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, 2004

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


122 Perimeter Park Drive, Knoxville, Tennessee             37922
----------------------------------------------             -----
(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 4,660,453,032 shares of common Stock outstanding as of August
10, 2004.


                                       1
<PAGE>


                                     PART I

FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS







                                       2
<PAGE>

<TABLE>
<CAPTION>


         CELERITY SYSTEMS, INC.
         Condensed Balance Sheets
                                                                         (unaudited)
         Assets                                                         June 30, 2004  December 31,2003
                                                                         ------------    ------------

<S>                                                                      <C>             <C>
  Cash                                                                   $     10,037    $     56,156
  Other current assets                                                          5,244           6,764
                                                                         ------------    ------------
        Total current assets                                                   15,281          62,920
                                                                         ------------    ------------

Fixed assets, net                                                              40,600          38,317
Investment in Yorkville Advisors Management, LLC, at cost which
   approximates fair value                                                  5,240,000       5,240,000
Investment in and advances to Celerity Systems-NV, at fair value                   --              --
Debt offering costs, net                                                      116,916         165,903
                                                                         ------------    ------------

     Total assets                                                        $  5,412,797    $  5,507,140
                                                                         ============    ============

Liabilities and Stockholders' Equity

Accounts payable                                                         $    519,627    $    463,552
Judgments and defaults payable (including $213,400 to a related party         428,400         570,781
Accrued interest ( including $152,413 and $126,416 to a related party)        247,340         270,746
Notes payable - related party                                                  10,000         115,000
Other current liabilities                                                      19,850          16,867
                                                                         ------------    ------------

     Total current liabilities                                              1,225,217       1,436,946

Convertible debentures - related party, net                                   523,801         570,727
Convertible debentures, net                                                 1,705,762       1,518,758
                                                                         ------------    ------------
                                                                            2,229,563       2,089,485
                                                                         ------------    ------------

     Total liabilities                                                      3,454,780       3,526,431
                                                                         ------------    ------------

Commitments and contingencies                                                      --              --

Stockholders' Equity
Common stock, $.001 par value, 5,000,000,000 shares authorized,
     4,660,453,032 issued and outstanding at June 30, 2004 and
     4,553,473,409 issued and outstanding at December 31, 2003              4,660,453       4,553,473
Additional paid-in capital                                                 40,601,051      40,544,690
Net unrealized depreciation on investments                                 (1,067,082)       (842,121)
Accumulated deficit                                                       (42,236,405)    (42,275,333)
                                                                         ------------    ------------
     Total stockholders' equity                                             1,958,017       1,980,709
                                                                         ------------    ------------

     Total liabilities and stockholders' equity                          $  5,412,797    $  5,507,140
                                                                         ============    ============


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

</TABLE>


                                       3
<PAGE>

<TABLE>
<CAPTION>

            CELERITY SYSTEMS, INC.
            Condensed Statements of Operations
            Unaudited
                                                              Prior to                                                Prior to
                                                              Becoming                                                Becoming
                          As a Business    As a Business      Business         As a Business     As a Business        Business
                         Development Co.  Development Co.  Development Co.    Development Co.   Development Co.    Development Co.
                         ---------------  ---------------  ---------------    ---------------   ---------------    ---------------
                           Three Months    Period from       Period from        Six Months        Period from        Period from
                              Ended      June 3, 2003 to   April 1, 2003 to       Ended         June 3, 2003 to   January 1, 2003 to
                          June 30, 2004   June 30, 2003     June 2, 2004       June 30, 2004     June 30, 2003       June 2, 2003
                         ---------------  ---------------  ---------------    ---------------   ---------------    ---------------

