an allowance for loss/reserve until
        realized.
  The
        write-down of the Company’s advances to and investment in Celerity NV recognized
        that without additional sales, there was a substantial risk that Celerity
        NV
        would not be able to continue operations. On November 4, 2004, Celerity NV
        entered into an Asset Purchase Agreement with Escent whereby Celerity NV
        sold
        its assets and interactive video business to Escent in return for 25% of
        Escent’s equity. Celerity NV also provided $15,000 in cash toward the working
        capital of the new venture. Because Escent has limited sales history and
        lack of
        necessary product and content development capacity, Celerity NV has determined
        that the fair value of the investment to be nil.
  During
        the nine month period ended September 30, 2004, Celerity NV recorded no sales
        or
        gross profit and incurred other general and administrative expenses that
        resulted in a net loss of $214,223 for the period. During such period, Celerity
        NV received parent company advances of $233,103 (net of cash recoveries from
        liquidation of inventories of $61,015) to fund its working capital requirements.
        Management recorded a write-down of the Company’s advances.
   **Dividend
        income**
  Since
        its
        investment in Yorkville on December 1, 2003, the Company has received $1,255,000
        in 2004 and $65,000 in 2003 in proceeds, which have been recorded as dividend
        income in the statements of operations. On January 31, 2005, the members
        of
        Yorkville decided to wind-up its operations and amended its Operating Agreement
        to establish a new class of membership with preferential rights. The Company’s
        investment interest was converted to this new class of ownership. The
        preferential rights allowed the Company to receive its investment purchase
        price
        returned in cash by December 31, 2005, but receive no other dividend income
        distributions. During the nine month period ended September 30, 2005, the
        Company has received its entire investment cost of $5,240,000 and the Company
        has no further interest in Yorkville.
  During
        the nine month period ended September 30, 2004, the Company received $955,000
        in
        proceeds from its investment in Yorkville and recorded these receipts as
        dividend income in the statement of operations.
   **Operating
        Expenses**
  Operating
        expenses for the first nine months of 2005 were $664,397 compared to $514,212
        for the first nine months of 2004, an increase of $150,185 or 29.2%. Increased
        operating expenses in 2005 can be attributed to higher payroll ($113,185),
        professional service expenses (approximately $51,300), and higher operating
        and
        administrative costs (approximately $33,700). Expenses were reduced by lower
        facility charges ($48,000).
   **Amortization
        of debt offering costs**
  Amortization
        of debt offering costs for the first nine months of 2005 was $40,529, compared
        to $65,141 for the same period in 2004, a decrease of $24,612 or 37.8%. The
        debt
        associated with the debt offering costs was paid-off in the first quarter
        of
        2005.
   **Beneficial
        conversion feature - convertible notes**
  Non-cash
        interest expense relating to amortization of a beneficial conversion feature
        for
        the various convertible debentures issues amounted to $242,988 and $259,266
        for
        the nine months ended September 30, 2005 and 2004, respectively. This decrease
        results primarily from the payment of certain debt in 2005 which caused full
        recognition of the related beneficial conversion feature in this period compared
        to the longer amortization period for debt not converted.
  14
  **Interest
        Expense**
  Interest
        expense for the nine months ended September 30, 2005 was $71,042 compared
        to
        $180,208 for the same period in 2004, a decrease of $109,166 or 60.6%. The
        decrease is attributable to the repayment of debt primarily from the funds
        from
        the liquidation of the Yorkville investment in 2005.
  **Settlement
        of Debt**
  For
        the
        nine months ended September 30, 2005, the Company settled certain convertible
        notes and trade payables that resulted in net gains of $1,372 **.** For the
        nine months ended September 30, 2004, debt settlements resulted in net gains
        of
        $41,196.
   **Net
        Loss Attributable to Common Stockholders**
  As
        a
        result of the foregoing, the Company had a net loss of $975,624, or $0.00
        per
        share, for the nine months ended September 30, 2005, compared to a net loss
        of
        $254,620, or $0.00 per share, for the nine months ended September 30, 2004
        an
        increase of $721,004 or 279.2%.
   **Liquidity
        and Capital Resources**
  The
        primary source of financing for the Company since its inception has been
        through
        the issuance of common and preferred stock and debt. We had cash balances
        on
        hand of $630,033 as of September 30, 2005 and $1,863 as of December 31, 2004.
