U.S. 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 June 30, 2005

|_|  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                              (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

146 Maryville Pike, Suite 201, Knoxville, Tennessee          37920
---------------------------------------------------          -----
(Address of Principal Executive Offices)                     (Zip Code)

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

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $0.001 per share

                                (Title of Class)

      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 |X| No |_|

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

                                 Yes |_| No |X|

      There were  4,390,579,206  shares of common Stock outstanding as of August
1, 2005.

<PAGE>

                                     PART I

FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CELERITY SYSTEMS, INC.
Balance Sheets

<TABLE>
<CAPTION>
                                                                                 (unaudited)
 Assets                                                                         June 30, 2005  December 31,2004
                                                                                -------------  ----------------
<S>                                                                              <C>             <C>
  Cash                                                                           $    842,992    $      1,863
  Other current assets                                                                152,879           2,664
                                                                                 ------------    ------------
        Total current assets                                                          995,871           4,527
                                                                                 ------------    ------------

Fixed assets, net                                                                      32,791          38,391
Investment in Yorkville Advisors Management, LLC, at cost which
   approximates fair value                                                                 --       5,240,000
Investment in and advances to Celerity Systems-NV, at fair value                           --              --
Debt offering costs, net                                                                   --          40,529
                                                                                 ------------    ------------

     Total assets                                                                $  1,028,662    $  5,323,447
                                                                                 ============    ============

Liabilities and Stockholders' Equity

Accounts payable                                                                 $    423,554    $    473,637
Judgments and defaults payable (including $213,400 to a related party in 2004)        115,000         400,675
Accrued interest ( including $188,366 to a related party in 2004)                      11,609         321,629
Notes payable - related party                                                              --         510,000
Other current liabilities                                                              17,350          11,311
                                                                                 ------------    ------------

     Total current liabilities                                                        567,513       1,717,252

Convertible debentures - related party, net                                                --         583,517
Convertible debentures, net                                                           232,500       1,703,495
                                                                                 ------------    ------------
                                                                                      232,500       2,287,012
                                                                                 ------------    ------------

     Total liabilities                                                                800,013       4,004,264
                                                                                 ------------    ------------

Commitments and contingencies                                                              --              --

Stockholders' Equity
Common stock, $.001 par value, 5,000,000,000 shares authorized, 4,390,579,206
     shares and 4,796,102,805 shares issued and outstanding
      in 2005 and 2004, respectively                                                4,390,580       4,796,103
Additional paid-in capital                                                         39,981,350      40,555,128
Treasury stock, at cost - 226,843,599 shares in 2004                                       --        (561,334)
Accumulated deficit                                                               (44,143,281)    (43,470,714)
                                                                                 ------------    ------------
     Total stockholders' equity                                                       228,649       1,319,183
                                                                                 ------------    ------------

     Total liabilities and stockholders' equity                                  $  1,028,662    $  5,323,447
                                                                                 ============    ============
</TABLE>

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

                                        2

<PAGE>

CELERITY SYSTEMS, INC.
Statements of Operations (unaudited)

<TABLE>
<CAPTION>
                                                        Three Months        Three Months       Six Months         Six Months
                                                            Ended               Ended             Ended              Ended
                                                        June 30, 2005       June 30, 2004     June 30, 2005      June 30, 2004
                                                        -------------       -------------     -------------      -------------
<S>                                                    <C>                <C>                <C>                <C>
  Unrealized loss on investments                       $            --    $      (121,578)   $            --    $      (224,961)
  Realized gain on investments                                  39,944                 --             39,944                 --
  Dividend income                                                   --            350,000                 --            695,000
                                                       ---------------    ---------------    ---------------    ---------------
                                                                39,944            228,422             39,944            470,039
     General and administrative expenses                       192,239            135,785            392,920            332,574
                                                       ---------------    ---------------    ---------------    ---------------
           Operating income (loss)                            (152,295)            92,637           (352,976)           137,465
  Other income (expense)
     Amortization of debt offering costs                            --            (11,863)           (40,529)           (48,987)
     Beneficial conversion feature -
        convertible debentures                                 (53,709)           (48,252)          (242,988)          (223,578)
     Interest expense                                           (9,374)           (43,819)           (68,112)           (92,026)
     Settlement of debt                                       (156,408)            39,979             32,038             39,979
     Other income                                                   --                 --                 --              1,114
                                                       ---------------    ---------------    ---------------    ---------------
  Total other income (expense)                                (219,491)           (63,955)          (319,591)          (323,498)
                                                       ---------------    ---------------    ---------------    ---------------
          Net loss attributable to common
             stockholders                              $      (371,786)   $        28,682    $      (672,567)   $      (186,033)
                                                       ===============    ===============    ===============    ===============