<S>                      <C>              <C>              <C>                <C>               <C>                <C>
Unrealized loss
 on investments          $      (121,578) $            --  $            --    $      (224,961)  $            --    $            --
Dividend income
 - related party                 350,000          695,000               --                 --
                         ---------------  ---------------  ---------------    ---------------   ---------------    ---------------
                                 228,422               --               --            470,039                --                 --
   General and
    administrative
    expenses                     135,785           74,811          141,690            332,574            74,811            301,483
                         ---------------  ---------------  ---------------    ---------------   ---------------    ---------------
     Operating income
      (loss) -
      related party               92,637          (74,811)        (141,690)           137,465           (74,811)          (301,483)
                         ---------------  ---------------  ---------------    ---------------   ---------------    ---------------
Other income (expense)
   Amortization of
    debt offering costs          (11,863)           9,357          (53,445)           (48,987)            9,357            (95,062)
   Beneficial
    conversion feature
    - convertible
    debentures                   (48,252)          15,250         (127,002)          (223,578)           15,250           (196,080)
   Interest expense              (43,819)          (8,933)        (101,584)           (92,026)           (8,933)          (202,402)
   Settlement of debt             39,979           21,655           13,278             39,979            21,655            176,095
   Other income                    1,114
                         ---------------  ---------------  ---------------    ---------------   ---------------    ---------------
Total other
 income (expense)                (63,955)          37,329         (268,753)          (323,498)           37,329           (317,449)
                         ---------------  ---------------  ---------------    ---------------   ---------------    ---------------
  Net income (loss)
  attributable to
  common shareholders    $        28,682  $       (37,482) $      (410,443)   $      (186,033)  $       (37,482)   $      (618,932)
                         ===============  ===============  ===============    ===============   ===============    ===============

Loss per common share,
 basic and diluted Net
 loss per common share
 attributable to
 common shareholders     $            --  $            --  $            --    $            --   $            --    $            --
                         ===============  ===============  ===============    ===============   ===============    ===============

   Weighted average
   shares outstanding
    - basic and diluted    4,794,080,467      487,036,609      398,677,194      4,824,716,663       487,036,609        647,230,033
                         ===============  ===============  ===============    ===============   ===============    ===============


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

</TABLE>


                                       4
<PAGE>

<TABLE>
<CAPTION>

                CELERITY SYSTEMS, INC.
                Condensed Statements of Cash Flows
                Unaudited
                                                                                                          Prior to becoming
                                                                       As a Business      As a Business      a Business
                                                                         Development        Development      Development
                                                                          Company            Company           Company
                                                                          ---------         ---------         ---------
                                                                                            Period from       Period from
                                                                       Six Months Ended    June 3, 2003 to January 1, 2003 to
                                                                        June 30, 2004      June 30, 2003      June 2, 2003
                                                                          ---------         ---------         ---------
Cash flows from operating activities:
<S>                                                                       <C>               <C>               <C>
   Net loss                                                               $(186,033)        $ (37,482)        $(618,932)
   Adjustments to reconcile net loss to net
        cash used in operating activities:
            Settlement of debt                                                                (21,654)         (176,095)
            Unrealized loss on investments                                  224,961
            Depreciation and amortization                                     4,375             3,779            17,289
            Abandonment of fixed assets                                                                          46,561
            Beneficial conversion - convertible notes                       230,767           (15,250)          196,080
            Amortization of debt offering costs                              48,987            (9,357)           94,063
            Changes in operating assets and liabilities:
                Other current assets                                          1,520            (9,246)          (34,322)
                Accounts payable                                             56,075            45,496           154,541
                Judgments and defaults payable                             (142,381)                                 --
                Accrued interest                                            (23,407)                                 --
                Other current liabilities                                     2,984            (8,479)            8,479
                                                                          ---------         ---------         ---------
                    Net cash provided by (used in) operating activities     217,848           (52,193)         (312,336)

Cash flows from investing activities:
   Purchase of fixed assets                                                  (6,658)                                 --
   Advances to Celerity Systems-NV                                         (224,961)
                                                                          ---------         ---------         ---------
                    Net cash used in investing activities                  (231,619)               --                --

Cash flows from financing activities:
   Proceeds from notes payable - related party                                                  5,000            25,000
   Payments on  notes payable - related party                              (105,000)               --
   Proceeds from convertible debentures                                     537,500            50,000           283,500
   Principal payments on debt                                              (475,000)                                 --
   Acquisition of treasury stock                                           (189,808)
   Proceeds from issuance of common stock                                   200,000                                  --
                                                                          ---------         ---------         ---------
                    Net cash (used in) provided by financing activities     (32,308)           55,000           308,500