        Our cash position continues to be uncertain. Our primary need for cash is
        to
        fund our ongoing operations until such time that income from our investments
        generate enough proceeds to fund operations. In addition, our need for cash
        includes satisfying current liabilities of $562,909, consisting primarily
        of
        accounts payable of $314,568, accrued interest and other liabilities of
        $133,341, and judgments and defaults payable of $115,000, including a judgment
        of $71,000 obtained by Veja Electronics, Inc. for breach of contract, a judgment
        of $8,000 obtained by Del Rio Enterprises for non-payment of services, and
        liquidated damages resulting from the lack of filing a registration statement
        relating to certain convertible debentures of $36,000. We will need significant
        new funding from the sale of securities or from proceeds from our investments
        to
        fund our ongoing operations and to satisfy the above obligations. We anticipate
        that preferential distribution proceeds from the liquidation of our investment
        in Yorkville will provide sufficient funds in 2005 to operate the Company
        after
        satisfying certain related party debt of $1,500,000.
  We
        currently do not have any commitments for funding except as follows: (i)
        on
        October 6, 2005, Cornell purchased $1 million of Series F Stock from the
        Company
        for net proceeds to the Company of $880,000 before the payment of legal expenses
        in connection therewith (please refer to page 7 hereof for a description
        of the
        Series F Stock and this transaction); and (ii) on August 29, 2005, the Board
        approved a term sheet regarding a financing agreement whereby Cornell would
        purchase up to $50 million of the Company’s common stock in connection with the
        establishment by Cornell of an equity line arrangement for the benefit of
        the
        Company. While the term sheet is subject to a definitive agreement being
        executed by Cornell and the Company and there can be no assurances that such
        agreement will, in fact, be executed, management believes that there is a
        substantial likelihood that such an agreement will be executed during the
        first
        quarter of 2006, provided that the stockholders of the Company approve of
        the
        withdrawal of the Company’s election to be treated as a BDC under Section 54 of
        the ICA, which will be voted on at the upcoming Special Meeting of Stockholders
        in December 2005. If such withdrawal is approved and such definite agreement
        is
        executed, the Company would then be able to draw on the equity line of credit
        with Cornell to fund the Company’s business plans. The Company intends to use
        the proceeds that it receives in connection with the sale of the Series F
        Stock
        to Cornell and any funds that it may receive under the equity line with Cornell
        for general working capital purposes, including funding the Company’s business
        plans and operations.
  As
        discussed in the overview section, on September 3, 2003, the Company elected
        to
        become regulated under Section 54 of the ICA. As a BDC, the Company may sell
        up
        to $5,000,000 of its common stock in a 12-month period. Shares sold are exempt
        from registration under Regulation E of the Securities Act of 1933, as amended.
        To that end, at our Annual Meeting of Stockholders held on January 14, 2003,
        the
        stockholders approved an increase in our authorized capital stock to
        5,000,000,000 shares of common stock. On September 4, 2003, the Company filed
        an
        Offering Circular Under Regulation E to sell up to $4,500,000 of its common
        stock at a minimum price of $0.001 to a maximum price of $0.02. Between
        September 4, 2003 and January 13, 2004, the last date of sales of securities
        under this offering, the Company sold 1,289,833,333 shares resulting in net
        proceeds of $1,360,000.
  15
 We
        are
        also looking at several other options in terms of improving our cash shortage.
        We are continuing to seek to arrange financing, including possible strategic
        investment opportunities or opportunities to sell some or all of our assets
        and
        business, while continuing to pursue sales opportunities. The lack of sales
        or a
        significant financial commitment raises substantial doubt about our ability
        to
        continue as a going concern or to resume a full-scale level of
        operations.
  During
        the nine months ended September 30, 2005, we had a net increase in cash of
        $628,170. Our sources and uses of funds were as follows:
  ***Cash
        Flows From Operating Activities.*** **** We
        used
        net cash of $1,396,363 in our operating activities in the nine months ended
        September 30, 2005. Our net cash used in operating activities resulted primarily
        from the Company’s net loss of $975,624, non-cash income of $180,001 related to
        the settlement of debt, the acquisition of miscellaneous assets of $150,215
        and
        the payment of accounts payable, judgments and defaults and accrued interest
        of
        $489,931. Cash was provided by non-cash expenses of depreciation of fixed
        assets
        of $8,400, beneficial conversion feature of $242,988, and debt offering costs
        of
        $40,529. In addition, cash was provided by increases in other current
        liabilities of $107,491.