Loss per common share, basic and diluted
Net loss per common share attributable to
   common stockholders                                 $         (0.00)   $          0.00    $         (0.00)   $         (0.00)
                                                       ===============    ===============    ===============    ===============

          Weighted average shares outstanding -
             basic and diluted                           4,428,073,650      4,794,080,467      4,491,955,173      4,824,716,663
                                                       ===============    ===============    ===============    ===============
</TABLE>

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

                                        3
<PAGE>

CELERITY SYSTEMS, INC.
Statements of Cash Flows (unaudited)

<TABLE>
<CAPTION>
                                                                           Six Months     Six Months
                                                                             Ended          Ended
                                                                            June 30,       June 30,
                                                                              2005           2004
                                                                              ----           ----
Cash flows from operating activities:
<S>                                                                       <C>            <C>
   Net loss                                                               $  (672,567)   $  (186,033)
   Adjustments to reconcile net loss to net
        cash used in operating activities:
            Settlement of debt                                               (181,901)            --
            Unrealized loss on investments                                         --        224,961
            Depreciation and amortization                                       5,600          4,375
            Beneficial conversion - convertible notes                         242,988        230,767
            Amortization of debt offering costs                                40,529         48,987
            Changes in operating assets and liabilities:
                Other assets                                                 (150,215)         1,520
                Accounts payable                                              (50,083)        56,075
                Judgments and defaults payable                               (103,774)      (142,381)
                Accrued interest                                             (310,020)       (23,407)
                Other current liabilities                                       6,039          2,984
                                                                          -----------    -----------
                    Net cash provided by (used in) operating activities    (1,173,404)       217,848

Cash flows from investing activities:
   Purchase of fixed assets                                                        --         (6,658)
   Advances to Celerity Systems-NV                                                 --       (224,961)
   Proceeds from liquidation of Yorkville Advisors Management, LLC          5,240,000             --
                                                                          -----------    -----------
                    Net cash provided by (used in) investing activities     5,240,000       (231,619)

Cash flows from financing activities:
   Proceeds from notes payable - related party                                     --             --
   Payments on  notes payable - related party                              (1,265,000)      (105,000)
   Proceeds from convertible debentures                                                      537,500
   Principal payments on debt                                              (1,542,500)      (475,000)
   Proceeds from issuance of common stock                                          --        200,000
   Acquisition of treasury stock                                             (417,967)      (189,808)
                                                                          -----------    -----------
                    Net cash used in financing activities                  (3,225,467)       (32,308)

Net increase (decrease) in cash                                               841,129        (46,079)
Cash, beginning of period                                                       1,863         56,156
                                                                          -----------    -----------

Cash, end of period                                                       $   842,992    $    10,077
                                                                          ===========    ===========

Cash paid for:
     Interest                                                             $   302,040      $ 201,285
                                                                          ===========    ===========
     Taxes                                                                $        --    $     1,450
                                                                          ===========    ===========
</TABLE>

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

                                        4

<PAGE>

CELERITY SYSTEMS, INC.
Statement of Changes in Stockholders' Equity
For the six months ended June 30, 2005