Net increase (decrease) in cash                                             (46,079)            2,807            (3,836)
Cash, beginning of period                                                    56,156             1,176             5,012
                                                                          ---------         ---------         ---------

Cash, end of period                                                       $  10,077         $   3,983         $   1,176
                                                                          =========         =========         =========

Cash paid for:
     Interest                                                             $ 201,285         $      --         $      --
                                                                          =========         =========         =========
     Taxes (State franchise taxes)                                        $   1,450         $      --         $      --
                                                                          =========         =========         =========

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

</TABLE>

                                       5
<PAGE>

<TABLE>
<CAPTION>

             CELERITY SYSTEMS, INC.
             Condensed Statement of Changes in Stockholders' Equity
             Unaudited

                             Common Stock             Additional                   Net Unrealized                       Total
                    ------------------------------      Paid-In       Treasury      Depreciation      Accumulated    Stockholders'
                        Shares          Amount          Capital         Stock       on Investments      Deficit         Equity
                    --------------  --------------  --------------  --------------  --------------  --------------   --------------
<S>                 <C>            <C>             <C>             <C>             <C>             <C>              <C>
Balance,
December 31, 2003    4,553,473,409  $    4,553,473  $   40,544,690  $           --  $     (842,121) $  (42,275,333)  $    1,980,709

Issuance of
 common stock          145,000,000         145,000          55,000                                                          200,000
Conversion of
 convertible
 debentures to
 shares of
 common stock          102,578,147         102,578          50,571                                                          153,149
Acquisition of
 treasury stock                                                           (189,808)                                        (189,808)
Retirement of
 treasury stock       (140,598,524)       (140,598)        (49,210)        189,808
Net income (loss)                                                                         (224,961)         38,928        (186,033)
                    --------------  --------------  --------------  --------------  --------------  --------------   --------------
Balance,
June 30, 2004        4,660,453,032  $    4,660,453  $   40,601,051  $           --  $   (1,067,082) $  (42,236,405)  $    1,958,017
                    ==============  ==============  ==============  ==============  ==============  ==============   ==============


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

</TABLE>

                                       6
<PAGE>


                             CELERITY SYSTEMS, INC.

Notes to Unaudited Condensed Financial Statements

Overview

      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  consolidated  financial statements and
notes to the financial  statements  for the interim  periods as of June 30, 2004
and for the six  months  ended  June  30,  2004 and  2003,  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,  2004,  are not  necessarily
indicative  of the results that may be expected for the year ended  December 31,
2004.  The  condensed  consolidated  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,  2003.  Certain
prior period  balances have been  reclassified to conform with the June 30, 2004
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. 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, 2004 the losses
total approximately $43,303,000. As of June 30, 2004, the Company had a negative
net working capital of  approximately  $1,210,000.  These factors taken together
with the lack of sales 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  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. Between June 30, 2003 and June 30, 2004 the Company sold
1,299,833,333 shares resulting in net proceeds of $1,376,500.

      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.


                                       7
<PAGE>

Conversion to Business Development Company

      The  operating  results for the six months ended June 30, 2004 and for the
period from June 3, 2003 to June 30, 2003  reflect  the  Company's  results as a
business  development  company  under the  Investment  Company  Act of 1940,  as
amended,  whereas the  operating  results for the period from January 1, 2003 to
June 2, 2003  reflect the  Company's  results  prior to  operating as a business
development  company.  Accounting  principles  used  in the  preparation  of the
financial  statements for the interim periods are different and, therefore,  the
results of operations are not directly  comparable.  The primary  differences in
accounting principles relate to the carrying value of investments.

Stock-Based Compensation

      The Company had no stock  options  granted in 2004 and 2003.  There was no
stock-based  compensation  determined under the fair value method during the six
months ended June 30, 2004 and 2003 and there is no difference  between net loss
as reported and proforma net loss.