  ***Cash
        Flows From Investing Activities*** *.* We
        provided cash of $5,240,000 in investing activities in the nine months ended
        September 30, 2005 from the proceeds from preferential distributions from
        Yorkville. As of September 30, 2005, we had no further interest in Yorkville.
        These funds were used to fund the operating activities of the Company, liquidate
        certain convertible notes and purchase shares under the Company’s stock buyback
        program.
  ***Cash
        Flows From Financing Activities*** *.* We used
        $3,215,467 in net cash for financing activities, consisting primarily of
        principal payments on debt to a related party of $1,255,000, principal payments
        on certain convertible debentures of $1,542,500, and the purchase of treasury
        stock under the Company’s stock buyback program of $417,967.
  As
        of
        September 30, 2005 we had net working capital of approximately $220,000.
        We have
        reduced overhead expenses, which will have a favorable impact on cash required
        to fund the business. We had no significant capital spending or purchase
        commitments at September 30, 2005 other than a certain lease of corporate
        office
        space
  We
        have
        no existing bank lines of credit.
  There
        can
        be no assurances that we will be successful in our attempts to raise sufficient
        capital essential to our survival. To the extent that we are unable to raise
        the
        necessary operating capital it will become necessary to further curtail
        operations. Additionally, even if we raise operating capital, there can be
        no
        assurances that the net proceeds will be sufficient enough to enable us to
        develop our business to a level where we will generate profits and positive
        cash
        flows. These matters raise substantial doubt about our ability to continue
        as a
        going concern.
  **Item
        3.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
  **Interest
        Rate Sensitivity**
  The
        Company does not have any exposure to market risk as it relates to changes
        in
        interest rates as all of the borrowings of the Company are at a fixed rate
        of
        interest.
  The
        Company has no cash equivalents or short-term investments that are subject
        to
        market risk.
  **Foreign
        Currency Risk**
  The
        Company does not do any business that has any risk of foreign exchange rate
        fluctuations.
  **Equity
        Security Price Risk**
  We
        do not
        have any investment in marketable equity securities; therefore, we do not
        have
        any direct equity price risk.
  **Commodity
        Price Risk**
  We
        no not
        do any business involving commodities; therefore, we do not have any commodity
        price risk.
  16
  **Item
        4.**  **Controls
        and procedures**
  
 (A)  Evaluation
        Of Disclosure Controls And Procedures
 
 As
        of the
        end of the period covered by this report, the Company carried out an evaluation,
        under the supervision and with the participation of the Company’s Principal
        Executive Officer/Interim Principal Financial Officer (one person), of the
        effectiveness of the design and operation of the Company’s disclosure controls
        and procedures. The Company’s disclosure controls and procedures are designed to
        produce a reasonable level of assurance of achieving the Company’s disclosure
        control objectives. The Company’s Principal Executive Officer/Interim Principal
        Financial Officer has concluded that the Company’s disclosure controls and
        procedures were, in fact, adequate and effective to ensure that material
        information relating to the Company that is required to be disclosed by the
        Company in reports that it files or submits under the Securities Exchange
        Act of
        1934, as amended, is recorded, processed, summarized and reported within
        the
        time periods specified in Commission rules and accumulated and communicated
        to
        the Company’s management, including its Principal Executive Officer/Interim
        Principal Financial Officer (one person), to allow timely decisions regarding
        required disclosure.
  (B)  Changes
        In Internal Controls Over Financial Reporting
 
 In
        connection with the evaluation of the Company’s internal controls during the
        Company’s last fiscal quarter, the Company‘s Principal Executive
        Officer/Principal Financial Officer (one person) has determined that there
        are
        no changes to the Company’s internal controls over financial reporting that has
        materially affected, or is reasonably likely to materially effect, the Company’s
        internal controls over financial reporting.