<TABLE>
<CAPTION>
                                                                                                                  Total
                                      Common Stock             Additional                                     Stockholders'
                                 ------------------------       Paid-In         Treasury      Accumulated       (Deficit)
                                 Shares          Amount         Capital          Stock          Deficit          Equity
                                 ------          ------         -------          -----          -------          ------
<S>                          <C>             <C>             <C>             <C>             <C>             <C>
Balance December 31, 2004    4,796,102,805   $   4,796,103   $  40,555,128   $    (561,334)  $ (43,470,714)  $   1,319,183

Acquisition of treasury
  stock (unaudited)                                                               (417,967)                       (417,967)

Retirement of treasury
  stock (unaudited)           (405,523,599)       (405,523)       (573,778)        979,301                              --

Net loss (unaudited)                                                                              (672,567)       (672,567)
                             -------------   -------------   -------------   -------------   -------------   -------------
Balance, June 30, 2005       4,390,579,206   $   4,390,580   $  39,981,350   $          --   $ (44,143,281)  $     228,649
                             =============   =============  ==============   =============   =============   =============
</TABLE>

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

                                        5

<PAGE>

                             CELERITY SYSTEMS, INC.

Notes to Unaudited Condensed Financial Statements

Overview

      Celerity  Systems,  Inc.,  a Delaware  corporation  (the  "Company")  is a
business  development  company  that has  elected to be  regulated  pursuant  to
Section  54 of the  Investment  Company  Act of 1940.  We  intend  to focus  our
investments  in  developing  companies,  but do not intend to limit our focus on
investment  in any  particular  industry.  We  intend  to  seek  investments  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 periods as of June 30, 2005 and for the six
months ended June 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 six month  period
ended June 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 June 30, 2004  balances  have been  reclassified  to
conform with the June 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.

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

      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 June 30, 2005 the losses
total approximately  $44,143,000.  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.

                                       6
<PAGE>

      On June 3, 2003,  the  Company  elected  to become a Business  Development
Company  which is regulated  under Section 54 of the  Investment  Company Act of
1940. 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  twelve month period.  Between June 30,
2003 and June 30, 2005, 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.

      Stock-Based Compensation

      The Company has not granted any stock options in 2005 and 2004.  There was
no stock-based  compensation to be determined under the fair value method during
the six months ended June 30, 2005 and 2004 and there is no  difference  between
net loss as reported and proforma net loss.

2.    Investment in Celerity Systems, Inc. (A Nevada corporation)

      Celerity NV had no operations  for the six months ended June 30, 2005. The
following table  represents  Celerity NV's operating  results for the six months
ended June 30, 2004.

                  Sales                               $        --
                  Cost of Sales                                --
                                                      -----------
                  Gross loss                                   --
                  General and administrative expenses     134,772
                                                      -----------
                  Net loss                               (134,772)
                                                      ===========

      The following table represents  Celerity NV's balance sheet as of June 30,
2004.

                  Accounts receivable, net            $    24,319
                  Inventories, net                        299,200
                                                      -----------
                    Total current assets                  323,519
                  Fixed assets, net                        60,433
                  Other                                     1,600
                                                      -----------
                  Total assets                        $   385,552
                                                      ===========

                  Accounts payable                    $   936,488
                  Other current liabilities                23,601
                                                      -----------
                  Total liabilities                       960,089

                  Stockholder Deficit
                  Common stock                                250
                  Additional paid-in capital              499,750
                  Accumulated deficit                  (1,074,637)
                                                      -----------
                  Total stockholder deficit              (574,537)
                                                      -----------
                  Total liabilities and deficit       $   385,552
                                                      ===========

      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.  Due to a lack of
funding  prior to June 30, 2004  Celerity NV has been  targeting  the  education
market, to the exclusion of other markets available to them.

                                       7
<PAGE>

      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
six  months of 2004,  the  Company  advanced  $224,961  to  Celerity  NV to fund
Celerity NV's operations.  This amount resulted in an unrealized depreciation on
the  investment  in Celerity NV of $224,961 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.