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

      The following table  represents  Celerity NV's statement of operations 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

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

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

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

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


                                       8
<PAGE>

      The Company charges Celerity NV for salaries and benefits and a portion of
costs as a facility  charge.  During the first six months of 2004,  the  Company
advanced $224,961 to Celerity NV to fund operations.  This amount resulted in an
unrealized  loss on  the  investment  in  Celerity  NV of  $224,961 as reflected
in the statement of operations of the Company as a BDC.

3.    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.

4.    Issuance of Convertible Debentures

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

                                            June 30, 2004    December 31, 2003
                                            --------------    ---------------

     4% convertible debentures               $      12,500     $       67,500
     5% convertible debentures - 2003            1,374,000          1,475,000
     5% convertible debentures - 2004              537,500                -0-
     10% secured convertible debenture             705,000          1,170,000
                                            --------------    ---------------
                                                 2,629,000          2,712,500
     Less:    Unamortized debt discount          (399,437)          (623,015)
                                            --------------    ---------------
     Long-term debt less current maturities $    2,229,563    $     2,089,485
                                            ==============    ===============

During the six months ended June 30, 2004 the Company issued  52,186,027  shares
of its common stock upon the conversion of $91,000 of 5% convertible  debentures
- 2003 and 50,392,120  shares of its common stock upon the conversion of $55,000
of 4% convertible  debentures.  These  transactions have been treated as noncash
investing and financing activities for the statement of cash flows.

5.    Dividend Income

      During the six month  period  ended June 30,  2004,  the Company  received
$695,000 in proceeds from its investment in Yorkville Advisors  Management,  LLC
and has  recorded  that these  amounts as dividend  income in the  statement  of
operations.  Since its  investment  in  Yorkville  Advisors  Management,  LLC on
December  1, 2003,  the Company  has  received a total of $760,000 in  proceeds.
Yorkville  Advisors has no set dividend policy.  Dividends are declared based on
the discretion of the management of Yorkville Advisors.

6.    Judgments and Defaults Payable

      In January 2002, the Company  terminated the Equity Line of Credit entered
into on September 14, 2001 due to delays in getting  related  shares  registered
and in order to pursue other types of financing  arrangements.  As a result, the
Company  does not have an  effective  registration  statement  including  common
shares to be issued in connection with certain debentures issued in 2001 and the
first  quarter of 2002 under the 1999 Line of Credit  Agreement.  The Company is
required  to pay  liquidated  damages in the form of  increased  interest on the
convertible  debentures  as a result  of not  filing an  effective  registration
statement for these  debentures  at a rate of 2% of the principle  plus interest
per month.  The liability for  liquidated  damages will continue to accrue until
the date a new registration statement becomes effective. The Company has accrued
and unpaid liquidated damages of $249,400 at June 30, 2004.

      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, 2004.

      On October 27, 2001, we defaulted on payment due of $100,000, plus accrued
interest,  on  a  certain  unsecured  note.  We  are  seeking  to  make  payment
arrangements with this note holder.


                                       9
<PAGE>

      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, 2004.

      In addition, certain creditors have threatened litigation if not paid. The
Company is seeking to make  arrangements  with these creditors.  There can be no
assurance  that any  claims,  if made,  will not have an  adverse  effect on the
Company.  These amounts are included in the Company's  accounts  payable and are
accruing applicable late fees and interest.

7.    Common Stock

      During the six months ended June 30, 2004 the Company  issued  145,000,000
shares of its common stock for cash  proceeds in the amount of $200,000 to third
party investors.

      The Company also completed a transaction with Eagle Broadband in which the
Company  purchased  140,598,524  shares  of  its  common  stock  and a  $350,000
convertible  debenture from Eagle  Broadband.  The Company paid Eagle  Broadband
$662,308 for the purchase of these shares,  ($189,808) for the retirement of the
remaining  $350,000  portion  of a  $500,000  convertible  note  held  by  Eagle
Broadband, and $122,500, net of a gain on the settlement of debt of $39,979, for
interest and penalties on these securities. The Company's Board of Directors has
resolved  to cancel the  shares  and make them  available  for  issuance  in the
future.