   17
 **PART
        II**
   **OTHER
        INFORMATION**
   **Item
        1.**  **Legal
        Proceedings**
  There
        is
        no pending or threatened litigation against us that occurs outside the ordinary
        course of our business, except as otherwise noted below:
  ·
              In
                  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
                  for
                  products not received by us. During 2003, a judgment was rendered
                  against
                  the Company in the amount of $71,000.
  ·
              In
                  2003, Del Rio Enterprises sued the Company for non-payment of services
                  rendered. During 2003 a judgment was rendered against the Company
                  in the
                  amount of $8,000.
  ·
              On
                  September 20, 2004, Joseph Banta, et al. filed an action in the
                  United
                  States District Court for the Eastern District of Tennessee at
                  Knoxville,
                  Tennessee in the amount of approximately $60,000 for non-payment
                  of
                  salaries and benefits during a two-month period in 2002. The Company
                  settled this case in full in January
                  2005.
  In
        addition, the United States Internal Revenue Service and the Knox County,
        Tennessee Trustee, creditors for which we have fully accrued liabilities
        and
        other claims, have threatened litigation if they are 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.
  All
        liabilities in connection with the foregoing legal proceedings have been
        accrued
        on the Company’s financial statements to the extent material or could have a
        material impact on the Company.
   **Item
        2.**  **Changes
        in Securities and Use of Proceeds**
  None.
   **Item
        3.**  **Defaults
        Upon Senior Securities**
  None.
  **Item
        4.**  **Submission
        of Matters to a Vote of Security Holders**
  None.
  **Item
        5.**  **Other
        Information**
  Not
        applicable.
  
  18
  **Item
        6.**  **Exhibits
        and Reports on Form 8-K**
  **(a)**  **Exhibits.**
  **Exhibit
                  No.**
              **Description**
              **Location**31.1
              Section
                  302 Certification
              Provided
                  herewith32.1
              Section
                  906 Certification
              Provided
                  herewith
 
 **(b)**
              **Reports
                  on Form****8-K****.**
  Current
        Report on Form 8-K filed by the Company on August 3, 2005 pursuant to Item
        8.01
        (Other Events) whereby the Company reported that, effective July 26, 2005,
        it
        had engaged the services of Worldwide Stock Transfer, LLC as its new stock
        transfer agent.
  Current
        Report on Form 8-K filed by the Company on August 30, 2005 pursuant to Item
        1.01
        (Entry into a Material Definitive Agreement) whereby the Company reported
        that
        it had entered into two term sheets for a $51 million financial commitment
        from
        Cornell Capital Partners, LP. In the same Form 8-K, pursuant to Item 5.02
        (Departure of Directors or Principal Officers; Election of Directors;
        Appointment of Principal Officers), the Company reported that Robert Legnosky
        resigned, effective August 30, 2005, as a Director, President and Chief
        Executive Officer of the Company and the Board of Directors appointed C.
        Thomas
        McMillen to be a Director, President and Chief Executive Officer of the Company
        effective on said date. In the same Form 8-K, pursuant to Item 8.01 (Other
        Events), the Company reported that the Company intends to pursue a new strategic
        direction to focus on owning and operating small and mid-sized growth businesses
        that provide homeland security solutions through innovative technologies
        to both
        the public and private sector. The Company also announced on said date in
        the
        same Form 8-K its intention to seek stockholder approval to change its name
        to
“Homeland Security Capital Corporation”, its intention to seek stockholder
        approval to withdraw the Company’s election as a BDC under the ICA, and its
        intention to move its corporate headquarters to the Washington, D.C.
        area.
  Current
        Report on Form 8-K filed by the Company on August 31, 2005 pursuant to Item
        8.01
        (Other Events) whereby the Company reported that effective September 12,
        2005,
        the principal offices of the Company will be located at 4100 North Fairfax
        Drive, Suite 1150, Arlington, Virginia 22203-1664.
   19
 **SIGNATURES**
  In
        accordance with the requirements of the Securities Exchange Act of 1934,
        as
        amended, the Registrant caused this Report to be signed on its behalf by
        the
        undersigned, thereunto duly authorized.
  Date:November 14, 2005
              **CELERITY
                  SYSTEMS, INC.**By:/s/
                  C. Thomas McMillenC.
                  Thomas McMillenPresident,
                  Chief Executive Officer, and Interim ChiefFinancial
                  Officer
 
  20