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 six months ended June 30, 2005
that  would  change  the  valuation.  Accordingly,  the Board of  Directors  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 is 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 has been 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 an affiliated company of Yorkville.  In the six
months ended June 30, 2005, the Company received $5,240,000 net of $1,500,000 to
a related party for debt the Company had recorded at  $1,681,901.  The resulting
gain has been  recorded  as income in the  operating  statements  for the period
ended June 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.    Issuance of Convertible Debentures

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

                                            June 30, 2005  December 31, 2004
                                            -------------  -----------------
      4% convertible debentures              $         0     $    12,500
      5% convertible debentures                  232,500       1,812,500
      10% secured convertible debenture                0         705,000
                                             -----------     -----------
                                                 232,500       2,530,000
      Less: Unamortized debt discount                 (0)       (242,988)
                                             -----------     -----------
      Long-term debt less current
        maturities                           $   232,500     $ 2,287,012
                                             ===========     ===========

                                       8
<PAGE>

      During the six months ended June 30, 2005 no convertible  debentures  were
presented  for  conversion,  accordingly,  no shares of its  common  stock  were
issued.

7.    Stock Buyback Program

      In  September  2004 the  Board of  Directors  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  June  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 six month period  through June 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  Capital  Partners,  LP 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 June 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 June 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 June 30, 2005.

      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.

9.    Common Stock

      During the six months  ended June 30,  2005 the  Company did not issue any
shares of its common stock.

10.   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 June 30, 2005 and to the date of
this report. The Company and the respective parties are currently  negotiating a
termination agreement.

                                       9
<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-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
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.

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 of
Directors,  based upon assets and revenues of the underlying  investee companies
as well as general market trends for businesses in the same industry. Because of
the inherent uncertainty of valuations,  management's estimates of the values of
the  investments may differ  significantly  from the values that would have been
used had a ready market for the investments existed and the differences could be
material.

      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.

                                       10
<PAGE>

      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 June 30, 2005, the
losses total  approximately  $44,143,000.  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  Management  Advisors,  LLC. The Company's investment in
the minority interest of Yorkville Management Advisors, LLC was made on December
1, 2003 and the Company has received  $1,310,000 in dividend proceeds since that
date.  As of June 30, 2005,  the Company has  liquidated  all of its interest in
Yorkville and will not receive any further dividend income in the future.

Results of Operations

      Three Months Ended June 30, 2005 Compared to Three Months Ended June 30,
2004

      Realized loss on investments

      Since the election to operate as a Business  Development  Company  ("BDC")
the Company has recorded a realized loss on its investment in Celerity  Systems,
Inc.,  a Nevada  corporation  ("Celerity  NV").  This loss is  comprised  of two
elements:

     Effect of recording advances at fair value               $    633,008

     Effect of recording equity investments at fair value          500,000
                                                              ------------
                                                              $  1,133,008
                                                              ------------

      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 June 30, 2004, Celerity NV recorded no
sales or gross profit and incurred  other  general and  administrative  expenses
that  resulted  in a net loss of $53,404  for the  period.  During  such  period
Celerity NV  received  parent  company  advances of $121,578 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 six months
ended June 30, 2005

      Dividend income

      Since its investment in Yorkville Advisors  Management,  LLC ("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 June 30,  2005,  the Company  has  received  $3,000,000  in
proceeds and the Company has no further interest in Yorkville.

      During the three month  period  ended June 30,  2004 the Company  received
$350,000 in  proceeds  from its  investment  in  Yorkville  and  recorded  these
receipts as dividend income in the statement of operations.

                                       11
<PAGE>

      Operating Expenses

      Operating  expenses for the second quarter of 2005 were $192,239  compared
to  $135,785  for the second  quarter of 2004,  an increase of $56,454 or 41.6%.
Increased  operating  expenses in 2005 can be attributed to higher  professional
service expenses (approximately $46,000),  higher payroll (approximately $2,400)
and higher operating and administrative costs (approximately $21,500).  Expenses
were reduced by lower facility charges ($13,400).