                                       10
<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, 2003.  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.

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

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

      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.


                                       11
<PAGE>

      Going Concern - 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, 2004 the
losses total approximately  $43,303,000.  As of June 30, 2004, the Company had a
negative net working capital of  approximately  $1,210,000.  These factors taken
together  with  the lack of  sales  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 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  $760,000 in dividend  proceeds  since that
date.

Results of Operations

      Three Months  Ended June 30, 2004  Compared to Three Months Ended June 30,
2003

      Unrealized loss on investments

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

      Effect of recording advances at fair value                    $  567,082
      Effect of recording equity investments at fair value             500,000
                                                                    ----------
                                                                    $1,067,082
                                                                    ==========

      During the three month period ended June 30, 2004, Celerity NV recorded no
sales or gross  profit  and  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 NV will need to
terminate its operations.

      Dividend Income

      During the three month  period  ended June 30,  2004 the Company  received
$350,000 in proceeds from its investment in Yorkville Advisors Management,  LLC,
which has been recorded as dividend income in the statement of operations. Since
its  investment  in  Yorkville  Advisors on  December  1, 2003,  the Company has
received a total of $760,000 in proceeds. Yorkville Advisors has no set dividend
policy.  Dividends are declared  based on the  discretion  of the  management of
Yorkville.  This was the  Company's  only source of income for the three  months
ended June 30, 2004.

      Operating Expenses

      Operating  expenses for the second quarter of 2004 were $135,785  compared
to the second quarter of 2003 of $216,501. Operating expenses in the 2004 period
included payroll expenses of approximately  $21,000, and expenses for operating,
legal,  accounting and other  professional  services of  approximately  $19,000.
Expenses  were reduced in the 2004 period by the lack of  non-recurring  charges
for corporate asset abandonment and state sales and use tax assessments equaling
approximately $91,000.

      Amortization Of Debt Offering Costs

      Amortization  of debt  offering  costs for the second  quarter of 2004 was
$11,863  compared  to  $44,088  in same  period of 2003.  This cost for the 2003
period  was due to the  reduction  of debt  instruments  and  the  related  cost
associated with them.

      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
$48,252  and  $111,752  for the  three  months  ended  June 30,  2004 and  2003,
respectively.  This decrease  results  primarily  from the conversion of certain
debt to equity  issued in 2003 which  caused  full  recognition  of the  related
beneficial conversion feature in this period compared to the longer amortization
period for debt not converted.


                                       12
<PAGE>

      Interest Expense

      Interest  expense  for the three  months  ended June 30,  2004 was $43,819
compared to $110,517 for the same period in 2003.  This reduction is principally
from the lower level of debt  ($1,700,000  average  balance) at June 30, 2004 as
compared to the same period in 2003 ($3,100,000 average balance).

      Settlement Of Debt

      For the three  months  ended June 30, 2004,  the Company  settled  certain
trade and notes  payables  wherein  the total  amount due was reduced by $39,979
compared to $34,933 for the three months ended June 30, 2003.

      Net Income Attributable to Common Stockholders

      As a result of the  foregoing,  Celerity  had a net income of $28,682,  or
$0.00 per share, for the three months ended June 30, 2004 compared to a net loss
of $447,925, or $0.00 per share, for the three months ended June 30, 2003.

      Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

      Unrealized loss on investments

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

       Effect of recording advances at fair value                 $   567,082
       Effect of recording equity investments at fair value           500,000
                                                                  -----------
                                                                  $ 1,067,082
                                                                  ===========

      During the six month period  ended June 30, 2004,  Celerity NV recorded no
sales or gross  profit  and  other  general  and  administrative  expenses  that
resulted in a net loss of $186,033 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 NV will not be able
to continue operation.

      Dividend Income

      During the six month  period  ended  June 30,  2004 the  Company  received
$695,000 in proceeds from its  investment in Yorkville  Advisors  which has been
recorded as dividend income in the statement of operations. Since its investment
in Yorkville  Advisors on December 1, 2003,  the Company has received a total of
$760,000 in proceeds.  Yorkville Advisors has no set dividend policy.  Dividends
are declared based on the  discretion of the  management of Yorkville  Advisors.
This was the  Company's  only source of income for the six months ended June 30,
2004.