      Amortization of debt offering costs

      Amortization of debt offering costs for the second quarter of 2005 was nil
compared to $11,863 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
$53,709  and  $48,252  for the  three  months  ended  June 30,  2005  and  2004,
respectively,  an increase of $5,457 or 11.3%.  This increase 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.

      Interest Expense

      Interest  expense  for the three  months  ended  June 30,  2005 was $9,374
compared to $43,819 for the same period in 2004, a decrease of $34,445 or 78.6%.
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 three  months  ended June 30, 2005,  the Company  settled  certain
convertable notes and trade payables wherein the net amount due was increased by
$156,408.  For the three months ended June 30, 2004 debt settlements resulted in
net gains of $39,979.

      Net Loss Attributable to Common Stockholders

      As a result of the foregoing,  the Company had a net loss of $371,786,  or
($0.00) per share,  for the three months  ended June 30, 2005  compared to a net
gain of $28,682, or $0.00 per share, for the three months ended June 30, 2004, a
decrease of $400,468 or 1,396.2%.

      Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

      Unrealized 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               $    633,008

     Effect of recording equity investments at fair value          500,000
                                                              ------------
                                                              $  1,133,008
                                                              ------------

                                       12
<PAGE>

      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 six month period  ended June 30, 2004,  Celerity NV recorded no
sales or gross profit and incurred  other  general and  administrative  expenses
that  resulted  in a net loss of  $134,773  for the  period.  During such period
Celerity NV  received  parent  company  advances of $224,961 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.

      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 six month period ended June 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 six month  period  ended June 30,  2004,  the Company  received
$695,000 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 six months of 2005 were $392,920 compared
to $332,574  for the first six months of 2004,  an increase of $60,346 or 18.2%.
Increased  operating  expenses in 2005 can be attributed to higher  professional
service expenses  (approximately  $68,800),  higher operating and administrative
costs  (approximately  $9,100).  Expenses were reduced by lower facility charges
and payroll ($17,500).

      Amortization of debt offering costs

      Amortization  of debt offering  costs for the first six months of 2005 was
$40,529  compared  to $48,987 in same  period of 2004,  a decrease  of $8,458 or
17.3%.  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  $223,578  for the six  months  ended  June  30,  2005  and  2004,
respectively.  This increase 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.

      Interest Expense

      Interest  expense  for the six  months  ended  June 30,  2005 was  $68,112
compared to $92,026 for the same period in 2004, a decrease of $23,914 or 26.0%.
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 six months  ended  June 30,  2005,  the  Company  settled  certain
convertable notes and trade payables wherein the net amount due was decreased by
$32,037. For the six months ended June 30, 2004 debt settlements resulted in net
gains of $41,093.

                                       13
<PAGE>

      Net Loss Attributable to Common Stockholders

      As a result of the foregoing,  the Company had a net loss of $672,567,  or
($0.00) per share, for the six months ended June 30, 2005 compared to a net loss
of  $186,033,  or ($0.00) per share,  for the six months  ended June 30, 2004 an
increase of $486,534 or 261.5%.

      Liquidity and Capital Resources

      The  primary  source  of  financing  for us since our  inception  has been
through  the  issuance  of common  and  preferred  stock  and debt.  We had cash
balances on hand of  $842,992 as of June 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 $567,513,  consisting  primarily of
accounts payable of $423,554,  accrued interest and other liabilities of $11,609
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.

      As discussed in the overview section,  on June 3, 2003 the Company elected
to become a BDC, which is regulated  under Section 54 of the Investment  Company
Act of 1940.  As a BDC,  the Company  may sell shares of its common  stock up to
$5,000,000  in a twelve month period.  Shares sold are exempt from  registration
under  Regulation E of the  Securities  Act of 1933.  To that end, at our Annual
Meeting of Shareholders  held on January 14, 2003, the shareholders  approved an
increase in our authorized capital stock to 5 billion shares of common stock. On
June 4, 2003 the Company filed an Offering  Circular Under  Regulation E to sell
up to  $4,500,000  of its common stock at a minimum price of $0.001 to a maximum
price of $0.02.  Between  June 4, 2003 and June 30,  2005,  the Company has sold
1,289,833,333 shares resulting in net proceeds of $1,360,000.