      Operating Expenses

      Operating expenses for the first six months of 2004 were $332,574 compared
to the first six  months of 2003 of  $376,294.  Operating  expenses  in the 2004
period  included  payroll  expenses of  approximately  $56,000 and  expenses for
operating,  legal,  accounting and other professional  services of approximately
$13,000.  Expenses were reduced in the 2004 period by the lack of  non-recurring
charges for corporate asset  abandonment and state sales and use tax assessments
of approximately $91,000.

      Amortization Of Debt Offering Costs

      Amortization  of debt offering  costs for the first six months of 2004 was
$48,987  compared  to  $85,705  in same  period of 2003.  This cost for the 2003
period  was due to the  reduction  of debt  instruments  and  the  related  cost
associated with them.

      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
$223,578  and  $180,830  for the six  months  ended  June  30,  2004  and  2003,
respectively.  This increase  results  primarily  from the conversion of certain
debt  to  equity  which  causes  full  recognition  of  the  related  beneficial
conversion feature in this period compared to the longer amortization period for
debt not converted.


                                       13
<PAGE>

      Interest Expense

      Interest  expense  for the six  months  ended  June 30,  2004 was  $92,026
compared  to  $211,335  for the same  period  in 2003.  This  reduction  is from
liquidated  damages  incurred  due to the late  filing of  certain  registration
statements  resulting  in a  charge  of $-0- in the  first  six  months  of 2004
compared  to a charge  of  $28,520  in for the same  period in 2003 and from the
lower level of debt at June 30, 2004 ($1,700,000 average balance) as compared to
the same period in 2003 ($3,100,000 average balance).

      Settlement Of Debt

      For the six months ended June 30, 2004, the Company  settled certain trade
and payables  wherein the total amount due was reduced by $39,979  compared to a
benefit of $197,750 for the same period in 2003.

      Net Loss Attributable To Common Stockholders

      As a result of the  foregoing,  Celerity  had a net loss of  $186,033,  or
$0.00 per share,  for the six months ended June 30, 2004  compared to a net loss
of $656,414, or $0.00 per share, for the six months ended June 30, 2003.

      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 $10,037 as of June 30,  2004 and $56,156 as of December  31,
2003. 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
generates  enough proceeds to fund  operations.  In addition,  our need for cash
includes satisfying current liabilities of $1,225,217,  consisting  primarily of
accounts  payable of $519,627,  accrued  interest of $247,340 and  judgments and
defaults   payable  of  $428,400,   a  judgment  of  $71,000  obtained  by  Veja
Electronics,  Inc. for breach of contract,  and a judgment of $8,000 obtained by
Del Rio Enterprises for non-payment of services. Additionally this also includes
notes payable in default of $100,000 and liquidated  damages  resulting from the
lack  of  filing  a  registration  statement  relating  to  certain  convertible
debentures of $249,400.  We do not currently have sufficient  funds to pay these
obligations. We will need significant new funding from the sale of securities or
from proceeds from our investments to fund our ongoing operations and to satisfy
the above obligations.  We anticipate the dividend income from our investment in
Yorkville  Advisors  Management  will be sufficient  to operate the Company.  We
currently do not have any commitments for funding.

      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,  2004 the  Company  has sold
1,294,833,333 shares resulting in net proceeds of $1,366,500.

      We are also looking at several  other  options in terms of  improving  our
cash  shortage.  We are  continuing  to seek  to  arrange  financing,  including
possible strategic investment opportunities or opportunities to sell some or all
of our assets and business,  while continuing to pursue sales opportunities.  We
have granted a security  interest in our personal  property to the  investors in
the 10%  convertible  debentures  issued in 2002.  Such  security  interests may
hinder  our  efforts  to obtain  financing.  The lack of sales or a  significant
financial commitment raises substantial doubt about our ability to continue as a
going concern or to resume a full-scale level of operations.