      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 six months ended June 30,  2005,  we had a net increase in cash
of $841,129. Our sources and uses of funds were as follows:

      Cash Flows From  Operating  Activities.  We used net cash of $1,173,404 in
our  operating  activities  in the six months ended June 30, 2005.  Our net cash
used in operating  activities  resulted primarily from the Company's net loss of
$672,567  non-cash  income of $181,901  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  $463,877.  Cash was
provided  by  non-cash  expenses  of  depreciation  of fixed  assets  of  5,600,
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 $6,039.

      Cash Flows From  Investing  Activities.  We provided cash of $5,240,000 in
investing  activities  in the six months  ended June 30, 2005 from the  proceeds
from preferential  distributions from Yorkville.  As of June 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 $3,225,467 in net cash for
financing  activities,  consisting  primarily of principal payments on debt to a
related  party  of  $1,265,000,   principal  payments  on  certain   convertible
debentures and the purchase of treasury stock under the Company's  stock buyback
program.

      As of June 30, 2005 we had net working capital of approximately  $428,358.
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 June 30, 2005 other than a certain  lease of corporate
office space

                                       14
<PAGE>

      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.

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/Acting  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/Acting  Principal  Accounting  Officer has concluded  that the Company's
disclosure  controls and procedures  are, in fact,  effective at this reasonable
assurance level. In addition, we reviewed out internal controls,  and there have
been no  significant  changes in our  internal  controls or in other actors that
could  significantly  affect those controls subsequent to the date of their last
valuation or from the end of the reporting period to the date of this Form 10-Q.

(B)   Changes In Internal Controls Over Financial Reporting

      In  connection  with the  evaluation of the  Company's  internal  controls
during the  Company's  six months ended June 30, 2005,  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.

                                       15
<PAGE>

                                     PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

      o     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.

      o     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.

      o     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,  certain creditors for which we have accrued  liabilities and
other claims,  have threatened  litigation if they were 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

      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.

                                       16
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

      (a)   Exhibits.

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

31.1                  Certification re: Section 302            Provided herewith

32.1                  Certification re: Section 906            Provided herewith

      (b)   Reports on Form 8-K.

      Report on Form 8-K filed April 19, 2005  pursuant to Item 5.02  (Departure
of  Directors or  Principal  Officers;  Election of  Directors;  Appointment  of
Principal  Officers)  reported  that,  effective  April 15,  2005,  David  Leigh
resigned from the Board of Directors for personal reasons.

      Report on Form 8-K filed April 27, 2005  pursuant to Item 4.01 (Changes in
Registrant's  Certifying  Accountant)  reported that Marcum & Kliegman,  LLP was
dismissed as its independent  registered  public accounting firm effective April
22,  2005.  Marcum &  Kliegman's  reports did not contain any adverse  opinions,
there were no disagreements on any matter of accounting  principals or practices
and there were no reported events under (a)(1)(v) of Item 304 of Regulation S-K.

      Report on Form 8-K filed May 6, 2005  pursuant  to Item 4.01  (Changes  in
Registrant's  Certifying  Accountant) reported that HJ & Associates,  L.L.C. has
been engaged as its registered  public  accounting firm,  effective May 3, 2005.
The Company has not consulted  with HJ & Associates on any matters  described in
paragraph  (a)(2)(i) or (ii) of Item 304 of  Regulation  S-B during the last two
years.

      Report on Form 8-K  filed  August 3,  2005  pursuant  to Item 8.01  (Other
Events)  reported  that the Company has engaged the services of Worldwide  Stock
Transfer, LLC as its new stock transfer agent effective July 26, 2005.

                                       17
<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: August 15, 2005                        CELERITY SYSTEMS, INC.

                                              By: /s/ Robert Legnosky
                                                 -------------------------------
                                                 Robert Legnosky
                                                 Chief Executive Officer and
                                                 Interim Chief Financial Officer

                                       18