      During the six months ended June 30,  2004,  we had a net decrease in cash
of $46,119. Our sources and uses of funds were as follows:

      Cash provided by operating  activities.  We generated net cash of $217,808
in our operating  activities in the six months ended June 30, 2004. Our net cash
provided from operating  activities resulted primarily from non-cash expenses of
$509,050 related to the amortization of beneficial  conversion  feature of debt,
amortization  of debt offering costs and the  unrealized  loss on an investment.
These  non-cash  items were  directly  offset due to the  Company's  net loss of
$186,033.

      Cash  used in  investing  activities.  We used  net  cash of  $231,619  in
investing activities in the six months ended June 30, 2004 of which $224,961 was
used to fund the operating activities of Celerity NV.


                                       14
<PAGE>

      Cash  used in  financing  activities.  We used  $32,308  in net  cash  for
financing  activities,  consisting  primarily of principal payments on long-term
debt of $475,000 and notes payable - related  party of $105,000 and  acquisition
of treasury  stock.  This was offset to a large extent by proceeds from issuance
of convertible debentures of $537,500 and issuance of common stock of $200,000.

      As of June 30, 2004 we had a negative net working capital of approximately
$1,210,000.  Celerity NV has ceased  purchasing any material amount of inventory
until inventory levels can be reduced and has reduced overhead  expenses,  which
will have a favorable  impact on cash required to fund the  business.  We had no
significant capital spending or purchase commitments at June 30, 2004 other than
a certain  lease of  corporate  office  space and the working  capital  needs of
Celerity NV.

      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  investment  which 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 provide 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 our internal controls,  and there have
been no  significant  changes in our internal  controls or in other factors 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.


                                       15
<PAGE>


(B)   Changes In Internal Controls Over Financial Reporting

      In  connection  with the  evaluation of the  Company's  internal  controls
during the Company's  three months ended June 30, 2004, 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.


                                       16
<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.  In June 2003, a judgment was entered  against the Company
            in the amount of $76,000, which has been accrued by the Company.

      o     On October 27, 2001, we defaulted on payments due of $150,000,  plus
            accrued  interest,  on certain  unsecured notes.  Written demand has
            been received  from one of the two note  holders.  We are seeking to
            make arrangements with these note holders.

      o     On March  25,  2003,  R R  Donnelly  & Sons sued the  Company  for a
            delinquent account. The action was brought in the Chancery Court for
            Knox County, Tennessee. In this action the plaintiff, R R Donnelly &
            Sons, has sued the Company for  non-payment of invoices for printing
            services  and is  seeking  $16,972.  In  September  2003,  a default
            judgment was entered against the Company.

      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.  This  amount has been  accrued at
            June 30, 2004.

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

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

      During the six months  ended June 30, 2004 the Company  issued  52,186,027
shares of its common  stock  upon the  conversion  of $91,000 of 5%  convertible
debentures - 2003 and 50,392,120  shares of its common stock upon the conversion
of $55,000 of 4% convertible debentures.

      The Company also completed a transaction with Eagle Broadband in which the
Company  purchased  140,598,524  shares  of  its  common  stock  and a  $350,000
convertible  debenture from Eagle  Broadband.  The Company paid Eagle  Broadband
$662,308  for the  purchase  of  these  shares  and for  the  retirement  of the
remaining  $350,000  portion  of a  $500,000  convertible  note  held  by  Eagle
Broadband.  The  Company's  Board of Directors has resolved to cancel the shares
and make them available for issuance in the future.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

      On October 27, 2001,  we  defaulted on payments due of $150,000,  of which
$100,000 is remaining unpaid, plus accrued interest, on certain unsecured notes.
We are seeking to make arrangements with this note holder.

      The  Company is in default  on  $942,500  of  convertible  debentures  for
failure to file an effective registration statement.

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

         None.


                                       17
<PAGE>

ITEM 5.  OTHER INFORMATION

         Not applicable.

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.

          None.

                                   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 18, 2004                        CELERITY SYSTEMS, INC.

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


                                       18